House of COMMONS






Crown Dependencies



Wednesday 10 December 2008


Evidence heard in Public Questions 1 - 23





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Oral Evidence

Taken before the Justice Committee

on Wednesday 10 December 2008

Members present

Sir Alan Beith, in the Chair

Mr David Heath

Mrs Siān C James

Alun Michael

Julie Morgan

Robert Neill


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.

Q1 Chairman: 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.

Q2 Chairman: 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.

Q3 Chairman: 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.

Q4 Chairman: 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.

Q5 Chairman: 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.

Q6 Chairman: 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?

Lord Bach: That is a matter that is still under discussion, as I understand it, but it is not an issue that the Ministry of Justice has taken a leading role in. As you know, the Treasury has agreed to represent the interests of the Isle of Man in early October - I think on 10 October - and it will be the Treasury that will represent the Crown Dependencies' interests as far as the Iceland Government is concerned, on what it does with the money it has received from the IMF.

Q7 Chairman: 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 forum.

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.

Mr Heath: Thank you. That is a more helpful answer.

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 point.

Q14 Chairman: 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.

Q15 Chairman: 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 suggests.

Q18 Chairman: 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.

Q19 Chairman: 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.

Q20 Chairman: 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.

Robert Neill: My apologies for not being here at the beginning of the discussion but I was delayed by something else on the way. Can I say, Lord Bach, I agree with your points about the willingness of the Crown Dependencies generally to reform themselves, as Mr Bourke was also saying. Against that background, you may be aware that I wrote to the Lord Chancellor earlier on in the year about the question of capacity-building. That was raised in relation, for example, to reforms and changes in Sark, where a very small number of people, working part-time, are going to have to create new structures to work effectively. It is unlikely that they have the capacity to do that. You get a situation sometimes where they face difficulties from extremely well-resourced individuals or organisations, and there is a certain lack of equality of arms, if I may put it that way. Can you help me as to what further steps are being taken? I know that you have referred it to the Local Government Association to see if they can give any assistance, but I think you were also going to speak to DfID.

Q22 Chairman: 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 assistance.

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.