Taken before the Justice Committee
on Wednesday 10 December 2008
Sir Alan Beith, in the Chair
Mr David Heath
Mrs Siān C James
Witnesses: Lord Bach, a Member of the House of
Lords, Parliamentary Under-Secretary of State, Patrick Bourke, Head of European and International Division, and Mark Taylor, Head of Legal Aid
Analysis, Finance and Performance Division, Ministry of Justice, gave evidence.
Perhaps I may take the opportunity to welcome Lord Bach on his first appearance
before the Committee and his officials, Mr Bourke and Mr Taylor. We are very glad to have you on what I
understand is the day of Sark's first general election. Although it also has to be noted, of course,
that the Government's advice to the Crown on the situation of Sark has been
found by the courts to be wrong, in a recent Times law report. If you
want to explain that, you can do it later.
What we want to consider first of all is the Crown Dependency system and
the role of the Ministry of Justice in dealing with Crown Dependencies. Briefly, what do you see as the role of the
Ministry of Justice in representing the interests of the Crown Dependencies?
Lord Bach: The Ministry of
Justice is of course the department that is responsible for protecting the role
of the Crown Dependencies in UK Government; so we obviously take a residing
interest in issues that other government departments may or may not have with
the Crown Dependencies. It is a relationship
that seems to work pretty well.
It did not sound like that when the Chancellor referred to the Isle of Man as
"a tax haven sitting in the Irish Sea".
It did not sound like a healthy relationship.
Lord Bach: The relationship that
has worked very well and is working well in regard to the review that the
Treasury has now undertaken. I think it
important for the Committee to understand that the Ministry of Justice was
involved very early on and I was personally, talking to the Treasury about the
terms of the review. I met with
representatives from the Crown Dependencies, or some of them, and I was present
and co-chaired a meeting that Lord Myners, the Treasury minister, held in
the Treasury on the day that the announcement was made. It is perhaps worth pointing out that each
of the Crown Dependencies put out a press release, warmly welcoming the
review. I think that it is quite a good
example of how the Ministry of Justice is involved in looking after the
interests of the Crown Dependencies that this particular exercise was carried
out so successfully.
We will come to the review itself later.
Let us look at the relationship in terms of recent events, because they
do test and illustrate issues around the relationship. If it is the role of the Ministry of Justice
to represent the Dependencies in international relationships, which it is, then
there is surely a conflict of interest?
The Isle of Man Government and the Guernsey Government have an interest
in ensuring that the Icelandic Government meets the guarantees upon which
depositors in Landsbanki in Guernsey and Kaupthing SE in the Isle of Man
depend. The Treasury's interests relate
to the United Kingdom public purse, and yet the impression has been given that
the Ministry of Justice has simply passed over to the Treasury all
responsibility in this area. Is there
not an actual conflict of interest, given that the Ministry of Justice should
be representing the Dependencies' interests whereas the Treasury is looking
after the UK taxpayer?
Lord Bach: No, I do not think
there is. Her Majesty's Government
looks after the interests in international affairs of the Crown
Dependencies. The department of state
in the UK Government that has prime responsibility for that and for the constitutional
relationship is the Ministry of Justice.
As far as this issue is concerned, there is no conflict at all between
both what HM Government says and, whether it be the Treasury or the MoJ, there
be no conflict between the two departments at all as to their role; and I do
not think that it has been suggested by the Crown Dependencies that there is
somehow a conflict. We work closely
with the Crown Dependencies on a day-to-day basis as is necessary and they make
representations both to us and of course to other parts of government as well;
but I do not see that there is this conflict of interest.
But both the Dependencies and the depositors thought that there was a conflict
of interest, because the UK Treasury took action to freeze or transfer assets
in the interests of UK depositors and UK taxpayers within the UK, and the
interests of depositors in the Isle of Man and Guernsey would have been for
that money to stay in the accounts in the banks in the Dependencies, so that
the depositors could get their money back.
Lord Bach: It may be that the
Crown Dependencies themselves, or one of them in particular, was not entirely
happy with the course of events but that did not compromise the Ministry of
Justice in any sense at all. We are
part of Her Majesty's Government primarily of course. However, it may be worth my describing briefly, particularly in
regard to Kaupthing and the Isle of Man, how we saw this, because this has
obviously been an important issue. As
the Committee knows, Kaupthing Bank, the parent company, had at least two
subsidiaries that are relevant: one in the UK and one in the Isle of Man. The business model usually used in the Crown
Dependencies, as I understand it, is a practice of upstreaming deposits for
Treasury management by the parent company.
Banks incorporated into the Crown Dependencies therefore deposit a large
amount, an amount equal to a significant portion of their deposits, with the
parent company; but that is not what happened here. The Isle of Man branch deposited £532 million with its sister
company in the United Kingdom, not with its parent company. That was a decision for the Isle of Man
branch and resulted, we believe, from concerns that the Isle of Man regulator,
namely the Financial Supervision Commission, had about the position of the Isle
of Man's parent company - the Iceland parent company - and the Isle of Man
branch appear to have determined that placing money with the UK branch was a
more prudent thing to have done. That
decision followed discussions that the Isle of Man regulator had had with our
regulator, but at no time did our regulator advise or require these deposits to
be made; the discussion did not extend to the giving of any assurances, by the
FSA for example, that the UK would be able to repay the money or that the IoM
branch would be treated preferentially.
Under our insolvency rules and law, the Isle of Man branch ranks like
any other creditor of the bank, and the Isle of Man branch of Kaupthing will
have been fully aware of that and it made a choice to put its deposits into the
UK branch, when it could have diversified those deposits and put them in a
number of different places, as it happens.
Was the Ministry of Justice consulted before the freezing took place?
Lord Bach: On 8 October, which
is the date I believe that the freezing took place, I do not know whether we
were consulted first; but it would not surprise me to hear that we were not.
Let me take you a stage further, though.
The IMF loan was a process in which obviously the Isle of Man's
relations with the Icelandic government were of crucial importance. What role did the Ministry of Justice take
in representing the Isle of Man's interest to the Icelandic Government, and
what conditions have been secured that depositors in the Isle of Man Kaupthing
bank will be repaid as a condition of the IMF loan?
This is what is puzzling to us, when you said earlier that there is not a
conflict of interest. Surely there is a
potential conflict of interest here?
The Treasury, in discussions about the IMF loan, has as its primary
responsibility to secure the interests of the UK taxpayer and depositors in UK
institutions for which it has regulatory responsibility. The primary interest of the Isle of Man
Government is different. If it came to
an issue as to what conditions were attached to the loan, whether they were
conditions that suited UK taxpayers' interests or UK depositors, or conditions
which suited depositors in the Isle of Man bank, the Treasury's conditions
would be different from those which are most important to the Isle of Man
Government. That is the point where
surely you come in? Your apparent
absence from these discussions seems strange.
Lord Bach: We represent the
interests of the Isle of Man where it is appropriate to do so but we are part
of Her Majesty's Government, and of course that is our prime
responsibility. The Isle of Man runs
its own fiscal affairs, as it runs its own legal system and it runs everything
itself; it runs its own parliament. Our
position, under this set-up, is to be the department in the United Kingdom
Government that has the closest relationship with the Crown Dependencies and
looks after its interests where appropriate, particularly in the international
Q8 Mr Heath:
This does sound extremely strange to me.
It seems to me as though the department has abdicated its responsibility
on behalf of the Isle of Man completely, has said, "The Treasury is looking
after that", and appears to show no interest - or no observable interest from
the answers we have had so far - in the outcome of the way in which those
interests have been protected or otherwise by the Treasury. Am I being entirely unfair?
Lord Bach: Yes.
Q9 Mr Heath:
Then tell us what has been happening in terms of the Treasury and tell us how
the Ministry of Justice has assessed its efficacy in protecting the interests
of the Isle of Man.
Lord Bach: Mr Heath, I do not
think that you are being entirely unfair; I think that you are being a little
unfair here. As I said a little
earlier, we keep a very close, day-to-day interest in relations with the Crown
Dependencies, and we clearly are on this issue as on every other issue. I do not know what you would expect us to
do. We are part of Her Majesty's
Government. This is an issue that the
Isle of Man Government has, and is quite capable of talking to the Treasury
itself. We talk to the Treasury too, of
course. In the end, however, we are not
dealing here with a sort of colony; we are dealing here with a Crown Dependency
that, in the case of the Isle of Man, is self-governing, has its own systems,
has its own financial systems. It is
not our job to nanny the Isle of Man in any sense. Our job is, in the broadest sense, to have a close relationship
with them and to assist. However, it
may be that Mr Bourke could improve on that.
Patrick Bourke: I think that it
is to put it too strongly to say that we have abdicated all responsibility for
them. I am quite sure that if you were
to ask the Isle of Man whether they felt the same way about the MoJ as the sense
that was apparent in your question, I think that they would disagree very
strongly. We have facilitated a number
of meetings between the Isle of Man and the Treasury. The Justice Secretary himself saw the chief minister, the chief
executive and the chief regulator at MoJ headquarters. That meeting was attended by Treasury
officials. There are weekly
videoconferences between the Treasury and the Isle of Man, which we suggested
would be a very good idea, so that the Treasury can update the Isle of Man on the
status of negotiations with Iceland.
Q10 Alun Michael:
I take it that it is quite difficult to disentangle the different issues
here. Can I try to do so, bearing in
mind that we are actually looking backwards to a situation that nobody
anticipated. The UK Government did not;
the Icelandic Government did not; the Isle of Man did not; the financial
institutions did not. Therefore, it was
not a question of people acting in the knowledge of what was going to happen
but being reasonably prudent and making the right checks at the right
time. As I understand it, in relation
to the Icelandic parent company you then have three jurisdictions: the UK
jurisdiction, the Isle of Man jurisdiction and the Icelandic one. We have two regulators that are relevant to
our situation, which is the FSA and the Isle of Man regulator to which you have
referred. We have three commercial
entities: the parent company in Iceland, the UK subsidiary and the Isle of Man
subsidiary. We also have, in each of
these, investors from the Isle of Man and investors from the wider UK; so the
interests of UK citizens are not straightforwardly with the UK institutions;
they run across the different ones. Is
it not true to say that there was reasonable prudence in the sense that the
money went from the Isle of Man bank to the UK bank, there having been some
discussion between the two financial regulators about the prudence of dealing
with that? What is the relationship and
the responsibility between the different financial regulators, therefore, and
what is the responsibility of the Ministry of Justice, as the representative of
the Isle of Man in effect within the UK Government, in working out what is
right, going forward?
Lord Bach: There were, as you
say, in May 2008 discussions between the Isle of Man regulator and our
regulator in the UK, but at no time, I am advised, did our regulator advise or
require the deposits, which were made quite freely by the Isle of Man branch.
Q11 Alun Michael:
But you would not expect a requirement, though, would you? My point is that there was reasonable
discussion, was there not?
Lord Bach: There was a
discussion, but this was a commercial decision taken by Kaupthing Isle of Man.
Q12 Alun Michael:
Does it not affect the situation that they, it would seem sensibly, had
discussions with the FSA, because of their concerns about the Icelandic bank,
about what was the most prudent thing to do?
My point being that that prudence was being exercised not on behalf of
an institution out there but the interests of UK investors, amongst others.
Lord Bach: As I understand it,
the FSA offered no advice in relation to what would be prudent or not prudent,
save their saying that there were some fears around the parent company. What the Isle of Man branch of Kaupthing
then did with its deposits was entirely a matter for it and not a matter for
either HM Treasury, let alone the Ministry of Justice.
Q13 Alun Michael:
Yes, it may be entirely a matter for them and they have the responsibility of
taking the decision - as in any situation, the actor has the responsibility of
taking the decision - but it does seem sensible, when there is UK investors'
money potentially at risk, because as I understand it there was UK investors'
money in the Isle of Man sibling of the UK branch, for there to be a
precautionary approach taken by everybody concerned.
Patrick Bourke: I certainly
would not disagree with that. Dialogue
between regulators, particularly in neighbouring jurisdictions with significant
interests in each other's accounts, if I can put it that way, is obviously to
be welcomed. One of the things that
will be the subject of the independent review announced by the Chancellor as
part of his pre-Budget report will be precisely how to further stimulate and
render yet more efficacious the dialogue between Crown Dependencies' regulators
and the FSA. It is a self-evident
We will come to the review in a moment, but I am still puzzled that you seem to
have difficulty in answering an absolutely basic question. What was the primary interest of the Isle of
Man Government and the Guernsey Government in the negotiations leading to the
IMF loan? It was that the Icelandic
Government should meet the guarantees which it had previously given to banks
domesticated in Guernsey and the Isle of Man.
I have asked you if that primary objective of those two governments was
satisfied in the international negotiations, for which you are responsible even
though you may have delegated the duty, the carrying out of it, to the
Treasury. How far was that objective
met? If you do not know the answer to
that, it suggests that the role of the Ministry of Justice, representing the
interests of the island - which in this case happens to be also the interests
of a lot of people in the UK who have deposits in those accounts - is not
central to what you are doing.
Patrick Bourke: The MoJ, if you
like, acts as a focal point for the Crown Dependencies within Whitehall. What the MoJ's role has been to do has been
to work with our Treasury colleagues to ensure that the Isle of Man's interests
are indeed represented. The application
was made by the Isle of Man to us on 10 October; on 14 October, Treasury
confirmed that, obviously in line with constitutional principles, it would be
representing the Isle of Man's interests in those negotiations. Frankly, I think the Isle of Man would not
thank us very much if I personally was negotiating with Iceland on matters
which are quite beyond my ability, I am afraid.
How successful have you been? News of
the IMF loan to Iceland is out. We know
that it is happening. Have you been
successful between you, you and the Treasury, in securing conditions or not?
Lord Bach: As I understand it,
negotiations are still continuing. "No
results yet", I think is the best way I can describe it.
Q16 Mrs James:
Mention was made of the review earlier and we are going to come to some
questions about the review. What
happens if the Crown Dependencies' administrations refuse to implement any of the
changes that the review suggests or proposes to them?
Lord Bach: We would very much
hope that the Crown Dependencies, and in due course the Overseas Territories,
approach constructively the opportunity to work with what is a very credible
and heavyweight reviewer on developing their response to these circumstances -
very challenging circumstances given economic conditions. We are not proposing any changes to the
constitutional scope as a part of this review.
That is a very important point and was very important to the Crown
Dependencies themselves. It is
absolutely up to the Crown Dependencies, as you suggest, to respond as they see
fit. We do not think that we will come
to the position where the Crown Dependencies refuse to implement the
recommendations. If there are issues
and problems once the review is out of the way, then I hope that we will be
able to act as a kind of honest broker behind the scenes, in order to make sure
that it does not come to a question of refusing to carry out what may or may
not be suggested in the review.
However, we are a very long way from that. As I say, the Crown Dependencies all welcome this review. They do not see it as a kind of threat; they
see it as something that is necessary and useful at this particular stage. So the answer to your question is we do not
think that this will happen and, if it does, it will be our role to try to make
sure that things are kept in line.
Q17 Mrs James:
We are talking about the regulatory arrangements here, where the Crown
Dependencies have had great freedom in the past. The Chancellor did make the comment about the "tax haven in the
Irish Sea", and this is how the greater public in Britain see it. What levers do we have as a Government to
impose reform? Many people, including
myself, think that reform is long overdue.
Lord Bach: I think the answer is
that we do not have levers at the end of the day, in the sense that the Crown
Dependencies, as I think I have already said, have their own parliaments, their
own legal systems and their own financial arrangements. Frankly, the relationship that there is
between the Crown Dependencies and Her Majesty's Government is so good as to make us believe that all sides will
act sensibly and that the Crown Dependencies themselves will not be against
some reforms, if that is what the reviewer suggests. We do not think that we will get to the stage that the question
Have you not rather understated your power?
If legislation is proposed in the Crown Dependencies, you give advice as
to whether Royal Assent should be given to legislation, do you not?
Lord Bach: Yes, of course we do,
and it comes across my desk certainly every week. The Privy Council then signs off, of course. You are quite right to remind me, Sir Alan. That is a hypothetical possibility, but it
is not something that we think will happen.
Is it not a rather negative power, in that something has to be initiated by the
Crown Dependency for you to refuse it; whereas if an action is not taken, you
do not have a parallel power to make sure that it is taken?
Patrick Bourke: I suppose that
is one interpretation you could place on it, but I think that the practical,
day-to-day dealing is what we need to focus on. In actual fact, we spend huge amounts of time and effort speaking
to the Crown Dependencies, understanding and, if you like, encouraging them to
undertake reforms. I have to say that
our track record is pretty good. The
Edwards review, which my political boss Jack Straw initiated 11 years ago, led
to some conclusions which were implemented.
I would also say to you, Mrs James, that if you look at the Crown
Dependencies' record in terms of international transparency standards, they
stand out from the rest of the crowd.
The reason why the Crown Dependencies have welcomed this review is so
that they can put some clear blue water between themselves and jurisdictions
which are perhaps a more legitimate target for the sort of criticism that seems
prevalent at the moment.
I did say that I would give you a proper opportunity to refer to the Sark
issue. What happened was the Court of
Appeal ruled that the proposed reform of the Sark constitution, which allowed
the Seneschal to be a member of the legislature and the chief judge,
contravened Article 6 of the European Convention on Human Rights. You are aware of this?
Lord Bach: Yes, I am. If that is what the Court of Appeal decided
- on four of the five issues that they had to decide, they decided actually on
our side. The most important decision they
made of all was that the elections that you referred to earlier today - the
first democratic elections in Sark in its 450-year history - are taking place
as we speak, at the moment, with 58 candidates for a population of 600. It would be the equivalent of five million
candidates in a British general election.
So democracy has certainly broken out in Sark today. I am sorry to have gone on about that, but
it is quite an important day and I think that the British Government has played
its part in years past in getting to that position. We are considering the Court of Appeal decision, of course, and
will come to a view on it. We have to
do that fairly shortly.
Q21 Mr Heath:
May I come back to the core issue of the current situation? Lord Bach, you are then entirely satisfied
that the interests, of not only the banking sector in both the Isle of Man and
in Guernsey but also of those who deposited monies with the banks in those
countries, were safeguarded from the first point of action of the Treasury in
freezing the assets of the Icelandic banks and since, and that those
depositors' interests are now safeguarded, in so far as any depositors'
interests are safeguarded in the UK?
Lord Bach: Yes, I am.
Perhaps I could just supplement Mr Neill's point, because I think that there is
also a wider issue that the Committee itself raised with the secretary of
state. It was in the context of
capacity-building being one of the ways in which the British Government can
help in situations where it does not have power to do things but it can be of
Patrick Bourke: Following on
from Mr Neill's point, I was there when the commitment was made by the
secretary of state to look into this issue, and my team is following it
up. I cannot give you today an
outcome to those discussions, but it was a very useful contribution, a good
thought, and we are taking it forward.
If I may, I will write to you to tell you what the progress is to date.
Q23 Robert Neill:
That will be helpful. Obviously,
talking in terms of the immediate litigation and consideration of the Court of
Appeal's decision, no doubt that sort of quality advice will be made available
by Her Majesty's Government to the authorities in Sark, to enable them to come
up with whatever solutions are necessary in a timely manner.
Lord Bach: Yes, indeed.
Chairman: At this point, we will
move to the question of legal aid reform.