Evidence submitted by the Department for
Constitutional Affairs
1. The Government welcomes this opportunity
to submit a memorandum to the Committee on the issue of the funding
of political parties. This memorandum sets out the current position
on the regulation of the funding of political parties and addresses
the issues in the inquiry's terms of reference.
REGULATION OF
THE FUNDING
OF POLITICAL
PARTIES
2. The current system for regulating the
funding of political parties in the United Kingdom was introduced
by this Government following the recommendations in 1998 of the
Committee on Standards in Public Life chaired by Lord Neill of
Bladen. The Prime Minister extended the terms of reference of
that Committee "to review the issues in relation to the funding
of political parties, and to make recommendations as to any changes
in present arrangements". Specific issues identified by the
Prime Minister for consideration were whether donations should
be declared; whether there should be a cap on the size of donations
and whether there should be more state funding for political parties.
3. The recommendations of the Neill Committee
were that donations to political parties over £5,000 should
be publicly disclosed; that overseas donations should be banned
but that there should not be a cap on the size of a permissible
donation. No new system of state funding for parties should be
introduced for the foreseeable future although the amount of Short
and Cranborne money received by the Opposition parties in the
House of Commons and House of Lords should be reviewed, and consideration
be given to a small fund to enable the political parties to engage
more fully in policy development. The Committee also recommended
the introduction of tax relief for donations of up to £500
per annum.
4. The Government welcomed all these recommendations
with the exception of tax relief for small donations. The majority
were implemented through the Political Parties Elections and Referendums
Act 2000 (PPERA) and came into force from February 2001. Thus
the Government has put in place a transparent regime under which
donations of £5,000 or more to a party or organisation, and
£1,000 or more to an individual or constituency organisation,
have to be registered with an independent body, that is the Electoral
Commission. Where the donation comes from a company shareholder
agreement has to be obtained, and donations from overseas sources
are not permitted.
THE EXISTING
REGIME FOR
THE DISCLOSURE
OF DONATIONS
TO POLITICAL
PARTIES
5. PPERA imposes a number of controls relating
to the disclosure of information about donations received by political
parties, holders of elective office, members of registered political
parties and members' associations. In broad terms these donations
must be reported to the Electoral Commission.
6. PPERA requires donations over a certain
amount to be reported in one of four reporting periods in each
calendar year (January to March; April to June; July to September
and October to December (section 62)). A threshold of £5,000
must be crossed before the requirement to report donations is
triggered, and thereafter each donation of £1,000 must be
reported. However in a general election period the quarterly reporting
requirement is replaced with a weekly reporting requirement. A
"general election period" runs from the dissolution
of Parliament to the date of the poll.
7. The donation reports are made to the
Electoral Commission (section 65). Schedule 6 to PPERA prescribes
a number of detailed requirements as to the contents of the donation
report which, in broad terms, include details as to the identity
of the donor, the value of the donation and the date of the donation.
The Electoral Commission is required to maintain a register of
donations (section 69) which is required to be made available
for public inspection. They are placed on the Commission's website.
8. PPERA also places restrictions on who
can make donations (section 54). Broadly "permissible donors"
are:
— an individual registered in
an electoral register;
— a company (i) registered under
the Companies Act 1985 or the Companies Northern Ireland) Order
1986, and (ii) incorporated within the United Kingdom or another
Member state, which carries on business in the UK;
— a limited liability partnership;
— any other unincorporated association
of two or more persons carrying on business or other activities
wholly or mainly in the UK and whose main office is here.
It is unlawful for a party to retain donations
from an impermissible or unidentifiable donors.
9. A loan is only treated as a donation
if there is a gratuitous element to it. Donation is defined by
section 50(2)(e) of PPERA to include "any money lent to the
party otherwise than on commercial terms". This is to be
assessed by having regard to "the total value in monetary
terms of the consideration provided by or on behalf of the party
in respect of the loan" (section 54(4)). Accordingly the
detailed regime currently applicable to donations does not apply
generally to loans.
10. PPERA does place general accounting
requirements on parties which capture some information about loans.
In overview, PPERA requires political parties to:
— maintain accounting records,
which will record loans;
— prepare an annual statement
of accounts, which will be forwarded to the Electoral Commission;
and
— have their accounts audited,
if their income exceeds £250,000.
— However, only the statement
of accounts is made available for public inspection and political
parties are not required to identify the makers of loans in their
statements of accounts.
11. Loans at a commercial rate do not have
to be recorded as donations to a party, although they would have
to be taken account of in a party's statement of account which
is submitted to the Electoral Commission annually and published.
Details of individual loans do not appear in the statement of
account.
STATE ASSISTANCE
TO POLITICAL
PARTIES
12. Political parties in the UK receive
varying degrees of direct and indirect state support for their
activities, but there is no general system of state funding for
the parties. Following the recommendations of the Committee on
Standards in Public Life's report on the Funding of Political
Parties (see paragraph 3 above) the Government extended the current
state aid to political parties through the increases in Short
and Cranborne money and the introduction of Policy Development
Grant.
13. Short money was introduced in 1975 and
is funding to support opposition parties in carrying out their
Parliamentary business. It is made available to all opposition
parties in the House of Commons that secured either two seats
or one seat and more than 150,000 votes at the previous General
Election. It is not available to Members who have not sworn the
oath. Short money funds are largely spent on research for the
front -bench spokesmen, assistance in the Whips' offices and staff
for the Leader of the Opposition. A similar scheme, "Cranborne
money" was introduced in 1996 to provide financial assistance
to opposition parties in the House of Lords in relation to parliamentary
business. Both funds were increased as a result of Lord Neill's
recommendations.
14. The table below gives a breakdown of
state funding received by the 3 major parties in 2003-04; 2004-05
and 2005-06:
CONSERVATIVE PARTY
| 2003-04 | 2004-05
| 2005-06 |
| Short money | 3,566,927 |
3,666,885 | 4,206,058 |
| Cranborne Money | 402,662 |
413,131 | 426,351 |
| Policy Development Grants | 438,603
| 439,571 | 440,394 |
| Total | 4,408,192 | 4,518,587
| 5,072,803 |
| Total from 2003 to 2006 = £ 13,999,582
| |
| |
| |
LIBERAL DEMOCRATS
| 2003-04 | 2004-05
| 2005-06 |
| Short money | 1,210,902 |
1,244,856 | 1,536,221 |
| Cranborne Money | 201,045 |
206,272 | 212,873 |
| Policy Development Grants | 438,603
| 439,571 | 440,394 |
| Total | 1,850,550 | 1,890,699
| 2,189,488 |
| Total from 2003 to 2006 = £ 5,930,737
| |
| |
| |
LABOUR
| 2003-04 | 2004-05
| 2005-06 |
| Policy Development Grants | 438,603
| 439,571 | 440,394 |
| Total | 438,603 | 439,571
| 440,394 |
| Total from 2003 to 2006 = £ 1,318,568
| |
| |
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15. Again as a result of Lord Neill's recommendations,
the Government introduced Policy Development Grant in 2002 for
all parties with two or more sitting MPs (not just opposition
parties) for use for the development of policies to include in
their manifesto. The Policy Development Grant fund is fixed at
£2 million per annum divided amongst the eligible parties.
There are currently seven eligible parties and the money is allocated
as follows:
PDG 2006-07 TOTAL ALLOCATIONS
The following table sets out the exact allocations of the
PDG for 2006-07 to those parties that the Commission considers
are eligible to receive the funding.
| Party | Total allocation 2006-07
| Actual allocation 2005-06 | Net gain
|
| Labour Party | £457,997
| £440,394 | £17,603
|
| Conservative and Unionist Party | £457,997
| £440,394 | £17,603
|
| Liberal Democrats | £457,997
| £440,394 | £17,603
|
| Scottish National Party | £162,542
| £145,828 | £16,714
|
| Plaid Cymru | £151,894
| £134,393 | £17,501
|
| Ulster Unionist Party | £0
| £132,866 | n/a |
| Social Democratic and Labour Party | £155,786
| £132,866 | £22,920
|
| Democratic Unionist Party | £155,786
| £132,866 | £22,920
|
| Total** | £1,999,999 |
£2,000,000 | £132,864
|
| ** Discrepancies in totals are due to rounding of figures.
| | |
| |
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16. Political parties retain present state assistance
for their activities outside parliament—for example, candidates'
entitlement to free postage for one election communication, use
of local authority-owned meeting rooms for free, and entitlement
to Party Election Broadcasts if standing candidates in more than
one-sixth of the seats at an election.
PLANS FOR
FURTHER SAFEGUARDS
17. The Committee on Standards in Public Life did not
make any recommendations in relation to loans, which were not
perceived at the time as a substantial source of funding for parties.
Lord Goodhart speaking in Grand Committee during the passage of
the Electoral Administration Bill on 23 March 2006 said however
"In retrospect, we in the Committee on Standards in Public
Life were, I fear somewhat naïve in not realising that loans,
even if nominally at a commercial rate of interest, could be used
to evade the rules of disclosure of donations and should be treated
as donations. Loans at a full rate of interest can of course also
be used to evade the ban on gifts by individuals not on the electoral
register or companies not carrying on business in the United Kingdon
which are not, under the 2000 Act, permissable donors".
18. The Secretary of State for Constitutional Affairs
announced on 20 March that "the Government intends to amend
the Electoral Administration Bill, currently before the House
of Lords, to make it compulsory for political parties to disclose
any loans they receive", in order "to achieve as great
a transparency for loans made to political parties as applies
to donations under the regime in the Political Parties, Elections
and Referendums Act 2000 (PPERA)". It is the Government's
intention to table the amendments for consideration at the next
stage of the Bill.
FRAMEWORK OF
PROPOSED NEW
RULES FOR
LOANS TO
POLITICAL PARTIES
19. The main thrust of the proposal is to apply to loans
to political parties a similar regime of transparency and permissibility
to that set out in PPERA for donations received by political parties,
modified only where necessary to reflect the differences in nature
between a donation and a loan. The four main elements will be:
— All loans to political parties, regardless
of the terms on which they have been made will be reported to
the Electoral Commission. Disclosure would be at quarterly intervals
and weekly during a general election period. Loans of over £5,000
and thereafter additional £1,000 from the same lender would
have to be disclosed;
— All loans extant on the day that the provisions
come into force would have to be disclosed and any taken out thereafter;
— Parties would only be permitted to take out
loans from the same sources as are permitted for donations, but
existing loans taken out before the provisions commence would
not be subject to this requirement;
— The regime would also cover guarantees in
all the same respects as above, where they were for a value of
£5,000 or an unlimited amount.
THE DETAILED
REQUIREMENTS
20. Part IV of and Schedule 6 to PPERA set out the detailed
requirements for the control of donations to political parties
registered with the Electoral Commission under Part II of PPERA.
It does not cover unregistered parties or minor parties (the latter
contest only parish and community council elections). The intention
is that as far as possible these controls should be replicated
for loans taken out by registered political parties. Following
this structure the comparative elements for loans are envisaged
as being as follows.
DEFINITION OF
A LOAN
21. This will cover:
— all types of loans whether made on commercial
terms or not;
— the giving of guarantees;
— other forms of security;
— overdraft facilities regardless of whether
they are activated.
22. PPERA already provides for "any money lent to
the party otherwise than on commercial terms" to be treated
as a donation. The introduction of a regime specifically for the
regulation of all loans to parties, regardless of whether there
is a non-commercial element involved renders it unnecessary for
such loans also to be recorded under the donations regime. This
will avoid confusion as to which provisions a loan of that nature
should be registered under.
PERMISSIBILITY
23. Provisions are proposed to prevent a registered party
from taking out a loan unless it was with the same persons/bodies
as listed as permissible donors (see paragraph above). The permissibility
element of the new regime would not apply retrospectively so that
existing loans declared when the powers come into force will not
have to meet this condition.
REPORTING REGIME
24. A party will be charged with making a donation report
to the Electoral Commission in respect of the following periods:
to be received by the Commission within 30 days beginning
with the end of the reporting period to which it relates.
25. During a general election period (ie from dissolution
of Parliament to polling day) reports would be submitted at weekly
intervals. The duties relating to these reports will be the responsibility
of either the registered leader or registered nominating officer
of the party.
26. A relevant loan will have to be recorded in a report
where the overall value of the loan is more than £5,000 or
if when it is added to any other relevant loan the aggregate amount
of the loans is more than £5,000.
DETAILS TO
BE GIVEN
IN THE
LOAN REPORT
27. Details of all loans and related transactions outstanding
when the provision comes into force and those taken out thereafter
will be required to be disclosed in the report. So, for example,
in the case of a loan the relevant detail might be:
— The identity of the lender with address or
company's name, registered address and number (and similar detail
for other permitted lenders);
— The date the loan was taken out;
— Whether it was taken out by the party or
an accounting unit of the party;
— The period of the loan;
— Terms of the loan such as interest rates
and those which reflect any requirement for security and any flexibility;
— Whether there was a clear understanding that
the loan would be converted into a donation at a later stage.
OFFENCES
28. PPERA contains a series of offences relating to donations
and we would put in place similar provisions for loans. Examples
of those which would be appropriate are:
— knowingly entering into or furthering any
arrangement which facilitates the concealment or disguise of the
making of a loan by an impermissible lender and the giving of
false information to the registered treasurer or withholding information
with intent to deceive from the registered treasurer;
— failure to make the loan report within the
required period and failing to record all the required information
in the report;
— making a false declaration to the Commission
that the details recorded in the report are correct.
ROLE OF
THE ELECTORAL
COMMISSION
29. The Commission's role will be as for donations. They
will be required to take receipt of the required reports and maintain
a register of the loans which should be available to the public.
If they follow their practice for donations this is likely to
mean publication on the Commission's website.
ALTERNATIVE FUNDING
METHODS
30. Thriving political parties have generally been recognised
as a crucial factor in a healthy democracy and, despite the rise
in other outlets for political activity, the main way in which
public opinion can be focused. They ensure the conduct of effective
parliamentary government. However a number of factors such as
declining voter turnout, significant reduction in membership numbers
and lower levels of voter attachment have all brought into question
the legitimacy of the party system. This has resulted in a decline
in both financial and other support for parties at the local level
and increasingly reliance by the parties on securing large donations
from individuals.
31. The successful implementation of the Neill Committee's
recommendations as regards donations to political parties introduced
a very welcome transparency to these types of transactions. It
is clear however that the same level of clarity would be welcomed
universally in relation to loans to political parties. The amendments
to the Electoral Administration Bill will achieve this. The Government
has also overseen a modest increase in the amount of state funding
which parties receive and this has become a vital source of income
to parties supporting their role in this representative democracy.
32. The Government feels however that the issues need
to be looked at afresh. This view is shared by all the major political
parties and with this in mind the Prime Minister has announced
that Sir Hayden Phillips will conduct a review of the funding
of political parties. The terms of reference of the review were
announced on 20 March and are as follows:
To conduct a review of the funding of political parties.
In particular:
— To examine the case for state funding of
political parties including whether it should be enhanced in return
for a cap on the size of donations;
— To consider the transparency of political
parties' funding;
— And; to report to the Government by the end
of December 2006 with recommendations for any changes in the current
financial arrangements. Sir Hayden Phillips will work closely
with stakeholders including, especially, the political parties
and the Electoral Commission. He has been asked to aim to produce
recommendations which are as much as possible agreed between the
political parties with a view to legislation as soon as Parliamentary
time allows.
33. It would be inappropriate at this stage for the Department
to comment in any further detail on the matters which Sir Hayden's
review will be examining in a full and comprehensive manner.
Department for Constitutional Affairs
March 2006
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