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Grand Committee

Wednesday, 12 June 2013.

3.45 pm

The Deputy Chairman of Committees (Lord Bates): My Lords, in the unlikely event of a Division in the House, the Committee will adjourn for 10 minutes.

Education (Amendment of the Curriculum Requirements for Second Key Stage) (England) Order 2013

Education (Amendment of the Curriculum Requirements for Second Key Stage) (England) Order 2013 2nd Report from the Joint Committee on Statutory Instruments

Considered in Grand Committee

3.45 pm

Moved by Baroness Garden of Frognal

That the Grand Committee do report to the House that it has considered the Education (Amendment of the Curriculum Requirements for Second Key Stage) (England) Order 2013

Relevant document: 2nd Report from the Joint Committee on Statutory Instruments

Baroness Garden of Frognal: I thank noble Lords for the opportunity to debate the Government’s proposals for the introduction of compulsory foreign language teaching into primary schools in England. As noble Lords will know, the study of languages is currently a compulsory national curriculum subject in maintained schools in England at key stage 3 only.

In January 2011, the Government launched a review of the national curriculum in England. After consideration of evidence from competitor nations, advice from subject experts and responses to the review’s call for evidence, the expert panel advising the review recommended that the teaching of languages should be introduced at key stage 2. Following this, in June 2012, my right honourable friend the Secretary of State for Education confirmed that it was the Government’s intention to include the teaching of foreign languages at key stage 2 and, in doing so, build on the good work that many primary schools are already doing, and bring us into line with practice in many other countries.

I will say something about why we think this change is essential. Learning a language benefits individuals’ social and economic prospects and the economy more widely. It improves the mind, provides an opening to other cultures and deepens our understanding of the world. It is one mark of an educated person and we want all children to develop confidence and enjoyment in being able to speak another language early in their school life.

It is a sad fact, however, that the state of languages teaching in secondary schools has been in decline for a number of years. One sign of this can be seen in the fall in the numbers of those taking languages GCSEs. It is startling to note that the proportion of the cohort entering for at least one modern foreign language GCSE has declined from a high of 79% in 2001 to 40%

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in 2011. Other evidence also points to a decline. For example, the 2012

European Survey on Language Competences

highlighted the poor state of languages ability among school pupils in England. Specifically, in the first taught foreign language, England had significantly more pupils at the lower proficiency levels and significantly fewer at the highest levels than our European counterparts.

We are committed to changing this situation and improving the teaching of languages. The English baccalaureate performance measure has already started to address the number of pupils studying languages at key stage 4. We believe that introducing languages earlier will improve take-up further still and also help pupils to achieve higher levels of performance at GCSE level and beyond.

We recognise the importance of making foreign languages compulsory at key stage 2, as recommended by the expert panel appointed to advise the national curriculum review. There is evidence that suggests that children are better able to learn the sounds of new languages when they are younger. We have also taken into account previous recommendations, made by Lord Dearing, that the teaching of foreign languages should be compulsory at key stage 2, and the similar conclusions of Sir Jim Rose’s review of the primary school curriculum conducted under the previous Government. Learning languages at an early age also helps general cognitive development. Researchers from University College London in 2004 found that learning other languages altered grey matter—that is, the area of the brain that processes information—in the same way that exercise builds muscles.

We have also taken into account the international evidence that shows that many other jurisdictions recommend the teaching of foreign languages in the primary phase. Indeed, evidence from Europe shows that many countries start a compulsory second language much earlier than at age 11. In Austria, France, Norway and Spain, for example, pupils will have started to learn a second language by the age of seven. We also considered evidence from secondary schools, which told us how difficult it is to plan languages teaching for their new intake that builds on what they may have been taught in primary school. This means that in some circumstances teaching is not built on effectively when pupils start secondary school.

We were encouraged by the recent CfBT Language Trends survey, in which 97% of primary schools reported that they were already teaching a language. The same survey found that more than 80% of primary schools were reasonably confident about meeting the statutory key stage 2 language requirement from 2014. It is uplifting to see examples such as St Paul’s primary school in Brighton, a leading school for the teaching of Spanish, which is taught from reception to year 6.

All pupils should enjoy the benefits of learning a language for at least four years during their primary education, which will enable them to make significant progress. We also believe that making languages compulsory at key stage 2, underpinned by a statutory programme of study, will give secondary schools a much more secure base on which to build.

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We have sought views on this proposal both through the national curriculum review call for evidence and a specific consultation exercise on making languages compulsory at key stage 2. Responses on this issue in both exercises were overwhelmingly positive. The large majority of respondents to the consultation—more than 90%—agreed with the Government’s intention to introduce foreign languages at key stage 2. Their arguments included the view that young children have a natural disposition for learning languages. They claimed that making the subject compulsory was important to ensure its place in the curriculum of all schools. They also argued that doing so would lead to better attainment at key stage 3, and greater take-up at key stage 4, and that pupils would benefit from a more global outlook and enhanced career prospects.

Only a very small proportion of respondents—3% —opposed the proposal. Their key argument was that languages should not be a priority for this age group compared with other subjects such as literacy, numeracy and science. The majority of respondents, however, were of the opinion that all children benefited from learning a foreign language and that it widened opportunity.

In November last year, we therefore announced our decision to proceed with the necessary legislation to make languages compulsory at key stage 2. As noble Lords may be aware, on the same date we sought views on a proposal to require primary schools to teach one of the following languages at key stage 2: French, German, Italian, Mandarin, Spanish, Latin or ancient Greek. Responses to this second consultation were divided, but the matter for debate today is whether we should make foreign languages a statutory subject at key stage 2. A separate order will be laid subsequently on the proposed list of languages.

We also published, in February this year, a programme of study for key stage 2 languages in draft, along with one for key stage 3. These programmes set out the purpose and aims of study, as well as the subject content to be taught. The intention behind them is that children should enjoy learning a language, with the goal of being able to speak it with increasing confidence and fluency, and finding ways of communicating what they want to say. Having the confidence and ability to use a foreign language for their purposes, as well as for academic study, is very important. We have been extremely encouraged by the very positive response with which these programmes of study were greeted. Our belief that they will provide a challenging, rigorous and appropriate standard has been supported by many respondents.

On the implementation of the proposal, we are carefully considering the responses to the recent consultation on the Government’s wider proposals for reform of the national curriculum. This included a specific question asking for views on the support that schools will need to implement the new national curriculum. Clearly, system leaders, such as teaching schools and national support schools, will play a key role. We are also working with subject associations, publishers and others to ensure that high-quality support is available.

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As my honourable friend the Parliamentary Under-Secretary of State for Education and Childcare said in her speech to the National College Fellowship Commission last month, the implementation of this edition of the national curriculum will be unlike previous revisions. There will be a much greater emphasis on freeing up teachers from central government prescription to enable them to make these reforms work in their schools.

Language teaching requires expertise both in using the language and in age-appropriate pedagogy. Many primary schools have already successfully addressed these needs. Making languages compulsory at key stage 2 will build on this good base and on the investment made by previous Governments to support primary languages teaching.

We recognise that training and continuing professional development will, of course, be important, particularly with the new emphasis on written as well as spoken language, but needs will vary from school to school. The Government, therefore, believe as a general principle that schools themselves are best placed to decide what arrangements they need to put in place to support their staff to deliver the new national curriculum.

Making foreign languages compulsory at key stage 2 is a hugely significant step, and one that has and will attract widespread support from the teaching profession and employers. Many primary schools have already made significant progress towards providing languages in key stage 2. Once we have completed the analysis of the responses to the consultation exercise and reflected on the feedback received, we will publish what we intend to be final versions of the new programmes of study. Subject to the will of Parliament those programmes of study will be confirmed in the autumn. I believe that the reforms that we are making will be crucial in helping to improve the standard of languages teaching in England. I therefore commend the order to the House.

Baroness Jones of Whitchurch: My Lords, I thank the Minister for her explanation of the order. I should make it clear from the outset that we are not in principle opposed to the requirement to teach a foreign language at key stage 2. In fact, the previous Government led the way on this and were already legislating for it in the Children, Schools and Families Act 2010 when the then Opposition refused to support it in the run-up to the general election. If our proposal on the primary school curriculum had been allowed to continue, modern foreign language teaching in primary schools would have been compulsory from 2011; it will not now be compulsory until September 2014.

The order is set against the backdrop of much broader curriculum changes that have been subject to detailed debate and criticism both in your Lordships’ House and in the wider education world. While I am sure that the noble Baroness will be pleased to hear that I do not intend to repeat all those concerns today, some of them are specific to this discussion and I shall address those now. First, the whole process of curriculum reform has been marked by secrecy and a lack of transparency, which is equally true of the foreign language proposals. The Government have carried out two consultations on this issue but the responses were

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available only when sought by a freedom of information request, so we have to take the summary in the Explanatory Memorandum on trust. Nevertheless we were pleased to see that the vast majority of respondents supported the change in principle.

However, we share the fundamental concerns also identified in the memorandum about the prescriptive list of languages to be taught. It is not at all clear how the list was drawn up and what the evidence base was to determine that these and no other languages should be taught. Why not, for example, include Bengali, Hindi or Arabic, or other languages with strong roots in local communities? I was a school governor a decade or two ago in a south London school with a strong local Portuguese community. Why should that school not be able to benefit from the advantages of pupils who already have some bilingual knowledge in their classroom? I appreciate that the specifics are subject to a separate order and will take note of the Minister’s justification of the list, but I would like to return to this later.

Secondly, we are concerned that the current broad aims of learning set out in the old curriculum are being replaced by a much narrower concentration on pupils acquiring core knowledge. We are concerned that this will have an impact on the way in which any foreign language is taught, will militate against developing a love and respect for other languages, and will be replaced by a more formulistic count of words and phrases that have to be memorised. With a technical emphasis on learning in the curriculum, there appears to be a lack of understanding of the wider benefits of intercultural understanding, access to a global community and greater transferrable skills, although I was pleased to hear the noble Baroness making some references to those issues in her introduction. Can she provide any insight into the teaching guidance that will be given to language teachers to ensure that pupils learn in a broad global context?

4 pm

Thirdly, we are concerned at the tight timetable proposed for the implementation of the changes. I would like some further reassurance that this has been thought through. What assessment has the department made of the capacity of primary schools to recruit sufficient suitably qualified staff to teach a language by September 2014—or will it be the case, as I suspect, that it will be added on to the teaching portfolio of existing non-specialist staff?

Has any thought been given to the adverse effects of teaching a language badly? I speak with some painful personal memories in this regard, having been in a French class for three years that consisted of collectively being played audiovisual tapes. Needless to say, it was rather too late to take any remedial action by the time it was realised how little any of us had learnt over that period. I have to say that maybe my grey matter has suffered as a result of not learning that language at that time. Will the Minister clarify what steps are being taken to boost the number of language teachers prior to September next year to ensure that potential teaching programmes and materials are in place and to guarantee that quality specialist teaching exists from day one?

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The recent Ofsted report on modern languages acknowledged that significant progress had been made under the previous Government, and that there was a commitment of senior leaders to introduce modern languages in primary schools. Again, the Minister made reference to that progress. However, it also recommended that the department should consider how best to support, both nationally and locally, the effective consolidation of modern languages and increased liaison with secondary schools to provide continuity of learning. How has the department responded to that challenge?

Meanwhile, the Education Minister in the Commons, Elizabeth Truss, in reply to a recent Question about the availability of resources to help with the new curriculum, was quoted as saying that schools were best placed to decide what teaching resources and professional development met their needs and that it was down to them to identify their priorities. Again, I think I heard an echo of that comment in the Minister’s introduction. I have to say that that feels rather like passing the buck, given that these changes will be a requirement on all maintained schools. I hope that the Minister can give a slightly more encouraging response about the scale of support that will be provided centrally.

In conclusion, I repeat a point that has been made repeatedly in other contexts: if the teaching of a foreign language at key stage 2 is important to the Government, how can it be right that a proportion of children, including those who attend academies, free schools and independent schools, are outside the scope of these proposals and therefore unaffected by the changes?

I have focused my comments today on the principle and practicalities of introducing a language teaching requirement at key stage 2. However, as I have made clear, we have considerably more concerns about the specific list of languages that are being proposed and which will be dealt with in a separate order to follow. We reserve our position on this. In the mean time, I look forward to hearing the Minister’s response to the points that I have raised today.

Baroness Garden of Frognal: I thank the noble Baroness for her response on this. The number of participants in today’s debate means that we must regard this as quality rather than quantity. I appreciate the dialogue that we have sometimes over these matters outside the Chamber, which helps us come to better responses.

On the point about secrecy and transparency, the first consultation report on introducing statutory language teaching was published on the DfE website on 16 November 2012, and responses continue to come in. The consultation report was published on 7 February 2013 together with the draft programmes of study, and the consultation report on the programmes of study will be published in due course. I assure the noble Baroness that we have made every effort to ensure that there is no secrecy on these matters, and that the information is available and people’s contributions have been welcomed.

The noble Baroness mentioned the choice of modern languages; we both recognise that that is not the subject of this instrument. The list of modern languages

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proposed reflects the languages that primary schools told us that they were mostly likely to teach and therefore have the expertise for teaching. Mandarin is particularly important to our future economic success. Latin and ancient Greek were added because they provide an important foundation for a number of foreign languages. We recognise that the list will provoke debate. My right honourable friend has received representations on behalf of a number of languages that are not included, including Japanese and Hebrew, is considering those representations carefully and will take all the points raised into consideration before putting the order in place.

Of course, we are not preventing any school from teaching any language it wants to. All children should have opportunity to learn one of the major world languages on the proposed list; it may, for example, be a language that they already learn at home or, as the noble Baroness has said, a language which is prevalent in the particular school. There is no restriction on that.

The noble Baroness mentioned academies. Although there is no specific regulation for the academies to teach a language, they will fall under the same regulations about teaching a balanced curriculum as other schools. It is unlikely that parents of children at an academy would not insist, if the academy were not offering a language, that it should be part of a balanced curriculum. Again, however, we will monitor that.

The noble Baroness mentioned the effectiveness of teaching of foreign languages. I agree that, again, we must ensure that we keep up with this. I assure her that her grey matter does not seem to be in short supply due to her language learning. There is of course now a great deal of technology which can assist with the teaching of languages; although I recall as a one-time language teacher being faced with language labs; there only ever seemed to be one person in the school who knew how to work them and they were almost inevitably on the far side of the sports pitch. Some technologies have not been as useful as others. These days, however, there are some exciting developments for helping to teach modern languages, but they are no substitute for a good teacher.

We know from the recent annual reports that the majority of schools already have good practice and good teachers, but that is not to say that the recruitment of new teachers with relevant expertise will not also be important. We will continue to prioritise attracting foreign language graduates to the profession through bursaries and working with professional bodies to try to ensure that modern language graduates see teaching as an excellent career choice. We will work closely with subject-specific expert groups to ensure that primary-level standards will be maintained. I repeat my acknowledgement of the work of the previous Government in increasing modern languages at particular stages in schools. We are building on that.

We recognise that in certain situations it may be appropriate for the Government to consider what we can do to facilitate the provision of support to ensure high-quality teaching in key subjects. We will continue to monitor that. The National College for Teaching and Leadership has established an expert group, chaired

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by a leading primary head teacher, which has been meeting to develop the sign-posting of resources, to identify high-quality teaching materials that are freely available and looking at ways in which initial teacher trainers and schools could best prepare for the introduction of key stage 2 languages. We will be considering the group’s recommendations carefully as we prepare for implementation of the new national curriculum from September 2014.

The resources currently available include the Primary Languages training zone developed by CILT, the National Centre for Languages, which supports the teaching of French, German and Spanish in primary schools. We hope that the availability of staff expertise, including support from secondary schools, will encourage a greater dialogue between primary and secondary schools to ensure that there is a smooth transition for youngsters who have learnt a particular language in primary school to be able to continue, if they wish, with the same language into secondary school. In 2013, there will be initial teacher training bursaries of up to £20,000 to attract foreign language graduates. I have already mentioned our wish to attract more bright foreign language graduates.

I thank the noble Baroness, Lady Jones, for the points she has raised, and I hope that I have reassured her on some of them. I look forward to debating at a later stage the list of languages.

Motion agreed.

Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Referral Fees) Regulations 2013

Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Referral Fees) Regulations 2013 2nd Report from the Joint Committee on Statutory Instruments

Considered in Grand Committee

4.10 pm

Moved By Lord Newby

That the Grand Committee do report to the House that it has considered the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Referral Fees) Regulations 2013

Relevant documents: 2nd Report from the Joint Committee on Statutory Instruments

Lord Newby: My Lords, these regulations concern the ban on referral fees introduced by the Legal Aid, Sentencing and Punishment of Offenders Act 2012. They make provision for the implementation of the ban in two specific areas. First, they provide for the ban on referral fees to apply to certain types of financial services firm—namely, those in the insurance sector. Secondly, they provide for the enforcement of the ban, as it applies to financial firms, by the Financial Conduct Authority.

I turn first to the rationale for the ban. In late 2008 Lord Justice Jackson was commissioned to undertake a review of the rules and principles governing the costs of civil litigation in England and Wales and to make recommendations to promote access to justice at proportionate costs. His report set out a number of

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proposals to tackle the disproportionate costs of civil litigation. In responding to these proposals the Ministry of Justice included provisions to ban referral fees in relation to personal injury cases in the LASPO Act 2012. Referral fees are typically paid by solicitors to third parties who refer business to them. Most personal injury claims are referred to solicitors by claims management companies. However, other parties, such as insurers, are also often involved. In cases where policyholders contact insurers to make a claim on their motor insurance policy, the insurer may check whether there is a related personal injury claim and refer the policyholder to a lawyer in return for a fee. If the case is successful, the lawyer’s costs, including the referral fee, would be recovered from the losing defendant. In many cases, the losing defendant could be another insurance company.

Referral fee payments have increased from around £250 per case in 2004 to around £800 per case in 2009. Both the Law Society and the Association of British Insurers raised the concern that the circular flow of money generated by referral fees incentivises and rewards making claims and therefore inflates the cost of claims and ultimately insurance premiums. According to the ABI, the average insurance premium increased by approximately 10% from 2009 to 2010 in order to make up for insurance underwriting losses of over £2 billion in 2010, when 20p was lost in every £1 of premium earned.

Lord Justice Jackson recommended that the payment and receipt of referral fees should be banned. A ban discourages lawyers from bringing unnecessary claims for compensation, including unmeritorious lower-value claims, while reducing the overall level of legal costs in personal injury cases and related insurance costs. The Ministry of Justice took forward Lord Justice Jackson’s recommendations. Rules against referral fees in personal injury cases were included in the LASPO Act 2012. The rules cover both the payment and the receipt of referral fees. The ban captures all the main businesses involved, such as solicitors, claims management companies, insurers and insurance intermediaries. Under the provisions of the 2012 Act, the individual regulators in each sector are required to effectively enforce the ban. For regulated financial services firms, the relevant regulator is the FCA.

I will now explain the specifics of the regulation. The provisions in Sections 56 to 60 of the LASPO Act 2012 introduce rules against the payment and receipt of referral fees for legal services in relation to personal injury cases. The ban on the payment and receipt of referral fees generally came into effect on 1 April.

4.15 pm

The 2012 Act confers two main powers on the Treasury that are exercised through these regulations. The first relates to the scope of the ban. The ban on referral fees applies only to financial services firms of a type described by the Treasury in regulations. The regulations specify the financial services firms to which the ban on referral fees applies. The ban is applied to those primarily conducting insurance and insurance mediation or those in the same group as such persons. The second relates to the monitoring and enforcement of the ban. The 2012 Act provides for the Financial

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Conduct Authority to be the regulator for financial services firms. It allows the Treasury to adapt the existing regulatory powers of the FCA to this new regulatory function.

The FCA has existing powers under the Financial Services and Markets Act 2000 to supervise, monitor and enforce regulatory requirements imposed on financial services firms. These regulations provide the FCA’s existing powers of monitoring and enforcement to be applied, with appropriate modifications, to the ban on referral fees. This will enable the FCA to use those powers to enforce the ban. For example, it can impose financial penalties where a firm breaches regulatory rules under the Financial Services and Markets Act 2000. These regulations provide for the FCA to be able to use the financial penalties power where a financial services firm breaches the rules against referral fees.

Another example is provided in investigatory powers. Under FiSMA, the FCA can require financial services firms to provide it with information where this is relevant to the authority’s functions under the 2000 Act. These regulations allow the Financial Conduct Authority to use this power to require information to be provided where this is relevant to enforcing the ban against referral fees, as it applies to financial firms.

The ban on referral fees will apply to those conducting insurance and insurance mediation and those in the same group as such persons. It will mean that insurers and insurance brokers are likely to incur compliance costs related to ensuring that they are not in breach of the ban. Firms can also expect to be subject to monitoring by the Financial Conduct Authority and enforcement action where breaches are identified. The FCA has published a one-minute guide for firms affected by these regulations on how it will supervise the ban on referral fees in relation to financial services firms. Supervision of the financial sector’s compliance with the ban will form part of the existing supervisory regime of the FCA. For those reasons, I commend the regulations to the Committee.

Lord Beecham: My Lords, today is perhaps the first bite of the regulatory apple in as much as the noble Lord, Lord Hodgson, has a Question on Monday, to which the Minister will be replying, on the impact of this measure on the introduction of alternative business structures. We will no doubt be returning to that aspect later.

I am always impressed by how the Government rely on Lord Justice Jackson’s report, except when it comes to his very strong assertion that legal aid should have remained intact. It is a very selective approach—we are moving from apples to cherries in terms of our botanical analogies. Having said that, we have no objection to a ban on referral fees in general, although I am bound to say that I was a little surprised that my noble friend Lady Hayter reported to me that in her experience in the consumer world, in which she is heavily engaged, consumers apparently very much like the referral fee system and going through a referring body to solicitors. It was rather a surprise and, perhaps, a disappointment to me. I declare an interest as a solicitor, although now an unpaid consultant in my old firm.

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Be that as it may, there were certainly abuses, particularly in claims management companies but also by the very insurance companies that have constantly pressed the Government, now successfully, on their need to reduce the likelihood of litigation by making it more difficult and more expensive for litigants to obtain justice. The limits, particularly on claims of less than £25,000 for personal injuries, will be subject to a very strict regime in terms of costs that may well make it uneconomic for solicitors to pursue them—but that, I guess, is a different matter.

The ceaseless advertising and constant cold calling from which many of us still suffer have been a nuisance. I do not know how many times I have been told that I have a claim under PPI—mind you, if I had, it does not look as though Lloyds Bank would be paying up. Insurance companies in particular and claims management companies abused their position, so we have no objection in principle to the ban.

Having said that, there are areas in which the extension was not justified, which I mentioned in debate on the LASPO Bill, as it then was—in particular, the ban on referral fees to non-profit organisations and trade unions, because they are regarded in the same light as those commercial organisations. I thought then and I think now that that equivalence does not exist, but we are where we are.

I note from the Explanatory Notes that the FCA has issued guidance notes to firms affected by the regulations. I am bound to say that I could not trace those when I looked online, but they may exist. It would have been helpful had I had them but I assume that they have been issued, as the Explanatory Notes state that they have. The noble Lord might want to check that before Monday.

It is interesting that the Legal Services Board has also issued guidance on referral fees. My noble friend Lady Hayter has copied to me a letter dated 21 August 2012 that seems to have been addressed to all approved regulators, so I suppose that that includes the Solicitors Regulation Authority, the FSA and possibly other bodies as well—the Institute of Chartered Accountants in England and Wales, or whatever. I am not sure, and the Minister may not be able to tell me today, whether the FCA guidance reflects the guidance previously offered by the Legal Services Board. I note from the Explanatory Notes that there was no consultation on this statutory instrument, which puzzles me because if the Legal Services Board pronounced some months ago, unless the FCA simply adopted its guidance, one would have thought that it would have at least consulted the Legal Services Board and possibly other bodies. I am curious about that apparent turn of events.

The Legal Services Board stated in its letter—this may reflect the substance of the question of the noble Lord, Lord Hodgson last Monday—that on the rules against referral fees in personal injury matters,

“it will be important to ensure that such rules do not go beyond the obligations in LASPO. That legislation bans referral fees, but does not prohibit, for example, new alternative business structures that effectively do away with the need for a referral”.

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That is the Question that the Minister will be asked on Monday. It looks as though the Legal Services Board was saying at that point—admittedly, that was before the regulations were issued—that the ABS would effectively, as it states,

“do away with the need for referral”,

and therefore, presumably, for referral fees. It states:

“A liberal approach that supports the regulatory objectives of the Legal Services Act 2007, while properly delivering the legislative intent of LASPO, will therefore be crucial in making sure that both pieces of legislation are implemented effectively”.

It is not clear what its view was or now would be on the regulations, but it appears to be taking a somewhat different position from that which I suspect that the FCA and the noble Lord would anticipate.

The board went on to state that its guidance on referral fees applied across all segments of the legal market, whereas at the moment we have a ban in respect only of personal injury. That is because the ban on personal injury suits the insurance industry, and we know how influential the insurance industry is with at least one of the coalition government parties. The board states:

“In particular, regulators will need to justify any ban on the payment or receipt of referral fees that remains in place with clear supporting evidence”—

and that, in respect of personal injury, regulators will rely on the provisions of the Act—

“and to take proper account of the rest of the guidance”,

including transparency and the like. So we question, with regard to other areas of law beyond those that are the subject of these regulations, when, if at all, the referral fee ban would be extended to other areas of law. Perhaps the noble Lord could enlighten us about that—again, if not today, then subsequently.

Lest it be thought that this is a straightforward matter, there has been an interesting duel about the effect of this ban in the pages of the Law Gazette between two authors, whose names I do not have, and two QCs. The later of the two articles is from the two QCs who find that the Solicitors Regulation Authority—which is of course the primary regulatory body for the profession and will have to oversee the conduct in the situation as opposed to the operation of the ban—has been clear about how the position will work. Meanwhile, in the previous article, considerable doubt was cast on the effect of the proposed ban. I am fairly persuaded by the position that the two QCs adopt; they seem to argue their case effectively. However, this illustrates that, even here, there may be some grey areas that will provoke not further litigation, hopefully, but at least correspondence and some difficulty—particularly on the part of those involved in understanding exactly what it is that they are required to do or, more particularly, what they are required not to do on referral fees. I suspect that that matter will be included in part of the questioning that will occur on Monday.

Having said that, the Opposition do not object to the regulations. They will be reviewed over the next few years and we will see how they go. I reiterate, however, that it is most unfortunate that they extend to non-profit-making bodies, but that argument was fought and lost during the passage of the Act.

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Lord Newby: My Lords, I am most grateful to the noble Lord for his thoughtful comments on these draft regulations. I will attempt to deal with his questions as best I might.

I have an introductory comment. The noble Lord referred to the noble Baroness, Lady Hayter, saying that the referral fee system was supported by some people. The thing that no one is objecting to is referrals. People are objecting to the fact that people are now being paid probably more than £800 on average to do it. That is a heck of a lot of cash. The problem is that it pushes up insurance payments to everyone and gives an incentive to the referrers to refer anything because they are on a winning ticket: if the case is taken up they get their fee, and if it is not then they do not lose anything. That means that there is a perverse incentive in the system for people to take cases that may or may not have huge validity, particularly when the amount being claimed is relatively small. If I am right in thinking that people like the prospect of being referred on but do not like the idea of paying fees, I would have thought that that would apply to NGOs, unions and others as well. However, as the noble Lord said, we are not discussing that principle today; the die is cast on that one.

The noble Lord asked about alternative business structures and whether they would be able to get around the ban. As the Committee knows, the Government strongly support alternative business structures to increase competition and innovation. Alternative business structures do not allow organisations to avoid the ban but allow them flexibility to operate in the personal injury market in a way that is compliant with the law.

4.30 pm

The noble Lord asked about consultation. A general consultation was undertaken by the MoJ at the time on the Jackson recommendations as a whole, which included referral fees. The scope for consultation here seems to be very limited. It is a straightforward ban. Once it has been decided to have a ban, unlike many bits of legislation where there is a whole raft of issues surrounding implementation, this is very straightforward: just do not do it. I am not sure what more detailed consultation could have been done.

The noble Lord suggested that this might be being done for the benefit of the insurance industry. This is being done for the benefit of consumers because they then will not be paying huge fees for referrals, which we hope the professional bodies would do as part of their duty of care to their clients. I assure him that it is not being done somehow to benefit the insurance industry.

The noble Lord asked when the Government would extend the ban to other categories of law beyond personal injury. At the moment we are very much concerned with this area of referral fees, because they are the main source of claims inflation. That is why we are taking immediate action here. However, as he said, the LASPO Act 2012 includes the power to extend the prohibition to other types of claim and other legal services, should the need arise, but I am very pleased to say that that is a matter for the MoJ, not the

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Treasury. There is no immediate intention to move on any of that but, if I misled the noble Lord or indeed the Committee, I will write to him.

On guidance, about which the noble Lord asked, the FCA has published guidance in the form of something called a “one-minute guide”. I had never heard of one-minute guides, so I got it and will let the noble Lord have a copy. It is something that you can read in a minute; it is what it says on the tin. Because this is a very straightforward matter—just do not do it any more—it is actually possible to cover the substance in one minute, including the attitude that the FCA is going to adopt in supervising and enforcing the ban. When I sit down, I will give the noble Lord my copy of this guide, because I suspect that I will not need it again.

I hope that I have answered most of the noble Lord’s questions. With that, I commend the regulations to the Committee.

Motion agreed.

Child Support and Claims and Payments (Miscellaneous Amendments and Change to the Minimum Amount of Liability) Regulations 2013

Child Support and Claims and Payments (Miscellaneous Amendments and Change to the Minimum Amount of Liability) Regulations 20132nd Report from the Joint Committee on Statutory Instruments

Considered in Grand Committee

4.33 pm

Moved By Lord Freud

That the Grand Committee do report to the House that it has considered the Child Support and Claims and Payments (Miscellaneous Amendments and Change to the Minimum Amount of Liability) Regulations 2013

Relevant document: 2nd Report from the Joint Committee on Statutory Instruments

The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud): My Lords, this instrument was laid in draft before the House on 20 May 2013, and I confirm to the House that I consider it as being compatible with the European Convention on Human Rights.

The minimum amount of liability, more commonly known as the flat rate, is applied to non-resident parents whose gross weekly income is more than the flat rate itself and less than £100 per week. It also applies to all non-resident parents who are in receipt of certain prescribed benefits. The flat rate was set at £5 in 2003 and has not been uprated since. The Child Maintenance and Other Payments Act 2008 made provision for increasing the flat rate of child support for cases dealt with under the rules of any scheme established under the terms of the Act. The change has yet to be brought into force.

The increase provided for in the 2008 Act was from £5 to £7. However, because the 2012 scheme launched as a relatively small-scale pathfinder when it began on 10 December 2012, technical changes were applied to the 2012 scheme calculation regulations to ensure that the flat rate remained at £5. The flat rate for the 2012 scheme will remain at £5 for the duration of

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the pathfinder and will increase only once the 2003 scheme closes to new applicants. This is to ensure that all new cases will be subject to the same flat rate, regardless of whether they are directed to the 2012 scheme pathfinder or the 2003 scheme.

It is intended that the increase to the flat rate made by the 2008 Act will be brought into force later in the year, when the 2012 child maintenance scheme is opened to all applicants. This instrument makes certain consequential amendments as a result of that increase. The policy intention behind the increase is primarily that the value of the flat rate should be restored to its 2003 real value. This will reinforce the principle that parents have an obligation to support their children where they have the means to do so.

At £7, the increased flat rate will represent broadly the same value as the £5 flat rate when it began. For example, when the flat rate was introduced in 2003, £5 represented 9% of the benefit of a single person over 25 years of age on jobseeker’s allowance. The annual uprating of benefits has meant that the same £5 represents just 7% of the benefit of a single person over 25 years of age on jobseeker’s allowance. A flat rate of £7 represents 10% of the benefit of a single person over 25 years of age on jobseeker’s allowance, restoring the value of the 2003 flat rate.

The proposed flat-rate increase will also amend the percentages applied to the reduced rate of child support maintenance payable if the non-resident parent has an income of less than £200 but more than £100. This will mean that the maintenance liability of parents on the reduced rate will increase in order that the reduced rate continues to smooth increases in liabilities between the flat rate and the basic rate, which is used for those parents earning £200 or more. The Government are also committed to a wider review of the child maintenance calculation formula, with a particular focus on work incentives, once we have delivered the current raft of reforms.

The regulations before us also make miscellaneous amendments in relation to variations, which are those rules that allow for a deviation from the usual child maintenance calculation rules in certain limited circumstances. A variation could increase or decrease a child maintenance liability. For example, if a parent receives unearned income from property, savings and investments or casual earnings, this could increase their liability. On the other hand, if they incur special expenses, such as the cost of travelling to see a child, or boarding school fees, this could reduce their liability. I should make it clear that the changes contained in these regulations affect only those variations that increase liability.

The 2012 scheme is designed to work with historic income information obtained annually from HM Revenue and Customs. The changes proposed will allow that, where the information cannot be obtained electronically from HMRC, we will be able to determine unearned income by reference to information supplied by the parent in relation to the most recent tax year. This change will make for a more efficient means of obtaining reliable unearned income information and therefore allow for a more accurate calculation of maintenance liability.

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In addition, the amendments will clarify that where a variation would decrease a non-resident parent’s income for child maintenance purposes to the point that their liability would fall to below the flat rate, even if the variation is agreed, the amount of maintenance that the parent will be liable for will none the less remain at the flat rate. This is in order to strike a balance between reducing liability to take account of special expenses and ensuring that children continue to benefit from some financial support. It puts children first. This will also ensure consistency between a non-resident parent who has their maintenance reduced to the level of the flat rate through a variation and a non-resident parent on the flat rate. A non-resident parent in the latter situation cannot apply for a special expenses variation.

As has always been the practice throughout the development of the 2012 scheme regulations, we have undertaken extensive stakeholder engagement. The proposed increase to the flat rate was subject to a formal consultation in 2011, and stakeholders made it clear that they believe that an increase in the flat rate to £7 is warranted. We have met stakeholder groups since that consultation, and on careful reflection we are persuaded by their arguments and have decided that the flat rate should increase to £7. We will closely monitor the regulations, along with other child maintenance policy changes, to ensure that all the activities in the new 2012 scheme are delivering the intended outcomes.

I hope that that short opening speech reassures the Committee that the changes we have proposed are sensible ones that have been developed with the aim of delivering an efficient statutory child maintenance system. These changes will ensure an appropriate increase in the amount of maintenance flowing to children. They will also make for a more efficient and accurate variations regime. I commend the instrument to the Committee.

Baroness Sherlock: My Lords, I thank the Minister for his introduction of these regulations. We could hardly oppose provisions enabling the increase in the flat-rate maintenance amount from £5 to £7, as they flow from the 2008 Act, which was the legislation of the previous Government. The Government were right to listen to stakeholders and to draw back from their original intent of increasing that to £10. As the Minister has indicated, the £7 figure will keep the amount at about 10% of the basic over-25s JSA rate, and the increase should therefore mean more money for children.

I understand from both the documentation and the Minister’s introduction that the regulations are not intended to come into force until the introduction of the 2012 scheme, so the utilisation of gross income in the calculation is used “for all purposes”. Perhaps the Minister could clarify that; otherwise I will have to read the record to see when exactly this is going to come into force. Is it intended to refer to the time when the 2012 scheme is open to all new applicants or the time when the 2012 scheme will have replaced the 1993 and 2003 schemes? If the latter, could he clarify now when the Government expect that to take place?

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We have also heard that the regulations cover other “consequential” matters. As the Minister indicated, one of these is the revised rate calculation that applies where the non-resident parent has income of between £100 and £200. The rates in the regulations are lower than those provided for in the 2012 regulations, and perhaps the Minister could explain why. I imagine that it relates to the effect of raising the flat rate but it would be helpful if he could confirm that, as well as setting out the impact on the levels of child maintenance liability for non-resident parents earning between £100 and £200. I would be grateful if he could give some indication of the range of changes—what is the smallest and largest amount by which the future liability will differ from the past? That would give us an indication of whether they are indeed large or small in their impact. I would also be grateful if the Minister could confirm what would happen to someone earning precisely £200. Is there any danger of a cliff-edge when someone moves from below £200, where the reduced rate applies, to £200 where the standard rate will apply?

4.45 pm

In his introduction, the Minister referred to the provisions that relate to what happens when the department cannot get information electronically from HMRC relating to historic income. Do the Government expect that use of that provision will be widespread, or is it intended to happen only in the odd case where for some reason, it does not work? That might enable him to bring us up to date, if necessary, with what is happening with RTI and related developments. We might also reflect on the regulations in the context of the letter and briefing note from the Minister dated 20 May 2013, to which he referred, which set out the Government’s updated position on the reforms to the child maintenance system. We look forward to seeing the detailed response to the consultation in due course, whenever autumn comes—although I assume that the Minister will take a seasonal rather than climatic determination of that, otherwise I expect it any day now.

It appears that the pace at which the 2012 arrangements are to be fully introduced has slowed, perhaps mirroring what has happened to the Government’s benefit reforms generally, but history reminds us of the perils of going too quickly. The Minister may want to say a bit more in his response about the experience of the pathfinder—albeit that it applies to only a small number of cases. Can he tell us precisely how many? Are the systems performing as planned? The manner in which it is proposed to deal with cases under the 1993 and 2003 schemes remains a matter of contention, with real concern that the closure of cases as planned could mean people dropping out of the system altogether, and with children being the losers, but I am sure that we will have the opportunity to return to that.

We acknowledge the announcement that no charging will be introduced until the 2012 system is open to all applicants and is seen to be working well. The announcement that the collection fee for parents with care is to be reduced from 7% to 4% is a step in the right direction, but not far enough However, most of that is for another day. If the regulations do what

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the Minister has described and what the Explanatory Memorandum describes, we do not have any objection to them.

Lord Freud: My Lords, before I aim to answer most of those questions, it is worth briefly reflecting on where we are with the rollout of the 2012 scheme. As the noble Baroness said, we began a pathfinder in December which was open to new applicants with four or more qualifying children. That has allowed us to micromanage each case so that we are confident that our system and processes will work as we intend. As the noble Baroness will know, we are adopting that structure with all of our reforms so that we are really able to see what happens as we take each person through. By definition, in the early weeks, numbers are intentionally small. We are monitoring and observing the results of that pathfinder so that when we open it much more widely it will work efficiently. I know that the noble Baroness will be as keen as I am for all those systems to work smoothly when we do them in volume.

The timing is that we will open to new applicants with two or more qualifying children—in our jargon, Commencement 2—later in the summer. We will move to all new applicants—in our jargon, Commencement 3 —by the end of 2013. It is at that point that we will increase the flat rate of maintenance. As part of our wider reforms, we are making good progress in implementing the help and support for separated families initiative.

In November 2012, we launched the Sorting out separation web app, which directs people to information and support on the range of issues that they will face after separation. We have also launched the Help and Support for Separated Families mark, which helps parents identify the organisations that they can trust to help them work together; and an innovation fund, which will test and evaluate interventions designed to help separated parents work together and reduce conflict. The first contracts in this fund have recently been awarded to seven voluntary and third-sector organisations, and will give around 280,000 separated families creative and targeted help to collaborate in their children’s interests.

Last month we tabled a Written Ministerial Statement outlining important changes to child maintenance reform. As well as the announcement of our intention to use the £7 rather than the £10 flat rate for the non-resident parent, we announced a reduction in the proposed parent-with-care collection fee from 7% to just 4%. Both changes were the product of an extended period of consultation and reflection, and we have been at pains to ensure that our changes are seen to be fair to both parents. On the outstanding question of how the £100 and £200 figures work together, the reason for the different rates is that they are on top of a different basic amount. The calculation is done not as a pure calculation but on flat rate-plus. There are some variations, but broadly it comes out at much the same level. Let us take the example of a non-resident parent with one qualifying child and no other relevant children and put them in the middle of the range at £150. The current rate would be £14.50, which is the £5 flat rate plus 19% of the £50. That comes out at 9.7% of their gross income. Moving to a flat rate of

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£7, the same person would pay £16.50, or 11% of their gross income. That is how the sum works. It is impossible to absorb these sums verbally, so I would be very happy to lay them out in a letter to the noble Baroness. That would make them clearer—but broadly, that is one effect.

The noble Baroness asked a very subtle question about the difference between £199.99 and £200.01. There is no cliff edge there. There are quite a lot of factors, and some little bumps here and there. Again, the easiest thing would be for me to write with a few examples so that the noble Baroness can study them on paper. However, I can say that the structure is relatively smooth and that certainly there is no cliff edge. On how widespread we are expecting this to be, where there is a glitch in the system and, for whatever reason, we cannot get a particular piece of information, we are ensuring that there is another way through. We are not anticipating large volumes on this, but one has to have it as a baseline defence. Clearly, this is a different system to RTI. This system was created rather before universal credit was a gleam in anyone’s eye. We do not have this monthly process which UC depends on. It is a different annualised process. It will be up to a future Government at some stage to look at whether it makes sense to use similar systems. However, there is no relationship whatever between the systems under UC and this.

I have dealt with all the specific issues and look forward to getting some interesting tables in a letter to the noble Baroness. I hope that today’s discussion reassures noble Lords that the changes that we have proposed are sensible and have the aim of delivering an efficient statutory child maintenance system. They will ensure an appropriate increase in the amount of maintenance flowing and will make a more efficient and accurate variations regime. I therefore present to you a set of regulations which, if approved by noble Lords, will come into force when the 2012 scheme opens to all applicants later this year. I beg to move.

Motion agreed.

Water Industry (Specified Infrastructure Projects) (English Undertakers) Regulations 2013

Water Industry (Specified Infrastructure Projects) (English Undertakers) Regulations 20132nd Report from the Joint Committee on Statutory Instruments3rd Report from the Secondary Legislation Scrutiny Committee

Considered in Grand Committee

4.57 pm

Moved by Lord De Mauley

That the Grand Committee do report to the House that it has considered the Water Industry (Specified Infrastructure Projects) (English Undertakers) Regulations 2013

Relevant documents: 2nd Report from the Joint Committee on Statutory Instruments, 3rd Report from the Secondary Legislation Scrutiny Committee

The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord De Mauley): My Lords, the draft regulations before the Committee today are aimed at helping the delivery of

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necessary, large or complex water or sewerage infrastructure projects. They are designed to help to contain and minimise the risks associated with their delivery to customers of water or sewerage companies, known as undertakers, and also to UK taxpayers. Containing and minimising these risks should correspondingly provide better value for money associated with delivering such projects. It should also help to ensure that undertakers’ customers continue to receive the required or desired level of existing water or sewerage services.

These regulations would enable the Secretary of State or Ofwat to specify by notice an infrastructure project where either is satisfied that two conditions have been met. The first is that the infrastructure project is of a size or complexity that threatens an undertaker’s ability to provide services to its customers. The second condition is that specifying the project would be likely to result in better value for money than if the project was not so specified, taking into account charges to customers and any government financial assistance.

Once specified, an undertaker would then be required to put the specified infrastructure out to tender and a separate Ofwat-regulated infrastructure provider would be designated to finance and deliver the project. These large, complex infrastructure projects raise issues of determining the cost of their financing coupled with a construction risk that is far greater than that normally associated with an undertaker’s typical capital investment.

Enabling an undertaker to tender competitively an infrastructure provider for a large or complex project provides an objective means of testing whether the financing costs of such a project are appropriate or reasonable. Without that tendering process, competitively determining the cost of capital for those types of project would not be possible. The ability to create ring-fenced Ofwat-regulated infrastructure providers between undertakers and large or complex projects would also help to ring-fence their associated higher risks, and should result in more effective risk management for these projects.

5 pm

Enabling the creation of infrastructure providers would prevent the threat of a large or complex infrastructure project affecting the ability of an undertaker to provide its day-to-day services for its customers, avoiding any resultant extra costs that would ultimately be borne to some extent by those customers.

There have been two public consultations on the regulations. An initial 12-week public consultation was carried out between February and May 2011, seeking views on proposals for new regulations. Thirteen replies were received and a summary published on Defra’s website in September 2011. The second consultation ran for four weeks between 5 November and 4 December 2012. Its purpose was to inform stakeholders representing interests likely to be affected by the proposals; it included draft regulations and a corresponding impact assessment.

The latter consultation was issued by e-mail to 73 contact addresses previously contacted for the 2011 consultation and included the Mayor of London, London MPs with a known interest, EFRA committee

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MPs, water and sewerage companies, Ofwat and the Consumer Council for Water. Seven responses were received and a summary published on Defra’s website in March 2013.

We have noted the range of views and comments received on the proposed legislation and relating to the proposed Thames tideway tunnel project in London. In particular, we note concerns that provision to enable separate infrastructure providers might allow undertakers to avoid obligations to provide necessary infrastructure themselves within their own financial structures, and so enable the continuation of high levels of dividend payments to shareholders.

It is important to note that the regulations would enable only the Secretary of State or Ofwat to require an undertaker in England to tender competitively an infrastructure provider. This would be only for large or complex projects that they consider would threaten an undertaker’s ability to meet its statutory service provision obligations, and where this would provide better value for money for both customers and taxpayers. This would never be a decision for undertakers, so would not provide an incentive for them to avoid their obligations.

The current water industry regulatory framework is designed so that Ofwat can regulate undertakers so that they do not make excessive payments to shareholders. Customers’ bills are kept as low as possible while recognising that the companies must attract appropriate investment to meet future needs.

Following due consideration of the public consultation, we have decided to proceed with these regulations for the reasons that I have outlined. The ability to enable undertakers to tender competitively an infrastructure provider to finance and deliver a large or complex project will be a useful tool, even if rarely exercised. Enabling the ring-fencing of important infrastructure projects will help to attract necessary private capital at a transparent and competitive price, helping to protect the interests of both undertaker customers and UK taxpayers.

I know that many noble Lords have firmly held views on the merits or otherwise of the Thames tideway tunnel and I look forward to our debate this afternoon, during which I expect that many of these views will be put forward. However, I ask the Committee to bear in mind that the regulations before it today could apply not only to the Thames tideway tunnel but to any large or complex sewer or water infrastructure projects in future. I commend the draft regulations to the Committee.

Lord Knight of Weymouth: My Lords, the Minister will be relieved to know that on this occasion, unlike a previous one, I will not seek to give contradictory views to represent the views of some of my colleagues on this side of the Committee. This debate comes at an inconvenient time for Thames Water but, therefore, at an opportune time for Parliament. I will make some general comments and then delve a little into some of the specifics of the Thames tideway tunnel project. In making my comments, I am grateful as ever to the Secondary Legislation Scrutiny Committee of your Lordships’ House. Its third report of this Session brings

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these regulations to the special attention of the Committee on the grounds that they give rise to issues of public policy likely to be of interest to us. I am particularly grateful that the Committee is willing to delegate me to take forward all those public policy issues. It is right that we should reflect on them.

As the committee points out, the Explanatory Memorandum implies that these regulations are generic and apply to all water and sewerage companies and large infrastructure projects that meet the criteria. That was clearly set out by the Minister. However, the only project to which the regulations are expected to apply over the next 10 years is the Thames tideway tunnel. The impact assessment therefore exclusively estimates the impact of the project in relation to these regulations. We have debated the tunnel before, but there are issues I would like to raise as events have moved on.

First, I will make some generic comments. The arguments put for establishing a separate body to manage the finance, delivery and extraordinary risks of major water infrastructure projects are reasonable. The example of the Thames tunnel is helpful. It will cost more than £4 billion and, while Thames Water will carry out associated investment at its own risk, the cost of the main tunnel is a considerable financial risk to put on a company with a turnover of £1.8 billion. Assuming that Thames Water is well regulated and responsible, there is logic in establishing a separate infrastructure provider to construct the tunnel and have Thames Water effectively lease it back.

These regulations then extend the reach of Ofwat to these providers, which is important to ensure that the public interest is protected. The alternatives discussed by the Minister and in the accompanying papers are to leave things as they are or to require that the project be put out to tender by the water company. Defra discounts the former because Ofwat would struggle to regulate the financial arrangements when they are bound in with the rest of the company’s activities. To some extent, I struggle to see how it can effectively regulate the general finances of a company and then the separate finances of a big project, but cannot manage to do it when they are done together. However, I am happy to believe those involved when they tell me that they cannot. I am also happy with the desirability of a separate provider over the complexity of negotiating a new licence, which is the implication of requiring the company to tender a major project. Therefore, I am happy with the regulations as they stand in the generality.

Let me then turn to the specifics of the Thames tideway tunnel and the figures in the impact assessment. I remind the Committee that I rent a flat here in London very close to one of the sites for the construction of the tunnel, so in that respect have an interest. Thames Water has also been to see me to brief—or some would say lobby—me about the project. I accept the basis of the company’s argument. The capital’s Victorian sewerage system has served the capital well, but urgently needs more capacity to meet the needs of modern-day London. The Thames tideway tunnel will ensure that the capital has a sewerage system fit for purpose for at least another century.

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The tidal part of the river remains an environmental and public health hazard. It cannot be acceptable to allow the tidal River Thames to be an open sewer. Sewage discharges into the tidal River Thames breach the urban waste water treatment directive and British taxpayers would face the prospect of substantial fines if the tunnel is not built. Other world-leading cities, including Paris, Stockholm, Helsinki and Washington DC, as well as the Rhine/Ruhr conurbation in Germany, are forging ahead with similar schemes. I agree with Thames Water’s briefing that London is in danger of being left behind and facing substantial fines if we do not act.

I am happy to support the project. The benefits to employment in London should be maximised and the impact on residents minimised, and I am pleased on progress in moving more material off the roads and on to the river during the construction phase. However, I also note the recent remarks by the new chair of Ofwat, Jonson Cox. Interestingly, Mr Cox is a water industry insider. He said last week that some unlisted companies have a moral case to answer over allegations, that they,

“use shareholder loans to avoid UK taxation”,

through “complex offshore holding structures”. He said:

“A good number use high-coupon shareholder loans to improve their equity returns … It appears that this reduces tax liability for the benefit of shareholders”.

He went on:

“Tax policy is not for an economic regulator and these structures may be legal and common in private equity. But some aspects are morally questionable in a vital public service”.

Thames Water has published its annual results this week. It appears that the company pays no corporation tax on its £1.8 billion turnover while continuing to pay executives many times more than the Prime Minister. In my view, this is unacceptable—it stinks. Why should the public be reducing the risk to shareholders of Thames Water through the Water Industry Financial Assistance Act 2012, if it then uses every last trick in the book to maximise shareholder return at the expense of the UK taxpayer? Does the Minister agree that these loopholes must be addressed as a matter of urgency? The logic of allowing profit is to reward the risks, particularly of investment, but that is undermined by excessive profit, excessive executive pay and tax avoidance when Parliament and the Government are acting to reduce the risk to Thames Water customers and shareholders.

When we turn to the impact assessment, why should the taxpayer be funding an extra £5 million of regulatory cost of Ofwat in setting up these arrangements? Could we not find a way of billing Thames Water for this expense, given that Thames Water pocketed a £5 million credit from the Treasury in a year when it made £550 million in profits? Given that the chief executive, Martin Baggs, was awarded a pay rise of 5.9%, taking his basic salary to £450,000 plus a bonus of £274,000 as part of a scheme to,

“reward significant improvement in the group’s financial and corporate performance”,

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as well as picking up a further £366,000 in shares next month under the company's long-term incentive plan, maybe the £5 million could be found from senior executive salaries alone. Does the Minister agree?

On the narrow question of the regulations, I am content. On the question of Thames Water fulfilling its moral responsibilities and thereby breaching the trust on which the financing of the Thames tideway tunnel is based, I am not.

Lord De Mauley: My Lords, this has been an interesting debate on a number of issues relating to the draft regulation and indeed to the Thames tideway tunnel. I thank the noble Lord for his views and his insightful interventions. I thank him for agreeing that the general approach we are taking is reasonable. That is perhaps the most important thing to come out of today, and it is extremely helpful. I will come back to his specific points in a moment.

As I indicated in my introduction, it is important that these regulations should be considered separately from the specific Thames tideway tunnel project in London. In summary, the regulations enable the creation of infrastructure providers regulated by the Water Services Regulation Authority, Ofwat, to finance and deliver large or complex water or sewerage infrastructure projects. They provide for the procuring, licensing and regulating of an infrastructure provider that is separate from a water or sewerage company. They set out how the Secretary of State or Ofwat can specify to which projects the regulations would apply and how they designate the company that is to become an infrastructure provider. The regulations are intended to apply to all such large or complex water or sewerage projects that may be proposed in the future, where their application would be considered to result in better value for money for both customers and taxpayers.

I turn specifically to the Thames tideway tunnel, and I think the noble Lord has already made similar points. Climate change, population growth and higher customer expectations of environmental standards and supply resilience are anticipated to require larger and more complex infrastructure than the existing regulatory regime was designed to provide for. For example, changing rainfall patterns are expected to result in wetter winters and drier summers—who would believe it after last summer?—and to aggravate water scarcity conditions in the south and the east. This may lead to an increased requirement for potentially complex arrangements for transporting water.

Moreover, heavy rainfall events are likely to become more frequent—that we can all believe. In London, these events will further strain an already overtaxed sewerage system, leading to more overflows of untreated wastewater, containing raw sewage, into the Thames. Even after ongoing upgrades to sewage treatment works and the Lee tunnel are completed by the end of 2015, just over 18 million tonnes of wastewater will enter the Thames every year from London’s combined sewer overflows when storm-water capacity is exceeded. These overflows currently occur on average about once a week and have a significant environmental impact on the river. They

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increase the likelihood of fish kills, create a higher health hazard for the users of the river and damage the aesthetic appeal of the Thames.

5.15 pm

The proposed Thames tideway tunnel is an example of a large and complex high-risk infrastructure expected to be constructed within the next 10 years. It is also one of the top 40 priority infrastructure investments within the national infrastructure plan 2011. Its construction would intercept storm sewage overflows and ensure that the River Thames meets water quality objectives established by the 2006 Thames tideway strategic study, preventing deterioration and ensuring that the Thames remains at moderate status.

The works would also ensure that the UK met its legal obligations under the urban wastewater treatment directive. On 18 October last year, the Court of Justice of the European Union found the UK to be in breach of the directive in London since 31 December 2000 by failing to have adequate collection and treatment facilities in place, despite our clear commitment to major improvements to London’s sewage collection treatment systems. We are currently in contact with the Commission regarding the measures considered necessary to comply with the terms of the court judgment. The court accepted that the Thames tideway tunnel represents a solution to the problem of the collection system in London. The implication, therefore, is that the tunnel represents a means to come into compliance with the judgment. The urgency of the project is increased by the need to comply with this judgment.

The project is large, complex and high-risk. It requires engineering and construction skills that have been rarely deployed by UK water and sewerage undertakers, certainly in recent years. We consider projects such as these to be better suited for delivery under a separate and parallel regulatory regime, rather than under the existing single regulatory regime for water and sewerage undertakers.

I turn to the noble Lord’s questions. He suggested that Ofwat should be able to manage the finances of a Thames Water and a Thames tideway tunnel combined. I think the point here is that the risk profiles of a standard water company business on the one hand and of a tunnel construction project such as this on the other are significantly different. Pricing against both is, therefore, different. We feel that the tunnel is better priced as to risk in the market as it stands.

The noble Lord raised the recent comments of the Ofwat chairman. Like the noble Lord, we agree with Mr Cox that there must be full transparency in the finances of all water and sewerage companies so that Ofwat can do its job and customers can obtain any benefits resulting from cost savings. The specified infrastructure project regulations would enhance such transparency. They enable water or sewerage companies to tender competitively—as I said earlier, Ofwat-regulated infrastructure providers that finance and deliver large or complex infrastructure projects. This IP tendering

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process provides an objective means of testing whether the financing costs of such projects are appropriate and reasonable. Without this tendering process, provided by the SIP regulations, competitively determining the cost of capital for a project would not be possible.

The noble Lord asked, effectively, why are the Government not making sure that Thames Water pays all the tax that it should? Thames Water Utilities Limited does pay its tax. All UK companies are allowed to claim capital allowances when they spend on capital investment programmes. That, I feel sure, was the same under the previous Government. Tax relief is allowable against the capital expenditure incurred, which reduces the tax payable, with the aim of encouraging investment by companies. Water and sewerage companies have significant capital programmes in comparison with their revenues. They therefore benefit from tax allowances proportionately more than other companies.

HM Revenue and Customs remains vigilant in ensuring that companies operating within the United Kingdom pay the tax that they are legally obliged to pay.

The noble Lord asked about executive remuneration. Thames Water is a private company and is responsible for setting its own remuneration policy which is approved by its shareholders in the normal way. Ofwat’s regulatory remit is to ensure that customers get a fair deal with good service at a fair price. Ofwat has ensured that water companies, including Thames Water, have kept price rises in line with inflation. Fair and stable returns for the water companies have enabled £108 billion of investment since privatisation to significantly improve service to customers while ensuring that bills are kept down as much as possible.

If water companies fail to provide the levels of service expected by their customers and required by their licences, Ofwat can and does take action, clawing back more than £550 million following under-performance since 2005. Thames Water has met its annual leak reduction target for the seventh year running, is delivering £1 billion of investment and continues to maintain its high drinking water quality.

In conclusion, these regulations would enable the risks and costs associated with these projects to be more transparently captured; better contain the risks and costs of financing these projects, helping to prevent those costs transferring to an undertaker’s other ongoing business and less risky infrastructure projects; help to minimise total final project costs by requiring undertakers to tender competitively an infrastructure provider to finance and deliver these projects; provide an objective means of testing whether the financing costs of a project are appropriate or reasonable; and, finally, enable any government financial assistance for such projects to be targeted at a sole project rather than at a specific undertaker with its range of services.

With those comments, I hope your Lordships will agree to have considered these regulations.

Motion agreed.

Committee adjourned at 5.22 pm.