House of Lords
Wednesday, 24 July 2013.
3 pm
Prayers—read by the Lord Bishop of Hereford.
International Development: Diseases of Poverty
Question
3.08 pm
To ask Her Majesty’s Government how much of the £30 million allocated to fund the development of new technologies to impact on diseases of poverty, announced in March 2012, has been awarded to date.
Baroness Northover: My Lords, DfID is committed to tackling diseases of poverty through supporting the development of new technologies. Business cases for product development partnerships have been prepared and allocated funding is expected to begin this year, as planned.
Baroness Jolly: I thank my noble friend for her response, but how much has been spent in the past five years on biomedical and scientific research into HIV/AIDS and TB, and how much is planned to be spent in the next five years? I have tried to find this information; perhaps she can also tell the House where DfID’s 2013 onward research strategy is to be found.
Baroness Northover: DfID has provided approximately £60 million for biomedical and scientific research into HIV/AIDS and £39 million for TB research over the past five years. Spending for the next five years is dependent on the results of the ongoing product development partnerships competition. If my noble friend looks online, she will find DfID’s research strategy priorities and commissioning practices, which were published earlier this year as part of the International Development Committee’s annual accounts inquiry. This information is also in the Library.
Baroness Kinnock of Holyhead: My Lords, while a malaria vaccine is the biggest need at this time, it receives virtually no research funding. Currently, 10 times more is spent on a cure for male baldness than on a cure for malaria. Does the Minister agree that the research conducted by pharmaceutical companies focuses, as Bill Gates has said, on what is most lucrative and not on what is most needed? Does she agree with him that it is unlikely that the global poor will ever be profitable enough to attract the interest of the pharmaceutical industry?
Baroness Northover: The noble Baroness gets to the nub of the problem. This is why special effort must go into supporting research in these areas because it is, of course, the poorest who suffer from these diseases and cannot pay the prices for the drugs. I think about 1%
of any investment went into this area of neglected tropical diseases, which is of course why Gates took it up. At the moment, he funds 49% of the research being taken forward. That is a template for what we are doing and why we are supporting it.
Lord Chidgey: My Lords, with DfID’s support, health organisations have been successful in developing a wide range of new health technologies to address the diseases that we are clearly aware of in developing countries, including TB and malaria. Can my noble friend tell us how successful the outcomes have been, and how confident she is in the results, given that countries such as the DRC and Nigeria together account for some 40% of the deaths from malaria, yet they have the most inadequate data of any country?
Baroness Northover: DfID’s research investments have helped to develop a range of treatments plus tests across these areas. For example, there is a diagnostic test for TB which is now available in 29 countries and a child-friendly, life-saving anti-malarial is now available in 39 countries—just to give my noble friend an indication of positive outcomes. We are also working very hard at country level to improve the quality of data to strengthen accountability because he is quite right: if we are to measure this properly, it is very important to have such data coming in.
Baroness O’Neill of Bengarve: Is the Minister aware that in addition to the money that is going through DfID for these purposes, the Medical Research Council—I declare an interest as the chair of its ethics committee—supports a great deal of research into tropical diseases and has two research centres in Africa?
Baroness Northover: Indeed, the United Kingdom is extremely strong in this field. The Wellcome Trust is a major player in this regard and we have the strengths of the London School of Hygiene and Tropical Medicine and the Liverpool School of Tropical Medicine, so we contribute significantly in this area. I pay tribute to what the MRC does.
Baroness Masham of Ilton: My Lords, is the Minister aware of the organisation here in London called Find and Treat? It has a mobile X-ray unit and goes out to homeless people in hostels and other places to X-ray them for TB. Its X-ray unit is now on its last legs and it desperately needs a new one. Could she ensure that money is available here because TB is just as bad here as it is in third-world countries?
Baroness Northover: I remember colleagues being tested in one of those centres locally. I will take this back to the Department of Health and get an answer for the noble Baroness. It is obviously important to address TB here, where it is an increasing problem, as well as in developing countries.
Lord Hunt of Kings Heath: My Lords, I refer noble Lords to my health interests in the register. Does the noble Baroness think that the introduction of value-based pricing for pharmaceuticals in this country will lead to
more research in those areas where at the moment there clearly is not a return for the pharmaceutical companies? They are often called orphan drugs. If they were incentivised it could lead to greater help for these diseases in poorer countries that noble Lords have been discussing.
Baroness Northover: I know that the noble Lord is very concerned about value-based pricing in the United Kingdom. We have to take a few steps back in terms of the support that needs to be given for the development of these treatments overseas. This is on a totally different scale. There is, in effect, no market, as the noble Lord’s colleague said, and we need to ensure that there is support for research and development before even the prospect of a market is taken forward.
Lord Hughes of Woodside: My Lords, great damage is being done to vaccination programmes by religious fanatics who preach that vaccination is in some way an imperialist plot. Is a lot of money being spent on education to disabuse people of that idea?
Baroness Northover: Again, the noble Lord highlights an important area. Polio is on the edge of being eradicated but in Pakistan and northern Nigeria, as the noble Lord will know, religious fanatics have killed some of those trying to roll out the programmes there. The Bill and Melinda Gates Foundation is working extremely hard to tackle this but, obviously, it is a very delicate problem.
The Countess of Mar: My Lords, does the noble Baroness agree that prevention is better than cure and that a vital component of this is clean water and good nutrition? What is DfID doing from that point of view?
Baroness Northover: DfID fully recognises that malnutrition goes with diseases of poverty and is therefore trying to tackle both poverty and malnutrition. As the noble Countess says, clean water and sanitation are vital in ensuring that children, in particular, manage to survive these diseases.
Homelessness and Rough Sleeping
Question
3.16 pm
To ask Her Majesty’s Government what assessment they have made of the causes of homelessness and rough sleeping in the United Kingdom.
The Parliamentary Under-Secretary of State, Department for Communities and Local Government (Baroness Hanham): My Lords, the reasons for homelessness and rough sleeping are complex. This is an important issue which we are taking action to address, including by investing £470 million to support prevention and recovery services. This includes £34 million for the mayor’s office for rough sleeping in London; changing the law so that homeless families can be placed quickly in suitable
private sector accommodation; and joining-up actions across government through the ministerial working group on homelessness to tackle the causes of homelessness.
Lord Dubs: My Lords, I thank the Minister for the Answer. Will she confirm that a disturbingly large proportion of the homeless and rough sleepers are ex-prisoners and that if they do not get homes they are more likely to be reconvicted and sent back to prison? Will she comment on the difficulties facing a prisoner who is discharged with a £46 discharge grant having to wait a week under the Government’s policy before they can claim benefits?
Baroness Hanham: My Lords, I do not have the exact percentage but I acknowledge that there must be, and will be, some ex-prisoners among the homeless and rough sleepers who may go back to prison. When they leave prison, their benefits are calculated in the normal way.
The Earl of Listowel: From the Cross-Benches, I ask how care-experience young people are represented in the rough sleepers’ figures. Will the Government consider bringing forward an amendment to the Children and Families Bill to place a duty on local authorities to enable young people leaving care to stay with their foster carers, where they choose to, to the age of 21, instead of being obliged to leave at 18, whether they like to or not, as is the current situation?
Baroness Hanham: My Lords, my understanding is that for children leaving care, local authorities are obliged to keep acting for them until they are 21 if they are homeless. So they are already being looked after. We recognise that a number of children under 21 leave care. The 15 to 18 year-olds, in particular, are well cared for but we know that we have problems with the 18 to 25 year-olds. I am advised that in the specific area of children leaving care, local authorities have responsibility for those until they are 21.
Lord Cormack: My Lords, further to the point made by the noble Lord, Lord Dubs, does the Minister agree that if we are truly determined to ensure that young offenders and others are properly rehabilitated and do not reoffend, it must be incumbent on us to ensure that they have the means to survive when they come out of jail?
Baroness Hanham: My Lords, I totally agree with my noble friend and I accept that benefits are a requirement. I am afraid that I cannot respond on how they are assessed at the moment and I will write to both noble Lords on that.
Lord Kinnock: My Lords, when the evidence from the National House-Building Council is that the bedroom tax is forcing people out of even low-rent social housing, which is still too expensive for new tenants to take up, could it not be said, fairly, that the Government are, through their policies, making their own contribution to the increase in homelessness and rough sleeping?
Baroness Hanham: My Lords, there is no evidence of the bedroom tax having affected homelessness. Local authorities have a responsibility to look after people as they make the changes to downsize. It is important to point out that most families, especially those in the private sector, do not have the luxury of having spare bedrooms, particularly those who are being subsidised by the country.
The Lord Bishop of Birmingham: The Minister will be aware of the good practice of the multi-agency response to homelessness among 16 and 17 year-olds in Birmingham at the St Basils Youth Hub but, with the recent support expressed by the Housing Minister for the End Youth Homelessness Alliance, how will the Government meet the alliance’s challenges for family support, employment and affordable, safe housing for that category of people?
Baroness Hanham: I am aware of what the right reverend Prelate the Bishop of Birmingham is talking about. The policies of the Government will support the question that he has asked.
Lord Roberts of Llandudno: Does the Minister agree that so many of those who are homeless and rough sleepers are the most vulnerable and fragile in society and that we must do everything possible in order to give them confidence in their communities? Is the present Home Office campaign not also against immigrants, with those billboards going around saying, “Go home or face arrest”? Does that not cause a great disturbance in our communities, possibly also for the homeless people who may feel under threat?
Baroness Hanham: My Lords, there are two important questions there. On the first, about rough sleeping, as noble Lords know and as I have made clear in this House, the Government are intent on stopping rough sleeping. There is the No Second Night Out initiative, in London, The Passage and other initiatives by organisations such as St Mungo’s and St Basils. There is support for rough sleepers and we do not expect them to have to stay rough sleeping for very long.
Regarding the second matter raised by the noble Lord, this is a new initiative that has just been undertaken by the City of Westminster to try to encourage those who should not be here and have not got accommodation to think about going home. It is intended to be helpful; I do not think that it is meant to be intimidating but to address the reality of the situation, as there are people coming here without jobs and accommodation.
Lord McKenzie of Luton: My Lords, are we not at the start of seeing the horrors of what the bedroom tax will produce? We know that homelessness will be fuelled by that tax. The Government have suggested that it is possible to stave off the effects of the bedroom tax by taking in a lodger—what advice would the Minister give to a family forced to consider this course of action?
Baroness Hanham: My Lords, there are people who would welcome having that single-room accommodation —there are students, people in the Armed Forces who are here for a short time, and people who do not have
other accommodation. Those options are there if people choose to rent out a room. It would be subject always, of course, to their tenure, lease or arrangements with the local authority, but it is perfectly possible for them to do that. The situation with regard to having a spare room is such that we have to recognise that the welfare bill is enormous, it is £210 billion, and contributions need to be made to that.
Thames Tideway Tunnel
Question
3.24 pm
To ask Her Majesty’s Government what steps they are taking to ensure that any support provided by HM Treasury for financing the Thames tideway tunnel project has minimal impact on customers’ bills and provides value for taxpayers.
The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord De Mauley): My Lords, we believe that the private sector should finance the tunnel. However, there are some risks that it may not be able to bear at an acceptable cost. We are willing in principle to provide contingent financial support that encourages private sector investment and offers an incentive to delivery partners to manage project risks and minimise costs. The Government are working to ensure that the tunnel offers value for money for customers and taxpayers, while being financed and delivered efficiently.
Lord Berkeley: I am grateful to the Minister for that Answer. But how will the Government explain to 6 million households that they are required to pay £80 a year extra on their water bills for 100 years or so to a company which last year paid no corporation tax but managed to pay £231 million in dividends to its offshore owner and which has reduced its assets to the extent that it cannot fund the project, with the Government not only guaranteeing it but agreeing to pay for it if they have to? How can this really be good for customers or the taxpayer?
Lord De Mauley: My Lords, we are faced with the problem of London’s sewers being at or close to capacity and millions of tonnes of sewage overflowing each year. The solution costs a great deal of money—more than £4 billion—so we need a sophisticated way to finance it. Thames Water pays its tax, and the entity which builds the tunnel will pay its tax, but water and sewerage companies have to make huge investments in infrastructure, the tunnel being a classic example. Therefore, while all companies are eligible for capital allowances, water companies perhaps appear to benefit more from them than others. We expect Thames Water’s customers’ bills to rise by about £70 to £80 a year to pay for the tunnel, which would still leave them paying below the national average. Removing capital allowances would of course mean that those bills would increase further.
The Earl of Selborne: My Lords, surely an infrastructure project of this lifespan, expense and complexity should deliver more than just a cleaner river. Is my noble friend confident that the project will deliver flood-risk management, drought management, nature conservation and reuse of water, all of which future generations would certainly expect from a project of this size?
Lord De Mauley: My Lords, my noble friend makes an important point. Of course, the primary purpose of the tunnel is to reduce the impact of sewage pollution on the river, thus, I think, indirectly contributing to recreation by giving us a cleaner river. However, my noble friend’s question leads me to the broader point, which is that the tunnel on its own is not enough. We also need sustainable drainage systems. I was visiting some very innovative solutions today in Herne Hill. Those solutions are not able to deal with the whole problem on their own either, but they can directly contribute to flood—particularly surface water—and drought management, conservation, recreation and better public places.
Baroness Kramer: My Lords, I fully recognise the need for the tunnel but is the Minister aware that most of the boating and swimming on the tidal Thames is upstream of Hammersmith and that, even with the tunnel and additional improvements, there will still be discharges of raw sewage in this area? Therefore, can he tell me why the tunnel is stopping at Hammersmith?
Lord De Mauley: My Lords, because the major problem is below there.
Lord Davies of Oldham: My Lords, when, some three decades ago, the Conservative Government privatised water, did they expect that a company such as Thames Water would pay no corporation tax in the past year, as has been stated, despite considerable profits and a major distribution of dividends, and that it would then come to the taxpayer for necessary investment on this major project? What will be the basis of equity in these terms as far as this private company is concerned?
Lord De Mauley: My Lords, I thought I had addressed that question when I answered the noble Lord, Lord Berkeley. Thames Water does not avoid paying tax. HMRC’s capital allowance regime allows companies to delay—not to avoid—paying corporation tax, based on how much they invest. Capital allowances are simply the allowed amortisation of an asset for tax purposes and they exist to encourage companies to carry out crucial investment. The mechanism enables tax to be paid over the lifetime of the asset. If capital allowances did not exist, that would mean either less investment or higher bills for customers.
Lord Deben: Does my noble friend accept that this is an old-fashioned and unacceptable answer to the problem? It is like the Three Gorges dam: it is not the way to do it. Will he please undertake that before any public money is put into this scheme he makes sure that better schemes, which may not be so convenient
for the water company concerned—I declare an interest in the water industry—but are more environmentally sensible than this wholly out-of-date proposal, are thought of by the Government?
Lord De Mauley: My Lords, while I agree with my noble friend on many things, I do not agree with him on that. After years of work by Governments of both hues, we do not consider that there is a viable, cheaper solution that would simultaneously address the current sewer overflow problems relatively swiftly for the foreseeable future and deliver value for money.
Lord Campbell-Savours: Is not the question asked by the noble Lord, Lord Deben, the question being asked by the whole of the British environmental movement, which says that this was the wrong solution and that sustainable developments were possible as an alternative? Why are we wasting £4 billion on this project when there was another solution?
Lord De Mauley: My Lords, over the past decade studies have looked at options which include green infrastructure solutions such as sustainable drainage systems. The purpose of the Thames Tunnel Evidence Assessment, published by my department in 2012, was to ensure that due consideration had been given to the full range of evidence available on all the proposed solutions to address sewage in the Thames and to provide an assessment of the nature of that evidence.
Lord Harris of Haringey: My Lords, is not the fundamental problem that since privatisation the privatised water utilities have failed to make the investment that is necessary, including in sewers? What are the Government doing to address that in terms of the regulatory environment?
Lord De Mauley: My Lords, I am sorry, I simply do not accept the premise of the noble Lord’s question.
Alcohol: Minimum Pricing
Question
3.31 pm
To ask Her Majesty’s Government, in the light of the number of alcohol-related deaths among women in their 30s and 40s, whether they will reconsider their policy on alcohol unit pricing.
Lord Taverne: My Lords, I beg leave to ask the Question standing in my name on the Order Paper. In doing so, I declare an interest as a trustee of the Independent Scientific Committee on Drugs.
The Parliamentary Under-Secretary of State, Home Office (Lord Taylor of Holbeach): My Lords, last week the Government published their response to the recent consultation on the alcohol strategy. This sets out our next steps for reducing alcohol-related harm. These include banning the sale of alcohol below the level of
duty plus VAT and tightening up restrictions on irresponsible promotions. Minimum unit pricing will not be taken forward at present but it will remain a policy under consideration.
Lord Taverne: My Lords, alcohol has been shown to be much the most harmful of all the addictive drugs if one takes into account its social as well as its physical impact. As the latest figures show, the physical impact is becoming more serious and it seems likely that liver disease will soon overtake heart disease as the biggest killer. In 2008, the Government’s own research department showed that increasing the price of alcohol led to a steep decline in alcohol consumption and was a most effective way of dealing with it, and lots of other research confirms that. Why, then, have the Government changed their mind? They announced their intention to increase alcohol pricing and it was widely welcomed. Why do they ignore the evidence on this urgent issue when there is scientific evidence showing that action would save lives, reduce hospital admissions and reduce crime?
Lord Taylor of Holbeach: My Lords, the Government are not ignoring the evidence; in fact a study published recently by Sheffield University is very interesting in this subject area. That is why the Government have introduced the whole business of duty plus VAT—so that, for example, low-alcohol beer cannot be sold below 40p a can and strong lager below £1.15. This has been a long-standing problem which Governments of all types have not been prepared to deal with. This Government have a strategy now to deal with it and I hope that it has the support of the House.
Baroness Hollins: My Lords, my interest is as chair of the Board of Science at the British Medical Association. I understand that research commissioned by the Department of Health shows that this policy on its own will not have any impact. How much of an increase in price does this new policy represent? I estimate that the policy will mean a minimum shop price of 21p per unit for beer and 28p for spirits—considerably less than the 45p minimum unit price previously being considered.
Lord Taylor of Holbeach: My Lords, I have some figures that might inform the House. In 2008—the latest figures that I have available—retailers sold 220 million litres of alcohol below cost. Six out of seven supermarkets sell alcohol below cost. That is what we are tackling with duty plus VAT. It is part of a combination of strategies to reduce alcohol and binge drinking in this country.
Lord Morris of Handsworth: My Lords, in the light of the number of substance-related deaths, will the Government consider returning to the policy of requiring cigarettes to be in plain packaging? The House will recall that this is the policy on which Mr Lynton Crosby has never lobbied the Prime Minister.
Lord Taylor of Holbeach: My Lords, that is a slightly different issue from alcohol but I can see the relation between the two. As for Mr Lynton Crosby, I have no doubt that Australians have been able to give lessons
to all of us. I am sure that the Labour Party is taking great note of its sister party in Australia as regards how to deal with the party leadership.
Baroness Williams of Crosby: The evidence is quite clear that minimum unit pricing has two dramatic effects. First, it cuts the level of alcohol-related deaths and sharply reduces admissions to hospital, as my noble friend has said. Equally importantly, it drives drinkers steadily towards lower-strength alcohol from high-strength alcohol—which has nothing to do with the Minister’s proposal about VAT and all the rest of it. Given the latest evidence from Saskatchewan and from Sheffield University with regard to the United Kingdom, will the Prime Minister and the Cabinet readdress this issue, at a time when many thousands of English and Scottish people suffer from the effects of serious alcohol, including not least in domestic violence?
Lord Taylor of Holbeach: I reiterate to my noble friend that the minimum unit pricing policy remains under consideration. It has not been shelved.
Baroness Smith of Basildon: My Lords, I am surprised by that answer. On several occasions I have asked the noble Lord from this Dispatch Box about this so that I might understand why the Government have moved from absolute certainty that they would introduce minimum alcohol pricing to equivocation and a consultation, and now seem to be moving to total rejection. Following David Cameron’s evasive answers at the weekend, the lobbyist and Prime Minister’s adviser, Lynton Crosby, has stated that he has never spoken to the Prime Minister about plain packaging for cigarettes. Can the Minister give us the same assurance about minimum alcohol pricing? Do the Government consider that Mr Crosby should now declare all his lobbying clients?
Lord Taylor of Holbeach: The noble Baroness has been in government and I am sure that she knows the procedures and the way in which Ministers behave in relation to advisers. I give that assurance in the knowledge that my right honourable friend the Prime Minister will vouch for that himself.
Public Bodies (Abolition of Victims’ Advisory Panel) Order 2013
Motion to Approve
3.38 pm
That the draft order laid before the House on 25 April be approved.
Relevant documents: 1st Report from the Secondary Legislation Scrutiny Committee, 1st Report from the Joint Committee on Statutory Instruments, considered in Grand Committee on 15 July.
Road Safety (Financial Penalty Deposit) (Appropriate Amount) (Amendment) Order 2013
Motion to Approve
3.38 pm
That the draft order laid before the House on 5 June be approved.
Relevant documents: 4th Report from the Joint Committee on Statutory Instruments, considered in Grand Committee on 10 July.
Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2013
Financial Services Act 2012 (Consumer Credit) Order 2013
Motions to Approve
3.38 pm
That the draft orders laid before the House on 25 June be approved.
Relevant documents: 6th Report from the Joint Committee on Statutory Instruments, considered in Grand Committee on 17 July.
Offender Management Act 2007 (Commencement No. 6) Order 2013
Motion to Approve
3.39 pm
That the draft order laid before the House on 10 June be approved.
Relevant documents: 4th Report from the Joint Committee on Statutory Instruments, 6th Report from the Secondary Legislation Scrutiny Committee, considered in Grand Committee on 22 July.
Local Audit and Accountability Bill [HL]
Local Audit and Accountability Bill [HL]
Third Reading
3.40 pm
1: After Clause 22, insert the following new Clause—
“Auditor’s right to documents and information of significant private contractors
(1) A local auditor has a right of access at all reasonable times to audit documents from significant private companies that the local authority have contracted services to during the last financial year.
(2) Local auditors only have a right of access to audit documents from private companies, under subsection (1), that relate to the service provided to the local authority by that company.
(3) A local auditor must make available on request any audit documents, obtained under subsection (1), subject to the provisions of the Freedom of Information Act 2000.
(4) In this section “private company” shall be interpreted to mean any legal entity, including joint ventures, not-for-profit organisations, mutually-held organisations and charities.
(5) Five years after the coming into force of this section, the Secretary of State must commission and publish a review of the effectiveness of subsections (1) to (3) and of the costs to local auditors, private companies and local authorities arising from it.”
Lord Wills: My Lords, this amendment is designed to bring greater transparency to the relationships between local authorities and the private contractors to whom increasingly large amounts of public services are being contracted out. Billions of pounds are at stake in these contracts and the recent revelations about the electronic tagging work carried out by private sector firms for the Ministry of Justice are just the latest example for the case for greater transparency in these arrangements.
I moved a similar amendment at both Committee and Report, when I set out the merits of greater transparency in tackling fraud and corruption, incompetence and inefficiency and in terms of citizens’ rights to know about the services provided to them and the taxpayers’ right to know about the services they pay for. I do not need to detain your Lordships today by rehearsing those arguments again at length.
The Government appear to believe that there are already sufficient provisions for transparency for this amendment not to be necessary, but the fact that local authorities themselves are covered by the Freedom of Information Act does not always provide the necessary transparency for private sector bodies carrying out public sector work, as I argued at Committee and Report, nor does the right of electors to inspect accounts and audit documents, important though that right is and has been for the many years.
At the heart of the Government’s resistance appears to be a belief that transparency increases cost. I addressed this argument at length on Report, by analysing the Government’s figures, which suggest that such costs are likely to amount, if at all, to an increase in a tiny percentage of the sums involved. The Government have not, so far, questioned my calculations. I also
pointed out that transparency can save money often by revealing fraud and corruption, incompetence and inefficiency. However, I recognise that Ministers fret about things which sometimes they do not always need to fret about and, in an attempt to set their minds at ease, I have made two changes that I hope will go some way towards meeting the Government’s concerns.
First, in this amendment, there is a provision for a review after five years to see whether the Government’s concerns about costs among other things are justified. Secondly, I have inserted “significant” into the amendment to make it clear that it is not intended to cover the provision of services by small businesses, nor the work of town and parish councils, as in those cases this amendment might be unnecessarily onerous. I hope that, even at this late stage, Ministers might reconsider their position on greater transparency in this area and that these changes might encourage them to do so. I beg to move.
Lord Tope: My Lords, Liberal Democrats campaigned hard for freedom of information long before the Act was passed and have since been consistent and enthusiastic supporters of its provisions. It follows therefore that we start with considerable sympathy for the issue that the noble Lord, Lord Wills, is pursuing. This is the first time I have spoken on his amendments and I am grateful to him for pursuing the issue at all stages of the Bill.
It is timely because we are now seeing in local government a significant and substantial change towards commissioning. It is not quite the same as outsourcing, as has been referred to, but it is largely brought about by budget pressures and is a change that is coming anyway. Now and in the years to come we will see local authorities all over the country of all political persuasions increasingly commissioning services not just from commercial contractors, but from the third sector, joint ventures, charities and so on. I am pleased that the noble Lord has therefore included in subsection (4) of his proposed new clause a reference to,
“joint ventures, not-for-profit organisations”,
and so on, because that is at least in part the direction in which we are heading. For all those reasons, I am pleased that we have the opportunity to debate his amendment. I am also pleased that he included “significant” for reasons that he explained. I assume it will mean that all the smaller sub-contractors, for instance, will not necessarily be covered by this, and that is welcome too.
3.45 pm
I start to part company with the noble Lord a little on costs. He is quite right to raise the issue and quite right that Governments of all persuasions, local and national, tend to overstate this. I know that the Government have argued that many of the respondents to the consultation said that it would increase costs. I suspect that many of those respondents were companies and others which did not want it to apply to them, so one could say, “They would, wouldn’t they?”. The noble Lord, Lord Wills, has said comprehensively at each stage of the Bill why it should not increase costs.
The Local Government Association, of which I am a brand new vice-president—that was a declaration of interest—has said that it supports the amendment, provided there is no increase in audit fees. I want to question that a little and I do so from the point of view of having for quite a number of years, until very recently, had political responsibility within my own local authority for freedom of information requests, of which there are now a huge number. Many of them are fishing and some seek genuine information. To say that there is no increased cost is not right; it actually takes organisations dealing with freedom of information requests considerable time, and time is money. That will apply even where the information is comparatively readily stored and available. That happens and it would happen in this case, too.
I hope that the Government will agree not simply to accept the word of respondents, who probably have a vested interest, or even to take the well rehearsed word of the noble Lord, Lord Wills, for this but to look themselves at what actual costs would be involved in extending the Bill in this way—it is, in effect, an extension. Then I would say, as I think the noble Lord, Lord Wills, did, that it is not simply a matter of the costs; there are the benefits as well. That is why we have a cost-benefit analysis. Always, there are benefits but it is usually harder to quantify them. That is sometimes because the benefits are retrospective and we do not know what they are until they have occurred. That has to be the other side of the equation, so there is rather more work to be done on this issue.
Although of course this has to be raised in the context of auditing and auditors, because that is the subject of this Bill, the issue is very much wider. I said earlier that the future for local government—and perhaps of other public services—is with commissioning services from other organisations, be they commercial companies or the third sector with its charities and so on. Here, we have a very much bigger issue of the extent to which, and how and whether, the freedom of information provisions apply there. That is a wider issue and I would be happier if the Government were able to reply again today by saying that they recognise that this is a live and growing issue, and one that the Government are going to address. Perhaps the Minister replying—I do not know whether it is he or she, but I think it is he—will give an undertaking that the issue will be actively reviewed and that conclusions can be reached as to how or whether it should apply to the more narrow confines of the Bill before it ends its parliamentary life. The Bill is likely to leave this House after today but that certainly does not end its life, as it will continue in another place throughout the autumn. If the Government can say that they will continue to look actively at that issue, both generally and in the context of the Bill, I would be content to support them.
Lord Campbell-Savours: My Lords, I will briefly intervene to follow up some of the comments of the noble Lord, Lord Tope. From 1986 onwards, I argued in the Commons for revision of the law governing the provision of information to the public. It was during a very interesting period following the arguments in the mid-1980s over Tony Wright and the reform of the Official Secrets Act.
One of the reasons we argued for freedom of information was that we believed that it would change the conduct within local authorities. My noble friend’s amendment would extend those rights of access to a group of organisations that effectively are carrying out the functions of local authorities. In saying, “change the conduct”, I refer back to the comments of the noble Lord, Lord Tope, on the additional cost. However, no-one has been able to quantify the benefits financially to local authorities of being more transparent in their operations. I frequently used freedom of information requests to press local authorities and other public bodies on the way that they conduct themselves. After a series of freedom of information requests, one sometimes notices a change in the way that a local authority conducts its affairs. Very often, it means greater efficiency, the saving of public money and a happier general public paying their council taxes.
When the Minister winds up, I do not think that he should see the issue simply in terms of costs; he should think about the actual benefit to the taxpayer of a system that is far more transparent in its operations.
The Earl of Lytton: My Lords, I had intended to add my name to the amendments tabled by the noble Lord, Lord Wills. I regret that probably I advised the clerks too late for that to happen. I start, therefore, by apologising to the noble Lord.
As did the noble Lord, Lord Tope, I declare my interests as a newly polished and appointed vice-president of the Local Government Association and a possibly somewhat more tarnished president of the National Association of Local Councils. The issue is one of not adding unnecessarily to costs, as the noble Lord pointed out. Part of me says that whenever locally—or at whatever level—a greater throughput of taxpayers or public money is being used, it is right that the level of scrutiny is proportionate. The reference to “significant private companies” is perhaps slightly less than I would have liked. I would have liked the figure itself to have been objectively significant rather than the company providing the service being significant. I am not sure that I know what a significant company is in this context, whereas I am clear as to what a significant figure might be.
However, it is right that auditors should have a degree of discretion in looking at this. As I said at an earlier stage in the Bill, we may be looking at quite small organisations that, for whatever reason—perhaps because of some project they are undertaking—may be responsible for deploying fairly significant sums. It is right that those should be subject to scrutiny. There is no place here for opacity in the way in which figures are presented. Therefore I very much support the principle of this amendment.
I will digress, if I may, onto the freedom of information issue. I am aware that one of the get-outs in relation to providing freedom of information data is when the request is considered to be vexatious. The standard of “vexatious” as a term of art seems to be a matter of self-assessment to a degree by the body that is providing that information; at least, that is how it seems to me. The noble Baroness opposite is shaking her head slightly; if I have got it wrong, I apologise. However, it
seems to me that that is capable of a degree of latitude. I certainly have seen evidence of “vexatious” used as a reason for not providing information—although not in the context of local government—and the term ought to be made a little clearer. In general terms, I support what the noble Lord, Lord Wills, has put forward and am grateful to him for continuing to bring it to the attention of the House.
Lord Palmer of Childs Hill: My Lords, first, I declare an interest as the current chairman of a local authority audit committee. I shall chair a meeting later this evening. I shall add a touch of reality to the comments made by other noble Lords.
The first subsection of the amendment moved by the noble Lord, Lord Wills, states that the local auditor is to have right of access to the books and records of contractors. In the real world, any local authority worth its salt has in all its contracts a clause allowing it access to the documents of its auditors or the processes that those local auditors use. If a local authority does not have that, shame on it. What we are perhaps trying to do here is to put into legislation something that is a normal commercial attitude that local authorities or corporate bodies should do anyway. As my noble friend Lord Tope said, commissioning is coming on in so many local authorities, and the measure and size of some of the contracts will be very significant. With these large commissioning items, it is not the legislation that should be relied on but the normal contractual terms between the local authority and the contractor. The Government and the noble Lord, Lord Wills, are right to highlight that local authorities should deal with this with their contractors. As my noble friend Lord Tope said, when the Government review these matters, even after this Bill is passed, they should perhaps seek to encourage that within local authorities.
Subsection (3) of the amendment states:
“A local auditor must make available on request any audit documents, obtained under … the Freedom of Information Act 2000”.
That worries me somewhat because, if something is too rigid and too demanding, the net result in practical terms is that people do not put it down on paper in order not to be subject to freedom of information. That might discourage the local auditor from carrying out its job in a deep way. I am all for transparency, but it should be transparency as the auditor feels is right rather than being enshrined in law. Although I understand where the noble Lord, Lord Wills, is coming from, and I appreciate the amendment, I hope that it will encourage the Government to review matters before the Bill becomes law.
Lord Beecham: My Lords, I join others in declaring membership of the LGA vice-presidential mafia. I am also a member of Newcastle City Council’s audit committee. I strongly support my noble friend’s amendment, as did the noble Lord, Lord Shipley, a former leader of Newcastle City Council who, alas, is not in his place.
I congratulate the noble Lord, Lord Tope, on the ingenuity with which he has contrived some wriggle room to justify supporting the Government this afternoon as opposed to doing what the noble Lord, Lord Shipley,
would perhaps have done had he been here and opposing them, but I do not think his arguments carry very much weight. He is particularly concerned about the cost of these matters, but the audit is carried out on these services whether they are provided as of now by the local authority or by an external body. There ought to be a level playing field in that respect in any event so that there will be a cost of proper auditing by the district auditor and it should not add to the burden that is currently experienced.
The argument that the noble Lord adduces about the need to assess the situation is perfectly fair, but of course it is provided for in the amendment. One could argue that my noble friend has been excessively generous in saying that the review should take place after five years. It may be that a shorter period will be short enough to assess the functioning of the system and, if there is still a question as to the costs, the costs. However, the principle of my noble friend’s amendment is clearly right.
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The noble Lord, Lord Palmer, raised at the Report stage the issue of the contractual aspect and he raised it again today. I do not think that gets away from the thrust of my noble friend’s amendment, which is to endeavour to ensure that these matters are properly looked at by the district auditor and that the district auditor’s findings are disclosable subject to the proviso that he has included about commercial confidentiality and freedom of information. We have to remember the context in which this debate takes place. We have had the glaring and shocking examples of Group 4 and Serco recently in the public domain. Those were large national contracts. I wonder whether the questions of the noble Lord, Lord Palmer, about access to the documentation and the contracts might not be addressed to central government if that is a real concern. Certainly, they do not seem to have taken steps of the kind that the noble Lord indicated in relation to the problems that have been faced by those organisations.
They are not the only ones where considerable difficulty has been experienced, vast expense incurred and failures or inadequacies of service detected across a range of public services. Again one thinks of Serco’s contract with National Health Service England about out-of-hours care in Cornwall and a range of other matters of that kind. There had been systemic failure and it was clearly necessary for the audit service—in this case the district audit service—to have a role and for transparency to be the order of the day.
I am not sure whether the noble Lord or the noble Baroness will be the Minister replying—it will be the noble Lord shouldering this burden manfully as he replies to the debate. I hope that he can give some assurances of the kind suggested by my noble friend. I cannot see that the Government would emerge with anything but credit for accepting the amendment in the interests of transparency, in the interests of proper scrutiny of what happens, and ultimately of procuring value for money and saving money for the public purse.
Lord Wallace of Saltaire: My Lords, I start by thanking the noble Lord, Lord Wills, for our useful discussions about Amendments 1 and 2, both after
Committee and again earlier this week. I also acknowledge his commitment to this agenda and the enthusiasm with which he pursues it.
Amendment 1 seeks to give auditors a right to access audit documents of significant contractors to local authorities and to make these available on request. Amendment 2 is concerned with extending freedom of information rules. The debate we have just had has extended over both amendments and, to some extent, I have to answer both amendments, even though the noble Lord chose to separate the two last night.
I acknowledge that there is a wider issue here, as the noble Lord, Lord Beecham, has just said, about the appropriate levels of audit, transparency and accountability for private providers of public services—whether they be for-profit companies, not-for-profit voluntary organisations or others. This issue has grown over the past 25 to 30 years as successive Governments of all parties have outsourced public services, both from the national and from the local level. As the noble Lord, Lord Beecham, pointed out, recent publicity over inadequate performance has heightened public interest and interest in this House, although I should note that almost all the recent cases publicised have been about nationally negotiated contracts, not local contracts. Noble Lords may have noticed that the Atos contract with DWP on work disability assessment included provision for DWP audit. That has now discovered certain weaknesses for which Atos has apologised.
I encourage the noble Lord to pursue this issue further. I will repeat what I said on Report: both Parliament and the Government need to look at this issue in general. With my Cabinet Office hat on I would say that the Cabinet Office is actively looking at the issues of commissioning and contracts and how to make sure that we are raising standards across Whitehall. The new Commissioning Academy, the Government’s champion for the non-profit sector, is part of how we are working at learning from mistakes that have been made, both under this Government and under our predecessor, and raising the level of approach. It would be highly appropriate for Parliament to look at this in parallel with the Government. As I suggested on Report, I encourage the noble Lord, Lord Wills, to consider whether he should bid for a sessional committee, for example, which would examine the changing relationship between non-governmental providers of public services and local authorities and national authorities to see whether we can find consensus across the parties on how we approach this issue.
On the wider issue, nevertheless, I have to say that the case has to be made. I suspect that the noble Lord, Lord Wills, was, in his commitment to greater transparency and freedom of information, in a minority in the previous Government. I recall that the Prime Minister Tony Blair said that the Freedom of Information Act was the biggest mistake that they had made. I share, as do all those in my party, a commitment to transparency in government, and the coalition Government have done their best to extend transparency. In many ways, however, there is rather further to go, particularly when one comes to the relations between the private sector and the public sector—the private for-profit
sector, which pleads commercial sensitivity and additional costs from the extension of the sort of transparency and audit which the noble Lord is approving.
This specific amendment is not necessary because the Bill already gives these powers to local auditors. Clause 21 enables local auditors to access whatever documents and information they think are necessary to undertake their functions under the Bill. That includes documents held by local authorities’ contractors if the auditors consider that these are necessary in order to undertake their functions. That covers all the functions in the Bill, not just the audit of the financial statement but all the additional functions that are unique to local public audit such as the consideration of questions and objections from the local electorate and the issue of public interest reports. Schedule 11 to the Bill also includes provisions which enable local auditors to disclose information necessary to answer those questions and objections. The Government’s code of recommended practice for local authorities on data transparency recommends a minimum set of data to be published locally. All local authorities now publish expenditure over £500 and many publish their contracts. No audit firms have yet indicated that the current access rights are inadequate or lacking.
That being the case, I argue—I hope the noble Lord recognises that I do not argue the resistance to his amendment primarily on cost grounds—that the case is not made on this amendment. We all recognise that there is a wider issue about the overall transformation over the past 25 years of the relationship between government as provider of funds and the private, profit and non-profit sectors as the provider of those services in return for funds. However, I agree strongly with my noble friend Lord Palmer of Childs Hill, who said that much of this is covered in the contractual relationship. We are all learning about how to improve that contractual relationship. The Government, particularly within the Cabinet Office, are working on how to extend best practice across the Government nationally as well as assisting local authorities. Having given all of those assurances, I hope that the noble Lord feels able to withdraw his amendment on the condition that we will continue to discuss and examine this very broad issue.
Lord Wills: My Lords, this has been a short but useful debate. I am grateful to all who have spoken in it and for the fact that everyone—except the Minister—has broadly supported the amendment. I congratulate the two new vice-presidents of the Local Government Association on their contribution on this subject. I am also grateful to the Minister and the noble Baroness, Lady Hanham, and their officials for their willingness to engage continually with me on this subject. I have benefited from our discussions.
I am grateful, too, that the Minister expressed his continuing willingness for the Government to keep looking at this issue. That is a step forward from the Committee stage and the Report stage. Although the Government have not accepted the amendment, I am grateful for what I take to be a slow, almost imperceptible, warming of their position on it. However, looking at this issue is not the same as doing something about it.
It is not the same as taking advantage of what is likely to be quite a rare legislative opportunity to bring greater transparency to this important sphere of public life.
The Minister mentioned two primary reasons for resisting the amendment. One was commercial sensitivity. However, he will be well aware that the Freedom of Information Act 2000 has an exemption for commercial sensitivity—subject, of course, to a public interest test. So, with all respect to him, I am not sure how far he would wish to pursue that argument.
The Minister then focused on the idea that the amendment is not necessary. Both he and the noble Lord, Lord Palmer of Childs Hill, relied for their position on the fact that good local authorities should have this aspect covered anyway in their contractual relationships with private sector companies providing outsourced work. The noble Lords are, of course, right. Good local authorities should have this covered. If all local authorities were good local authorities, my amendment would not be necessary. But they are not. They make mistakes and they overlook things, as we all do. In Committee I gave examples. I notice that the noble Lord, Lord Palmer of Childs Hill, did not say that all local authorities do this. He said, quite rightly, shame on those that do not, but he conceded that there are those that do not. I think that the Minister himself said that “much” of this—not all of it—was covered under the contractual arrangements. That is precisely what the amendment seeks to remedy. It seeks to ensure that all local authorities bring greater transparency to this crucial area of public life, where billions of pounds of taxpayers’ money are at stake. We have seen already how necessary this is.
In the light of that, I am afraid that I shall have to resist the Minister’s invitation to withdraw the amendment. Because the Government are warming to this idea, I hope that this House can send a signal to the other place about the importance of transparency and perhaps encourage the Government, when the Bill gets there, to move further on this issue. I therefore beg to test the opinion of the House.
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Contents 172; Not-Contents 191.
CONTENTS
Adams of Craigielea, B.
Adonis, L.
Ahmed, L.
Allenby of Megiddo, V.
Alton of Liverpool, L.
Anderson of Swansea, L.
Andrews, B.
Bach, L.
Bakewell, B.
Barnett, L.
Bassam of Brighton, L. [Teller]
Beecham, L.
Berkeley, L.
Bew, L.
Bilston, L.
Birmingham, Bp.
Boateng, L.
Brennan, L.
Brooke of Alverthorpe, L.
Brookman, L.
Browne of Belmont, L.
Browne of Ladyton, L.
Campbell-Savours, L.
Carter of Coles, L.
Chester, Bp.
Christopher, L.
Clancarty, E.
Clarke of Hampstead, L.
Clinton-Davis, L.
Collins of Highbury, L.
Crawley, B.
Cunningham of Felling, L.
Curry of Kirkharle, L.
Davidson of Glen Clova, L.
Davies of Coity, L.
Davies of Oldham, L.
Davies of Stamford, L.
Dean of Thornton-le-Fylde, B.
Deech, B.
Donaghy, B.
Drake, B.
Dubs, L.
Eatwell, L.
Elder, L.
Elystan-Morgan, L.
Erroll, E.
Evans of Parkside, L.
Evans of Temple Guiting, L.
Falkland, V.
Farrington of Ribbleton, B.
Faulkner of Worcester, L.
Fellowes, L.
Foulkes of Cumnock, L.
Gale, B.
Gibson of Market Rasen, B.
Giddens, L.
Glasman, L.
Golding, B.
Gould of Potternewton, B.
Grenfell, L.
Grocott, L.
Hanworth, V.
Harris of Haringey, L.
Harrison, L.
Haskel, L.
Hayman, B.
Healy of Primrose Hill, B.
Hilton of Eggardon, B.
Hollick, L.
Hollis of Heigham, B.
Howarth of Newport, L.
Howells of St Davids, B.
Howie of Troon, L.
Hoyle, L.
Hughes of Stretford, B.
Hughes of Woodside, L.
Hunt of Kings Heath, L.
Janner of Braunstone, L.
Jay of Paddington, B.
Jones of Whitchurch, B.
Jones, L.
Jordan, L.
Kilclooney, L.
Kinnock of Holyhead, B.
Kinnock, L.
Kirkhill, L.
Knight of Weymouth, L.
Laming, L.
Lane-Fox of Soho, B.
Lea of Crondall, L.
Liddell of Coatdyke, B.
Liddle, L.
Lipsey, L.
Lister of Burtersett, B.
Low of Dalston, L.
Lytton, E.
McAvoy, L.
McDonagh, B.
Macdonald of Tradeston, L.
McFall of Alcluith, L.
McIntosh of Hudnall, B.
MacKenzie of Culkein, L.
McKenzie of Luton, L.
Mallalieu, B.
Mar, C.
Massey of Darwen, B.
Maxton, L.
Meacher, B.
Monks, L.
Morgan of Huyton, B.
Morris of Aberavon, L.
Morris of Handsworth, L.
Myners, L.
O'Neill of Clackmannan, L.
Ouseley, L.
Patel of Blackburn, L.
Patel of Bradford, L.
Pendry, L.
Pitkeathley, B.
Prescott, L.
Puttnam, L.
Quin, B.
Radice, L.
Ramsay of Cartvale, B.
Rees of Ludlow, L.
Reid of Cardowan, L.
Rendell of Babergh, B.
Richard, L.
Rogan, L.
Rooker, L.
Rosser, L.
Royall of Blaisdon, B.
Sandwich, E.
Sawyer, L.
Sherlock, B.
Simon, V.
Slim, V.
Smith of Basildon, B.
Snape, L.
Soley, L.
Stevenson of Balmacara, L.
Stoddart of Swindon, L.
Stone of Blackheath, L.
Symons of Vernham Dean, B.
Taylor of Bolton, B.
Temple-Morris, L.
Tenby, V.
Thornton, B.
Tomlinson, L.
Touhig, L.
Triesman, L.
Tunnicliffe, L. [Teller]
Turnberg, L.
Turner of Camden, B.
Uddin, B.
Wall of New Barnet, B.
Walpole, L.
Walton of Detchant, L.
Warner, L.
Warnock, B.
Watson of Invergowrie, L.
West of Spithead, L.
Wheeler, B.
Whitaker, B.
Whitty, L.
Wilkins, B.
Williams of Elvel, L.
Williamson of Horton, L.
Wills, L.
Woolmer of Leeds, L.
Worthington, B.
Young of Norwood Green, L.
NOT CONTENTS
Aberdare, L.
Addington, L.
Ahmad of Wimbledon, L.
Alderdice, L.
Anelay of St Johns, B. [Teller]
Armstrong of Ilminster, L.
Attlee, E.
Avebury, L.
Bates, L.
Benjamin, B.
Berridge, B.
Best, L.
Bilimoria, L.
Black of Brentwood, L.
Bonham-Carter of Yarnbury, B.
Bowness, L.
Brabazon of Tara, L.
Bradshaw, L.
Brinton, B.
Brittan of Spennithorne, L.
Brooke of Sutton Mandeville, L.
Brougham and Vaux, L.
Burnett, L.
Butler-Sloss, B.
Byford, B.
Caithness, E.
Campbell of Surbiton, B.
Cathcart, E.
Chidgey, L.
Clement-Jones, L.
Cobbold, L.
Colwyn, L.
Cope of Berkeley, L.
Cormack, L.
Cotter, L.
Courtown, E.
Craigavon, V.
Crathorne, L.
Crickhowell, L.
Crisp, L.
Dannatt, L.
De Mauley, L.
Deighton, L.
Denham, L.
Dholakia, L.
Dixon-Smith, L.
Dobbs, L.
Doocey, B.
Dundee, E.
Eames, L.
Eaton, B.
Eccles of Moulton, B.
Eccles, V.
Empey, L.
Falkner of Margravine, B.
Faulks, L.
Flight, L.
Forsyth of Drumlean, L.
Fowler, L.
Framlingham, L.
Freud, L.
Garden of Frognal, B.
Gardiner of Kimble, L.
Gardner of Parkes, B.
Geddes, L.
Glasgow, E.
Glenarthur, L.
Goodlad, L.
Griffiths of Fforestfach, L.
Hamilton of Epsom, L.
Hamwee, B.
Hanham, B.
Harries of Pentregarth, L.
Harris of Richmond, B.
Higgins, L.
Hill of Oareford, L.
Hodgson of Astley Abbotts, L.
Hooper, B.
Howard of Rising, L.
Howe of Aberavon, L.
Howe of Idlicote, B.
Howe, E.
Howell of Guildford, L.
Hunt of Wirral, L.
Hussein-Ece, B.
Inglewood, L.
James of Blackheath, L.
Jolly, B.
Jones of Cheltenham, L.
Jopling, L.
Kakkar, L.
Kramer, B.
Lamont of Lerwick, L.
Lang of Monkton, L.
Lawson of Blaby, L.
Lee of Trafford, L.
Lexden, L.
Lindsay, E.
Lingfield, L.
Linklater of Butterstone, B.
Loomba, L.
Luke, L.
Lyell, L.
McColl of Dulwich, L.
MacGregor of Pulham Market, L.
Mackay of Clashfern, L.
McNally, L.
Maddock, B.
Maginnis of Drumglass, L.
Mancroft, L.
Marks of Henley-on-Thames, L.
Masham of Ilton, B.
Mayhew of Twysden, L.
Morris of Bolton, B.
Moynihan, L.
Naseby, L.
Nash, L.
Neville-Jones, B.
Newby, L. [Teller]
Newlove, B.
Noakes, B.
Northbrook, L.
Northover, B.
Norton of Louth, L.
Oakeshott of Seagrove Bay, L.
O'Cathain, B.
O'Loan, B.
O'Neill of Bengarve, B.
Palmer of Childs Hill, L.
Pannick, L.
Parkinson, L.
Parminter, B.
Perry of Southwark, B.
Phillips of Sudbury, L.
Popat, L.
Rawlings, B.
Redesdale, L.
Rennard, L.
Ribeiro, L.
Roberts of Llandudno, L.
Rodgers of Quarry Bank, L.
Roper, L.
Scott of Needham Market, B.
Seccombe, B.
Selborne, E.
Selsdon, L.
Shackleton of Belgravia, B.
Sharkey, L.
Sharp of Guildford, B.
Sharples, B.
Shaw of Northstead, L.
Shephard of Northwold, B.
Shrewsbury, E.
Smith of Clifton, L.
Stedman-Scott, B.
Steel of Aikwood, L.
Stephen, L.
Stewartby, L.
Stoneham of Droxford, L.
Storey, L.
Stowell of Beeston, B.
Swinfen, L.
Taverne, L.
Taylor of Goss Moor, L.
Taylor of Holbeach, L.
Tebbit, L.
Teverson, L.
Thomas of Gresford, L.
Thomas of Swynnerton, L.
Thomas of Winchester, B.
Tonge, B.
Tope, L.
Tordoff, L.
Trees, L.
Trefgarne, L.
Trimble, L.
True, L.
Tugendhat, L.
Tyler of Enfield, B.
Tyler, L.
Verma, B.
Wakeham, L.
Wallace of Saltaire, L.
Wallace of Tankerness, L.
Warsi, B.
Wei, L.
Wheatcroft, B.
Wilcox, B.
Williams of Crosby, B.
Willis of Knaresborough, L.
Young of Hornsey, B.
4.24 pm
2: After Clause 35, insert the following new Clause—
(1) In the Freedom of Information Act 2000, at the end of Part 1 of Schedule 1 (public authorities), insert—
“7 A local auditor of a local authority.”
(2) Five years after the coming into force of this section, the Secretary of State must commission and publish a review of the effectiveness of this section and of the costs to local auditors, private companies and local authorities arising from it.”
Lord Wills: My Lords, I moved an identical amendment to this at both Committee and Report stages of the Bill. I will not rehearse again all the arguments I set out at both stages or the merits of greater transparency, which we discussed in the debate on the previous amendment, the advantages of tackling fraud, corruption, incompetence and inefficiency, or the principled arguments in favour of citizens having the right to know about the services provided for them to the maximum extent possible and of taxpayers knowing as much as possible about the services for which they pay. However, I stress again that this amendment sets out not to promote an increase in transparency so much as to tackle a decrease in transparency which is brought about by the new arrangements under the Bill.
As I said on Report, the Audit Commission, which is being replaced by the provisions of the Bill, was covered by the Freedom of Information Act. My understanding is that in addition to information that it held for its own purposes, which of course was covered by that Act, other information held by auditors would also have been regarded as being held by the commission in certain circumstances, and therefore would also be covered by the Freedom of Information Act—for example, when the Audit Commission was investigating a complaint against a specified auditor, when it was conducting a quality control assessment of an auditor’s work or when it had required an auditor to provide information for the discharge of wider commission functions such as making judgments
on local authorities’ use of resources. In such circumstances, such information would have been deemed to be held by the Audit Commission, and therefore would be subject to the Freedom of Information Act. These are important categories of information that cover significant areas of public interest and concern. Yet, as far as I can see, no public authority as defined in the Freedom of Information Act has inherited those responsibilities from the Audit Commission under this Bill. Therefore, under this new regime, such information will no longer be covered by the Freedom of Information Act. I think that it should be.
This restriction of transparency damages the public interest and the amendment seeks to prevent that happening. At previous stages, this amendment received support from all sides of the House and has the support of the Local Government Association. Only the Government have stood out against it. In the light of our previous discussions on this issue and the previous debate today, I hope that they will now change their minds. I beg to move.
Lord Beecham: My Lords, my noble friend is absolutely right to point out that this is simply a question of preserving, or perhaps reviving, the level terms on which freedom of information has hitherto applied. It is different from the previous case that we debated. No question of cost is likely to be germane to the amendment. It is simply there to ensure that the transparency currently available within a local authority’s documentation is extended to those with which it contracts, subject to the Freedom of Information Act provisions and exemptions. There seems to be an unanswerable case for ensuring that that degree of transparency will apply as it applies now, before the Bill is enacted. I concur with my noble friend who urges on the Government acceptance of this provision, which is different from the previous amendment and to which I can see no possible objection, even from Liberal Democrat Members of your Lordships’ House or, indeed, elsewhere.
Lord Wallace of Saltaire: My Lords, the Government are keen to promote transparency. As I have previously suggested, they are sometimes keener than their predecessors were to promote transparency and accountability around outsourced services. However, we agree with the Justice Select Committee’s recommendations in its post-legislative scrutiny of the Freedom of Information Act and consider that the better approach is to preserve transparency through contractual provisions, rather than the formal extension of the Freedom of Information Act at this time. In 2012 the Justice Select Committee considered in detail during its post-legislative scrutiny the challenge of how to deal with contractors of public authorities. The committee concluded that,
“contracts provide a more practical basis for applying FOI to outsourced services than partial designation of commercial companies under section 5 of the Act”.
4.30 pm
The Government agreed with the Justice Select Committee’s recommendation that contracts should include provisions specifying that contractors should
fully assist public authorities in meeting their obligations under the Freedom of Information Act. The Government will encourage public authorities to include and enforce transparency clauses in contracts to ensure that openness and accountability are maintained, and a revised code of practice will be issued later this year. I stress that this is something with which the Government are currently engaged and that the Cabinet Office is helping to standardise across government. This will also encourage the inclusion of clauses in contracts that go beyond current Freedom of Information Act obligations and require the release of a wider range of information about contract delivery.
We believe that this, coupled with the wealth of information about contracts already available from public authorities, both proactively and in response to FOI requests, strikes an appropriate balance between transparency and reducing burdens on business. The Government and the Information Commissioner will monitor the success of this approach during 2014. It is only right that we should give the approach we have already outlined time to bed in over the next 12 months before deciding whether further action might be justified. We strongly urge public authorities and contractors to strive for the maximum possible transparency under these arrangements. Should an appropriate level of transparency not be achieved, public authorities and contractors alike should be under no illusions that we will consider what other steps we should take, including the potential extension of the Freedom of Information Act.
There are cost issues, which I know the noble Lord wishes to push to the side, but they cannot be entirely ignored. I shall not rehearse them yet again but issues of cost as well as issues of potential benefit cannot entirely be ignored. Having rehearsed these arguments through various stages of this Bill, I reiterate—
Lord Beecham: If it is the Government’s intention to see how the system works and then possibly take further steps, why do they not accept the amendment on the basis that it will incorporate in another place a sunrise clause, giving it the opportunity to proceed without primary legislation, which would otherwise be involved?
Lord Wallace of Saltaire: My Lords, this Government, unlike their predecessors, are concerned to minimise the number of burdens on business, contractors and on the voluntary sector. After all, we are dealing with a large number of non-profits. We want to see whether the system works before adding more regulation.
Let me end by reiterating that increasing transparency is important but we do not see that the amendment moved by the noble Lord, Lord Wills, provides the right approach at the current time to the problems that we face. Local people already have the right to ask questions and raise issues with the auditors, and the Government are committed to keeping under review the current approach to encourage local authorities and contractors to interpret their obligations more broadly and, if necessary, consider other approaches.
Lord Wills: My Lords, I am grateful to my noble friend on the Front Bench and to the Minister for his response, but I am baffled by it. He has not argued on the fact that it is a decrease in transparency, does not maintain the status quo and does not provide citizens with the right to know, in the way of the old regime. Yet the Minister wants time for this decrease in transparency to bed in.
Lord Wallace of Saltaire: My Lords, I do not accept the noble Lord’s contention that it is a decrease in transparency. As I remarked on the Atos cases, on which there has been some publicity, the way in which contracts are now being formulated provides for a considerable expansion in transparency in how they are negotiated, and with access to the public authority as contractor. We simply do not accept what the noble Lord is arguing.
Lord Wills: I am grateful for the Minister’s intervention but he has still not answered the question. It is clear that the Minister cannot guarantee—I will sit down if he can do so—that all local authorities will formulate their contracts with private sector contractors in a way that guarantees the transparency that he says he wants. I am happy to sit down if he can guarantee that. The Minister is not moving in his seat. Of course, he cannot guarantee it.
Lord Wallace of Saltaire: There is a difference of philosophical approach between the two parties and the current position of the Labour Party. The Labour Party is rather more centralist and authoritarian and wishes to tie everything up together. We are trying to provide more flexibility and more autonomy. That is why we are attempting this slightly less centralised and over-regulatory approach.
Lord Wills: I agree that there is a difference between the two sides on this. However, it is not about authoritarianism but about whether we trust a bunch of politicians or the citizen with the right to transparency. The whole point of freedom of information is that it gives the citizen the right. The Minister wants to give private sectors and politicians the chance to stitch it up between them without giving the citizen the right to scrutinise it. That is the difference between the two parties. It has nothing to do with authoritarianism.
However, the Minister has still not addressed the point that this is a decrease in transparency. He has not said, for example, how the coalition will decide, when it reviews the arrangements that the Bill will bring in, whether transparency needs to be increased. By its definition it will be almost impossible for the coalition to find out and I am curious about how the review will be conducted.
The Minister focused his remarks on the relationship with the private sector but the amendment covers not only that relationship but local district auditors. That is the key point. The citizen and the taxpayer need transparency in the operation of the people who scrutinise the delivery of public services. I remind the Minister
that the Grant Thornton report on Mid Staffs showed how important it is that there should be transparency in the work of those who monitor and scrutinise the delivery of public services. The Government say that they have learnt the lesson from Mid Staffs but the Minister, whatever he says, has just proved that they still have not learnt the lessons about the merits of transparency.
However, I notice the Minister’s careful words. He said that “at this time”, “at this stage”, he is reserving his options. It may be that between now and the Bill going to the other place the Government will change their mind and it will not be “at this time” any more but “at another time”. With that and the disappointingly unsatisfactory response from the Minister in mind, and in the hope that your Lordships’ House will send a signal to the other place, I ask leave to test the opinion of the House.
4.37 pm
Contents 172; Not-Contents 192.
CONTENTS
Adams of Craigielea, B.
Adonis, L.
Allenby of Megiddo, V.
Alton of Liverpool, L.
Anderson of Swansea, L.
Andrews, B.
Bach, L.
Bakewell, B.
Barnett, L.
Bassam of Brighton, L. [Teller]
Beecham, L.
Berkeley, L.
Bilston, L.
Boateng, L.
Brennan, L.
Brooke of Alverthorpe, L.
Brookman, L.
Browne of Belmont, L.
Browne of Ladyton, L.
Campbell-Savours, L.
Carter of Coles, L.
Chandos, V.
Chester, Bp.
Christopher, L.
Clancarty, E.
Clarke of Hampstead, L.
Clinton-Davis, L.
Cobbold, L.
Collins of Highbury, L.
Crawley, B.
Crisp, L.
Cunningham of Felling, L.
Curry of Kirkharle, L.
Davies of Coity, L.
Davies of Oldham, L.
Davies of Stamford, L.
Dean of Thornton-le-Fylde, B.
Donaghy, B.
Drake, B.
Dubs, L.
Eames, L.
Eatwell, L.
Elder, L.
Elystan-Morgan, L.
Erroll, E.
Evans of Parkside, L.
Evans of Temple Guiting, L.
Falkland, V.
Farrington of Ribbleton, B.
Faulkner of Worcester, L.
Foulkes of Cumnock, L.
Gale, B.
Gibson of Market Rasen, B.
Giddens, L.
Glasman, L.
Golding, B.
Gould of Potternewton, B.
Grenfell, L.
Grocott, L.
Hanworth, V.
Harries of Pentregarth, L.
Harris of Haringey, L.
Harrison, L.
Haskel, L.
Haworth, L.
Hayman, B.
Healy of Primrose Hill, B.
Hennessy of Nympsfield, L.
Hilton of Eggardon, B.
Hollick, L.
Hollis of Heigham, B.
Howarth of Newport, L.
Howells of St Davids, B.
Howie of Troon, L.
Hoyle, L.
Hughes of Stretford, B.
Hughes of Woodside, L.
Hunt of Kings Heath, L.
Janner of Braunstone, L.
Jay of Paddington, B.
Jones of Whitchurch, B.
Jones, L.
Jordan, L.
Judd, L.
Kilclooney, L.
King of Bow, B.
Kinnock of Holyhead, B.
Kinnock, L.
Kirkhill, L.
Knight of Weymouth, L.
Lea of Crondall, L.
Liddell of Coatdyke, B.
Liddle, L.
Lipsey, L.
Lister of Burtersett, B.
Low of Dalston, L.
Lytton, E.
McAvoy, L.
McConnell of Glenscorrodale, L.
McDonagh, B.
Macdonald of Tradeston, L.
McFall of Alcluith, L.
McIntosh of Hudnall, B.
MacKenzie of Culkein, L.
McKenzie of Luton, L.
Mallalieu, B.
Mar, C.
Masham of Ilton, B.
Massey of Darwen, B.
Maxton, L.
Monks, L.
Morgan of Huyton, B.
Morris of Aberavon, L.
Morris of Handsworth, L.
O'Neill of Clackmannan, L.
Ouseley, L.
Patel of Blackburn, L.
Paul, L.
Pendry, L.
Pitkeathley, B.
Prescott, L.
Puttnam, L.
Quin, B.
Radice, L.
Ramsay of Cartvale, B.
Rees of Ludlow, L.
Reid of Cardowan, L.
Rendell of Babergh, B.
Richard, L.
Rogan, L.
Rooker, L.
Rosser, L.
Royall of Blaisdon, B.
Sawyer, L.
Sherlock, B.
Simon, V.
Smith of Basildon, B.
Smith of Gilmorehill, B.
Snape, L.
Soley, L.
Stevenson of Balmacara, L.
Stoddart of Swindon, L.
Stone of Blackheath, L.
Symons of Vernham Dean, B.
Taylor of Blackburn, L.
Taylor of Bolton, B.
Temple-Morris, L.
Thornton, B.
Tomlinson, L.
Touhig, L.
Triesman, L.
Tunnicliffe, L. [Teller]
Turnberg, L.
Turner of Camden, B.
Uddin, B.
Wall of New Barnet, B.
Walpole, L.
Warner, L.
Warnock, B.
Warwick of Undercliffe, B.
Watson of Invergowrie, L.
West of Spithead, L.
Wheeler, B.
Whitaker, B.
Whitty, L.
Wilkins, B.
Williams of Elvel, L.
Williamson of Horton, L.
Wills, L.
Woolmer of Leeds, L.
Worthington, B.
Young of Norwood Green, L.
NOT CONTENTS
Aberdare, L.
Addington, L.
Ahmad of Wimbledon, L.
Alderdice, L.
Anelay of St Johns, B. [Teller]
Armstrong of Ilminster, L.
Attlee, E.
Avebury, L.
Baker of Dorking, L.
Bates, L.
Benjamin, B.
Best, L.
Bilimoria, L.
Birmingham, Bp.
Black of Brentwood, L.
Bonham-Carter of Yarnbury, B.
Bowness, L.
Brabazon of Tara, L.
Bradshaw, L.
Brinton, B.
Brittan of Spennithorne, L.
Brougham and Vaux, L.
Burnett, L.
Butler-Sloss, B.
Byford, B.
Caithness, E.
Chidgey, L.
Clement-Jones, L.
Colwyn, L.
Cope of Berkeley, L.
Cormack, L.
Cotter, L.
Courtown, E.
Cox, B.
Craigavon, V.
Crathorne, L.
Crickhowell, L.
De Mauley, L.
Deech, B.
Deighton, L.
Denham, L.
Dholakia, L.
Dixon-Smith, L.
Dobbs, L.
Eaton, B.
Eccles of Moulton, B.
Eccles, V.
Empey, L.
Falkner of Margravine, B.
Faulks, L.
Flight, L.
Fookes, B.
Forsyth of Drumlean, L.
Fowler, L.
Framlingham, L.
Freeman, L.
Freud, L.
Garden of Frognal, B.
Gardiner of Kimble, L.
Gardner of Parkes, B.
Geddes, L.
Glasgow, E.
Glenarthur, L.
Glentoran, L.
Goodlad, L.
Griffiths of Fforestfach, L.
Hamilton of Epsom, L.
Hamwee, B.
Hanham, B.
Hannay of Chiswick, L.
Harris of Richmond, B.
Higgins, L.
Hill of Oareford, L.
Hodgson of Astley Abbotts, L.
Hooper, B.
Howard of Rising, L.
Howe of Aberavon, L.
Howe of Idlicote, B.
Howe, E.
Howell of Guildford, L.
Hunt of Wirral, L.
Hussein-Ece, B.
Inglewood, L.
James of Blackheath, L.
Jenkin of Roding, L.
Jolly, B.
Jones of Cheltenham, L.
Jopling, L.
Kakkar, L.
Kirkwood of Kirkhope, L.
Kramer, B.
Laming, L.
Lamont of Lerwick, L.
Lang of Monkton, L.
Lawson of Blaby, L.
Lee of Trafford, L.
Lexden, L.
Lindsay, E.
Lingfield, L.
Linklater of Butterstone, B.
Loomba, L.
Lucas, L.
Luke, L.
Lyell, L.
McColl of Dulwich, L.
MacGregor of Pulham Market, L.
Mackay of Clashfern, L.
McNally, L.
Maddock, B.
Mancroft, L.
Marks of Henley-on-Thames, L.
Marlesford, L.
Mayhew of Twysden, L.
Morris of Bolton, B.
Moynihan, L.
Naseby, L.
Nash, L.
Neville-Jones, B.
Newby, L. [Teller]
Newlove, B.
Noakes, B.
Northbrook, L.
Northover, B.
Norton of Louth, L.
Oakeshott of Seagrove Bay, L.
O'Cathain, B.
O'Loan, B.
O'Neill of Bengarve, B.
Palmer of Childs Hill, L.
Pannick, L.
Parkinson, L.
Parminter, B.
Patten of Barnes, L.
Perry of Southwark, B.
Phillips of Sudbury, L.
Popat, L.
Rawlings, B.
Rennard, L.
Ribeiro, L.
Roberts of Llandudno, L.
Roper, L.
Sandwich, E.
Scott of Needham Market, B.
Seccombe, B.
Selborne, E.
Selsdon, L.
Shackleton of Belgravia, B.
Sharkey, L.
Sharp of Guildford, B.
Sharples, B.
Shaw of Northstead, L.
Shephard of Northwold, B.
Shrewsbury, E.
Slim, V.
Smith of Clifton, L.
Stedman-Scott, B.
Steel of Aikwood, L.
Stephen, L.
Stewartby, L.
Stoneham of Droxford, L.
Storey, L.
Stowell of Beeston, B.
Swinfen, L.
Taverne, L.
Taylor of Goss Moor, L.
Taylor of Holbeach, L.
Tebbit, L.
Tenby, V.
Teverson, L.
Thomas of Gresford, L.
Thomas of Swynnerton, L.
Thomas of Winchester, B.
Tope, L.
Tordoff, L.
Trees, L.
Trefgarne, L.
Trimble, L.
True, L.
Tugendhat, L.
Tyler of Enfield, B.
Verma, B.
Wade of Chorlton, L.
Wakeham, L.
Wallace of Saltaire, L.
Wallace of Tankerness, L.
Walmsley, B.
Warsi, B.
Wei, L.
Wheatcroft, B.
Wilcox, B.
Williams of Crosby, B.
Willis of Knaresborough, L.
4.49 pm
Schedule 12: Failure to appoint local auditor
3: Schedule 12, page 88, line 37, at end insert—
“Omit sections 69 and 70 (transitional provision: local government bodies in Wales and Welsh NHS bodies).”
Baroness Hanham: My Lords, Amendment 3 is a further minor consequential amendment to the Public Audit (Wales) Act 2004 following the closure of the Audit Commission.
The Public Audit (Wales) Act 2004 transferred a number of powers from the National Audit Office and the Audit Commission to the Auditor-General for Wales. This Bill already repeals some sections within the Public Audit (Wales) Act 2004 which refer to the Audit Commission. Sections 69 and 70 provide transitional arrangements to enable auditors of Welsh local government and NHS bodies who were appointed by the Audit Commission to continue for the whole of their term, despite the Public Audit (Wales) Act 2004 transferring responsibility for auditor appointment from the Audit Commission to the Auditor-General for Wales.
Section 69 also makes transitional provision to enable the Audit Commission to complete any studies which include a local government body in Wales that were under way at the time of the transfer. The Welsh Government have now confirmed that the transitional period has been completed and that these provisions can be repealed. I beg to move.
Lord Beecham: My Lords, I am sure they will be putting up the flags in the valleys and hills of Wales tonight in celebration of this government amendment, which I am happy to support.
A privilege amendment was made.
Baroness Hanham: My Lords, I beg to move that the Bill do now pass. It is my pleasure to thank the Members of the Committee who have helped us through the Bill over the past few months. I am extremely grateful to everybody who has taken part and, as always with Bills leaving this House, I think it has been strengthened as a result. It might be worth reflecting that in response to issues raised during the debate, the Government have made 15 individual amendments, not including minor, technical amendments, and we have also made clear our intention to amend the Bill in the other place to enable the non-mandatory central
procurement of auditors on behalf of relevant authorities. We are also considering other points in relation to the data-matching powers, so there have been significant interventions and significant help and I thank all noble Lords, on the opposite side and in the coalition, for all they have done to see us through the past few months.
Bill passed and sent to the Commons.
Financial Services (Banking Reform) Bill
Second Reading
4.53 pm
That the Bill be read a second time.
The Commercial Secretary to the Treasury (Lord Deighton): My Lords, the Bill is a central part of the Government’s response to the financial crisis of 2007-09. Noble Lords will recall the terrible events of those years. Britain saw the first bank run in over a century. Depositors in Northern Rock queued in the streets to take their money out. The biggest bank in the world, the Royal Bank of Scotland, teetered on the brink. RBS and HBOS had to be bailed out and the Government had to inject £65 billion of taxpayers’ money to save the banking system from collapse.
Huge though this direct cost to the taxpayer was, the full costs of the crisis were still greater. Gross domestic product fell, peak to trough, by 7.2% as the supply of credit dried up and tight credit continues to be a problem for many businesses and families. This is why the Government have had to intervene to support credit supply through measures such as Funding for Lending, Help to Buy and the Business Finance Partnership. These will help to address the consequences of the crisis. To tackle its causes and to prevent a repeat, the Government are taking forward a programme of reform built on three pillars.
The first pillar is reform of financial regulation. This was achieved through the Financial Services Act 2012, which received Royal Assent last December and came into force this spring. The second pillar is structural reform of the banking industry. That is the focus of the measures in the Bill before us today. The third pillar is reform of banking standards and culture. The Parliamentary Commission on Banking Standards—the PCBS; I am afraid there will be quite a few abbreviations today—last month made important recommendations in this area. The Government have accepted the PCBS’s principal recommendations and where those require primary legislation they will be incorporated into this Bill through government amendments at Committee stage.
Let me first turn to the measures already in the Bill. The bulk of these implement key recommendations of the Independent Commission on Banking, or ICB, chaired by Sir John Vickers. As noble Lords will know, the Vickers commission was established in 2010 to consider both structural and non-structural reforms
to the banking sector. It reported in September 2011 and recommended, first, the ring-fencing of retail from investment banking. The ICB also proposed measures to improve banks’ ability to absorb losses and to ensure that losses can be made to fall on banks’ creditors and not the taxpayer if a bank fails. These measures included higher capital requirements for ring-fenced banks, a bail-in power and preference in insolvency for bank depositors over other creditors. The Government accepted virtually all the ICB’s recommendations.
This Bill will implement the ring-fence as recommended by the ICB. It defines core activities—that is, taking deposits—which must be inside the ring-fence, and it defines excluded activities—that is, trading in investments as principal—which must be outside the ring-fence. As the ICB recommended, activities that are neither core nor excluded may be either in or out. The Bill makes safeguarding the continuity of services connected to deposit-taking a part of the Prudential Regulation Authority’s general objective. It requires the PRA to make rules to ensure the independence of ring-fenced banks from their wider corporate groups. In response to the recommendations of the PCBS, we have amended the Bill in the Commons to electrify the ring-fence. I will come on to the details of that shortly.
The Bill also makes deposits protected by the Financial Services Compensation Scheme preferential debts in the event of insolvency. This will increase the FSCS’s expected recovery in the event that a bank fails and the FSCS has to pay out, reducing the risk of contagion and protecting the taxpayer. The ICB also recommended that if a bank fails the authorities should have the power to bail-in creditors, imposing losses on them rather than letting those losses fall on the taxpayer. The forthcoming EU bank recovery and resolution directive should deliver a bail-in tool at European level and a requirement for national authorities to ensure that their banks have in issue a minimum amount of credibly bail-inable liabilities, necessary to ensure bail-in is effective and credible. This Bill gives the Treasury power to set the framework within which the PRA imposes requirements on banks to have in issue minimum amounts of bail-inable debt.
In addition to the ICB’s recommendations, the Bill also reforms the governance of the Financial Services Compensation Scheme manager to ensure proper oversight and accountability for its use of public funds. It extends to subsidiaries of the Bank of England exemptions from Companies Act accounting requirements given to the Bank itself where the Bank considers that necessary for reasons of financial stability. It also allows for the costs of the Treasury’s participation in international organisations dealing with financial stability to be recovered from the industry.
Before reaching this House, the Bill already received very substantial scrutiny. The Government published the Bill in draft last October for pre-legislative scrutiny by the PCBS, which of course included several Members of this House. In light of the PCBS’s report on the draft Bill, the Government made a number of changes both before the Bill was introduced to Parliament and while it was before the House of Commons. In the Commons, the Bill was scrutinised line by line over the
course of eight Committee sittings and had two days of debate on Report. For a Bill of just 35 pages, that was intensive, detailed scrutiny.
Throughout this process the Government have consistently adopted a constructive approach. We have welcomed suggestions from all quarters on how the Bill might be improved. Where we found those suggestions valuable, we have amended the Bill accordingly. For example, in pre-legislative scrutiny the PCBS argued that the regulator’s objective for ring-fencing could be made clearer. We accepted this suggestion and amended the Bill before its introduction and again on Report in the Commons. The PCBS also called for specific requirements for ring-fenced bank independence to be put in the Bill. We agreed and amended the Bill in a way that the PCBS acknowledged arguably went even further than it had suggested. The PCBS proposed that the PRA be required to report on ring-fenced banks’ sale of derivatives to clients. We will amend the Bill to this effect while it is before this House.
On the procedures for exercising delegated powers, the Government not only accepted recommendations made by the House of Lords Delegated Powers Committee, but also accepted a further amendment tabled by the Opposition in Committee in the Commons.
Perhaps most significantly, as I alluded to earlier, in response to the recommendation of the PCBS, the Government amended the Bill in the Commons to provide for a power for the full separation of an individual banking group. This is what the PCBS termed “electrifying” the ring-fence. The power we have added to the Bill will substantially reinforce the ring-fence. It will allow the regulator to require a banking group to separate completely its retail from its wholesale banking operations. This power can be exercised if the regulator believes that a ring-fenced bank is insufficiently independent of the rest of its group, or that the group’s conduct might in some other way threaten the regulator’s ability to safeguard the continuity of core retail banking services. As the PCBS recommended, given the momentous consequences for a banking group of a requirement to separate, the regulator can only use this power with the consent of the Treasury.
As noble Lords will know, when this power was debated in the Commons, questions were raised about the process for exercising it set out in the Government’s amendment. Some argued that the procedure was too complicated or lengthy. The Government have listened to these arguments. We accept that the process for requiring a group to separate could usefully be streamlined. We will therefore bring forward amendments to that effect while the Bill is before this House. And we will listen to the contributions of noble Lords to ensure that the process in the Bill meets the objectives that the PCBS set out, and which the Government share.
The Government remain unpersuaded, however, that a reserve provision for full separation across the entire industry would be appropriate. A firm-specific reserve power will reinforce the ring-fence by deterring banks from seeking to undermine or weaken it. However, to move to industry-wide separation would be to abandon the ring-fence altogether, in favour of an alternative structural reform. Let us be clear: this
would not be a sanction, it would be a different policy. That alternative policy was considered in detail by the ICB, which rejected it. As noble Lords will know, the ICB concluded that full separation similar to Glass-Steagall would entail very significant additional costs, for doubtful—or even negative—additional benefits to ring-fencing. The Government have accepted the ICB’s recommendation and are therefore implementing the ring-fence through this Bill.
Like the ICB, the Government believe that the ring-fence will succeed. A future Government would, of course, be within their rights to come to a different conclusion, and to shift to an alternative policy. But if they did, the only proper and democratic way to implement that new policy would be to return to Parliament with new primary legislation which could be properly debated and scrutinised. The proposal made by the PCBS would potentially lead to full separation with no more than a short debate in Parliament and a vote. This would stand in extreme contrast to the extensive consultation and scrutiny that the current policy has gone through.
We have also recently heard proposals from the PCBS on the issue of the leverage ratio. The PCBS has suggested that control over the leverage ratio should be taken out of political hands and given to the regulator. The Government strongly support the principle of a binding minimum leverage ratio, as agreed in the Basel III accord. We believe that it is entirely appropriate for minimum standards to be set in statute. This applies to all the minimum requirements in Basel III, which we continue to push to have implemented through EU legislation.
This does not mean that there is no role for the regulator. Judgment-based regulation means the regulator having the ability to impose additional requirements if it feels that these are necessary to achieve its statutory objectives. Only last month, the PRA required a number of banks to meet higher leverage standards sooner than the Basel III deadline. The PRA thus demonstrated that it already has the power to impose higher requirements on leverage. So beyond minimum requirements set in statute in line with international standards, day-to-day control over the leverage ratio lies in the hands of the PRA.
Structural reform of the banking industry is the second pillar of the Government’s reform programme. The third pillar is reform of banking standards and culture. As noble Lords well know, the Government have welcomed the recent report of the PCBS, one main theme of which was to strengthen individual accountability in financial services. The PCBS argued that the existing approved persons regime has failed in this, and that new measures are needed to replace it. The PCBS also called for criminal sanctions for reckless misconduct in the management of a bank.
The Government have accepted these recommendations. While the Bill is before this House, we will therefore bring forward amendments to introduce a new senior persons regime. We will reverse the burden of proof for senior persons so that they will be accountable for any breaches of regulatory requirements in their areas of responsibility, unless they can prove that they took all reasonable steps to prevent them.
We will also amend the Bill to give regulators the power to make rules governing the conduct of anyone employed in financial services, and to extend the time limit for enforcement action from three to six years.
Lord Forsyth of Drumlean: I am most grateful to my noble friend. Perhaps I should declare an interest as a regulated person. This new criminal offence of reckless misconduct is to apply—according to the excellent report which was produced—only to the senior management of banks. Can the Minister explain why, if someone is responsible for major systemic difficulties arising from the collapse of a bank, this new criminal offence should be limited only to the management of the bank and not apply to regulators or Treasury officials?
Lord Deighton: I thank my noble friend for that interesting observation. The purpose of the Bill is to look at the management of the financial institutions themselves rather than the system. I would welcome that discussion later, in Committee, if my noble friend would like to take it further.
As a further deterrent against misconduct, the Government will table amendments to make reckless misconduct in the management of a bank a criminal offence. Those found guilty will face the possibility of prison sentences. Together, these measures represent an historic overhaul of the system for holding bankers to account for their actions. However, rules and sanctions alone will not guarantee good conduct. The PCBS argued that effective competition between banks is essential to ensuring high standards of behaviour, and the Government agree. We will therefore amend the Bill to give the PRA a secondary competition objective. This will give the PRA a greater role in championing competition in the banking market, to the benefit of consumers.
One key barrier to competition in banking, and in particular to new entrants and smaller firms looking to challenge the big high street banks, is the big banks’ control of payments systems. The Government will therefore introduce amendments establishing utility-style regulation of payments systems. To ensure the safety and stability of payments services, we will also bring forward amendments to provide for a special administration regime for payment and settlement systems. This will require critical payment and settlement services to be continued even in insolvency, until the firm recovers or alternative provision is available.
While the Bill is before this House, the Government will also make some technical amendments to provisions on the pension liabilities of ring-fenced banks and introduce amendments to modernise the rules for building societies, helping to create a level playing field between building societies and banks while preserving the distinct nature of the building society sector.
In the other place, the Government set out our intention to use this Bill to require the Bank of England to produce a resolution strategy for each major UK bank—that is, a plan for how the authorities propose to respond in the event that that bank failed. We still believe that resolution plans are necessary, but given that the European Council of Ministers and the European
Parliament have recently published proposals for the EU recovery and resolution directive that include similar provisions, it may be more appropriate for this requirement to be imposed through transposition of the directive than through the Bill. The Government will continue to review this issue in the light of European developments while the Bill is before this House, with a view to bringing forward amendments if necessary.
We can all agree that this is legislation of the highest importance. It is essential that we address the causes of the terrible banking crisis of five years ago, whose consequences remain with us today. The Bill is a vital step towards ensuring that this crisis is never repeated. Its current provisions represent a once in a generation reform of the structure of British banking, while forthcoming amendments will revamp the accountability regime for bankers’ conduct and standards. I look forward to constructive engagement with all sides of this House over the months ahead. To support noble Lords’ consideration of the Bill, last week the Government published drafts of the principal secondary legislation exercising delegated powers under the Bill, and I will ensure that my officials are available to noble Lords to discuss any details of the Bill. I am pleased to present the Bill for the consideration of noble Lords. I beg to move.
5.10 pm
Lord Eatwell: My Lords, I am most grateful to the noble Lord, Lord Deighton, for introducing the Bill. In his introduction he acknowledged the work of the Independent Commission on Banking and the Parliamentary Commission on Banking Standards in developing the thinking behind the policies that this Bill is intended to implement. The whole House is grateful to noble Lords who are members of the parliamentary commission for all the hard work they have done to formulate a new banking policy for this country. We look forward to hearing from three of them later today. The right reverend Prelate the Bishop of Birmingham is, I think, standing in for the most reverend Primate the Archbishop of Canterbury, from whom we hope to hear at a later stage. I hope also that we can hear at a later stage from the noble Lord, Lord Turnbull.
This Bill is the outcome of the Treasury’s intermediation, let us say, of the recommendations of the independent commission and, to a more limited extent, of the parliamentary commission. Less kindly observers might suggest that, instead of one of intermediation, the Treasury’s role might be described as watering down those recommendations. Every dilution by the Government increases the risk in the banking sector. It would assist the House enormously if, when the noble Lord, Lord Newby, sums up, he would list precisely those areas in which the Government have significantly toughened up on the recommendations that they have received.
Anyone who read this Bill without having studied the various documents issued by the independent commission, the parliamentary commission and the Treasury over the past two years would have absolutely no idea what the Bill is intended to achieve. The Bill essentially is an enabling Bill, which establishes the
powers to do certain things—particularly with respect to the establishment of a ring-fence in the banking sector—without specifying exactly what is to be done. Noble Lords may search in vain for an indication of where the ring-fence might actually lie, how electrified or permeable the ring-fence might be, what would be the equity capital or primary loss-absorbing capital requirements and the leverage ratio—I prefer the British pronunciation—inside and outside the ring-fence, and so on. All those and many other matters are to be determined by order or handed over to the relevant regulator.
Yet those issues are central to any evaluation of the value of this legislation in the reform of one of Britain’s most important industries. The Government published last week a number of draft orders that illustrated how important aspects of the concept of a ring-fence will be made operational. That document illustrates just how fearfully complex those vital orders will be. To ensure that this crucial secondary legislation—and, indeed, what the parliamentary committee refers to as tertiary legislation—is suitably scrutinised, will the Government implement the parliamentary commission’s proposal that a small ad hoc joint committee of both Houses of Parliament be established on an ongoing basis to scrutinise secondary legislation and the proposed use of delegated powers?
It is clear that the Bill before your Lordships’ House today relates to but a fraction of the measures that either the parliamentary commission has recommended be included in it, or the Government have stated they intend to include. By the way, those are not the same thing, given that the Government have already rejected some of the parliamentary commission’s proposals.
We know that from the second report of the parliamentary commission there were 25 draft amendments. Some of those have been accepted but many have not. What is to become of those amendments?
There are then the important proposals on banking standards and culture contained in the remarkably thorough final report of the parliamentary commission. In their reaction to that report, the Government suggested that 13 of the conclusions will require implementation by means of primary legislation. There is a wide range of other matters that might properly be discussed at this Second Reading. So what will be accepted, and what will not? What form will all these amendments take? We do not know because we do not have them before us today. This Second Reading is being conducted largely in the dark. We wait for the Government to reveal their hand. When will this happen? When the Government publish their raft of amendments, will they publish a commentary on their significance to facilitate debate on this vital but complicated matter?
The Government estimate that the private cost of the Bill for the banking industry will lie in the range between £3.5 billion and £8 billion. Much of this cost is the removal of the implicit guarantee enjoyed by financial institutions too big to fail and is thus an economically appropriate reallocation of costs. Risk is being properly priced. In so far as the extra cost falls on ring-fenced banks, we can be sure that under
current circumstances it will be passed on to retail customers and SMEs, increasing what is already an unreasonably marked-up cost of credit.
There is a serious need for increased competition in the banking industry to mitigate the impact of these extra costs. Since the crisis, defensive amalgamations and forced mergers have reduced competition from what was already a seriously inadequate level. This legislation introduces no fundamental change to the competition regime in banking. Account portability is a valuable addition to consumer choice, of course, but it is not a game changer in terms of competitive challenge. In addition, prudential regulation in our sensitive post-crisis world is proving an almost impenetrable barrier to entry for those who wish to establish new banks. The PRA will have competition as an objective, but where will that objective come in the hierarchy of objectives when it is considering a particular application? What are the Government going to do to bring about a game-changing shift in competition in retail banking in this country?
There are two major issues that do not seem to me to have been closely examined either by the independent commission or the parliamentary commission: regulatory arbitrage and the impact of banking structures on the performance of the real economy. In the run-up to the crisis, the activity of European banks raising deposits in the US and recycling them into the US shadow banking sector undermined the impact of US leverage regulations. The ICB refers tangentially to the importance of regulatory arbitrage, but I do not find its assertions convincing. Could the same recycling arbitrage happen to the UK’s ring-fence? Surely branches of EEA banks operating in the UK could undermine ring-fencing by providing the universal and potentially cheaper banking services that UK and EEA subsidiaries are no longer able to provide. What steps will the Government take to protect the UK ring-fence against such regulatory arbitrage?
Understandably, the thinking behind this Bill concentrated on the problems of the stability of the banking sector and, in particular, on ensuring that essential banking services are maintained during a crisis. This legislation also provides the opportunity to address a wider question: what structure of banking industry would best serve the needs of British industry as a whole, including manufacturing, the creative industries and internationally traded services aiding them to grow and compete in the global economy? Is the current structure that we are shoring up in this legislation really appropriate to the needs of the rest of UK plc? Is there a need for a British investment bank to supplement the Green Investment Bank and the infrastructure bank? Is there a case for regional banks? If the answer to both these questions is yes, will the Minister tell us how such institutions would fit into the ring-fenced structure proposed in the Bill?
An unfortunate aspect of the Treasury’s analysis has been the continued reliance on risk-weighted assets as the reference point for equity capital and potentially loss-absorbing capital and for the gradation of prospective measures with size. This reliance must be abandoned. As currently formulated, risk-weighted assets are a flawed and discredited measure. Consider, for example,
the recent assessment by BaFin, the German banking regulator, on the capital requirements of German banks, as reported in the
Financial Times
on 28 May.
“Germany’s largest banks were €14bn short of the capital needed to meet incoming Basel III banking rules at the end of last year … BaFin’s estimates suggest that banks have mainly improved their capital ratios by … recalculating the risk weightings attached to some assets … Reducing the quantity of risk-weighted assets on the balance sheet means a bank can report a better capital ratio even if the amount of capital has not changed”.
If you do not like the numbers, just change them.
Three weeks ago, the Basel committee announced a major reconsideration of the role of risk-weighted assets, given that the measure is now so widely discredited. However, the Government’s response to the parliamentary commission’s final report states:
“The Government shares the concerns raised by the Commission and many other experts that flawed risk-weightings played a major role in the last crisis”.
That is all well and good, but after turning a single page, we read:
“Risk-weighted capital requirements should remain the primary measure of prudential capital regulation”.
This Government are deeply confused. A fundamental problem of risk-weighted assets is that they are excessively complex. As everyone knows, complexity is the friend of evasion, whether in taxation or regulation. However, a simpler measure is available: the leverage ratio. The parliamentary commission has recommended a leverage ratio of 4%. The United States has announced that it will be 6% in the US. The Treasury insists on sticking to 3%—why?
A higher leverage ratio of course reduces the return on bank equity—hence, by the way, bank bonuses—but it also significantly reduces risk. Why are the Government postponing handing determination of the leverage ratio to the Financial Policy Committee until 2018, despite the Bank of England repeatedly asking for this power now?
The vagueness of the ring-fence is exacerbated by the need to define various terms. What is an SME? If non-ring-fenced banks can inject capital into ring-fenced banks in times of need—a benefit claimed by the independent commission—cannot capital flow out when needed elsewhere, increasing the possibility of damaging contagion? If banks are also allowed to sell derivatives within the ring-fence, rather than act as agents, does this not reintroduce the fee-based culture that has already done so much damage in retail banking, whether in the form of PPI or selling to SMEs derivative protection that was anything but?
Surely it is not enough to claim that mandated activities do not pose a threat today, since activities that are safe today may prove very dangerous tomorrow. These dangers may even be part of systemic phenomena that are no fault of the individual firm. These and many more issues raise the core question of the permanence and permeability of the ring-fence. It is central to the attainment of the objectives of this Bill that the fence is impermeable; and it is vital for future confidence and investment in the banking industry that the fence’s location is clear, well-known and reasonably permanent.
The PCBS’s proposals on the electrification of the ring-fence are vital to the credibility. The Government have accepted the “first reserve power”, whereby a group containing a ring-fenced bank that is deemed to actively undermine the ring-fence could be forced to divest itself of the ring-fenced bank or the non ring-fenced bank—in other words, splitting them up. However, as we heard from the noble Lord today, the Government have rejected the inclusion of the second reserve power, whereby the ring-fence would be abandoned and full separation of all domestic and commercial banking strictly enforced.
Surely the Government have got the matter the wrong way round.The decision to split up a single group would have severe financial and competitive consequences and would undoubtedly entail a lengthy and expensive legal and political battle. It is such a nuclear deterrent that there will be a high expectation that it will never be used. It is not a credible threat. However, if banking as a whole might be split, there is a powerful incentive for mutual monitoring. Accordingly, the incentives motivating the sharpest minds in the industry, ensuring that their colleagues do not undermine the interests of the banking industry as a whole, would be aligned with the statutory objective. What could be better than that?
There are many more complex issues in this legislation which we will debate in Committee. I totally understand the Government’s desire to have this legislation on the statute book as soon as possible, and we on this side will do everything we reasonably can in support of that endeavour. However, this is the most significant reform of the structure of UK financial services in the past 40 years, and we must get it right. That is why we will scrutinise the legislation line by line and demand the early and comprehensive publication of secondary legislation to better judge the true implications of the Bill.
It is vital that this legislation succeeds. If it is watered down, or if it is too complex and does not succeed, it may well do more harm than good. As the parliamentary commission commented in its final report:
“The banking industry can better serve both its customers and the needs of the real economy, in a way which will also further strengthen the position of the UK as the world's leading financial centre. To enable this to happen, the recommendations of this Commission must be fully implemented in a coherent manner”.
Sadly, the Government’s response to the independent commission and the parliamentary commission has been anything but coherent. This incoherence has grave implications for Britain’s financial services industry. On this side, it is our intention in Committee to restore coherence to the Bill.
5.26 pm
Baroness Kramer: My Lords, on a hot day such as today and so near to Recess, my noble friend Lord Sharkey and I, who will be working together on the Bill, have tried somewhat to divide up the issues between ourselves so that noble Lords are spared at least some degree of repetition—although I have to admit that it will not always be completely appropriate.
I will associate myself particularly with three issues that my noble friend Lord Sharkey will focus on in greater detail. The first is competition, perhaps the most significant long-term reform to the banking system and one which the current version of the Bill virtually ignores. While the regulators and the Government are now open to competition in, frankly, a complete reversal of historic attitudes, it will be a generation before new banks will be in a position to seriously challenge the dominance of the big four if we rely on organic growth alone. I was quite shaken to hear some senior members of the banking world describe the future very much in terms of a bar-bell: there will be the big four, a group of little ones down the other end and almost nothing in the middle. That will be a continuation of the uncompetitive situation that we face today. As I have said, my noble friend Lord Sharkey will come forward with some ideas on how we can try to accelerate that change, which everyone now acknowledges is necessary. It is fundamental to our banking system.
I will address two other issues, the first of them very quickly. In the Financial Services Act 2012, this House seriously tackled the issue of payday and high-cost short-term lenders in what we all name the Sassoon-Mitchell amendment, which gave very extensive powers to the FCA to crack down on rollovers, interest rates, fees, duration—indeed, I would argue, all the powers necessary to prevent exploitation by this industry. Some comments by Ministers in this House have suggested that the Government might have somewhat watered down their position, although I have heard denials from other Ministers. However, before we return in October we will see the draft version of the new FCA rules. If they are not satisfactory to this House we will have the opportunity to use the Bill to provide the strength that we all think is appropriate.
The third issue, which is not often addressed in banking, is absolutely fundamental and, I suspect, the biggest threat to our future; my noble friend Lord Sharkey will address it in more detail. That is, that the issue of the central clearing platforms for derivative contracts will be a huge source of concentrated risk. Some recent articles by Bloomberg say that the greatest security or strength of the protection under these contracts is largely through the collateral that companies are required to post. They suggest that the banks are finding some fairly clever ways for junk to be used, going through the alchemy process to provide collateral under these contracts. Therefore, I am not sure what the answer is, but this House must not duck that issue, and the Bill is an opportunity for that debate.
I was privileged to be a member of the Parliamentary Commission on Banking Standards, and our four reports covered a wide range of issues in the banking system. It was always intended that those issues should be addressed in this Bill. I appreciate that the Government have made a commitment to address them, and will present to us an extensive series of amendments, as is outlined in their response to the report. However, we will all want to see the detail, rather than just the generality.
I am concerned that much of the content of the Bill will, essentially, come in the form of secondary and even tertiary legislation. I join the noble Lord, Lord
Eatwell, in supporting the proposal from the banking commission, and I am glad that he has done so. However, so much of the core and the heart of what the Bill is attempting to achieve will be in the secondary and tertiary legislation that we must have some special mechanisms to enable Members of this House to understand fully what the content is, and what that content implies, and to raise challenges at a point when the Government can take them on board and we can come to a satisfactory conclusion.
Many questions hang over the whole process of reform. For example, in response to the commission’s report, the Government have given us a commitment to review whether RBS should be broken up. Until we see that review, we will not know whether it will be a substantial piece of work which this House can accept or one that we shall have to challenge.
The Chancellor has announced that there will be a new regulator to deal with the payments system—the plumbing of banking—which has been one of the huge barriers to bringing in new competition. It is quite right that the Government should focus on that issue, but we need to see what powers the regulator will have, and whether those powers will extend to, for example, changing ownership of the payments system, and to dealing with more technical but still critical issues such as full account portability.
I appreciate that the Government have said that they will act on new rules governing the approved persons regime, the new senior persons regime, criminal sanctions for reckless misconduct in the management of a bank, and the deferral, cancellation and clawback of remuneration—but will those new rules be as strong as intended? I suspect that until we see the actual language, this House will want to reserve its judgment.
I am particularly concerned that the amendments we have seen so far to electrify the ring-fence look exceptionally cumbersome and inadequate. I hope that that is not a foretaste of the other amendments that will come before us. To quote Andrew Tyrie on that one amendment,
“the Government’s amendments would render the specific power of electrification virtually useless”.—[
Official Report,
Commons, 8/7/13; col.75.]
I am glad that the Government are to go away to think about that and come back with a new version. I ask them to really take that seriously, and ensure that future amendments represent their quality thinking, not their first thinking. The work of this House requires a great deal of trust on all sides in order to tackle a challenge as serious as that of banking reform.
Rather like the noble Lord, Lord Eatwell, I feel strongly that we must consider the recommendation from the parliamentary commission, which has been rejected by the Government, not just to provide powers to separate an individual bank that misbehaves around the ring-fence but to look at separating the entire industry. I am not a particular fan of separating the whole industry, but I believe strongly in the ring-fence, and I am certain that the banking industry recognises that if there is widespread abuse, if there are issues on every front, and if the Government and the regulator have to go after every individual bank through the
courts, with all the legal powers that will be thrown up on the other side, it will become almost impossible to enforce the ring-fence.
I regard the reserve power to split the entire industry—in fact it would facilitate Parliament’s taking that action, as it is not a power given to the regulator but one that passes to Parliament—as essential to ensure that the industry not only polices itself but recognises that there is a nuclear deterrent. It is crucial that the industry learns to respect both the regulator and the Government. Historically, we have seen such manipulation of the system by the industry that we have to make it very clear that that is not the pattern that will be permitted.
I very much support the commission’s views, and that of the Vickers commission, on higher capital requirements and on using a leverage ratio, although I recognise that there may need to be carve-outs for particular circumstances nationwide—that is one of the obvious examples. The issue that we have to confront is that, if we allow risky big banks, which can crash our entire economy, to continue to play a major role in our system, as they must, we must make sure that steps are taken to limit their ability to fail. We must make sure that they have adequate capital, in effect to make them safe. There is no other way in which we can protect both the taxpayer and the economy.
The banks will say with justice that if there are higher capital requirements, it becomes harder for them to make riskier loans, so they have choices over which businesses they abandon and which business they focus on. I am frustrated that many have chosen not to focus on small business under those circumstances, but I recognise that those choices are difficult. But the response to that has to be to bring in new players to provide that kind of lending and credit, not to allow the banks to be riskier than they should be for a safe economy. So the focus has to be on developing deeper and broader capital markets that can serve small businesses, to bring on the peer-to-peer players in this arena. Last week, this House passed the relevant orders to provide regulation for that industry. We need to bring in smaller, specialised, non-systemic banks, so that reliance on the big banks to provide the riskier end of credit is significantly reduced and we can require of them that they put their houses in order and are adequately capitalised.
My concerns about allowing a more lax capital measure is enhanced by my suspicion of bail-in bonds, which I understand is not shared by others. It is not that I am opposed to the concept of bail-in bonds, but Governments worldwide are relying on them very heavily to provide security to the banking system. Who is going to hold these bonds? We cannot allow other banks to hold them, or we are back to an interconnected system. Pension funds and insurance funds—and I have started to talk to some of them—may be attracted to hold some of these bonds, but only at the cost of cannibalising their shareholdings in banks, so that gets us no farther forward. Given that this is meant to be a solution to cover every systemically important bank across the globe, I would like to hear from the Government about who they think is going to hold these kinds of instruments and whether it will
be a sufficient amount for them to play the role expected in providing safety for the banking system and protection for the taxpayer.
There are two other areas which I hope to pursue. The first is community development financial institutions, which I have talked about in this House before. The big banks are increasingly abandoning lending to disadvantaged individuals and to new and micro-businesses. They lack the capacity to be able to analyse these credits in the detailed way that is necessary, to provide handholding—and, frankly, after a look at the risk involved in these portfolios, many decide that this is not a business that they want to pursue. I am willing to accept that they do not play as much in this market, if we can provide an alternative that can. In the United States, it is provided by a completely separate sector, which serves disadvantaged communities and micro-businesses alone—the community development financial institutions. I suggest that we have to build this; it requires a genuine alliance of the Government, perhaps using a business bank, and the big banks—and, in the US, carrots and sticks have been used to make sure that the big banks provide capital and know-how to these little local institutions. Charities and social enterprises, as well as the Church of England, are potential players in this arena.
Particularly pertinent to this Bill, in order to ensure that the big banks can provide capital to these community institutions, the United States has negotiated a carve-out under Basel III for loans from the big banks to community development financial institutions. The UK is in a position to take advantage of the carve-out, but I understand that we have not done so. I consider that this is an opportunity not to be missed and I hope very much that the Government will address the issue.
I am conscious of the time so, finally, I congratulate the Government very much on the announcement made today on the agreement that they have reached with the big banks regarding the disclosure of lending data by postcode. We pressed for that in the debate on the Financial Services Act 2012. The Government promised it and they have delivered. The data will show lending across 10,000 individual postcodes and we will be able to see where the market has failed and where there is unmet need. Dealing with unmet need in regard to banking surely has to be part of banking reform.
We have a great deal of work ahead, but banking reform is crucial to our economy. I suspect that there will be a lot of agreement on these issues across all Benches as they are not particularly party-political. I also suspect that they are issues on which Members of this House will frequently speak with a single voice. The Bill is our chance to make sure that the legislative framework is in place to provide good banking to support our economy in the future.
5.41 pm
The Lord Bishop of Birmingham: My Lords, I am grateful to the noble Lord, Lord Eatwell, for his kind remarks about members of the banking commission who sit in this House, not least my friend the most reverend Primate the Archbishop of Canterbury, who, sadly, is not in his place today but fully intends to be so
many times in the autumn when the commission’s work will be discussed in this House in more detail. Perhaps I can partially stand in his place as we spent many years in different parts of the oil industry before entering another sort of multinational work.
We appreciate the practical themes in the Financial Services (Banking Reform) Bill and the opportunity that it provides to implement the recommendations of the Vickers report and, more recently, of the Parliamentary Commission on Banking Standards. As the Community Investment Coalition put it, the Bill provides an opportunity,
“for Britain to continue as a leading global financial centre, while at the same time protecting ordinary working people”.
I thought that that conveyed rather well the complexity of the issues with which we are dealing.
As we face up to the essential and urgent reform of a sector that should indeed play a major part in our national well-being and prosperity we are presented not only with proposals for regulation and structural change but with the broader themes of cultural change, including appropriate standards for the industry. Those who have heard the discussions on the Radio 4 programme “The Bishop and the Bankers”—it is available on iPlayer and has two more sessions to go—have been reminded that the capitalist system on which we all depend for our welfare can, in its search for efficiency and other objectives, become dehumanised and disconnected from the needs and culture of individuals. Therefore the structural proposal to ring-fence retail banks is most welcome, but only—as has been noted already today as well as in another place and by the commission—if the electric current in the fence is strong enough to ensure compliance with our intentions.
The proposal to include a competition element in the Prudential Regulation Authority is also attractive, but will it go far enough? I hope that in promoting real alternatives to the present arrangements we will keep our vision precise and technical—as I am sure many speeches today will be—but that we will also keep in view the long-term possibility of a much better arrangement for the country as a whole. As we focus both on the struggle of ordinary people to manage with what little money they have, and on the need for micro, small and medium-sized businesses to stay on their feet in competitive local and export markets, strong arguments are being made not only for a new regional bank but for more support for credit unions and other local arrangements, with the potential, particularly as regards the latter, to put an end to the corrosion of payday lending and the unacceptable effects of the poverty premium.
To get an image of what this might look like we could consider one bank which operates in this country from overseas whose philosophy originally was for the manager of a region to go to the top of a church steeple and from there to survey all that he or she could see. He or she would then be responsible for all the businesses and finance within that area. It not only provided local autonomy but located responsibility for professional decisions where they might best be made. On the retail side, it should also be noted that in Birmingham there are still 100,000 people who do not have a personal bank account. We should also want to
endorse the proposals made within these discussions that the accounts of those who have them should be portable. Portability of accounts might be made possible within the industry so that competition and client service can come together for the benefit of those who use those banks.
I have referred to coherence and comprehensiveness. I wish to add at this stage in the debate, perhaps a little earlier than we need to, the important theme which the Minister mentioned regarding the change of culture around our discussions—in the background and sometimes in the foreground—as we emerge from the immediate scandal and crisis in the industry. As noble Lords will know, there is in the industry a growing understanding of and openness towards discussion at all levels, as well as, dare I say it, a little vulnerability on these matters.
In my own area of the West Midlands, senior regional bankers from all the main banks have been prepared to meet regularly under Chatham House rules to ask difficult questions of themselves and their businesses. It is notable that one major player, which has already been mentioned this afternoon, has added to its obvious corporate values of “Client first” and “We must work together” the extraordinary line that, “We must do what is right”. That gets us into a very interesting area of culture: not just our values, behaviours and mission statements but—I would go so far as to say—what it means to be virtuous. Another global leader, in a seminar held within the past six weeks for all its world-wide risk managers, allowed the whole morning to be spent on the question, “What does society want from us?”. These are little signs of openness to a new culture that will undergo and deliver some of the practical measures that your Lordships will be discussing in the Bill and in response to the commissioners. Our own body, the Church Commissioners, is leading a discussion on what it means to have a good bank, which my friend the most reverend Primate described as living,
“with a culture that is self correcting and self learning, a culture that is more like a body than a system, and so develops the conscience, will and direction that enable the common good”.
As we help develop structures that are fit for purpose, and that might look quite different from what we have been used to, I hope they will become ethical structures. I hope that they will not just keep to easy-to-sign-up-to corporate values but go further into the deeply challenging discussions about personal virtue. Alasdair MacIntyre, the philosopher, would say that we must acknowledge robustly the belief that human life is more precious than any possessions and recognise that human solidarity is an integral part of the common good.
It is time to get back to the detail, which I will leave to the speakers who follow me. I and my colleagues on these Benches trust that the industry will wholeheartedly embrace a professional standards process, with independent leadership and all the practical things that we will talk about in the next few minutes and days; and that step by step—with any necessary amendments to the Bill and a full adoption in the autumn of the parliamentary commission’s recommendations—we will all take responsibility for achieving a healthy, vigorous, profitable and accessible but virtuous banking system.
5.49 pm
Lord Lawson of Blaby: My Lords, I am particularly happy to follow the excellent speech of the right reverend Prelate the Bishop of Birmingham, not least because he stressed the importance of changing the culture of banking. That is accepted across the board. It is certainly accepted in the United States and it is accepted by everybody in this country. Indeed, when the Parliamentary Commission on Banking Standards was set up—like my noble friend Lady Kramer, I was a member of that commission—the Prime Minister said that we needed to address standards and culture. That is a problem that I was concerned about.
Unlike the right reverend Prelate the Bishop of Birmingham, I do not have the ability to preach, so we had to decide how to change the culture by legislation. It was not so easy, but we tried a whole battery of proposals that we hoped would do something to help change the culture. I will mention one or two specific things during the course of my remarks. In speaking about the Parliamentary Commission on Banking Standards, I shall say some things that are slightly critical of my noble friend Lord Deighton. I was sorry that he did not find time to pay tribute to our chairman, our honourable friend the Member of Parliament for Chichester, Andrew Tyrie. It was an extraordinary effort. We produced an enormous number of recommendations in a large number of reports. Incidentally, my noble friend Lord Deighton said that the commission produced some important recommendations in its report last month. We produced five reports and there were important recommendations in most of them. I am sure that that is what he meant to say. We all worked quite hard, including incidentally the most reverend Primate the Archbishop of Canterbury. He, too, worked very hard, despite the fact that he also had a day job. Nobody worked harder than Andrew Tyrie. It has a lot to do with him that, with all parties represented, we managed to secure a unanimous report. That gives it much greater weight than would otherwise be the case.
I shall focus on certain areas, some of which, although not all, have already been discussed in the debate. One of them that has not been discussed explicitly, on which we made a recommendation and which has on the whole been accepted by my right honourable friend the Chancellor of the Exchequer, George Osborne, concerns the split of the Royal Bank of Scotland Group into a good bank and a bad bank. He has agreed to set up an inquiry, which will report very soon. I very much hope that it will come to the right conclusion. That is very important indeed to our economy in its present condition.
The idea of a good bank/bad bank split is not at all new. It was done in the case of Northern Rock recently; and it has been done on other occasions in this country and in other countries overseas. It is the classic answer to the sort of problem we are facing. It is particularly important in the case of the Royal Bank of Scotland Group. It is the biggest bank in our country that supports, or is meant to support, small and medium-sized businesses—SMEs. However, there is a problem with SME lending to which my noble friend Lord Deighton referred. It is one of the reasons why our emergence
from the present recession is so slow. There is a real problem with lending to SMEs, which is inhibited by the fact that the banks have a huge amount of bad debts on their books—far more than they would ever admit. They are very nervous of lending because it might increase the amount of their bad debt. They already have more than they say they have and they are exercising what is known in today’s jargon as forbearance. They need to be strong. They will not lend unless they are strong. We hold between 81% and 82% as a taxpayer stake in the Royal Bank of Scotland Group. We should use that power to split the bad assets and put them into a bad bank. Then we would have a good bank with good assets which could help by lending to SMEs in order to help our economy. That is the most important single thing that the Government can do at the present time.
I very much hope that that will be done. I know that my right honourable friend George Osborne wishes that he had done that at the start. It is not too late; better late than never, and we should do it now. Our newest recruit to your Lordships’ House, the noble Lord, Lord King of Lothbury, better known as Mervyn King, former governor of the Bank of England, said:
“Formal accounting conventions should not be allowed to get in the way of what is best for the economy in general and for the SME sector in particular”.
That is the issue here. I very much hope that that will be done. I agree incidentally with my noble friend Lady Kramer and others who have spoken about reforms in the banking system, in the sense of having more banks and more competition, being necessary, but that cannot happen overnight. However, this could be done virtually overnight and it would do enormous good.
I shall now refer to the so-called ring-fence. I was very happy with what my noble friend Lord Deighton said. Let me back-track a bit. I have been arguing for the best part of five years for complete separation between what used to be known as high street banking and investment banking. To call it retail banking is slightly misleading because it is also SME banking. We always used to have that in this country. I have been a close observer of the City of London ever since I wrote the LEX column for the Financial Times more than half a century ago. For most of the time we had the high street banks and the merchant banks. They were completely separate and we did not need legislation to keep them separate; they were separate by custom and practice. I know the people at the top of both kinds of bank. They were different kinds of people with different cultures. The system worked and served this country very well.
The Vickers commission accepted the problem and thought that the ring-fence would be the solution. We on the commission were concerned that the ring-fence would not be robust enough. There are all sorts of problems with the ring-fence. I shall mention three quickly, if I may. One of them, which is perhaps the least of the problems, but which has been put to me by a number of senior bankers, is that the governance structure is impossible. There has to be two totally separate governances of a single entity, which would have an overall holding governance with another governance with responsibility to the same group of
shareholders. Many bankers have said that that cannot possibly work. The other problems, which are perhaps more fundamental, are that it is likely to be gamed; there will be a huge incentive to game it if it is in the interests of the bank concerned to find ways around the ring-fence. The third problem goes back to what the right reverend Prelate the Bishop of Birmingham was saying. The cultures of high street banking and the cultures of investment banking are totally different. It is very difficult, with the best will in the world, to see how we can have two totally separate cultures in the same organisation.