The Operation of the Parliamentary Standards Act 2009

Written evidence from Mr. Hugh V Thomas

Introduction

1. I am very grateful to the Committee for the opportunity to submit my comments and observations on its current review of the operation of the Parliamentary Standards Act 2009.

2. Following qualification as a barrister and call to the Bar at Lincolns’ Inn in 1986, I pursued a career in the City principally as Legal Counsel or Compliance Director/Officer in a number of large UK and international financial Institutions. In these senior roles I also advised upon the international aspects of regulation and have experience in the laws and regulations of a number of European countries in addition to the US and Asia.

3. Some three years ago, I had the opportunity to accept the role of Head of Compliance of the Conservative Party which I undertook until just before the last general election. In that role I advised the Party nationally on its activities relating to the Political Parties, Elections and Referendums Act 2000 and its relationship with the Electoral Commission and also the leadership of the party in the House of Commons and the House of Lords in relation to transparency, allowances and related issues. During that time I was also asked by the Leader of the party to advise the Conservative MEPs in respect of their expense and allowance arrangements following some revelations in the press. After ceasing my role as Head of Compliance of the Conservative Party, I was asked by the Leadership of the Conservative MEPs to continue to undertake an advisory role in respect of their expenses, allowances and transparency.

4. Currently, in addition to my advisory role with the MEPs, I also undertake consultancy roles with international investment firms in the City and elsewhere in relation to their Compliance and Regulatory activities. I am also an ordained priest in the Church of England and combine all the above with a part-time role as priest at a church in the City of London.

5. I have been very fortunate in having been able to leverage substantive and practical experience of complex regulatory environments into my previous and current roles relating to the UK and European Parliaments.

Background and context

6. The Committee has asked for comments in relation to the operation of the Parliamentary Standards Act 2009. However, also of direct relevance is the Constitutional Reform and Governance Act 2010 which, amongst other things, brought in changes to the scope of the Parliamentary Standards Act 2009 and introduced the role and terms of reference of the "Compliance Officer" of IPSA. For the purposes of my submission I will refer to both pieces of legislation.

7. When the Financial Services Act 1986 was passed, it was done in the context of the proposals by Professor L. C. B. Gower who had produced a report (perhaps in a somewhat similar context to the report by Sir Christopher Kelly concerning MPs’ expenses) following a number of highly publicised scandals during the late 1970’s and early 1980’s. Professor Gower recommended a new regulatory framework which would, it was hoped, restore the confidence of the public in the City and investment companies.

8. As Members of the Committee might be aware, since the passing of the Financial Services Act 1986 there have been many changes to the structure of regulation in the City. Whereas the Act originally established the "Securities and Investments Board", in line with the original purposes of the Act many changes, various changes in structure have been made whereas the Act has only recently been superseded by the Financial Services and Markets Act 2000. In a similar way, it is suggested that, in line with the original purposes of the legislation, further changes and improvements may need to be made to the Parliamentary Standards Act 2009 over a period of time to ensure that it fully meets the purposes for which Parliament intended. In the area of regulatory law this is an understandable and reasonable transition. The appropriate timescale for such a transition is another matter. Neither an effective regulatory system nor Rome was built in a day!

9. In the same way as in relation to the regulation of investment business before 1986 a return to the prior discredited "old" arrangements is not an option. As I found in the City, experienced people will be able to survive and prosper in a new regulatory environment in which at least some of them initially thought was unreasonable, unworkable and inappropriate. My experience with MPs and MEPs gives me some confidence that most will soon (if not already) appreciate the merits of a transparent system so that they can get on with the job for which they were elected (and for which they are paid).

Developing an effective and efficient system?

10. Much has been reported regarding the apparent inefficiencies and lack of cost-effectiveness of IPSA in the recent past. However, it should be recognised that, unlike a financial services regulator (like the FSA), IPSA is both "regulator" and "paymaster". It is "regulator" of the activities of MPs is respect of the use of their allowances and "paymaster" of their allowances and also their salaries. This dual role can, I believe, cause confusion.

11. One of IPSA’s goals, as stated in Sch 1 para 10 of the Parliamentary Standards Act 2009, is to "…do things efficiently and cost-effectively". In order to meet this fundamental aim, IPSA must so conduct itself that it can be seen to meet its "paymaster" role whilst not compromising its "regulator" role.

12. The importance of these matters was further emphasised when Parliament underlined the importance of "efficiency and cost-effectiveness" by adding section 3A into the Parliamentary Standards Act 2009 by the terms of section 28 of the Constitutional Reform and Governance Act 2010 right at the start of the Act and not relegated to a distant schedule !

Transparency etc E+W+S+N.I.

(1)The Parliamentary Standards Act 2009 is amended as follows.

(2)After section 3 insert-

"3AGeneral duties of the IPSA

(1)In carrying out its functions the IPSA must have regard to the principle that it should act in a way which is efficient, cost-effective and transparent.

(2)In carrying out its functions the IPSA must have regard to the principle that members of the House of Commons should be supported in efficiently, cost-effectively and transparently carrying out their Parliamentary functions."

The additional provision (Section 3a(2)) states that IPSA must not only look at its own activity but ALSO the activity of Members of the House of Commons in how they are supported in determining efficiency and cost effectiveness.

13. Recent reports from the National Audit Office (July) and the Public Account Committee (September) indicate that efficiency and cost-effectiveness for the "users" of the system have not been met. Therefore, one must ask whether IPSA is currently fulfilling all its statutory duties.

14. There are no specific provisions in the Parliamentary Standards Act 2009 which determine exactly how IPSA should, or should not, administer the expenses and allowances scheme for MPs. In fact section 6(1) of the Parliamentary Standards Act 2010 merely states briefly that "No allowance is to be paid to a member of the House of Commons under the MPs’ allowances scheme unless a claim for the allowance has been made to the IPSA". All the administrative details which were determined to effect this action were created and developed by IPSA itself under its own authority.

15. In the National Audit Office report published in July they specifically made mention of the need for "…a more "risk based approach" - for example, identifying low risk claims and carrying out spot checks, rather than physically checking every single claim that comes in - as they were published anyway…" (extract from BBC News 7 July 2011)

16. On the basis of my own experience in the City and elsewhere, no company (large or small) would dream of checking or verifying every single transaction or trade. In fact, it would be fair to say that no major regulatory body would consider the need for 100% verification and checking on an ongoing basis (unless possibly in an investigatory context). No City Compliance Director would ever have the resources or ability to screen and have checked every single trade. However, this does not mean that the principle of "good compliance" is diminished. It is purely practical good sense – as I believe the National Audit Office was trying to indicate.

17. Of course, since the provisions affect the direct payment of public money, a direct comparison with all the examples from the City and elsewhere may not be perfect. However, in this context it is worthwhile noting that the Constitutional Reform and Governance Act 2010 did seek to allay some concerns by inserting in Section 6 ( subsection 8) of the Parliamentary Standards Act new provisions requiring the publication of information concerning each claim and payment from a MP. In this way, overt transparency in the process should lead away from the need from over-detailed regulation and checking – which is in any event not often effective.

18. On the basis of the evidence produced by the Public Accounts Committee and the National Audit Office it would appear to me that there is clearly no effective "risk-based" approach at IPSA - to the extent that the National Audit Office also reported that"… it is striking that 38% of claims are for less money than the average cost of administering them." Further the National Audit Office also reported that of the 134,696 claims that were processed in 2010-11 all had been checked at least once, and some more, but only 0.5% had been rejected. If this was a "risk-based" approach, then the usual commercial approach would be to reduce the sampling size on the basis that the system seemed to be working!

19. The recent report of the Public Accounts Committee also revealed that 85% of MPs complained they had to spend too much time dealing with expenses. The comment mirrored earlier comments made in earlier hearings of the Speakers’ Committee on IPSA ("SCIPSA"). Whereas, I am aware that there have been debates about exactly how much time a MP and their staff actually spend (or need to spend) on completing claims for IPSA it seems clear that there is a significant "perception gap" between what MPs think (and experience) and what IPSA perceives.

20. On the basis of the comments in the above paragraphs it does occur to me that there is at least some evidence that the provisions of Section 3A of the Parliamentary Standards Act 2009 governing the "General Duties" of IPSA are not being completely fulfilled.

21. The observations and comments from the Committees that have examined the arrangements of IPSA have not indicated that a change in the principal provisions of the Parliamentary Standards Act 2009 are needed. I would agree with this position. What is needed is more effective implementation.

22. The general provisions of the Parliamentary Standards Act 2009 (as amended) are, indeed, general but do provide a reasonable basis for the implementation of a practical system to succeed the "Fees Office" arrangements in the House of Commons.

The Role of the IPSA "Compliance Officer"

23. The role of "Compliance Officer" was not initially covered under the terms of the Parliamentary Standards Act 2009, but added by the provisions of the Constitutional Reform and Governance Act 2010. The Terms of the Compliance Officer’s role are set out in Sections 9 & 9A of the Parliamentary Standards Act 2009 (as amended).

24. From my perspective and experience as a Compliance Officer and Director in the City and in Westminster I was somewhat surprised at the terms of reference. They appear very restricted, and the comments made by representatives of IPSA in evidence to SCIPSA and the Committee on Members’ Expenses indicate to me that the role of the IPSA Compliance Officer is quite separate from the day-to-day work of IPSA. In fact, I might even describe the role of IPSA Compliance Officer as more of "investigations officer" than "compliance officer".

25. The role of a "Compliance Officer" in a financial firm (and as I also know from my personal experience as a Head of Compliance with a political party) is NOT just an investigator when things might go wrong. A good compliance officer should be integrated in an organisation as the "eyes and ears" of the Chief Executive / Leader. It is a role where daily work to prevent problems goes on unnoticed. In fact, the main aim in my experience is for a good Compliance Officer is not to be noticed in public at all ! A Compliance Officer should be the moral and ethical "conscience" of an organisation who is not afraid to criticise the actions by senior colleagues, who has a direct and uninhibited reporting line to the Chief Executive and unfettered access to all parts of the organisation at any time.

26. Where a Compliance Officer’s role is restricted to the type of investigatory work as indicated for IPSA then I believe that it would be difficult to effectively understand and guide the organisation.

27. If the Compliance Officer was satisfied with the risk controls in place then he/she might be prepared to approve changes in procedures to streamline processes. In that regard, a good Compliance Officer is really an "internal regulator".

28. Further, a very important role for any Compliance Officer (in the City or Westminster) is the ongoing training and the familiarisation of staff of required procedures and risk controls and what is expected by the company of them – from an ethical perspective. In the City there are "whistle-blowing" arrangements in most companies to protect staff who are concerned.

29. In the context of IPSA, the relationship between the IPSA Compliance Officer and MPs seems not to be clear. The MPs are the "clients" or "users" of the system and hence the Compliance Officer could also usefully be a guide to them also. In my role as head of compliance of the Conservative Party in Westminster I developed good working relationships with not only the central administration of the political party but also senior MPs and the political leadership of the party.

30. On the basis of the terms of reference of the IPSA Compliance Officer and how I have heard his role described, I am concerned that the Compliance Officer role at IPSA is not the effective "check and balance" and "trusted advisor" to IPSA and the Board which would be the usual expectation in such a role elsewhere. I also note that the most recent Compliance Officer of IPSA resigned after a short while in the post stating that "…it was not the right role for me". Previously, IPSA had an interim Compliance Officer and currently has an Interim Compliance Officer. It is concerning to me that this important role has had no stability in IPSA.

31. Further, I believe that to be an effective IPSA "Compliance Officer" the role needs to have a broader brief than that described in the legislation – including possibly a seat on the Board, or at least with independent access to a senior Board member and unfettered access to all parts of IPSA. An alternative might be for the IPSA "Compliance Officer" to have an obligation towards SCIPSA directly – in a similar way in which a City Compliance Officer is directly licensed by the FSA.

Where Next ?

32. I believe that the fundamental broad provisions of the Parliamentary Standards Act 2009 are good and do enable a fair and reasonable system of expenses and allowances (and other matters) to be administered for MPs and their staff. As I have indicated, I do not believe that changes are needed to the principal provisions of the Parliamentary Standards Act 2009 are necessarily needed.

33. However, I would agree with the comments from the National Audit Office and others that the manner in which the arrangements are administered is less than helpful for Members of Parliament. The arrangements need to be more effective and not more complex.

34. It is clearly fundamental to the continued restoration of public confidence in the financial expenditure activities of MPs that an independent authority for the paying of their monies is used. Returning to "old" arrangements is neither feasible nor desirable.

35. However, if the central concern of the public is the fair and cost-effective spending of taxpayers’ money to support the work of their Members of Parliament, then the manner in which IPSA operates in the context of the Parliamentary Standards Act 2009 would seem to need to be reviewed and revised to some extent.

36. The manner in which IPSA have chosen to operate and implement the provisions of the Parliamentary Standards Act 2009 would seem to me at least to raise some doubt as to whether the provisions of section 3A of the Act concerning efficiency and cost-effectiveness have been fully met.

37. I remain concerned that the role of "Compliance Officer" of IPSA is not an effective "check and balance" on the activity of IPSA. The role of Compliance Officer should be integrated more into the organisation, to gain unfettered access to any aspect of its activity at any time (which is the case in the financial services sector). To remain merely an "investigations officer" seems to be an ineffective role. In other industries and sectors a Compliance officer would have a much wider brief.

38. The importance of ensuring the continued, and enhanced, reputation of Members of Parliament in their activities is fundamental to our Parliamentary system and democracy. In the light of the scandals uncovered during the last Parliament the role of IPSA in this is central to this restorative process. However, this change in historical arrangements for MPs should not be underestimated nor, it would seem, should it be for those officials now charged with implementing the revised arrangements. It is not an easy process !

39. Getting the operation of IPSA "right" both for MPs AND those who elected them and pay for their expenses is essential. No taxpayer likes to think that their hard-earned cash is wasted unnecessarily by anyone – either MP or official !

1st October 2011