Political and Constitutional Reform CommitteeWritten evidence submitted by Justice in Financial Services
LOBBYING IN ACTION: A CASE STUDY
Preface: a Retreat
1. During the election campaign, the Prime Minister said:
“Now we all know that expenses has dominated politics for the last year. But if anyone thinks that cleaning up politics means dealing with this alone and then forgetting about it, they are wrong. Because there is another big issue that we can no longer ignore.
“It is the next big scandal waiting to happen. It’s an issue that crosses party lines and has tainted our politics for too long, an issue that exposes the far-too-cosy relationship between politics, government, business and money.”
2. The Coalition agreement contained a commitment “to regulate lobbying through introducing a statutory register of lobbyists and greater transparency”.
3. Nothing happened for a while but then a lobbyist called Collins made a series of claims about his excellent contacts in government to a person he thought was a potential client but actually was a journalist. It became too embarrassing to do nothing.
4. So last week a consultation document was issued.
5. Section 3 of the consultation document—Purpose of the UK Statutory Register—makes it abundantly clear that the Government does not propose to do more than the barest minimum to honour this commitment. There is no assessment of the mischief being done at present, no analysis of what is and is not compatible with democratic institutions and Parliamentary government.
6. JFS offers a case study of lobbying in action: Capita and Quiller.
An FTSE 100 Company and its Lobbyist: the Case Study in This Paper
7. We look at a current case of an FTSE 100 Company (Capita) seeking to minimise the sum that it should pay in compensation to those who have suffered losses thanks to its bungling incompetence.
8. From 2007, Capita Financial Managers Limited was ACD (Authorised Corporate Director) to OEIC funds into which some 20,000 individuals invested about £400 million. Under the regulatory system, the ACD and another firm, called the Depositary, invariably a bank, have responsibilities to ensure that funds are invested in conformity with rules made by the Financial Services Authority (FSA).
9. In March 2009, these funds were suspended.
10. This happened because Capita and the banks acting as depositaries had failed properly to supervise the management of the funds entrusted to them. As ACD, Capita should have exercised proper control and given clear instructions to the advisers making day to day investment decisions. It did not do so—incredibly despite having very large funds under management and being allowed to run a highly innovative and unusually opaque major fund, it had no investment director. Capita had also issued accounts that materially failed to meet accounting standards.
11. Suspension of funds of this type and size is rare. In 1996, funds of a similar size were suspended. The regulators acted promptly and decisively and the equivalent of the ACD and the Depositary paid compensation within weeks. If Capita and two banks involved in the Arch cru debacle had been compelled to pay compensation on the basis that the regulators had insisted on in 1996, Capita and its associated banks would have had to find around £350 million in cash and take a loss of over £200 million onto their balance sheets.
12. Capita’s accounts disclose that it has spent millions to safeguard shareholder interests—ie to evade paying. Capita spent £1.4 million between 1 January and 31 December 2010 alone on this exercise. We may be given figures for 2011 in due course. The figures for 2009 are included in a larger item. Most of this money will have been paid to Capita’s lawyers, but during the year it (and another firm involved in this scandal, HSBC) appointed the lobbying firm Quiller to act for it.
13. It is reasonable to assume that Quiller was recruited to deal with the crisis threatening Capita.
14. By any standards, Quiller has done a superb piece of work. One of Quiller’s boasts is that it keeps adverse publicity to a minimum. It has certainly succeeded in that—only the Mail on Sunday has given extensive coverage and even the FT has given less than a half page. There was no debate in Parliament until October 2011.
15. In July 2011, the Financial Secretary to the Treasury wrote to MPs endorsing a decision to limit the amount Capita and the banks have to pay to £54 million.
16. Subsequently he defended the settlement in favour of Capita in a Westminster Hall debate and refused to set up a formal inquiry under S14 of FSMA into what had gone wrong. He has subsequently written letters defending his position and Capita that contain materially false statements, including letters to fellow ministers and shadow cabinet members. The Prime Minister has been drawn into this row, first signalling that he wanted more to be done and then endorsing the refusal to set up a proper inquiry.
17. So far Capita has avoided the embarrassment of a report from independent inspectors.
18. This has come at a price. A large number of individuals have found their savings and livelihoods threatened. They find it incredible that Capita (and the banks) should be let off paying by the FSA when the FSA’s predecessor, IMRO, dealt with an indistinguishable situation in 1996 by making the fund manager (equivalent to Capita) and the bank behind it pay ever penny due within weeks. They have looked at such information as in the public domain and jumped to the most lurid conclusions as to why ministers are letting this happen.
19. Suspicions about what the lobbyists are up to has entirely destroyed the confidence of those affected in the decision making process on this matter and has led them to allege that there is corruption at the highest level. That this allegation is almost certainly mistaken does not detract from the conviction with which it is held. Huge damage is being done. And although the allegations now being made of corrupt practices by ministers and the Conservative Party are almost certainly false, there is an appalling stench emanating from the Board Room of Capita.
Transparency
20. “Transparency” does have a role to play in good government. It is often foolish to try to legislate or make detailed prescriptive rules. Public outrage at an obvious abuse—outrage echoed and amplified in Parliament—is often a better way of deterring wrong doers.
21. Members of Parliament and campaigning journalists, not to mention a growing blogosphere can cause wrong doers embarrassment. As the late Auberon Waugh observed, if you are in public life and are doing something of which you are ashamed, you have three choices: to stop doing it, to stop being ashamed of it or to hope Private Eye does not find out.
22. Unsurprisingly, some lobbyists offer as a service “counselling those wanting to stay out of the glare of publicity and media scrutiny” (Quiller website).
23. So regulation by ensuring disclosure of information is by no means a bad strategy. In some circumstances it may be the best. But it will only work if adequate information is provided. On that test, the proposals seem woefully inadequate. Capita—and its lobbyists—currently disclose all that they would be required to disclose under the new regime. Yet there are widespread suspicions—and entirely reasonable suspicions—that by spending huge sums Capita has not only been able to evade its liabilities but to get the state in the shape of the FSA to hound people who have done no wrong.
24. We investigate the shortfalls in disclosure under three headings:
(1)
(2)
(3)
Disclosure of Spend on Lobbying and of Meetings
25. The consultation document comes down against disclosure of the amount spent on lobbying. Some of the reasons presented are good but none compelling. We argue that the Quiller/Capita case shows that disclosure of who is lobbying, who is being lobbied, and how much is being spent is necessary.
General Principles
26. When a relatively small amount is being spent in pressing for a change, then it is unlikely that the lobbyist and its client will succeed in drowning out or overwhelming the other side of the argument. When large sums are being spent, this is a very real danger and the concept of equality of arms comes into play.
27. Likewise if the activity only contributes a small proportion of a lobbyist’s income and no firm or individuals have a large financial interest in securing the income stream from the client then it is less likely that there will be a departure from ethical norms than when the future of a firm or individual employees (or perhaps their bonuses) depend upon that income stream.
28. Both of these considerations point to a requirement to disclose when total spend on a project exceeds a threshold and also when a firm or individual’s earnings would be significantly diminished but for that contract.
29. Conditional fee agreements, success fees and such like should always have to be disclosed.
30. There is also a clear case for disclosure when there are particular sensitivities—which may of course imply a more extensive disclosure regime to avoid judgments having to be made on whether a matter is sensitive.
31. When we look at what Quiller appears to have done for Capita, we might conclude that a high level of financial disclosure is essential and that the Consultation Document’s proposals fall well short of what is needed.
Quiller and Capita
32. Quiller’s clients include both Capita and HSBC. Both firms appear to have become clients at some date between June and August 2010. This is disclosed in existing public registers—and it seems as if the Government is not proposing to require any further information to be disclosed. In particular there is no proposal to require either a disclosure of meetings or of money spent.
33. Quiller’s principals include some high powered individuals who had worked in senior positions during the Thatcher and Major years and had worked closely with a number of individuals who now hold senior positions in the Coalition Administration as well as a number of heavyweight backbench MPs including former ministers. Quiller was thus an extremely good choice for a pair of financial service companies anxious to evade their liabilities to investors. The firm could be certain of access at the highest levels of the Cameron administration and knew exactly how to craft an argument to appeal to the senior individuals and backbench MPs who would have to acquiesce in anything that the fabulously expensive but massively competent Herbert Smith could persuade the rather less well resourced FSA to swallow.
34. As has become increasingly clear, one of the major messages to the Cameron administration was that Capita simply could not afford to pay compensation on the scale that the IMRO precedent required. This argument surfaces in a number of places—notably the letter that Hector Sants sent to the Chancellor of the Exchequer on 3 August 2011 and some later letters sent out by the Financial Secretary to the Treasury. The published accounts of Capita Group show the improbability of Capita being able to find over £100 million in cash. Statements by Capita and information in published accounts fixes Capita’s share of the capped payment of £54 million at £30 million-£35 million. Capita can at present afford this and indeed has negotiated a bank overdraft large enough to allow it to keep this sum as a positive balance with a bank—probably not a bank that has provided overdraft facilities.
35. The average amount invested in the CF Arch cru funds was £20,000. Investors have so far only received a few thousand pounds back. By about 2016, the lucky ones will have got back around 65% of what they put in—unless they are able to bring claims against their advisers. Even if they are able to, several hundred people will suffer heavy losses—much of this is likely to be in pension funds.
36. In addition up to 1,000 people who work for advisers—many of whom will have had nothing to do with the advice—stand to lose their jobs as their firms are closed thanks to the failure of the FSA to make Capita pay what it owes and its vigorous attempts to portray advisers as responsible for gross incompetence by Capita and the Depositaries.
37. The idea that there is transparency when all that is placed in the public domain is the bald statement that Quiller acts for Capita and HSBC is risible. The proposals in the Consultation Document are utterly inadequate. With millions of pounds involved and thousands of jobs we need to know what is going on, who is seeing who, and how much is being spent.
Bungs—Sorry, I Mean “Hospitality”
38. Capita provides evidence of two further weaknesses in the proposals. Lobbyists deal with a variety of entities but the Register does not propose to cover local government or many public bodies. There is also no requirement to disclose spending that directly benefits the target of a lobbyist. I develop this weakness further.
39. While one can understand the absurdity of having to record a cup of tea for an MP who came on a factory visit, some hospitality clearly is on a scale that influences and most people would think stinks of corruption.
40. The conduct of our friend Capita shows that the idea that there is no need for any financial disclosure of what is provided to persons in public life or public employment whether by external or internal lobbyists is risible. Take this citation in Private Eye (23 December 2011) for a Rotten Boroughs Award 2011: “Services to the Hospitality Industry Birmingham city council chief exec Stephen Hughes said he would ensure that everything had been “above board” when Capita was awarded a £700,000 contract despite a local firm crying foul when the tender specification was changed at the last minute in Capita’s favour. Brum’s hospitality register showed that, on at least four occasions in 2011, Hughes accepted the hospitality of Crapita for luxury hotel stays in London, Cardiff and Stratford upon Avon, slap-up dinners and champagne receptions. Trebles all round.”
41. We need those who give hospitality costing more than a modest sum (say £75) to register and record this.
42. The suggestion that registers run by government departments are adequate is also ludicrous. It is the provider of hospitality who knows the cost of what is provided, not the recipient. And it is all too easy for a recipient to treat something as “social”. A requirement to register any hospitality or gift worth more than £75 provided to any politician or official and the entry of this information on a readily searchable online database would be a real step towards transparency. A firm that engaged in extensive “generosity” whether to a local authority or government department or to politicians would soon find itself facing unwelcome publicity that even Quiller could not save it from. And we can be sure that a number of people would cross-check departmental and local authority registers of recipients with the proposed register of donors.
Shielding Donors to Political Parties From Being Known
43. Donations to political parties have to be revealed in company reports under the Companies Act and to be disclosed to the Electoral Commission that publishes a register of all donations on the internet.
44. The annual report and accounts of Huntsworth PLC—the parent company of Quiller—contains a section disclosing donations, and the accounts for the year ending 31 December 2010 disclose only a donation to the Conservative Party of £1,000. This disclosure is for a sum that falls to be disclosed under the Companies Act 2006.
45. In contrast, the Electoral Commission website contains the following information:
DONATIONS BY HUNTSWORTH
|
Recipient |
Donor name |
Type of donation |
Value |
Date |
|
|
Labour Party |
Citigate |
Cash |
£11,750.00 |
01/09/2005 |
|
|
Conservative Party |
Huntsworth |
Cash |
£12,100.00 |
10/10/2008 |
|
|
Conservative Party |
Huntsworth |
Cash |
£9,500.00 |
03/08/2009 |
|
|
Labour Party |
Square Peg |
Cash |
£6,770.00 |
15/03/2010 |
|
|
Conservative Party |
Huntsworth |
Cash |
£8,500.00 |
18/08/2010 |
|
|
Conservative Party |
EHPR |
Non Cash |
£2,596.00 |
28/11/2003 |
|
|
Conservative Party |
Hunstworth |
Cash |
£15,500.00 |
24/08/2011 |
|
46. There is no immediate way of reconciling the two disclosures relating to 2010. This implies an unhappy failure to align statutory obligations.
47. We can be quite certain that the donations recorded by the Electoral Commission do not originate in a desire by the owners of the firm to support a particular Political Party—or (because of the dates) donations to support the political process generally, with the sums given to each party determined by individuals loyalties. No. Perhaps we are looking at donations on behalf of clients that wish “to stay out of the glare of publicity and media scrutiny”.
48. The first observation is that there is no transparency here. If these sums are donations made by clients of Huntsworth or its subsidiaries, this is a tactic to prevent a donor being identified.
49. Second, this sort of transaction can—and indeed has—given rise to suspicions of corruption. JFS learned about these donations from an angry IFA who believed that Capita was using Huntsworth to reward the Conservative Party for Mr Mark Hoban’s support for the FSA agreeing to limit its liabilities to investors in CF Arch cru. The sum is almost exactly 1% of the amount Capita has been protected from paying.
50. I personally do not believe that this is a bung to the Conservative Party—the sum is too small: if the donation of £15,500 on 24 April 2011 actually were a douceur for the Capita/FSA deal, Conservative ministers are selling their party pretty cheap. This is not a mistake, we may recall, that the previous leadership of the Labour Party made. A former chief executive of Capita had to resign after he was exposed for “lending” Labour £1 million. That is real money.
51. The problem becomes partially serious given what has been revealed to the Leveson inquiry of the use of text messages and emails to maintain a level of pressure and frequency of communication that lobbyists, say, the Major Government could not possibly have achieved. Almost all calls would have been on landlines and monitored by officials; although email had started to become available by 1997, it was much later that it became a medium for chatter rather than a substitute for fax or even telex. The volume of communication between, for instance, Mr Marcel and Mr Smith would have been inconceivable—and cabinet ministers would not have used text.
52. But the lack of transparency has real consequences. Ministers are becoming victims of innuendo and gossip. Confidence in public life is undermined. This surely demonstrates the need to insist on the full and complete disclosure of any payments made to political parties and to politicians, civil servants and other public employees and to prevent a client sheltering behind its PR company.
Conclusion: Much More is Needed
53. The Parliament elected in May 2010 made an excellent start in undoing the damage inflicted on the entire concept of Parliamentary Government by the Rotten Parliament. It had the huge benefit of the work done by Dr Tony Wright and his colleagues on the Reform and Public Administration Committees. It was fortunate in having as Leader and Deputy Leader of the House two Parliamentarians of the first rank. It promptly implemented the most important reform of all—the creation of the Backbench Business Committee.
54. Now this excellent start is being threatened by the failure to tackle the scandal of lobbying.
55. For much of the last seven centuries, Members of the House of Commons have had as a primary duty the effective representation of the counties and towns and cities that have sent them to Parliament. When an MP rises to his feet in Business Questions or an Adjournment Debate to demand action on some local problem, what she or he was doing would be instantly recognised by the Member from the same area six or seven centuries ago.
56. In the last two centuries, the Government of the United Kingdom has been taken away from a Venetian oligarchy descended largely from the men who engorged themselves on the dissolution of the monasteries to an administration that is under a measure of control by a House of Commons elected by the nation.
57. All of this is threatened by the power of money and the influence that money can buy. There is indeed an issue of image, but there is also an issue of substance. The proposals in the Consultation Document Introducing a Statutory Register of Lobbyists fail.
February 2012