Select Committee on Public Administration Second Report

5  Loans and electoral administration

85. As we made clear at the outset of our inquiry and of this report, it is for other Committees to consider proposals relating to the system for party funding. Before the machinery of government changes which created the Ministry of Justice, the Constitutional Affairs Select Committee (CASC) produced a report which set out a possible direction of travel, a package which included an increased element of state funding, some tax relief on political donations, and lower caps on spending and individual donations.[69] At the same time, the Government commissioned Sir Hayden Phillips, responsible for its review of the honours system, to conduct a similar exercise with regard to party funding. Sir Hayden's report was published on 15 March 2007 and its prescriptions followed much the same direction as the CASC report.[70] Following publication of Sir Hayden's report, the parties were involved in talks to try to agree a way forward, although at the time of writing those talks are suspended. We did not take evidence on the future of party funding and do not intend to make suggestions to influence those discussions, except to note that if there are more effective mechanisms to prevent donations producing rewards, then part of the funding issue is easier to resolve.

86. However, given the allegations which triggered the police investigation, our inquiry inevitably touched on questions of how parties acquired donations, and whether the legal and regulatory frameworks around party funding were working, irrespective of how they might be altered in future. This chapter summarises our findings.

Loan funding

87. Some political commentary implies that the act of donating money to a political party is inherently dubious behaviour. There is certainly now a school of thought which holds that the parties' reliance on a few wealthy donors has skewed political behaviour. We heard arguments along these lines from Dr Pinto-Duschinsky.[71] There may be truth to these assertions—we have not tested them—but if so, it is not necessarily the fault of the donors themselves. David Perry QC offered a qualified defence of political giving in the context of suspicion over donors subsequently being ennobled:

    People donating to parties who become recognised as supporters of parties and are properly then given peerages because they do support the party in question and they have demonstrated their support in the past is not necessarily wrong.[72]

88. We would go further. In a system where political parties rely on donations to fund their continued existence, it is nonsensical to distrust instinctively the act of donation. The logic of a donor-based funding system is that we should move in the opposite direction, to make it more commonplace to give money to political parties in the way that people do to philanthropic organisations. We believe that political giving can and should be akin to charitable giving. Dr Meg Russell gave us an interesting observation:

    In a funny sense, if you have someone who is at the top of their field who is being considered for membership of the House of Lords, you have to be a little bit suspicious as a party if they have not given a significant amount of money to the party because when you are a wealthy individual, it is one of the only ways that you can show your commitment, particularly when you are extremely busy. The House of Commons is full of donors to political parties and we do not tend to think that that is corrupt.[73]

Donating should not in itself be controversial. It should not be assumed that every donor to a particular cause does so in search of preferment or reward.

89. Nonetheless, transparency is essential, which was the purpose of the 2000 Act. The problems arise more when donations are not declared on receipt. It is scarcely surprising that when the existence of undeclared loans to political parties became public knowledge, searching questions were asked as to why they had not been declared in the first place. It would have been far preferable with hindsight for the transparency regime introduced by the Political Parties, Elections and Referendums Act 2000 to have extended to all loans to political parties, and not just be limited, as it was, to those which were not made on commercial terms. This was put right by the Government when it acted swiftly in 2006 to add provisions on declaration of loan funding to the Electoral Administration Bill, now an Act; and the then Lord Chancellor, Lord Falconer of Thoroton, admitted that such provisions should have been in the earlier Act.[74]

90. In retrospect, it was a mistake for the Political Parties, Elections and Referendums Act 2000 not to require the declaration of all loans, whether commercial or otherwise. The Government was right to acknowledge that mistake, and right to take swift steps to rectify it in the Electoral Administration Act 2006.

A regulatory failure?

91. The passage of the Electoral Administration Act closed the loophole which was at the heart of the long police investigation. But we heard some evidence that even with this loophole, however regrettable, the 2000 Act was nevertheless workable. In this version of events, the failure was not just one of policy in 2000 but also subsequently one of implementation. The charge laid is that the definition of "commercial loan" was never satisfactorily clarified, meaning that parties were unable to judge the legality or otherwise of their actions. At fault, if we accept this hypothesis, is the Electoral Commission.

92. The argument that the police investigation flowed from an Electoral Commission regulatory failure was put to us most forcefully by Dr Pinto-Duschinsky:

In other words, the charge is that by failing to give any guidance on the definition of a commercial loan, the Electoral Commission gave the parties no chance to demonstrate that they were clearly working within the law.

93. This absence of a clear definition of commercial loan would prove problematic for the police investigation. We know that the police, unable to put together a case under the 1925 Act, turned to the 2000 Act in pursuit of a charge of failing to declare a loan on non-commercial terms. We also know that in the end they failed to convince the CPS that charges could be brought on these grounds. On deciding not to prosecute, the CPS wrote that:

    In relation to possible breaches of the 2000 Act, we are satisfied that we cannot exclude the possibility that any loans made—all of which were made following receipt by the Labour Party of legal advice—can properly be characterised as commercial.[76]

In our evidence session with the police, Assistant Commissioner Yates seemed to ascribe this inability to prosecute at least in some degree to a failure on the part of the Electoral Commission:

    At the moment, there is no definition of a commercial loan, which I know of, the Electoral Commission cannot provide me with one and I think it is a big gap in the law…[77]

    I think there is an absence of guidance as well. Without a definition there should be some guidance to help people.[78]

94. Carmen Dowd of the CPS, though, argued that we should not be too quick to attach all the blame to the electoral regulator:

    I think that is slightly unfair in that the Electoral Commission have not been in a position to define what a commercial loan might look like.[79]

We put to our panel of academic experts the suggestion that the Electoral Commission should simply have pronounced on what constituted a commercial loan. Professor Fisher, who has worked closely with the Commission in the past, gave us a robust defence of the Commission:

    They were not able to. That pronouncement would have had no legal standing. There is no legal definition of what constitutes a commercial loan and, therefore, whatever pronouncement they made could have been open to legal challenge.[80]

However, this defence was challenged by Dr Pinto-Duschinsky:

    In many countries electoral commissions do give advisory opinions which can indeed be challenged afterwards in a court of law, but which nevertheless help political parties. In fact, when the Chief Executive of the Electoral Commission was questioned about this by the Committee on Standards in Public Life, he said himself that he favoured the giving of such advisory opinions, despite the fact that they could then be challenged in the courts later on, so the Electoral Commission itself now agrees that it is desirable to give advisory opinions, as are given in the United States, as are given in Canada, et cetera.[81]

95. We see validity in the points made by all of our witnesses. The position is complex. Section 10 of the 2000 Act provides that the Commission can provide certain people with advice and assistance. The section lists certain people such as registration officers and registered parties to whom the Commission is specifically empowered to provide advice and assistance, and also provides that the Commission can give advice and assistance to other persons if this is incidental to or otherwise connected with the discharge by the Commission of its functions. The question is therefore whether the Commission could have issued advice and assistance either generally to registered parties, or in response to a particular request from the CPS in respect of the specific investigation. In our view, although the Act would have empowered the Commission to issue advice to parties generally about what loans were or were not to be treated as donations, such advice would have had no legal standing. It would simply have been the Electoral Commission's view of what the statute meant, and would not have been binding on any court that had to consider the matter.

96. In fact, the Commission was in an invidious position. Able to advise but not authoritatively, it ran the risk of sinking potential future prosecutions if it did pronounce on what it believed commercial terms to be. Let us take a hypothetical example, based on the assumption that guidance did exist on what constituted a commercial loan. If a party received a loan and, based on Electoral Commission guidance, did not declare it, this would not prevent others complaining to the police that the party treasurer had committed an offence because the loan should actually have been treated as a donation. The court might then be minded to find against the party, but even if the court thought that the Commission's guidance was wrong, because the treasurer could point to the advice from the Commission, it would be impossible to say that the treasurer "knowingly or recklessly" failed to include a donation in the report. In short, if Parliament had wanted the Commission to be able to give definitive advice in this area, then it should have provided for that in the statute.

97. Our understanding of the 2000 Act is that it did not give the Electoral Commission the power to publish binding guidance on what would constitute a commercial loan. Therefore, the Commission's decision not to give advisory guidance was quite defensible, as to do so would not have given helpful clarity over the legal position. Instead, it might even in some circumstances have prevented justified prosecutions. The Commission was damned if it did and damned if it didn't. The failure to define a "commercial loan" was in the drafting of the 2000 Act.

98. The criticisms we heard of the Electoral Commission are consistent with a wider criticism levelled at it—which is that it has failed to be a proactive body, defining and enforcing standards of acceptable behaviour by political parties and those acting in the political sphere. Again, we think this is harsh—the Commission was not designed to be that kind of body. Although it has some regulatory functions, it has also been responsible for encouraging people to take part in the democratic process, promoting voter awareness, advising and reporting. However, we do note the impressive consensus behind the opinion that it is time the Commission was refocused so that it is primarily a regulatory body. This was the central recommendation of the eleventh report of the Committee on Standards in Public Life.[82] It was recommended by the Constitutional Affairs Select Committee and by Sir Hayden Phillips.[83] The Commission itself responded to these reports by affirming that this course of action was in line with its own corporate plans,[84] and the Government has now indicated that it too agrees.[85] We note that the Commission and the CSPL agree that legislation is necessary to ensure that the Commission is able to carry out its envisaged enhanced role.

99. The Electoral Commission's inability to give binding guidance was entirely consistent with the way the Commission was set up. There is now a striking consensus behind the need to make the Electoral Commission into a more effective, proactive regulator. We add our voice to that consensus. The Government is currently considering what steps to take next. One of these steps might need to be changes to legislation to give new powers to the Commission.

100. The conclusions above suggest that if there was any failure in the regulation of funding, it was not a failure of the regulator, but of the regulatory framework set in statute, and of the parties themselves. There was a loophole in the law which allowed parties wider discretion than was presumably envisaged to receive loans without declaring them publicly. We note, as Dr Pinto-Duschinsky made clear, that at least two of the parties took legal advice on how not to breach the provisions of the 2000 Act regarding commercial loans, and he tells us that the Conservative Party went as far as asking the Electoral Commission for advice.[86] However, it is hard to understand the decision to seek legal advice as representing anything other than a desire to secure the most favourable rates possible without declaration—especially in the light of the subsequent failure to declare the loans that were made. The parties could easily have played safe on the question of law and simply declared the loans if there was any doubt as to whether they were commercial or not. Having designed the loophole, the parties did not have to dive through it so assiduously.

101. Lord Stevenson, who in addition to chairing HoLAC is also the Chairman of HBOS plc, was clear that, while not necessarily declarable, the loans not declared by the parties did not correspond with his understanding of "commercial":

    I personally was and am quite shocked by the expedient of loans. I am not saying they were illegal but I was quite shocked, it is a bit like tax avoidance, and second, there are some real shades-of-grey territory as to what is commercial and what is not.

    You try coming to my bank and getting an unsecured loan with interest rolled up at one or two points over base, and I would hate to disappoint you, Chairman![87]

102. He also argued that, while HoLAC's financial disclosure forms did not ask directly if nominees for a peerage had ever made loans to the party nominating them, they were phrased in such a way as to make it "perfectly obvious" that loans were relevant:

    It is important to say that quite a lot of nominees had told us about loans, as indeed I would expect them to. It is pretty obvious that they should, irrespective of what the 2000 Act said.[88]

Pushed further, he suggested strongly that he would have expected candidates to mention the loans if in any doubt whatsoever as to whether they were relevant:

    The fact is, Chairman, that an awful lot of our nominees, I am glad to report, tend to throw everything in at us. If they so much as bought an ice-cream for a politician's child, they will put that in. I am exaggerating a little bit, but half a dozen bottles of beer featured…[89]

In this light, it seems unlikely that not one but four nominees should all be so sure of their interpretation of the Appointments Commission's disclosure requirements as to decide independently that their loans—in three cases of £1 million or over—were not relevant. It seems clear that the non-disclosure of undeclared loans was deliberate.

103. The question of non-disclosure of undeclared loans arose in a letter sent to the Chairman of this Committee by Sir Gulam Noon, which we publish with this Report. The letter reads:

    When I was approached in relation to the possible peerage, I completed what I understand to be the usual form and disclosed on an attached document my schedule of donations including the £250,000 loan. I was, thereafter, reminded by Lord Levy that this should not have been declared because it was a loan, not a donation.

    At his suggestion, I telephoned Richard Roscoe, the appropriate civil servant at 10 Downing Street, and, following discussion, I wrote enclosing the revised schedule. I thought that I was correcting an error and am embarrassed and upset by the nature of some of the publicity which has resulted.[90]

Sir Gulam's letter also states that he initially offered a gift but was asked for a loan.[91] As our inquiry became the subject of a police investigation, we have been unable to test these allegations on other witnesses. We cannot therefore judge their veracity. We understand that Lord Levy does not agree with the account given by Sir Gulam.

104. The suggestion that undeclared loans should have been declared is not entirely without difficulties. The most important of these would have concerned the privacy and confidentiality of the lender. The lender (which in some instances would have been a bank) might not have wanted to make public the fact that they had made a commercial loan to a political party because they might not have wanted to be associated with a particular political party. Where the loan came from an individual there could have been personal data protection problems with the party making the loan public in a situation where there was no statutory requirement to do so. We acknowledge that parties would not have been acting improperly in choosing not to declare genuinely commercial loans.

105. Nonetheless we see no reason why any parties could not have made it their policy to declare all of their loans (as of course they are now compelled to do). If either banks or individuals had not wanted to make loans under those terms, there would have been no compulsion for them to do so. Data protection would presumably not cause any problems if donors were aware that their loans would be made public. In the event, despite their acknowledgement in the 2000 Act of the principled case for transparency, this was not the route that parties chose to go down. With hindsight, the failure to do so was, at the very least, misjudged.

106. The pattern of events is clear. While legal advice was taken to ensure that no law was broken, a deliberate attempt was made to stretch the loophole on commercial loans as far as it would go. Having agreed legislation to make party funding transparent, parties appear to have gone to some lengths to get around it.

107. If there was any doubt about whether it was legally necessary to declare their loans, parties should have done so. If there was any doubt about whether it was legally necessary for candidates for peerages to disclose their loans, they should have done so. Even if there was no doubt on either of these matters, there is a strong ethical case that loans should have been declared. The letter of the law may not have been broken, but the spirit of the law was quite clear.

69   Constitutional Affairs Select Committee, First Report of Session 2006-07, Party Funding, HC 163 Back

70   Sir Hayden Phillips, Strengthening Democracy: Fair and Sustainable Funding of Political Parties, 15 March 2007 Back

71   Q 364 Back

72   Q 322 Back

73   Q 374 Back

74   Quoted in Andrew Grice, "Parties forced to disclose all loans in wake of cash for honours affair", The Independent, 27 April 2006, p26 Back

75   Q 378 Back

76   Crown Prosecution Service, CPS decision: "Cash For Honours" case, 20 July 2007, para 30 Back

77   Q 350 Back

78   Q 358 Back

79   Q 354 Back

80   Q 377 Back

81   Q 377 Back

82   Committee on Standards in Public Life, Eleventh Report, Review of the Electoral Commission, Cm 7006, January 2007 Back

83   Constitutional Affairs Select Committee, First Report of Session 2006-07, Party Funding, HC 163, p25; and Sir Hayden Phillips, Strengthening Democracy: Fair and Sustainable Funding of Political Parties, 15 March 2007, p7 Back

84   Electoral Commission, The Electoral Commission response to the recommendations of the eleventh report of the Committee on Standards in Public Life, 19 March 2007, p2 Back

85   Ministry of Justice, Government Response to the Committee on Standards in Public Life's Eleventh Report, Cm 7272, November 2007, p1 Back

86   Q 378  Back

87   Q 228 Back

88   Q 228 Back

89   Q 231 Back

90   Ev 74 Back

91   Ev 73 Back

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