Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 1 - 19)




  1. This afternoon we are considering the Comptroller and Auditor General's Report on Funds in Court: Unclaimed Balances and the report on the Public Trust Office accounts for the year ended 31 March 1999, the Agency Report. The principal witness is Sir Hayden Phillips, Permanent Secretary, and Mr Nick Smedley, Acting Chief Executive. Welcome to you both. You are familiar with the routine so I will go straight into it. I have had from you, Sir Hayden, a letter on some of the issues but I still think it is worth touching on them to bring them into the public domain. I will start with Part 3 of the Unclaimed Balances report which indicates that the trail to identify individual amounts included in the Unclaimed Balances Account involves a wide variety of accounting records. As custodians of the funds involved, why did the Court Funds Office fail to put in place proper systems which would allow a list of the amounts outstanding on individual cases to be extracted readily?

  (Sir Hayden Phillips) I think the basic reason from history is that it felt that in the records it had, both on index cards and in other ways, when requests were made it could identify the balances that were relevant and so there was an audit trail. What it had not done was, as you say, to list all of the individual balances so that you could see how the total was made up.

  2. Let us pursue this slightly. In your letter to the Committee of 17 March you indicate that larger sums are now being pursued more actively before being transferred to the Unclaimed Balances. Can you tell us what enhancements to procedures have been implemented and why these have not been standard practice in the past?
  (Sir Hayden Phillips) I think the principal enhancement now is to ensure that where higher sums are involved very active steps are taken to try to trace the claimants. Mr Smedley can confirm this is right. I think the procedures in the past in terms of attempting to locate claimants, and in response to claimants' requests, have been fairly sound but once we have, as it were, broken the back of the work in identifying the balances, and this is an accounting matter I think rather than the propriety of the anti-fraud issue, that will be in a stronger position for the future. I do not know whether you want to add to that?
  (Mr Smedley) Just to add to what Sir Hayden has said. Before the sums are paid over into the Unclaimed Balances, particularly the larger sums, we actively telephone either the solicitor, or if it is the litigant in person we telephone the court to try to find the identity of the person and we actively seek to explain to them that the period of dormancy has finished and we are about to pay it over into the Unclaimed Balances, is the case still viable or not?

  3. You say, Sir Hayden, it is a matter of accounting and not of fraud but the experience of this Committee historically is that one can lead to the other if we are not careful.
  (Sir Hayden Phillips) I agree.

  4. In paragraphs 3.23 to 3.27 of his report the C&AG describes the Unclaimed Balances Index which is required by statute to be available for public inspection. This would appear to be a far from user friendly search facility. In your letter to the Committee you note that you are now taking action to improve the facility using a modern database, but why was this not considered a long time ago? It seems a fairly obvious point since it is open to inspection.
  (Sir Hayden Phillips) I must say the story was told so graphically in the report that it does not make very comfortable reading and, indeed, you could say that this is a risible system, and indeed that is unacceptable, that that sort of result should be produced. I would simply say, Chairman, that I think this sort of thing ought to have been identified and this goes more widely. I think there has been a substantial under-investment in the past in proper information technology and information system support in the PTO. It does not go just to the Court Funds Office, it goes elsewhere, and I think we have recognised the problems with the NAO's help and we are putting that right.

  5. Others may come back on that. I want to turn now to the report on the Agency account. In paragraphs 16 to 25 of that report we see that a review of fees due to the Agency has resulted in an increase of fees of £1.25 million for 1998-99 and £800,000 for earlier years. Why was a special exercise required to establish accurately the fees due to the Agency when it might be reasonably assumed that this would be part of a normal accounting system?
  (Mr Smedley) One of the problems that has beset the PTO is that its fee structure is very complicated. It is based upon an assessment of the likely income of the client and then at the end of the year when the client's account is received it is then based upon what the actual income was and the fee is recalculated accordingly. That explains why the system has been so complex and why there are so many gaps in it. We are now on the threshold of moving to a simple flat fee structure which is going to be much easier to calculate.

  6. It will be easier but I still think a normal accounting system would have produced even the outcome of a complicated system, it does in commerce after all. Let us press on. Paragraph 20 of the report notes that the exercise in respect of 1998-99 fees was not fully completed at November 1999 as some 3,100, or more than ten per cent, of receivers' accounts had still to be received. Can you tell me whether this number is still outstanding, whether it has been reduced, and what action has been taken in respect of those outstanding? It is, after all, your legal right.
  (Sir Hayden Phillips) I think there are about 1,000 outstanding.
  (Mr Smedley) We have done a great deal of work on the accounts side of things. If I can just very briefly summarise those. I appointed a new Director of Mental Health in December with the agreement of the then Chief Executive and he has developed a much more robust chase-up procedure with the Court of Protection. We are now receiving about 500 accounts a week coming in, which is a significant improvement on the position when you last looked at it. We have a through-put now, we are reviewing about 1,800 accounts a month. Just to give you a flavour, this compares to 800 accounts a month before December. So we are actively getting them in and we are actively reviewing them. There were about 4,500 accounts that were outstanding for more than two months which is when we regard it as in arrears. That was the December figure. We have got that below 4,000 now and I would hope to continue to make progress on that.

  7. Can you tell the Committee for public information what your recourse is in the event that you do not get the account after several months?
  (Mr Smedley) This has to be handled reasonably sensitively. Where we feel that there is obstruction then the ultimate sanction against a private receiver is to discharge them as a receiver, and we can refer it to the Court of Protection. The problem there, of course, is we then need to find an alternative receiver, so we will do that. My view, having been in the post for a few months now, is that with many of these cases simply chasing it up actively will get the result and that is what seems to be the evidence. We sent out 4,000 reminders in December and, as I say, 500 a week are coming in. With professional receivers we can actually fine them in a sense but, on the whole, professional receivers do submit the account.

  8. My penultimate question is really rather a general one. Considering the issues raised in both reports in front of us today and the issues in the C&AG's report of February 1999, in what ways could the Department's oversight of the Agency's operations have been made more effective? That is one for you, Sir Hayden.
  (Sir Hayden Phillips) I think that there are three areas which, looking back, I wish the Department had been more proactive in relation to. The first was, indeed, in following up the 1993-94 NAO and PAC Report which identified accounts chasing and accounts reviewing as an important issue. I think at that stage that should have become a Key Performance Indicator for the Agency when it was set up. I think, on the whole, the Agency has pursued its Key Performance Indicators reasonably well but there was a gap there and, similarly, on the underlying financial and accounting framework and skills. That is the first area. The second, I think, is that both the Department and the Agency should have thought more imaginatively about a fee structure, a fee structure in which you have got a great deal of cross-subsidy going on and in which I think it is fair to say that everyone concerned, both in the PTO and in LCD, felt that it was very, very difficult to increase fees because of the sort of clients that the PTO has. At the same time, it could only invest in better management if it did increase fees and I think it did not look actively enough for a way out of this trap which Nick has described. We think we are now seeing our way through. The third area, I think it is fair to say, is that the PTO was undermanaged in the sense of the range of senior skills and senior staff in the different areas and under resourced in terms of IT. I think they are things we got wrong, I hope we are getting them right now.

  9. Thank you. That is very helpful. My last question, before I widen it out, is perhaps a slightly more embarrassing one. You are aware that the C&AG has provided us with a note on the payments made to Ms Lomas when she left the Agency in November[1]. These include some £24,000 in respect of bonuses. Can you explain why the Lord Chancellor's Department felt it appropriate to pay performance bonuses in these circumstances, including bonuses for 1999-2000 and to 30 June 2000? Given what you have described yourself in the last ten to 15 minutes, how on earth are bonuses payable?

  (Sir Hayden Phillips) The contractual position of the previous Chief Executive was that she was entitled to bonuses that were paid largely in accordance to whether or not the Agency managed to hit the target Key Performance Indicators. This was a mechanistic construction. In the main, year-on-year those targets were hit or nearly hit. It seemed to me, and legal advice confirmed this, that given that was the contractual position it would not be reasonable for me to withhold, as it were, those bonuses to which she was entitled. What I had done—I explained to the Committee a year ago—was to make sure no bonuses were paid from past years without there having been a proper validation of that, independent of the agency itself. That was, indeed, done for the year 1998/1999. In relation to the overall severance package I think she felt it was sensible that she left, I did too. It was in the interests of the agency to have a fresh start. I had to take a formal view about what a reasonable and defensible payment would be to secure that agreed departure. That was the underlying basis. What I am saying is that I do not necessarily believe myself that a bonus system which is based largely on, and I say mechanistically, individual KPIs, key performance indicators being met is necessarily the right way in which to reward or remunerate the head of an agency. I think you have to see the work in the round. I can understand that there might be a feeling by some and that those payments were criticised. I was very careful in making sure that I was doing it on the basis of legal advice and on the basis of looking at her contractual position.

  10. Two elements come out of that. I can understand the legal advice issue. One element is what those key performance indicators were? Off the top of my head I cannot remember. If you have those documents I would be grateful for a note on what they were[2]. Frankly, it sounds as though they did not include all of the things that were an issue for the evidence. The second point does not require an answer, I will just make a comment to you, on a number of occasions we have had circumstances where things have gone badly wrong, that is what this Committee looks at. It is almost a predictable outcome, it seems to me, that we see time and again people being given large severance packages to move them on when what they have done is not for the public service. That is not a very good position. I understand your detailed position, I just make the comment.

  (Sir Hayden Phillips) As far as the first question is concerned I will make sure that detail of each of the elements is available, our working documents. I will make sure you have those so that the Committee can consider them before it makes its final report. On the second point I totally understand the position as you expressed it. These are often difficult questions and judgments as to what is in the best overall interest of the organisation. I am sure there may be other questions about this. I believe that the judgment made was a reasonable and defensible one in the circumstances, despite equally acknowledging and, indeed, pointing out myself what I think are the criticisms of the organisation. In answer to your earlier question I did acknowledge that I do not think it is necessarily all the fault of the PTO. I think a more vigorous supervision on leadership in the department earlier on would have solved a number of the problems.

  Chairman: Thank you.

Mr Williams

  11. Sir Hayden, in answer to the Chairman's first question you used the term "risible", considering that you and your colleagues are always very defensive of the system that is fairly strong criticism. Where did the primary responsibility arise for this situation?
  (Sir Hayden Phillips) What I was referring to there is, if you look at the report and see the sort of clerical errors that occur with the different matching of keys through the system you would produce entries which did not enable you to straightforwardly find out the entry to which they related.

  12. I accept that. Who was responsible for that lax, incompetent and inefficient system being allowed to continue?
  (Sir Hayden Phillips) I think it would be right to say the management of the Public Trust Office in that part of Court Funds Office had those arrangements.

  13. Who was the accounting officer responsible?
  (Sir Hayden Phillips) Throughout the recent period the accounting officer was the Chief Executive of the Agency.

  14. Yes, Mrs Lomas.
  (Sir Hayden Phillips) The principal accounting officer was my predecessor.

  15. It was split between the two of them. In relation to the Agency it had targets which I assume were set by the Department. The Department set targets which you yourself recognised and admitted openly were virtually irrelevant. We have a situation where one accounting officer allowed targets to be arrived at which, at best, were going to be inefficient and almost meaningless. How on earth could he have had so little regard for the responsibility that he had?
  (Sir Hayden Phillips) I think that criticism, if I may say so, is a little harsh. I was not saying myself they were irrelevant, I was saying they were partial. They did not cover the whole story. In two respects I think they did not pick up the PAC's earlier recommendations.

  16. Were those recommendations to the Department?
  (Sir Hayden Phillips) These were recommendations made in 1993/1994.

  17. If they were recommendations to the Department, the accounting officer in the Department was responsible for ensuring our observations were accurate ones?
  (Sir Hayden Phillips) That is right. I acknowledged that to the Committee last year.

  18. From previous consideration we knew that there were problems that were exciting this Committee and that needed to be addressed. Why were they not addressed?
  (Sir Hayden Phillips) I do not know, both in relation to the accounting systems, indeed chasing and reviewing the accounts.

  19. We can always call him at a subsequent hearing, if necessary. The whole way in which this accounting officer system works, which most of us regard as farcical, is that the current incumbent has to answer for the previous officer. It does not allow the current one to turn around and say, "I do not know". If you do not know in that case it fits in with my view and the view of most of this Committee that we should call the accounting officer of the time. I am not blaming you for this situation. The accounting officer for the time should be sitting there because he or she cannot say, "I do not know". I know it is the way the system works but it is not satisfactory for you to say you do not know, because you must have wondered.

  (Sir Hayden Phillips) I wont get into the general debate about who should appear. I am not suggesting, and I hope the Committee is not suggesting, that the targets that were set at the time were irrelevant, they were relevant and centrally relevant to the work of the PTO. It is my judgment and with hindsight I think it would have been better in addition to those if targets had been set for accounting systems and for chasing, receiving and reviewing accounts. I am not saying any more than that.

1   Not reported. Back

2   Note: See Evidence, Appendix 1, page 14. Back

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