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27 Jun 2011 : Column GC141

27 Jun 2011 : Column GC141

Grand Committee

Monday, 27 June 2011

Arrangement of Business


3.30 pm

The Deputy Chairman of Committees (Baroness Harris of Richmond): My Lords, before the Minister moves that the first statutory instrument be considered, I remind noble Lords that in the case of each instrument, the Motion before the Committee will be that the Committee do consider the statutory instrument in question. I should perhaps make it clear that the Motions to approve the statutory instruments will be moved in the Chamber in the usual way. If there is a Division in the House, the Committee will adjourn for 10 minutes.

Undertakings for Collective Investment in Transferable Securities Regulations 2011

Undertakings for Collective Investment in Transferable Securities Regulations 2011

Considered in Grand Committee

3.30 pm

Moved By Lord Sassoon

The Commercial Secretary to the Treasury (Lord Sassoon): My Lords, these regulations transpose into UK law the updated fourth EU directive on Undertakings for Collective Investment in Transferable Securities-UCITS IV-and are supplemented by new FSA rules. I will give a little background on the UCITS framework before explaining why the Government are seeking to introduce the new regulations.

The UCITS directive sets out a common set of cross-EU rules for how eligible investment funds should be run. The rules emphasise transparency and consumer protection, which means that UCITS funds are designed particularly for retail investors. However, they are frequently used more widely, including by pension funds and insurance companies. UCITS funds account for roughly three-quarters of funds under management across Europe.

The UCITS framework is very important to the UK fund management industry and to investors. For investors, the directive ensures strong consumer protection-for example, through clarity in marketing-and integrates the EU market, which gives investors a wider and more diversified set of funds to select from. UCITS has been a key contributor to the growth of UK asset management firms. The directive brings down barriers, allowing them to market across the EU based on authorisation by the FSA. The UCITS brand is recognised worldwide and EU fund managers market

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it globally. There are now some £500 billion of UCITS assets under management in the UK. This is the third update to the UCITS directive since it was introduced in 1988. It is intended to ensure that the market can operate more efficiently, bringing further industry and consumer protection benefits.

UCITS IV addresses four widely recognised shortcomings. The first is the difficulty that fund management companies face in establishing UCITS funds in other member states. UCITS IV removes this barrier by streamlining the way UCITS funds are notified in other member states. Funds can access the market without delay once their fund manager has notified the domicile's regulator.

The second shortcoming relates to investor disclosure. UCITS rightly emphasises clear and transparent disclosure to retail investors so that they can easily understand the information about the fund that they are considering investing in. In practice, the requirements have led to prospectuses that are too long and complex and do not allow investors to make effective comparisons between UCITS funds. UCITS IV improves investor disclosure, replacing the required prospectus required with key investor information that will be contained in a simple document and will give key facts to investors in a clear and understandable manner.

Thirdly, European funds are often not taking advantage of economies of scale and are generally smaller than their American counterparts. Again, this has led to increased costs for investors. The directive addresses this in two ways. For the first time, UCITS will allow master feeder structures to be marketed across Europe. For example, feeder funds in different domiciles across the EU will be able to invest in the same master fund located, for example, in the UK. This will allow a single portfolio of assets to be offered across jurisdictions and for different types of investor. The directive also introduces a framework to allow UCITS funds to merge across borders, again removing a barrier to the creation of larger funds.

The final criticism made of UCITS is that it prevents specialisation. All the most important activities associated with a fund's management have to be located in one member state as only the fund can be passported. So, in practice, even though much of the investment management activity may be carried out in the UK, funds not based in the UK would have to establish extra fund management companies in the domiciles of each of their funds. That has pushed up the administrative costs that ultimately have to be borne by the investor, and prevents gains from scale and specialisation.

UCITS IV introduces an effective management company passport. This allows a management company to operate a fund in a different member state without the need to be established in the member state of the fund. To support this, UCITS IV requires improved co-operation between UCITS regulators, particularly when they are supervising a UCITS management company and fund established in different member states.

The new UCITS regime has been warmly welcomed by the UK industry, which considers it a further opportunity to grow, while serving investors better. The Government are taking all available means, within

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the current fiscal constraints, to maintain and build on the UK's lead as a centre for asset management, and that includes capitalising on UCITS IV.

In particular, the Government want the UK to be a home for new master funds. To achieve that, we are working with industry to develop the most suitable vehicle to meet the real demand for a tax-transparent vehicle in Britain. This year's Budget announced that the Government will legislate to introduce a tax transparent fund, from 2012. We are amending tax law to accommodate the conditions introduced by the management company passport, removing any risk that a foreign UCITS fund may become taxable in the UK as a result of having a manager resident in this country.

I hope that the Committee will support the making of these regulations today. I hope that this brief speech has reassured noble Lords that the regulations will bring considerable benefits to both the UK industry and consumers, and that they will therefore gain their support.

Lord Eatwell: My Lords, I do not like this legislation, because it is moving in exactly the wrong direction with respect to regulatory responsibility in a multijurisdictional context; namely, it is legislation that empowers the home regulator, not the host-and this when recent events, particularly in international banking, have shown beyond all reasonable doubt that power should be flowing in the opposite direction, towards the host regulator.

I understand that one of the ultimate objectives of the programme to create a single market in financial instruments in Europe is to make the home-host distinction irrelevant. That can be done only by the development of a regulatory regime in which the domain of the regulator is the domain of the market-that is, there is effectively a single regulator for the entire market space. However, that is not the case in the EU, or the EEA, and will not be in the foreseeable future; indeed, I rather suspect that the Government hope that it will not be the case. Therefore, the Government must face up to the fundamental weakness of home-based regulation-that it encourages regulatory arbitrage.

It may be argued that one of the purposes of these regulations is to encourage the adoption of common standards, to which the noble Lord referred, particularly in conduct of business regulation, and that that will tend to reduce the potential for arbitrage. We hope that that is true, but arbitrage will not be eliminated. For example, different enforcement standards can provide rich pickings for mobile and perhaps not entirely respectable firms. That is evident even in the much more coherent financial space that is the United States of America. It is far more likely in the somewhat less coherent European Union.

I was surprised that I could find nothing in the Treasury's impact assessment that refers to the impact of regulatory arbitrage. Nor could I find any reference to the role of the new European Securities and Markets Authority, the successor to CESR, which might be seen as a medium-term solution to the single-regulator problem. What is the Treasury's assessment of the impact of this legislation on regulatory arbitrage? Is

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the Treasury content that regulatory arbitrage is in the best interests of UK consumers? If not, what steps is the Treasury taking to discourage regulatory arbitrage, and more generally, what are the costs and benefits of such arbitrage for the UK, as will be encouraged by these regulations? What will be the role of ESMA in the definition of procedures to be followed in the UK both in the short and medium term?

A key element enhancing the likelihood of regulatory arbitrage is the simplified notification procedure to which the noble Lord referred. This removes the right of national regulators to vet funds before they are marketed. Is that not a regulatory weakness at a time when the need for the efficient and effective regulation of financial instruments has been clearly demonstrated? Why are we giving up our right to vet instruments marketed to UK consumers? The FSA or any successor organisation will now have a significantly diminished capacity to ensure that new fund managers seeking to enter the national market will conform to our standards.

This leads to the vexed question of consumer protection. The impact assessment, in considering the role of the Financial Ombudsman Service, states:

"We have also asked whether ... FOS referral rights should be made available in: Scenario 3-a UK management company operating a UCITS authorised by a regulator in an EEA member State other than the UK, on a cross-border services basis".

The assessment apparently asks the question, but unfortunately does not tell us the answer, so could the Minister tell us now? Will UK consumers have access to the FOS in such circumstances and, if so, what authority will the ombudsman have with respect to activities authorised in another jurisdiction? When answering these points, perhaps the Minister would like to consider whether his answer would be the same were the relevant authority to be, say, Romania or Malta. That is not a criticism of those states; rather, it is a reflection on their capacity to manage complex instruments. So the crucial question, as yet unanswered, is: what extra measures are Her Majesty's Government taking to protect UK consumers once UCITS IV is agreed?

Finally, I turn to the question of the review of the impact of this legislation. The Explanatory Memorandum states that:

"The Treasury will review the operation and effect of the Regulations within five years".

However, the European Commission plans to make further reforms regarding the roles and responsibilities of UCITS depositories and expects to publish proposals later this year. There are therefore no plans to have a post-implementation review until these further changes have been developed and proposed. Is that wise? Are we not likely to get into something of a muddle as to the impact of various changes layered upon one another over time? The changes about to be implemented have significant ramifications for the regulation of fund managers in national markets and on the options available to consumers. Would a review of the current changes not be in order sooner, regardless of other changes being proposed, to ensure that any problems are identified and addressed before they develop?

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While this legislation will undoubtedly increase consumer choice by easing the market access of UCITS managers throughout the EEA, I cannot but feel, despite all the warm words on exchange of information between regulators and the introduction of the key investor information document, that it represents a significant diminution of consumer protection. That, to say the least, is unfortunate.

3.45 pm

Lord Sassoon: My Lords, I thank the noble Lord, Lord Eatwell, for his contribution to the discussion, but I am sorry that he does not seem to see much of merit in what should be a sensible piece of tidying-up of a regime in Europe which has been in place since 1988. It has taken with it the interests of not only the industry but also the consumer groups as it has been developed successfully through three amendments-and now the fourth-to the directive. We have transposed the directive by way of copy-out without any gold-plating. It rather surprises me that the noble Lord takes this basic stance to a framework which has stood consumers across Europe very well for a considerable number of years and not to date raised any of the concerns that he suggests that this series of amendments might raise.

I shall go through those concerns. I hope that the noble Lord agrees that there is considerable work to be done to complete the single market, whether it is fund management, other parts of financial services or business services more generally. In areas of completing the single market, consumer protection has to be taken seriously but I would interpret that, as a starting position, as not wanting to help complete the single market. That is protectionist in its import if not in the intention, given how the noble Lord, Lord Eatwell, spells it out. That is an unfortunate starting point. We should be looking at ways to sensibly advance what is a well worked regime and to see how we can enable both consumers and the financial services industry to take advantage of sensible further development and the opening up of the single market.

On the noble Lord's specific concerns, there are two aspects to the question of regulatory arbitrage. First, in the regime, the directive leaves little room for member states' discretion. It is not that the UK will be transposing these rules in one way and other member states in a radically different way. I know that this is probably not the main thrust of the charge that the noble Lord made on this but it is important to be clear that it is not the rules themselves that will give any significant scope for regulatory arbitrage. Beyond that, it is of course important that we ensure in the UK that funds passported into the UK are suitably regulated. Broadly speaking, that is what has happened under UCITS to date. There are already a good number of funds passporting into the UK under the UCITS directive. The FSA has powers to regulate their marketing activities. This is not opening up some completely new avenue here.

Lord Eatwell: The noble Lord is quite wrong. It certainly is new. The whole point of the new regulation is that funds can be passported into the UK without the prior agreement of the FSA. That is entirely new.

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Lord Sassoon: My Lords, it is completely possible-it is done widely now-to passport funds into the UK or other European member states. What is new is that, for example, there will not have to be a multiplicity of management companies set up, so that the passporting in will happen on a much more flexible basis. That is why in UCITS IV there is the introduction of enhanced supervisory co-operation measures between European regulators, precisely to take account of this point. The noble Lord may shake his head and tut-tut but this is what the directive introduces, precisely to address the sorts of concern that he has.

For example, if the FSA has concerns that an inwardly passporting fund is not being managed in accordance with the directive, it is laid out how it can raise the matter with the home state regulator, which must take appropriate action and inform the FSA of the outcome. While I accept that not all regulators will necessarily have the same capacity round Europe, the fact that the FSA or other host regulators will have those sorts of powers gives adequate protection given the sort of regime that we are talking about. We are not talking about bank capital or things that go to the heart of financial stability. Therefore, it is important that the proposed regime is proportionate. The points the noble Lord raises are very reasonable but they have been thought about and are accommodated in the regime.

Arrangements regarding access to the FOS and to compensation arrangements for foreign funds passported into the UK are covered by FSA rules. The FSA rules require that EEA UCITS management companies that passport into the UK in order to operate a UK-authorised UCITS fund will have to contribute to the FOS and FSCS levies so that they are treated equivalently to UK-authorised firms carrying on the same activity. If a claim arises against such an EEA firm under the FSCS rules, it will be met from the general levy on firms in the fund management subclass. We believe that that is appropriate and justifiable because of the need that the noble Lord properly identifies to protect eligible UK investors.

I hope that I have addressed the two main issues which the noble Lord raises on this regime. As I have said, the regulations will work alongside FSA rules to implement the fourth UCITS directive. If they are approved by this House, it is intended that they will come into force on 1 July 2011. The Government will in parallel continue to develop the tax and regulatory landscape to ensure that the industry is able to take full advantage of new opportunities provided by the directive, and to maintain-the noble Lord may not want to see this but the Government do-the UK's position as a major centre of fund management activity in Europe.

Lord Eatwell: My Lords, I am very keen that the UK fund management industry should develop, grow and be successful; whether this piece of legislation will contribute to that only the future will tell. My main concern is consumer protection. I also asked when the regulations would be reviewed.

Lord Sassoon: The noble Lord is often one step ahead of me; I was coming to exactly that point. One of the best answers to the charges that the noble Lord

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puts is review. It should be good regulatory practice to review any regulation or directive of this kind. Indeed, the Commission is required to review the UCITS IV directive two years after its implementation. The Government will, of course, continue to monitor the UCITS framework and engage constructively with the European review. We do not anticipate the noble Lord's worst fears being justified but if that is the case a review is indeed built into the structure to address anything that arises.

I hope that I have addressed the noble Lord's concerns on the directive. Having heard that those concerns are already addressed in the directive, I hope that the Committee will support the making of these regulations.

Motion agreed.

Gender Recognition (Approved Countries and Territories) Order 2011

Gender Recognition (Approved Countries and Territories) Order 2011
20th Report from the Joint Committee on Statutory Instruments

Considered in Grand Committee

3.54 pm

Moved By Lord McNally

The Minister of State, Ministry of Justice (Lord McNally): My Lords, the order before us today revokes and replaces an order made in 2005 regarding the legal recognition of transsexual people in the gender they live in permanently, their acquired gender. The order prescribes overseas countries and territories with gender recognition processes equivalent to our own. The purpose of this draft order is to enable transsexual people who have gained legal recognition of their acquired gender overseas to apply for legal recognition in the UK through a simplified application process. The order prescribes countries and territories that are approved under the Gender Recognition Act 2004 for the purpose of this application process.

Members of the Committee may find it helpful if I outline the purpose of the Gender Recognition Act before considering this order in more detail. The Gender Recognition Act 2004 enables transsexual people to change their legal gender and gain the rights and responsibilities of their acquired gender. This means, for example, that a transsexual woman-that is, a transsexual person who is born a male but who subsequently transitions to live permanently as a woman-can gain the right to marry a man, or to form a civil partnership with a woman, as well as the right to claim state pension at the pensionable age for women. The Act sets out a stringent set of criteria which all applicants must meet in order to be granted a legal change of gender. Applicants for gender recognition must satisfy an independent judicial body established by the Act, the gender recognition panel, that they meet these criteria.

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First, the person must have or have had gender dysphoria, which is the recognised medical condition of feeling oneself driven to present oneself in the appearance of the opposite sex. Secondly, the person must have lived permanently in their acquired gender for the two years prior to the application being made. Thirdly, the person must intend to live in their acquired gender until death. Successful applicants who submit evidence to show that they meet these criteria receive a gender recognition certificate.

Many other countries have their own gender recognition system, and for this reason the Act provides for an alternative application process for those who have gained legal recognition overseas. The intention of the overseas application process is to minimise bureaucracy without compromising the integrity of the criteria set out in the Act. When the Act was passed, Parliament was mindful of the danger of creating a system which might allow transsexual people who could not meet the criteria in the Act to effectively sidestep those criteria. Such people might travel overseas to obtain gender recognition in a country with weaker criteria and then obtain legal recognition in the UK by virtue of that overseas recognition. This would have undermined the robust criteria in the Act agreed by Parliament.

The Act therefore contains a power that puts on a statutory footing the countries and territories which are approved for the purpose of the overseas application process. Applicants submitting an application through this alternative application process must satisfy the gender recognition panel that they have obtained legal recognition in one of those approved countries or territories. An order made in 2005 sets out the countries and territories that are currently approved for the purpose of the overseas application process. At the time that the order was made, those countries and territories were deemed to have a gender recognition system equivalent to our own.

When the 2005 order was approved, it was the view of Parliament that the list of countries and territories approved under the Gender Recognition Act 2004 would have to be amended as countries or territories established new schemes for legal recognition. Gender recognition is a relatively new and fast-developing area of law, and some countries and territories have indeed introduced new systems for legal recognition of a gender change since 2005. There are also some jurisdictions that have amended their existing gender recognition systems. Quite simply, the 2005 order is out of date.

4 pm

The order before us today lists the countries and territories that up-to-date research has shown have equivalent robust gender recognition mechanisms to our own. In drawing up the list, the Government were guided by two key factors. First, we included only those countries and territories that provide for legal recognition of a gender change. This reflects the main purpose of the Gender Recognition Act, which is to grant legal recognition. Secondly, we included only those countries and territories where the process for granting legal recognition includes a proper assessment that the individual has taken decisive steps to live fully

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and permanently in the acquired gender. This reflects the policy behind the Gender Recognition Act as agreed by Parliament.

The order before us today includes the majority of countries and territories listed in the 2005 order, with just two exceptions. One of these is Latvia. Following developments in Latvian case law, the process for legal recognition of a gender change in Latvia is no longer suitably robust. The second country from the 2005 order which does not appear in this order is Serbia and Montenegro, which no longer exists as a unified state. Serbia continues to maintain a gender recognition system broadly comparable to our own, so we have added Serbia to the list. In addition to Serbia, this order includes eight further countries and territories that were not included in 2005. In some cases, such as Uruguay, this is because a mechanism equivalent to our own for legally recognising a gender change has been introduced since 2005. In the case of some countries, such as Croatia, we have identified the country's gender recognition process for the first time.

The order has already been debated and approved in another place. Members raised the question of transsexual citizens from other EU member states, such as Portugal, that are not included in the list. Members wanted to know whether the requirements of the Gender Recognition Act might conflict with their rights as citizens of the European Union. Perhaps I may take this opportunity to assure Members of the Committee that the Gender Recognition Act does not compromise a person's rights under EU law in any way. Section 21(6) of the Act makes it clear that the Act recognises the right of free movement which all individuals from the European Union and European economic area enjoy.

If an individual has received legal recognition in an EU or EEA country, they must be treated in their acquired gender when visiting or living in the UK. Given the complexity of the law in this area, people in this category are nevertheless encouraged to consider seeking in addition a UK gender recognition certificate in order to secure added certainty as to their position, but that is their choice. While individuals from an EU country not included in the list are unable to take advantage of the simplified applications process, they are free to apply for a UK gender recognition certificate under the standard application process.

A question was also raised in another place about the impact of the order on charities that work on transgender issues. While the order is predominantly an administrative exercise, the Government took the opportunity informally to seek the views of key stakeholder groups. These included charities that work on transgender issues. None raised any concerns about the impact on them, nor did they have any objections to the countries and territories listed in the order.

In summary, the order provides an up-to-date list of those countries and territories that have a gender recognition system we can rely on. A transsexual person who has obtained legal recognition of their acquired gender in any of these countries and territories will have taken decisive steps to live fully and permanently in their acquired gender. I therefore commend this draft order to the Committee and I beg to move.

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Lord Lester of Herne Hill: My Lords, I thank the Minister for a very comprehensive and informative summary of the position. I very much welcome this update to the Gender Recognition (Approved Countries and Territories) Order. I think that 31 out of the 46 other member states of the Council of Europe are now in the schedule. One hopes that next time there might be 46. It is most welcome that the United States is included-the District of Columbia and all the states of the union except for four. I wish that there could be similar widespread recognition of civil partnerships, civil union and gay marriage. We have, of course, an identical mechanism in our Civil Partnership Act to recognise those unions in other countries. It would be very good indeed if one were able to ensure that a similar range of European countries and the United States also recognised gay marriage, civil partnerships and civil union. This is obviously a sensible measure. I cannot think of any good reason against it and I am very glad that we will approve it.

Lord Moynihan: My Lords, I also support the order subject to the continued exemption for competitive sport, which the world of sport promoted and argued for at length in 2004 when the Bill came before this House in the first instance. It may help your Lordships if I briefly summarise the issue at stake there, in seeking reassurance from the Minister that in extending the list we retain the fundamental principle that competitive sport in this country will be exempt from the order, and will continue to be exempt from the Act.

It is important that the voice of sport continues to be heard before the order is accepted, as it could have a fundamental impact on the running of sport and its selection procedures since no surgery is required as a prerequisite for transsexuals to change their sex and have new birth certificates issued, with the full weight of the law backing their newly acquired legal gender not only in this country but in the countries listed in the order.

In pursuing an original amendment to the Bill, which was eventually accepted by the then Minister, the noble Lord, Lord Filkin, I sought to enable UK sporting bodies to continue to make decisions about whether individual transsexual people may take part in competitive sports competitions. At the time I was very conscious that national governing bodies of sport needed to be aware that considerable work would have to done to establish clear reasons for restriction of competition related to fair competition and/or the safety of competitors. The onus of proof is likely to be with the complainant, but the national governing bodies of sport could be vulnerable if policies, procedures and decisions are not robust. Legal precedents, such as the case of Renée Richards, the transgender female who won the right to compete in women's tennis in the US Supreme Court, are likely to provide further challenges to sport's regulation of single-sex competition.

There are several potential problems related to the recognition of the physical and physiological advantages attached to men and women in different

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competitive activities. This was reflected in my amendment, which was accepted by the then Government. It stated:

"A sport is a gender-affected sport if the physical strength, stamina or physique of average persons of one gender would put them at a disadvantage to average persons of the other gender as competitors in events involving the sport".

Fairness in competition is facilitated by making provision for competition by categories other than sex-for example, age and weight. However, the latter categories are easy to define using the arbitrary limits of date of birth and weight on a specific date before or the day of competition. One of the intentions of the Gender Recognition Act was to protect the rights of individuals who wish to blur the boundaries between genders in their private lives. For sport, that is inherently problematic. It denies the only arbitrary limit between the categories of male and female: genetic sex at birth, as determined by chromosomes. The regulation of single-sex competition in sport currently depends on that arbitrary limit. Since the EHRA allows for the interests of the community at large to override the rights of the few, that arguably would mean that single-sex sporting competition may continue without legal challenge on the basis of sex at birth.

I give that background purely to set the scene for asking the Minister whether, irrespective of the legislation in each of the territories and countries in the order, governing bodies of sport in this country will still have the final word in determining those who enter into either the male or the female category, at whatever level of competitive sport. Should that remain the case, as I understand that it does, the order will have my full support. I look to the Minister for reassurance on that.

Lord Bach: My Lords, I can be brief. The Opposition support the order. I thank the Minister and other speakers in the debate; I thank him particularly for the clear way in which he outlined the order. I ask him to respond to the interesting points made by the noble Lord, Lord Moynihan, about the position as regards sport.

This is clearly an affirmative order; it has to come before the Committee. There will be changes in the future, of course; I hope that other countries come on to the list rather than countries coming off it. Will it really be necessary to bring that to a Committee sitting in this House and the other place, or is there any way around that? I do not know whether the previous Government willingly made this an affirmative order or whether it was forced on them by the then Opposition; it could have been either. In my view, if this is the sort of order to come forward, it would be much better for it not to be affirmative.

Lord McNally: My Lords, I thank the speakers who have participated in the debate. The noble Lord, Lord Lester, has a long and proud history in such legislation. Like him, I welcome the fact that we live in a world of growing tolerance in this area, which for the individuals concerned needs tolerance and understanding.

The noble Lord, Lord Moynihan, raised an important point and one on which I will try to give some clarification. The effect of a UK gender recognition certificate is the

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same regardless of whether it is obtained under the overseas application process or the standard application process. The overseas application process simply enables a transsexual person to obtain legal recognition in the UK through a simplified process if they have already satisfied authorities overseas that they live fully and permanently in their acquired gender. It does not enable a person to be treated in the UK as they would be in their home state. The effect of a gender recognition certificate is subject to UK law. That includes a transsexual person's right to compete in competitive sporting events in the UK.

As originally drafted, Section 19 of the Gender Recognition Act made it lawful to prohibit a transsexual person with a gender recognition certificate from participating in a sporting event in their acquired gender if the restrictions were necessary to secure fair competition or the safety of other competitors. The Equality Act 2010 presented an opportunity to replace Section 19 and an overlapping provision of the Sex Discrimination Act 1975. After all, the Gender Recognition Act is not intended to protect transsexual people from discrimination; rather, it provides a mechanism whereby a transsexual person can obtain a change of legal status that reflects the gender in which they live permanently. Protection from discrimination lies in equality legislation. For this reason, Section 19 of the Gender Recognition Act and Section 44(2) of the Sex Discrimination Act were repealed and their effect replicated in Section 195(2) of the Equality Act. That provision makes it lawful to restrict participation of transsexual people in separate sporting competitions for men and women if this is necessary to secure fair competition and the safety of competitors. The participation of a transsexual person from overseas in a competitive sporting event in the UK is subject to these provisions. This remains the case even if that person has obtained a UK gender recognition certificate. I hope that that gives the noble Lord, Lord Moynihan, the clarity and reassurance that he sought. I know how important that is.

I was intrigued by the final question of the noble Lord, Lord Bach. We would have to amend the procedure for future orders but it is a valid point. I suspect that, at the time, Parliament was still getting used to this whole idea. We may need to look at the procedure and discuss matters through the usual channels to see if it can be done without the necessary affirmative resolution. Perhaps this is something that will only come before the House once every four or five years as updates are made. It is a valid point and I will take it back.

Lord Lester of Herne Hill: In looking at this again, one might look at the Civil Partnership Act. My memory is that that Act, with similar provisions, does not require the affirmative procedure every time we recognise another jurisdiction in the way that we are doing here. It might just be worth looking at. Of course, my memory is always faulty but I have just an idea that it might be a way of dealing with that. It would need amendment but I can think of no logical reason for treating civil partnerships differently from general recognition of equality.

Lord McNally: I always know that a distinguished QC saying, "My memory might be faulty," means that he is absolutely accurate in what he says. Again, that is

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an extremely helpful suggestion. When I take this back to the House authorities, the point that the noble Lord, Lord Bach, has made and the suggestion from my noble friend Lord Lester may be the way forward.

Lord Moynihan: Before the Minister concludes his remarks, I thank him for clarifying the position and emphasising the fact that governing bodies of sport would be entitled to exclude a male-to-female transsexual person if competitive parity of the safety of other competitors was at stake. I should have declared my interest as chairman of the British Olympic Association and apologise to the House for not having done so.

Motion agreed.

Legal Services Act 2007 (Appeals from Licensing Authority Decisions) Order 2011

Legal Services Act 2007 (Appeals from Licensing Authority Decisions) Order 2011
23rd Report from the Joint Committee on Statutory Instruments

Considered in Grand Committee

4.18 pm

Moved By Lord McNally

The Minister of State, Ministry of Justice (Lord McNally): My Lords, I ask that the Committee consider these two orders together. Both were laid before the House on 17 May and, subject to parliamentary approval, the orders will be made by the Lord Chancellor under the Legal Services Act 2007 on the recommendation of the Legal Services Board.

The Law Society and the Council for Licensed Conveyancers, both of which are currently approved regulators, have applied to become licensing authorities. The role of licensing authorities is to license legal service providers which are wholly or partly owned or controlled by non-lawyers-known in the 2007 Act as alternative business structures or ABSs. This will be possible only when Part 5 of the 2007 Act is commenced in full later this year.

Although not connected in subject matter, the two orders will allow the society and the council to put in place the necessary arrangements in anticipation of the new licensing regime. The order to be made under Section 69 of the 2007 Act will also make improvements to the two bodies' existing regulatory arrangements.

Let me turn first to the Legal Services Act 2007 (The Law Society and the Council for Licensed Conveyancers) (Modification of Functions) Order 2011. The purpose of this order is to make changes to particular aspects of the functions of the society and the council to enable them to improve their regulatory arrangements both as approved regulators and, if designated as such, as licensing authorities. Since both are statutory bodies, those changes can be made only by legislation-in this case, Section 69 of the 2007 Act.

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Let me explain what regulatory arrangements the order changes and why. Article 4 amends the Administration of Justice Act 1985 to allow the society to make rules requiring firms of solicitors to pay periodical fees to the society unconnected to any application for authorisation. This will allow the society to authorise solicitor firms on an indefinite basis. At the moment, the society can charge fees only when an application for authorisation or an application for renewal of authorisation is received, which is usually annually. Under the ABS regime in the 2007 Act, licensing authorities can charge periodic fees and license ABS bodies indefinitely. The change is intended to make the society more efficient and effective by harmonising the arrangements applicable to both types of firms, allowing it to operate a single system of regulation for both ABS and non-ABS bodies. Article 7 of the order makes similar provision for the council.

Article 5 gives the society the power to make compensation rules in relation to licensed bodies for a transitional period by extending its existing powers under Sections 36 and 36A of the Solicitors Act 1974. Without this power, the society would have to develop a separate set of compensation arrangements for ABS bodies. The society is currently reviewing its compensation arrangements for all the bodies that it regulates and it considers that it would be disproportionate and inefficient to set up separate compensation arrangements for ABS bodies while this review is under way. By December 2012, when these provisions come to an end, new long-term compensation arrangements will be in place for all types of solicitor firms, including ABS bodies, following the conclusion of the review.

Article 6 will allow the society to make rules about the recovery of costs in its role as a licensing authority. Such rules allow the costs of investigating a breach of its licensing arrangements to be recovered from the ABS body or persons closely connected to it-for example, its head of legal practice. Article 10 makes equivalent provision in relation to the council's regulation of ABS bodies to ensure consistency between different licensing authorities.

Article 8 extends the council's power to make rules about compensation arrangements to any reserved legal activity in relation to which it has the statutory power to act as a regulator. The council has applied to extend the reserved legal activities that it can regulate and these provisions will allow the council to extend its compensation fund to cover those additional reserved legal activities if its application is successful.

Finally, Article 9 amends the constitution of the council to change the balance of membership so that it will have a lay majority. At the same time, it changes the definition of "lay member" to exclude all lawyers, not just licensed conveyancers, while allowing any lawyer working in a firm regulated by the council to become a lawyer member of the council. Finally, it removes the specific requirement that two members are appointed to represent consumer interest. This will allow more flexibility in the range of interests represented by its lay membership while still allowing consumer interests to be considered.

Under Section 62(2) of the 2007 Act, there is a requirement that the Lord Chancellor may make an order under Section 69 only if the Legal Services

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Board has made a recommendation to do so. As required under Section 70 of the 2007 Act, the Legal Services Board has consulted widely on the provisions included in the order and on the draft order itself. It has worked closely with the society and the council to ensure that the order reflects their requirements before making its final recommendation to the Lord Chancellor. Both the society and the council consented to the recommendations being made, as is required in the 2007 Act. The Lord Chancellor has agreed that these amendments will benefit both bodies in terms of discharging their regulatory duties, both as approved regulators and, if designated as such, as licensing authorities. The Lord Chancellor would be content and has agreed to make this order should Parliament approve it. I therefore commend this first order to the Committee.

The purpose of the second order is to modify the functions of the First-tier Tribunal to hear and determine appeals from decisions made by the council in its capacity as a licensing authority, should it be designated as such. This order contains three key provisions. It modifies the functions of the First-tier Tribunal to enable it to hear appeals from decisions made by the council under Part 5 of the 2007 Act or the council's own licensing rules. Secondly, it sets out the order that the First-tier Tribunal may make on appeals from decisions made under the council's licensing rules; for example, it may uphold, substitute or quash the decision made by the council. The order that the tribunal will be able to make on an appeal against a decision made under the 2007 Act is set out in the Act itself. Finally, it modifies the 2007 Act so that appeals from decisions of the First-tier Tribunal can be made to the Upper Tribunal in accordance with the Tribunals, Courts and Enforcement Act 2007.

Under the 2007 Act, the Legal Services Board may only approve an application to become a licensing authority if there would be a body with the power to hear and determine appeals against decisions the applicant could make in its capacity as a licensing authority. The council has chosen to use the First-tier Tribunal as the appellate body for its licensing decisions rather than using its existing regulatory appeal body, the discipline and appeals committee. This order is needed for there to be an appropriate appellate body for the council's licensing decisions. Without appropriate appeal arrangements, the council cannot be designated as a licensing authority. The Legal Services Board has obtained the consent of the Tribunals Service and the council to this order as required by the 2007 Act.

Following discussions between the Tribunals Service, the council and the Legal Services Board, it is anticipated that appeals from the council's licensing decisions will be heard by members of the general regulatory chamber of the First-tier Tribunal, who have experience in regulatory matters. The licensing authority decisions which can be appealed are either set out in the Act itself, in Section 96-"Appeals from financial penalties"-and Schedule 13, or in the council's licensing rules. Appealable decisions would include, for example, the refusal of an application for a licence and refusal to designate as a head of legal practice. This is in line with guidance issued by the Legal Services Board

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setting out what licensing decisions should be appealable. A memorandum of understanding between the Legal Services Board, the Tribunals Service and the council will be put in place and the arrangements monitored and reviewed at the end of the first year of operation should the council be designated as a licensing authority. As noble Lords might expect, there will be additional costs for the First-tier Tribunal and the council. The council has agreed to meet the establishment and running costs of the tribunal in setting up the new function. If the council is designated as a licensing authority, it will recoup the costs through the fees that it will charge to licensed ABS bodies.

4.30 pm

Before making its recommendation to the Lord Chancellor, the Legal Services Board consulted widely on its proposal that the First-tier Tribunal would be an appropriate appellate body for licensing appeals. A draft recommendation and order accompanied its consultation. The Legal Services Board considered that the First-tier Tribunal was a cost-effective option since it has a well established structure, an administrative support function and considerable expertise in regulatory matters. The proposal is in keeping with its long-term objective of having one appellate body that will hear all licensing appeals since the jurisdiction of the tribunal can be expanded to accommodate appeals from future licensing authorities if that is so wished. It will support consistency in decision-making and is consistent with the regulatory objectives set out in the 2007 Act.

The order makes provision for the First-tier Tribunal alone to hear the council's licensing appeals. Noble Lords may wonder why the society, which has also applied to become a licensing authority, is not included. The society has opted in the immediate term to use a different appellate body, the Solicitors Disciplinary Tribunal, and the consultation on its proposals has recently closed. When a formal recommendation from the Legal Services Board is received, a further order will be brought before Parliament for approval. This order is one of the essential requirements that the council needs to have in place for it to become a licensing authority. If approved, it will provide individuals and businesses affected by the council's licensing decisions with an opportunity to challenge them in an independent and impartial tribunal. I commend both orders to the Committee.

Lord Thomas of Gresford: My Lords, I confess to being slightly confused. The Minister has addressed the orders in a different order from that in which they appear on today's Order Paper-and they do have different aspects. As I understand it, the Law Society and the Council for Licensed Conveyancers are content with the modification of functions order, but the SRA is not content with the other order, which covers appeals against licensing authority decisions. Therefore, we are dealing with both bodies in relation to one order and one body in relation to the other.

I see no reason to object in any way to the proposal that there should be changes, to the powers of, first, the Law Society to enable it to make compensation arrangements, and to those of the council. Both seek to provide a fund for people who are damaged either

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by Law Society-regulated bodies or Council for Licensed Conveyancers bodies. They will have a common fund, as I understand it, from which compensation can be paid.

I will raise a single point that was put forward by the Law Society in its parliamentary brief, namely its concern about arrangements to ensure that the prospective owners of alternative business structure firms are fit and proper persons.

It is important that the Government should make a commitment that the Rehabilitation of Offenders Act 1974 should not be allowed to stand in the way of the approval of those who wish to involve themselves in alternative business structures. I have had the experience in Hong Kong of appearing, instructed by firms which were essentially Triad-funded, with a front of a solicitor who did very little except ultimately go to jail. The warning was there: one cannot be too blasé in these alternative business structures. The noble Lord, Lord Bach, will know how I feel about alternative business structures, but those arguments seem to be a long way away from where we are today. Can the Minister address the question of whether an exception can be made so that the licensing authorities can stop individuals with criminal convictions from becoming involved in ABS firms, specifically after the 10-year period has passed when their convictions might be concealed for other purposes? That is my only point on this order.

On the order about appeals from licensing authority decisions, it seems appropriate that the First-tier Tribunal should act as the appellate body for appeals in relation to licensing authority decisions. We certainly supported the setting up of the new tribunal system, with the First-tier Tribunal and Upper Tribunal. They contain people of considerable and wide experience, not necessarily totally involved in this area but nevertheless well capable of dealing with the issues that would arise in appeals from licensing authority decisions. I am surprised that the Law Society has decided to opt out and follow its own method of appeal. From the Explanatory Memorandum, it seems that the issue that very properly concerned the Law Society was that of costs. The tribunal has only a limited power to award costs, and the Law Society seemed to take the view that there should be a wide discretion, as for tribunals in other areas, to award all the costs when an appeal is dismissed having been improperly brought. Is that the issue? To set up a separate body to take these appeals seems quite unnecessary. Can the Minister help us with where he is on that basis?

Baroness Hayter of Kentish Town: My Lords, I declare an interest as chair of the Legal Services Consumer Panel. I welcome these two orders, which appear a little technical-as, indeed, they are. But they are also important milestones on the road to seeing a new form of company opening for business which will help clients get access to good legal advice and enable "one-stop shops" to serve the needs of consumers. The Legal Services Act 2007 is a key piece of legislation introduced by the previous Government. It set up the Legal Services Board and the consumer panel which I have the honour to chair. That Act established independent oversight of the regulation lawyers. The Act clearly

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requires that such regulations should be in the interests of access to justice and the rule of law, and also be consumer focused.

The Act, as we know, set up the new legal ombudsman, which came intro operation in October last year. What is pertinent to today's discussion is that it allows a new form of business, as the Minister has set out, combining law with other services in ways that we hope will better serve the needs of some clients in accessing particular types of service. As has been stated, the orders are part of the preparation for the introduction of the new business structures and are intended to ensure that the licensing authorities, which are the specialist parts of the approved regulators, will be ready to accept applications from October this year.

I, too, will start with the second order: like the noble Lord, Lord Thomas, I had them originally in the other order. The second order deals with appeals that are turned down by the new licensing authorities. It gives the First-tier Tribunal the remit to hear appeals from the Council for Licensed Conveyancers. This is a sensible, proportionate and appropriate regime. The noble Lord, Lord Thomas, said that he was surprised that the solicitors were not similarly covered. I very much regret that absence, and the fact that the Solicitors Regulation Authority did not accept exactly the same system for appeals against its decisions as a licensing authority on the same issue: namely, rejections of applications to be allowed to operate the new business framework. As other noble Lords have been said, the SRA prefers its own Solicitors Disciplinary Tribunal, for which, as we have heard, a separate order will come here in due course. I regret this because it will risk causing a delay to the desired 6 October start date. It will also mean, perhaps more seriously in the longer term, that there will be two tribunals dealing with essentially identical cases. It is in the interest of consumers, and more widely in everyone's interests, that a single, consistent body of case law should develop about legal services regulatory matters. Despite the absence of the SRA, I nevertheless welcome the order, which allows for an efficient and cost-effective solution to regulation completely independent of the CLC.

On the first order, I simply note and welcome the proposed change in membership of the Council for Licensed Conveyancers, which, as the noble Lord, Lord McNally, explained, will provide for a lay majority. This is in line with the Act's requirement for the Legal Services Board and also with the LSB's internal governance rules for all front-line, approved regulators.

Lord Hunt of Wirral: My Lords, I support my noble friend Lord Thomas of Gresford in his comments about the Rehabilitation of Offenders Act. I recollect that, with the noble Lord, Lord Bach, we spent considerable time not only in debating the Legal Services Bill, as it then was, but in the previous Select Committee. One basis on which we took forward the notion of alternative business structures was that there should be a level playing field. I explain that by reiterating the fact that the Solicitors Regulation Authority, which was established by the Law Society to discharge the society's regulatory functions, should have exactly the same powers to regulate ABS firms as it has already to regulate existing firms. We made several commitments

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at the time to reassure people about the new structures and affirm that there would be a level playing field between ABS firms and existing law firms. That is why we see a problem with the implementation of alternative business structures that is not dealt with through these provisions. Those are the arrangements to ensure that the prospective owners of ABS firms are fit and proper persons. Indeed, I could quote myself, Jonathan Djanogly MP or the noble Lord, Lord Bach, in stressing the importance of this key issue.

4.45 pm

Despite all that background, the Government have not yet made the necessary amendment to the exceptions order under the Rehabilitation of Offenders Act to ensure that all criminal convictions, even those which would otherwise be spent, are disclosed by the potential owners of ABS firms. As my noble friend explained, if the necessary amendment to the exceptions order is not made, individuals who, for example, are imprisoned for up to two and a half years for offences of dishonesty would be able to conceal those convictions once 10 years have passed since the date of the conviction. This would mean that the SRA and other licensing authorities would have no power to stop individuals with serious criminal convictions for dishonesty from owning law firms.

These are the two points on which I would welcome an assurance. First, I look to my noble friend the Minister for a commitment that the necessary modification to the Rehabilitation of Offenders Act will be made. I understand that he may be pressed to say, "We'll deal with that in a couple of weeks' time", but it would be wonderful if he was able to be more specific. Secondly, I seek an assurance that the provisions of the Legal Services Act allowing the external ownership of law firms will not be implemented until the necessary revision has been made.

Lord Bach: My Lords, I served under the noble Lord, Lord Hunt of Wirral, on a Joint Committee looking at the draft Bill. I was not a Minister at the time that the Bill went through, although I took some part in it from the Back Benches, so while I have some form on this, I do not have as much the noble Lord. I thought at the time, and I think even more strongly now, that the Bill was a very significant piece of legislation indeed, one that is already beginning to have genuinely profound effects on all three branches of the legal profession.

I congratulate the board on what it is doing. It has done a fine job until now, but as with all changes, and some of these are fairly revolutionary, it is important that the details are right and particularly important that they must be introduced sensitively. That is why I strongly support what has been said by the noble Lords, Lord Thomas of Gresford and Lord Hunt of Wirral, about the point of the Rehabilitation of Offenders Act. I, too, will ask the question because it really is essential that the order is brought forward as soon as possible, and therefore before alternative business structure firms become a reality. Indeed, I am not going to be as shy as the noble Lord, Lord Hunt, about quoting the

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Minister's colleague, who was an opposition spokesman when the Bill passed through the House of Commons. He said this:

"The effectiveness of fitness-to-own provisions is a crucial element of the public protections that need to be in place before external ownership of ABS firms can safely be permitted. It is essential to avoid the spectre of law firms being owned by criminal elements".-[Official Report, Commons, Legal Services Bill Committee, 22/6/07; col. 300.]

If that was true then, it is certainly true now, and he is in a position, as is the noble Lord, to do something about it. It is important that the order amending the exceptions to the Rehabilitation of Offenders Act is brought forward, and we look forward to the noble Lord telling us, when he replies to the debate, precisely when it will happen. We do not oppose either of the orders, and-again, rather late in the day-I thank the noble Lord for introducing them so clearly.

I want to say a little more before sitting down. On the statutory instrument concerning appeals, as I understand it the Law Society's concerns were around the point that appeals from ABS firms, which were regulated by the Solicitors Regulation Authority, would go to the First-tier Chamber, whereas appeals and decisions from other law firms would go to the Solicitors Disciplinary Tribunal, the SDT. Now the SRA has agreed to use the SDT for appeals to do with alternative business structure firms. That was apparently agreed in March this year, but there is some surprise that no statutory instrument has yet appeared to put that decision into effect. Finally-as I am sure the Minister will be relived to hear-when will that statutory instrument be brought forward, and why has there been a delay? I congratulate the Minister on bringing the orders forward.

Lord McNally: My Lords, I have said before that, as a non-lawyer there is nothing more daunting than facing the noble Lord, Lord Bach, who, as he confessed, was the Minister responsible when the key legislation was-

Lord Bach: I am sorry to interrupt. The noble Lord was not listening with his usual attention, or else I was particularly inarticulate. I served on the Joint Committee under the noble Lord's chairmanship as a Back-Bencher, and was indeed a Back-Bencher when the legislation went through, so I cannot be held to blame or praise for the legislation itself.

Lord McNally: I now fully understand. I will have to look at the noble Lord's CV: I had always assumed that he had ministerial responsibility going back well over a decade.

Lord Bach: I am delighted that the noble Lord assumed that, but he was wrong. There was a gap in the middle.

Lord McNally: In any case, both the noble Lord, and the noble Lord, Lord Hunt, fill me with fear on this.

I am sorry about presenting these matters as separate orders; I was only following orders, as they say. I am pleased that the contributions have been, in the main,

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supportive and that it is agreed that the initial legislation and what we are trying to do now take us forward into a new era of legal service provision. In that respect, I was particularly reassured by the fact that the noble Baroness, Lady Hayter, from her position as spokesperson or defender of consumers in these areas, found them useful.

My heart, too, sank when I saw that, despite all the consultation and so on, we had ended up with two lines of solutions, whereas one would be much more preferable. We will continue to use our good offices to encourage regulation and lines of appeal in this area to be as simple and clear as possible. I share with the Committee that, the other day, I had the great honour of meeting the Vice-Minister of Justice for the People's Republic of China. In a matter of general discussion, he asked me quite out of the blue if I could explain to him the regulatory system for our barristers and solicitors. The brief mentioned about nine different organisations, with any multiple of them having lines of appeal. I ended up by assuring the Vice-Minister of the absolute integrity and independence of the various branches of our legal profession and that I would write to him.

Lord Bach: That was the question I was going to ask. I thought the noble Lord would say that he would write to him.

Lord McNally: Yes, in Mandarin and with a suitable chart. We hope that the orders go some way along the line of trying to get some order into these things.

On the matter of the missing orders, they are being drafted. We are undertaking further consultation. At this stage, the draft standing order relating to the society is not finalised. Until it is, it cannot be approved to be laid before Parliament. As the order is subject to the affirmative resolution procedure, it will require parliamentary debate and approval before the order can be made. We will be back, folks.

Quickly, on the Rehabilitation of Offenders Act, that again is under review. The point that was made is being taken on board. The Law Society Council will have arrangements in place to consider fitness of owners. They are set out in its licensing rules. The Law Society Council has asked for the Rehabilitation of Offenders Act to be extended. An order has been laid before the House adding the head of legal practices and head of financial administration to be covered by the law. Again, I note what has been said here. These are serious matters and areas that need to be tidied up as we go through the process of bringing the ABSs on board and getting the right lines of appeal.

I am just seeing if there is anything else that I have either not understood or not covered. A draft order will be debated in the House next week. We are aware of the additional requirements sought for owners and managers. The matter is being discussed at the moment so, again, watch this space. I thank the contributors to the debate. I hope that this has been enough clarification. If I have missed things I will write to noble Lords.

My noble friend Lord Thomas raised the point about what the solicitors did not like. The Law Society did not sign up because of a principal concern that changes were needed to the First-tier Tribunal general regulatory chamber rules to allow a general power to

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award costs. The LSB has asked the tribunal procedures committee to consider changes to its costs rules but, on 1 March 2011, the committee came to the preliminary view that the rules in their current form were adequate to determine whether one party or another should pay costs. The Law Society has not consented to this order. As was said, it has made provision in its proposed licensing rules for the Solicitors Disciplinary Tribunal to be the appellate body for its licensing appeals.

Lord Thomas of Gresford: Before the Minister leaves that point, will he give us an assurance that he will take on board the point made by the noble Baroness, Lady Hayter, that it is quite wrong that there will be one way of appealing for ABS firms and another for Law Society-regulated firms? As she said, it is very important that there should be a common body that creates precedents on which people in future can advise and act.

Lord McNally: As a lay man, I was impressed that it was a consumer champion who made that point. Certainly I will take it on board. I know that in trying to get agreement one has to make sure that the profession is protected and that there are proper guarantees that these matters will not be repeatedly revisited. It is also important that, in getting through the negotiations, consideration is given to the consumer and to securing the clearest and most understandable forms of regulation. As I said when I read my brief, my heart sank a little when I saw that agreement had not been reached and that the bodies were going off in different directions. That was not the initial aim of the Act or the direction of travel that we want. Therefore, I hope that those responsible in the professions will note what has been said in this debate. I will report back to noble Lords and see whether we can help push these things in the right direction.

Motion agreed.

Legal Services Act 2007 (The Law Society and The Council for Licensed Conveyancers) (Modifications of Functions) Order 2011

Legal Services Act 2007 (The Law Society and The Council for Licensed Conveyancers) (Modifications of Functions) Order 2011
23rd Report from the Joint Committee on Statutory Instruments

Considered in Grand Committee

5.01 pm

Moved By Lord McNally

The Deputy Chairman of Committees (Baroness Gould of Potternewton): Moved formally?

The Minister of State, Ministry of Justice (Lord McNally): Moved formally. Sorry.

Motion agreed.

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Co-operation in Public Protection Arrangements (UK Border Agency) Order 2011

Co-operation in Public Protection Arrangements (UK Border Agency) Order 2011
23rd Report from the Joint Committee on Statutory Instruments

Considered in Grand Committee

5.02 pm

Moved By Lord McNally

The Minister of State, Ministry of Justice (Lord McNally): I apologise to the noble Baroness, Lady Gould: I was already on the next one. However, this time I cannot get anything in the wrong order because there is only one order. It adds the UK Border Agency to a list of bodies that are required to co-operate with local criminal justice agencies in each area in assessing and managing the risks posed by sexual and violent offenders. This co-operation already exists at an informal level. The order places it on a statutory basis, which should make it easier to identify, refer and manage foreign nationals in our criminal justice system.

The broad arrangements for co-operation are set out in the Criminal Justice Act 2003. Section 325(2) requires the responsible authorities in each area-the police, probation and prison services acting together-to make arrangements to assess and manage the risks posed by sexual and violent offenders. These are known as multiagency public protection arrangements-MAPPA-because the different agencies work together to protect the public. MAPPA provides a structure for identifying eligible offenders, notifying the relevant agencies, allocating offenders to various categories and levels depending on their offences and the degree of risk they pose, sharing relevant information about them and managing them through regular meetings and reviews.

Section 325(3) requires the responsible authority to co-operate with a list of other bodies specified in Section 325(6) in the task of assessment and management. It also places those bodies under a duty to co-operate with responsible authorities, including the local authority, social services, housing, education and health services, registered social landlords, youth offending teams, Jobcentre Plus and others. These agencies can expect to be notified when offenders who are relevant to them are identified. For example, if the offender is under 18, representatives from a youth offending team and local authority social services will be invited to all meetings where the management of the offender is discussed.

Those bodies are all specified in the Act. However, Section 325(7) also provides a power, subject to affirmative resolution, to amend the list of bodies with a duty to co-operate-to add to the list or remove from it. Parliament must have envisaged that circumstances might arise in which it would be beneficial to make equivalent statutory arrangements for co-operation between the responsible authority and other bodies. Those circumstances have now arisen.

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The UK Border Agency is responsible, among other things, for the operation of internal immigration controls, including asylum, management of applications for further stay, and enforcement. It aims to protect the public by deporting foreign nationals who commit serious criminal offences, where legislation permits, and by actively monitoring and managing foreign national prisoners who are released into the community. Over the past few years, the UK Border Agency has been working with the criminal justice agencies in an attempt to manage foreign nationals who are MAPPA offenders more effectively. This process includes sharing information, where it is possible to do so, about developments in particular cases and developing release plans.

However, there are limits to what can be achieved by informal co-operation. Both sides agree that they could achieve more together if their co-operation were placed on a statutory footing. One of the most important benefits would be that a clear legal basis would exist for the exchange of information about foreign national MAPPA offenders. Section 325(4) of the Criminal Justice Act 2003 explicitly provides that co-operation between the responsible authority and the specified bodies with a duty to co-operate may include the exchange of information. Other potential benefits include: ensuring that valuable resources are not expended on planning for the community supervision of an offender who will be subject to automatic deportation; ensuring that the UK Border Agency can prioritise enforcement action for the most dangerous sexual and violent offenders; and improving the information flow to immigration detention centres in respect of risk management and safeguarding-for example, in order to avoid the placement of certain offenders with children and vulnerable adults at the centres.

Co-operation between the responsible authority and the UK Border Agency will be governed by a memorandum of understanding drawn up in pursuance of Section 325(5) of the Act. This will set out clearly what each is required to do. For example, the responsible authority will notify the UK Border Agency of any MAPPA meetings to discuss a foreign national offender so that the agency may attend the meeting or provide information to it. Similarly, the UK Border Agency will notify the responsible authority if the offender is released from immigration detention or removed from the UK. Training has been provided to the relevant members of staff so that they can start to co-operate more effectively, subject to both Houses approving the draft order. I beg to move.

Lord Thomas of Gresford: My Lords, it is clearly sensible that the agency should be brought within the scope of the public protection arrangements. I have nothing to add to that. The most important thing is that it should legalise the passing of information between the various agencies that are concerned with these matters.

Lord Bach: I agree absolutely with the noble Lord, Lord Thomas of Gresford. I have nothing to say except that we support the order and I thank the noble Lord for moving it.

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Lord McNally: My Lords, I am mightily relieved at that unanimous support. I, too, think that it is an important order. One of the great frustrations of the criminal justice system in the past has been the working in silos. The MAPPA approach is very sensible, so it is equally sensible to extend it to the UK Border Agency. I thank noble Lords for their expressions of support.

Motion agreed.

Equality Act 2010 (Work on Ships and Hovercraft) Regulations 2011

Equality Act 2010 (Work on Ships and Hovercraft) Regulations 2011
23rd Report from the Joint Committee on Statutory Instruments

Considered in Grand Committee

5.11 pm

Moved By Earl Attlee

Earl Attlee: My Lords, the power to make these regulations is in Section 81 of Part 5 of the Equality Act 2010. The regulations were not introduced when most of Part 5 was commenced because further consideration was necessary on the issue of seafarers' pay. The draft regulations, if approved, will serve two purposes: applying the Part 5 work provisions of the Act to work on ships and hovercraft and to seafarers, and addressing the European Commission's concerns regarding differential pay for seafarers. I shall explain briefly how Part 5 would apply to work on ships and hovercraft and to seafarers, and then say a few words about seafarers' differential pay.

The proposals aim to ensure that the level of protection afforded to land-based workers under Part 5 is extended to those at sea, creating as consistent as possible an approach. The Act has many benefits, providing a cross-cutting legislative framework to protect individuals' rights and to advance equality of opportunity for all. It delivers an accessible framework of discrimination law, protecting individuals from unfair treatment and promoting a fairer, more equal society. Part 5 deals with work, giving protection in respect of specified protected characteristics from discrimination, harassment and victimisation, these being: age, disability, gender reassignment, marriage, civil partnership, pregnancy, maternity, race, religion or belief, sex and sexual orientation.

Broadly speaking, the regulations would apply Part 5 to seafarers, irrespective of nationality, working on board a UK-registered ship operating wholly or partly in GB or adjacent waters; and to EEA and designated state seafarers, where the legal relationship of their employment is located in or closely linked to Great Britain, working on board EEA-registered ships or hovercraft operating wholly or partly in British or adjacent waters. For ships operating wholly outside those waters, the regulations would apply on UK-registered ships only. Just to be clear, the designated states in question are those countries having various specific

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agreements with the EU, such as association agreements. They include various European states such as Russia, Mediterranean states such as Algeria and Morocco, and the countries of the African, Caribbean and Pacific group of states, with the exception of Cuba.

On a point of detail, while most of the obligations within the Equality Act are underpinned by EU law and therefore EEA states are also bound by those obligations, because the protected characteristic of marriage and civil partnership is a domestic provision not required by EU law, that protected characteristic is excluded as regards ships registered in EEA states other than the United Kingdom.

The United Nations Convention on the Law of the Sea-UNCLOS-restricts a state's ability to apply legislation to foreign-flagged ships but, where a seafarer works wholly or partly in Great Britain, these regulations will apply Part 5 to seafarers on ships registered in an EEA state other than the UK, provided the criteria that I have just mentioned are met. The regulations will ensure compliance with European law and provide clarity to employers and employees while achieving the intended effect of applying Part 5 to as broad a range of ships, hovercraft and seafarers as possible without breaching UNCLOS or European law, or placing additional burdens on UK-registered vessels alone.

5.15 pm

On differential pay, under current law-the Race Relations Act 1976-it is not unlawful for seafarers to be paid differently on the basis of their nationality if they were recruited outside Great Britain. That includes seafarers from EEA states and designated states. The European Commission has investigated a complaint that UK law on differential pay for seafarers does not comply with European law and has issued a reasoned opinion upholding that complaint. These regulations address that by providing that it is not unlawful to pay, or offer to pay, different rates to seafarers other than those from EEA or designated states, if a person applied for work as a seafarer or was recruited as a seafarer outside Great Britain. If the seafarer later became a British citizen or national of another EEA or designated state then the exception would no longer apply.

The Equality Act defines what constitutes indirect discrimination. The effect of these regulations in respect of seafarers' differential pay is that, where an apparently neutral provision, criterion or practice has an effect which particularly disadvantages seafarers from EEA or designated states in terms of different pay, it will nevertheless continue to be lawful if the employer can show that the provision, criterion or practice is objectively justified. If differential pay were challenged by a seafarer from an EEA or designated state, it would be for the employer to satisfy an employment tribunal that the provision, criterion or practice could be objectively justified as a proportionate means of achieving a legitimate aim in the particular circumstances of the case. To help ensure the continued competiveness of the UK shipping industry, it will remain lawful for employers to pay different rates of pay to seafarers from countries that are outside the EEA and not designated states.

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Addressing this issue was a conundrum, difficult to resolve to the total satisfaction of both the shipping industry and maritime trades unions. We have found the right balance in taking the minimum necessary measures to satisfy the European Commission's concerns. The Government will remain vigilant as to any negative impact on the UK flag, the competitiveness of UK shipping and the wider maritime cluster. Should Parliament approve these regulations, the Government will watch developments in this area carefully. Even if no immediate impact ensues, the review clause within the regulations allows a suitable opportunity for the Government to reassess any impact. I look forward to noble Lords' contributions to the debate. If I do not manage to address all the points raised, I shall do so in writing before the Motion to approve these regulations is considered by the House. I commend these regulations to the Committee.

Lord Moynihan: My Lords, I have a brief question for the Minister. I assume that Northern Ireland is making its own regulations in the context of this order. Can the Minister give us the background as to why this applies only to England, Scotland and Wales, and not Northern Ireland, yet the definition of "United Kingdom waters" is those waters adjacent to Great Britain or, under paragraph 3(c),

What would "a sufficiently close link" mean in this context?

Lord Higgins: My Lords, it is a very long time indeed since I qualified as a member of the Institute of Chartered Shipbrokers. Since then, I have taken a strong interest in the industry, both as a Minister and Opposition spokesman on trade, in Select Committees and so on. This is an extremely important order. The Minister has set out clearly why it is before us: as a result of European legislation. However, I have always considered it important that the number of ships on the British register should be as large as possible. It has considerable advantages to the UK, not least because, generally speaking, if ships are registered here, the headquarters, operating offices and so on tend also to be in the UK; the Treasury, in particular, benefits as far as taxation and other things are concerned. In addition, it encourages other, related, industries such as insurance, which have traditionally been located in London.

That is very important, but there are other aspects such as the training of officers, which again builds up the link with the UK. We remain a major maritime nation. None the less, the size of the register has, for reasons such as taxation, varied over the years. However, we have always played an important role in the IMO and so on.

This proposal, the extremely helpful Explanatory Memorandum and the impact assessment really examine two possibilities. They rightly reject the idea that we could do nothing, because, as the Minister has pointed out, we are under considerable duress from the European Union to deal with the matter. So the alternatives are either to change the position on differential pay for

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employees from the European Union, the EEA and the designated states-the designated states are of course really quite expensive in this context-or simply to say that you cannot differentiate at all, regardless of where the employees come from. The Government have opted for the first of these options and, I believe, rightly so. I have received some assessments from the Chamber of Shipping, and the impact assessment also deals with these matters as far as both options are concerned. They say that if one were to do it for seafarers from the EEA and designated states, the average percentage increase in wage costs, which range between 6 per cent and 32 per cent, would impact on a ship's overall running costs by up to 7.2 per cent. On the other hand, if one were to take the widespread option, the range would be an increase of 10 per cent to 130 per cent; it would depend, of course, on the type of ship and so on. The increase in the overall cost could be as high as 56 per cent.

The industry is highly competitive. If we are compelled to pay higher rates, as would be the case in the international market generally, that would obviously have a serious effect on our position and be likely to result in a considerable reduction in overseas earnings. While it appears that there is no choice but to go for the European option rather than the global one, that would seem to be the right solution. I hope that the Minister will give us an assurance that he is certainly not proposing to consider any further a wider option, which would have a very serious economic effect at a time when the British economy is obviously under considerable strain.

There is a provision in the order for a review after five years. I hope that the Minister will say that if it turns out to be the case that the percentage increase in wage costs that I have indicated under the provisions of the order is having a more serious effect than the one that we anticipate at the moment-which is already serious-a review might be carried out earlier to see whether, in the light of experience, some change ought to be made in the order. However, overall, this is probably the best compromise that can be effected. None the less, it will have an adverse effect on the British economy.

Lord Lester of Herne Hill: My Lords, 50 years ago in Worthing I had the privilege of arguing with the noble Lord, Lord Higgins, when I stood against him for the Labour Party and he won resoundingly. I disagreed with him then and, 50 years later, I disagree with what he has just said. I hope that in the long run the outcome might be different from what he hopes. The regulations are welcome-

Lord Higgins: The noble Lord should not worry unduly: my majority was only 32,000.

Lord Lester of Herne Hill: Yes, it was so great that the votes could have been weighed rather than counted. However, I got the highest vote Labour ever got in Worthing-which was still quite low.

The regulations are welcome in so far as they apply the provisions of the Equality Act 2010 to employment on ships and hovercraft so as to forbid discrimination,

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harassment, victimisation and other unlawful conduct in relation to the protected characteristics of age, disability, gender reassignment, pregnancy and maternity, race, religion or belief, and sex and sexual orientation. They are welcome also because they bring the law into line with our EU obligations so as to avoid liability in the pending Commission infringement proceedings. Because of the technical nature of some of the issues and their public importance, I gave the Minister notice of what I will say so that he might be well advised in his response. I hope that what I wrote to the noble Lord, Lord McNally, was passed on to my noble friend who is handling the matter.

It is most regrettable that these regulations are designed to permit some forms of racial discrimination by the British shipping industry to be outside the protection of the Equality Act, where the discriminatory treatment involves paying seafarers less because of their nationality in a way that may amount to direct or indirect race discrimination on grounds of ethnicity or national origin. I pause to mention that the designated states do not include those of Commonwealth Asia: namely, India, Pakistan, Bangladesh and the Philippines.

It is worth recalling the history. Under the Merchant Shipping Act 1894,

If the lascar refused to enter into the second agreement, under which he was employed on blatantly discriminatory terms, he should,

In other words, he could be punished under the criminal provisions of the Act for desertion or indiscipline.

Much of the 1894 act was repealed by the Merchant Shipping Act 1970, which did not re-enact the unsightly lascar clauses. However, under the Race Relations Act 1968, the practice of making racially discriminatory agreements with non-white seamen brought to Britain for this purpose was given fresh statutory blessing. During the passage in 1968 of the Race Relations Bill-I was watching at the time-Ben Whittaker MP attempted in Committee to remove provisions that permitted race discrimination on board merchant ships. He was supported by Eric Heffer MP, who pointed out that if the exemptions were not removed, 35,000 Asian seamen would be outside the Bill's protection. But the Home Secretary, James Callaghan, recalled his personal experience as a Cardiff MP and said that there was a long tradition in the United Kingdom that seamen of mixed races were segregated according to race and that lascars continued to be employed on British ships on terms and conditions of service which were dissimilar to those pertaining to British crews. Mr Callaghan, as he then was, said that he wanted to see this discrimination ended, but he would not make an amendment, which no doubt would have been a great advance in race relations, but would have upset a great many other things.

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5.30 pm

The Race Relations Act 1976 failed to deal with the problem and contained exemptions permitting race discrimination on ships. Subsequent anti-discrimination legislation contained similar exemptions. The Equality Act 2010 repealed the 1978 Act, but Section 81, as we have heard, provides that the employment provisions in Part 5 will apply to seafarers and the crew of hovercraft only in the way set out in these regulations. That is the purpose of the regulations we are now being asked to consider for approval.

As paragraph 4.2 of the Explanatory Memorandum explains, although Part 5 of the 2010 Act was commenced by SI 2010/2317, that order saved the legislation listed within it as regards work on ships and hovercraft and seafarers-see Article 11 and Schedule 3-and exempted shipping provisions in the context of race, sex, equal pay and disability discrimination in previous legislation.

The effect of these regulations is that the only discrimination within the scope of the Equality Act that will be permitted against seafarers, other than in relation to marriage and civil partnership, is different rates of pay for seafarers because of nationality, and only if the seafarer applied for work or was recruited outside Great Britain and is not a British citizen or a national of another EEA state or designated state. But that means-I ask the Minister again to confirm that this is so-that, subject to what I shall say about the meaning of race discrimination as a matter of law, it will be lawful to pay an Indian or Filipino seafarer less because of his nationality since he is not a British citizen or a national of another EEA state or designated state. That seems to me a highly problematic state of affairs. The House of Lords has decided that racial discrimination is contrary to a binding rule of customary international law-in Latin, jus cogens-in the case of R (European Roma Rights Centre) v Immigration Officer, Prague Airport 2005, a case where I acted for the ERRC. That means that the prohibition against racial discrimination on ships gives effect to and is not contrary to international law whatever traditional custom or practice might have evolved historically and whatever the right of innocent passage to and from our waters.

The Equality Act 2010 defines unlawful racial discrimination to include direct or indirect discrimination on racial grounds. Racial groups are broadly defined and the current case law indicates that "immigrants" or "foreigners" constitute racial groups-see Attorney-General's Reference No. 4 of 2004, [2005] of the Weekly Law Reports 2810, in which I appeared as amicus curiae. The Court of Appeal has also held that place of birth may found a claim to indirect national origins discrimination-see R ex parte Elias v Secretary of State for Defence 2006, in the Weekly Law Reports 3213. There is also the case of Mandla v Lee where discrimination against a boy for wearing a turban was held to constitute race discrimination, although the ground was ostensibly that of the turban. In a case held long ago, in which I was involved; namely, Race Relations Board v Ealing Borough Council ex parte Zesko, the House of Lords unanimously held that discrimination on grounds of nationality was not the same as discrimination on grounds of national origin.

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In that case, Ealing Borough Council refused to allow Irish people into council houses and said it was a matter of nationality and not national origin.

I apologise for that citation of the cases, but I hope it is useful to have it on the record. As I say, I have given notice of the general point. To explain, although the regulations deal with discrimination because of nationality, that does not end the argument. Discrimination because of nationality may also be discrimination because of ethnicity or national origins, as those cases all indicate. By excluding discrimination on grounds of nationality, one does not exclude at all the possibility that an Indian or Filipino seaman could come forward under the Equality Act as it stands and say, "This is not because of nationality. It is because of my colour, my ethnicity or my national origins". It is that problem to which I draw attention.

In my opinion, there is a serious risk that the payment of lower wages to, for example, Indian or Filipino seafarers recruited outside Great Britain will be unlawful under the Equality Act despite the exception made in these regulations in favour of the British shipping industry. It would involve either direct discrimination or a discriminatory adverse impact on that group or groups and would not be objectively justifiable. That real risk was not alluded to at all in the impact assessment or consultation. It means, if I am right, that the regulations will fail in that important respect to achieve the object declared in paragraph 7.1 of the Explanatory Memorandum of advancing equality "for all" and delivering,

As my noble friend said, the Department for Transport put forward two main options for consultation. Option A would have outlawed the practice of nationality-based differentials altogether, which the noble Lord, Lord Higgins, said he does not favour. Option B is what is in these regulations. It may not be appreciated-it is not referred to in the Explanatory Notes or anything else-that in May 2010, Susan Carter of IHPC, the reputable research institute, published for the department her external Review of Stakeholder Evidence on Differential Pay in the Shipbuilding Industry. On behalf of the shipbuilding industry, she examined all the arguments that the noble Lord, Lord Higgins, has put forward so eloquently today. Unfortunately, there is no reference to this important and highly relevant external review in the Explanatory Memorandum.

Taking the evidence as a whole, the main and most certain finding by this external review is that,

In her conclusions and recommendations, the external reviewer for the Government-not for some NGO but for the Government-wrote in paragraph 10.4 that:

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The Carter report continued in paragraphs 10.5 and 10.6 that:

"While option A could involve significant short-term costs for some shipping companies, the immediate benefit would be 'better outcomes for those who experience disadvantage' as the Equality Act 2010 intends. In the long-term, greater equality is expected to bring economic benefits ... On the basis of the evidence submitted, I recommend outlawing the practice of nationality-based pay differentials for seafarers altogether (option A)".

As I say, this was after a careful review in her report of all the evidence, which if I may say so has not really been dealt with either in the Explanatory Memorandum or so far in debate.

Lord Higgins: I am trying to follow my noble and learned friend, and it may well be that I have misunderstood the situation. Incidentally, he refers to the shipbuilding industry, when it is the ship operating industry. However, as I understand it, although I may be quite wrong, the order is purely concerned with pay differentials; all the legislation with regard to discrimination in other areas and so on is not effective. No doubt the Minister can clarify whether that is the case. In all events, if, as a result of the change on the pay differential, the vessel is flagged out to, say, Liberia, any protection they may have from UK law is lost.

Lord Lester of Herne Hill: First, I apologise for saying "shipbuilding industry", which is of course not what was intended at all; one is concerned with the shipping industry. Secondly, my noble friend is perfectly right that we are concerned with racial discrimination in pay and nothing else, which is preserved by these regulations. It is that and nothing else which Susan Carter of the external panel was considering in her careful review of stakeholder evidence on differential pay in the shipping industry, where she goes through the consequences of outlawing differential pay on five types of ship based on a Chamber of Shipping survey of its members. She looks at 229 ships and estimates what may happen about change of flag and so on. I have been quoting from her report. I submit that, being an external reviewer who has looked at all the evidence, her report should be given careful consideration. I respectfully agree with the report and wish that the Department for Transport would follow the wise and objective advice of the external panel instead of creating considerable legal uncertainty and continuing unfairness which our courts and employment tribunals may have to resolve. That may be to the benefit of my profession, but it is not in the public interest. I wish that the Government had taken the advice of their own external reviewer and I hope that these points can be considered before we come to the debate to approve the regulations.

Lord Tunnicliffe: My Lords, I thank the Minister for his explanation of these regulations and other noble Lords for their thoughts. The point of the noble Lord, Lord Lester, is well made. The regulations will leave an unsatisfactory piece of law on our statute book. They will regularise discrimination by nationality on British vessels. There are no two ways about that: they are designed to do so. They are designed to be compatible with European law and, for appropriate individuals, with UK law, and are designed to except those who are not in the protected group: some 12,700 overseas seamen.

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Option 2 in the impact assessment simply says that it is option 1, but also makes it unlawful for employers to pay seafarers differential rates of pay on the basis of their nationality. The argument against it is made by the Chamber of Shipping, and it is the argument that the Government seem to have accepted. It goes something like this: if we make discrimination illegal, our costs will go up, so we will deflag and that will be bad for the economy.

We are not going to oppose the regulations because we think it is better to get the first bit right, which is the option in front of us, and perhaps debate later the second bit, which is whether all seamen should be involved. But I am concerned that the report by Susan Carter, from which we have had extensive quotes from the noble Lord, Lord Lester, seems to have been ignored in the regulations, the memorandum and the impact statement. She makes a basic statement:

"On the basis of the evidence submitted, I recommend outlawing the practice of nationality-based pay differentials for seafarers altogether".

So I hope that the noble Earl will respond to the noble Lord, Lord Lester, and myself on why this report was ignored before this goes in front of the House.

5.45 pm

The argument in favour of not extending the anti-discrimination provisions to all seafarers is set out in the impact assessment, but the weakness in that assessment-I would like to know from the Minister whether this was tested in any way-is that the evidence comes solely from the Chamber of Shipping. It has produced some pretty dramatic figures. The worst-case argument is that on a worldwide container vessel, the costs of operation would go up by 22 per cent, which is a significant figure. The chamber goes on to argue, and the Government seem to have taken the case, that operators will deflag. That is the argument against pressing for the inclusion of all seamen: it will protect few people because operators will avoid the law by deflagging. Unfortunately, the Chamber of Shipping seems to shoot itself because in its submission to the analysis by Susan Carter, its members were asked how many would "flag out", as I believe the process is called, under the two options. The response was that under the option set out in the regulations, 122 ships-some 53 per cent of the fleet, would flag out-while only 27 ships, 12 per cent, would flag out if the regulations were extended to cover all seamen. So the evidence of its own reaction seems to be a bit iffy.

I hope that, in supporting the regulations so as at least to clean the European area, which is a good thing, and being a responsible Opposition we welcome all good things, we nevertheless would welcome comments or a response in writing from the Minister on why the Government have so readily accepted the evidence of the Chamber of Shipping but do not seem to have considered at all the report they commissioned from Susan Carter.

Earl Attlee: My Lords, this has been an interesting and, as usual when the noble Lord, Lord Lester of Herne Hill, is involved, well informed debate. I thank all noble Lords for their contributions. Gathered here today is a wealth of transport and equal rights experience,

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and I am grateful for the points made by the noble Lord, Lord Tunnicliffe, that we should solve the immediate problem first of all and then consider the wider issues.

On 2 March 2010, in a debate during the Report stage of the Equality Bill, the noble Lord, Lord Rosser, made an impassioned plea on behalf of seafarers in respect of both differential pay and the UK national minimum wage. Unfortunately, the noble Lord cannot attend the Committee today due to duties in the Chamber.

In response to that earlier debate, the then government Minister, the noble Baroness, Lady Thornton, said:

"The Government must carefully consider the implications of ending the practice of differential pay".-[Official Report, 2/3/10; col. 1384.]

This Government have carefully considered the issue and I pay tribute to my colleague in another place, the Maritime Minister. Since taking office, he has demonstrated a hitherto unseen level of determination to address the issue. He has consulted extensively with the shipping industry and with the unions.

As I said in my opening remarks, the Government accept that the regulations on differential pay do not go far enough for some, while for others they go too far. The noble Lord, Lord Lester of Herne Hill, is clearly embedded in the first camp. However, the Government are determined to protect the future of the UK shipping industry and with it the Red Ensign. The regulations that we are considering do the least possible to avoid a substantial fine being imposed by the European court.

The UK national minimum wage for seafarers is also a highly complex area and the Government are very familiar with the concerns expressed by the maritime trade unions. A legal working group that includes these unions was set up to look into how far international and EU law would allow the Government to apply the UK national minimum wage to non-UK ships. The conclusions of the working group will be submitted to Ministers in due course, after which all interested government departments, including the Department for Business, Innovation and Skills, which is responsible for the national minimum wage policy, will give further consideration to the issue.

I am grateful to the noble Lord, Lord Lester of Herne Hill, for giving me advance notice of what he intended to say. I, too, picked up the "shipbuilding" typo but rapidly translated it into "ship owners". In reply to the noble Lord, and with all due respect, indirect discrimination is not the issue here. The regulations allow discrimination on grounds of nationality. That is direct discrimination, excused by paragraph 1 of Schedule 23, "General Exceptions", and by Section 81, which says that Part 5 of the Act applies to seafarers only in such circumstances as are prescribed. These regulations prescribe the circumstances.

I confirm that it will continue to be lawful to pay some seafarers differently because of their nationality if they were recruited outside Great Britain and are not British citizens or nationals of another EEA state or designated state. That will include Filipino seafarers.

Lord Lester of Herne Hill: I fear that I have not explained my point clearly. Something may be discrimination on grounds of nationality and also

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direct or indirect race discrimination. It may involve discrimination based on nationality and ethnicity or on national origins, for example-that would be direct discrimination-or it may be indirect discrimination based on nationality, national origins and ethnicity. I will not go through the definitions in the Equality Act to explain what I have just said, but the definition is very large and the case law makes what I have just said crystal clear, whether it applies to "no turbans", "no Irish" or discrimination using other foreign epithets. It is quite clear from court rulings that discrimination may be ostensibly on one ground but in fact is on others. I do not want to see litigation on this matter because we have not dealt properly with it.

Earl Attlee: My Lords, I fully understand my noble friend's desire to avoid litigation. These extremely complex issues are well beyond my understanding, but I will give the noble Lord a detailed response in writing. My noble friend's argument is an essentially legal one and I hope that the Committee will forgive me if I write to him.

There remains the question of whether it is immoral to allow differential pay in any circumstances. That is a rather simpler question to answer. The short answer is no. The world is not that simple. That is why, traditionally, seafarers from around the globe have tended to be paid amounts commensurate with the domestic job market in their own countries. If seafarers from countries with generally low-paid workforces were paid at higher rates, this could seriously distort the job market in their own country. Imagine, for example, a situation in which highly skilled surgeons or other professionals find themselves better off serving as ratings on ships than using all their training, skills and knowledge to help to cure people and solve their problems. This would be damaging at a far deeper level, and I suspect that there could be other serious unintended consequences.

My noble friend Lord Lester asked me why the protected characteristic and civil partnership were excluded.

Lord Lester of Herne Hill: I am sorry; I have not asked that. Although I put it in my draft, I am satisfied with what the Minister said on that.

Earl Attlee: I am obliged to the noble Lord.

The aim is to apply the regulations to as many ships as possible of whatever flag, in so far as this is consistent with international law, to limit the effects being felt by the UK flag alone. The extension of the application of Part 5 to EEA ships is therefore limited to those protected characteristics which are underpinned by EU law. A ship flagged to EEA states would be under the same obligations. The characteristic of marriage and civil partnership is not an EU obligation and so is excluded.

My noble friend Lord Higgins made several important points. I accept his points about the importance of the UK register, and I hope that that came out in my comments. On the effect on the UK flag, leaving aside the issue of differential pay for the moment, the effect of applying the new consolidated equality legislation

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to work on ships is not very burdensome. Indeed, it should bring benefits through greater clarity for employers and employees.

As to the effect caused by the need to change the law in respect of seafarers' pay, we cannot say with absolute certainty what the effect will be on the UK-flagged fleet, although many noble Lords have suggested what it could be. We have consulted closely with all sides of the shipping industry on the likely effect and will monitor it closely. We are regulating in a way that will be least disruptive to the industry while allowing it to comply with EU law. We are also seeking undertakings from the European Commission that it will be vigilant in ensuring that other EU member states are also following EU law.

My noble friend Lord Higgins asked me about the review provided for in the regulations, and asked whether we would review earlier. As I indicated in my opening remarks, we will keep the implementation and the situation under close observation.

My noble friend Lord Moynihan asked me why the regulations did not appear to apply to Northern Ireland. Northern Ireland has been asked to introduce its own parallel legislation at the earliest opportunity. Until that legislation is also approved, the UK will remain in breach of EU law. The European Commission has been informed that action in Northern Ireland was necessarily delayed due to recent elections, but that the matter is in hand. My noble friend also asked me a rather detailed question about the definition of "sufficiently close link". It is a basket of measures as set out in Regulation 2(2)(b). It will be determined by reference to all relevant factors including those set out in the regulations.

Noble Lords asked me particularly about the Carter report. I agree that it is a significant report. Susan Carter reviewed all of the evidence submitted by stakeholders and came to the conclusion that she did. She was not asked to consider any other evidence, such as that from government. Maybe Susan Carter's report was a comment on the industry's evidence to maintain the status quo. As I have already indicated, my honourable friend Mr Penning, the Shipping Minister, has consulted extensively.

I am grateful to all noble Lords for their contributions. The wider issues are indeed complex. As indicated, I will write to all noble Lords who have contributed to the debate.

Lord Tunnicliffe: Will the noble Earl write specifically on the consideration that the department has given to Susan Carter's report and say why it does not share her conclusion? He seems to give a partial explanation which I do not think is valid. Susan Carter consulted as widely for her report as the department has for the regulations.

Lord Lester of Herne Hill: While the noble Earl is dealing with that, I should add that Ms Carter states at the beginning of her report:

"This report reviews evidence submitted by key stakeholders in the shipping industry about differential pay for seafarers on grounds of nationality. The Department for Transport invited them to submit financial estimates of the likely impact of either: option A ... or option B".

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That the department did not give evidence is, with respect, not the point; the point is that the department asked her to do this job on the basis of evidence submitted by-that ghastly phrase-"key stakeholders". Therefore, I am mystified as to how anyone reading her report could fault her findings or her conclusion. I would be very grateful if the Minister would write to us about that as well.

Earl Attlee: My Lords, paragraph 8.4 of the Explanatory Memorandum states that a summary of the evidence submitted can be found on a website. I will not read out the website address, but when I write to noble Lords I will discuss the Carter report. As indicated, I will write to all Members of the Committee before seeking the House's approval of the affirmative instrument.

Motion agreed.

Pensions Act 2007 (Abolition of Contracting-out for Defined Contribution Pension Schemes) (Consequential Amendments) (No. 2) Regulations 2011

Pensions Act 2007 (Abolition of Contracting-out for Defined Contribution Pension Schemes) (Consequential Amendments) (No. 2) Regulations 2011
23rd Report from the Joint Committee on Statutory Instruments

Considered in Grand Committee

6.02 pm

Moved By Lord Freud

The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud): I shall set out the general context for these draft provisions. Contracting out of the additional state pension was first introduced in 1978. Initially, contracting out was restricted to defined benefit or salary related occupational pension schemes but, in 1988, it was extended to pension schemes contracted out on a defined contribution or money purchase basis. The scheme members and, in the case of occupational pension schemes, their employers, receive a national insurance contributions rebate in place of the state benefits forgone.

At this point I should explain to noble Lords the terms "money purchase" and "defined contribution". A money purchase scheme is defined in legislation as one where all the benefits that may be provided are money purchase benefits, which in turn are calculated by reference to payments made by the member or by any other person in respect of the member and which are not average salary benefits. The term "defined contribution scheme" is not one defined in legislation but is the term commonly used throughout the pensions industry for money purchase schemes.

In 2005, an independent pensions commission, chaired by the noble Lord, Lord Turner, recommended the abolition of contracting out on a defined contribution

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basis. The commission's view was that the contracting-out/contracting-in choice added complexity to the UK pension system and was poorly understood. Its application to personal pensions helped to generate the pensions mis-selling problems of the 1990s. The then Government accepted the commission's recommendation and the Pensions Act 2007 provided for abolition, with some further consequential changes in the Pensions Act 2008.

During the passage of the legislation, there was widespread support in Parliament for abolition. In March 2010, the then Government announced that abolition would be on 6 April 2012, and that date has been confirmed by the present Government. For the purposes of this debate we are only concerned with contracting out of the additional state pension via a defined contribution pension scheme. We are not proposing changes here to contracting out via salary-related schemes.

In the case of a defined contribution occupational scheme, both the member and the employer pay lower rates of national insurance contributions. The employer pays a minimum payment to the scheme which is equal to the member's and employer's reduction in national insurance contributions. In a defined contribution contracted-out personal pension scheme, the full rate of national insurance contributions is paid by the employer and employee, and the rebate is provided by HMRC through an annual payment into the pension scheme at the end of the tax year. These reductions and payments are collectively known as the contracted-out rebate.

Under the current defined contribution contracting out system, special rules are applicable to protected rights, the collective term for the rebate, tax relief and investment return which abolition will remove. These rules include restrictions on the type of scheme in which protected rights can be invested or to which they can be transferred, a requirement to purchase a unisex annuity, and a requirement to make provision for a survivor benefit where the member is married or in a civil partnership at the point of annuitisation.

The affirmative draft order and regulations now before the Committee make consequential changes to the primary legislation by amending or revoking various pieces of legislation that will be redundant following abolition. They amend or repeal, where appropriate, all references to "contracted-out money purchase schemes", "appropriate personal pension schemes" and "protected rights" in existing legislation. The order and regulations are part of a package of consequential changes and should be read in conjunction with the negative statutory instruments that were laid on 16 June 2011; namely, the Pensions Act 2007 (Abolition of Contracting-out for Defined Contribution Pension Schemes) (Consequential Amendments) Regulations 2011, and the Pensions Act 2008 (Abolition of Protected Rights) (Consequential Amendments) Order 2011.

Turning to the affirmative provisions which are the subject of this debate, I do not propose to explain the minor amendments contained within these statutory instruments. I will, however, highlight the main provisions. The Pensions Act 2008 (Abolition of Protected Rights) (Consequenial Amendments) (No. 2) Order 2011 is

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split into three parts. Part 1 contains commencement provisions. Part 2 introduces a de minimis or minimum payment provision for late rebate payments and recoveries, and a transitional period that is necessary for the administrative tidying-up of late rebates. Part 3 deals with rebate payments made after the transitional period. By way of background to late rebates, rebate payments are made by HMRC to contracted-out DC schemes at the end of each tax year by means of automated payments.

In some instances, HMRC may need to amend an individual's national insurance record because of the changes notified to them after the end of a tax year- for example, where an employer discovers an error in the amount of earnings paid by an employee in an earlier tax year or where an incorrect date of birth is recorded and has to be revised. These adjustments to the national insurance records can sometimes result in an additional contracted-out rebate payment, or overpayment, becoming due. Analysis shows that the bulk of late rebate payments fall to be paid in the three tax years following the tax year to which the rebate relates. The transitional arrangements in this legislation will ensure that adjustments to rebates for periods prior to April 2012 are paid to individuals' pension schemes up to April 2015 by an automated process. Following the end of the transitional period of three years, payments will be made from 6 April 2015 to individuals who will be advised to pay the amount into a pension scheme.

The de minimis provision introduced by the order makes provision for a limit below which HMRC will not be required to make a rebate payment. This limit will correspond to the cost of paying the rebate clerically by HMRC-that is, the rebate will not be paid where it costs more to administer the rebate payment than its actual value. The limit is expected to be in the region of £15 where the payment is made clerically. Payments which are made during the transitional period through the automated payment system will, as now, not be subject to a minimum limit.

We have been working closely with the pension industry in developing the abolition legislation, including the transitional period. The legislation was subject to a full consultation and the industry is satisfied generally that it can all be implemented. However, there is one point that I need to draw to the Committee's attention. Article 3 of the Pensions Act 2008 (Abolition of Protected Rights) (Consequential Amendments) (No. 2) Order 2011 makes a minor consequential amendment to the Insolvency Act 1986 but it has recently become apparent to us that it will not be possible for this provision to have practical effect. The article amends provisions which currently provide that any pensions payments which derive from protected rights are not taken into account as income when a court considers making an income payments order for a debtor. The amendment seeks to provide that any pensions payments which give effect to protected rights before the abolition date will continue to be exempt from counting as income for these purposes.

We now consider that it will not be possible for schemes post-abolition to be able to identify such protected rights payments as schemes will no longer

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be required to track protected rights. As such, this part of the amendment will have no practical effect as the courts would not be able to identify pension payments which give effect to protected rights. While we have discovered this issue, we consider that it does no harm. We will therefore press ahead and make these sets of amendments to provide the industry with certainty over the substantive changes to be made to implement the abolition of DC contracting out. We will undertake to amend Article 3 of the order before 6 April 2012-the abolition date-to clarify the intention on that particular point.

To conclude, I am satisfied that the order and the regulations are compatible with the European Convention on Human Rights and I commend them to the Committee.

Lord German: My Lords, I welcome these statutory instrument. It is important to note that the so-called amendment instrument No. 1-I will not read the whole title out-have been laid by negative resolution at virtually the same time as these instrument for affirmative resolution. That is good practice for the House because it means that noble Lords will be able to understand and see the whole picture, and be able to work on them together. I commend that action from the Government.

Secondly, concerning the transitional arrangements, clearly this is a commitment made by the last Government being enacted by the present Government and so has a great deal of political support right across the boundaries, as it did when it first came before your Lordships' House at the time of the Pensions Act in 2008. I wonder, though, what would happen should there be an amendment needed or an error found outwith the three-year period. It might be, for example, that something was discovered beyond the three-year period. Is there any measure by which that can be dealt with?

I am pleased that the Government are introducing this measure because it will of course mean that small amounts of money will not need to be paid where the cost of administration is greater than the amount paid out. I hear what my noble friend says about the online methodology that will not be affected. However, when it comes to mechanical methods by which sums below £15 would be encountered, I dread to think what it will cost to administer a payment of £15: I am sure that it will be considerably more than the cost. Therefore, it is welcome that that area is covered.

6.15 pm

I broadly welcome the thrust and direction of travel in these instruments. They lay a route march towards the proposed flat-rate pension on which the Government are now consulting. Again, there is widespread support for that broader pension provision, and certainly this will make it a lot easier to undertake.

I have a small number of questions for the Minister. I have already asked about errors. Clearly the regulations make a big change to the pensions of a substantial number of people. They effectively take money paid into a private pension scheme, reducing national insurance contributions, and put it into a state pension scheme. Some of us hope that that will lead to an enhanced single flat-rate pension in future. Of course people will

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need to understand the consequences of the change. A sum of money will be taken from their private pension pot and put into a different pension pot: people will want to understand that. Perhaps the Minister will tell us what arrangements are in place to help pension fund contributors understand what the changes will mean for them, and whether they will be able to detect and understand, by means of going to the DWP's website or whatever, the differences in what it will mean for them.

I come to my final question. SAGA responded to the government consultation and stated:

"The rules for contracting-out are the most complex part of a whole pension system, which is itself the most complex system in the world".

I wonder when we will lift ourselves off the bottom of the table for having the most complex system in the world. The key sentence in the SAGA statement is:

"By sweeping this away, future pensions will be far simpler".

I say amen to that. The statement continues:

"Also, of course, workers and employers will all then pay the same rate of National Insurance, regardless of what kind of pension arrangements they have. which is far fairer".

I do not think that that is quite true, because defined benefit systems are excluded from the scheme. I wonder whether SAGA has inside information that we do not know about on whether this will lead to all employers and workers paying the same rate of national insurance. Given the earlier statement from the Minister, I suspect that the answer is no.

There is one issue that runs through the documentation. The impact assessment talks about "actuarial neutrality". I understand what that means. However, perhaps what it means for some people will be different from the average of what it will mean based on a large number of years of contributions. Perhaps when the Minister tells me how the Government will portray these changes to pension fund contributors, he will explain also how the actuarial neutrality will play out. One reads on the bottom of any savings scheme policy which one buys that the value of shares can down as well as up. Clearly people will have to make a judgment on the safety of the government scheme as against the relatively movable feast of a private pension scheme. That may be part of the process that the Minister will tell me about when he explains the changes for pension contributors.

I welcome the regulations and order because they remove complexity and make life easier. In a world where we have the most complex system, I hope that they will make it more understandable and perhaps lift us up from the fourth division to the third.

Lord McKenzie of Luton: My Lords, I do not propose to detain noble Lords for long with my contribution. I start by thanking the Minister for his introduction to and detailed explanation of the orders. As he indicated, they spring from the Pensions Acts 2007 and 2008, of which one has some fond memories and some other memories as well. He reminded us that they were based on the findings of the commission chaired by the noble Lord, Lord Turner. He will understand if we on this side now refer to the commission as the "Drake, Turner and Hills commission".

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But he was right to say that there was a political consensus at the time, as indeed there is now. The date for implementation was identified by the previous Government, and we are grateful for the support of this Government in taking it forward. The noble Lord, Lord German, is in a sense right in his description of what is happening here. People are moving out of a DC scheme into something that is effectively a DB scheme-moving out of a funded scheme into something that is pay-as-you-go. That is the essence of the switch that is going on here.

I have about three questions for the Minister, all of which I hope are pretty straightforward. The first was touched on by the noble Lord, Lord German. The impact assessment talks about actuarial neutrality. It identifies for employers both a short-term and a long-term neutral component to this. For individual employees and for the Government, although there may be actuarial neutrality overall, the cash flow effect for each is different in the sense that the Government will generate cash flow from this in the early years, while of course the payback will be the extra state second pension paid in later years. If we look at the remainder of this CSR period and perhaps the next period, how do the cash flows pan out? What is the extra amount of revenue for the Government over the period, which they will pay for later with increased contributions to S2P? What are the Government planning to do with the headroom they will get from that cash flow? I might suggest that they could help out on dealing with adjustments to the state pension age, but that is probably a debate we ought not to have at this point.

My second query was partly prompted and indeed enhanced by what the noble Lord said about the Insolvency Act and Article 3, and why that will not operate in future because schemes post abolition will not be able to track protected rights. I suppose that my question is this: looking at what is happening here, most of the DC schemes involved are personal pensions and therefore do not have the trustee arrangements that some of the occupational schemes may have as part of their fiduciary duties. What will protect the legacy guaranteed minimum pensions of those who built up these rights in the past? As the noble Lord said in his introduction, at the moment protected rights have restrictions on scheme transfers, on the type of annuity that can be bought-a unisex annuity-on survivor benefits and on joint life annuities. I think that that is one of the requirements. If that is all swept away and we are left to deal with contract-based schemes without the protection of trustee arrangements, what protection will there be for people with legacy rights? Obviously for new entrants and for the future the issue does not arise.

My last point again picks up on a comment made by the noble Lord, Lord German. He said that he liked the direction of travel because it helped us towards the enhanced flat-rate pension. Perhaps the noble Lord can give us an update on that. In particular, will he explain how as a practical matter it will be possible to deal with that while there is still contracting out from DB schemes and whether, as the noble Lord asked, there are any proposals to accelerate the withdrawal of contracting out for DB schemes?

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Those are the only questions I have, and I look forward to the Minister's response. However, obviously we support the regulations.

Lord Freud: My Lords, I thank noble Lords for some pointed and excellent questions, which I will be pleased to deal with as best I can. The first, from my noble friend Lord German, on what happens outwith the three-year period, is relatively straightforward. That is rather simple: if there has been an overpayment, HMRC will consider some recovery if it is cost effective; I suspect that it costs rather more than £15, but if it is a reasonable sum it will do it. If there is an underpayment, the additional amount will be paid directly to the individual, obviously subject to de minimis, with the suggestion that they put it in their pension pot, as I said at the beginning. I think that that is more than a suggestion, as well.

My noble friend asked me about the critical issue of communication. When you are in the fourth league of complexity, explaining how you are undoing complexity can be even more complex, taking you down to the fifth league. We are well aware of that. DWP and HMRC are working with industry representatives on a pretty elaborate communication strategy so that the information is targeted at those who need to know. We have developed a number of fact sheets that will be online for members, for schemes, for employers and for trustees. On members, we have made changes in the negative instruments, as part of this package, to require schemes to inform individuals of the key impacts of the abolition.

Both my noble friend and the noble Lord, Lord McKenzie, went on a slight fishing expedition-is that the fairest way to describe it?-about what the implications and interconnections might be with S2P and the state pension, referring to our consultation, A state pension for the 21st century. Again, I have to be slightly boring on that matter because we have now had the responses to it. The closing day was in fact last Friday, 24 June. I think that "We are considering the responses", is the way that that is expressed. There is clearly a highly interesting and relevant knock-on from this to that, depending on how it comes out.

Both my noble friend Lord German and the noble Lord, Lord McKenzie, asked about actuarial neutrality. The explanatory material makes it clear that there will effectively be an exchange with the uncertainty of the investment markets, where one can clearly get very good returns if one has the right investment strategy and equally appalling returns if one has the wrong strategy. Those risks are exchanged for the certainty of the state pension. I guess that that is what actuarial neutrality means, although it could be described in other ways as well.

6.30 pm

The noble Lord, Lord McKenzie, asked how the cash flows would work in the next two spending

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review periods. We have set that out in the impact assessment. Roughly £16 billion will be raised from rebate savings over the next six years, but of course the money is not a saving because it will lead to higher state pension liabilities in future. I do not have details of the precise netting-off in that period, but I can provide the information by letter.

Lord McKenzie of Luton: That would be very helpful. I had a look at the impact assessment but could see only aggregate figures rather than year-by-year figures. It would be helpful to have those.

Lord Freud: We can do that. Obviously, there are many figures running around in various ways, but we will get the appropriate figures to the noble Lord in a letter. His connected question on the extent to which there will be increased revenue in the short term and where that might be spent is something on which I could not possibly comment-nor, I suspect, would I be expected to.

I turn to more general issues of insolvency. The noble Lord, Lord McKenzie, talked about some of the more general implications for protected rights. Effectively, they mean that an annuity will have to be purchased with similar provisions to the state scheme. Of course, for that reason very few people will get extraordinary returns and we will get back to neutrality. The removal of the rules on protected rights will increase the flexibility for members. The size of the fund will remain the same but they will have choice in the provision of retirement income.

The provisions contained in the statutory instruments will support the delivery of the abolition of defined contribution contracting out. I hope that I have dealt with all the questions satisfactorily. I commend the measures to the Committee and ask for its approval to implement them.

Motion agreed.

Pensions Act 2008 (Abolition of Protected Rights) (Consequential Amendments) (No. 2) Order 2011

Pensions Act 2008 (Abolition of Protected Rights) (Consequential Amendments) (No. 2) Order 2011
23rd Report from the Joint Committee on Statutory Instruments

Considered in Grand Committee

6.33 pm

Moved By Lord Freud

Motion agreed.

Committee adjourned at 6.33 pm.

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