Written evidence submitted by Sameen Farouk (ENT 57)

Introduce a cap on ‘exit payments’ for public sector workers (comments and Malus provisions)

1. I have written to the Treasury in regards to the clauses about public sector exit payment caps. I welcome the proposal to exempt the armed forces from the cap and would suggest people in professions with similar traits like Her Majesty’s Coastguard Service and police should be given the same treatment. I also welcome the proposal to remove awards from Employment Tribunals from the cap. I would press upon MP's the need to move further on the measures

2. The policy excludes people who are providing services to the public sector but not directly employed by the public sector are excluded. What that means is that people setting up as consultants to effectively do the same job as they were doing before stay outside. It also means people transferring to an outsourced provider are omitted from the cap where they are also performing much the same function as before. In both cases, consideration should be given to limiting payments where it becomes obvious that the structure of employment is designed such that it will bypass the cap. The text of the Bill requires a general anti-avoidance clause.

3. Malus - It is my firm view that malus provisions should be introduced via delegated powers under the Enterprise Bill. The exit cap refers to deferred payments. Malus is an increasingly important feature in remuneration policy within financial services. The general argument of malus is that it cuts the losses of a company whose executives have engaged in excessive risk taking by clawback of deferred payments. In banking, this means bonus schemes. In private equity, for poorly structured deals. The employers or investors end up incurring losses as a direct result of risky actions. I don't see how public sector bodies are different.

4. Public sector bodies, particularly local government, are increasingly engaged in significant financial transactions where further safeguards are urgently required to protect the public purse. Malus is one example of a safeguard. For malus to work, a public body must be able to recover payments to a former employee/consultancy out with the cap, so after the first £95k. Payments made or deferred after the £95k should be recoverable for the taxpayer under certain conditions.

5. The intended boundary will not affect most public sector professionals. A good example of why malus is necessary in local government is in the case of the unitary authorities of the Isle of Wight and Portsmouth City Council. Both paid the same senior local government executive in excess of £150k a year to advise on PFI for highways and maintenance of local transport. In Portsmouth's case, the deal was structured such that the same person was paid through his consultancy a total of £601,000 for about 18 months worth of work.

7. In the first case, the consultant Atkins had to come in to the Isle of Wight at a cost of £300k to effectively unpick the PFI contract that was arranged. The second case is much more serious. On the back of the £600k advice, Portsmouth City Council entered into dispute with the PFI contractor which ended up in the High Court last July (Portsmouth City Council v Ensign Highways Ltd [2015] EWHC 1969). The Council duly lost the case and had to pay at least costs. The taxpayer has no recourse whatsoever in these situations and undermine trust in the public sector as a whole. There is a loophole to be closed here.

8. In his letter of 18th January 2016 to me [1] , Greg Hands MP set out the possibility of a waiver mechanism where the recovery of exit payments would result in poor value for money. I believe this should be probed through Parliamentary scrutiny to understand if there is some sort of transparent test. If value for money is the grounds for a waiver, then it also needs to be the rationale for malus provisions in the public sector. This is very important where the public sector is attempting to conduct functions which would otherwise be regulated under the Financial Services and Markets Act.

9. I would be grateful if MP's can consider raising the matter of malus in the Enterprise Bill where it relates to the protection of public funds for the same rationale as the £95k exit cap. The examples I have shown in my evidence may be more common than previously thought in local government and the NHS. I would not mind if the Government introduced clauses for delegated powers which could then be consulted on following a commitment for further consultation.

10. My view is that the Secretary of State should have the power to revoke any form of indemnity in place and permit the recovery of taxpayer funds beyond the £95k cap in situations as I have described, where the public body writes to the Secretary of State to request it be exercised. Having the power in reserve is in and of itself a powerful deterrant against such conduct in public office which I would hope MP's wish to stamp out in the public sector.

All errors in this submission are mine. This submission is made in a personal capacity.

February 2016

[1] Not published


Prepared 18th February 2016