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The insurance industry and those who push claimants toward getting money are colluding-that is not too strong a word-in damaging each other. As the Transport Select Committee in another place found, by loading charges such as expensive car hire and body shop bills on to each other, they try to damage each other's profitability. This mutual sadism would seem almost economically rational if it did not seem so irrational in every other way. The incidence of third-party capture, which we are debating, has risen. It is a technique whereby insurers get referral data, cold-call often genuine victims and try to get them to settle early-and cheaply, as has been said. They claim that they are doing so to lock out personal injury lawyers, and certainly that is the effect. However, people who have been genuinely injured and deserve compensation are often attracted by the thought of a lump sum up-front without knowing their rights to full restitution.
We need to address this all together. No doubt we agree on the basics. I hope that the Government are seriously thinking of putting down on Report the provisions of the Private Member's Bill that my right honourable friend Jack Straw MP introduced. If they do, I suspect that they will have not only our support but that of practically the full House. The insurance industry is trapped in practices that drive up premium costs. I commend the noble Lord, Lord Thomas of Gresford, and my noble friend Lord Dubs on tabling their amendments and starting the debate in this House. The matter was discussed in the other place-perhaps not as well as it should have been-and the discussion must continue. We look forward very much to the Minister's reply.
Lord McNally: My Lords, I thank my noble friend Lord Thomas and the noble Lord, Lord Dubs, for introducing the matter. I also thank the noble Lords, Lord Neill and Lord Bach, for their contributions. Part of the latter's contribution was a warm-up for the further debate that we will have on referral fees, and I will make two points about his comments. First, he said that the insurance industry was trapped in practices that drive up premiums. That would be fine if the insurance industry paid the penalty for that merry-go-round, but the reason that there is so much indignation is that the cost falls on the poor consumer. That is why there seems not to be much incentive in the industry to deal with this; companies casually pass on increased costs to the consumer, as we have seen with the escalation of insurance premiums in this area. Secondly, I join my right honourable friend the Prime Minister in
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As my noble friend Lord Thomas and the noble Lord, Lord Dubs, explained, Amendments 164 and 164ZA would prohibit an insurer making an unsolicited approach to potential claimants in a personal injury case if the insurer was aware that the claimant had legal representation. The amendments also specify the requirements that must be met before an insurer may make an offer to settle such a claim where a claimant does not have, or is thought not to have, legal representation. This includes a requirement to obtain adequate medical evidence of the injury and to advise the claimant of their right to obtain full legal advice before accepting the offer, and to make it clear to the claimant that the offer to settle is full and final. In either of these cases, a failure on the part of the insurer to observe the provisions would render any settlement void.
Third-party contact is the practice by insurers of making an early settlement offer to a claimant or third party where the insurer's policyholder is at fault in a car accident. The Financial Services Authority regulates the insurance industry and requires that insurers treat their customers fairly at all times. This would cover third-party claimants. I should explain that apparently the industry prefers the term "third-party contact" to "third-party capture". I will leave it to noble Lords to make their choice on that.
Lord Clinton-Davis: Speaking from years of experience in this field, I know that the term "full and final settlement" is often used by insurers at the very beginning of proceedings and negotiations, but I do not think that it is adhered to. It is often possible to obtain a better settlement, so the term is ignored.
Lord McNally: The noble Lord says he speaks from very long experience. As this Bill progresses, I have found that quite often noble Lords on all sides of the House who have more experience than me of the legal profession tell me that there is often a gap between what is written down and the reality of the day-to-day practice.
Third-party contact does not, in itself, cause detriment to consumers and may be to their advantage as a claim can often be resolved quickly. In addition, this practice can allow insurers to reduce the legal costs associated with handling a claim, and this in turn reduces costs for all policyholders. However, I am aware of concerns around the potential risk of conflict of interest and the need for the claimant to have independent legal advice before any settlement is agreed. The FSA undertook a review of third-party contact during 2009-10 and did not find conclusive evidence that unrepresented third parties could have achieved higher compensation had they obtained independent legal representation.
Following the FSA's review, which was referred to by the noble Lord, Lord Thomas, the Association of British Insurers published a code of practice, to which he referred, in June 2010. The code contains specific guidance for insurers on contacting claimants. This limits unsolicited contact. For example:
I know we will be returning to some of this later. The code also requires that claimants are informed of their right to seek independent legal advice and of other options available to them to resolve their claim. As I have indicated, the practice was reviewed in 2009-10 but was not found, overall, to be disadvantageous to claimants.
In summary, most of the issues that these amendments seek to address in respect of the handling of third-party contact claims are already covered by existing regulation. The FSA rules require that insurers fully inform third-party claimants of their legal rights, including to independent legal advice, and of alternatives to settling directly with the insurer. In the light of this, we do not believe it is necessary to go along the lines of the noble Lord's amendment, and I ask him to withdraw it.
Subsection (2) refers to a situation where that is not the case: the claimant is not legally represented or the insurance company does not know that he is legally represented. It sets out three terms: that the offer to settle can be made only when the insurance company,
The sanction that I have quite deliberately put into this amendment is not that it is an offence or anything of that sort but that a settlement made in breach of those subsections shall be void, which means, in effect, that if a person has been bought off for a small sum, he can reopen the matter without any problems. He can go to a solicitor, get proper advice, get a proper medical report and come back. To my mind, that appears to be the right way forward.
Lord Neill of Bladen: Another sanction would be that if a settlement has been made, the money is irrecoverable. Under a void agreement, insurers might get their money back again, but you could have a provision expressly about "money paid by way of settlement", because a claimant may not find out until later that he has been swindled.
Lord Beecham: My Lords, the amendments in this group refer to referral fees. Recent years have seen an explosion of growth among what might best be described as parasitic commercial organisations-claims management companies and the like-seeking to obtain part of the financial stream that flows when litigation occurs by charging for the referral of clients to lawyers. Paradoxically, it might be thought, some of this is fuelled by the very insurance companies that complain about the compensation culture and the costs of litigation. Clause 54 very properly seeks to prohibit referral fees to and by regulated persons, who will include claims management companies, lawyers, insurers and perhaps others. Perhaps slightly counterintuitively, for the purposes of the legislation a referral fee need not take the form of a payment, but could, for example, be an offer by a lawyer to take on work at a reduced rate or for no fee. However, the potential for abuse of the system is apparent, and the Bill seeks to address it.
The amendments tabled in my name and in the names of other noble Lords seek to improve the wording of the Bill. Perhaps I may briefly outline what they do. Amendment 164A would exempt not-for-profit organisations from the operation of the ban on referral fees. It would take them outside the category of regulated person for the purposes of the ban. Of course, there will be many membership organisations-charities, for example-that will come into that area. I understand that some charities refer people for legal and medical advice and any sums arising from those referrals go back into the work of the charity or the membership organisation. That seems a perfectly reasonable category to take out of the provisions of the Bill.
Amendment 164B is a consequential amendment making it clear that regulated persons would be businesses carried on for profit. It is a corollary of Amendment 164A, as is Amendment 164C, which is another consequential amendment. More substantively, Amendment 166 provides:
"A regulated person is not in breach of this section if ... that person is a solicitor; and ... the body to which the payment is made for the prescribed legal business is a registered charity that has been granted an exemption by the claims management regulation unit".
We support Amendment 166ZA, tabled by the noble Lord, Lord Pannick. The noble Lord will of course address this matter, but the thrust of the amendment seems to be to except from the ban a referral from one solicitor to another. This can easily arise in the course
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Perhaps more significant is Amendment 166ZB, in the names of the noble Lords, Lord Martin of Springburn and Lord Elystan-Morgan, and my noble friend Lord Collins of Highbury, which would take out of scope of the ban the relationship between trade unions and their members. I speak with long experience of these matters because I personally acted-the firm, for which I am now an unpaid consultant, continues to act- for a number of trade unions. The relationship there is not simply the passage of a name of a member but, as your Lordships will no doubt hear, one in which a good deal of administration is required and where the union is performing a service on the part of the member that will ultimately benefit the conduct of the case and therefore the solicitors involved in it. Again, it seems quite reasonable in that instance that a fee might become payable and it is unnecessary to bring that sort of relationship within scope.
Finally, Amendments 169 to 171 to Clause 56 are connected amendments. Instead of allowing the Treasury to make regulations enabling the Financial Services Authority to monitor and enforce compliance, they make this an obligation. Amendment 169 substitutes "shall" for "may" and Amendment 170 requires rather than enables the FSA to take action. Similarly, under Amendment 171 it would become a requirement for the Treasury to make rules outlining circumstances where payments are not to be treated as a referral fee. This echoes the Lord Chancellor's powers proposed under Clause 55(8).
None of this seeks in any way to detract from the thrust of the Bill's proposals but rather tailors them to the realities of the issues that the Bill seeks to address and to make better sense of what is in principle a sound proposal that the Opposition support. Accordingly, I beg to move.
The amendment would exempt solicitor-to-solicitor referral fees from statutory prohibition. I am puzzled as to why the Government think it is appropriate to impose a statutory prohibition on such referral fees. I am puzzled for two reasons. First, there is a public interest in solicitors having an incentive to transfer a case-with the consent of the client, of course-to another solicitor; for example, if the latter solicitor has greater expertise or if the former solicitor will not be able to deal with the case expeditiously. Secondly, any such referral fees from one solicitor to another are regulated by the SRA, which has ample powers to impose sanctions on either of the solicitors if there were any abuse of proper professional standards to the detriment of the consumer.
Lord Clinton-Davis: Does the noble Lord agree that it is common practice for one solicitor to transfer a case to a solicitor in another part of the country? Speaking from personal experience, I quite often had to deal with cases in London that were transferred from the north of England because it was more convenient to deal with the insurers in that way.
Lord Pannick: Yes, I agree. Of course, the Bill will not in any way prohibit such transfers; it will prohibit only payment. However, prohibiting payment will deter what may be a very sensible economic arrangement that provides an incentive to the first solicitor to transfer to the second solicitor a case which the second solicitor can deal with far more efficiently-in the interests of the client; that is the point. As I say, all these matters are properly regulated by the SRA. If the SRA is not properly regulating it is not doing its job. I ask the Minister why and also whether there is any evidence that the SRA is not doing its job properly in regulating referral fees in relation to transfers between solicitors.
Lord Martin of Springburn: My Lords, Amendment 166ZB is in my name and those of the noble Lords, Lord Elystan-Morgan and Lord Collins of Highbury. Of course, I am supportive of the other amendments that have been moved and spoken to.
I note that the other amendments mention payment to charities. When I signed up to the metal workers' union as a young apprentice, it was regulated under the Friendly Societies Act. It was the same as the insurance companies such as the Co-op, the Salvation Army or the Wesleyan-they were charities. The trade union movement has always had a tradition of not only looking at wages and conditions within the factory but trying to go beyond that to help the member and his family. It knew that there was no point in just fighting for wages and conditions alone; there were many problems outside the place of work. Often that meant that, particularly when workers were involved in an accident, the unions had to get in touch with a solicitor who was willing to help, particularly in the bad old days.
Not so long ago in my native city of Glasgow, the Kelvingrove Art Gallery-which I would recommend anyone who visits Glasgow to go and see-had an exhibition of trade union banners. Trade union banners today tend to have big messages saying "Cameron out!"-and before that it was "Thatcher out!" or, even before that, "Heath out!"-but these old trade union banners were absolute works of art. They displayed exactly what the trade was all about. I remember the coach builders' banner; one of the members had had an accident in the street and you saw the accident-the poor man had broken his leg-and another part of the banner showed him in bed and the officers of the branch turning up, and the caption underneath was, "When I was ill, you visited me". My point is that there was always care within the trade union movement.
I know that many people, particularly in the media, can point to the salaries of the trade union leaders and make negative comments about them. But it must be remembered that the vast majority of people working in trade unions do so on a voluntary basis without any financial help.
As regards accidents in the workplace, some people would think that an engineering workshop is very dangerous but I know, through my work with the National Union of Public Employees, that a hospital kitchen can be a very dangerous place. A person can break a hand through a fall in a kitchen. Usually, the person who starts an inquiry is a shop steward who gets the information together. Then there is a visit from the full-time trade union officer who would need transport and an office from which to operate, with secretarial back-up, in order that the paperwork can be put together to send to the solicitor. It is only right and fitting to have a referral fee which can help with the ongoing costs of a trade union office. Again I go back to the point that most people think, when they join a trade union, that it is for wages and conditions, but this is another area of help that is given. There is a financial cost and it is right and fitting that the trade union should get a referral fee to offset those costs.
Lord Collins of Highbury: My Lords, I obviously have an interest in that I have put my name to Amendment 166ZB. First, I want to state clearly that, as a former full-time trade union official for what is now Unite, on this issue I have had its assistance and that of the solicitors with whom I worked over many years. I want to separate the principle of referral fees from what we have heard in terms of the scandalous behaviour of certain commercial operations, including insurance firms, in road traffic accidents. It is important to do that because, as I said at Second Reading, we are using a sledgehammer to crack a nut. I fear that a lot of deserving people will be adversely affected by these changes.
The consequences will be devastating on working people and their unions. It is important that I set out-I am sorry if I take up a bit of time in doing so-precisely the sort of help and package that most unions offer to their membership. I also draw attention to the Prime Minister's remarks about the importance of the big society-that is, members helping themselves. We are talking about organisations of members for members who are, as the noble Lord, Lord Martin, said, regularly supporting their fellow members, very much in an unpaid capacity. No matter how much we have changed things, industrial accidents and diseases are still unfortunately far too common. We should be defending that principle of big society.
As a senior officer in the Transport and General Workers' Union, I took considerable time in building a relationship with solicitors and in ensuring that we had a clear understanding about the sort of services that solicitors should provide to our members. Referral fees were not about extracting huge sums of money but about ensuring that we could build services for our members. More than 6 million people in the UK, and their families, can take advantage of those services. I was proud to build them.
We talk about representation in personal injury cases but we also provide free wills and free telephone legal advice help. The services go beyond employment matters to consumer rights, neighbour disputes and a whole host of issues and services. There is free personal injury cover for members injured at work, including
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Representation, legal representation and relationships with solicitors are vital for working people. In an open and transparent way, referral fees have been used to build that relationship and to extend the services provided by specialist law firms. As I have said, that relationship is about building the quality of service. The union is able to monitor and regulate the relationship. Of course, unions are highly regulated and required to register all their finances and services with the certification officer.
This relationship is also able to provide appropriate complaint procedures and mitigation. If there are failures on the part of the solicitor, the union is able to intervene, which takes the burden away from other agencies. It is important that we are able to continue to do that work. The last figures I was able to get hold of were for 2010, when, for example, Unite, UNISON and the GMB's legal services helped more than 25,000 members to win damages through industrial accidents and personal actions. That figure applies just to cases with damages and ignores the tens of thousands who got other services. When I left Unite, we had established the legal telephone helpline through the introduction of referral fees. Now, 25,000 people ring it every year for advice. I feel like ringing it at the moment because the draught coming through here is potentially hazardous to all our health. I will ring it when we have finished.
Lord Collins of Highbury: I accept that there is no justification for excessive commercial referral fee arrangements, but we could establish criteria for these fees to ensure that they are reasonable in amount and provided wholly or mainly in services rather than in direct financial payments. We have talked about other organisations that are able to build legal services, and I am sure that other noble Lords will refer to campaigning and charitable organisations that rely on these services, particularly for work on industrial diseases. It may be an unintended consequence of this Bill, but that is why I want to stand up and be explicit about and proud of the sort of services that unions have been able to build up and give their members as a consequence of the arrangements they have made in an open and transparent way with solicitors.
I return to the point I made about road traffic offences in my Second Reading speech: this is a sledgehammer to crack a nut. My noble friend referred to the RTA portal and those arrangements. I wish that the department would not only build on that success, but also examine its impact. Maybe it needs to be improved, but not by introducing a piece of legislation that is going to hurt. After all, the statistics speak for
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Lord Alton of Liverpool: My Lords, claims management companies are sometimes described in more popular language as "claims farmers", and they are a real pest. Inasmuch as the Government are seeking to do something about the claims farmers, I am totally in support of them. However, I have added my name to Amendment 166 to which the noble Lord, Lord Beecham, has just spoken. As the noble Lord, Lord Collins, has rightly said, in these provisions are all the seeds of the law of unintended consequences. Just as the trade union organisations which do a superb job for some of their members will be caught by some of these provisions, so too will the campaigning charities, to which the noble Lord referred in his remarks. Amendment 166 suggests that a regulated person would not be in breach of the rules set out in Clause 54 if,
I want to return to an issue that I raised at an earlier sitting of the Committee: mesothelioma and asbestos victims. The example I want to give your Lordships is that of a charity that works specifically with the victims of asbestos exposure. I shall quote Mr John Flanagan, on behalf of the trustees of the Merseyside Asbestos Victim Support Group, who wrote to me to say that if the Bill goes through in its present form,
For that reason, I hope that noble Lords and the Government will look favourably on the amendment tabled by the noble Lord, Lord Beecham. The Merseyside Asbestos Victim Support Group was formed in 1992 and became a registered charity in 1993. The founding members were ordinary working people who had been struck down with asbestos-related diseases of the sort I have described. They and their families felt that there was a lack of help and assistance for those suffering from asbestos-related diseases and that the only way to solve this was by creating their own support unit for people in the same situation as themselves. Given the emphasis the Government rightly place on voluntary endeavour, encouraging people to get engaged in the
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The work of the group is primarily that of visiting victims who have been diagnosed with an asbestos-related disease, including the terminal condition of mesothelioma. As I said during our last proceedings, the prognosis once the disease has been diagnosed normally means that the victim has nine months to live. Victims of asbestos in almost all cases have not contributed in any way to their condition and they were not informed of the associated dangers or presence of asbestos in their workplace by their former employers. The idea that such people could be vexatious litigants or that these are frivolous claims is patently absurd and I do not think that anyone would advance that in your Lordships' House.
MAVS is supported by and works closely in association with local clinicians on Merseyside to provide a holistic support framework. It is an impressive community. Services are based locally and work is carried out with other voluntary organisations-at no cost to the patient or to the community. Clinicians give out leaflets to patients on diagnosis with the recommendation that they should contact the support group. Again, this is highly compatible with the plea that voluntary organisations should take up more of the burden. This is something that they are doing already, and yet they are going to be hit by the provisions in the Bill. A full range of advice and support is provided to patients and their families, including help with welfare benefits such as industrial injuries disablement benefit, pension credit, attendance allowance, disability living allowance and carer's allowance. They assist with the completion of complex application forms and offer practical help and support, providing assistance wherever it is needed. Sometimes victims and their families just need the support of a friend at the end of the telephone who understands what they are going through when times are really hard or challenging. They also provide details of legal advice experts, thereby preventing victims from falling into the hands of the claims management companies that the Government say quite properly that they want to deal with. Other asbestos victim support groups around the United Kingdom work tirelessly to provide the same services.
The majority of the people who run MAVS are volunteers, just like those described by the noble Lord, Lord Collins, in the trade union movement. I might add that the volunteers include those who themselves have been diagnosed with asbestos-related diseases. The management body, the trustees, also includes patients diagnosed with an asbestos-related disease and family members whose loved ones have been lost through asbestos-related illnesses. The Merseyside group co-ordinates with the Cheshire Asbestos Victim Support Group to hold an annual Action Mesothelioma Day, which helps to bring about awareness among the general public of asbestos disease and serves as a memorial day to commemorate those who have died from this insidious disease. I gave the figures during our last proceedings, but I remind noble Lords that some 30,000 people have already died of this horrible malignant disease, and it is predicted that
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The majority of the individual asbestos victims' groups' charities within the United Kingdom attend the All-Party Parliamentary Group on Occupational Safety and Health's sub-group on asbestos, thus providing invaluable expertise and insight on this disease and the situation of those who have been affected. The Merseyside group also gives talks to the local community, including the Liverpool Community College's building and construction section, to warn and educate upcoming apprentices of the dangers of asbestos and how to deal with it when it is discovered in their workplace. The charity works on a global scale with organisations such as the International Ban Asbestos Secretariat, which works towards a global ban on the use of asbestos. This collaboration has already produced a ban on asbestos in many countries which took the lead from the European Union ban back in 1999.
The charity was successful in obtaining lottery funding in 1997 for three years. It made a further bid for continued funding but was unsuccessful, being told that it was in the envious position of being able to attract donations from the legal sector for the work that it undertook. It set up financial arrangements under the solicitors' code of conduct with several asbestos-related disease specialist solicitors to ensure its continued funding and existence. It considered the term "referral fee" objectionable, as this funding from solicitors is in recognition of continuing work for and on behalf of victims and certainly not in the same context as payments made to claims farmers. This essential funding, together with donations from victims, is vital to its continuing existence.
Inasmuch as the Bill will scrap referral fees, particularly those payments to claims farmers, it is to be commended. However, there is an irony in that CMCs will set up alternative business structures-so-called ABSs-to avoid their demise and that the hounding of the public will continue unabated. They will find a lacuna; they will find a way around, as those groups who are about just making money invariably do. The people whom the Government want to catch will escape, while those who have been performing this extraordinary public service out of an altruistic spirit will be caught. Genuine charities such as MAVS will have their funding from expert lawyers specialising in asbestos-related diseases cut altogether. If ever there was a case of throwing out the baby with the bathwater, this is surely it.
The Government do not seem to realise the impact that the Bill will have if the amendment is not accepted. Terminally ill people do not have the energy to fight their own corner and are often beaten into psychological submission, especially when their mind is on what will happen to their family when they are no longer there. Surely it is the Government's responsibility to ensure that those least able to defend themselves are not treated as collateral damage in this Bill. That is why
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Lord Monks: My Lords, I support the amendments. I declare an interest as a non-executive director of Thompsons Solicitors, the largest company of trade union-related solicitors in the country. I am very pleased that noble Lords who have spoken before me have recognised the value and extent of trade union legal work-the noble Lord, Lord Collins, gave the figures. Looking at the government Benches just in the course of this debate, I have spotted distinguished barristers who have worked for trade union legal services and solicitors over the years. They include the noble and learned Lord, Lord Howe, the noble Lords, Lord Carlile, Lord Lester and Lord Hunt, who is with us at the moment, and the noble Lord, Lord Thomas. All of them have earned a few quid from the trade union movement in their time, looking after the interests of people who have hit hard times and need help.
The Minister referred movingly on Monday to a family illness that developed from one of the old ICI works. In a way, unions' role in litigation is only a relatively small part of their work on health and safety; the majority of their work is preventive. If you go to anyone in the chemical industry in Britain today, where conditions have improved immeasurably since the days of ICI in the 1960s, they will pay full tribute to the role of the trade union movement.
As others have said previously, the number of personal injury cases generally is falling, with the huge exception of road traffic accidents, where we know that something is going on that needs to be stopped, as my noble friend Lord Bach said earlier. Unions are getting a dirty name because some in the media, and perhaps in the Government, too, believe that unions should somehow be lumped together with the shroud-waving, ambulance-chasing, daytime TV-advertising groups of lawyers who go around inciting claims all over the place.
The need to differentiate is clear. At the moment, we are not being differentiated in any way. We are losing on conditional fee agreements, on "after the event" insurance, on legal aid in tribunals and now on referral fees, which is the subject of this debate. These are all ways in which we are able to fund a substantial legal service and which will be much restricted if and when the Bill goes through in its present form. The different provisions impose major limitations on unions' ability to run effective legal services. At a time when legal aid is being cut, a double whammy is being inflicted on many working people and a great victory is being enjoyed by the insurance industry.
Will the Minister and others in the Government give some recognition on Report to this imbalance? Not all aspects of trade union work are uncontroversial, but their legal services are widely appreciated and widely respected. They should be supported by the Government, not hit and curbed as they are in the Bill.
Lord Elystan-Morgan: My Lords, I join all those who have spoken in favour of the amendments, in particular Amendment 166ZB, to which I have appended my name with those of my noble friend Lord Martin and the noble Lord, Lord Collins.
If one were to ask whether Britain is an overlitigious society, the answer would be yes and no. There are massive abuses that we are all aware of; there have always been abuses in the law. A small percentage-a minority, I like to think-of the profession to which I belong, and I have belonged to both sides of it, belongs to that class that Dr Johnson spoke about when he said:
The Government are absolutely right to aim their weapon at such malpractices, but the weapon that they are aiming, it seems to me, is a blunderbuss with a very wide barrel, throwing a huge cloud of shot many yards wide that will hit many targets, some of them worthy and some of them not. My appeal to the Minister who will reply to this debate is not to express a Molotovian no to these appeals, which have been so sincerely and so solidly made. It would be utterly wrong to allow many worthy referral schemes to be destroyed wantonly just because the Government may not be sufficiently imaginative to look at each and every one of these situations separately.
It was very proper of the noble Lord, Lord Collins, to remind the Committee of the primary origins of so many trade unions: friendly societies and societies of brethren, uniting in brotherhood to try to bring about a justice that society as a whole was not able to give them at that time. It is a very worthy history. Therefore on that basis, speaking with the experience of one who has been a solicitor, a barrister and for some 20 years a judge, I concur completely with everything that I have heard. These are deserving cases and it would be wrong, unjust and utterly unworthy of the Government to lump them all together and treat them as if they were pariahs to be attacked in this way.
Lord McNally: My Lords, we have heard some powerful speeches about the good work of trade unions and charities, but that is not what this debate is about; it is about the ban on referral fees. In their reports, both Lord Justice Jackson and the noble Lord, Lord Young of Graffham, supported the ban on referral fees. The Government believe that the current arrangements under which lawyers and others are able to pay and receive fees for referring personal injury claims have led to higher costs and the growth of an industry that pursues claims for profit.
Lord Justice Jackson recommended that referral fees should be banned as part of his comprehensive package of recommendations to make the costs of civil litigation more proportionate. The prohibition will be enforced by the appropriate regulators, for example the Solicitors Regulation Authority for the Law Society, the Bar Council, the Financial Services Authority or the claims management regulator. The
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The noble Lord, Lord Alton, made a powerful case, as he did the other night, for help for those suffering from exposure to asbestos, but I do not believe that he should then link that deep concern to one form of fundraising for charity. Indeed, it is debatable whether it is any healthier for a charity than any other body to have such a dependency relationship with lawyers who are supposed to be providing a professional service, so we are not convinced that any exemption should be made for charities.
Lord Alton of Liverpool: My Lords, if there is a depletion of funds of charities such as the one that I described today, are the Government saying that if those charities cannot raise that through voluntary endeavour and voluntary giving, the Government themselves will fill their coffers?
Lord McNally: No, of course the Government cannot do that. There was one thing that I was interested in. I do not know this because it is always dangerous to think aloud at the Dispatch Box, but on the powerful case for aid for charity I do not see why wealthy solicitors' firms or wealthy solicitors could not make donations to that charity as long as there was no link with the search for work. It is worrying to have a charity that is dependent on making referral fees to certain solicitors. I am more comfortable with our banning referral fees.
In a way, the same applies to what has been said about trade unions. I fully accept the point made by the noble Lords, Lord Collins and Lord Martin, about the services that trade unions offer working people in this country. My father worked for 47 years for ICI and was a lifetime member of the National Union of General and Municipal Workers. When I hear attacks on health and safety, I know the importance of health and safety in industry, but that should not be linked to a relationship with a professional service organisation.
Lord Martin of Springburn: I may have failed to declare an interest in that I am a member of Unite. It used to be the metalworkers' union and then it became another union. When I looked today, it was still called Unite, but it might change its name tomorrow.
Lord McNally: It might. Some of them sound like coffee bars rather than trade unions these days, but perhaps that is part of the marketing. Certainly, the case of the trade unions was made very strongly by those who intervened. The service that trade unions provide their members no one gainsays-it is important-but we do not believe that that link between referrals and certain legal firms should be exempted from a general ban on referral fees. There must be those who have worked for trade unions who do not pay referral fees. I do not know. As a layman, I see referral fees as a distortion of the market, but there is nothing to stop
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The noble Lords, Lord Pannick and Lord Clinton-Davis, referred to the payments by solicitors to other solicitors for the transfer of prescribed legal business, and we believe that that argument is rational and sensible. If for any reason a solicitor decides that a piece of business needs to be transferred, perhaps for the geographical reason that the noble Lord, Lord Clinton-Davis, gave or because the solicitor realises that it is beyond the competence of his or her firm, it would be perfectly reasonable to see a transfer. When the transfer is made, the solicitor concerned is able to claim an appropriate amount of money for the work dispersed before the transfer was made. We accept that logic. However the Government's view is that reasonable payments of this type are not captured by the ban as long as they only cover the work undertaken by a firm in respect of the claim prior to it being transferred to a new firm. If there is a referral fee element to the payment, this would be subject to the referral fee prohibition and is a matter best dealt with by the regulator rather than by legislation.
Although I know that parts of this reply will disappoint noble Lords, we appreciate the widespread support for our ban on referral fees. We believe that this is the best way to lead our proposal to provide the most effective and proportionate way of preventing payment for personal injury claims and squeezing a bad practice out of the industry. We therefore invite noble Lords not to press their amendments.
Lord Beecham: My Lords, the noble Lord, Lord Hunt, has signified his support for the Government, but he is the only Member of your Lordships' House who has done so in respect of these amendments. We have had some powerful speeches from a variety of people with an interest in and experience of litigation of this kind: distinguished lawyers such as the noble Lords, Lord Pannick and Lord Elystan-Morgan; people with direct experience of the shop floor, such as the noble Lord, Lord Martin; people with a lifetime in the trade union movement, assisting members and no doubt helping them to make their legitimate claims for compensation and advice, such as the noble Lords, Lord Collins and Lord Monks; and the noble Lord, Lord Alton, with his extensive experience of the voluntary sector. They have all made a very clear case for exempting trade unions and charities from the restrictions of this Bill.
We agree that there is a problem with the referral of claims and the industry that has grown up around them. That is commercial exploitation, which may well lead to expectations being aroused and cases perhaps being brought that should not be brought. That is why we support the thrust of the Government's proposals. However, the Government and the noble Lord appear to be comfortable with third-party funding of litigation-subject, as we have heard and discussed in a previous debate, to possible regulation-but not at all comfortable with an arrangement by trade unions or charities for a referral fee for passing instructions, and no doubt assistance as well, to solicitors that they
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"Subsection (8) provides that a referral fee can be any form of consideration (which would include, for example, an offer by a solicitor to take on other work at a reduced rate or for no payment at all), other than normal hospitality".
As part of my firm's relationships with trade union clients, I used to offer a free will to a client for whom we acted after being referred to us by a trade union. We would offer free initial advice about other matters not connected with their personal injury claim, such as a matrimonial, employment or even a criminal matter. All of that would be caught by the Bill as it stands and as set out in these Explanatory Notes.
Perhaps I am being naive, but I cannot believe that the Government really intended those consequences, even though they appear to flow from the Bill as drafted. It means that the expectation that has developed over many years between trade unions and their solicitors-and I dare say the same applies to charities and the solicitors that they recommend as well-that a service would be offered, either free or at a lower charge than might otherwise have been the case because of that connection, would be prohibited by law. That would be the consequence of this Bill. I do not know whether the noble Lord has addressed his mind to that. I would not be surprised if it has not occurred to him, given all the other matters he has to address. However, I would urge him to look again at that aspect even if he is reluctant to look at the other aspects, to which we will undoubtedly have to return on Report. What is being suggested here is a gross interference with a relationship of many years' standing, covering both the categories of organisation we have talked about. With all respect to the Minister, I do not understand-
Lord Thomas of Gresford: My Lords, before the noble Lord does what he is going to do with his amendment, I just make one comment. He said that the Minister was on his own. When I was a young solicitor, I would have given my eye teeth to secure some union work. I did some at the Bar, but it was very difficult in a small firm to compete with a large firm, as I am sure the noble Lord will agree. If I
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Lord Beecham: Not all firms are large firms, and it will not surprise Members to know that my firm was not-and is not-a large one. However, we have had that kind of relationship. The profitability of firms conducting litigation of this kind is not high in any event, even without the question of referrals. I do not think that there are the kind of consequences that the noble Lord assumes to be the case. Equally, organisations with members seeking to derive the best service that they can for their members ought to be free to do that. I repeat that I do not think this Bill is at all on the right lines in what it is seeking to do. I again respectfully direct the Minister's attention to the peculiar circumstances that subsection (8) proposes.
I was going to finish by commending again the amendment tabled by the noble Lord, Lord Pannick, about solicitor-to-solicitor arrangements. He made a very strong case there, and I regret that the Minister seems to have just dismissed it out of hand. Certainly-
Lord McNally: I ask the noble Lord to read Hansard tomorrow. We have made it extremely clear that we do not think that the kind of relationship outlined by the noble Lord, Lord Pannick, will be caught by this ban. It will be regulated by the Solicitors Regulation Authority, and I hope my statement from the Dispatch Box will give it some help in carrying out that duty. The Government do not believe that that kind of relationship, where a solicitor transfers business and takes a reasonable charge for the work already done, is covered by this ban.
Lord Phillips of Sudbury: In the new, highly commercial context within which soliciting is carried on today, and in an era when we have these alternative business structures where we can be owned by virtually anybody, does the noble Lord not think that there is a real risk that some of these new ABSs will, as a matter of business, solicit work if they can then pass it on subject to a substantial referral fee? I can see that in the offing.
Lord Beecham: I can see a case for regulating the fees. I am not an enthusiast for alternative business structures as the noble Lord has defined them. But in any event, we are not discussing soliciting as such-despite the noble Lord's use of the phrase. We are talking ultimately about a system that has been used successfully from the point of view of trade unions, charities and their members, as well as the professions, for some time. The Bill is seeking to intervene because of a different set of circumstances and set of relationships, with different causes and consequences. If there is no
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(c) arranges for another person to provide, for a fee, marketing services by unsolicited SMS text message, unsolicited telephone calls or any marketing in a hospital or other primary treatment centre."
Lord Clement-Jones: My Lords, in moving Amendment 165, I shall speak to Amendments 167 and 168. We are still on Clauses 54 and 55, but we are dealing under these amendments with a rather different set of considerations. Both my noble friend the Minister and the noble Lord, Lord Bach, have mentioned the report from the noble Lord, Lord Young of Graffham, Common Sense, Common Safety. He was explicit in stating:
I suspect that a major reason for the public's perception that a compensation culture exists has been driven by the actions of ambulance-chasing claims management companies. The existence of referral fees is another major cause of that perception. I very much support the Government's attempt to solve the problem with Part 2 of the Bill, but legislation designed to end their influence must be watertight. In recent years, it is clear that there have been differing views on how to achieve this. Insurers allege that referral fees are directly responsible for the enormous increase in motor insurance premiums; others allege that insurers themselves have profited from receipt of referral fees for several years by selling details of their customers to panel solicitors or claims management companies. As we have heard from a number of noble Lords, Lord Justice Jackson in his review of legal costs, which reported in 2010, recommended that referral fees in personal injury cases should be banned. Others, however, such as the Association of Personal Injury Lawyers, fear that a ban will simply drive fears underground.
The insurance industry does not agree that transparency is sufficient and has welcomed the proposed ban. So too has the Law Society, of which I am a member, but it wants it extended beyond personal injury cases. Others, such as the right honourable Jack Straw, want to go further and make it a criminal offence-not just a matter of regulation-to solicit, offer or pay referral fees in road traffic accident claims. He proposed an amendment to the Bill to that effect last November. The Justice Select Committee, under the chairmanship of my right honourable friend Sir Alan Beith, believes that it should be punishable with a custodial sentence. This has been rightly resisted by the Government on the basis that circumstances could be very varied and complex and best dealt with by the regulator. I believe that the current provision strikes the right balance.
There are a number of issues, however, that arise in the course of consideration of the ban. First, the Legal Services Board highlighted the difficulty of defining referral fees. The Motor Accident Solicitors Society, in its evidence to the Transport Select Committee, highlighted the importance of a definition being wide enough to cover all potential commission fees, administrative costs, transfers and any other payments that may be disguised.
Secondly, the purpose of a ban on referral fees is to reduce insurance premiums in future. But how is that to be judged? The benefits derived from a ban may not necessarily be passed on to consumers. Indeed the impact assessment of the proposed ban admits that, overall, claimants might lose out from a ban on referral fees on personal injury cases, with individuals expected to be affected more than business. However, lawyers are apparently likely to incur no net additional costs.
Thirdly, are any other sectors in contemplation that could be activated by Clause 54(4)(b)? Last October, the House of Commons Justice Committee, to which I referred earlier, called for that ban to be extended for other types of case. My right honourable friend Sir Alan Beith, chair of the committee, said that it was "disappointing" that the Government had chosen to limit its enforcement capacity for the most serious cases of abuse of personal information. He added:
It is important, however, that the ban extends to the full range of malpractices. They include nuisance marketing in personal injury, specifically advertising in hospitals, cold calling and spam texts; third-party capture, which was debated earlier; financial incentives to claim; selling of contact and case details of personal injury victims without their consent; auctioning claims to the highest bidder; and marketing that is not accompanied by a service to filter out spurious claims. This is the reason for Amendment 165. The amendment would ban nuisance marketing, which fuels perceptions of a compensation culture and impacts on the ability of genuine accident victims to obtain redress. It would have the benefit of driving the really unscrupulous operators out of the market.
Health Minister Mr Simon Burns recently told English NHS hospitals that it was not acceptable to display adverts for law firms that encouraged no-win no-fee compensation claims. Surely, however, any conflict with the Compensation Act 2006, which allows businesses to operate in NHS trusts with the approval of the facility's management, must be resolved through primary legislation.
However, there must be clear exceptions. National Accident Helpline exists as a national brand for the marketing activities of more than 100 leading solicitors' firms around the country. They have told us that this scale of marketing allows tens of thousands of people who would otherwise find it very difficult to access legal support to obtain legal representation and pursue legitimate claims, and that they-the NAH-strictly filter those who respond to marketing. Every year, it tells more than 150,000 people who contact it that they do not have a claim. The NAH contends that if
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The ban on purely commercial referral fees must exclude provision of legitimate marketing services that enable innocent injury victims easily to access the requisite legal representation. The ban should also exclude other services under a scheme, such as sales, marketing, product development, vetting of clients, upholding solicitor standards and debt control. Amendment 168 would remove Clause 55(9), which is potentially very damaging to the ability of accident victims to obtain high-quality legal representation.
Some believe that the ban could also be read as banning or capping the legitimate costs of genuine, high-value services. These include the provision of necessary medical reports for clients, quality assurance for solicitor firms, sales and product development. To ban or limit those commercial activities would drastically restrict the ability of legal firms to offer the best advice to genuine claimants. My noble friend the Minister will, I hope, be able to give assurances that any cap excludes these legitimate services such as I have mentioned. I beg to move.
Lord Hunt of Wirral: My Lords, I shall speak to Amendments 166A and 166B, standing in my name on the Marshalled List, and to declare my interest as a partner for 44 years in the international commercial legal firm DAC Beachcroft LLP, and the other interests contained in the register.
This gives me an opportunity to respond to one or two comments in the earlier debate. In this important group of amendments we need to focus on the underlying problem of legal costs as much as on the problem of referral fees. As my noble friend Lord Clement-Jones just reminded us, the Government are implementing another of the main recommendations of Lord Justice Jackson's review of civil litigation costs. Perhaps I should mention here my personal pride that one of my partners, Andrew Parker, was an assessor to Lord Justice Jackson's review.
The intention so clearly expressed is firmly to reduce disproportionate legal costs in our system. As I was able to say on Second Reading, and I make no apologies for repeating it, Sir Rupert Jackson was able to produce a report which balanced all the special pleading of the various vested interests and came up with recommendations which were firmly in the public interest. It is that balance which we have to keep in view throughout the passage of the Bill in this House, particularly on these clauses.
I fully support the Government's proposal to ban referral fees, and these amendments in my name are intended simply to clear up some points of relatively fine detail in the drafting because any ban implemented must work effectively and not allow easy ways around the ban. We are already aware that there is quite an industry out there now, which will be thinking of innovative ways of defeating the intention of both the Government and Lord Justice Jackson.
The point is that many injury claims include claims for other items such as motor repairs or hire charges. In my view, the current wording imposes the ban on payments for only the injury element, so we could get the unfortunate situation where the same referral fee is instead paid for the repair or hire claim, neatly sidestepping the Government's intentions. Better surely to pick up the whole of any claim where there is an injury element, as my wording is intended to do.
into Clause 54(8). I fear there is a gap in the drafting which will be exploited by those business models in which the referral is made by a regulated person, but the payment for that referral is made back to an unregulated subsidiary. This amendment is intended to stop that. I understand entirely that the payment for that referral could be banned, but it is vital in my view that where both payment and receipt can be caught, that should be done. It is not just about balance or fairness, but about removing the incentives from the system. Speaking for one moment about incentives, this is as much about legal costs as about the rather distasteful practice of buying and selling people's injuries as some sort of commodity. Essentially the payment of referral fees demonstrates that, despite efforts to contain legal costs in low-value claims, solicitors acting for claimants can still afford to pay out over half their fees to a third party whose only role is to buy and sell on the details of an injured person.
I shall remind the Committee of some figures. This is not just about motor claims, but they illustrate the point clearly. We now have a system in which a solicitor can conduct a routine motor claim for personal injury, in which liability is not disputed, and be paid £1,200 profit costs by the defendant or the defendant's insurer. We hear that out of that sum of £1,200, many solicitors are apparently content to pay up to £850 to a middleman-namely, a claims farmer. What do the claims farmers then go out and do? They go and pester more people to bring claims to them, so that they can farm more lots at £850 a time. This is what is driving the compensation culture today, in which it is now becoming evident that we have the weakest necks in Europe. It is not just about whiplash and road accidents; this is a real issue for those businesses and households struggling to pay insurance bills.
In conclusion, what this demonstrates beyond any reasonable doubt is that the claimants' solicitors are being paid too much. In debates on this Bill in the House of Commons the Minister, Mr Djanogly, committed to consult on reducing that £1,200 fee but was unable then to give any commitment about timing or about the critical question of how much the reduction ought to be. The Government have also previously made it clear that they intend to extend the reduced
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Only by removing the cost from the system can the Government achieve their objective of bringing down insurance premiums. Any ban will immediately be the subject of attempts to work around it, however watertight the drafting. The key to making Clauses 54 to 58 work is not just to get the drafting right, but to remove the incentive for referral and profit share by removing the excess from the system. While I am of course merely speaking to my amendments, I urge noble Lords to join me in calling for an £850 reduction to the fixed fees, because that would stop at source this practice of trading people's claims.
Lord Carlile of Berriew: My Lords, I want to say a few words in support of these clauses and indeed of all the amendments that my noble friends have spoken to. One of the most unwelcome trends in litigation in recent years has been its commoditisation, and if this is not stopped I see the development of litigation futures as a commodity that will be traded, just like potato futures and metal futures.
I do not know whether any of your Lordships has had an experience like mine a few months ago. I was involved in a road traffic accident as a rear-seat passenger in a vehicle on a country road in Northern Ireland at about 11 o'clock one morning. I came back by air to Heathrow the same afternoon. I had not been injured in the accident, although it was quite unpleasant. As I was standing on the Heathrow Express platform, coming back into central London, I received a text message from a claims-farming business that referred to the accident I had had the same morning. Now if it happened to me, it must be happening to an awful lot of other people. I suggest that Amendment 165 nails this problem for that kind of activity. That kind of low-level claims farming, but on a very large scale, is putting up insurance premiums and the cost of litigation. Perhaps worst of all, it is encouraging people to make claims that they otherwise would not have made, and which may in the end cost them if not money, a great deal of anxiety.
Lord Thomas of Gresford: Does my noble friend not agree that in the instance that he described and in which he was involved there could have been an element of corruption with people being paid when they gave information about that accident?
I wanted to add something else about hospitals. When I was a Member of another place, I often visited a celebrated orthopaedic hospital in the next county. At that time-I cannot say whether it is the case now-at the end of a long corridor in that hospital there was a solicitor's office. That was an unusual arrangement but one that no doubt brought some rent to the hospital. I have real reservations about that kind
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Lord Bach: My Lords, the Committee seems to be at one in its attitude towards the amendments, and I include those of the noble Lord, Lord Hunt, as well as those in the name of the noble Lord, Lord Clement-Jones, who has spoken so persuasively. I hope that we are as one and that that includes the Minister. The amendments really cannot be argued against.
I intend to be pretty short in what I have to say as there is other business waiting to get on and we have had a long session today, but I have to say to the noble Lord, Lord Hunt, who talked about the Jackson report, that it is wrong to ally the Jackson conclusions with the conclusion that the Government have reached on his report. Lord Justice Jackson's balance obviously appeals to the noble Lord and no doubt to many others, but it did not appeal to the Government, who have picked and mixed from Lord Justice Jackson's findings.
In particular-I am afraid that I have used this example before and no doubt I will use it again-Lord Justice Jackson could not have been clearer that he did not believe that civil aid should be cut further, particularly with regard to clinical negligence. Indeed, when the Government decided that that was exactly what they were going to do, Lord Justice Jackson made his now quite famous Cambridge speech, which attacked-if that is the right word; a better word might be "criticised"-the Government for the stance that they have taken. So there is a difference between what Lord Justice Jackson said in his report and how the Government have responded. I am not saying that any other Government would have taken everything that Lord Justice Jackson said, although of course he saw it as a package. But I am saying that in this instance there is a difference.
On the question of claims management cases, I shall briefly mention that my right honourable friend Jack Straw, whose name has come up already in discussions today, gave the example in another place of a friend of his who, just like the noble Lord, Lord Carlile, was bombarded with texts and personal calls from claims management firms following a minor accident in which he suffered no injury. In that case, apparently, the details had been sold to the claims management firms by his own insurance company. I just wonder whether that might have been a possibility in the noble Lord's case, although it may be that his insurance company did not know about the accident. Actually, there is no reason why it should have known as he suffered no injury and he was a back-seat passenger. It is interesting to consider exactly how the company found out in the time that it took for him to get back to Heathrow, but the point that he makes is clear.
Unsolicited spam, which we are talking about here too, is incredibly intrusive. Worse than that, it must be appalling to have a minor prang and find people trying to prey on you for, effectively, a quick buck. This is a real problem.
It is not as though whiplash does not exist; it does. There are genuine cases and it can cause real pain, discomfort and disruption in people's lives. However, when ordinary people are encouraged or persuaded to exaggerate their symptoms, knowing that it is difficult for a doctor to diagnose the degree of impairment in a particular case, that is when the problem really shows itself. We support the amendments and hope that the Government can indicate today their intention to bring forward amendments on Report in these or similar terms.
Once again, I put to the Minister a question that-inadvertently, I am sure-he failed to answer on an earlier amendment but which is relevant now. Do the Government intend to move on Report the contents of the Private Member's Bill that my right honourable friend Jack Straw moved in another place?
On the noble Lord's final remarks about whiplash, my advisers' hearts will sink but they knew this was coming at some point in this debate. I had personal experience of a minor bump, which at the time was settled by my saying, "Send me the bill and I'll pay for it". This somehow escalated over the next few weeks into a case handled by a solicitor's firm 200 miles from where the accident happened, with a doctor's verification of whiplash made in Manchester, 180 miles from where the accident happened. Worst of all, when I wrote to the insurance company and said, "This is a scam and a fraud, and we're willing to give all kinds of evidence that it is", I got a letter back saying that they would settle for £5,000. Presumably the doctor, the solicitor and the injured party with his whiplash all got a cut, but who paid for it? Not the insurance company but the payers of insurance-the customers.
A number of similar stories have been told around the House; there have been two or three today. To my mind this is rampant corruption, not just an abuse. Whether or not there actually is a compensation culture, the behaviour of these companies feeds the perception that there is because so many of our citizens have experience of this. That is reinforced by these companies' adverts, which I asked Questions about over 10 years ago when I first came into the House. I had been off with a dose of flu and that was the first time I had been exposed to daytime television and advert after advert that looked almost like a lottery win, showing someone with a big cheque that they had won for some minor injury. That is where the idea of the compensation culture came from.
This has been a good debate. I say to my noble friend Lord Clement-Jones that the Government have sympathy with the intention behind Amendment 165. Unsolicited calls about personal injury are a nuisance at best, and at worst create precisely the impression of a compensation culture to which he referred. However, there is existing legislation on unsolicited calls. We will need to consider whether further legislation is needed and, if so, whether this is the right way forward, but the Government will consider the amendment further.
The intention behind Amendments 166A and 166B seems to be to make the ban more effective and harder to evade. The Government believe that the referral fee clauses as drafted should cover the concerns that the amendments seek to address, although of course we wish to ensure that the ban is as effective as possible. I therefore thank my noble friend Lord Hunt of Wirral for raising these two issues. We are sympathetic to the intention behind them and would like to consider them further. I am afraid that I cannot give him a more specific timeline about those considerations, but we take due note of the points that he made.
In response to Amendments 167 and 168 to Clause 55, I assure noble Lords that Clause 55 requires regulators to have arrangements in place to monitor and enforce the prohibition on the payment or receipt of referral fees. Under this clause, any payment can be treated as a referral fee unless the solicitor or other party can show that the payment was for the provision of a particular service. However, I noted my noble friend's points on that. It will be up to the regulators to define that issue in a way that does not prohibit legitimate activity. However, the amendments tabled by my noble friends would alter the way in which legitimate payments for services are defined. Amendment 167 to Clause 55 would ensure that pooled marketing would be a service exempted from the ban. Amendment 168 would remove the Lord Chancellor's powers to make regulations specifying the maximum amount that can be paid for those services.
Under our provisions, it will be for the relevant regulators to enforce the ban on referral fees and impose appropriate sanctions. The regulator will also have the power to require the regulated persons to show that payments for "marketing" do not include a referral fee-that is, that any marketing costs are reasonable and appropriate. The pooling of marketing resources-my noble friend Lord Clement-Jones referred to this-in our view does not in itself breach the prohibition on referral fees. However, it is important to understand that any potential breach will depend on how the information provided by the claimant is passed on by the organisation that holds it to the solicitor who takes on the claimant's case.
The Government believe that the appropriate regulators are best placed to monitor and assess payments made in these circumstances, particularly in taking a view as to whether a breach has occurred. That said, the Lord Chancellor's powers to make regulations are essential if the prohibition on referral fees is to be effective. The Government need to be able to respond to situations as they arise. I believe that these amendments are unnecessary and would serve only to hinder the Government and the appropriate regulators in enforcing the referral fee ban. In addition, the likely effect would be to encourage inflated marketing costs in order to get around the ban on referral fees. I therefore invite my noble friends not to press their amendments.
Lord Clement-Jones: My Lords, I thank the Minister for that reply. Apart from the metaphorical slap on the wrist at the end of his response, it was generally helpful. I thank those who have spoken to the amendments. The noble Lord, Lord Hunt, made some interesting contributions and it is good to hear that the Minister is looking favourably on those amendments. The phrase about removing the excess from the system is very powerful. My noble friend talked about commoditisation and the possibility of litigation futures. The lawyers are probably salivating at that prospect. A number of noble Lords have recounted their experiences in this area. I will not add to the list of those who have spoken on that. However, I have even received a text message when I have not had an accident, which just shows the assiduity with which these characters operate.
I enjoyed hearing the noble Lord, Lord Bach, going well off piste when discussing the Jackson report in responding to my humble reference to a single aspect of that report, which was then inflated into a general reference to the whole of the Jackson report.
Lord Bach: I say with the greatest respect to the noble Lord that of course I remember his comment on Lord Justice Jackson's report, but in this instance I was referring to what the noble Lord, Lord Hunt, said about that report.
I thank the Minister particularly for his sympathy for Amendment 165. I very much hope that he will carry that forward to Report. Having looked at the existing legislation, I think it would be extremely useful to signpost that measure explicitly in this legislation. I also thank him for his assurance about pooled marketing and legitimate activities on the part of those pooled marketing schemes. They perform a very useful service and it would be a retrograde step if they were not able to continue. I will read with great care what the Minister said about Clause 55(9). I beg leave to withdraw the amendment.
Lord Shutt of Greetland: My Lords, before the debate is introduced, I hope I may make the normal point that it is a timed debate. Apart from the mover and the responder, other noble Lords are limited to six minutes. The monitor is dark now but when it shows six, the six minutes are up.
Lord McFall of Alcluith: My Lords, I am delighted to introduce this debate on occupational pensions. Last year I was asked by the National Association of Pension Funds to set up a working party looking at occupational pensions. When the report was published, I mentioned that a golden sunset of pensions was giving way to a bleak dawn. Many millions of people will face poverty in retirement-some absolute poverty. That is the inauspicious background to this debate. People are saving less and less and there is less and less trust in the pensions system. In fact, the NAPF confidence index is presently at minus six-the lowest it has ever been since its inception.
I want to look at the issue of risk. The flight from defined benefit to defined contribution schemes means that all the risk is on the saver. In effect, the saver is often left to navigate through a pensions minefield which would puzzle the brain of Albert Einstein. The consumer is short-changed and the voice of that consumer is missing. We need to ensure that that voice and that presence is centre stage in pension provision. In the flight from defined benefits to defined contributions, it strikes me that it is not just the risk which has shifted from the employer to the employee but that the onus is on the employee-the individual-to make critical decisions about their pension which they are ill equipped to do. It is a fiendishly complex matter and they need help and reassurance from scheme trustees who promote good governance. We need good, strong, independent governance. That is central to good member outcomes. We can achieve that good governance only if we have an environment which is conducive to achieving that, and if we have proper structures. We need schemes which are of a sufficient size to enable them to reap the benefits of scale and produce low charges to ensure that we get good governance and high-quality communication.
At present, there are 54,000 separate DC schemes operated by tiny employers in this country. With the average worker now changing job 11 times, we see the proliferation of these tiny pension pots with no portability. These have two critical disadvantages. First, they lack the scale efficiencies of larger ones and have inadequate governance, and, secondly, they tend to deliver worse outcomes at higher costs. There are no compensating benefits whatever.
The Pensions Minister, Steve Webb, has put out a challenge on red tape, as he calls it. That is a welcome opportunity to reinvigorate the pensions landscape,
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The third aspect is auto-enrolment and NEST. This is welcome because it has the potential to encourage between 5 million and 9 million people to save for retirement in addition to those who have not saved previously-largely those on a low income. First, the Government have to look at the state offering and establish a firm foundation for saving. It will not be worth while for people to save if that firm foundation is not in place. Secondly, I have a simple message for the Government: remove the shackles from NEST. Take the messages that its chief executive Tim Jones and chairman Lawrence Churchill gave to the DWP Select Committee a few months ago. The cap and transfer-in rule are preventing the best outcome for institutional savers and government. The rule stops consolidation of existing pension provision for employers into NEST, and the cap ensures that employers have to run more than one scheme-one for the lower paid and another for higher earners-if they choose NEST.
Lawrence Churchill's remarks to the committee were telling. He said that 40 per cent of the lower paid are engaged by large employers, so already 40 per cent of those whom he called "our market" will not use NEST because of the restrictions. By impeding the volume of business for longer, the Government's loan will take longer to be repaid. It is therefore wise for the Government to remove that contribution cap. By doing so, NEST would need £100 million less in taxpayers' money. It should be remembered that the shackles were imposed because of a 2005 political settlement. Removing the restrictions would ensure efficient organisation, and auto-enrolment would incentivise industry to lower costs and charges.
On the issue of costs and charges, disclosure is inconsistent among schemes and providers. In fact, what is consistent is the opacity of disclosure. We need transparency on the cash impact on pension pots. I welcome the code of conduct that NAPF has established as a result of my committee's proposals. Let us keep in mind that a 2 per cent fee over the lifetime of a pension, which is not out of line, swallows up 50 per cent of an individual's pension pot. My message to the Government is: do not wait and see the impact on high charges; use regulatory powers to apply stakeholder charge-capped schemes that are eligible for auto-enrolment.
The UK has the largest annuities market globally-450,000 were purchased in 2009 with a total value of £11 billion, and that will increase in the years ahead. Research since 1957 indicates that for each year of life expectancy, annuity rates have fallen by 0.56 percentage
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The issue of Europe has been brought to me through lobbying. Lobbying by companies is very relevant because of the negotiations on Solvency II. The Government have to be vigilant here because if we do not get the right outcome, we will see the death of defined benefit schemes in the United Kingdom.
Lastly, on stability, the pensions cycle is between 40 and 50 years. The political cycle is between four and five years. We are out of sync. Since 1996, there have been more than 800 changes to pensions legislation and regulation-the equivalent of one change per week. I say to the Minister that that does not add stability. What we need to do is think about taking the politics out of pensions. A standing advisory body on, say, longevity and state pension ages, would be a good start, but we need a pension policy that is stable, for the long term and based on political consensus. I therefore suggested in our report, and suggest again to the Minister, that an independent standing commission on pensions should be established to ensure that the interests of the saver are centre-stage for the long term. If we work together in harmony on these proposals, perhaps we can assist in averting a bleak dawn for pensioners in the future.
Lord Freeman: My Lords, I congratulate the noble Lord, Lord McFall, on securing this debate on a very important subject. I am bound to say that I agree with a great deal of what he has said, not only in the past but to your Lordships tonight. There is a wealth of experience from those who are to contribute to this debate. I see in his place the author of a very important report on the pensions industry, and we look forward to hearing the noble Lord, Lord Hutton.
My contribution comes from my experience as chairman of a very large pension fund, as referred to in the register. Although I speak for myself and not for my fellow trustees, my experience obviously comes from my business background and from looking at the impact of the problems of our pension fund, and indeed of other pension funds in the private sector, on the well-being of British industry.
The position is serious. The latest estimate of the actuarial deficit of British pension funds is of the order of £750 billion. It has got a lot worse in the past three to four months. For funds with an actuarial valuation date of 31 December, the position is that the stock market has fallen since the middle of the year, and due to quantitative easing, the yields on gilts and more generally have increased the liabilities because the discounting factor is much less than it would have been in the past. It is a very serious position for British industry.
As the noble Lord, Lord McFall, said, defined benefit schemes have been closed at an increasing rate. In the FTSE 100, not a single defined benefit scheme is open to future members-they are closed to new members. However, the deficits remain. The schemes may not be taking on new members but the historical legacy of the pension funds and the benefits-very generous benefits, in certain circumstances-have contributed to the serious deficits. I will quote only one example-not a FTSE 100 company. I believe that the Royal Mail is still in a 25-year recovery period to pay off the existing deficit. The introduction of mandatory indexing of the pensions of those still left in defined benefit schemes is understandable, but I should point out, as the Minister well knows, that indexing is capped in only one country-in Holland. That, of course, assists the viability of an existing pension fund.
From my personal experience I would like to congratulate the diligence, efficiency and helpfulness of the regulator, who has to look after the Pension Protection Fund. He is looking over his shoulder to make sure that not too many burdens are placed on that fund. However, the regulator's willingness to consider longer recovery periods, and his understanding of the current problems of some pension funds, is to be applauded.
I have two concerns and will put two points to the Minister. If he does not have time to answer them in his winding-up speech, perhaps he will be kind enough to write to me. First, I echo what the noble Lord, Lord McFall, touched on: we need to increase the awareness of employees of the likely shortfall of proper provision in retirement. We need an awareness campaign, which I think only the Government, the Department for Work and Pensions, can lead. Clearly the regulator cannot do it alone. We need to appreciate that if you have a personal pension plan in addition to your defined benefit or defined contribution scheme, that may not provide enough in later life. For example, if in addition to your scheme, you save £100,000 over a lifetime of working, when it comes to drawing a pension, that may mean only £3,000 per annum. That gives you an example of what meagre addition might be entailed. We need an awareness campaign and, perhaps, even to relax the draw-down provisions in legislation to permit people to draw more money.
Finally-this is a rather radical proposal-we need to revisit trustee governance. That is an immensely complicated subject: the provision of pension funds and the advice that is given. In my experience, even with the training now provided in many pension funds for their trustees, it is becoming too complicated and we may need a new model, which is to permit trusts to wholly contract out advice. I look forward to hearing the contributions of more experienced Members than I around your Lordships' House.
Lord Hutton of Furness: My Lords, probably for as long as most of us in this House can remember, successive Governments in the United Kingdom have been wrestling with three unpalatable facts about occupational pensions. First, fewer and fewer people
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So we have three very difficult problems to wrestle with. I endorse all the comments and concerns of my noble friend Lord McFall and many of those introduced to our debate by the noble Lord, Lord Freeman. If those are the three problems that we are wrestling with, I am glad to say that successive Governments have found within themselves the ability to reach a reasonable consensus about how we deal with them. The noble Lord, Lord Turner, did the country a huge favour in 2005 with his report which the previous Government took forward and the current Government are now taking forward in a sensible fashion.
My advice to the Minister is not to tinker with the framework. That has been one of the enduring problems with pension law and pension law reform; we have never allowed the dust to settle on any of the reforms that we have introduced. That has created the problem that both noble Lords have referred to: the lack of confidence and trust in our pensions saving system.
It is too early to judge whether these reforms are likely to be as successful as we all in this House and outside want them to be. We are heading for a very difficult place. It cannot be right that the price that our society pays for increasing longevity-rising life expectancy, which is a great prize in our community-is increasing levels of intolerable poverty among that rapidly growing age group. We have it in our grasp, with the reforms that the noble Lord, Lord Turner, outlined a few years ago, to prevent that outcome, but we have to guard against the law of unintended consequences. It was perfectly right to set the contribution levels for NEST as they were. It is a very big change for many employers, particularly smaller employers, now to have to make pension contributions, and we must guard against the consequences in our labour market of going too far and too fast. I think that we all understand that. We must be mindful that NEST, although a step in the right direction, could have negative consequences for existing saving products, particularly in the defined contribution sector.
There is a way out of this conundrum. Living longer does not have to mean the end of the world as we know it. On occupational pensions, I think that we have a reasonable direction of travel. I support what Ministers are trying to do with the state pension, which is to make it more generous and more universally available to get us out of this very difficult space we are in with the current means-tested rules around pension credit. If we can find a way to ensure that there is a decent platform on which people can save without worrying about whether it is in their interests or not to save-whether any of those extra savings will be clawed back through lost pension credit and so on-we will have done the country a big favour. We
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Both noble Lords have basically raised all the points that I wanted to raise. That will not stop me from raising them in my own terms. We face two fundamental problems right now, given that, sadly, defined benefit schemes in the private sector are now clearly on the way out and are not coming back. That is a consequence of a number of factors of which we in this place and elsewhere will be very well aware. It means that defined contribution schemes will have to do most of the heavy lifting when it comes to breaking through into the sunnier uplands where more people are saving more for their retirement, allowing those savings to stretch for the extra years for which we know that people are living. We have to find a way through that.
The Pensions Regulator issued an important consultation document last year about reform of regulation for DC schemes. Like other noble Lords, I hope, I look forward to the outcome of the consultation. The regulator has identified many of the important issues to do with improvements in governance and oversight in DC schemes, which will not go away. We have to find a better way through to ensure that DC schemes produce better results for those who are saving in them than they are currently. I am not saying that regulation is the only way through; we must be mindful of the consequences of overregulation, but the Pensions Regulator has identified issues which, I hope, will result in more concrete proposals.
The second issue, which is of much greater concern, is what Europe is planning to do on defined benefit schemes. It is impossible to exaggerate-although we all exaggerate as a profession, as politicians-the danger that lurks behind the proposals from the European Commission. They would mean the end of defined benefit in the private sector. I want defined benefit schemes to continue in the public sector, and I believe that there is a way to do that, provided that reforms are made, but we should not sit back and welcome the demise of DB in the private sector, because that is what will happen if we move to Basel III-type insolvency regulatory frameworks for DB. That is the wrong regulatory tool. I understand why the European Commission wants to guard against the dangers and hazards, but good intentions do not always make good regulation. The Government are right to resist those proposals very strongly, because they would be a step backwards.
Lord Stoneham of Droxford: My Lords, I am pleased to take part in the debate initiated by the noble Lord, Lord McFall, whose work on the Workplace Retirement Income Commission was timely. I thank him for his immensely valuable input to this debate. I agree with pretty much everything that has been said by the previous speakers. That underlines that real progress on pensions comes when there is genuine cross-party co-operation. The work of the Pensions Commission and actions initiated by the previous Labour Government and now taken on by the coalition, are the ones that will have lasting value.
I hope that this generation, benefiting from the last of the direct benefit pensions, will help prepare the next generation for the pension problems that they will have. Clearly, over the next five years we will have to concentrate on the introduction of auto-enrolment and NEST to attract the 6 million to 8 million people whom we want to bring into pension coverage. I think that it was the noble Lord, Lord Hutton, who said that stability is now absolutely essential. The one opportunity that this big change will give is that it will raise the profile of pensions and the need for us to make the case for people to save for them. It is important that we concentrate on doing this well, but there remain a number of ongoing problems that we need to look at for the future.
The pensions system remains incredibly complex with the two-tier state pension and all the constraints and conditions of auto-enrolment-the phasing in and the exclusions. Initially these will not help; they will confuse people, and we are going to have to work very hard to explain them. I hope that the Government will progress with their proposal for a single higher-rate basic pension, not least because 9 million to 10 million people will miss out on auto-enrolment. There has to be a greater understanding of the need for people to provide more for their retirement. We must plan ahead for the review of auto-enrolment in order to simplify it once it has settled in-removing the caps, looking at the thresholds and easing the transfers into NEST.
One fundamental problem with the system that we are going into is that the contributions are simply too low to provide adequate pensions for people entering retirement. We will soon have to examine ways of gradually raising, through phased increases, an auto-escalation of the contribution rates. We cannot do this initially but it will be important for the future.
Another problem is that we are introducing this at a very bad time. The impact of the recession, all the changes associated with student loans and the ability to raise the deposit for a house will all delay saving for retirement and make it much more difficult for people to prepare for their retirement. As a result, we are going to require far greater experimentation and flexibility in relation to savings vehicles to encourage flexible saving to support pension provision.
Governance and risk in occupational pensions is one area that we will need to look at very carefully. We can argue about what has caused the death of the defined pension scheme but the consequence is that it has weakened, and will continue to weaken, employer interest in pension provision. It is already having the effect of weakening contributions. I suspect that it is going to weaken interest in the governance of defined contribution schemes, and there is going to be less joint employer/employee interest in these schemes. Employers will be outsourcing it, if they can.
It will be very important for the Government to do everything they can to encourage experimentation with pension schemes. The end of the defined benefit scheme has meant that we have become very polarised: now, the employer is not prepared to take any risk and has handed it all to the employee. In some respects, that polarisation has gone too far. We need to move back to a middle way of experimentation where there is a sharing of risk in pensions.
The role of employers remains terribly important in pensions. Certainly, they have to provide a countervailing power if we want to get competitive rates for annuities, if we want to get the general level of charges down and if we want to take advantage of the benefits of scale in pensions. The role and interest of employers in the management of pensions is absolutely essential. We must not downgrade the importance of the employer.
Finally, there is the outstanding issue of tax incentives. I am sure that there will be an ongoing debate about reducing the inequities of the current tax incentives, which see the majority of the £28 billion of tax relief going largely to higher earners. There is an inequity here which certainly Liberal Democrats have been committed to ending. Some of this money could be better used in attracting more lower earners to the idea of starting the habit of saving for retirement, as well as paying for the higher state pension.
Active membership of workplace pension schemes is now at its lowest level since the 1950s. Although I am relieved that the revised timetable for auto-enrolment has been published, I desperately hope that there will be no further delay. In fact, I plead with the Government that there should be no further delay.
For workers to persist in saving for their pension, they have to have trust and confidence. Auto-enrolment will mean that millions of workers begin saving through the capital markets, and the fiduciary duties and behaviour of those managing their assets are going to be of great importance. Trustees have a duty to act in the best and sole interests of the beneficiaries, but the auto-enrolled world coincides with an increasing move to contract-based provision, where fiduciary duty, managing conflicts of interest and governance standards are more ambiguous. To quote the Secretary of State, Vince Cable, in the foreword to A Long-Term Focus for Corporate Britain, returns can be,
A powerful, much needed benefit of establishing NEST as a not-for-profit trust is that it has already started to drive up standards in the industry. Otto Thoresen, the director-general of the ABI, recently acknowledged at the Work and Pensions Select Committee the role of NEST in driving a higher standard of behaviour in the market. Downward pressure on charges and upward pressure on standards of governance-these are the early impacts that NEST is having.
No one who has seen NEST's approach to governance or investment strategy can doubt the absolute focus on delivering a product for ordinary people. It has transformed thinking around the design of default funds. However, NEST's influence on the market has to be strong and sustained over a long time. The product restrictions on NEST, the transfer ban and the contributions cap must not be allowed to undermine that influence as the 2012 pensions market, with extensive contract provision, starts to take shape.
The potential cost-efficiency of NEST should not be inhibited. As these restrictions play out in practice, we are now finding that they add complexity to the NEST product rather than simplicity to the employer experience. They may force employers to make multiple-tier provision or sign up for a scheme that does not offer some workers best value.
The transfer restriction also prevents NEST acting as an aggregator of pension pots. With automatic enrolment and job churn, there will be millions of small pots in the system which will be vulnerable to high charges and neglect if they are not steered into a safer harbour.
The importance of NEST in driving up standards in the pension industry should be neither underestimated nor undermined. On the eve of auto-enrolment, we see emerging issues, such as providers selling short-service refunds as a propositional benefit to employers, with the consequential loss of up to two years' pension saving for the worker. There is also the establishment of multi-employer "master trust" schemes by providers with senior executives in trustee roles. How do they manage conflicts of interest? Will such trustees be able to sack underperforming fund managers if they sit within the same corporate entity?
The Secretary of State has reserved powers to set charge caps and I hope that he will monitor closely the emerging evidence. Low charges are essential to the public credibility of automatic enrolment. I also hope that the Government take the opportunity of the Financial Services Bill to strengthen the requirement on regulated bodies to have a duty of care and to act responsibly in the interests of the consumer.
There is increasing recognition of the importance of the alignment of interests between pension scheme governance and the member. NEST has this alignment at the core of its governance. Indeed, it was heartening to see Otto Thoresen at the Work and Pensions Select Committee arguing forcefully that the industry has really got it in terms of the need to make pensions work for the saver. It was equally heartening to hear him accept that some would be cynical of this claim, based on the industry's past behaviour in this area.
I urge the Government unequivocally to confirm that they accept that a successful and thriving NEST has an essential role to play in driving up standards in the industry, in pension provision and in the interests of all those workers who will be auto-enrolled in saving for their pensions. I urge them to take such steps as are necessary to ensure that the role that NEST will perform in raising the standards in the market place is maintained, including removing restrictions to allow it to continue to do that.
Lord Myners: My Lords, I congratulate my noble friend Lord McFall of Alcluith on securing this opportunity for the House to revisit this important area of workplace occupational pension schemes.
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I am a member of a defined benefit pension scheme. My wife, my children and I draw security from the fact that we have an assured income which will track inflation. My father was a fisherman and then a small shopkeeper. He had no workplace pension; he worked at sea. My teenage children will not have a defined benefit pension scheme. This is a single generational phenomenon. Perhaps it cost too much; perhaps it was not valued sufficiently by those who were members of the schemes in the early stages of their lives; and perhaps we in Parliament put too much pressure on this beast and burdened it with all manner of additional requirements. We sought to de-risk it and we sought to provide additional protections. We have destroyed something which I think we all know was a rather good development and whatever succeeds it will not be as good. I fear that that is an irreversible decision.
I congratulate my noble friend Lord McFall on his work on the Workplace Retirement Income Commission. That work focused in particular on some of the problems that arise with the successor arrangement, the defined contribution scheme. Contribution rates are simply too low to deliver the sort of benefits that people believe they will need and expect on retirement. There is a huge mismatch here which the Government constantly need to remind people about in order to encourage higher rates of contribution. Costs are also far too high. Costs are the one manageable element here. If the contribution is fixed and investment returns are outwith the control of the subscriber or the arranger of the plan, then costs is the one area where you can secure some improvement in the benefit that is acquired through contributions.
My noble friend Lord McFall also highlighted the absence of competition in the annuity market. I referred to this in a report that I produced for the Treasury in 2001. This continues to be a very serious problem, particularly for people with only modest amounts to acquire annuities. I would like to suggest to the Minister that the Debt Management Office seriously considers offering annuities. It is another form of funding. It has different features from lending, but essentially a capital sum accrues to Government and a rate of return is paid to the subscriber of that capital. Therefore, it is not unlike a gilt-edged security. The Government have no concerns about operating in the fixed-income issuance market, so why should they not also be funding themselves through annuities? At least they could examine that as a force for change and better value from the private sector.
I believe that NEST is being unreasonably hindered by its inability to act as an aggregator for small funds. That is something that the Government can do. Quite frankly, the private sector is not very interested in aggregation of small balances, so there is no obvious market for that. It is very much a seller's market in terms of pricing. As my noble friend Lady Drake has already reminded us, NEST has clearly played a very important role in improving the governance of pension schemes and improving the pricing of the pensions product. I pay great tribute here to Tim Jones, the
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My final observation relates to occupational pension schemes as owners of companies. There has been a complete failure of institutional ownership, which lies at the heart of so many of the problems that we have in the private sector, including the hot potato of bonuses, with which I see the coalition Government struggling, and which reminds me of my own days in trying to resolve that issue. There has been a dilution of ownership and a dilution of a sense of responsibility on the part of investors. NEST is seeking to correct that, but the Minister, as a former investment banker, must be very well informed on these issues. In the past, organisations such as the National Association of Pension Funds with Mr David Paterson and the Association of British Insurers with Mr Peter Montagnon have done sterling work in governance and stewardship, but their effectiveness is being diminished by the fact that the pension schemes now represent a much smaller part of the ownership of UK companies. There is a major lacuna there in the economy.
I was disappointed that the Secretary of State for Business's Statement recently on bonuses and pay did not say a great deal about making shareholders more effective in the performance of their duties as owners. I hope that the Kay review, which is due to publish an interim report in the next few days, will, as the noble Baroness, Lady Wilcox, assured us yesterday, address the issue of shareowners as responsible owners, including putting them at the fore in an active way in choosing boards of directors and sitting on nominations committees.
Lord McKenzie of Luton: My Lords, like all noble Lords who have spoken, I am grateful to my noble friend Lord McFall for initiating the debate and especially for his role in chairing the Workplace Retirement Income Commission. In six minutes it is impossible to do justice to its recommendations or the subject of our debate. This is an important piece of work which builds on the earlier deliberations of the Pensions Commission, although the noble Lord is right to highlight the change in circumstances in the few years since the commission reported.
Clearly, the economic environment has changed for the worst-a bleak dawn, as my noble friend called it-where real incomes have fallen, confidence in long-term savings is low and real interest rates are negative. At the same time, people continue to live longer. There is both an imperative to save and an expectation that consumers will do their bit to sustain GDP. Low interest rates have pushed up the value of liabilities of DB schemes, making funding more difficult with greater risks on employers. The noble Lord, Lord Freeman, spoke on that. For the DC environment, low interest rates have meant lower annuity rates and slower build up of capital, with the risks falling on individual savers. So it is little wonder that we have seen the number of employees in private sector workplace schemes
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The need to sustain and reinvigorate pensions is clear and the proposition to do this via occupational schemes is to be supported but we would be cautious about how employers should be engaging with employees on pensions and other savings, as this was certainly a bone of contention when auto-enrolment was planned with a distinction between giving advice and providing information. As the noble Lord's commission identified, although not a panacea, the recommendations of the Pensions Commission provided the foundation for reinvigorating occupational pensions. The components are well known, if complex, as the noble Lord, Lord Stoneham, said: a more generous state pension, flat-rating of S2P and the introduction of auto-enrolment. However, as we heard, things have moved on and we now have the coalition Government's proposals for a simpler, single-tier pension to consolidate the two components of the state pension and resources from pension credit. A higher state entitlement and the squeezing out of at least some means testing will clearly provide a platform to encourage further saving, but the proposition is not without its technical challenges. Perhaps the Minister will give us an update on the current plans. What work streams are under way to achieve this and what is the planned phasing of the introduction?
The Government are to be congratulated on sticking with auto-enrolment, although we express our disappointment at the deferred start date for smaller companies and at the fact that it will not be until 2018 that the full employer rate of 3 per cent comes into effect. A number of noble Lords identified that the 8 per cent would have to increase over time. Because the Government are raising the earnings figure, now heading north of £8,000, yet more people will miss out.
Like my noble friend Lady Drake, I urge the Minister to confirm that there will be no further delay in the implementation of auto-enrolment. It has the potential to change the occupational pension landscape, although, as my noble friend Lord Hutton said, it is too early to judge. This is linked to the success of NEST, which has the clear remit of delivering a national scheme with low charges. It has been constrained in its construct as part of the consensus that underpins the Pensions Commission's reforms. The removal in due course of the prohibition on transfers in, and of limits to annual contributions, argued for by my noble friends Lord Myners, Lord McFall and Lady Drake, will certainly be right.
A range of other technical issues would help encourage pension savings. New rules facilitating the cashing in of small pension pots-which would give special help to women-tackling short-service refunds, and changing the rules on enhanced transfer values, will all help. We will support the Government as they tackle these measures. We were promised a bonfire of regulations-from the trivial to the huge-by the Pensions Minister. Perhaps the Minister will give us a clue to what is included in the "huge" category, and how this will help to invigorate pension saving.
There is a lot in place or coming on stream that can make a difference, but we agree with my noble friend that there is much that the industry also must do to address fee levels and structures, and secure greater transparency and a more flexible annuity market. The Minister was given novel suggestion by my noble friend Lord Myners. All the measures are vital, particularly if DC schemes are to take the strain of a challenged DB regime. They are also vital if reputations are to be enhanced and confidence generated. The Workplace Retirement Income Commission stressed the need to develop products for DC schemes that mitigated the risk for individual members. This raises issues of collective DC, hybrid schemes and potentially many more, including the consolidation of a range of smaller schemes. Of course, it depends on whether the risk to be shared is the investment risk or the longevity risk. The development of such products and the complexity that they might bring sharpen the need to address the governance of DC schemes.
In conclusion, I congratulate my noble friend Lord McFall again on the work of his commission and on stimulating the debate tonight. As the report says, pension policy needs to be considered in a long-term context of 40 to 50 years-certainly longer than the routine political cycle. An independent pension commission would help sustain the changes that are needed.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud): My Lords, I join other noble Lords in paying tribute to the noble Lord, Lord McFall, and congratulating him on securing this important debate on reinvigorating occupational pensions. I am sure that noble Lords will join me in thanking him also for the skill and diligence that he showed as chairman of the Workplace Retirement Income Commission. The report was a fascinating read. It proposed recommendations on how industry, employers and the Government can strengthen workplace retirement saving. More importantly, I am relieved to see that in most of these areas the noble Lord and I are in much the same place.
The pensions landscape, which is always fluid, will see a huge change again in 2012 with the introduction of auto-enrolment, which presents a once-in-a-lifetime opportunity to transform our savings culture. However, if we are looking to reinvigorate occupational pensions, we need to go further than this. We need to build public confidence that such pensions are value for money; increase employee engagement in retirement saving; and motivate employers to provide good pension vehicles. None of these goals is easy, and they have become a lot more difficult recently.
In the past 25 years, life expectancy at 65 has increased by six years for men and five years for women. That is great news generally, but poses serious financial questions. Saving is in sad decline. In 2010, 13 million jobs had no pension provision-an increase of 2.5 million on 1997. The noble Lord, Lord Myners, uttered a lament for the occupational pension. We have seen falling annuity rates, increased longevity and a fall in the rate of return on equities. My personal belief is that some of us in this generation had a free
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Only one in three private sector workers is contributing to a workplace pension. Other noble Lords cited different figures but basically, if one wants a £15,000 pension, it will require £300,000 of capital outlay to fund. That brings home very starkly the challenge of getting people to invest in a pension.
First, we must change attitudes towards pensions as a whole. Many people find pensions too complex, the incentives to save unclear and the expected retirement incomes unknown. For these reasons, the state pension needs to be reformed to provide a simpler, clearer foundation to support those saving for retirement. That is what the proposals in the Green Paper A State Pension for the 21st Century outlined: a simpler, single-tier pension set above the basic level of the means test as the primary option. I can update the noble Lord, Lord McKenzie of Luton, that, should we decide to proceed, we will set out further details as part of a White Paper in accordance with the usual process.
Nevertheless, around 7 million people are not saving enough to deliver the pension income they are likely to want, or expect, in retirement. With automatic enrolment, we will start to see a behavioural change requiring all employers to enrol all eligible workers into a workplace pension scheme. I welcome the introduction of the National Employment Savings Trust as a simple, low-cost pension scheme designed to fill a gap in the market for employees on low to moderate earnings. We are already seeing NEST acting as a beacon of best practice to other providers and encouraging high standards of governance, responsible investment, effective communications and low charges. A number of noble Lords raised the issue of the shackles on NEST. We will keep that balance between competition and choice very much under review. In response to my noble friend Lord Freeman, I am pleased to report that last week the department began its communication campaign to alert individuals and employers to the reforms and to ensure that tailored information is received by those affected.
On top of this, we must restore public faith in the concept of pension saving and, behind this, pension charges are key. Individuals who perceive their charges to be high are less inclined to save, so I welcome efforts by the National Association of Pension Funds to bring the pensions industry together to improve transparency of charges information for customers and employers. My department will offer its support to ensure that real improvements are made. It is also worth bearing in mind that since departmental research places the average annual management charge in default funds at between 0.4 per cent and 0.6 per cent, with none found higher than 0.9 per cent, the case for rushing into a charge cap without due consideration carries less weight. This is especially as new entrants
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As noble Lords have pointed out, there are a lot of small pension pots. There are more than 1 million small pension pots valued at less than £2,000, and automatic enrolment will clearly increase that number further. This is a serious hazard for individuals who want to build up their pension saving. Small pots are easy to lose track of and difficult to aggregate due to the cost and complexity of transferring pension schemes. In December 2011, the Government released the consultation paper Meeting Future Workplace Pension Challenges: Improving Transfers and Dealing with Small Pots, in which potential solutions are set out to address this issue. These include radical proposals such as an automatic transfer system in which pension pots could move with the individual from job to job or be consolidated in one or more aggregator schemes.
Individuals also need to get best-value outcomes. The Government believe that individuals are likely to get the best deal by shopping around on the open market and exploring options from a range of providers before purchasing an annuity. We have been working with consumer groups, industry representatives and other government bodies to bolster the current right to the open-market option by developing a default open-market option. The Association of British Insurers is currently consulting on a new draft code of conduct which supports this aim.
One area where standards must improve is on incentivised transfer, where members of perfectly sound defined benefit schemes are being offered cash incentives to transfer out of, or modify, their existing pension arrangements. It often results in members receiving less generous arrangements and thus lower retirement incomes. We are therefore working with the Pensions Regulator and the Financial Services Authority to develop an industry-wide code of practice which will cover all forms of incentivised transfers to ensure that these practices, when appropriate, are done fairly and transparently and are communicated to the member in a balanced and easily understandable manner.
We need to make it easier for employers to provide good-quality pension provision for their workers. To help deliver this, we aim to make it easier for employers to restructure their pension arrangements without requiring the employer to pay the difference between its assets and the cost of buying out the scheme's pensions.
The department's private pensions legislation will also be the focus of the red tape challenge. In response to the noble Lord, Lord McKenzie, I say that this is a cross-government initiative that seeks to revoke or simplify as much legislation as possible to ease the burdens on employers and business. We will use this opportunity to look objectively at pensions policy and consider whether the legislation as it stands reflects the department's priorities and is fit for purpose.
The Pensions Regulator has set out its principles for what a good defined contribution scheme looks like, to establish standards for design and governance
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Looking further ahead, we need to build on the good work that the consensus of previous years has achieved. We should consider the role for government in determining scale and ask ourselves whether the high fragmentation of the UK pensions market offers good value, or whether a smaller number of larger schemes could offer lower charges and higher governance, to the advantage of members.
As defined benefit continues to wane, we must take opportunities to study alternative risk-sharing arrangements, such as systems that I might term "defined ambition". Here the schemes aspire to a set level of benefits, rather than making a firm promise as our defined benefit schemes currently do.
We must also consider how to encourage automatically enrolled individuals to save more where they can. The minimum 8 per cent contribution should be considered as it is described-a minimum. Options such as automatic escalation, in which pension contributions increase in line with member salaries, have merit and are worthy of close examination.
I feel confident that 2012 represents a step change in how pensions in particular, and saving in general, are perceived by the public. I thank again the noble Lord, Lord McFall, and I hope noble Lords will join me in acknowledging that we have taken great strides in reinvigorating our pension system for the future.
In section 194(10) of the Legal Services Act 2007, after ""civil court" means", add "the Supreme Court,"."
Lord Pannick: My Lords, Amendment 171A is surely the least controversial of all the many amendments to this Bill that are being debated. It proposes an amendment to Section 194 of the Legal Services Act 2007. Section 194 is a very useful provision. It recognises that members of the Bar and solicitors frequently act pro bono for clients in legal proceedings-they charge no fee. This is of course to their great credit and to the enormous benefit of the legal system as a whole, as well as of their fortunate clients.
Some of our debates on this Bill have involved criticism of lawyers, some of it justified. We should take a moment to note that many lawyers act regularly in a wholly creditable manner by providing people with legal assistance when there is no funding, and without that pro bono assistance justice would simply
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Section 194 addresses this situation. It confers power on the court in civil cases to order a person, normally the unsuccessful party, to pay a sum in respect of the notional costs to a charity prescribed by the Lord Chancellor. The charity prescribed is the Access to Justice Foundation, which distributes the funds paid to it to voluntary organisations providing free legal support for individuals and communities.
Section 194 of the Legal Services Act 2007 was promoted by the efforts of the noble and learned Lord, Lord Goldsmith, who I am delighted to see in his place. As Her Majesty's Attorney-General, he promoted this valuable provision. He is now chairman of the Access to Justice Foundation and I pay tribute to his considerable efforts in encouraging and supporting pro bono work done by lawyers.
Section 194 has one small defect; it applies to the county courts, the High Court and the Court of Appeal but it does not apply to the Supreme Court. There is no sensible reason for not conferring this valuable power on the Supreme Court to make orders for payments to the prescribed charity in appropriate cases. Indeed, many cases in which lawyers act pro bono are the Supreme Court.
Justices of the Supreme Court and the Supreme Court users group have expressed the view that Section 194 should apply to the Supreme Court as it does to other courts. I hope that the Minister will be able to tell the Committee tonight that this omission will now be rectified. I beg to move.
Lord Goldsmith: My Lords, I very much welcome this amendment and thank the noble Lord, Lord Pannick, for having taken the opportunity to move and to promote it. He has already explained my particular interest as the now chairman of the charity that receives money made under these orders, which I prefer to call pro bono cost orders rather than Section 194 orders, because that is what they are. They are cost orders in the same way as the court grants costs in any other case. It is just that they do not go to the lawyers; they go to this charity which then distributes them. I should also declare an interest as the non-executive president of the Bar Pro Bono Unit and patron of the National Pro Bono Centre, two organisations that might-one of them certainly has-receive some of the grant money.
As the noble Lord has explained, the reason for these orders is the so-called "indemnity principle" in our costs regime. The indemnity principle means, first, that the court can order one party to pay the other party's costs but only if that party is liable for those costs. In pro bono cases, the body is not liable for
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Secondly, there is no incentive to settle cases, which there often is in English cases, when there is a possible liability to costs at the end of the day. We have seen in a number of cases how that affects whether cases are settled; insurance companies and corporations will pay to a deserving claimant because they know that at the end of the day they will have to bear some costs if they do not.
Thirdly, it has proved to be a very valuable source of additional money for voluntary organisations providing pro bono services. I am very grateful to the noble Lord, Lord Pannick, for paying tribute to the lawyers-solicitors, barristers and legal executives-who do this for free and without payment. When I established the Bar Pro Bono Unit, I asked whether members of the Bar would be prepared to commit to three days of free unpaid work a year, and straightaway I had an overwhelming response. People are prepared to do this, and that is a great credit to them.
I have one thing to say to the Minister, which I always say when talking about this subject: this is not a substitute for a properly funded legal aid service but an adjunct to it, and a very valuable one. However generous a system might be, and we hope very much that the noble Lord will produce a more generous system at the end of the Bill, there will still be a need for this unit. However, as the noble Lord, Lord Pannick, has explained, there is a gap in that the House of Lords is not covered-
Lord Goldsmith: I am sorry, the Supreme Court-how outdated I am. To fill that gap would be very valuable. My understanding, like that of the noble Lord, is that the Supreme Court would welcome this. That is not surprising because the president of the Supreme Court is the noble and learned Lord, Lord Phillips of Worth Matravers, who, when he was Master of the Rolls in the Court of Appeal, was instrumental in passing the earlier Bill, but no doubt the Minister can confirm that. If not, his unsleeping department will be able check it instantly. I strongly support the amendment and hope that the Government will be able to accept it.
Lord Bach: My Lords, very briefly, we support the amendment. The expression "no brainer" has been used on a number of occasions. It is not an attractive expression, but it is surely one that applies to this amendment.
The Minister of State, Ministry of Justice (Lord McNally): My Lords, I am grateful to the noble Lord, Lord Bach, for his intervention, and to the two noble Lords who contributed to the debate. The role of the Ministry of Justice in pro bono work is undertaken in
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Let me say first that the Government recognise the valuable contribution made by the legal profession in providing advice through pro bono work. The pro bono contribution made by the legal profession is made alongside publicly funded legal assistance. It is an adjunct to, not a substitute for, such assistance. I think that these speaking notes must have been left over from one of the briefs of the noble and learned Lord, Lord Goldsmith.
Lord McNally: My Lords, Section 194 of the Legal Services Act 2007 allows courts to make an order for costs against a losing party in pro bono represented cases, with the moneys recovered going to a prescribed charity, the Access to Justice Foundation. The Ministry of Justice works with the Attorney-General who, as I have said, has policy responsibility for this work. The legislation reduces the disadvantage to parties represented pro bono by levelling the financial risks of litigation for both sides. It has also provided a new source of funding for the strategic support and promotion of pro bono work.
I am extremely grateful to the noble Lord, Lord Pannick, for highlighting this issue. The amendment, though, is one that the Lord Chancellor would like to consider further. Perhaps I may say that considering it further does not mean kicking it into the long grass or even making it a no-brainer, but it is one that needs proper consideration, and he has asked that, in that respect, he be given time to give it that consideration. I hope that the indications of support given in the Chamber tonight, the general direction of travel of this reply and my desire to make this a full house in terms of saying nice things about amendments that the noble Lord, Lord Pannick, has introduced today will give him confidence that what I have said is not a way of putting this matter into the long grass but of asking, as my briefing note does, that the Lord Chancellor be given time to give full consideration to this important matter. I see both the noble and learned Lord and the noble Lord coming for me.
Lord Goldsmith: One issue that we have looked at is whether it would be necessary to have any orders or consequential provisions made as a result of this change. I understand that, because of the existing Supreme
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Lord McNally: The wonderful thing about this House is that you get free legal advice. I will certainly take that back to the Lord Chancellor with the weight of the advice of the noble and learned Lord, Lord Goldsmith, behind it. With that further steer, I would be grateful if the noble Lord, Lord Pannick, withdrew the amendment.
Lord Pannick: I am very grateful to the Minister. I will of course withdraw the amendment. I am very grateful to the noble and learned Lord, Lord Goldsmith, for his support, as I am to the noble Lord, Lord Bach, for his. It would indeed be churlish of me not to understand and accept the indications given by the Minister in respect of the amendment, which is plainly receiving far warmer consideration than some of the other amendments that we have discussed. I have to say that I cannot understand what further consideration is necessary in relation to an amendment of this sort in the light of the factors to which this debate has drawn attention, but on the understanding that this matter is receiving proper attention, in the hope that the Government will be able to bring forward an amendment in appropriate terms on Report and in thanking the Minister, I beg leave to withdraw the amendment.
Lord Ponsonby of Shulbrede: My Lords, the amendment would give all victims the right to be told about sentences passed in the courts. Yesterday, the Government launched a consultation document called Getting it Right for Victims and Witnesses. In the opening sentence, the Lord Chancellor states:
In paragraphs 72 and 73, he makes it clear that it is his intention to opt in to a new EU directive on rights and support for victims of crime. He states also that he believes that victims are entitled to be treated with dignity and respect, and, crucially, that victims should receive information. That is the crux of the amendment. I have no doubt about the Government's good intentions in this matter.
At present, once a case has been concluded, either in the courts or in an out-of-court settlement, there is no guarantee-and certainly no formal mechanism-to ensure that that the victim of a crime, if they so wish, is informed of the outcome of the case. In the Crown Court, there is a duty on the probation service to contact victims and their families after someone has been imprisoned for 12 months or more for a sexual or violent crime, but there is no obligation for less serious offences. I felt that it would make sense to put this new duty on the prosecuting agency on behalf of the victim rather than on the Courts Service itself. I did that because the prosecuting agency will already have the contact details on its files, and of course it already informs victims of the progress of their cases as they come to court.
The current situation can be remedied by the introduction of a victim information order where a sentencing Bench can order the prosecuting agency to give victims information concerning the sentence itself, the reasons for that sentence, if it is a community order what they are likely to carry out within that order, the commencement and completion of that order and any compensation that may be paid. At present, the victim's views in court are part of something called the victim impact statement. Victim impact statements are a valuable source of information for any sentencing Bench but they are, in my experience, rare. I have been a magistrate for six years and I have read an impact statement only about four or five times, so they are not used very much. They should be used more and they could be used to request a victim information order. Through that mechanism, the victim could ask the court to make sure that they are told about the outcome of the sentence.
Whether a victim impact order is made should ultimately be at the discretion of the court, and the court should of course have regard to any cost of making such an order. The only possible objection that I can see to my amendment is the likely cost of making such an order. I would be interested if the Minister could give any information about the likely cost of such an order given the Government's expressed intent to put victims at the heart of the criminal justice system.
All noble Lords taking part in the Bill will know that there are many organisations representing victims. I have been contacted by a number of them, as I am sure have other noble Lords. They all essentially make the same point, which is that the lack of contact between victims and agencies such as the police, the courts, the prosecution services or the probation service is very often perceived as a lack of action by those agencies. In many cases that is the wrong perception
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Baroness Quin: Amendment 172B is in my name and that of the noble Lords, Lord Ramsbotham and Lord Wigley, and relates to Clause 61. I tabled two more amendments in the same group with the support of the noble Lord, Lord Wigley, Amendments 178ZA and 178ZB, which are similar to the first amendment and relate to Clauses 86 and 95. Even though my noble friend spoke on a slightly different aspect, I associate myself with his comments and with his concern for victims.
Although I do not have a financial interest to declare, I was prompted to table this amendment by some work that I did some years ago with the Prison Reform Trust. We were part of a project called No One Knows, which looked at the experience of people with learning difficulties and learning disabilities in the criminal justice system. I chaired the project's advisory group, which brought together people with knowledge of issues from various spheres, including members from Mencap, healthcare professionals, people involved in social care and learning and skills, and various practitioners and academics. We were also helped in that work by the Working for Justice Group, a group of people who have direct experience of the system and whose first-hand knowledge was invaluable to us.
The project produced what I hope was an authoritative report, Prisoners' Voices, which was well received by Ministers at the time, who undertook to look at our recommendations. I am pleased to say that both the previous Government and this one have taken some action on those recommendations; in particular, we are about to have more of a proper screening programme in the prison system to identify people with learning difficulties and disabilities. There have been improvements in the training of prison officers in this respect, and the very welcome recent development of some offender behaviour programmes recognising these particular issues. In addition, the Easyread system is being adopted in various parts of the criminal justice system, to increasingly good effect.
However, I believe strongly that further improvements and commitments in this area are necessary, certainly as far as the courts are concerned, which explains the tabling of these amendments. I am very grateful to the noble Lords, Lord Ramsbotham and Lord Wigley, for their support, particularly on an issue such as this, where I recognise their keen interest and experience. I am also grateful to the noble Lord, Lord Wigley, for signing the other two amendments that I mentioned. It is perhaps particularly appropriate because I know that the Prison Reform Trust's report, Prisoners' Voices, has been taken very seriously in Wales. The previous Health Minister in Wales, Edwina Hart, was part of the launch in Wales of the report and the measures that we wanted to see adopted.
I am also aware that Mencap and the noble Lord, Lord Rix, had very similar concerns about this part of
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