Universities UK argued consistently that existing exemptions are inadequate, but also made it clear that universities are certainly not hostile to the Freedom of Information Act, or to greater openness in research. Universities have in fact done a great deal to ensure that the majority of FOI requests are complied with. A recent survey carried out for Universities UK by Jisc showed that universities complied with 63% of FOI requests in 2010. There have also been real moves towards further openness in research through a commitment to open access. Most universities have a repository that could be used to showcase and share all their open-access publications, as well as doctoral theses and other material. Increasingly, such repositories are also used to support research management and reporting. UK universities, backed by the Government and funders, are leading the way internationally in providing free online access to research publications and data.

Having said that, universities are fairly unusual among the so-called “public authorities” that are subject to the Freedom of Information Act. As independent bodies that are decreasingly reliant on public funds, they also operate in a highly competitive environment. I do not believe that the Freedom of Information Act fully anticipates the complications that arise when dealing with FOI requests in the university context. This has been demonstrated to good effect by a number of recent cases involving university research.

Until now universities have had relatively few requests for information relating to research, but this appears to be changing. Recent high-profile instances illustrate how FOI requests can be used to intimidate researchers working in controversial fields or to gain competitive advantage. To give one example, during the passage of the Protection of Freedoms Bill, I understand that the University of Oxford received a request for research data from a large nationwide health study, submitted by a company with a significant commercial interest in it. Although the request was subsequently not pursued, the research group lost significant research time in attempting to rebut the request, and the university incurred significant legal costs in the process.

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Universities UK has examples of academics who received FOI requests relating to ongoing research from people who they believed to be their academic competitors. Queen Mary, University of London, had a case where research data was requested while the analysis was still being undertaken. They feared that releasing the data would lead to their losing the chance to publish their own results in respected journals. Like all universities, it pointed out that publications are vital in the assessment of quality as part of the research excellence framework, and of course in attracting future funding. Universities argue that if research data are made public prematurely, before the normal scrutiny and challenge of the peer-review process, it could not only undermine an individual or an institution’s reputation for quality but lead to misleading information and data getting into the public domain.

I do not believe that this was how the Freedom of Information Act was intended to work, and I do not believe it is in our national interest that this situation should be ignored. I warmly welcome the fact that the Government are acting now to prevent such damage occurring.

1.57 pm

Lord Young of Norwood Green: My Lords, I start by thanking the Minister and noble Lords from around the House for what has been an extensive and very interesting debate. As I look around I see that a number of the usual suspects have been rounded up. I was actually a bit surprised that the noble Baroness, Lady Buscombe, is not in her place, as she said that we had not done anything on it. I spent at least three months of my life, together with a few others, examining the sheer delights of the Digital Economy Bill. We might not have got it all right; it was an unfinished work, as it ended up being decimated in the wash-up. Nevertheless, we understood and recognised the importance of this area of policy.

I, too, congratulate the noble and learned Lord, Lord Walker, on his maiden speech. It is a reincarnation and a giving-up of a 10-year vow of silence. He has an advantage on me; he obviously has some O-levels. I did not have any. I can only reflect that I once came second in a chemistry exam, but the remark on my report was, “Amazing. His behaviour in class is not so good”. It has lingered with me for 60-plus years. I am sure that the noble and learned Lord will make a very powerful contribution, given his experience in the area of patents.

I think it was my noble friend Lord Stevenson who said that this is a slim Bill. My experience is that it can soon become obese, given the weight of amendments that it is likely to attract. It makes important changes to the UK design framework in line with some of what was proposed in the Hargreaves review. Measures that we have already heard about include changes to the scope of design, the protection and ownership of design, new routes of appeal against decisions made by the registrar relating to design, a power for the Secretary of State to provide for a non-binding opinions service—as a number of noble Lords have said, a very welcome provision—and provision for the inspection of documents. The Bill puts in place provisions to allow the UK implementation of the Geneva act of the

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Hague agreement. Most of these provisions are straightforward and positive and go some way towards strengthening and clarifying the framework, although we fear that they might not go very far in addressing the complexity of what the Hargreaves report referred to as a “patchwork of protection”.

The Bill amends the law relating to patents to enable patent owners to provide public notice of their patent rights; to expand the circumstances in which the IPO may issue an opinion in relation to patents; to allow the IPO to share information on unpublished patent applications with international partners; and to provide for the agreement establishing a unified patent court—a provision which seems to have met with universal approval around the House today and on we should congratulate the Government. An interesting question about whether there would be two courts was posed and I have no doubt that the Minister will pick it up. The noble Baroness, Lady Brinton, mentioned lower-value patents and keeping those costs down, which is also very important.

Finally, as we heard from the noble Baroness and from my noble friend Lady Warwick, Clause 19 introduces an exemption into the FOI Act in relation to research and a duty on the Secretary of State to report to Parliament on how the IPO’s activities are supporting growth and innovation, both of which we support. The idea of reporting on growth and innovation was commented on by a number of noble Lords, including my noble friend Lord Browne. Both the extent of the report and whether this idea could be extended were raised. I do not think that I need go any further on research and the FOI Act, because they were covered extensively by my noble friend Lady Warwick and the noble Baroness, Lady Brinton.

Much of what is proposed in the Bill is intended to simplify the law and to ensure that it is understood, enforced and better supports innovation. As my noble friend Lord Howarth said, an interesting balance needs to be achieved between the desire to reward creativity and innovation and ensuring that competition and further innovation are not stifled. That will be a difficult judgment for us to make, and probably one of the most crucial, as we take the Bill through its Committee stage. The devil will be in the detail and we will ensure that the Bill gets the scrutiny it deserves.

We will look at each clause in detail to see how the Bill may be improved, and I must admit that I have some sympathy with the Minister as he tries to deal with the range of issues that have already been raised. Another issue which came up in relation to innovation versus competition was the domination of Microsoft over the years. Of course, it has not been total domination, as open source software, Linux and other systems became available. The noble Baroness, Lady Buscombe, made a strong contribution to the debate on the power of the search engines. It was interesting, but I was not quite sure that I grasped what her solution would be to that world domination—no doubt that will emerge in Committee.

There was a significant difference of opinion on the key issue of whether to criminalise in relation to registered designs—the noble Lord, Lord Clement-Jones, wanted the offence to include unregistered designs as

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well. As I listened to the noble Lord’s comments on that, one thought occurred to me: why do we not do something about the cost of registering designs? I would welcome the Minister’s comment on that. In this day and age where most things are being dealt with online, it should not be beyond the wit of man to reduce costs in this area; and if we are serious about stimulating the creative industries then we should be able to do so. A number of noble Lords expressed concern about extending criminality in this area. At this stage, all we would say is that we will pursue this matter extensively in Committee to see whether there are clear definitions and whether criminality is capable of being limited to those few examples of deliberate attempts to pirate and then copyright the theft.

The Minister referred to the small claims track into the patents county court. We welcome that as a useful step forward.

We share the Government’s view about the importance of the creative industries. Although there has been a lot of government rhetoric on this topic, enough is still not being done to support this essential sector of our economy. The Bill will of course play a part, but we have to recognise that the creative industries account for 3% of the UK economy and provide some 1.5 million direct jobs. They are one of the great success stories of our country and a driver for jobs and growth, yet there are concerns that they could be left behind without a clear strategy and leadership on the part of this Government.

This is a broadly positive Bill which we will engage with constructively and seek to improve. However, on its own, it is not up to the task of rebuilding our economy and creating growth in our industries, although it will play a significant role.

2.07 pm

Viscount Younger of Leckie: My Lords, I thank all noble Lords who have taken part in this debate. It has certainly been wide-ranging and interesting, and I particularly welcome the support for the Bill from all sides of the House. Many points were raised and I shall do my best to address them all. If I am unable to do so, I shall write to the Peers concerned.

I first pay tribute to the noble and learned Lord, Lord Walker of Gestingthorpe, for a splendid maiden speech. He clearly demonstrated to the House his long and distinguished legal experience and knowledge with the wise words that he spoke on the unified patent court. I am delighted that he has chosen the Intellectual Property Bill as a platform from which to relaunch himself into this House. We look forward to hearing more from him in Committee and onwards.

I thank my noble friend Lord Sheikh for his supportive comments on the purpose behind the Bill and how its provisions support that purpose. He raised the issue of an opinions service for designs and asked whether this might be extended to cover unregistered designs. I welcome his support to this effect. The law has been crafted in such a way as to allow this service to cover both registered and unregistered designs. As my noble friend will appreciate, details of how the service will operate will be set down later in secondary legislation.

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On this subject, the noble Lord, Lord Borrie, asked me to confirm that the cost of an opinion would be a “modest” £200. I welcome his positive comments about the opinions service. As he mentioned, the Government’s response suggested that a fee of £200 would match that for the existing and well used patent opinions service. This will be subject to consultation, as will other details of how the service will operate.

My noble friend Lady Buscombe, in giving broad support to the Bill, made some interesting points about some of the powerful players in our digital age—she referred to them as “content aggregators”. The clear message is the need, which I agree with, to improve the quality of the content. They should have a responsibility and a moral duty to run their businesses reputably.

In respect of the search engines and creators it is important to acknowledge the value of both. The Government are in discussions with the industries, with both groups, to tackle online infringement of copyright, including responsible online advertising. I therefore value the points that my noble friend Lady Buscombe made today.

I thank the noble Lord, Lord Browne of Ladyton, for his many comments. He made an important point about celebrating this IP Bill as an important area of law that affects the whole of the UK, and I welcome his comments about the importance of the union to Scotland. This Bill is UK-wide and the Government hope that people across the UK will welcome the benefits to business that it will bring.

The introduction of criminal sanctions for the deliberate copying of a UK or EU-registered design was mentioned, which resulted in a lively debate. The noble Lord, Lord Stevenson, raised the question of the rationale for criminalising design theft and asked why the existing remedies are not enough. Extending criminal sanctions to registered designs will give them the same level of protection as the infringement of copyright and trade marks. This will create a coherent approach to enforcement and protection and also recognises that the creativity of design is as important to the UK economy as music protected by copyright and brands protected by trade marks. Creating a criminal offence for the copying of a registered design could help to reduce the scale of design theft in the UK. It will do so by acting as a deterrent against those who deliberately copy the designs of others.

The Government recognise that this is finely balanced and that there are arguments on both sides. Indeed, the noble Lord, Lord Howarth, alluded to that balance in his fine speech. Nevertheless, we believe that the Bill as drafted will provide strengthened protection for the design sector but in a measured and clearly defined way that does not prevent follow-on innovation by those genuinely seeking to create new designs.

The noble Lord, Lord Stevenson, and my noble friends Lord Clement-Jones and Lady Buscombe asked about the rationale of the policy for not including unregistered rights. The offence covers registered designs because the existence of a registration certificate gives a particular starting point, including what the designs looked like, who they belong to and when the right started. That information is not so readily available, as noble Lords

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might appreciate, for unregistered designs, making it more difficult for the designer to prove and for the authorities to act on.

My noble friend Lord Clement-Jones raised a concern about the level of penalties for certain offences and asked why the Government had not addressed certain discrepancies in the level of financial payments available in magistrates’ courts for trade marks and copyrights. Sections 85 to 87 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 make provisions to raise the maximum fines available in magistrates’ courts. The Government are working to implement these provisions, which will take effect with regard to all offences.

My noble friend Lord Clement-Jones, supported by the noble Earl, Lord Erroll, raised the issue of 2-D and 3-D and asked specifically whether the Bill would mean that 2-D works would be treated differently from 3-D works. This situation arises because copyright protection, which is currently covered by criminal sanctions, applies to, for example, a design drawing but not to a design made from that drawing. In proceeding in the way that we have, we have recognised the difficulties associated with proving matters such as subsistence and in relation to those rights, but there are also other issues not associated with copyright that need to be considered. For example, unregistered design rights can be exploited legitimately subject to licensing agreements by third parties for the last five years of their existence. This could be jeopardised if criminal sanctions applied before that period. For example, we know that 2,097 applications to use designs in the last five years were filed in 2012.

My noble friend Lord Clement-Jones asked rather mischievously whether the motivation behind introducing criminal sanctions for registered designs was to increase the income from the Intellectual Property Office by encouraging registration. I reassure the House that that is not the case. The measures in the Bill will protect designs registered both in the UK and through EU Community-registered design.

The noble Lord, Lord Stevenson, raised the matter of the unified patent court and asked whether this would not be an area where my right honourable friend the Prime Minister would seek an EU opt-out. I suggest that the noble Lord, Lord Howarth, was encouraging me to give a broader view of our European position, but I will not be drawn on that particular matter. The unitary patent is an important part of the Government's internal market and growth agendas. The Prime Minister has made it very clear that he wants Britain in the EU and he wants to maintain our influence in shaping the debate on the things that really matter; for example, reducing burdens on business and encouraging growth. The unitary patent court agreement is an agreement negotiated by all member states that have chosen to be part of it. The Government have signed up to the agreement because we believe that it would be good for UK businesses—clearly, I have been drawn on that to a certain extent after all.

The noble Lords, Lord Stevenson and Lord Browne of Ladyton, raised an interesting point about Scotland and the unified patent court. I can assure them both that the Government are working very closely with the

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devolved Administrations to ensure that the needs of users throughout the United Kingdom are considered. Ensuring local access to justice is a key element of the unified patent court and that is why the agreement makes provisions for setting up local divisions of the court. These local divisions are in addition to the central division, part of which will be hosted in London. I believe that the noble Lord, Lord Browne, alluded to that in his speech. The UK could host a local division and it would be possible to host more than one if the level of case work is high enough to require it. The UK would be expected to pay for the facilities such as the building, IT equipment and administrative staff of any division that we host.

The noble Lord, Lord Stevenson of Balmacara, raised the question of copyright and root-and-branch reform. I want to address this particular question because it was raised by the noble Lord, Lord Howarth, as a broader, more overarching matter relating to our intentions for intellectual property. I am grateful to the noble Lord, Lord Stevenson, for his acknowledgement that the intellectual property framework must change to promote innovation and protect creators. In that important interest, he suggests that root-and-branch reform of copyright is needed with proper consideration of evidence. What he proposes, however, is a major undertaking and the Government, in the light of the Hargreaves review, have committed not to undertake any further major review into intellectual property in this Parliament. We want to make progress with the measures that we have already put forward.

My noble friend Lord Clement-Jones expressed concern over the Intellectual Property Office’s ability to revoke patents, which the Bill will allow through the patent opinions service. The power will be to initiate revocation proceedings against the patent if an opinion concludes that it lacks novelty or an inventive step. That does not mean that the patent will be revoked straight away, and a provision is made so that the patentee can request a review of the opinion as well as an appeal of any review. The patentee will also have the opportunity to make observations and amendments to the specification and any decision to revoke a patent will be appealable to the High Court. The power will mirror the power that the Intellectual Property Office already has to revoke patents under Section 73(1) of the Patents Act 1977.

My noble friend Lord Clement-Jones and the noble Lords, Lord Stevenson and Lord Browne of Ladyton, raised the issue of the annual report of the Intellectual Property Office, spoke of the proposals in the Bill for reporting and suggested that the scope for reporting is somewhat narrow. There were suggestions that the clause on the Secretary of State’s reporting duty could contain an explicit commitment that the Government will report on how the IPO's activities have supported IP businesses with a focus on growth. I can reassure noble Lords that the Government will report on how the IPO's activities have supported IP-owning businesses whether through legislative changes or the delivery of services to help businesses protect and exploit their IP more effectively. The annual report will need to have a wider scope than the support of IP businesses. This is why the clause refers in broad terms to innovation and

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economic growth in the United Kingdom. It will therefore be important to ensure that the scope of the report is not drawn too narrowly in legislation.

The noble Lord, Lord Browne of Ladyton, raised the question of the proposal to expand the reporting duty to other areas of policy and asked why assurances on copyright-licensing issues will not be in the report and not reflected in the Bill. The report will cover new legislation and policy developments in the field of intellectual property, as has been made clear. During the debates on the Enterprise and Regulatory Reform Act I gave an undertaking that the report will also cover policies and services that impact on the licensing of intellectual property. One example is the Copyright Hub which noble Lords will be aware is currently under development.

The noble Lords, Lord Stevenson and Lord Borrie, and my noble friend Lord Clement-Jones raised the question of responsibility for intellectual property policy across government. The issue of responsibility for the creative industries was also raised. I am, as noble Lords will know, the IP Minister, and I can assure the House that I take this role very seriously. I also work closely with my colleague in the other place, Ed Vaizey, who has responsibility for the creative industries and their funding, and we are working together closely to deliver support for all UK businesses.

The noble Lord, Lord Browne of Ladyton, asked what communication had taken place with the Scottish Crown Office and the Law Commission about the value of the criminal sanctions to Scotland. He also asked what level of consultation had taken place with the Scottish Government. I can confirm that my officials have been in discussions with their Scottish counterparts, particularly in relation to the important point made about criminal sanctions. The clause dealing with this issue makes specific reference to the position in Scotland, given the different legal systems there.

My noble friend Lord Clement-Jones raised an important point about the parity between sanctions in relation to online and physical goods. The Government recognise that there is a discrepancy between the two offences. However, as this is an economic crime, it is right that the emphasis should be placed on fines. The issue was addressed in the Digital Economy Act, which increased financial penalties on conviction for digital and physical copyright theft of up to £50,000 so that they are now the same. Prosecutors also now use fraud legislation to obtain convictions more effectively. Increasing sanctions under the CDPA is therefore unnecessary at present although the Government will certainly keep the issue under review.

My noble friend Lord Clement-Jones raised the issue of unfair contracts for creators. During the proceedings on the Enterprise and Regulatory Reform Act a commitment to look at this issue was made. On the issue of contract terms, I am happy to repeat the precise commitment that I made to the House then to discuss this important and complex matter further. To that end I intend to meet my noble friend Lord Clement-Jones and the Creators’ Rights Alliance.

The noble Lords, Lord Borrie and Lord Howarth, and the noble Earl, Lord Erroll, raised the matter of intellectual property and competition and asked whether

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the period of intellectual property protection was right and why there are differences between intellectual property rights. If the period of intellectual property rights is set correctly, the protection afforded can reward innovation and creativity properly without being anti-competitive. The Government believe that the various periods referred to for different rights are, on balance, the right ones. They reward creativity and innovation while encouraging the sharing of information. This allows others to innovate further, but in a fair and balanced way. This issue mirrors some of the points that the noble Lord, Lord Howarth, made.

The noble Lord also raised the question of whether the Government were focused too much on intellectual property rights and whether they should turn their attention to skills, research and business support. That is a fair point. However, this Bill is only one part of the Government’s agenda. I agree that it is just as important to focus on research, skills and other business support. It is a point well made.

My noble friend Lord Clement-Jones also asked about extending the public lending right to remote e-loans. It is a matter—I was in the Chamber myself—that was raised in an Oral Question in the House earlier today. I can reassure him that the Department for Culture, Media and Sport is giving careful consideration to the extension of the public lending right to onsite loans of audio books and e-books. This is following William Sieghart’s review of e-lending in public libraries. The department is considering, for example, the implications for public lending right funding in the context of the number of remote loans of e-books. The department is also awaiting the results of research led by the Society of Chief Librarians. As a result, and as my noble friend will be aware, no decisions have yet been made. I therefore hope that he will agree that it seems too soon to legislate on the matter now.

I would like to raise a point concerning the speech of the noble Lord, Lord Howarth, who raised a number of interesting and important points in relation to the Bill. As always he gave an engaging speech and I thank him. I agree with him that there is an important balance to be struck between the rightful benefits to owners of intellectual property and the impact on others in the economy and in society. I look forward to having further discussions with him on this matter.

In speaking to Clause 19, my noble friend Lady Brinton, supported by the noble Baroness, Lady Warwick, and the noble Lord, Lord Stevenson, raised the issue of a newly qualified exemption for pre-publication research in the Freedom of Information Act. I thank noble Lords for their clear and cogent examination and explanation of the purpose and benefits of Clause 19. The Government have always said that they would look carefully at the evidence. We recognise the strength of the case identified by the Justice Select Committee and have included this provision in the Bill as a result. We hope that it will provide reassurance and clarity, and to those working in the publicly funded research sector in particular.

Noble Lords may have raised some further points which I have been unable to address and of course I will write to them on those. We will have the Committee stage in a few weeks’ time, when, after a well deserved break for your Lordships over the Whitsun Recess, we

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can return refreshed to discuss the more detailed points. I look forward to that process. As your Lordships know, my door is always open, as is that of my officials, to listen and to provide as much information as possible. With that, I commend the Bill to the House.

Bill read a second time and committed to a Grand Committee.

Local Audit and Accountability Bill [HL]

Local Audit and Accountability Bill [HL]

Second Reading

2.28 pm

Moved by Baroness Hanham

That the Bill be read a second time.

The Parliamentary Under-Secretary of State, Department for Communities and Local Government (Baroness Hanham): My Lords, the local Audit and Accountability Bill is another important step in our plans to strengthen local democracy and transparency. It is the final step in a programme of reforms to local audit that will secure millions in savings, protect important local freedoms and further increase the localism agenda in three specific ways.

First, it will allow local bodies to take control of their own audit arrangements, and replace the Audit Commission with a new framework for local audit that is robust and retains a focus on value for money. Secondly, it safeguards the contribution that our independent local press makes to local democracy. Thirdly, it protects the taxpayer against excessive increases set by the levying bodies.

I should like to focus on each of these in turn but, before doing so, let me rehearse the context of the Bill. The Government are doing everything we can to bring down our inherited deficit, achieve sensible savings for the taxpayer and give local people greater say in decision-making. As part of this, the coalition agreement pledged to reduce the cost and number of quangos. It also pledged to end the era of top-down government by giving new powers to local councils, communities, neighbourhoods and individuals. We have already ended assessment and inspection of local authorities—that is, comprehensive area assessments and local area agreements—freeing local authorities from centrally imposed targets and £25 million in annual compliance costs. Currently, the Audit Commission appoints auditors for nearly 11,000 local public bodies, which are responsible for some £200 billion of public expenditure. It is however no longer fit for purpose, its remit and functions having expanded significantly beyond their original intention. It has become unnecessarily centralist and bureaucratic.

Local independent audit is essential to ensure that those who handle public money spend it in the public interest, but there is no reason why local authorities should not be able to appoint their own auditors—something the private sector, charities, foundation trusts and academies do as a matter of course. We have been open about our plans to abolish the Audit Commission and replace it with a local regime. The Government

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consulted extensively on the proposals, including publishing a draft Bill for pre-legislative scrutiny. Over the past two years, we have stopped the Audit Commission exercising many of its functions, privatised its in-house audit practice—resulting in a 40% reduction in audit fees for local bodies—scaled back its other activities and cut overhead costs. The Bill is the final piece in the jigsaw and it will now abolish the Audit Commission completely. It will bring down the curtain on the centralised arrangements for the audit of local bodies and replace them with a new framework.

Local bodies will be firmly in the driving seat. Under the Bill’s provisions, they will appoint auditors of their own from an open and competitive market. They will have to publish information about the appointment of an auditor within 28 days of that appointment being made. To safeguard the integrity of this process, they will need to consult and take into account the advice of an independent auditor panel. We know, because we have been told so, that local government has concerns about these auditor panels but the Bill provides a flexible approach. These local bodies will be able to use an existing committee, if it meets the independence requirements, establish a small new panel or combine with other public bodies to appoint auditors collectively.

After listening to views, we will be retaining a limited audit regime for smaller authorities: that is, those with a turnover below £6.5 million. Local bodies with an annual turnover below £25,000 will be exempted from automatic external audit altogether, although a mechanism will be retained for auditor-led scrutiny if problems are perceived to have arisen. New transparency requirements for smaller authorities will enable electors to access the information about accounts and governance that they need to hold the authority to account.

I have heard the arguments that this Bill will affect the independence and quality of the audit process, so it is important to underline that we are strenuously safeguarding the integrity of the local audit system. The scope of that system will broadly remain the same: auditors will look not just at the accuracy of the financial statements but at value for money. Auditors will continue to be required to comply with a code of audit practice and have regard to accompanying guidance, which will be set by the independent and impartial National Audit Office. Parliament will retain its oversight role by approving this code.

The National Audit Office will also slightly increase the number of value-for-money studies it carries out to enable it to undertake examinations that take account of local delivery. This will enable a wider view to be taken on the use of public money. There will continue to be a statutory duty on auditors to make public interest reports, and they will be able to recover their costs from the audited body for undertaking an investigation. There will also be a new requirement on local bodies to publish any public interest reports and their response.

The Financial Reporting Council will oversee the monitoring of the quality of audits, as it already does for the private sector. This will align the regulatory system for local public audit more closely with the private sector and remove unnecessary duplication.

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Recognised supervisory bodies—professional accountancy bodies—will register audit firms and assess those individuals responsible for signing audit reports. We are working very closely with these professional organisations to develop the detailed arrangements and ensure a smooth transition to the new regulatory framework.

Meanwhile, the Bill also protects the rights of local taxpayers to inspect a local authority’s accounts and to raise concerns with the auditor, who may report on these matters if necessary. Whistleblowers will also be protected by amending the relevant whistleblowing legislation so that they can raise matters of concern confidentially with the auditor or the Comptroller and Auditor-General, without prejudicing their employment. The Government also recognise the value of the national fraud initiative. The Bill transfers the Audit Commission’s data-matching powers to the Secretary of State, the Minister for the Cabinet Office or another authorised Minister, so that the work to prevent and detect fraud at local level can continue.

The local audit system we are proposing to put in place will maintain, we believe, a high quality of audit. It will also be markedly improved in terms of efficiency and cost effectiveness. Overall, these reforms will deliver estimated savings of £1.2 billion over 10 years, which is rather more than originally anticipated. Authorities will not just have greater control over how much they pay for the services; they will have greater incentives to keep their costs down, since they will no longer have to fund the Audit Commission’s overheads and other activities.

I know that consultation respondents and Select Committees have raised a question about the current lack of competition in the audit market. However, the outsourcing of the Audit Commission’s in-house audit practice has already increased the number of suppliers in the market from five to seven, with at least a dozen firms passing the pre-qualification questionnaire. We expect a greater number of smaller contracts to be available once local bodies start to appoint their own auditors. This will open up much more opportunity for smaller firms.

The other provisions covered in the Bill include those relating to local authority publicity. We have made it clear all the way through that we expect local authorities to conform to the publicity code. Many are not doing that at the moment; councils such as Tower Hamlets and Greenwich are not. We are therefore taking powers in this Bill to make that code something that local authorities will have to apply.

The final matter here is the question of levying bodies. We have been conscious that levying bodies are not part of the council tax system or the referendums, while they can have an enormous effect on council tax bills. In some areas, levies account for over half of the local council tax requirements. In Liverpool they account for 56%—a very high percentage, which is not given any democratic oversight. Percentage increases in levies year-on-year have consistently outstripped the increase in council tax as a whole. In 2011-12, levies in England increased by 4.1% at a time when Band D bills were frozen, and this year authorities in Greater Manchester

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have increased their bills by more than the 2% referendum threshold set. Without the Bill, any tax increases by levying bodies effectively mean that large elements of council tax demands remain beyond direct democratic control. Local taxpayers must have the right to approve or veto all council tax increases above the approved amount, without having to worry that some elements of that increase are beyond their control.

The provisions contained in this Bill will strengthen localism and democracy. They will put local bodies in charge of their own audit arrangements, help save council tax payers money and ensure that elected representatives can continue to be held to account. I commend this Bill to the House.

2.39 pm

Lord McKenzie of Luton: My Lords, I thank the noble Baroness, Lady Hanham, for introducing the Bill and for yesterday’s briefing. As we have heard, the Bill introduces a new audit regime for local authorities and health bodies, although the Government have not been able to resist tagging on two largely unrelated matters: amendments to the council tax referendum rules and draconian powers concerning observance of the code on local authority publicity. My noble friend Lord Beecham will deal with each of these in detail in Committee, but I shall make a few comments before moving on to the meat of the audit proposals.

Clause 39 revisits the council tax referendum provisions, which we discussed a couple of years ago in what was then the Localism Bill. The effect of this clause is to include in the definition of a relevant amount of council tax certain levies and these have hitherto, as we have heard, been excluded in the calculation, such that any increase in council tax resulting from an increase in the levy would not of itself cause a determination that any level of council tax would be excessive or trigger the requirement for a referendum. In future, levies will be included so that a disproportionate levy increase could trigger a referendum requirement by the local authority or, more likely, the local authority will seek to absorb a sufficient part of that increase within its budget to avoid a referendum, a potentially awful dilemma given the precarious state of the finances of most local authorities.

The legislation allows calculations of future limits to reflect circumstances where local authorities would have breached the council tax threshold in the current year if the new rules had applied to it. This has the whiff of retrospection and perhaps the Minister would say in what circumstances the Government would use Clause 39 to penalise local authorities which had complied in every way with the rules as they stood when their council tax levels were set. Can the Minister say how many and which authorities would be caught by this retrospection?

We have particular concerns with this provision where local authorities have entered into arrangements predicated on a certain increasing levy stream. It is understood that the city deal with Leeds, for example, has been promised an investment fund partly financed by an increased levy from the integrated transport authority. In these circumstances, where arrangements have been put in hand for vital infrastructure based on

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the existing law and with the specific agreement of the Government, there is a strong case for some transitional protection. We will press this case in Committee.

We support the code of recommended practice on local authority publicity as being broadly sensible but the Government have yet to produce any evidence about widespread breaches of the code to justify giving the Secretary of State such widespread powers as are contained in Clause 38. Once again, the declared localist is determined to micromanage from the centre but I will leave our detailed critique to the tender mercies of my noble friend Lord Beecham.

It looks as though it has taken three years for the Secretary of State to get round finally to abolishing the Audit Commission. We are not campaigning for its retention but we need to be reassured that new arrangements maintain auditor independence, encourage probity and make appropriate provision for whistleblowers. We also need to examine the gaps which potentially arise from the demise of the commission, which means that no single body will have overall responsibility for supervising and co-ordinating local public audit. We also need clarity on the costs as well as the benefits that might accrue from this. This will be a major part of our task in Committee.

One of the hopes for the Bill is that by transferring the commissioning of local audits to local public bodies and by the provision of audit to be transferred to private sector audit firms, there will be a strengthening and growth of an open and competitive audit market. We think the jury is very much out on whether this will be the case with the risk that, over time, the big four will come to dominate the market, certainly among larger authorities, as they do in the private sector. They earn some 99% of audit fees paid by FTSE 100 companies at present. It is understood that there were only some 13 audit firms—I think the noble Baroness mentioned 12—which pre-qualified when the Audit Commission was going through the process of outsourcing 70% of its audit practice. That is an advance on four but still only a fraction of the audit firms in the market. For the year ended 31 March 2013, of the nearly 800 local authorities, health bodies, fire and rescue authorities and so on audited by private sector firms, only seven different firms were appointed, as we have heard, but more than 90% of these bodies were audited by just five different firms—the big four plus Grant Thornton.

CIPFA has expressed concerns in particular about the need to recognise the wider scope of public audit which is conducted in the public interest. Its briefing says:

“This wider scope goes further than private sector audit in requiring regularity, propriety, probity and value for money to be considered”—

rather than solely—

“providing an audit opinion on financial statements”.

It also states that these additional responsibilities should be reflected in a number of areas including the arrangements for the appropriate training and supervision of registered local auditors where the Bill is currently silent.

We agree with this approach. There is a need also to ensure that the Financial Reporting Council is up to speed on the wider scope of public sector audit, a point

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raised by the pre-legislative scrutiny committee, and that the arrangements for assuring the quality of audits—major and others—are sound. Whether all of this leads to lower audit fees remains to be seen. What seems clear is that foregoing the prospect of a single buyer means that the huge savings which the commission was able to generate—a quarter of a billion pounds over five years—will not be available in the future. The savings will endure for a few more years because I believe that the contracts run to 2017, although they can be extended to 2020. But if there is market concentration over time, this will eventually lead to higher, not lower, fees, although joint procurement and framework agreements will be one route to counteract this.

We want to see a timely process whereby Parliament can assess what is happening to the cost of audits, particularly for smaller authorities, and in Committee we will test the practicalities of retention of some central procurement capability. It would seem that the Government are warming to the NALC/SLCC's proposal for bulk procurement for its sector and look forward to the Minister’s comments on that. We will also wish to be reassured on the rules that will govern auditors selling other services to their audit clients and what safeguards should be in place to prevent conflicts of interest.

As a means of safeguarding auditor independence the Bill requires relevant authorities to have an independent panel to provide advice on the appointment of auditors. Other than for health bodies, the panels must have a majority of independent members and an independent chair. As the Minister indicated, she is aware of concerns which have been expressed about the capacity of all authorities to set up such a panel, although the prospect of sharing is permitted. The possibility of having overlap and confusion between an independent panel and an audit committee has also been raised. Can the Minister say how that will be handled where the two exist side by side, if they do?

Conclusions have not yet been reached over the final destination of the National Fraud Initiative, although it is understood from our discussions with the Minister yesterday that this is under active consideration. Are these deliberations likely to be concluded by the time we reach Committee stage?

Schedule 9 to the Bill covers data matching and includes provision for the possible extension of the purposes for which data matching might be deployed. Can the Minister say whether there are specific plans and a timescale for this extension to be undertaken? The Audit Commission suggests that a further purpose might be added covering the prevention and detection of maladministration and error, which might assist in identifying overseas patients who are not entitled to free NHS treatment. Would the Government support that?

We welcome the requirement placed on the NAO to consult with representatives of relevant authorities in the planning of its examinations into the economy, efficiency and effectiveness of how such authorities use their resources. It is important that the NAO is properly resourced to carry out its expanded role and we would not wish to see some formal limit placed on the number of studies it can undertake. At present,

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of course, the Audit Commission acts as an intermediary between government departments, the NAO and auditors. How does the Minister see alternative arrangements developing in the future?

There is much else to pursue in Committee. Audit may be a bit of a dry subject that does not arouse the passions of many of our colleagues but it is a vital part of our democracy that underpins accountability. Done properly, it is an independent assurance of how public resources have been spent and how services are being delivered on our behalf. Maintenance of its integrity is fundamental. We will approach this Bill constructively to this end.

2.50 pm

Lord Tope: My Lords, as always, I must begin by declaring my interest as a London borough councillor and, again as always, I thank the Minister for the careful and considerate way in which she explained the main provisions of the Bill. I am also pleased that my noble friend Lord Shipley will again be working with me on the Bill, bringing with him his many years of experience, some of them as leader of Newcastle City Council. In particular, I welcome the return to local government business of my noble friend Lord Palmer of Childs Hill, who I think has been insulted by the suggestion that audit is anything approaching dull. My noble friend is one of the relatively few chartered accountants I know of who actually understands public sector accountancy and, indeed, has much experience as chair of a local authority audit committee—a post to which, I believe, he was unanimously re-elected only yesterday evening.

The Audit Commission has been a very long time going. Few of us regret its demise and I am pleased to hear that the noble Lord, Lord McKenzie, is not campaigning for its resurrection. Much of what it did, particularly in its early days, was good and helpful but, as the Minister said, its mission grew and grew. Few of us in local government will regret the passing of the assessment and inspection regime. By the end, it was expensive and, frankly, oppressive and rewarded most those who knew best how to play the game.

As the Minister will know but perhaps many others here do not, the Congress of the Council of Europe is carrying out one of its local democracy audits this year to assess how well the UK conforms to its Charter of Local Self-Government. I am pleased to say that the ending of this regime is judged to allow the UK to meet the requirements of Article 8.2 of the charter for the first time since the UK signed it in 1997. That is an important step forward that I did not wish to pas unnoticed in your Lordships’ House.

We must, however, be careful that we do not throw the baby out with the bath water, and that we keep the best and get rid of the rest. In particular, we must address concerns of CIPFA, the Chartered Institute of Public Finance and Accountancy. It feels that the Bill presents an opportunity to embed the wider scope of public audit. Given that this point was well made by CIPFA and others in the consultation, will the Minister explain why the Government have clearly decided not to do so?

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I also share the concern of CIPFA, the LGA and others about the proposed arrangements for audit, the relationship with a council’s audit committee, many of which are chaired by a member of the opposition, and the appointment of auditors. My noble friend Lord Palmer will no doubt speak more about this with considerable personal knowledge and we shall certainly need to examine it in detail in Grand Committee. Let me say at this stage that I really do wonder why the Government believe it is either necessary or desirable, or indeed possible, to have independent auditor panels. In my long experience of local government, I have yet to meet anyone who has been clamouring to be a member of an independent auditor panel. That is not usually the way in which public engagement is sought by the public.

There is also much to be said for national procurement of auditors, and I am pleased that the Minister has made clear that local authorities will certainly be able to procure collectively. The LGA is arguing that national procurement should at least be an option. That is one of the measures that will no doubt be examined in Committee.

The proposed role of the National Audit Office will also be explored in more detail and I hope that it will prove useful. Certainly the requirement to consult with relevant parties on any studies is very welcome, but there is concern about mission creep, based at least in part on experience with the Audit Commission, to which the Minister has already referred, which started well but grew and grew. We will not wish that to happen to the National Audit Office. With these proposals it should not happen, and I am sure that we will explore ways to prevent even the possibility. For instance, the LGA is suggesting a statutory limit for the number of studies each year. Given the financial regime in which we are working, I am sure that that will be desirable. Perhaps the Minister will say a little more in her summing up about the role of the National Audit Office, which essentially reports to Parliament, as distinct from local government, and how the parliamentary exercise will be carried out.

Without doubt, the most controversial part of this Bill is Clause 38, giving statutory backing to the existing publicity code. As the noble Lord, Lord McKenzie said, most if not all in local government support the publicity code as a voluntary code. However, there is widespread concern and perhaps some misunderstanding about why it is intended to back the code with statutory provisions. As usual, we ask the Government for objective evidence that the problem is so widespread and so serious that this action, which is hardly consistent with localism, is necessary and why existing powers are insufficient to deal with the very few well publicised cases of abuse, such as in Tower Hamlets or, arguably, Lambeth. I am looking forward to the no doubt robust defence by the noble Lord, Lord Beecham, of the activities in those boroughs and perhaps one or two other authorities—certainly not the majority. All we have had from the Government is rather silly and misleading statements from the Secretary of State about “town hall Pravdas”. That might in itself be a breach of the publicity code.

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The overwhelming majority of local authority magazines or newspapers fall well within the scope of the publicity code and are not in the least controversial. In my experience, in every survey of public opinion that I have known, the public say they want more information, not less, and all of us would say that they have a right to that information. Local authority publications that comply with the publicity code are one way, and arguably still the best way, to provide it for the great majority of the public who do not regularly search their council’s website, or who have neither the ability nor the wish to do so at all.

It has been argued that local authority newspapers or magazines are a threat to local newspapers, but there is no evidence to support that. A quarterly magazine with little or no advertising is hardly a threat to a weekly newspaper. Indeed, the opposite is often the case and there are far more places where the practical partnership between the local council and the independent local press brings mutual benefit to each than places where anyone thinks there is a problem.

Many regret that the Bill does not remove the requirement to publish statutory notices in the local press. The LGA states that this requirement alone costs local authorities £26 million a year, yet no one would seriously argue that it is either the best or most cost-effective way of communicating information to the public, or even to those with a particular professional interest in the subject matter. I understand that the Government are carrying out a review of this requirement, coincidental to but separate from the Bill. Will the Minister tell us more about this review and whether its conclusions will be reached in time for them to be included before the Bill is enacted, possibly early next year? I am sure that we will spend much time on this part of the Bill, which has caused great alarm, yet I am sure that the Minister will be able to reassure us today that its proposals will make no difference at all to what the great majority of local authorities do now.

Finally, we come to the issue of extending council tax referendums to include levies and precepts from other bodies. As I have said many times in your Lordships’ House, I am strongly opposed to council tax referendums, which are really just the latest manifestation of capping by central government. It has always seemed to be a fundamental democratic principle that the role of a local elected councillor is to balance the needs of the local community with the cost to that community of meeting those needs—and to be properly and effectively accountable to the local community for the decisions taken in doing so. Council tax capping by whatever name or disguise runs contrary to that democratic principle.

It follows therefore that I would be much happier if the Bill abolished council tax referendums altogether, rather than extending their scope; but given that this is not going to happen, I can certainly understand the logic of this proposal and we will examine its effects in greater detail in Committee. The noble Lord, Lord McKenzie, has already asked about the retrospective nature of this provision. By the time the Bill is enacted, we will be almost completely through the current financial year and attention will be entirely focused on the coming financial year, 2014-15. I hope that when

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the Minister replies, she will be able to reassure us and say something helpful about the retrospective nature of this, and whether we will be seriously looking in the early part of the next financial year at decisions legitimately taken about the current financial year.

I understand that we are currently offered the prospect of 24 hours in Grand Committee to better understand the Bill and its implications. I am sure this will prepare us well to make it an even better Bill on Report. I look forward to working again with the usual team on all sides of the House to do just that.

3.02 pm

The Earl of Lytton: My Lords, I start, as others have done, by declaring interests. I am the president of the National Association of Local Councils, which I will refer to as NALC, and I recently accepted an invitation to become one of the Local Government Association’s many vice-presidents, so I shall be in good company declaring that interest along with many of your Lordships. One of my children is employed by one of the big four accountancy and audit practices. It is only fair to point that out, but I am not a finance person and I look at the reality that sits behind this Bill in terms of everyday life.

NALC can be extremely pleased with the ongoing dialogue it has had with the department. I particularly thank the Minister for the helpful opportunities for discussion that this has generated. I hope that there may be the possibility, between this stage and the next, for some of the staff from NALC to come and meet her and her officials to bottom out some of the detail on this, which I think would be quite important. I shall concentrate fundamentally on the application to parish and town councils. Like many modern Bills, the principles are set out in the primary legislation, but we are left to deal with regulation at a later stage. However, we need to be particularly vigilant about what we lay the foundations for at this juncture.

There is a lot to welcome in this Bill. On audit, as has already been said, I accept that it is an absolutely basic tool for holding to account those who control and handle significant sums of taxpayers’ money, or, in the private sector, shareholders’ assets. The core ingredients, however, are that it should be purposeful, cost-efficient and proportionate. It does not make sense to remove centralist mechanisms by creating some dispersed arrangement that is complex or uncertain, fails to provide real transparency or is excessively costly. Like the noble Lord, Lord McKenzie, I fear that long-term there will be higher costs.

NALC has made it clear that it looks for six key factors on audit. The first is a proportionate and cost-effective but limited assurance audit regime for parish and town councils, with particular exemptions for very low-spending parish and town councils. Secondly, it feels that the national procurement of external audit—already mentioned—may well be the most efficient way of procuring audit on the most cost-effective basis. I think NALC is at one with the LGA on this. It then wants the establishment of a self-financing, sector-led body to undertake this audit procurement, particularly for smaller local public bodies, including parish and town councils.

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NALC feels that it is vital that there is a right for electors to inspect the accounts of parish and town councils, but that any new transparency arrangements need to be proportionate. They need to be practical and cost-effective and there needs to be a financial safeguard for parish and town councils in the event of auditor-led scrutiny; in other words, to guard against parish funds being hijacked by those with some deconstructive agenda, of which the Minister will be well aware. While reading the Bill and the various bits of paperwork we received, I wondered how one would have an audit panel with a majority of independent members on it. In my limited knowledge of local government geometry, I wondered how that would work. I suppose it would have to come from these Benches.

Moving swiftly to the code of publicity, I understand that this is the “accountability” that sits behind the title of the Bill. I understand that the Government have consulted, but they are asking the House to agree these proposals without our knowing the outcome of that consultation. I should like to know what the outcome is and the Government’s response. I hope this was not an instance of setting out to canvass opinions when the decision was already made. Perhaps the Minister would clarify that at some juncture.

The proposals stand in considerable contrast to the direction of travel of the audit. It appears to be a transfer to the Secretary of State of significant additional statutory powers. I am bound to say that it walks and looks like a Henry VIII clause. It is a puzzle to me, because I am not aware—I echo other noble Lords—of any instance in which the Secretary of State has actually intervened under the current code of recommended practice. I have to ask where the objective need is for the statute?

I noticed the comment by the noble Lord, Lord Tope, about the issue of the regional press. I recall that my late father once christened a West Country local newspaper the “Trumpet of Truth”—not its real name —on account of its serial and culpable inaccuracies, bias and other mischief. I leave that particular point parked, but there is no particular evidence that parish and town councils compete unfairly with local newspapers and there is no reason why the code should be put into primary legislation. The existing code provides for action to be taken if there is evidence. Again, there have been no breaches of which I am aware. Giving more powers to the Secretary of State looks anti-localist, and we need to ask whether it is necessary for parliamentary time to be taken up by this and whether there is a problem in the first place.

This may be a lawyer’s matter—forgive me if I tread on others’ toes—but the code as it stands seems to be couched in nebulous terms. I wonder whether it is the right sort of document to form the basis of a statutory code? My final point concerns parish polls. In this respect, the Bill needs some strengthening. The Localism Act, as originally drafted, included provisions that were subsequently removed with other clauses on referendums. That leaves us with Schedule 12 to the Local Government Act 1972, which sets out the circumstances in which a poll at a parish meeting may be demanded. The trigger is unbelievably low: fewer

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than 10 electors or one-third of the local government electors present, whichever is the lower. This is far too lax. It is an open door for the vexatious use of parish polls on matters that may not even directly affect—or affect at all—the local area. The responsibilities of the parish and town councils are what should be in focus. If they are not, it is a waste of taxpayers’ money. I am concerned about a comment made by the Audit Commission that it could be a matter of an auditor deeming that the money so expended had not been correctly incurred. That is not very good if the thing happens after the accounting period is finished and you are in a parish council meeting and have to make a decision. The guidance needs to be a lot clearer so that everybody knows where they are up front.

I look forward to the further deliberations on the Bill. I sometimes wonder whether the philosophy and direction of travel of the Bill, and of localism more generally, is entirely coherent. On the Growth and Infrastructure Bill, the Government argued that businesses need certainty. I buy that to a considerable degree but so do municipalities and parishes. Uncertainty adds cost and risk, and in this case increases public expenditure. We need to do everything that we can to avoid falling into that trap. I wish this Bill in all other respects a good passage, and I am sure that we will have plenty of interesting times trying to knock it into slighter better shape that it is now.

3.11 pm

Baroness Eaton: My Lords, I declare an interest as a vice-president of the Local Government Association, of which I am a former chairman. I also declare my interest as an elected member for Bingley Rural since 1986 on Bradford Metropolitan Council, where I had the privilege of being the leader between 2000 and 2006. I thank my noble friend the Minister for the clarity of her explanations and her willingness to have briefing meetings. I regret that I was unable to attend yesterday.

We are very well aware of the significant implications of the Bill for local government. As someone who has worked in local government for many years, I warmly welcome the Government’s commitment to cutting back on external inspection. Any measures that reduce interference with, and the burdens on, local government have to be welcomed. It is therefore regrettable that many of the proposed measures in the Bill centralise powers to the Secretary of State and allow central government to interfere with matters that should rightly be decided at a local level. The provisions to extend the referendum powers introduced in the Localism Act strike me as being anti-localist in nature and difficult to implement in practice.

On a point of principle, local elections exist so that people can pass judgment on the performance of their councils and the amount of council tax they charge. The United Kingdom is a representative democracy. We do not hold referendums every time the national government raise taxes, quite often by more than 2%, so why should we impose referendums on councils for managing their own finances? Elsewhere, the Bill reads as if it is possible for the Secretary of State to impose a different referendum limit on local authorities where their council tax increase for 2013-14 would have been

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excessive under the new definition, but not under the current definition. That is not fair to those who obeyed the rules, only to find out that the goal posts might be moved. It is like revising the speed limit downwards and then fining any motorist who has not obeyed the new limit before it was introduced.

From my experience as the LGA chairman, local government in England is subject to a variety of different levying arrangements in different areas, covering issues such as transport and drainage. As the proposals are currently drafted, there is the risk of serious perverse outcomes. For example, a drainage board in an area of high flood risk might be denied the funding it needs to improve flood defences without subjecting the local authority to one or more council tax referendums. Not only is this an additional cost to the local authority, it inhibits the delivery of government policy on flood defences. Likewise, growth measures, such as the building of new transport infrastructure, might be caught by this provision. Will the Minister please look further at these concerns? If there are particular issues that the Government have with individual levying authorities it makes more sense to sort these out individually rather than modifying the entire structure of local government finance.

A further measure in the Bill that is causing concern for councils has already been mentioned by my noble friend Lord Tope. I refer to the proposal for a statutory code of practice on local authority publicity. This clause is unnecessary as there is no evidence that council publications are competing unfairly with local newspapers and, by the Government’s own admission, very few councils are breaking the existing recommendations. The Bill, as currently drafted, will introduce some very wide-ranging powers that will allow central government to direct a local authority regardless of whether it is complying with the code. That strikes me as a charter for central government to interfere, meddle with and second-guess councils.

It is also worth noting that the majority of councils produce newsletters because they are the most cost-effective way of reaching 90% or more of the local population. In my authority, which has well over 500,000 people, the publication does not look like a newspaper, has no political content whatever and is used regularly to inform people of changes in refuse collection, summer play schemes, and many things that they may well not have the benefit of enjoying but for the knowledge that they gain from the publication. By way of comparison with the council newsletters, 1% of local newspapers reach 90% or more people.

Before Parliament legislates to change the status of the code, I feel that the Government should set out the evidence for their decision. Will my noble friend the Minister therefore consider commissioning an independent review to establish what, if any, impact council publications have on local newspapers?

As I said at the opening of my speech, the Government's commitment to cutting back on the red tape of central inspection has been most welcome. This Bill makes provision for the appointment of local audit, the duties on auditors and local authorities and the role of the National Audit Office. Procuring local audit is a costly exercise for councils. In Clause 9, the

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Bill requires councils to have an independent audit panel that will advise the councils on their appointments. Others have mentioned, and certainly early indications show, that councils will have considerable practical difficulties finding enough suitably knowledgeable independent local people willing to serve in this capacity. I was pleased that the Minister did say that there is going to be some flexibility. Even so, I think that this area needs a great deal of thorough consideration during the Committee stage if this whole process is not to be incredibly burdensome.

It is also worth noting that national procurement of external audit is the most efficient way of procuring audit, at the best possible cost to local councils. This was demonstrated by the recent tendering exercise carried out by the Audit Commission. That exercise delivered savings to councils of £250 million. As a result, I would like the Government to ensure that sufficient flexibility is retained in the Bill to allow national procurement to continue as a way of helping councils secure savings for the future. As the Local Government Association has said, amending the Bill to allow for national procurement does not imply ministerial agreement to the approach. It simply demonstrates a willingness to keep the option available for the future.

I should like to finish by talking about the role of the National Audit Office. Having been critical of some of the provisions in this legislation, I am delighted to see that the Government have listened to advice from local government on the need for the National Audit Office to consult relevant parties when developing value for money studies. It is crucial that the National Audit Office works with councils on its programmes of studies, as this is the best way to achieve the most efficient system.

I do, however, share the view held by the LGA that there should be a limitation on the number of studies the National Audit Office is able to conduct each year. I am concerned that there is potential for mission creep given the absence of any constraints or limits regarding the total number of studies per year. This burden is precisely the sort of the thing the Government have rightly tried to prevent under the new audit regime and it would be a shame for the National Audit Office to become the “Audit Commission lite”.

The reduction in central inspection and changes to the audit regime are largely welcome. But I do hope that the Minister takes my constructive criticism of the council tax referendum and publicity code provisions in the spirit in which they are meant. I would welcome a Government response to my fears of the unintended consequences of the council tax clauses. I would also like the Minister to explain why the provisions for the publicity code create such wide-ranging powers for central government when there are hardly any councils breaking the spirit of existing guidance.

I feel that it is the role of this Chamber to offer an honest assessment of the measures put before us and arguably our most crucial role is helping to improve legislation in a spirit of consensual debate. I am sure that, across the House, we can improve this Bill in the way we need to.

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3.21 pm

Lord Christopher: My Lords, I first declare a specific interest. For six years I was one of the commissioners of the Audit Commission. I found that a very rewarding and learning experience. We are approaching this whole matter with some risk. It is worth recording that the commission was set up by Lady Thatcher, who only a few weeks ago was said farewell to and regarded by very many as the finest Prime Minister that Britain has had since Winston Churchill. I am not going to argue about that, but that was the feeling. The Bill that proposed setting up the Audit Commission was put through Parliament by the now noble Lord, Lord Heseltine, a man held in high regard and called back to serve only recently to advise the Government on how to advance business. He made a report on this not that long ago.

The second controller of the Audit Commission was Sir Howard Davies, who only last week was called in by the Government to produce a report on what should happen to London airways. The Audit Commission did not involve people of minor importance or minor ability. We are now seeking to get rid of it. It is worth quoting something that the noble Lord, Lord Heseltine, said at the time, which was that he saw this,

“in the mainstream of the Government’s economic policy.”

I thought efficiency and cost-effectiveness were in the mainstream of the present Government’s policy, but I do not believe that is going to be the effect of this Bill.

The chairman of the commission under whom I served was Sir David Cooksey, one of Britain’s most successful and efficient businessmen. However some people may have seen the commission, it was certainly not what I have heard described. It was a catholic bank of people drawn from a number of walks of life—local government, central government and the opposition. Over that period, I very rarely, if ever, sensed that one’s political views mattered in the context of the issue on the table. The objective was invariably: there is a problem, what is the best solution? Now we are looking at a proposal that will effectively move it to the status of a profession. With respect to the noble Earl, Lord Lytton, whose views I find most interesting and helpful, even the president of the organisation that runs accountancy indicated that it was in dire need of some reform. He expressed the reasons why.

I wonder why this is being done. I have been what I would call an outside insider in local government for a number of years. I have never had a phone call, a letter or a representation from a member of a local council—county or district—to say, “Please get the Audit Commission off my back”. As for citizens, I have never heard anyone complain to me, “I feel deprived and lonely because I do not have close access to the auditors”. What people are complaining most about in this context are potholes and planning applications. They are little concerned about structures, as is demonstrated by the poor turnout at elections for local authorities.

The coalition is demolishing a very successful professional asset of this country. It has been a source for the map which local government was holding to operate with true cost-effectiveness, and it has worked extraordinarily well. The idea suggested here, and by

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the Secretary of State from time to time, is that it has outgrown itself. It could easily have been restricted economically had that road been chosen.

Most people sense that this is a bone-dry issue, but it was not and is not. Perhaps I may cheer up your Lordships with a couple of cases that I saw dealt with—rare perhaps, but underneath will still lie the deep anxieties of auditors. One is from Labour and one is from the Conservatives, so I am not being selective. The Labour example was the somewhat left-wing authority of Hammersmith and Fulham which, towards the end of the 1980s, had what one might describe as an interest rate swaps crisis. It had massive exposure to interest rate swaps, all on one side of the market, relying on high interest rates when they were falling. The borrowing was £308 million, and it was distributed worldwide at the time. Who assisted in clearing it up? The Audit Commission. How, under the Bill, could such a case be dealt with?

The Conservative example, which most people will remember, is the Dame Shirley Porter scandal. She was the chairman of Westminster Council. At the time, in 1987, it owned 23,000 council homes; 10,000 people were on the housing list; and 9,800 homes were designated as being for sale. The proposal was to ship out of Westminster enough people to allow it to select the people who would replace them in their council houses. I pay tribute to John Magill, the accountant, who kept his nerve throughout that extremely difficult case, which went on for several years. I can see the box files of evidence now; they were yards long. The commission stood its ground; the accountant stood his ground. I am sorry that the noble Lord, Lord Pannick, has left the Chamber. It was towards the end of the operation when, wondering whether we were right, the council decided to get independent advice on our judgment to appeal at the end of the day. In his absence, I thank the noble Lord, Lord Pannick, for giving us the advice needed to allow us to keep our nerve. The sum involved was £12 million. It would have been a very serious problem for any local auditor to deal with and hold their ground with that potential bill facing them.

Parliament is proceeding with the Bill on very limited knowledge. The Minister has already told me in answer to a Written Question, and I am sure she will repeat it, that Parliament knew exactly what our intentions were and what we were about. What I contest is that Parliament has been given information of a nature that would materially assist it in arriving at a sensible conclusion. There has been a pre-emption of Parliament here in a way that may just get through on the basis that it has been told what we are about, but it has certainly missed out on vital information. This would be a rather interesting case for the Public Accounts Committee to look at in the context of the House of Lords Constitution Committee’s report on this matter, published recently. At the heart of that is that a Bill should receive, if one wants to pre-empt it, a demonstrably successful Second Reading in the House of Commons. We have a Second Reading here, with hardly a massive audience, on the eve of a bank holiday. I wonder whether that was a sensible arrangement.

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What is important is the detail underneath the words used. I would like to have a look at some of that. I am conscious of the clock but it is important that this comes out. The impact assessment is quite a thick document. You need to be a nerd, and certainly very knowledgeable, to work your way through it, and at the end of it you do not always understand it. As I say, the net benefit over 10 years of this operation will be £1.28 billion. It is refined a bit: £731 million over five years, 2012-17. I imagine that the dates will need to be revised. Annually, that is about £182 million. It is not at all clear to me how these figures were calculated. The Government have very much based the figures on the outsourcing—perhaps not quite the word—of audit.

The Audit Commission—reduced, incidentally, from nearly 1,000 to 70 staff—has made a calculation comparing local choice with the current procurement process. Its view is that the arrangements we have now would, in fact, save the public purse just over £200 million over a five-year period. The alternative is very much higher costs of audit. This paper has not been published. It would be interesting if the noble Baroness could put a copy in the Library.

In 2011, her department appointed FTI Consulting Ltd to,

“provide expert research and advice on the transfer to the private sector of the Audit Commission’s in-house audit practice”.

I quote from the report:

“Conventional economic theory states, that, all other things equal, competition leads to lower prices”.

This is the argument.

“Under a single buyer, however, there are lower prices than under a competitive market”.

I do not think that Parliament has been told that that is the advice the Government had.

I move now to the issue of value for money. It is not clear to me whether any value for money studies are actually in the paper. I have to say that they have been rather derided by some of the statements made by the Government. I will give the House some examples of these value for money studies. I cannot find the damned things, but there are five studies that have been carried out over the past few years that show very clearly that, given the amount of money that is available, if local authorities follow through on the recommendations they can save considerable sums of money. The studies show that the potential savings are over £1 billion. I know that the Government say it is the intention that these should be carried out, but fewer in number and by someone else. I question whether there is any possibility whatever of savings of that magnitude being produced by someone else in any reasonable time period. In my judgment, that simply is not possible.

Where does this all this leave me? It was clear from day one, when this issue was first in Appendix 7 to a Bill whose name I forget, but it was the first Bill to lay waste to the quangos, that whoever was responsible for it did not comprehend at all that they needed primary legislation to get rid of the Audit Commission. That is why we have waited for so long—it must be a year, I suppose—for this Bill to come forward. It is clear to me even now that the real value of the Audit Commission is either not appreciated by the Government

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or not acknowledged for reasons that I do not understand. I cannot see how their figures can possibly balance over a reasonable span of time.

In my view, notwithstanding what my noble friend Lord McKenzie said, this is a bad, unnecessary and reckless Bill. Indeed, I believe that the whole operation is a folly that the country will regret.

3.37 pm

Lord Palmer of Childs Hill: My Lords, following on from that resounding vote of confidence, I need to declare an interest, although I think that my interest has already been declared for me by my noble friend Lord Tope, my friend of 27 years and currently on Barnet Council. I am probably the only Member of your Lordships’ House who still chairs an audit committee of a London borough. As my noble friend said, I was rather stupidly elected last night and, as noble Lords possibly know, the protocol in most boroughs and local authorities is that it is an opposition councillor who fulfils that post. That is what we did when we were in power, and I am glad to see that this is what has happened in the borough of Barnet when the Conservatives are in power.

I understand the desire to put the publicity code on a statutory basis, to prevent councils wasting public money on council-produced newspapers and magazines, often containing political propaganda, even at the level of, “Aren't we doing well?”—and very often it is purely at that sort of level. Putting it on a statutory basis, as framed, is unnecessary and heavy-handed. Local authorities need to communicate and local newspapers are useful, but are not as effective as they were. In my locality I find that I no longer know who the editor is, or even if there is one. I do not recognise the names of the local journalists, who are reduced in number, mainly office-based and changing with great rapidity. The journal, be it local authority or commercial, is in the end only as good as the guy delivering it—or not delivering it, as the case may be. London boroughs support commercial newspapers; I think that my noble friend Lord Tope referred to a figure of £26 million nationally. Some £4 million per annum in London is spent on advertising.

I believe that this aspect of the Bill is aimed at that small minority of councils that misuse public money for overtly political purposes. I hope that the Minister will confirm that during the passage of the Bill we can come up with a less heavy-handed way of dealing with this. My noble friends Lord Tope and Lady Eaton both referred to this. The Minister said this Government are against top-down government, but what is this if not top-down government?

I now turn to the abolition of the much-reduced-in-size Audit Commission, and the setting up of a system of locally appointed external auditors. A main concern of the Bill is the preserving of auditor independence. Currently, it is the Audit Commission that appoints external auditors and that is seen as preserving auditor independence. It prevents cherry-picking of audit opinions and helps the interaction with the local authority start on a level playing field. There might also be a concern from auditors, who quite naturally might believe that issuing unfavourable audit opinions may adversely

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impact on their ability to obtain contracts in the future, as the very people that they might criticise in their audit opinions will have a say in their future appointments.

The Bill attempts to cover this through an independent panel to appoint auditors, but, again, these panellists—as has been mentioned by other noble Lords—will need to be skilful individuals who understand what is important in terms of external auditor characteristics and can assess value for money. Moreover, these panels will be joint panels, appointing to a number of local authorities, and will—with difficulty—need to ensure that conflicts of interests are resolved. The conflict I envision is between internal audit and external audit. In the London Borough of Barnet, one major accounting firm has been appointed by the Audit Commission to carry out the audit while locally, the internal audit team is enhanced by a contract with a separate team from a major accounting firm. Therefore, if this goes out to an independent panel, one can see pretty clearly that there could be conflicts where an internal auditor might have to resign in order to be the external auditor. It is incredibly complex.

The Bill concentrates on the appointment of external auditors, but the reality—and I am speaking as the current chair of an audit committee—is that external audit at a reasonable cost is only as good as the internal audit team of that local authority. In carrying out the external audit, the auditor will first look at the internal audit process and determine what reliance could be placed on it. I cannot see any comment on this in the Bill.

Then there is the process and transparency of the authority’s audit committee. In Barnet, we have a committee of Labour councillors, Conservative councillors, two independents who are not councillors and me, a Liberal Democrat opposition councillor, as chairman. We involve the public, many of whom are investigative bloggers, who have a space in the agenda to ask questions and supplementary questions, which I must admit officers sometimes find extremely uncomfortable. At the last meeting, there were 15 questions plus supplementary questions which I, as chairman, had to answer, even though I am not a member of the administration. The audit committee sessions are often recorded on video by these members of the public and appear on their blog sites, Facebook and the like. I must tell your Lordships that I find this a great benefit because it is actually challenging and brings transparency, however much at times it might seem uncomfortable.

A considerable amount of audit of process is done by the internal team which, if necessary, buys in extra accountancy capacity. Any service area of the council that is seen to have produced less than a satisfactory grading is then required to send its service area director and/or assistant director to come and explain how they intend to tackle the problem. It is not a blame culture: if the report at the next meeting is still unsatisfactory, they have to come back to be grilled again by the audit committee, which is all-party and no-party. I am pleased to say that it is rarely necessary for a director or assistant director to come back. We give them time between the meetings, and, invariably, the satisfactory grading is achieved by that method.

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The noble Lord, Lord Christopher, said that this was not to do with potholes, which concern most people. This shows he does not know what happens on an audit committee. If there was a problem with potholes, it would at least be brought up by members of the public, if nobody else. It would be addressed by the audit committee. The director and assistant director of that service area would be called to that committee to explain and, by the next meeting, one would have to have some resolution of that problem. That is what the audit committee of a local authority does.

The noble Lord, Lord Christopher, also mentioned the millions of pounds lost through incorrect investment. We have experience of that in the London Borough of Barnet. A former Conservative administration borrowed money at a good rate of interest; the noble Lord mentioned the same thing. It invested £27.4 million in Icelandic banks. That was not a good decision. What happened? How was this dealt with? Not by the Audit Commission. It was dealt with by a combination of local authorities led by Kent County Council, which combined to deal with the Icelandic Government and banks. Most of that money, amazingly, is coming back—they are actually very lucky. It was nothing to do with the Audit Commission. It was, and can be, done locally. The noble Lord, Lord Christopher, also mentioned value for money as a criterion. That criterion will be dealt with by the National Audit Office under the new regulations.

The theory for the changes in where the audit committee procures audit services to the Companies Act model is that they will increase competition, reduce fees and increase quality. My question is whether it will. I am not convinced. The noble Lord, Lord McKenzie, spoke about the transfer of audits from the Audit Commission to other firms of accountants. Is it not amazing that the Audit Commission, which used to do a lot of the audits itself, has over the past few years transferred 70% of audits to audit firms? The noble Lord, Lord McKenzie, raises the point that few of those firms have had that. He also mentioned that the firm in addition to the four main firms was Grant Thornton, which is still very large. Is it not amazing that, to my knowledge, Grant Thornton got the maximum number of audits permitted of those direct audits lost by the Audit Commission? It took on a lot.

I welcome the expansion to other firms. As a practising chartered accountant, a local councillor and someone dealing with people in business, I can say that a large organisation such as a local authority has to be extremely courageous, as Sir Humphrey would probably have said, to go anywhere other than the larger firms. Although it might seem a good deal—maybe it is more cost-effective and you will get a good deal—if something goes wrong, you will be criticised very fiercely for not having gone to KPMG or PricewaterhouseCoopers. Many local authorities will naturally take the safe course of going to one of the larger firms. We must consider during the passage of the Bill how we can make it easier for that to happen.

I was somewhat appalled when my noble friend Lord Tope said that we have another 24 hours of this Bill; I am only relieved that it is not all in one sitting. I look forward to the Bill being amended and improved during that process.

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Lord Christopher: I advise the noble Lord, Lord Palmer, and the House that 70% of audits being outsourced —if that is the word—has been the case for a long time; it is not a sudden decision. Secondly, I apologise for possibly misleading the House: the £1 billion saving I mentioned in relation to the value-for-money studies was actually £2 billion, and the £1 billion has been raised under the fraud initiative.

3.50 pm

Lord True: My Lords, I, too, declare an interest as leader of a London borough council and a member of the Leaders’ Committee of London Councils. I thank my noble friend for the way in which she introduced this legislation, and apologise to her for not being able to attend her briefing yesterday as I was present at a committee of your Lordships’ House at the same time.

I hope I do not surprise my noble friend too much by saying that this Bill is welcome in many ways. I join other noble Lords in saluting the abolition of the giant bureaucratic industry of performance assessment and so on that grew up under the Audit Commission after 1997. I do not for a moment take away from what the noble Lord, Lord Christopher, whose work I respect immensely, has said. He is right to point to the many good things that were done by the Audit Commission in the past, but that regime became overblown and it is an enormous relief to local authorities that the Government have acted to restrain it. Therefore, I very much welcome that part of the Bill.

On the other hand, as others have said, there are in the Bill some new fiddlesome interventions from the centre. I also note, with others, that the powers given by Clause 34 to the National Audit Office, if understandable in principle, have alarmed some local authority organisations. They fear that the clause leaves on the statute book mechanisms by which a central body could begin to recreate the performance assessment industry.

Having read the Bill, it seems to me that subsections (5), (6) and (9) of Clause 34 offer safeguards against that happening. No doubt, we will explore that in Committee. I also have some reservations about the absolute abolition of the provision to allow for national procurement of potential auditors. We have just heard a very powerful speech on matters of audit, and I will not follow that specific line. However, some arrangements in the Bill look very cumbersome, and I agree with the comments that have been made about how the independent panels will work. As we have just heard, there are merits in many of the existing Audit Commission arrangements. Perhaps it would have been better to enable various local regimes with due safeguards, but to leave the power to conduct national procurement in place.

On local audit and accountability, this Bill goes wider than just local authorities, as it refers to other local bodies, including some NHS bodies but not others. I shall spend a little time on that. The Bill misses an opportunity for local authorities to play a more constructive role in securing effective audit and accountability of public bodies operating in their local authority area. I will dwell specifically on the local accountability of the NHS for its use of resources. This omission from the Bill—the NHS weaves in and

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out of it at different stages—is a little disappointing, at a time when the Government are rightly promoting health and social services integration, a process in which my own authority has been actively engaged for some time. The Government have also acted—again, it is greatly welcomed by many authorities—to give local councils a greater role in health. I do not believe that as local authorities, health trusts and commissioning groups grow together, audit arrangements can stay apart and be handled through separate strands of legislation. There is a growing perception that parts of the NHS regard themselves as beyond reach in questions of local accountability.

I cite the example of Croydon Primary Care Trust, where, in 2011, a new management team uncovered serious financial problems. An investigation by Ernst & Young followed, which confirmed a discrepancy in the accounts of some £28 million, roughly equivalent to the cost of a new secondary school or more than a fifth of my local authority’s annual discretionary budget. Even then, when faced with such findings, the NHS represented Ernst & Young’s report in its own way to gloss over some of the realities of what had occurred. Had that taken place in a local authority, I would have been forced to consider my position. Instead, the board member within the trust who first raised concerns was eased out as a disruptive influence, and a massive black hole in the accounts was apparently covered by the stroke of a pen and the insertion of balancing items by what proved to be an unqualified person. In the private sector this would have counted as false accounting, and would have had the direst consequences for those involved. In a local authority it would unquestionably have cost the jobs, not only of the person involved but of top management, who had failed to exercise due supervisory control and had put an unqualified person in such a position.

Yet what happened in this local NHS body in response to the auditor’s report? No one initially lost their post, except the man who had wanted something done about the matter. The people involved were quietly transferred to other jobs elsewhere in the NHS. Other health trusts were told they would have to fill the gap in finance by transfers of money held centrally on their behalf, to the detriment of health resources in properly managed and more efficient areas. The six local authorities that were affected, including my own, which have the duty to safeguard the interests of local people, were understandably scandalised by such procedures.

To ensure effective audit and a proper response to the comments of the auditor Ernst & Young, we set up a joint scrutiny committee to look into what had happened, suggest appropriate remedies to improve local public accountability and get a proper response to audit from this local public body. Again, what happened? There was a wall of silence and a climate of non-co-operation and cover-up. Most of the key witnesses who were invited to assist the scrutiny committee simply declined to appear. Calls came from the centre, asking the authorities involved not to rock the boat. I have to say that I was myself approached at one point by a senior NHS manager, who urged me to let the matter drop.

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A devastating report finally emerged from this joint scrutiny committee, exposing in detail what had happened and taking up the original auditor’s report. It set out a range of concrete recommendations for action to prevent any recurrence, to safeguard use of public money and ensure proper public scrutiny of audit reports on local bodies within the NHS. Inevitably, lawyers acting on behalf of some of those who had previously declined to co-operate glided into the offices of those who had tried to get to the bottom of their actions to gag, or seek to gag, aspects of the report, frankly.

If the local audit and accountability of NHS and other local bodies that affect local communities is to have any meaning, there must be a place for public scrutiny. Local authorities have an obvious role in this. I shall return to this matter in Committee, and I will have to consider whether, under protection, I need to detail a little more of what I consider to be the shocking background to this case and the careless attitude to the use of NHS resources that was involved.

I hope that my noble friend may be prepared to consider amendments to strengthen the audit and the scrutiny of the response to audit role beyond the measures already in the Bill. I believe there is a role for local authorities in this. At the very least, we should find ways to ensure adoption of the joint scrutiny committee’s recommendations in order to protect local people and local authorities from what is frankly the incompetence and derogation from any sense of public responsibility that was displayed by some people in this case. NHS bodies are key local bodies, and we have the opportunity to use this Bill to strengthen their accountability to local people.

I will be brief on other matters. On publicity, I am a slight dissenter. I share the views of others that the system we have now operates relatively well, and no doubt we will review the evidence base for the proposals. However, when I took office in 2010, I abolished my own authority’s glossy newspaper. I would do the same again, as it did not in my view add much to the sum of human knowledge, so fast is the world of communications evolving. However, local authorities must communicate with local people and, increasingly, hear back from them. Increasingly, this will be done by online and web-based methods. Despite the limits on penetration, online communication is growing fast. It is a necessary instrument of dynamic, localist initiatives in which often differentiated approaches and priorities are enabled within local authority areas. Already in our own localism initiatives, for example, we so far have six separate web-based newsletters that allow two-way communication between the public and the local authority. This is a vital emerging instrument for effective and responsive governance. I will want to be assured that regulations under the Bill will not affect such communication, as it enables localist public involvement in decision-making and in no way competes with local newspapers.

Finally, on council tax referendums, here, too, I am a slight dissenter. The day after 100,000 people voted no to Heathrow expansion by a margin of three to one in a local referendum conducted by my authority and the borough of Hillingdon, you probably would not

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expect me to stand up to oppose the concept of local referendums—indeed, I was rather disappointed that some of the referendum proposals were dropped from the Localism Bill, as my noble friend knows. I am not all out against council tax referendums, although I perhaps rather impishly hope that my noble friend may suggest to her colleagues that they consider legislating to give central government the same duty to have regard to the results of local referendums as it imposes on us to have regard to its dictates.

I shall not today follow others—we have heard some very significant contributions—into the complex field of how to increase democratic control on precepting or levying authorities and what the Government now propose in Clause 39. However, the matter is definitely complex—I use the word advisedly—and will need close examination in Committee if local authorities that seek to behave properly are not to be penalised for the profligate actions of levying or precepting bodies, because that is effectively what often happens now. If in a referendum an overall quantum is rejected, a levying body can simply say, “Go away. We have the power to impose the levy”, and the council must not then be left having to reduce its services because of the profligacy of others.

With these riders, I add my voice to those who have welcomed the basic core of the Bill. I support the abolition of the Audit Commission and the bureaucracy that went with it, hearing the reservations that have been expressed by some, and thank my noble friend for bringing the Bill forward.

4.03 pm

Lord Shipley: My Lords, I declare my interest as a vice-president of the Local Government Association. I have found this a very helpful debate. It has identified all the key issues that we need to examine in Committee and I look forward to doing that.

I agree with the main thrust of the Bill in terms of audit. It was right to abolish the Audit Commission and the complex inspection regime that it had created. Probity and soundness in council finances can be assured without the overly centralised machinery of the Audit Commission, which acted as regulator, commissioner and provider of services as well as the setter of its own fees. Councils should be accountable to their electors rather than to the centrally imposed target culture which the Audit Commission introduced and which took so much officer and member time to deal with. However, in abolishing the Audit Commission, we have to ensure that the public interest in what councils do is safeguarded. With a few amendments, this Bill can do that.

When I was a board member of One North East, the regional development agency, and a member of its audit committee, I found it hard to understand why the RDA was audited by the National Audit Office whereas my council was audited by the Audit Commission. I never felt that two national auditing organisations were needed. I felt that savings could be made and the public interest secured more cheaply. It is no surprise to me that there have been large savings of 40% in recent audit procurement exercises—savings that councils can redirect into services.

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So I welcome the new role of the National Audit Office. It will prepare the code of audit practice and undertake some thematic studies to be driven primarily by value for money and I welcome that. It must beware of mission creep, trying to do too much and spreading itself too thinly. It must also beware of simply identifying problems rather than solutions. The Audit Commission was excellent at financial audit and sometimes good in value-for-money studies, although too rigid in its tick-box inspection regime, but it was much poorer, at least in my experience, in devising solutions. Time and again we would be criticised for a problem that we already knew about and understood—an example is health inequalities—but it was rare to get a clear statement on actions needed or budgets required to deliver solutions. I hope that the National Audit Office does not fall into the same trap of thinking it has been useful when really it has not. But I doubt it will, because the change to the NAO undertaking thematic studies is the right approach.

Might I offer to the Minister some ideas as to what the NAO might look at in its early days? It could examine the benefits or otherwise of unitary councils or perhaps the potential for increasing local procurement. Here we have a proposal for audit to be procured more locally, but actually there is potential for greater local procurement and improving the relationship of local suppliers with their local council. Might it also look at the impact of the living wage in those places and on those councils where it has been adopted with an assessment of its potential for wider application?

Like other noble Lords, I understand the concerns about the local public audit section of the Bill for the Chartered Institute of Public Finance and Accountancy. I am surprised that these have been made both at the public consultation stage and in evidence to the Pre-legislative Scrutiny Committee but none of it has been acted on. I am keen to hear from the Minister why that is. Maybe we should be looking at this specific issue very carefully, as other noble Lords have said, in Committee.

Public auditing needs to be conducted in the public interest. Put another way, private sector auditing primarily concerns providing an audit opinion on financial statements. Public sector auditing requires something more in terms of propriety, probity and value for money. I have come to the conclusion, particularly from listening to this debate, that we have to be very clear on this matter during the passage of the Bill.

A separate issue has arisen in the course of the debate, which was raised by CIPFA, and that is the auditor panels. I agree that where audit committees already exist, it might be sensible to build on those rather than establishing separate auditor panels. I hope that we can look very carefully in Committee at audit committees, where they exist, and auditor panels. But above all, we have to maintain two things. First, we must maintain the independence of the audit structures away from any suggestion of party political influence or control. That takes us to the issue of independence. Audit committees and auditor panels have to have a majority of independent people externally appointed

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through robust mechanisms to make sure that the right people, who will be working in the public interest, are appointed to those posts.

The second need is to ensure real competition in the provision of audit services. Again there has been discussion in the House about that and about how it can be done. I am encouraged to hear that many more than the big four audit companies will be involved in auditing local councils. Competition keeps costs down. I hope that we will see regular changes in auditors by a specific authority, too, to ensure that things never get too cosy. We must have a discussion on local as opposed to national procurement and I hope that we will do that effectively in Committee.

Can I mention briefly the publicity code, referred to in Clause 38? It is not a problem for me that there is to be a statutory code. Here I support the Government. The reason is simple. The Government do not publish newspapers, and nor should local councils. It is one thing for councils to publish information; it is absolutely right that they should, be it on the web, or be it a quarterly or bi-monthly publication. I have no difficulty with that. I do have a difficulty with weekly newspapers, which run the risk of being seen as propaganda. If we want a free press it has to be free of any suggestion of party-political influence. I see a weekly newspaper as a step too far. It is likely, inevitably, to verge on the propagandist.

There is an important issue around the notices, however. Requiring councils to advertise them in local newspapers can be expensive, at around £40 million a year. I am not sure that that is as cost-effective as it might be and conceivably it is outside the requirements for the National Audit Office to deliver value for money. Councils should be free to devise their own solutions to this. There are many ways in which it could be done, not just on the web but in regular reports to ward committees, and so on. There are things that can be done to reach a wider audience.

Finally, on referendums, my position differs from that of the Government. I have never liked the power given to the Secretary of State to cap council tax rises and order a referendum over an arbitrary figure selected in Whitehall. There are four reasons.

First, it is against the principles of localism. Secondly, accountability is better done through the election of councillors at local elections. Thirdly, the Government do not hold referendums when they increase taxation. When VAT was increased two or three years ago there was no national referendum on it. It is unclear to me why it should be thought that referendums are right when local councils increase council tax. Fourthly, council tax levels can differ widely, something we do not talk enough about. Levels in neighbouring councils, whether you compare at band D or compare the average amount paid in a council area, can vary by several hundred pounds. If one council decides to raise a bit more money to protect essential services, such as libraries, swimming pools or local facilities, or to provide a decent standard of adult social care, why should it have to hold a referendum to do so?

The Bill could make things worse. I am not clear why Clause 39 is needed at all. I have major problems over the issue of levies. What is being proposed as

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regards levies counting as part of the Secretary of State’s decision about the maximum council tax rise is not acceptable. I believe that it will have to be amended in Committee. It certainly cannot be retrospective but, more than that, even if a referendum decides that an increase should not be permitted for a levying body, a local council would be left picking up the bill for it. In doing so the council would therefore have to cut services. I do not think that this is acceptable. I am starting to wonder whether Clause 39 is needed at all in the Bill and hope that we will explore that too in Committee.

4.14 pm

Lord Beecham: My Lords, I declare an interest, as so many others have, as a vice-president of the LGA. I am also a member of Newcastle City Council and a member of its audit committee, which incidentally is independently chaired.

As my noble friend Lord McKenzie reminded us, it is nearly three years since the Government announced their intention to abolish the Audit Commission. Characteristically, in yet another demonstration of their contempt for the parliamentary process, they have effectively achieved their objective by virtue of pre-legislative implementation of a policy that they have not deigned to submit to parliamentary scrutiny. Parliament was not invited to the bedside of this apparently terminally ill patient. We have merely been called upon to act as pall-bearers at its internment.

I had my differences with the commission during the 25 years for which I served as vice-chairman and chairman, successively, of the Association of Metropolitan Authorities and the Local Government Association, not least over its propensity to reach for a headline when publishing its reports. Yet it played an important part in highlighting issues of efficiency, effectiveness and good governance, which made a significant contribution to making local government the most efficient part of the public sector. I recall that in his second incarnation as Secretary of State for the Environment, the noble Lord, Lord Heseltine, who is not in his place today, invited me to become a member of the commission. I declined because I thought that there might be a conflict with my role of chair of the AMA, although the offer was useful in rebutting claims from Conservative councillors in Newcastle that I was the leader of a profligate council. I note in parentheses that we have not had a Conservative council in Newcastle for the past 17 years.

Latterly, the commission had responsibility for health as well as local government, which was precisely what was needed given the overlap of responsibilities now recognised with the return to local government of the responsibility for public health removed in Sir Keith Joseph’s 1973 reorganisation of the NHS, and the provisions of the health and social care Bill now being launched in your Lordships’ House. So why has this legacy of the Thatcher era—one of its more benign bequests, as we were reminded by my noble friend Lord Christopher—been abandoned? The answer seems to be embodied largely in the person of the Secretary of State.

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Your Lordships will perhaps be familiar with the distressing condition known as obsessive compulsive disorder. Mr Pickles seems to be afflicted with a kindred but more destructive condition: obsessive compulsion disorder. In addition to a long-standing obsession with the commission, which appears to date back to his brief period as leader of Bradford City Council—I pay tribute at least to one of his successors, the noble Baroness, Lady Eaton, for her contribution to this debate—the Bill reflects two other symptoms. They are the power to direct councils to comply with directions in the code of practice on local authority publicity, which, I remind your Lordships, is already restricted to four publications a year, and changes to the council tax referendum process, on which the Secretary of State is so keen, to include levy-making bodies—but in this case with the added ingredient of retrospection.

The position is well explained, appropriately, in the Explanatory Notes to the Bill. These provisions are contained in Clause 39, in subsections (14) to (16). The explanation given is that they,

“allow the Secretary of State to determine a category of authority on the basis of whether its relevant basic amount of council tax for … 2013-14 would have been excessive if the relevant basic amount in that year and 2012-13 had been calculated in accordance with the newly-amended legislation. In short, this explicitly allows the Secretary of State to consider the impact of previous levy increases when setting”,

referendum thresholds for 2014-15. I have drawn the attention of the noble Baroness, Lady Jay, as chair of the Constitution Committee, to this flagrant departure from normal and good practice. The effect of the provision could of course include councils, and therefore council tax payers, in the considerable expense of holding a referendum not on their own budget but on that of another body, over which they have no direct control. It could also lead to some authorities covered by a single levy-making body being required to hold a referendum and some not, depending on how close their council tax rate was to the threshold as determined.

The idiosyncratic nature of the Secretary of State was well illustrated earlier this year when he denounced councils for setting council tax just under the referendum threshold, as if they were somehow cheating the system. He seemed to threaten to lower the threshold accordingly next year. So go over the threshold this year and you will have a referendum; go just under it and you will have one next year. Will the Minister say whether there is any truth in the rumour that the next threshold will be a 0% increase?

Most of your Lordships, although not the noble Lord, Lord Shipley, regard the proposal about publicity in Clause 38 as equally objectionable. The original restrictions were partly based on the specious grounds that council newspapers or publications were somehow putting the local press out of business. That ignores the reality that all the print media are suffering from a combination of factors, including the growth of online media, free newspapers, which are often published by the local press, social media and local radio, and, of course, a decline in advertising, in part as a result of the recession. As has previously been mentioned in the debate, coverage of local government affairs has declined

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hugely in the past 20 years and the number of journalists has been cut. The noble Lord, Lord Palmer, certainly recognised that point.

As we have heard, the local press benefits hugely from council advertising to the extent of some £26 million a year, even without one of the unlamented features of the Audit Commission. That was a requirement proposed, I am sorry to say, by the previous Government, to publish annually some 200 performance indicators in a paid-for newspaper. That is not something that in my experience led to a significant increase in sales on the day of publication.

I suppose it is possible for some publications to stray into the political arena, but there are mechanisms to challenge such inappropriate behaviour without the Secretary of State setting himself up as a censor. By the way, when will the Government stop civil servants acting as spokesmen and using the personal pronoun, as many of them do, when defending government policies? It is not the job of civil servants to speak in that way about government policy.

Incidentally, I am challenged by the noble Lord, Lord Tope, to refer to Lambeth and Tower Hamlets. Tower Hamlets is not a Labour authority; it has the dubious benefit, as a result of one of the Government’s proposals, of having an elected mayor, who is not a Labour elected mayor.

Mr Pickles often talks of his early flirtation with communism. It appears he has not quite shed his belief in democratic centralism, the hallmark of the Lenin and Stalin regimes. I suppose we should be grateful that he has not required councils to act on his other obsessions, such as weekly bin collections, sacking chief executives, banning biscuits from council meetings or whatever else would appeal to such organisations as the TaxPayers’ Alliance or UKIP, or to the right-wing press.

As a final reference to the cavalier approach so often adopted by the Government as a whole and in particular by the Secretary of State, I remind the House that neither of these two measures, on referendums and publications, were included in the draft Bill which was considered by the ad hoc draft Bill committee in the House of Commons. Once again, extraneous and controversial measures have been spatchcocked into a Bill at short notice. The Government’s contempt for due process could not be clearer. My noble friend Lord Christopher was entirely right to draw attention to that.

Turning to the more prosaic and technical parts of the Bill, so lucidly analysed by my noble friend Lord McKenzie and other noble Lords, I regret the diminished capacity for value-for-money studies and the quality and improvement agendas which the Audit Commission was so effective in promoting. The National Audit Office will conduct only six value-for-money studies a year. Significantly, we learnt from a meeting that the noble Baroness kindly organised yesterday, that those studies will essentially be directed at the impact of central government spending, and will not, therefore, be likely to deal with such issues as the noble Lord, Lord Shipley, raised about the possible advantages of unitary government or the living wage. Those are not directly related to central government spending.

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On the other hand, the commission conducted 16 such studies across the whole field. The potential of Total Place or, as it is now known, Community Budgets, will not be exploited fully on that partial basis. These are areas in which a cost-cutting approach to assessment ought to be made, involving both central and local government, and that is unlikely to take place under the auspices of the National Audit Office, if it is to carry out its responsibilities in the way that we learnt yesterday. That is particularly regrettable in the health and social care fields, which, after all, we in your Lordships’ House have begun debating and in which the need for closer working relationships is emphatically emphasised.

Health will now potentially have a separate field of auditors, although the same firm might end up auditing the clinical commissioning group and the local council, presumably with different staff. There is a notion, ventilated in the ad hoc sub-committee’s deliberations, that the Local Government Association will be able, in some respects, to replace the commission’s work and to sustain its improvement programme. I am afraid that is illusory. The Local Government Association has been the target of another of the Secretary of State’s obsessions. He has cut its funding, topsliced from the revenue support grant, from £41.3 million a year to £25.5 million, or by 38%. That has significant implications for its staffing and capacity to represent the sector and enhance its effectiveness. Interestingly, £25 million is the sum that local government is paying into the coffers of the local press for the statutory advertisements to which other noble Lords have referred.

As my noble friend Lord McKenzie has pointed out, the privatisation of district audit and the new tendering system leaves a handful of large accountancy firms, many of which have other services to sell to the councils that they are auditing, to have an effective oligopoly of the audit role, at least in the larger councils. The noble Lord, Lord Shipley, exaggerates the benefits of the change. There are not a large number of firms. Seven are accredited nationally, two of which are arms of just one organisation. Therefore, there are effectively six firms, one with a couple of branches. That does not offer a vast choice. There will be a requirement to retender every five years but your Lordships might think that it would be better if the requirement were to be a change of auditors every five years to ensure that there is a turn-around and that the relationship does not get too close. That is a matter that we can perhaps pursue in Committee.

This is in many respects a bad and unworthy Bill. I hope that all who proclaim themselves localists, who wish to promote informed debate and decision-making at a local and national level, and who are concerned at the manner and form in which this legislation comes to us, will combine to improve it. The Minister has a long and distinguished record in local government. She is looking somewhat sceptical. I have no intention of doing anything but praising her at this stage because she is a localist and has a relationship with local government that I can only wish other of her ministerial colleagues would share. We will work with her and I hope that across the House we will be able to improve the Bill—it certainly needs improvement.

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Before I resume my place, there is another matter that I understand is also to be raised by the Minister. I wish to pay tribute to the outgoing Yeoman Usher, who performs his last day as an official in this House before his well deserved retirement. For someone who has both a royal function in this House and is responsible for the organisation of security he was, appropriately, a lieutenant-colonel in the Army Royal Logistics Corps.

Perhaps his most celebrated moment in the course of his activities was when, shortly after the last general election, he deputised for Black Rod at the State Opening of Parliament. I understand that he struck the Commons Chamber door in the correct place, which may take some doing, and then successfully ran the gauntlet of the traditional barbed wit of my honourable friend in the Commons, Dennis Skinner, which he deflected with extreme courtesy.

I am personally grateful to the Yeoman Usher for the very helpful induction he gave me, along with noble Lord, Lord Popat, before we were introduced into the House. We clearly owe our promotion to our respective Front Benches to his wise advice. Since joining this House as Yeoman Usher in 2009, he has always performed his role here with great aplomb, efficiency and courtesy. He will be missed by us all, and I am sure noble Lords will join me in wishing him well for the future.

4.28 pm

Baroness Hanham: My Lords, I will follow what the noble Lord said about the Yeoman Usher. We do not like losing senior members of staff in this House. We always like them and he has been no exception. We, too, wish him well. I thank the noble Lord for giving the background to his appointment and time here. It saves me from having to do so, but I certainly endorse what he said and wish the Yeoman Usher well as he leaves this House. We will remember him fondly and affectionately for his time here.

The noble Lord, Lord Beecham, is looking slightly sceptical. He is always very kind, although there is usually a sting in the tail. I do not I accuse him of being a scorpion—

Lord Beecham: That is my star sign.

Baroness Hanham: That was a lucky hit.

We have had a long debate on three matters within one Bill. That was most unusual. Usually we have many more and we have managed to spend nearly two hours on these three matters. Noble Lords have raised a number of points and clearly we will come back to all of them. I hope that the noble Lords who spoke today will take part in Committee, because sometimes there is a tendency for people to come and deliver their thoughts but not carry them forward in Committee. I hope as many noble Lords as possible will do that.

I have no doubt that the noble Lords, Lord McKenzie and Lord Beecham, will be in their seats in Committee, and we will pick up many of the remarks and comments that have been made about the detail of what happens with the abolition of the Audit Commission. I did not

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get a sense of any great exasperation—except perhaps from the noble Lord, Lord Christopher—that the Audit Commission was coming to the end of its days. However, I understand that there are questions to be asked about how the process will go forward to ensure that local government has in place a proper system and that the integrity of the process of auditing is maintained.

I have sheaves of answers to questions and I do not want to go through all of them. Because of the time, everybody will want to go. I will deal with just one or two areas. The question was raised about the training and supervision of auditors. The noble Lord, Lord McKenzie, raised this point. Recognised supervisory bodies are being put into place and they will lay down the rules and the training that must be implicit in auditors applying to do work for local authorities. We can discuss this further, but we can be sure that there is an understanding that auditors must first understand local government finance, apart from anything else; that seems pretty basic. They will also have to be independent from the authority. This point was made by the noble Lord, Lord Palmer. There should be absolutely clear independence between the audit committee and the auditors. I think we shall be able to satisfy the noble Lord that this is what will happen.

A number of noble Lords raised the question of whether just four companies would bid for this audit. I said in my opening remarks that we expected considerably more than those four. Thirteen fulfilled the pre-qualification when it was put out. With the expectation that local authorities will seek auditors independently, or perhaps come together in a small cohort, there will be a requirement for more local auditors who are smaller companies. They will have to be properly qualified and be able to do their job, and while the suggestion is that for safety’s sake everybody will go for the big four, I hope and believe that there is an opening for others to take part.

The noble Lord, Lord McKenzie, asked about the difference between the auditor panel and audit committees. The noble Lord, Lord Palmer, was also interested in this aspect. The audit committees were clearly the supervisory committees of the councils’ own accounts and finance; they were in-house. The auditor panel will be there to ensure that auditors are selected and chosen properly against proper backgrounds. They will also be there to ensure that the external auditors carry out their role.

It is important to take a step away and have independent members in the majority. These committees do not have to be big. I should think that most authorities would be able to find two or three people who will fulfil the role of being independent and who have some idea of what it is all about. It is not unusual for local authorities to have to find independent members; they do it for standards boards and other things, and many of them have them on their pension fund committees as well. It is not beyond the wit of local authorities to find suitable people to sit on these committees to ensure the integrity of what is being done.

The internal audit is not in the Bill because it deals only with external audit arrangements. The requirements for local authorities to maintain effective internal audit

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has been included in the accounts regulations since 1974. A point was made by the noble Lord, Lord Palmer, who is obviously very experienced, and he will recognise that that is the situation. The regulations are made under the Audit Commission Act but we intend that those regulations made under Clause 31 will make similar provision in the future. The requirement for health service bodies to maintain the internal audit is dealt with separately under the National Health Service Acts.

The noble Lord, Lord McKenzie, asked about the national fraud investigation and what will happen when the Audit Commission is abolished. A final decision has not been made on where it will be placed but it is extremely important that it carries on the work that it is doing, so we will consider it very carefully. I am sure that we can discuss that.

The noble Lord, Lord Tope, asked why the opportunity to broaden the scope of the audit was not taken. We understand that the audit of public funds needs a broader scope than the audit of companies. After consultation we decided that the same scope of the audit provides a good balance between maintaining the high quality of audit and audit fees. The noble Lord, Lord Palmer, again with his experience, suggested that auditors will be reluctant to criticise that appointment for fear of not being reappointed. They have statutory duties to consider whether they need to make public interest reports; so they cannot be so biased in favour of the local authority that they do not do that. Local people have a right to appeal and they will have to deal with that as well. I do not think that they will be in a position to be reluctant; it will be part of their duties to ensure that they take those up.

We have dealt with the big four. The noble Lords, Lord Tope and Lord True, and the noble Baroness, Lady Eaton, asked how we would prevent mission creep in the National Audit Office’s role and said that it should not undertake studies that are not required. The National Audit Office already does studies on government spending. We expect it to add no more than about six to that, which will include local government on a wider scale rather than individual local authorities.

I shall turn to the other two areas on which we received some comments. On levying by external authorities, there are examples where those levies are a very substantial part of the council tax bill. Often, very little consideration is given by those bodies to what those levels are. It is important that they are taken account of.

On the question of retrospection and whether anything this year will be taken into account for next year, no decision has been taken at all about referendums yet. The principles for 2014 will be set out by the Secretary of State later on when he has taken into account all relevant factors, including the position of levies, in due course.

The issue of the principles that might trigger council referendums has long since passed; it was dealt with in previous legislation.

The noble Lord, Lord McKenzie, asked about levies and city deals, particularly with Manchester. Again, the Secretary of State can take account of this when he is looking at the principles that might trigger a

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referendum, but we intend that local people should have a say before any excessive bills are imposed upon them—in other words, with a referendum.

On publicity, there have been a number of triggers. One of them is that there has been pressure on the local press from local authority newspapers; the other is that some of them have been overtly political. There are examples of where local government publications are still within the political area, and also where they are being issued so often that they are becoming a pressure on the local press. We all agree that the local press is a very important part of being able to inform local people of what is going on, and what the councils are doing. It is worth pointing out that taking action about these papers was not only in the coalition agreement but was a pledge in the general manifestos of both the coalition partners. There is a publicity code already, as noble Lords know, and it will just be a question of giving the Secretary of State powers of direction where he thinks there is an overenthusiasm on the part of local authorities undertaking these publications.

The noble Earl, Lord Lytton, described the direction requiring compliance with the code as being nebulous. I am sure that we will have an opportunity to discuss that further in due course.

Finally, the noble Lord, Lord Tope, asked about statutory notices. We are aware of the burden that placing statutory notices in newspapers has on local authorities. The Secretary of State has stated that,

“in the internet age … commercial newspapers should expect that over time there will be less state advertising”.—[

Official Report

, Commons, Seventh Delegated Legislation Committee, 23/3/11; col. 18.]

That would imply that they can be carried out in other ways.

I know we are going to come back to many of these points. Noble Lords must forgive me if I have not specifically picked up any of the points that they have made. If they think that it would be helpful to have a reply before we go into Committee where I have not answered them I will make sure that happens. Otherwise, I look forward—

Lord True: Before my noble friend sits down, she has not responded—I understand why and I do not complain about it—to the gravamen of my speech, which related to the ability of certain local bodies, in this case, an NHS body, to evade accountability and proper response to a report from an auditor. Will she undertake to hold discussions about that before Committee?

Baroness Hanham: My Lords, I certainly will. I apologise to my noble friend. It would perhaps be better if we discussed that before we take it on. The noble Earl, Lord Lytton, asked me whether we could discuss the audit for small authorities. Of course, I am delighted to do that as well; we will make arrangements for that, once we have all had a good Recess and time to put these things behind us for a day or two.

Bill read a second time and committed to a Grand Committee.

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Motion to Adjourn

Moved by Baroness Anelay of St Johns

That the House do now adjourn.

4.45 pm

Baroness Anelay of St Johns: My Lords, in moving the adjournment of the House, I refer to the fact that I was pleased to hear tributes paid by the noble Lord, Lord Beecham, and my noble friend Lady Hanham to the work of Lieutenant Colonel Ted Lloyd-Jukes as our Yeoman Usher in this House.

Noble Lords: Hear, hear!

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Baroness Anelay of St Johns: Of course, formal tributes will be paid when we reach the normal stage in December, but it was most appropriate that they should be made at this stage, as we will not see that much more of him here. We will have very good memories of the service that he has given. I know that we all wish him a happy retirement. I know that he will shortly stand ready to bear the Mace out of the Chamber on his last day. I beg to move.

Motion agreed.

House adjourned at 4.46 pm.