Examination of Witnesses (Questions 1
MONDAY 17 APRIL 2000
PHILLIPS KCB AND
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
(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
(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
(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
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 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.
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
(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 doneI explained
to the Committee a year agowas 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
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.
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
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
Note: See Evidence, Appendix 1, page 14. Back