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Grand Committee

Monday, 21 July 2014.

Arrangement of Business


3.30 pm

The Deputy Chairman (Baroness Fookes) (Con): My Lords, the usual reminder: if there is a Division in the House, the Committee will adjourn for 10 minutes.

Copyright and Rights in Performances (Extended Collective Licensing) Regulations 2014

Copyright and Rights in Performances (Extended Collective Licensing) Regulations 20144th Report from the Joint Committee on Statutory Instruments

Motion to Consider

3.30 pm

Moved by Baroness Neville-Rolfe

That the Grand Committee do consider the Copyright and Rights in Performances (Extended Collective Licensing) Regulations 2014.

Relevant document: 4th Report from the Joint Committee on Statutory Instruments

Baroness Neville-Rolfe (Con): My Lords, I am privileged to be here speaking for the first time as a Minister for the Department for Business, Innovation and Skills and moving my first piece of business in this House. I should say that I value the work of this House and its expertise very highly.

In a traditional collective licensing arrangement, the relevant licensing bodies—or collecting societies as they are otherwise known—are mandated by their members to manage their rights. Extended collective licensing—which I will refer to if I may as ECL—allows collecting societies to license on behalf of all rights holders who fall in the scope of the ECL scheme. This includes rights holders who are not members of the collecting society and have not given it a mandate to license their rights. They become part of the ECL scheme by default unless they say otherwise. This is known as opting out.

ECL can be used to simplify licensing, reduce costs and increase the amount of legally available copyright material. With an ECL scheme in place, a collecting society can issue the comprehensive licences that its customers demand, but without the risk of infringing non-members’ rights. Consequently, there should be improved compliance with copyright law, enhanced confidence in the UK copyright system and increased returns to non-member rights holders, because the regulations make clear provision for how and when money should be paid to them.

It is well known that de facto ECL schemes are already in operation in the UK. Their existence reflects market demand. Statutory ECL will allow collecting societies running such schemes to put their businesses on a legal footing and protect rights holders’ interests.

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As ECL schemes allow for the licensing of non-members’ works, it is essential that they are afforded strong protections. As I shall outline, this is the golden thread that runs through these regulations—golden light dawns. An ECL application simply cannot get off the ground unless the collecting society has a mandate from its members. Not only must it prove that it is acting with the informed consent of a substantial proportion of its voting members, it must also show itself to be significantly representative of the rights holders affected by the ECL scheme. Members’ views and their informed consent are at the heart of an ECL application. They are a good proxy for non-member rights holders, who can reasonably be assumed to share the same interests.

We have been fleshing out the concept of informed consent with stakeholders in recent weeks. The elements that go to making consent informed will be outlined in the legal guidance that accompanies the regulations. It will cover who should be balloted, how they should be balloted, what information they should be given, and so on.

I pause here to say that this work with our stakeholders is but one example of the in-depth research and consultation that we have been conducting since the passage of the ERR Act, taken through under the stewardship of my predecessor, my noble friend Lord Younger of Leckie. We have convened working groups that ran until September 2013; conducted a technical consultation between November and January 2014; developed the regulations and published the government response in May 2014.

The Copyright (Regulation of Relevant Licensing Bodies) Regulations 2014—the codes regulations, for short—which were taken through on 6 April this year, provide a further safeguard for rights holders. They require collecting societies to self-regulate with codes of practice that comply with minimum standards of governance and transparency set by the Government. The Government can act to remedy any problems in the self-regulatory framework. Collecting societies’ compliance with their codes is reviewed regularly by an independent code reviewer, whose evidence will form part of any ECL application.

In addition, these regulations make provision for a period of representations lasting a minimum of 28 days. This is an opportunity for any interested parties to comment on anything related to the ECL application, including the credibility of the collecting society. To cater for the possibility that, despite these safeguards, an ECL scheme is operating less than optimally, the Secretary of State has the power to modify or revoke an ECL authorisation.

The regulations allow for an initial, renewable authorisation period of five years. This mirrors successful ECL schemes in the Nordic countries. Libraries and archives have argued for a longer authorisation period to encourage digitisation. However, the Government feel that the soundness of an ECL scheme must be properly tested within a shorter period of time. As a compromise, if the ECL is renewed, it can continue indefinitely, subject to three-year reviews. These are light-touch unless there are grounds for further scrutiny. This should help facilitate digitisation while still protecting rights holders.

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The right of a non-member to say no or opt out is absolute. This allows the non-member to withdraw from a scheme both before and after it has commenced. To facilitate opt-out, the collecting society must show how it will alert non-members to the scheme when it applies. Collecting societies have an obligation to make reasonable efforts to find and pay non-members. Their efforts will be assessed during the renewal and review processes.

I hope that these regulations provide noble Lords with the detail that they asked for and that we promised when the then ERR Bill was at Committee and Report stages. ECL schemes in the UK should benefit licensees, collecting societies and rights holders alike. The Government have put in place a flexible and balanced framework that safeguards the interests of non-members and ensures that ECL schemes are possible only where they have been demanded by the market and sanctioned by rights holders. ECL schemes will enhance respect for copyright, help rights holders get paid and allow for more streamlined licensing so that a greater number of works can be circulated and enjoyed legally. The Government believe that these regulations are a reasoned and proportionate reform and I commend them to the Committee.

Lord Howarth of Newport (Lab): My Lords, perhaps I can be the first to congratulate the noble Baroness, Lady Neville-Rolfe, on her appointment and I welcome her to her new responsibilities. She will bring her experience of administration, business and politics to a fascinating, important and very difficult portfolio, and I wish her well. However, I think I can say on behalf of all noble Lords that we were very fond of her predecessor, the noble Viscount, Lord Younger. He was invariably patient, courteous and helpful in the way that he dealt with issues raised by noble Lords, and I thank him for that. I think that the noble Baroness may be the eighth intellectual property Minister in seven years, which raises a question as to whether, in the institutional life of this country and our culture of government, we organise things very sensibly. This kind of discontinuity cannot make for good-quality government. If policies are well developed, it is in spite of the system of ministerial appointment rather than because of it. It is not only the IP portfolio but a whole series of others that have been subject to these vicissitudes and prodigalities, and all parties have been as bad as each other. It is a cultural, political and governmental problem for us all.

As it clearly cannot be anticipated that the noble Baroness will still be in post beyond 7 May next year, she, too, is unlikely to have very much time in the exercise of these responsibilities. However, I am sure that in the few months allowed to her she will think radically about how we may better balance the interests of the wider public against the legitimate claims of creators, and will think about what dispositions in copyright policy may be appropriate in the digital age, when reproduction can be made at zero marginal cost. There are massive issues that I am sure she will work on, and I hope she will work on them fruitfully. However, before I am reproved by the Committee I must narrow my focus to the specific provisions of this particular statutory instrument.

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I will say a few words on behalf of the British Library. I was its Minister—I had ministerial responsibility for the British Library for some years—and I continue to stay in quite close dialogue with it. As the country’s national library and one of the leading research libraries of the world, its interests and concerns ought properly to be taken into account—as I am sure they are—by the Government, and will be by this Committee. The British Library has no problem with the principle of extended collective licenses—and nor do I. We debated that principle at great length in our proceedings during the passage of the Enterprise and Regulatory Reform Act.

I will press the Minister a little further on one aspect which she touched on in her remarks. Mass digitisation of library content is very costly. Among the costs are project management, scanning, digital platforms, hosting and licensing. All those procedures and operations are expensive. The British Library enters into public-private partnerships with publishers and other collaborators, and there is an anxiety for the library and its commercial partners that it may not be possible to recoup the costs of investment in mass digitisation within the five-year timescale that the Government have set as a limit.

The Government want the regime to facilitate mass digitisation of all sorts of material that is out of print and not commercial but of great interest and potential, and which is still in copyright and cannot under the present regime be accessed by people online—you have to visit the library if you want to see that material. That is a great inhibition on education, research, innovation and creativity, so this is important in all our interests. Indeed, it is important in the interests of authors, because authors of such works may then find that their works find a wider audience, and they may indeed receive royalties through the licensing body. So it is in nobody’s interest at all that the system should not work as it is intended to work.

I am therefore puzzled that the Government have decided to set a five-year limit on the terms of licences. The British Library’s existing licensing agreements with its commercial partners last for longer than five years—usually 10 years or more. In Scandinavia, which the Minister touched on, they have been running ECLs, so far as I know, with no set time limits since the 1960s. Very recently, in France, in 2012, and in Germany, in the present year, functioning ECL regimes have been set up which allow the digitisation of out-of-commerce works—in the case of France in the period up to 2000, and in the case of Germany up to 1966. I am not aware that the European Union is asking for any limit on the duration of licences. The European Commission’s 2011 memorandum of understanding on digitisation of out-of-commerce works does not mention any duration for such licences, and the public sector information directive 2013, which is currently being implemented in the UK, also contains no maximum duration for the period of exclusive licences for the digitisation of public domain items. I am perplexed as to why the Government are out of line with European counterpart countries and have adopted an approach which is not sanctioned or encouraged by the European Union.

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3.45 pm

We are where we are, and the Government have introduced this regulation, but I ask them to consider reviewing the existing regulation after a year to see whether it is facilitating or failing to facilitate digitisation. If it is found that there has been a chilling effect on digitisation, that investments have not been made and that the new partnerships have not been formed, I hope that the Government will consider separating the limit on the duration for which a collecting society can operate an ECL from the length of the licence that the collecting society can offer its customers. In other countries, that is either longer or left completely open. I would be grateful if the Minister could explain why the Government have introduced this particular feature of the statutory instrument and indicate whether they will be flexible, if it proves not to work well in practice, in seeing whether it can be modified to overcome the unfortunate consequence that the British Library and other cultural institutions fear.

Lord Clement-Jones (LD): My Lords, I warmly welcome my noble friend the Minister to her new role. I have known her in a number of previous incarnations and have no doubt that she will be extremely effective in her role as IP Minister. She will soon realise that these debates on copyright involve the usual suspects on most occasions.

I certainly hope that the Minister will continue the good work of her predecessor, our mutual noble friend Lord Younger, who was so assiduous in his work, variously in this House during the passage of the then ERR and IP Bills and otherwise in his briefing to colleagues and enthusiasm in building relations with rights holders and the creative industries, to the point where some of the bad taste left by the Hargreaves review has to a considerable degree been dispelled.

We had extensive debate on ECL during the passage of the Enterprise and Regulatory Reform Act. We have also, in the mean time, seen the passage of the Copyright (Regulation of Relevant Licensing Bodies) Regulations 2014, to which my noble friend referred, relating to collecting societies.

The Government’s explanations always described ECL as “voluntary extended collective licensing”, but the fact is that ECL allows the licensing body to license rights without the prior authorisation of the rights holder. So ECL, as I emphasised during the passage of the Act, is potentially dangerous to rights holders. However, the fact remains that—as the Minister told us today, and as we were informed in very timely fashion in correspondence last week from the chief executive of the IPO, which I very much welcomed—the assurances about safeguards given during the passage of the ERR Act have been delivered in these regulations.

The suggestions that a number of us made on Report and otherwise during the passage of the ERR Act were essentially translations of the Nordic statutory provisions adapted to our own copyright regime. I am pleased to see that we have incorporated many of those as a result of the careful consultation process. These safeguards, taken together with the previous collecting society regulations, usefully include, as my noble friend outlined, matters such as the need to

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explain the type of licence being granted in terms of the types of works and uses in scope, and the need for the authorised body to be representative and acting with the approval of the membership. I agree that an absolute threshold for either is not practical and applaud the provision requiring informed consent. The safeguards also include the adoption of a code of conduct and the powers of the Secretary of State in relation to codes of conduct, especially where non-members are concerned; the ability to refer to the Copyright Tribunal where a claim is being made that the body is not representative or that licences go beyond the scope of existing copyright licences; the requirement to give details of opt-out arrangements and to publicise ECL schemes to non-members; a limitation on the term of initial authorisation to five years, with schemes being subject to renewal; a 28-day period, also referred to by my noble friend, in which representations can be made before the Secretary of State grants authorisation; and clear provisions about the ability to give notice of exclusion of a work. Although I would have preferred them in the primary legislation, I welcome the Government’s adoption of those safeguards in the regulations.

At Report stage on the Act, however, I raised a number of issues that are not, I think, covered by the regulations. There are a number of other issues involved as well. The first is the ability for rights owners to opt out in a manageable way. In Grand Committee my noble friend Lord Younger made a commitment that the working group on extended collective licensing would be asked to consider whether the right to opt out should be extended to exclusive licensees and their representatives. I am pleased to see that under the regulations they can indeed opt out. But as I said on Report:

“It will be unworkable to have an opt-out which is exercisable only by the copyright owner or exclusive licensee”.

Can we assume that authorised representatives can do this on behalf of rights holders?

As I also said on Report:

“In Hungary, one reason for the failure of being able to rely on the opt-out came from the requirement of Artisjus that the rights owner—not any representative—provide due diligence evidencing ownership of each title in question”.—[Official Report, 11/3/13; col. 35.]

In the context of ECL, the burden of challenging any opt-out must sit with the entity operating the scheme and not with the individual right owner. My noble friend Lord Younger said on Report that,

“the Government’s intention is that the burden of proof should favour the party seeking to opt out … It will be the responsibility of the collecting society to operate opt-out schemes which meet the needs of effective rights holders. They will need to demonstrate how they intend to do this when they apply to operate an ECL scheme”.—[

Official Report

, 11/3/13; col. 39.]

Will my noble friend give assurances that this has been translated into practice in the regulations? Will collecting societies be asked specifically about the burden of due diligence when authorisations are being considered by the IPO?

Secondly, as regards the possibility of an independent body to consider applications, I cannot discern in any of the regulations that any third party is tasked with evaluating the data emanating from collecting societies

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when authorisations are sought. This would help to prevent disputes with non-members. Will the IPO be doing this? Will it have the resources? Will it have the expertise? Is this the appropriate way to proceed?

Thirdly, since we first debated ECL we have seen the approval of the EU directive on collective rights management, which will not come into effect until 2016. I welcome EU regulation that moves us towards a common European digital economy but, specifically, how do these regulations and the directive potentially impact on each other? Does this mean that collecting societies can eventually go beyond the UK in their ECL schemes? Will they incorporate the same safeguards if they do? Should we not be incorporating the ability to choose collecting society that is contained within the directive? I certainly know that organisations such as the British Association of Picture Libraries and Agencies would be very keen to see the incorporation of that choice in these regulations and not to have to wait until 2016.

Finally, there is the question of the five-year initial authorisation. After discussion in the consultation and the Government’s response, it is clear that the initial authorisation period is five years, but what is the intention regarding subsequent periods? Do the Government envisage that the periods after that initial period will in fact be longer, which may meet some of the requirements that have already been debated?

At the end of the day, it will be necessary for collecting societies to demonstrate to member and non-member alike that they provide value for money in operating ECL. Given the emergence of the Copyright Hub and new technology, the question for the creator or right holder will be: what are the advantages of not opting out of an ECL scheme? I hope that all the time and effort expended on establishing an ECL regime proves worth while.

I remain an ECL sceptic, I am afraid to say, not least when I see the original 2012 impact assessment appended to the Explanatory Memorandum. It contains some magnificently speculative language on the prospective benefits, especially economic activity and growth in the form of unspecified,

“further value creation and cumulative innovation”.

However, there will be great swathes of creative content that will not be covered: film, television, photographs, news footage, footage on YouTube and so on. So rather like the Libraries and Archives Copyright Alliance—although perhaps for rather different reasons—which says in its briefing that it would like potentially perpetual licences, which I thoroughly oppose, I am not going to hold my breath waiting for ECL to have a dramatic impact. Far more significant to the successful and effective exploitation and licensing of copyright works is the Copyright Hub and its successful rollout.

Lord Stevenson of Balmacara (Lab): My Lords, I join others in welcoming the Minister to her first outing. I have rarely seen a smoother and more effective transition from Back-Bencher to Front-Bencher. She seemed to take to it as though she had been doing it all her life—indeed, so much so that the government Chief Whip, who crept in at the start of the Minister’s

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remarks, presumably just to make sure that she had made the right decision, left almost immediately, smirking widely. The Minister seems to have passed whatever test that was, and I congratulate her.

I also play tribute to the noble Baroness’s predecessor, the noble Viscount, Lord Younger, who, as has already been said, has been very good on this issue: patient, courteous—yes, all that—but also a fantastically good letter writer. I hope that the Minister might pick up from him his ability to find one or two issues that came up during these debates and discussions which required him to write us letters which served as a good way of catching up on what had been talked about and picking up on the points that occasionally get missed. That is not mandatory, but it was something that we all welcomed and enjoyed.

As others have done, I also thank officials for their work on this SI. It is the first time that I have ever had a briefing from no less than the chief executive of the IPO—which made me tremble slightly as I opened it up and realised what it was. It was good to have. Maybe it is not a change of view, but one of the concerns that we have had over the plethora of activity that has come out of the Hargreaves review has been a slightly defensive attitude on the IPO’s part, which I felt was manifested in meetings and correspondence. If this is the new IPO under the new Minister, she has effected change in a remarkably short time. It very welcome and long may it continue.

The Minister will already have realised that she is entering an area of deep expertise from a very small number of people in your Lordships’ House. There are usually one or two more of us than there are today—we are feeling a bit bereft of other noble Lords and Baronesses. However, we geeks like nothing better than to get our teeth into a bit of IP and feel that a day in Parliament is wasted if we have not had some meaty issue to chew over. I am delighted that we are back on track and look forward to more of these debates.

This instrument has a long pedigree, as has already been mentioned. We have been talking about the passage of the ERR Act of famous memory, during which some of the debates around the Government’s approach were rehearsed over a long period of time. Out of that has come some good, however, because I am sure that the thoughts that informed those debates have been reflected in some of the outturns that we have seen today. As the noble Lord, Lord Clement-Jones, was right to point out, this area is not free of others who might wish to make regulations. We have a European directive on this and a number of similar areas that is still to come through within a couple of years. There is also the ongoing work of the non-statutory but important Copyright Hub, which will in time prove very capable of dealing with so many of the issues that we have been looking at.

In looking at collecting societies, we should have at the front of our minds the fact that this is a process of dealing with a regulated monopoly. As such, it is important that Parliament should exercise as much scrutiny as possible in these areas. We are broadly disposed not to accept monopolies, even though they often occur and exist in many parts of the economy. However, in this area we are permitting them to exist

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and, indeed, encouraging them to take their work further. It is therefore important that we spend time on thinking through the implications, certainly those raised by the noble Lord, Lord Clement-Jones, and my noble friend Lord Howarth.

4 pm

This measure takes the idea of monopoly further in the sense that it seeks to move into areas where rights holders are not currently obtaining the benefits that may be provided by a collecting society, and to some extent are making it more likely than not that they will join into the monopoly to benefit from what is going on. Dealing with real property rights, we clearly have to be careful about how that is done. It is therefore not a surprise that the regulations themselves are extremely complex and quite long. That is a good thing. What is a bit less good, and perhaps something that we might ask the noble Baroness to respond to, is why the detail that is already in the regulations needs to be accompanied by what is called a legal opinion, which will be circulated when these go out. What is the difference? Is there more detail that we have not had? I can guess that other noble Lords have raised points that might be part of it. Like the noble Lord, Lord Clement-Jones, I am slightly worried about there being sources of authority in relation to how this will be implemented in practice that are not being scrutinised at the moment but which are being left to come out and will, in fact, be the vehicle through which collecting societies themselves and rights holders are expected to operate. We should be grateful for the Minister’s comments on that.

However, it is extremely good to have confirmation from the chief executive and also to read in the final regulations that the regulations have been amended through the debates we have had in this House and also through discussions with the industry. That is all for the better. I sense from talking to those who have submitted comments to me that we are at a point where this has broad acceptance, even if it is not an ecstatic welcome, right across the industry. That is good.

I have four points that I want to raise. One is very trivial in that I want to record that I am pleased that the Government have now accepted that their statutory instruments should come out on the two vesting dates. This one is due to come out on 1 October. That system was departed from with two earlier SIs on this copyright area, and I think that that is to be regretted. The reasons for the entry of these new regulations are good and robust, and it requires very specific reasons not to do it. That is not the case in this area.

Secondly, the regulations touch on fees that may be charged. It is always important to have a sense of what is being talked about. There are fees in two directions, as far as I can see: the fee that will be charged by those authorising collecting societies, which are limited to the recovery of expenses; and the fees that may be charged by the collecting societies to their members in relation to the work they are doing in servicing the rights holders in respect of the remuneration that they might recover. Unfortunately, there is very little detail on that. Like the noble Lord, Lord Clement-Jones, I looked back at the initial impact assessment and could find very little about it. It is not an impact assessment in terms of money, although it does deal with some of

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the legal issues. I would be grateful if the noble Baroness could give us some sense of where she thinks those fees will lie. We need to have a sense of that, even though it will depend on the actual costs. Work must have been done on that. If she does not have the figures today, it would be a good topic for a letter.

Thirdly, there is the question of the mandate, as I call it. The noble Lord, Lord Clement-Jones, raised this point. Why are the regulations so coy about when it is feasible for a collecting society to start operating an extended system? We are talking about “substantial majorities”, “significant support” and “informed consent”. We are quite used to democracy in our country. Is there something being hinted at here that is not meant to be discussed in polite society? Is this some sort of code for a 75% majority? Why is it not just a simple majority of members voting in an open election perhaps run by the Electoral Reform Society, or something like that? That is the normal way to do these things. Even trade unions do that sort of thing. I cannot believe that it is so difficult for the Government to come up with a nice simple phrase that says that a majority of members voting in this will be sufficient for it to take effect. I should be grateful if the noble Baroness would respond on that.

Fourthly, like my noble friend Lord Howarth, I am also very confused about the duration point. The first time that it comes up there is a very fearsome statement that the duration will never be more than five years. Two pages further on, however, there seems to be the possibility of open-ended and permanent durations. I can see the issues that must have been in the drafters’ minds: “This is new; we are dealing with monopolies; it is difficult; therefore we will set a firm time limit”. However, all the responses we are getting are about the need to ensure that this is long term, not just for the institution itself but because contracts with private companies will need much longer terms to recoup the investment they might put in for perhaps the larger data transfers.

There is obviously a tension here. I can understand the issues, but I question having five years initially and the inability to apply for an extension until three years have passed. Incidentally, this is accompanied by what seemed quite a draconian—a sloppy word, I admit—or substantially bureaucratic requirement that review is to be on a three-year basis. For the review, there is a page of detailed requirements that ECL schemes must comply with, which suggests that the scheme is being quite heavily policed. I just wonder, like the noble Lord, Lord Clement-Jones, whether we have got the balance right. Clearly the regulations will stand as they are, but when there is an opportunity to review them, perhaps this point can be taken into account.

Having said all that, I am broadly in favour of what is happening. I do not share the concerns that the noble Lord, Lord Clement-Jones, has about the regulations. I think that they are good both for society and for the economy, although we have very little to go on except a sense among the industry that this will be, for certain big institutions, a very important change and should result in more royalty payments and therefore greater earnings for people who have rights that they currently do not exercise. I ask the noble Baroness to respond to that series of questions.

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Baroness Neville-Rolfe: I thank noble Lords for their valuable and supportive comments and, indeed, for their very kind welcome this afternoon. I share the warm words that have been said about my noble friend and predecessor Lord Younger of Leckie. I will do my best to be an equally hard-working and successful Minister. I am also a great fan of the art of letter writing, and if I can learn from him and use that well in my departmental responsibilities and in the House more generally, I will be very pleased. There is one plus to the change, which is that there will be even more people in this House with a knowledge of and a passion for the complicated subject of IP. I assure the House that I come to this area with great passion. I was especially delighted to be offered a role in carrying forward such an important agenda.

ECL is a tool that can be used where there is market appetite for it. That appetite has to come from licensees, the collecting society and, most importantly, the rights holders. The Government cannot impose ECL on a sector; rights holders must want it. It is not possible for the Government or anyone else to force it on the rights holders. It is not possible without a significant representative collecting society acting with the informed consent of its voting members. It is not possible for a non-member to be forced to stay in a scheme. This is because there are a number of safeguards for all concerned. My noble friend Lord Clement-Jones commented positively on the safeguards, and I have gone through some of them. Their range includes: the absolute right of non-members to opt out; the ability of any interested party to make representations about any ECL proposals; and, of course, the minimum standards of good governance and transparency which an authorised collecting society must adhere to and offer.

The noble Lords, Lord Howarth and Lord Stevenson, referred to the length of the authorisation and the practice in other countries. The Government believe that, following an authorisation, it is essential that the ECL is thoroughly scrutinised within a relatively short period to ensure that it is running smoothly. This is particularly so given the additional powers granted to an authorised collecting society. The length of the initial authorisation period is not dissimilar to authorisation periods in the Nordic countries, where ECL schemes have been running successfully for many years, as has been said. The renewal process is designed to strike a balance between the business continuity and low cost, desired by some licensees, and the need to ensure that all those affected by the ECL can continue to have confidence in it.

It is therefore the Government’s view that the renewal process should be open and transparent so that representations can be invited. A renewal application would need to include evidence of the performance of the collecting society in respect of non-members and a number of other features. If the ECL is running smoothly, the renewal process should not prove a barrier. If it is not, the ECL would have needed to be revoked anyway regardless of the length of the authorisation. The Government believe that the authorisation period is balanced and proportionate, reflecting a legitimate need to look at an ECL at a relatively early stage. As I said in my opening remarks, there is a light-touch renewal period after that.

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Obviously the Government have sympathy with the efforts of libraries and archives to digitise their collections. However, those efforts cannot be at the expense of safeguards to ensure that ECL schemes are functioning properly, and one of the safeguards is an initial authorisation period of five years. It should also be remembered that only collecting societies can make ECL applications. If a licensee cannot interest a collecting society in the possibilities of an ECL scheme because it makes no financial sense to the collecting society or because member rights holders oppose it, that is a matter for the collecting society and the licensee. The Government have no role to play in this process, and the regulations may not be a factor in what is essentially a commercial decision. It is the Government’s understanding that digitisation projects are not a first-order priority for collecting societies. It is therefore unlikely that there will be applications for such schemes in the first few months. For these reasons, the Government do not think it appropriate to commit to a review in a year’s time.

Lord Howarth of Newport: Will the noble Baroness deal with the point that a distinction can be made between the period of authorisation of a collecting society to go about its business—there may well be a very reasonable case to limit that to five years and then to see whether its performance has been good and it should be allowed to continue on the one hand and a licence that is given, for example, to a library to undertake mass digitisation? It does not follow from the need to be sure that the collecting society is doing a proper job, in general, that you have to restrict the licence that it approves to a period of five years. In fact, it can be extended beyond five years, to 10 years perhaps, or further. Can she deal with that, please?

Baroness Neville-Rolfe: Perhaps I may comment on the point about the EU directive and then come back to the point that the noble Lord has raised.

My noble friend Lord Clement-Jones and the noble Lord, Lord Stevenson, talked about the EU directive and the interaction between the regulations and the directive. Where relevant and where we have the powers to do so, we have in fact included the provisions from the directive in these regulations. The rest will need to be consulted on—in my view, a vital part of good legislation—and will then be incorporated in time for the coming into force of the directive in, I think, 2016. To give more detail, I should add that where there are concepts that we do not need to consult on that are relevant to these regulations and for which we have the legal power—for example, the definition of a collecting society—we have actually included that in these regulations, obviously with the objective, which I think we share, of keeping administrative and regulatory burdens in this important area to a minimum, while having proper governance.

My noble friend Lord Clement-Jones also talked about the risk of disreputable collecting societies running ECLs. Any collecting society applying for an ECL authorisation must already be licensing the types of works that are subject to the authorisation. The codes of practice regulations which became law in April 2014

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are intended to support a system of self-regulation by collecting societies by giving government powers to close any gaps that may emerge in the self-regulatory framework. This should strengthen confidence in the operation of collecting societies. As part of the self-regulatory framework, the collecting society must allow for an initial independent review one year after implementation and further reviews every three years thereafter. Any collecting society applying for an ECL will need to have a code of practice in place. Any collecting society that fails to comply in all material respects with its code of practice would run the danger of having its authorisation revoked. This power can be invoked at any time during the authorisation period. Interested parties concerned about an ECL scheme can make representations to the Secretary of State at any time during its operation.

My noble friend also asked about the Copyright Hub, which he felt could be more valuable than ECL. The industry-led Copyright Hub project is a very important attempt to make licensing easier and more valuable. ECL is likely to complement the hub by allowing broader collective licences to be offered by the hub. However, both use of ECL and use of the hub are of course choices for rights holders; government is merely offering a new choice to collecting societies.

4.15 pm

The noble Lord, Lord Stevenson, said that this involves property rights and that it is important that we get it right, which I agree with. Helpfully, he broadly accepted that we were trying in the regulations to do what we said we would do during the passage of previous legislation.

The noble Lord raised four points, the last of which I think I have dealt with. He said that he was pleased that the SI was vesting on one of two vesting dates, 1 October. As a former businessperson, I very much agree with him on this point. It has been a change that has come about in recent years that has helped business a lot, and I am proud of the fact that this regulation comes into effect on 1 October.

The noble Lord also asked a perceptive question about fees charged and expenses. My understanding is that the cost of licences is negotiated with licensees, and the obligation to do this is in the code of conduct. There is recourse to the Copyright Tribunal, which regulates the price of a licence. If I have not satisfied the noble Lord, I will very happily take recourse in this new art, the art of letter writing.

The point was made that there is not enough detail in the regulations around “informed consent” and “significantly representative”. We have deliberately not defined those concepts in the regulations because there is often a great difference in the operation of collecting societies in different sectors, as I am sure noble Lords will understand. That was strongly evidenced in the consultation, which showed that different sectors wanted and needed different thresholds to make ECL work for them. Putting the detail in the accompanying legal guidance gives us the flexibility to cater for those differences and to cope with future changes. The guidance will be available when the new regime comes into place and it is hoped that it will meet the concern raised.

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Lord Stevenson of Balmacara: I am grateful to the Minister for rehearsing that point, but I really still do not quite get it. She said that it was possible that different collecting societies would have different thresholds at which informed consent would be deemed to have been properly researched and implemented. Can she be quite clear that we are not talking about a minority of members of a collecting society being able to impose some sort of structure on other right holders at—let us take an arbitrary point—50%?

Baroness Neville-Rolfe: I think that this issue merits further discussion, which might need to be the subject of the new art of letter writing.

If I may, I would like to come back to the point made by the noble Lord, Lord Howarth—that libraries do not need regular checks on digitisation projects. All ECLs, including those for digitisation, must be balanced with safeguards for non-members. It is this which has led us to the view that we need regular reviews. Libraries and archives are very important to us, as are digitisation projects, but, as I said earlier, this does not seem likely to be the main focus of use of the provision in the early stages.

Lord Howarth of Newport: If it turns out that this five-year limit is inhibiting investment and choking it off, and evidence is seen to that effect in a year or two’s time, would it not be sensible for the Government to take another look at this? The Government have made it clear in the impact assessment and elsewhere that they want the kind of mass digitisation projects that could be undertaken by libraries, archives and other cultural institutions to happen, but that needs very significant investment. Those who are to put up the investment capital for this need to be confident that they are going to get a return. They are saying that the timescale of five years is insufficient to get the return. With the uncertainty about licence renewal, there is a real danger that the investment will not occur. Would it not be sensible for the business department to keep an open mind on this and be willing to look at it again if there is evidence that the policy is inhibiting investment?

Lord Clement-Jones: Perhaps I may add a question so that my noble friend can answer them all in one fell swoop. Strangely enough, although I agree with the five-year initial term, it not clear, as the noble Lord, Lord Stevenson, pointed out, whether a subsequent authorisation can be longer than five years. The noble Lord, Lord Howarth, might be entirely delirious with a 20-year extension. I would not be very keen on that but he might think that it was a wonderful thing. But from my reading of the regulations, it is not clear whether or not that subsequent authorisation could be longer than the initial authorisation.

Baroness Neville-Rolfe: The noble Lords have raised good points in their passion to get this right. I would like to look at this and write to the noble Lords about what can be achieved. There is good sense in having clarity for five years to get things off the ground but the noble Lords have made the point about the period after five years and having a look at what makes sense.

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I also commend the points that the noble Lords made about the part that officials have played in developing the IP regime and these regulations in particular. Perhaps unsurprisingly, my first meeting after today’s business is with the CEO of the IPO, and I shall be visiting it soon, so I will have the opportunity to pass on your Lordships’ kind words.

I have given due regard to the Secondary Legislation Scrutiny Committee’s decision and comments. We have had a good debate. The Government believe that these regulations are a fair and reasonable reform and I commend them to the Committee.

Motion agreed.

Paternity and Adoption Leave (Amendment) Regulations 2014

Paternity and Adoption Leave (Amendment) Regulations 2014 4th Report from the Joint Committee on Statutory Instruments

Motion to Consider

4.24 pm

Moved by Baroness Neville-Rolfe

That the Grand Committee do consider the Paternity and Adoption Leave (Amendment) Regulations 2014.

Relevant document: 4th Report from the Joint Committee on Statutory Instruments

Baroness Neville-Rolfe (Con): My Lords, these regulations are part of a package of statutory instruments that implement the modern workplace agenda that this Government are committed to delivering.

Since women were given maternity leave and pay rights in the 1970s, the employment landscape has changed dramatically. The legislative framework has not kept pace with the way in which employees juggle their home and work lives and how businesses respond to the challenges that this places on the management of their workforces. I speak as a businesswoman and a mother of four boys who has always worked, with spells of maternity leave.

The Children and Families Act 2014 has changed the framework. Noble Lords might like to be reminded that, through the Act, we introduced measures that allow us to give eligible working couples a new statutory entitlement to shared parental leave and pay, give all employees the right to request flexible working and allow a wider group of adopters and prospective parents to access adoption leave and pay. The Children and Families Act also gives employees the right to attend important events in their child’s life. This includes the right of a father, a mother’s partner and intended parents in surrogacy arrangements to unpaid time off work to accompany their partner or the mother of their child to up to two antenatal appointments. It also includes the right of an adopter to time off to attend a number of adoption appointments relating to the forthcoming placement of their child.

As a whole, the package marks a dramatic reform and a real step forward in employment law. It makes a reality of the Government’s commitment to creating a framework of family-related leave which reflects and supports the needs of working parents in the 21st century.

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It allows, for the very first time, mothers and adopters to share their leave and pay with the other parent. This will allow them, together, to manage their family responsibilities in a flexible way. As such, the introduction of shared parental leave and pay is truly ground-breaking. It is a framework which is also balanced with the needs of employers to be able to manage their businesses and workforces effectively. Evidence shows that both parents playing an active role in the care and development of their children from the earliest stages has strong positive benefits, both for the individuals involved and for society as a whole. That is why the changes that the Government are introducing, which I have just outlined, are so important.

Today, we are debating the draft Paternity and Adoption Leave (Amendment) Regulations 2014. There is nothing novel or unexpected in what I am seeking your Lordships’ approval for today. The provisions are in line with statements made in the course of the debates during the passage of the Act, or have been discussed and consulted on extensively with a wide range of stakeholders. Furthermore, they passed through the JCSI and the Lords Secondary Legislation Scrutiny Committee without comment.

The Paternity and Adoption Leave (Amendment) Regulations provide protections from detriment and unfair dismissal for individuals seeking to exercise rights granted to them in the Children and Families Act 2014: first, the right of fathers, mothers’ partners or prospective parents in surrogacy arrangements to unpaid time off to attend up to two antenatal appointments from 1 October this year; and, secondly, the right from April 2015 for adopters to take paid and/or unpaid time off to attend adoption appointments in advance of the child joining the family. The regulations will also remove the 26-week qualification period for entitlement to adoption leave. This will make it a day-one right for all employees from 5 April next year. This provides parity with the eligibility requirements for maternity leave, which is already a day-one right.

Through these regulations, we are ensuring that the person who exercises the right to take paid time off to attend adoption appointments cannot take paternity leave. Instead, that person can take adoption leave. So, in the case of a joint adoption, the couple must decide ahead of attending any adoption appointment which of them will take adoption leave and which of them will take paternity leave.

The amendments to these regulations also ensure that a parent cannot take paternity leave in relation to a child for whom he—or she, in the case of a same-sex partner—has already taken shared parental leave. An employer will therefore know that when an individual takes shared parental leave, they will not be chopping and changing between paternity leave and shared parental leave. Paternity leave can never follow a period of shared parental leave. This is another measure aimed at making the forthcoming introduction of shared parental leave easier for employers to manage and understand.

The regulations also set out the position on the right to return to work after periods of family-related leave. We know that this is an issue which employers in particular are keen to understand. Our approach rolls

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forward the existing principle in other areas of family-related leave, while taking account of the fact that shared parental leave can be taken in separate, discontinuous blocks of time.

To conclude, these regulations rightly enable more parents and prospective parents to play an active role in the care and development of their child from the very earliest stage. They also pave the way for the smooth introduction of the new system of shared parental leave and pay, on which we laid the draft regulations in both Houses today. The House will have the opportunity to debate the regulations on shared parental leave and pay in the autumn. I commend the regulations to the committee.

4.30 pm

Lord Young of Norwood Green (Lab): My Lords, I, too, welcome the noble Baroness to her new role. I was impressed to hear that she is a mother of four boys—the gender balance is a bit doubtful, but you cannot have everything. I was also reflecting on the fact that over a long period I have been the father of five children. The paternity leave throughout that was unpaid and, when I reflect, I suppose it was a bit short as well. As the noble Baroness rightly said, times have changed. The culture and the attitude of fathers—indeed, both parents—towards their role in parenthood has changed fundamentally.

We welcome and agree with the proposal. It is worth reflecting on the fact that we spend the vast majority of our lives at work. Having the flexibility to be able to look after family, to adopt or to foster is something that we should be encouraging. It is the role of government, whether EU government or at local level, to try to find a structure that works best for such flexibility.

Previously, the focus of legislation has rightly been on mothers. That is absolutely right, but it is nice to see, with the Government’s introduction of shared parental leave, there is a greater emphasis on change. However, there is still an issue of cultural change, which I should like to discuss for a few moments. We have done some research into the impact of some of the changes beyond what it says in the impact assessment. Although we welcome the extension of shared parental leave, there is concern that, in reality, the policy does not make a lot of difference to families. The Government’s impact assessment shows that as few as 2% to 8% of eligible fathers will take part in shared parental leave. Our analysis of additional paternity leave—the precursor to shared parental leave—shows that just 1% of eligible fathers have taken that up. That is fewer than 4,000 fathers across the whole country since 2011.

It is worth looking at how transformative the measure can be. Although we welcome the legislation, especially the day-one rights, and the statutory instrument, there needs to be a cultural shift in respect of how more fathers can be involved in using shared parental leave and how to make it so that they do not feel financially disadvantaged.

If we take the financial disadvantage out of the equation, a significant cultural shift is still required. What plans do the Minister and the Government have to change that culture? It could, for example, include

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providing information to fathers, mothers, adopters and employers. We very much welcome the instrument, given that it addresses paternity leave issues and equalises the adoption qualification period. With those questions, we commend the instrument.

Baroness Neville-Rolfe: My Lords, I thank the noble Lord for his support and valuable comments. He may be glad to know that I have two granddaughters, so we have managed at last to add a little equal opportunity to the family.

The main concern that the noble Lord raised was that men would not take shared parental leave, not necessarily only because of not being able to afford it but because of culture. The introduction of the new provision offers choice and flexibility to working couples in a way that ought to help bring about a culture change. There will be some early adopters, and they will be copied, so the advantage of the new regulation will be taken up. We recognise that for some couples it will not make financial sense for the father to take off extended time on shared parental leave, but it may well be hugely advantageous for fathers to take a number of short spells of leave—which, of course, we are now making provision for.

It is also worth noting that although men are the main breadwinners in many households, in 28% of households where both the man and the woman work, women are now the higher earner. I appreciated the points that the noble Lord made about the change of culture and his ideas for the dissemination of information, and I will give thought to those as we implement this very important package of measures.

To conclude, the Paternity and Adoption Leave (Amendment) Regulations make important changes to the existing paternity and adoption leave framework, which will pave the way for the smooth implementation of the new system of shared parental leave and pay, and have a significant and positive impact on adopters. I am very glad to be the Minister who is today commending the statutory instrument to the Committee.

Motion agreed.

Community Interest Company (Amendment) Regulations 2014

Community Interest Company (Amendment) Regulations 20145th Report from the Joint Committee on Statutory Instruments

Motion to Consider

4.36 pm

Moved by Baroness Neville-Rolfe

That the Grand Committee do consider the Community Interest Company (Amendment) Regulations 2014.

Relevant document: 5th Report from the Joint Committee on Statutory Instruments

Baroness Neville-Rolfe (Con): My Lords, the Government believe that it is important to encourage the growth of what, for brevity, I will call CICs limited by shares. We want to attract social entrepreneurs who seek a vehicle for social enterprise but also require some return on their investment. CICs limited by

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shares are the way to do that and are one of this country’s most successful forms of social enterprise. The existing regulations contain unnecessary restrictions that limit dividend payment. At the moment, a director with a single share with a par value of £1 will receive a maximum of only 20p dividend payment, regardless of the level of profit made, or if the actual value of the shares has risen to £100. It is our intention, with these amendment regulations, to make it easier for investors to share in the success of a CIC.

The purpose of these regulations is to remove the share dividend cap—a statutory restriction on the amount of dividend that the directors of a community interest company may pay investors. CICs were introduced by statute in 2005, creating a new type of company for social purpose. The CIC is increasingly the model of choice for many social entrepreneurs, and since the legislation came into force, more than 9,300 social entrepreneurs or social enterprises have chosen to register as community interest companies, and numbers continue to grow year on year.

The CIC is a unique form of company. A CIC must be set up to benefit a particular community, and cannot be used solely to make a profit. CICs carry out a wide range of activities, but they take in sectors such as health and social care, including NHS spin-out social enterprises, environmental business support, addressing cultural needs and running community cafes and centres. At the core of every CIC is its community benefit.

One of the key characteristics of a CIC is its asset lock. The asset lock applies to all CIC models and requires the company to use its assets to achieve its objectives in the interests of the community. Two forms of CIC predominate: there is the company limited by guarantee, where there is no private gain; and the company limited by shares, where there are limits on the amount of profit that can be distributed in share dividends to shareholders. These limits are one aspect of the asset lock.

In 2010, changes were made to the legislation to simplify the application of the asset lock with regard to share dividend caps. These measures simplified the process of applying and managing the caps, but in 2012 a review of these changes by the CIC Association, an independent support organisation for CICs, together with the regulator of community interest companies, revealed that further action was needed, as the caps remained a barrier to investment and to taking up the share model.

There are currently two separate caps on the amount of dividend that the directors of the CIC can declare. The first limit is the share dividend cap, which prevents directors from declaring more than 20% of the paid-up value of a share. The second limit is the aggregate dividend cap, which prevents directors from declaring more than 35% of the profits of a CIC as dividends in any financial year.

These regulations today remove the share dividend cap completely, while retaining the aggregate share dividend cap. This change will make it simpler for CICs to declare dividend, encouraging investment in, and ultimately the growth of, CICs.

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The changes we are making today have been fully consulted on and are supported. Last year a consultation was carried out jointly by the CIC regulator with HM Treasury, which was consulting on tax relief for social investment, where CICs are one of the specified models for investment. The joint consultation was a good example of collaboration between departments, and in both cases resulted in introducing new measures that would benefit CICs. The consultation showed that CICs found the so-called double cap confusing, difficult to work with and, frankly, unnecessary.

There is also evidence that the existence of the double cap put off founders of CICs from using a share model at all, instead creating a company limited by guarantee. This choice naturally inhibits the ability of a CIC to seek investment and to bring in share capital.

I hope to reassure noble Lords that the asset lock, which is a key feature of the CIC model, will not be compromised by these measures for the following reasons. First, CICs will still be able to distribute only 35% of their profits in share dividends, and the peg to the paid-up value of the shares will be retained in relation to redeeming or buying back shares by the company.

Secondly, the cap on performance-related interest will remain, although the regulator intends to increase this from 10% to 20% to encourage investment further, which can be done under her own powers.

Thirdly, CICs will continue to be required to report annually to the regulator on their activities and on the distribution of dividends.

The measure in these regulations, together with the changes to the performance interest rate being made by the CIC regulator, will, we hope, encourage growth in CICs. This is particularly desirable in light of the announcement by HM Treasury to introduce social investment tax relief in December 2013. These changes combined are expected to have a very positive impact on existing CICs, as well as encouraging social entrepreneurs to use this company form in new ventures.

These regulations will make it simpler for CICs to operate, and make them more accessible and attractive to investors while retaining the important elements of the asset lock and serving the needs of the community for which the CIC was established. I commend them to the committee.

Lord Hodgson of Astley Abbotts (Con): I begin by adding my congratulations to my noble friend on her new role, and congratulate her on having so far descended the crest unscathed. Her officials certainly gave her—or parliamentary procedure gave her—a good mixture to begin with, starting off with IP, proceeding to employment regulations and now to company law.

I declare my long interests in the charitable world. As my noble friend Lord Wallace of Saltaire knows, I conducted the Government’s review of the Charities Act, and I have an interest in how CICs and the charitable sector work together. I do not oppose these regulations, but I would like just to draw attention to a potential danger. Then I have one specific question to which I would appreciate clarity from my noble friend.

We have a broad spectrum of organisations. We start at one end with limited companies, commercial companies, with which we are all familiar, and at the

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other end we have charities, which are severely and properly legally restricted. Everything has to be done by them for the public benefit. To fail to do so is breaking the law and opens the trustees to the full force of that law. Between those two extremes—limited companies at one end and charities at the other—there is an increasing number of corporate forms, one of which is the CIC. There are also community benefit societies—bencoms, as they are called—we had better have some new regulations for them; industrial provident societies; social enterprises that are not CICs; companies limited by guarantee that are not CICs; mutuals; charitable incorporated organisations; and CICs themselves.

4.45 pm

I see the value in diversity. One does not want to be a one-club author. But we need to ensure that the public are clear about what all these organisations do, what their powers are and what they are permitted to do. Each of those organisations started out with a very clear differentiation in the law but sometimes those differences are being whittled away, on the grounds of utility, practicality and efficiency. This is one small whittling away. Does it really matter? Probably not but my concern is that we have this basic charity movement—165,000 registered charities doing wonderful things for our society and probably double that number if you take the unregistered ones—which is highly and hugely respected by the public.

The danger is that we create organisation forms that appear to the public to be charitable but are not entirely so. If there are scandals and difficulties, that may serve to undermine the trust that the public have in charities pure and simple, which remain the mainstream of our voluntary and social endeavour. Charities are already on the defensive due to, for example, the Cup Trust and the accusations of tax avoidance; the issue of executive salaries—what should the major charities pay their chief executives; and of course the even more vexed question of charitable aid going to extremist causes overseas.

I accept what my noble friend says, that the asset lock is critical, and certainly if she were to say that the asset lock will be changed, that would be a red signal as opposed to a yellow one, which I think we have this afternoon.

The Deputy Chairman of Committees: My Lords, I am sorry to interrupt the noble Lord but we have a Division. We shall resume in 10 minutes.

4.47 pm

Sitting suspended for a Division in the House.

4.57 pm

The Deputy Chairman of Committees (Lord Geddes) (Con): The noble Lord, Lord Hodgson, was in full flow. Perhaps he would like to resume.

Lord Hodgson of Astley Abbotts: I thank the Lord Deputy Chairman. I was just concluding my first general concern about the regulations, which is that

21 July 2014 : Column GC340

we are in danger of creating such a multiplicity of corporate forms that the public become concerned. As such, if we have scandal or difficulties in these intermediate categories, that may undermine the public trust in proper, full charities which are already under some pressure because of other issues such as executive salaries, aid to extremists and so on. I was saying to my noble friend that I very much hope that she will be robust in the maintenance of the asset lock, otherwise that would open up a significant whittling away. I hope that as the Government think about reforms in this area they will bear in mind the need to keep as clear a differentiation as possible and to explain it to the public. That is my general concern.

On my specific question, I turn to a point that my noble friend raised in her opening remarks about the change being made by the regulator to raise the performance rate of interest rate payable from 10% to 20%, which is in paragraph 8.3 of the Explanatory Memorandum. I understand from my noble friend’s remarks that this can be done by the regulator off her own bat. I seek an explanation of what this actually means. I understand what it says on the tin, but does that mean that it is inside the tin? If I understand it, it means that if I were to lend some money to a CIC and was able to arrange with the management that some performance-related criteria could be set—and I might seek that they be set in a way that was reasonably favourable to me—I could then get a 20% performance-related interest rate payable.

I may be completely wrong, in which case I am delighted to withdraw that view, but if I am right that does not seem to be a very happy state of affairs. A 20% rate of interest is high. The regulator should have control over the performance criteria that enable such a rate to be set, but it seems unlikely that that could happen without a high degree of bureaucracy. As the Minister knows, 20% in today’s markets is an extraordinarily high rate of interest, when the base rate is as it is. Indeed, it is nearly the APR that you are charged on overdue bounces on your credit card—about 22% or 23%—which everyone is saying is close to usury and that it is disgraceful that people should be charged such a rate.

5 pm

It is strange to set this performance-related percentage in a vacuum. It would be much better if it were related to the Bank of England’s base rate, as then it would go up and down depending on interest rates. There have been times when rates have reached a level when a 20% performance-related rate would have been perfectly proper, but at current levels that is not the case. I understand that this is pretty specialised and specific. My noble friend may wish to write to Members of the Committee about it, but her officials may have managed to scribble a note that has made it absolutely clear that the whole thing is not as I thought it. If that is the case, I would be happy to withdraw my concern, which is that there is an opportunity here for malfeasance that could undermine general confidence in the sector.

Lord Young of Norwood Green (Lab): My Lords, I thank the Minister for her introduction and the noble Lord, Lord Hodgson of Astley Abbotts, for his seminar

21 July 2014 : Column GC341

on the variety of different organisations, which certainly educated me. He talked about destroying trust, but even now you regularly get bits of paper through your door, sometimes accompanied by a bag, from organisations purporting to be collecting clothes for charity. It is only when you read more carefully that you realise that there is not a registered charitable number associated with it. Even now the public have to be careful when they are contributing either in cash or kind.

We are not opposed to these changes, but we have some questions, to which I trust the noble Baroness will be able to respond. One justification for this move is to increase the number of CIC start-ups, but does the Minister have any estimate of the increase that will result? What merits are there in the Government’s proposal to remove the individual share cap while retaining the aggregate cap, versus the CIC Association’s proposal of linking the individual dividend cap to profits rather than paid-up share capital? Have I made that clear, or do I need to repeat it? I am looking at those behind you. What merits are there in the Government’s proposal to remove the individual share cap while retaining the aggregate cap, versus the CIC Association’s proposal to link the individual dividend cap to profits rather than paid-up share capital? That is your starter for five.

The Government aim to create more of a market in CIC shares through the removal of the dividend cap. However, the CIC regulator has said that that alone is not enough, and that it must be accompanied by clearer guidance and a campaign to educate stakeholders. What is being done to fulfil that objective? I am glad that the noble Lord, Lord Hodgson, raised the question of the performance-related interest rate, because I confess that I did not quite understand what that meant in practice.

On a final point, as a matter of interest, although the Minister may not have the figures: have there been any situations where a CIC company has failed—due to misconduct, shall we say—in any way? What has the track record of those companies been, now that we have 9,300 of them?

Baroness Neville-Rolfe: My Lords, I thank noble Lords for their valuable comments during this debate, and for their kind words on my first day on the Front Bench. These regulations introduce a welcome simplification and are important in enabling and encouraging the growth of CICs and making the model accessible to more social entrepreneurs. In response to the question asked by the noble Lord, Lord Young, we expect there to be an increase of between 10% to 20% within the first two years.

With their community benefit, CICs are an important part of the social enterprise landscape which have widespread support, and these regulations will ensure that CICs remain so. The measure will encourage a wider market for investment in a key and growing model of social enterprise that is accountable and transparent in its operation. I was glad that my noble friend Lord Hodgson of Astley Abbotts joined our debate today and was able to make a valuable contribution given his great expertise in the charitable area.

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I will make a number of points. The steps we are taking are cautious, and indeed, as the noble Lord acknowledged, they are intended to preserve the vital asset lock. The change to the dividend cap has been 10 years in the making. As I said in my opening speech, that has been thoroughly consulted on and is supported by the CIC community. On the point on performance-related interest, this recognises the balance between risk and reward. The 20% is a maximum and is based on profit. At present, very few CICs pay performance-related interest at all. However, I will look at the points that he made and will perhaps write to him in the light of that.

I agree with both noble Lords that the public should be properly communicated with on the availability of different types of social enterprise entities. We need to explain the options clearly to citizens—and online options in that area can be very helpful and important. That will also be important in the debate we had previously on the new family-friendly policies. We will certainly consider how we can best make sure that those new arrangements and the whole range of social enterprise entity provisions are made publicly available.

The noble Lord, Lord Young, asked about the failure of CICs. The regulator has had a number of complaints about CICs, but that is a very small proportion in relation to the numbers on the register. All are investigated, and I will write to noble Lords with the exact numbers. On the campaign to educate stakeholders, I understand that not only does the regulator place priority on this matter, but it also works closely with umbrella organisations such as Social Enterprise UK, Social Enterprise Mark and the CIC Association to promote CICs. In my experience, that is often a very good way of ensuring wider dissemination of information in the market. I am grateful for the points raised in this debate and I commend these regulations to the House.

Lord Young of Norwood Green: Before the noble Baroness sits down, did she cover the rather complex question I asked in her response?

Baroness Neville-Rolfe: Perhaps this is the question that the noble Lord kindly repeated for me, twice. I fear that I still found—

Lord Hodgson of Astley Abbotts: Perhaps I may be of assistance to the Minister. There is a limit of 35% on the amount of total profits that can be distributed; therefore, how they are distributed among the shares does not matter. Presently, the individual share dividend cap is linked to par value. The par value of shares can vary enormously—you can have a pound par or a penny par. Therefore, 10% of that is an irrelevant figure. What is important is that they should not be able to pay out more than 35%. How it is paid out among the shares does not matter. The important thing is to make sure that not all the profits will be paid out. If the officials have not got that wrong, I will shut up.

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Baroness Neville-Rolfe: I am grateful to my noble friend Lord Hodgson for coming to my aid. I will, with the officials, take a careful look at Hansard and perhaps indulge in the art of letter writing to clarify this important point after the debate.

Motion agreed.

Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order 2014

Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order 2014 4th Report from the Joint Committee on Statutory Instruments

Motion to Consider

5.12 pm

Moved by Lord Newby

That the Grand Committee do consider the Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order 2014

Relevant document: 4th Report from the Joint Committee on Statutory Instruments

Lord Newby (LD): My Lords, it is a great pleasure to open this debate on these two ring-fencing instruments because today marks the latest milestone in the long process of legislation to implement the ring-fence between retail and investment banking. These two orders define what must be inside the ring-fence and what must be outside. They are the final stage of legislation on the location of the ring-fence.

Ring-fencing will protect retail bank customers against the risks of investment banking. It will help to reduce the risk that a future Government are obliged to rescue a failing bank with taxpayers’ money. Ring-fencing will achieve this; first, by insulating vital retail deposit and payments services against shocks from elsewhere in the global financial system; and, secondly, it will make retail banks that provide these vital services simpler and more resolvable. This will mean that, if a bank gets into financial difficulties, the authorities will be better able to manage its failure in an orderly way, keeping those essential retail services running but without having to rescue the bank with public funds. Ring-fencing thus aims to get the taxpayer off the hook by making retail banks both less likely to fail and more safe to fail. The ICB recommended that all the legislation needed to implement the ring-fence be in place by the end of this Parliament. The Government have committed to that timetable and we are well on track to meeting our commitment.

Last year, we took the Financial Services (Banking Reform) Act 2013 through Parliament. It established in law the principles of ring-fencing, as well as implementing the recommendations of the ICB on bail-in and depositor preference. The Act also brought in wider reforms, including those proposed by the Parliamentary Commission on Banking Standards.

The Act created the concepts of a “ring-fenced body”; “core activities”, those that must be inside the ring-fence; and “excluded activities”, those that must be outside the ring-fence. It provided that the precise definitions of “core” and “excluded” activities be set in secondary legislation. This is the purpose of the two orders before us today. The ring-fenced bodies and

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core activities order defines the scope of the ring-fence and the kinds of deposit that must be in the ring-fence. The excluded activities and prohibitions order defines the forms of trading in securities and commodities that must be outside the ring-fence, and imposes specific prohibitions on ring-fenced banks.

5.15 pm

The ring-fenced bodies and core activities order sets out which bodies will be subject to ring-fencing. The 2013 Act provides that any UK institution which accepts deposits, other than a building society, will be subject to ring-fencing, unless exempted by order. The order creates exemptions in two cases. First, it provides that only banks above a certain size will be required to be ring-fenced. The Government believe that the benefits of ring-fencing smaller banks are marginal and that the smaller banks would be likely to incur disproportionately high costs from having to ring-fence, which would reduce their competiveness. The order therefore creates an exemption, excluding banking groups with less than £25 billion of core deposits from the definition of “ring-fenced body”.

Secondly, the order exempts classes of institutions, such as insurers and credit unions, which are captured by the definition of “ring-fenced body” in the Act because they accept deposits. Ring-fencing is a policy developed to deal with the specific characteristics of banks and building societies. It was not designed as a solution to the regulatory challenges of other financial services firms. Therefore it is correct that they are exempted by this order. The order also provides that banks that cross the threshold due to a merger or acquisition, or resolution action taken by the Bank of England, will have a fixed four-year grace period before ring-fencing is applied to them.

The order also defines in detail the circumstances in which deposits can be held outside the ring-fence. The ICB recommended that large organisations and high net worth individuals should be able to deposit outside the ring-fence if they make an active choice to do so. This was because these depositors are sufficiently financially sophisticated to tolerate an interruption in access to a single bank, typically because they have multiple banking relationships. These sophisticated depositors therefore do not need the protection that is being mandated inside the ring-fence. They may, of course, choose to deposit in a ring-fenced bank if they wish.

The Government accepted this recommendation, and the order therefore provides that organisations above the Companies Act threshold for small companies—that is, organisations with turnover greater than £6.5 million, more than 50 employees, or an annual balance sheet total of more than £3.26 million— and individuals with greater than £250,000 in financial assets, can choose, as a one-off, to certify their deposits as non-core, allowing them to deposit with a non-ring-fenced bank.

The excluded activities and prohibitions order defines in detail the things that ring-fenced banks may not do. Under the Financial Services (Banking Reform) Act 2013, the regulated activity of,

“dealing in investments as principal”,

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is an excluded activity. This means that ring-fenced banks may not engage in trading in financial investments on their own books. The Act, however, gives the Treasury power to make exceptions from this ban. The order before us creates exceptions, most importantly for ring-fenced banks’ own risk management and funding, for transactions with central banks, and for the provision of simple risk-management services to customers.

The first exception is intended to permit ring-fenced banks prudently to manage their own risks; for example, the interest-rate risk that arises from their lending activities. The ICB recommended that ring-fenced banks should be permitted to use derivatives or similar instruments to hedge these risks. The exception in the order therefore permits dealing in investments, including derivatives, provided that the sole or main purpose of the transactions is to hedge the risks of the ring-fenced bank or its subsidiaries. Similarly, the ICB recommended that ring-fenced banks should be allowed to trade in liquid assets, such as UK gilts, to manage their liquidity: the order therefore permits ring-fenced banks to do this. The second exception permits ring-fenced banks to trade with central banks. This will allow ring-fenced banks to access central bank liquidity in times of stress.

Thirdly, the order permits ring-fenced banks to sell a narrow range of simple risk-management products to their customers. A great many businesses, including small businesses, use simple swaps, futures and options to limit their exposures to interest rates, commodity prices and exchange rates; for example, by fixing the interest rates they will pay on their loans or locking in the exchange rate for trade transactions. This gives businesses certainty over their costs and revenues, allowing them the confidence to invest, grow and create new jobs. The exception in the order permits ring-fenced banks to sell the simplest and most standard products used by businesses for these purposes. This will allow ring-fenced banks to meet all the needs of the vast majority of UK businesses, including small businesses, which typically have only a single bank, and might find it costly and difficult to deal with an investment bank for risk-management services. Complex derivatives will not be permitted inside the ring-fence. These are typically used only by larger and more sophisticated corporate customers, who are often already multi-banked, so would have little trouble in sourcing derivatives from a non-ring-fenced bank.

Finally, as well as defining what trading in financial securities must be outside the ring-fence, the order creates a further excluded activity: dealing in commodities. Ring-fenced banks will be banned from speculating in physical commodities, such as precious metals or oil, as well as trading in financial investments. As well as defining the scope of the ban on dealing in investments, the order imposes a series of specific prohibitions on ring-fenced banks. First, ring-fenced banks are prohibited from having exposures to certain financial institutions. The ICB recommended this prohibition, which is a key part of the insulation of the ring-fence. It protects ring-fenced banks against financial contagion from elsewhere in the financial system. In line with the ICB’s recommendation, the order prohibits ring-fenced banks from having exposures to non-ring-fenced banks, most investment firms, globally systemic insurance

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firms and investment funds. It permits exposures to other ring-fenced banks, building societies, credit unions, recognised clearing houses and central counterparties, investment firms which only offer advice, and banks subject to the same restrictions as ring-fenced banks, such as small retail banks.

In connection with this, I should tell the Committee that there is a small typo in Article 2(3)(g) of this order. The words “is not permitted” in the second line of that sub-paragraph should come at the end of the first line, as I am sure all noble Lords will have spotted. This will be corrected in the order before it is made.

Exposures to non-systemic insurers are also permitted, as these firms, which engage only in traditional insurance business, do not pose contagion risks comparable to those from non-ring-fenced banks or investment banks. The ICB recommended some exceptions to the prohibition on relevant financial institutions. This order creates those exceptions. First, ring-fenced banks may have financial institution exposures for the purpose of managing their own risks. Secondly, ring-fenced banks may provide payments services to other financial institutions; for example, acting as clearing banks for small banks. The exposures involved are permitted, subject to controls imposed by the PRA to address any prudential risks. To ensure that ring-fenced banks are themselves always able to access the payments systems whose use is critical to their business, the order separately imposes restrictions on the extent to which they may use the services provided by interbank payment systems except as direct members the payments systems.

The third exception permits ring-fenced banks to offer trade finance services to their customers. The ICB recommended that ring-fenced banks be permitted to offer trade finance services to customers. Such transactions often involve exposures to other financial institutions on behalf of their customers. The order also permits ring-fenced banks to have exposures to their own covered bond or securitisation vehicles and to engage in conduit lending and repo transactions. This is necessary to ensure that ring-fenced banks are not excluded from an important source of funding. Provision is also made to ensure that exposures to financial institutions which arise in the course of ordinary banking business, such as allowing retail customers to draw cash from the ATMs of foreign banks, do not breach the prohibition.

The final prohibition that the order imposes is on ring-fenced banks establishing branches or subsidiaries outside the EEA. The ICB recommended that ring-fenced banks should not offer services outside the EEA, to protect them against risks arising from elsewhere in the global financial system. Non-EEA branches or subsidiaries, which would be outside the recently agreed common European resolution framework, could also compromise the resolution of a ring-fenced bank in the event of failure. The order, therefore, prevents ring-fenced banks having such branches or subsidiaries, other than service companies that undertake no regulated financial activities.

These orders thus complete the process of defining the location of the ring-fence. It is central to the Government’s radical programme of financial reform

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to ensure that there is no repeat of the crisis and bailouts of 2007-09. Making these orders is an important milestone towards meeting our commitment to have the ring-fence legislated in this Parliament. It is a big step towards finishing the job of financial reform, to give Britain a world-beating financial sector, while protecting consumers and taxpayers. I commend the orders to the Committee.

Lord Tunnicliffe (Lab): My Lords, I thank the Minister for his presentation of these orders. The Opposition will not object to them. Indeed, in some ways they are unsurprising to the extent to which I sat through them with colleagues, facing the noble Lord, Lord Newby, through many hours of the parent Bills. As far as I can tell, most of the features appearing in these orders have already been mentioned in debates, notes and so on. They seem to do the job. I have just a couple of direct questions about the orders, and one or two wider questions that I hope the Minister will be able to respond to.

It is very interesting in terms of political process the extent to which we depend on the supporting material. It is conceivable to put in the 30-odd hours that are necessary to work from the Act through to the orders, through to whether the Explanatory Memorandum properly explains the legislation. I trust the Minister.

Noble Lords: Oh!

Lord Tunnicliffe: Well, I trust the Minister in this case then, on the Explanatory Memorandum. Let us not get carried away, although I do have a small point even on that. I am saying essentially that the Minister’s presentation and the Explanatory Memorandum, which I have studied in some depth, and the orders in as much as I was able to relate them to the Explanatory Memorandum, leave me with only a couple of direct questions.

First, the Minister spoke about the firms that are in the core. That was unexceptionable and exactly how the commission was talking. All the stuff I remember from the Explanatory Memorandum seems to fit with that. I found no surprises and the Minister has not pointed out any surprises to me. Therefore, my attention has concentrated on the Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order 2014.

Looking at the Explanatory Memorandum for that order, as a result of the Minister’s speech, I first lighted on paragraph 7.4, which states:

“This Order provides that dealing in commodities (e.g. precious metals, oil, agricultural products) is an excluded activity”.

The Explanatory Memorandum refers to “agricultural products”, and I am sure that if I went into it in enough depth, I could find whether or not agricultural products are excluded. The Explanatory Memorandum says that they are, but the Minister’s speech did not. I ask that as a small technical question.

It is interesting that in the rest of the order virtually everything seems to be fairly black and white. This is in; this is not. This is excluded; this is not excluded.

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Paragraph 7.5 of the Explanatory Memorandum caught my eye, where it lists the key things that the order does. It states:

“Third, the Order creates an exception to permit ring-fenced bodies to sell a narrow range of simple derivatives to their customers”.

The Minister gave a perfectly satisfactory explanation of why that was useful. What was less clear to me—I have to admit that it may be deep in the order—is how one defines “simple”. Listening to the Minister, “simple” seems to be defined as small and what small businesses want, while “complex” is big and what complex businesses want. That did not seem to me a fundamentally correct definition of “simple”; it should have more depth in it if it is to be a serious limitation on what is inside and outside the ring-fence. I would value further explanation of what “simple” means.

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I was also interested in how policy and detail developed. As we know, there is subtle detail when orders are created to bring an Act into force. I noticed with some disappointment the rather short section in the Explanatory Memorandum on consultation. It states:

“In the light of consultation responses, the Government made a number of technical changes”.

I would have valued a little more information on how the consultation and the changes came about. Of course, I could have taken up the invitation in paragraph 8.2 to go to the link there given. I fear that, if I did, I would probably find myself facing a 200-page document and having to admit defeat by sheer volume. If the Minister could shed a little more light on the consultation, I would value it.

My mind then started to go away from where we had been together with the Bill to the reality of this becoming a ring-fence. I started to wonder who does what, which is when my thinking came back to this idea of “simple”. How does whoever is responsible for this—I assume that it is the PRA—ensure that the instruments inside the ring-fence are simple and that all other instruments are outside? Does it review every instrument that a bank is going to trade in, or does the bank have to self-certify with the PRA reviewing it afterwards? By what process does the detail in the orders come about? We can all pass rules, but, let us be honest, with this industry, a policeman—for want of a better word—has to be there making sure that the rules are obeyed and implemented. I am interested in who does what and how they do it.

Finally, we heard a number of lovely little phrases throughout the Minister’s speech referring to timetables. He talked about being in the final stages, and said that the instruments would be in place by the general election and that the Government were close to finishing the job. Can the Minister flesh that out a bit? Finishing the job means a ring-fence being in place that is properly policed. When we can we expect that? I seem to remember a dreadful date like 2019 being bandied about. If all the stuff is in place by 2015, why will it take that amount of time for it to be in place, giving the protection for the citizen that I know both the Minister and I want? Certainly, I want to see it in place as quickly as possible.

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Lord Newby: My Lords, I am grateful to the noble Lord, Lord Tunnicliffe, for those questions, because they enable me to clear up, I hope, the points that he raised. He asked whether agricultural products were included in the definition of “commodity”. The answer is that, just like a metal, agricultural products —such as pork belly, or whatever, futures—are an excluded entity, along with all other commodities.

The noble Lord asked me about how to define “simple”. I am slightly inclined to say that of course it is not easy to define “simple” simply. However, the simple instruments that ring-fenced banks will be permitted to sell to their customers are defined in articles 10 and 11 of the excluded activities and prohibitions order, so there is quite a long list there. The definition or underlying concept of “simple”, is that we are primarily talking about derivatives that do not complicate the resolution of a failing bank. Why do we try to keep to simple products? We want to make it possible, relatively easily, to resolve a failing bank. Therefore simple derivatives are primarily ones that are straightforward to value; that is what makes them simple, or relatively simple.

Lord Tunnicliffe: Can the noble Lord repeat what he just said? I think he said something quite profound, although he said it quickly: that, by definition, they must be instruments that would not complicate the resolution.

Lord Newby: Yes; they are derivatives that would not complicate the resolution of a failing bank. They would not complicate it because they are relatively straightforward to value. As the noble Lord can imagine, some derivatives are extremely difficult to value. If I can just slightly elaborate on that, the excluded activities and prohibitions order limits ring-fenced banks to selling forwards and futures, plus a small range of options. They may only sell derivatives to hedge against three types of common business risk, namely currency, interest rate and commodity risk. Those are the most common business risks in which the market for derivatives is most liquid and, because it is liquid in those areas, it is easier to value them. To ensure that derivatives do not have any of the features that make them hard to value, the order requires that options contracts entered into must specify the amounts that may be bought or sold under the option, be at a specified price, and exercisable on a single specified day; or, in the case of interest caps or floors, interest rates must be based on a specified principle sum for a specified period.

The order also requires that ring-fenced banks may only sell derivatives that can be valued on the basis of observable market data or of a type traded on exchanges, and whose fair values are based on level 1 or 2 inputs under international financial reporting standards. Such instruments are more liquid and could be more easily valued in resolution. Article 12 of the order creates those safeguards, as well as placing caps on the net market risks of the derivatives portfolio, the gross size of the derivatives portfolio and the proportion of the portfolio that can be made up of simple options. I hope that that has gone some way to satisfy the noble Lord on that front.

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The noble Lord asked about consultation. Consultation was issued in July last year, and the summary of responses was released in December of last year. We also consulted widely with stakeholders, including the Association of Corporate Treasurers, the CBI, non-financial companies, law firms and, of course, the banking industry itself. As a result of that consultation, we have made some changes to the legislation that are largely technical, but which will ensure that ring-fencing is fully compatible with the needs of UK businesses. For example, we made some small changes to the definition of “simple derivatives”, made it permissible for ring-fenced banks to have exposures to non-systemic insurers, made a series of technical changes to ensure that exemptions for payments and trade finance are operable, and removed the caps on payments and trade finance exposures. We also prohibited ring-fencing banks from having branches in the Crown dependencies. Therefore that is relatively technical stuff, but it has improved the legislation and has been a good exercise.

The noble Lord asked how the supervisors would supervise. The PRA is the principal supervisory body. It is in day-to-day contact with the banks. If it feels that it is not getting adequate information from the banks, it has extensive powers to require further information from them if it has any specific concerns. If a generic problem were to arise, it would obviously be in a position to discuss with the Treasury whether any further changes were needed in terms of the secondary legislation or in any other respect.

As to the question of timing, as the noble Lord said, the end point for the final implementation of the ring-fence is 2019. The justification for that is so that we can get all the secondary legislation done by the end of this year, which we expect to be able to do. The PRA then has to produce very detailed rules to make sure that the system is clear and works in the way that we wish it to do. On the basis of both the primary and secondary legislation, we estimate that it could take up to two years for all those rules to be finally in place, and then a final two years for the banks to implement the rules. That does not mean that the banks will not do anything in the mean time, because making this change obviously involves them in a huge amount of effort, activity and cost, so they are beginning to think about how they are going to do it. We have always thought that this timetable is measured and proportionate. The very fact that the banks know that we are moving in this direction means that some activities that they might have undertaken in the past they will not undertake in the interim period because they know what the new rules will be and that they will abide by them.

Lord Tunnicliffe: I thank the Minister for giving way. Clearly, we would like to see this done more quickly, but I hear the Minister’s response. I presume that, alongside this, there will be a parallel activity by the banks to develop their own structure—the responsibility of directors and so on—and to be in a corporate shape for this structure. Are the Government, through the PRA, participating in or monitoring that development?

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Lord Newby: Yes, they are. We are talking not about hundreds of institutions but about a small number of banks, which are very heavily regulated already. They are in daily touch with the PRA about one or other aspect of the regulations and that dialogue is ongoing. Indeed, some banks have already announced some of their broader strategic thinking. Others are keeping theirs close to their chest and, in some cases, are looking to make sure that these orders have indeed gone through before they decide what to do. In most cases, by the end of the two years before which the PRA detailed rules will not have come out, I expect the banks to become pretty clear about where they want to end up. They will do it, as I said, in consultation with the PRA because that is the way that the system operates already and will continue to operate in the future.

I hope that I have answered the noble Lord’s questions. I was involved, as was he, with the passage of the Financial Services (Banking Reform) Act, at the start of which there was a lot of scepticism about whether it would be possible to do what we have done today and define a ring-fence satisfactorily. I think that these orders indeed do so satisfactorily. It is a major step forward in a very important process to improve the safety and security of the banking sector. I commend the orders to the Committee.

Motion agreed.

Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) Order 2014

Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) Order 20144th Report from the Joint Committee on Statutory Instruments

Motion to Consider

5.44 pm

Moved by Lord Newby

That the Grand Committee do consider the Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) Order 2014

Relevant document: 4th Report from the Joint Committee on Statutory Instruments

Motion agreed.

Police and Crime Commissioner Elections (Amendment) (No. 2) Order 2014

Police and Crime Commissioner Elections (Amendment) (No. 2) Order 2014 5th Report from the Joint Committee on Statutory Instruments6th Report from the Secondary Legislation Scrutiny Committee

Motion to Consider

5.45 pm

Moved by Lord Taylor of Holbeach

That the Grand Committee do consider the Police and Crime Commissioner Elections (Amendment) (No. 2) Order 2014.

Relevant documents: 5th Report from the Joint Committee on Statutory Instruments, 6th Report from the Secondary Legislation Scrutiny Committee

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The Parliamentary Under-Secretary of State, Home Office (Lord Taylor of Holbeach) (Con): My Lords, this order was laid in Parliament on 9 July. The Government are seeking to amend the Police and Crime Commissioner Elections Order 2012, which sets out the rules governing the conduct of elections of PCCs in England and Wales.

Following the deeply sad and untimely death of PCC Bob Jones, your Lordships will be aware that a by-election for the West Midlands PCC is due to take place on 21 August. The instrument before the Committee today changes the existing provisions by making candidate addresses available online during ordinary elections and by-elections. The instrument goes further by seeking to raise voter awareness about candidates standing for PCC in their police area by providing for booklets containing candidates’ election addresses to be delivered to residential premises in the West Midlands by-election on a trial basis.

The Electoral Commission has been consulted about our proposals and it has lent its support to them. Indeed, the proposals stem from recommendations that the Electoral Commission made in its report on the 2012 PCC elections.

The police area returning officer—PARO—responsible for the by-election in the West Midlands stands ready to produce the booklets if the instrument is approved by Parliament. Before considering whether it would be appropriate to use printed booklets in future PCC elections, the Government will evaluate the impact on voter awareness during the trial.

I hope that the Committee will support these measures, which are intended to help voters make informed decisions when voting for their police and crime commissioner. Accordingly, I commend the instrument to the Committee.

Lord Imbert (CB): My Lords, I thank the noble Lord, Lord Taylor of Holbeach, for putting some flesh on the bones of this proposal. None the less, I would address the cost of this.

As we know, at the time of the original elections, a YouGov poll showed that 65% of those polled did not want the system; 15% did and 20% did not know. None the less, the Government decided to go ahead with it and were a laughing stock when the election took place, when in some polling stations fewer than 10 people attended. I was told in the Chamber that the election cost £50 million.

Now, accepting that the whole system has cost £100 million to date, and if we pursue it until the regular time of the next elections we must accept that it will be another £100 million or so, is it right that this by-election money—another £4 million at the very least—should come out of the public purse as well? I know it is not in the Act, but when the Bill was passing through your Lordships’ House, like others I thought that if something happened to the police and crime commissioner, he or she would hand over to their deputy.

Did the Minister see the television production, “Meet the Police Commissioner”? If not, will he do so? It should be compulsory viewing for the whole Cabinet. It has not become a Whitehall farce but it is being talked about as a Westminster farce. It has become something of a laughing stock. When the

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police and crime commissioner in Kent allowed the television cameras in, she was asked by the interviewer about her daily workload. He asked, “What is the first thing you do when you arrive in the morning?”, and she said, “My nails”. She has paid herself £85,000. She has a staff of 16. When they get depressed and bored, she brings her dogs into the office to cheer them up. This really is an awful farce. If the Government do not do something to stop this, they will be the laughing stock.

If the by-election costs more than £4 million, could that come out of the money that has been set aside already for the running of the PCC system and not out of the taxpayer’s pocket, although inevitably at the end of the day it comes out of the taxpayer’s pocket anyway? I ask the Minister: how many more—and I mean more—accident and emergency departments are going to be closed in order to keep paying for it? We have already lost dozens of them. I know that the money has to come from somewhere. Would it not be better to spend that money on saving lives rather than saving red faces in the Home Office and the Government?

Baroness Smith of Basildon (Lab): My Lords, I am grateful to the Minister for his—albeit brief—explanation of the order. The comments made by the noble Lord, Lord Imbert, are very relevant to this debate.

I thank the Minister for his comments about Bob Jones. He died at the age of 59 very suddenly and it has been a dreadful shock to his family, friends and colleagues in the Labour Party. He was well loved and very highly regarded. His commitment to the post he held, despite the flaws in the legislation, was not new. He had been on the police committee previously and a local councillor for many years, and he is a great loss to the community. His drive always was to engage with the community and with young people so he leaves a huge gap in the lives of his family, friends and the community he served.

Given all the circumstances and the sense of loss and shock felt, it is all the more disappointing that a by-election has been called in the way it has. The legislation provides for just two electors to be able to call a by-election. I understand that one of those electors is a former candidate for the post. They have called a by-election, with the costs and issues that have been raised by the noble Lord, Lord Imbert, which has to be held 35 days later. That leaves us in the position of having an election on 21 August. I would have thought that there would be some kind of decency—that someone should be buried or at least have a memorial service before someone calls a by-election in those circumstances.

Having mentioned the tremendous loss of a friend and colleague that we feel, I am pleased that my old friend and colleague from the other place, David Jamieson, has been selected to stand as our candidate. I know personally of the commitment and integrity he will bring to the election from my work with him in the other place.

The noble Lord, Lord Imbert, raises some valid questions. When the Police Reform and Social Responsibility Bill started its passage through your

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Lordships’ House we opposed the position of police and crime commissioners. I also note the Kent police commissioner’s TV programme; “sad amusement” might be one way of describing it. I do not think that is typical of police and crime commissioners; however flawed the process and posts are, most of those elected do the best that they can in the job. The Minister will recall that Tony Lloyd, a police and crime commissioner from Manchester, was helpful to us during the passage of the anti-social behaviour Act when he suggested proposals to deal with child sex grooming and how to close down premises more quickly. He was using his role in a positive way.

That fact is that the legislation was rushed in. It became law only 10 weeks before the first elections. That illustrates that more time should have been taken to think it through, perhaps with some heed taken to our objections. Having said that, we fought those elections and put forward the best people because the posts were there. Those posts remain. We are not opposing the order today, but there are some questions on which we seek clarity. Some measures in the order seem to be there to prevent the Government facing further humiliation over the disastrously low turnouts we saw in the elections and, presumably, the by-election. Both the Electoral Reform Society and the Electoral Commission have raised concerns about the level of turnout and public engagement. The Electoral Commission feared that there would be a turnout of just 18.5% when these elections were held in 2012. What a disaster it would be if we had elections in which only 18.5% of people voted. In fact, it was grossly overoptimistic. Nationally, 14.7% took part in the elections. In the West Midlands, where we now face a by-election, only 12% took part. It was an almost perfect storm.

We had public apathy at best, public opposition at worst and a situation, which we raised again and again with Ministers, where the campaign was digital by default. People would find out information about their candidate by going online, because they would obviously be very interested, finding the details of all their candidates and rushing out to the polling stations to vote for them. Well, that was wrong, was it not? Even if it had been right and those who were interested had looked online, 7 million people on the electoral roll have no access at all to computers and to the information. That appallingly low turnout was therefore inevitable. Can the Minister say anything about the kind of turnout that he would expect to see in this by-election, particularly given its date of 21 August?

The Government are recognising the problem in that the order provides for what it calls a “trial”—I should have thought this was evidence that people should get certain information during election campaigns—of the mailing of candidate election booklets. The returning officer should be able to seek a reasonable sum from the candidates towards the printing of an election booklet. This is the kind of thing that we were saying when legislation went through before but which the Government rejected at the time. I am pleased to say that we have seen more interest in telling people that an election is on than we did then.

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In the Explanatory Notes, as the Minister says, there is a partial response to the concerns expressed by the Electoral Commission. I mentioned the lack of awareness of the candidates at elections. Then it was an unfamiliar time of the year for elections: November. No other elections were being held and we rarely have elections in November, just as we rarely have elections in August. There was a lack of information, not just on the candidates. The point still remains about what the elections were for, what they were about, why they should stand, and what the PCCs could do. That has not been made up since those elections took place. When I talk to people in my local area, very few of them know who the PCC is, know what they can do, or have any awareness of their role at all. Therefore all those issues are of extreme concern.

The other issue that the noble Lord did not mention that I sought to address was that at the last elections there was a helpline for those who wanted information, albeit it worked for only 23 days before the election took place. Are there any plans for any kind of helpline this time? Also, there was no provision in the elections in 2012 for people with sight difficulties, or materials in any other language. Can the Minister tell me what has been done to address those issues?

6 pm

We said at the time that the election was deeply flawed, but there was no great gloating, with people saying, “I told you so”—it was a bad day for democracy and for the police that there was so little interest and enthusiasm, or engagement and involvement with those elections. However, seeking to make changes for this by-election, and presumably to make an assessment of any improvement, comes at a cost. The noble Lord, Lord Imbert, was absolutely right to raise the issue of costs. I have been trying, from the comments on the order and from the Minister’s comments, to get to the bottom of what the costs are. It is a little confusing. There are few bits of legislation that have no impact assessment, and an impact assessment would have been helpful for this order today to try to get to the bottom of the costs.

The Explanatory Memorandum says that the figure is £300,000—£0.3 million—but the Government have since given out other figures. I have heard the figure of £700,000 raised; another figure was as high as £3 million. Why, then, does it say £300,000 in the memorandum if there are other figures as well? When the Minister winds up, can he clarify exactly how much it will cost and who pays? It is important that we have that precise information. We are losing front-line police officers—in my county of Essex we now have no 24-hour police stations, we have lost PCSOs and full-time police officers, yet the money is being spent on elections. How many police officers has the West Midlands lost, and how many could be paid for by the money being spent on these elections? Whatever budget that comes out of, whether it is the Government’s budget, or the Government try to force local councils in some way—and I cannot believe that even this Government would force more costs on local government—at the end of the day, the taxpayer is paying. I am sure that if I speak to any taxpayer in the West Midlands, they could find better things to spend this money on.

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The Minister will be aware that the Explanatory Memorandum says that the Government will “track the performance”. Can he tell me how that will be done? He referred to that in his comments about how the marketing of the elections will be conducted, and that the Government will track its performance. If there is a very low turnout again, what conclusions will the Government draw from the turnout as regards any marketing campaign that is run? I am slightly puzzled by that, so any information that the noble Lord can give would be extremely helpful. Will it incur more costs, and has a budget been set aside to track the performance of the marketing exercise to raise awareness, or will it be done purely on the turnout on the by-election day itself?

I will address some other issues. My attention was drawn to some comments made by the head of electoral services in Birmingham, which I think are reflected throughout the West Midlands region. They relate to the number of polling stations that will be available. A number of the polling stations are in schools. The advantage of August is that schools will not be forced to close for the day for another election, but a number of those schools will be having repairs and maintenance undertaken. I am told that 136 out of 460 polling stations in Birmingham will not be available.

Can the Minister confirm whether enough polling stations will be available, but more crucially, can he say how many of those polling stations will be moved from their normal place? One way to encourage voter turnout is the familiarity of polling stations. People know where to go, because they always go to the same place. I am sure that the noble Lord and I have knocked on enough doors on election day to come across people who, as soon as they see that there is a change, say, “Where do I vote? I don’t know where to go”. How many of the polling stations across the West Midlands region will have to close, so there will be a different polling station for these elections?

Can the noble Lord give a reassurance that all polling stations will have disabled access in the normal way as required by law? Can he confirm what the staffing arrangements will be? I know that local authorities are very concerned, because staff will be on holiday during August when schools are away. There will be staff on holiday during the period leading up to and including election night. Can he address that?

There is also the issue of postal votes. In the debate in the other place, the concerns of the head of electoral services in Birmingham were again raised. He had said that the new postal voting arrangements had,

“the possibility to confuse electors”.

If the Minister could say what arrangements have been put in place to deal with that concern, again, that would be very helpful.

We support the order before us today. However, it is a very sad day for us for a number of reasons. We have lost a very impressive police and crime commissioner. The legislation creating police and crime commissioners has been shown to be flawed and unwanted. There has been a lack of interest and enthusiasm from the public. The unseemly haste with which the by-election is being organised is likely to disfranchise a number of people. The cost of this, when the number of front-line

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police officers is being cut and police stations are being closed, is to the great shame and discredit of the Government. This is a stop-gap measure, but I urge the Minister to give some clarity in response to the points that I have raised today. I would find that extremely helpful.

Lord Taylor of Holbeach: I thank the noble Lord, Lord Imbert, for his contribution and the noble Baroness, Lady Smith, for her comments. The choice of the date of the by-election is not the Government’s; it does not lie with the Government.

Baroness Smith of Basildon: I said at the very beginning of my comments that it had been called by two electors, one of whom I understand is now a member of UKIP. Although he was an independent candidate at the time, I wonder whether he will pop up as a candidate for another party in these elections.

Lord Taylor of Holbeach: I am grateful to the noble Baroness for making that clear. Yes, she did say that the by-election was called by two people. All I am saying is that, in law, the Government have no locus in fixing the date of a by-election. The by-election is unwelcome both for political reasons, in the sense that having a by-election in August would not be the choice of any of us who really believe in democracy, and because of the circumstances which led to it; namely, the death of Bob Jones, who was a highly respected figure. Although, rather like the noble Lord, Lord Imbert, he was not entirely in favour of police and crime commissioners, he realised that it was an important job and he did it well.

It is important to address the question of money, because there are two sides to it. If you are going to hold an election, you need to spend the amount of money that it costs to have the clerks and the polling stations open and you need to meet the bare costs of an election. In this case, we estimate the cost to be £3 million. What we are discussing today is the cost of the leaflet and its provision. I understand, as noble Lords have said, that these are difficult times, and the Government are mindful of the need to keep public expenditure under control. However, the balance of advantage in this case is for there to be an informed electorate and the leaflet provides an opportunity for that to be the case. We consider that the leaflet will cost somewhere between £700,000 and £1 million, although we cannot be certain. We know that in certain forces the cost would have been as low as £300,000, but in the largest forces, of which the West Midlands is one, the cost is estimated to be £1 million. The Explanatory Memorandum makes that clear. I hope that there is no suggestion that this is not good value for money, because democracy never comes cheap. Those of us who have been involved in democratic politics all our lives know how important it is that people are engaged in democratic processes.

I should also emphasise that this money is not coming out of police budgets; it is coming out of direct Home Office budgets. Of course, it is funded by

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the taxpayer, as all government money is, but it is not at the expense of proper policing or the role that we would expect of the police.

I have to say that I did not see the “Panorama” programme; I read things about it but I have not seen it. As I think the noble Lord will understand, I am usually quite busy, not least in the House, and I do not see television during the week at all, so I missed it.

You have only to look at some of the successes that PCCs have brought. Consider the role that Bob Jones played in the West Midlands. The noble Baroness made reference to her former colleague in the Labour Government in the House of Commons, Tony Lloyd, and his role in Manchester. I can talk of Nick Alston in Essex, Adam Simmonds in Northamptonshire or Martin Surl in Gloucestershire. There are so many examples of individuals who have really made something of the job and brought something to effective policing. As someone who, I know, has spent his life extolling the importance of effective policing, I hope that the noble Lord, Lord Imbert, will accept that.

The noble Baroness asked particular questions. She wanted to know about helpline accessibility. We intend to provide the booklets in alternative formats, such as Braille, and provide a helpline for the election. Of course disabled access will be available, because it is required by law at all polling stations. It is unfortunate: 21 August is not the time to hold a by-election. However, the law is the law. We have to have it on 21 August and deal with it, so not all the polling stations will be the normal ones. That is all the more reason why it is important that the electorate is informed in the proper way.

There has been a lot of ribbing about turnout. I shall not estimate the turnout. All I can say is that I am sure that all noble Lords present would want a better turnout at this by-election than the 12%-odd turnout in the West Midlands when we had the first PCC elections. Those elections were held, as the noble Baroness, Lady Smith, said, at a time of year when we do not normally hold elections. Next time round, as she well knows, they will be in May, alongside local government elections. I believe that the opportunity of this by-election—unsought as it is—and this order will inform us about public response to the opportunity to elect their police and crime commissioners and seek to make those elections as effective as possible.

If it is necessary to bring legislation forward in future—secondary legislation, most likely—of course the Government will not hesitate to do that. I hope that we will have the general support of the Opposition in bringing it forward, because I am a little confused as to where they stand on how they are to provide for people to vote for police and crime commissioners in future if they are not fully in favour of the system. It will be interesting over the next few months, when the position will no doubt be clarified.

6.15 pm

Over the weekend the PARO’s team confirmed that the polling stations had indeed been identified. Some will need to move from their existing locations, as I said, but those who are responsible on the ground for arranging these elections have done very well. Any

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elector who already has a postal vote will be retaining it for this particular by-election so they will receive their ballot papers by post. Nobody has mentioned that as far as I know, but it is an important addition.

I have spoken entirely from notes from the Box on this issue rather than reading the grand speech that I have here, but I hope that noble Lords will support the order. It is designed to provide the people of the West Midlands who have the unfortunate duty of finding a successor to Bob Jones with the information that they need to make a proper choice. It is an important job. PCCs have shown themselves to be extremely effective and I believe that it is an important election. I hope that the order we have presented to the House will be supported by the Grand Committee.

Motion agreed.

Mobile Homes Act 2013

Question for Short Debate

6.17 pm

Asked by Lord Graham of Edmonton

To ask Her Majesty’s Government what assessment they have made of progress following the enactment of the Mobile Homes Act 2013.

Lord Graham of Edmonton (Lab): My Lords, this is a good opportunity to review the situation, and that is the spirit in which I raise the issue. There are lots of things that I could say from experience, and especially from correspondence with the people involved. I do this because in 1983 I was a member on the Mobile Homes Act 1983. As a consequence, for the last 30 years I have been heavily involved. When I look back over 30 years the progress made from the situation then to now is quite remarkable and satisfactory. I do not intend to go over old ground of what has been fought over, achieved, and all the rest of it. However, I want to put down one or two markers.

The Minister, in replying to me on issues that I raised, alluded—not to put words in his mouth—to the fact that for the next three or four years the Government were looking forward to the issue bedding down. If he thought I was asking for action tomorrow he was wrong, but I know that he was saying, “Look, give us time to work out the detail”. All I want to say to the department—members of which I see not 100 miles away from me—and Ministers who have taken an interest is that there is a big job still to be done and I just want to point out one or two aspects of it.

I have here a booklet, Park Homes in Cornwall. I am sure it is familiar to the department and those who work there. What puzzles me is the assumption that because we are very creditworthy and using all the facilities, everybody else is the same. From a source that I have, which I accept completely, in Cornwall only 8% of the people who live on parks have access not just to telephones but computers. I do not have the answer, but the department should look at how it is possible to ensure that not just every authority and park but every resident on a park is given the information

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that they are entitled to. It is a tall order and I am not too sure how it should be done, but I congratulate Cornwall County Council, which has gone out of its way to ensure that residents on the parks are given all the information they need in order to make progress.

I remind the Committee that there are some villains who own sites. The situation has changed. At one time a park was owned by a man or a woman or a married couple, and that was their life. Their job in life was to make sure that the people who lived there, who they knew were vulnerable and sometimes distressed, were looked after. But now there are people who own 30 or 40 parks. Because they have that muscle and it is a big business, they combine with others, and a handful of people have the park home industry in their hands.

There are one or two instances that I want to bring up. The first is the following local newspaper article:

“The company that owns an Isle of Wight mobile home site has been ordered to pay more than £300,000 after offences committed against residents”—

of course, comment can be made that if that is the situation, that is what I want. I do not want people to have to pay. I want people to recognise that although they do not have a gold mine, they have something that pays well and they should look after it and do what needs to be done.

We all know the situation in Wolverhampton. I have a document here from a good friend, who lives in Wolverhampton. He is the secretary of the PHRAA. He woke up one night to find that the owner had set fire to some oil drums. In effect, he was trying to force him out. He was very quick. He was on to me like a shot. I spoke to the local police and they set up a system whereby they could co-ordinate. One of the problems we have is the number of different people involved. There is the department, which I deeply respect and the people who work in it, but we not only have the people who work there, but we also have politicians. There are residents’ associations, and all sorts of other things. We even have the police.

A few years ago, Detective Inspector Colquhoun, in Bromsgrove, solved the problem. We usually find that if we make a request, most police will argue that disputes on parks are civil matters, not criminal. Yet, Detective Inspector Colquhoun was called out to the park when a gang of eight tried to burn out this person and some others. The gang was caught and taken to court. Eight of them were given a total of 64 years in prison. That must have been a very big case, but the beauty was that under the Proceeds of Crime Act they were also fined hundreds of thousands of pounds because they could not show where their money had come from. Of course, that is very important.

I have one or two cuttings from various places. A caravan site was fined for safety breaches. Many site owners, as part of a quid pro quo, ask for a pitch fee or 10% of the sale, but they do not carry out the basic requirements or ensure that various aspects of their responsibilities are carried out. Many of the residents meekly accept that the law is the law and think that they can do nothing about it. When they raise the matter with the local police or the council, because of pressure from other places, including this place, those

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organisations say, “Well, it’s easier for us to tolerate a bad situation than to get involved”, and it costs a lot of money to the council or the police.

An article in the Cornish Guardian has the headline: “£11,500 bill for parks’ failings”. One park was found guilty of having,

“street lamps left with broken glass fittings, exposed electrical wiring in a clubhouse and a former swimming pool building being demolished by unqualified staff”.

The article continues:

“An inspection found sections of the roof fallen in, guttering blocked and electrical wiring exposed”.

People are getting away with these things. Frankly, we ought to be man enough to realise that they should not. The Herald ran an article with the headline: “Big fine for unsafe lights, wiring and pool building at caravan park”. I do not want to see headlines like that, because I know that behind them is human misery.

About a month ago, on 2 July, the marvellous organisation fronted by Sonia McColl presented a petition to No. 10 Downing Street, and then came to a meeting in Room No. 10 here, attended by Members of Parliament and others. They were quite clear in their minds that although they had won one or two victories, the biggest victory was the ability of a site owner to stop a sale, and, further, still to demand 10% of any sale. That battle is going on now, and so far, so good. But we need to watch the situation very carefully because many people who live in parks are single, elderly and unwell. I am frightened to raise the issues that they have in order to keep their homes. They have their homes, which they look after. When you look at a magazine or some of the journals, you will see that the products that these people are selling are absolutely fine, except that there are some blemishes.

There are no instant solutions; if there were, if it were possible to do things by the wave of a wand, I know that this Minister, looking after this Committee and others, would do it. But the strategic value of combining forces with other people needs to be recognised. The police, councils, councillors and authorities are all organisations that can make a contribution.

Baroness Williams of Trafford (Con): My Lords, I ask the noble Lord to conclude his remarks because he has gone significantly over time.

Lord Graham of Edmonton: Time is up. Thank you.

6.32 pm

Lord Best (CB): My Lords, I am very grateful to the noble Lord, Lord Graham of Edmonton, for providing us with this chance to consider the position of mobile home owners following the enactment of the Private Member’s Bill which I had the honour of taking through your Lordships’ House. I pay tribute to the noble Lord’s many years of tenacious campaigning on behalf of mobile home—or park home—residents. I took on the Mobile Homes Bill entirely because of my admiration for the noble Lord’s tireless work.

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I also want to record my appreciation for Peter Aldous MP, who piloted the legislation with great skill through its stages in the other place. In noting the all-party nature of parliamentary backing on this issue, I also thank Annette Brooke MP, joint chair of the relevant APPG, for her persistent support. In addition, we all owe a debt of gratitude to the hard-working civil servants who have handled all these difficult issues over many years with great skill.

There is no doubt that the Mobile Homes Act 2013 has righted some terrible wrongs and is a landmark for the thousands of residents of mobile homes who faced grave injustices from the evil practice of so-called “sale blocking”. When I got involved with these matters and talked to residents in their homes, I was deeply shocked to discover the appalling behaviour of certain site owners. These had acquired the freehold ownership of sites—some of which were previously quite idyllic little rural communities—and set about exploiting, harassing and intimidating residents, making huge fortunes from acquiring their homes at knockdown prices and selling on at huge profits. Not only that, but services on sites were neglected; the service charges—pitch fees—were exorbitant; and peaceful communities of older citizens suddenly became places of fear, insecurity, danger or even violence.

I believe that the Act has been a power for good both in outlawing sale blocking and in introducing licensing arrangements that, with proper opportunity for appeals to the First-tier Tribunal, mean that pitch fees must be reasonable and site owners must manage their sites effectively. It is gratifying to note that, in most cases, site owners are now using the standard forms recommended by the Department for Communities and Local Government for their agreements with residents on pitch fees.

So far so good, but we always knew that the Act could not do everything, and park home residents still face serious challenges. I shall set out four areas for further action by the Government. I hope that they may be addressed not by another Private Member’s Bill, as it is difficult to get time allocated to such Bills, but by primary government legislation—particularly when the next housing Bill is prepared.

First, when the Mobile Homes Act was a Bill, we recognised that it could not cover the separate but related issue of excessive charges by site owners controlling the supply of liquid petroleum gas—LPG, often calor gas—distributed to residents’ homes. We heard of cases where the site owner, holding residents to ransom, charged double the sum he paid to the liquid gas suppliers. Similar problems with piped gas, electricity and water were the subject of an Upper-tier Tribunal case last year. The tribunal has outlawed such profiteering from the supply of those utilities—although the worst site owners still ignore those rulings—but many sites depend on LPG, and exploitation through controlling that source of heating can mean fuel poverty for elderly residents. Action is needed.

Secondly, the Act makes provision for a review of whether a fit and proper person requirement should be introduced to debar the real gangsters and profiteers who have moved in on this lucrative opportunity to exploit older people. Ministers have said that this

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exercise will not be undertaken until 2017. In the mean time, some sites remain in the ownership of some pretty unsavoury characters. It is surely unwise to allow those who are serving prison sentences, those with criminal records, bankrupts, those who have been found seriously wanting by a First-tier Tribunal and other undesirable speculators to be awarded licences to manage park home sites. Although the Act may have chased out some of those operators, some offenders have remained in control of sites. It is open to the Government of the day at any time to bring forward the necessary statutory instrument that would require site owners to be fit and proper persons. I urge that process to be pursued as soon as possible.

Thirdly, there is the question of holiday homes being used as permanent residences and occupied on virtually the same terms as other mobile homes, but falling outside the important protections of the Mobile Homes Act. Clearly, genuine holiday homes serve an important function and help local economies, but if some so-called holiday homes are in reality permanent retirement homes, with the protections afforded to other park home occupiers being avoided simply by requiring residents to take an annual holiday elsewhere, surely they should be brought within the scope of the 2013 Act. This is unfinished business, which a forthcoming housing Bill needs to address.

Finally, there is the issue of the 10% sales commissions—payments to the site owner when a resident sells. That was the subject of the rally which the noble Lord, Lord Graham, mentioned, when hundreds of park home owners came to Parliament earlier this month. I am familiar with the concept of exit fees—typically of 1% of sales proceeds—paid by outgoing leaseholders in many retirement housing schemes. The Office of Fair Trading, just before its demise, condemned this practice whereby the money raised was not used to improve the housing or top up “sinking” funds, which provide for future major repairs. The OFT opposed exit fees that were not used to keep down monthly service charges but instead simply represented a windfall gain for the freeholder. I suggest that the same approach should be applied to 10% sales commissions required by owners of mobile home sites. If the sales commission is used to enhance conditions on the site—improve roads, plant trees, upgrade electricity supply lines et cetera—then everyone benefits. The value of a park home may be 10% higher where the quality of a site is kept up to good standards. This suggests that the charge could pay for itself. All occupiers then enjoy better facilities and the site owner benefits, too, because his commission is 10% of a higher sum.

Conversely, if the site owner pockets the commission and neglects his duties, and the site deteriorates, he does not justify extracting a substantial commission. Indeed, I am told that there are cases in which the site owner deliberately runs down the conditions on the site in order to put pressure on the mobile home owners to leave so that more sales, more commissions, will flow in. That is a travesty.

Now that local authorities are being resourced—I hope adequately—to ensure that licence-holders are doing what they should, the proposition from campaigners like Tony Turner in Cornwall deserves to be progressed.

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They want to align the requirement to pay a large commission to the quality and quantity of time and money invested in the site by its owner. Paying for something rather than paying for nothing changes the picture considerably. A change to make 10% commissions conditional on performance requires primary legislation. However, means of implementing a change seem to be in place already. Local councils would have to be satisfied with the condition of the site and its management before allowing commissions to be demanded. That certainly looks like a priority for legislation when the chance arises.

I conclude by underlining the appreciation of all those concerned with the fate of mobile home occupiers for the sterling efforts of legislators, civil servants, campaigners and residents’ associations but, above all, for the life’s work of the noble Lord, Lord Graham of Edmonton.

Lord Graham of Edmonton: Hear, hear!

6.42 pm

Lord McKenzie of Luton (Lab): My Lords, we should be grateful to my noble friend Lord Graham of Edmonton for causing us to keep a focus on mobile or park homes following the passing of the Mobile Homes Act 2013. As we know, and for which we admire him, my noble friend has been a long-standing campaigner for the rights of park home residents. He could be forgiven for signing off and putting his feet up with a job well done now that the legislation is passed, but it is not in his nature to stop campaigning and to give up on the cause. I acknowledge also that the Act was expertly steered through your Lordships’ House by the noble Lord, Lord Best, who is a housing expert to boot, and who had the support of the Government and from all Benches in this House.

However, my noble friend’s Question is a reminder of the nature of our role in such matters. The job is not done just by passing the Act or, indeed, by Ministers securing any necessary funding. It is about seeking to ensure that the legislation is delivering as expected. Of course what spurred this legislation in the first place were the serious abuses in the sector, the victims of which are mostly elderly—“frightened” was the word used by my noble friend and the noble Lord, Lord Best—people. There was also the powerful testament to these abuses not only from the organisations representing the victims but from Members of the Commons and several noble Lords, including the noble Lords, Lord Cormack and Lord Best, the noble Baroness, Lady Scott of Needham market, and my noble friends Lord Whitty and Lord Graham.

The purpose of the legislation was to stop those abuses, giving reassurance and justice to those 85,000 households for whom these sites were intended to be their homes. The legislation was also to create and sustain a level playing field for good site owners and operators, preventing them facing unfair competition from unscrupulous ones. What has happened so far?

Sections 1 to 7 of the Act were brought into force only on 1 April this year, a year after the Act was passed. This date marked the end of the Government’s moratorium on new burdens for micro-businesses. What

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benefit does the Minister think was gained by the deferred implementation of those provisions? Inevitably this means that there has been very limited opportunity to see how some of the provisions are working in practice. But so far as the licensing role in Section 1 is concerned, is there any indication of the level of fees local authorities are charging and whether they have sought to increase their capacity to undertake their role effectively? Will the Minister say how many authorities in England have “relevant protected sites” within their boundaries?

One of the major bones of contention of the past has been circumstances where site owners have tried to block home owners selling or gifting their property. Section 10 prevents this happening in different ways depending on whether the home is subject to a new or existing agreement. This section has been in force for more than a year and has presumably been tested in practice, certainly with regard to existing agreements. Will the Minister tell us whether any problems have yet arisen from its application and whether site owners are seeking to circumvent or have circumvented its intent?

As the noble Lord, Lord Best, said, we have had no movement on the introduction of a fit and proper person test for site owners and operators. That was a major concern when we debated the Bill and when it was introduced in another place. Such a test was recommended by the CLG Select Committee and strongly backed by the Park Home Owners Justice Campaign. If we had that fit and proper person test, it would address some of the real issues that are still going on in the sector, as we have heard from my noble friend.

Section 8 includes a power to introduce a fit and proper person test but this power has not yet been used. In replying to the Second Reading debate, the then Minister, the noble Baroness, Lady Hanham, explained that it was not,

“the Government’s intention to impose an industry-wide fit and proper requirement at present. New burdens on business are always a last resort”.

However, she went on to say that,

“we will be reviewing the situation after a suitable period—I hope that would be shorter rather than longer—to see how behaviour in the industry has changed”.—[

Official Report

, 1/2/13; col. 1814.]

Will the Minister confirm that “shorter rather than longer” accords with his view and say what plans there are to review the situation? Must we wait until 2017, as the noble Lord, Lord Best, suggested? What sort of new burden would be unreasonable to impose on someone who was not a fit and proper person in those circumstances?

In that debate, the noble Baroness, Lady Hanham, also responded to points raised by the noble Lord, Lord Best, concerning energy efficiency and fuel poverty. The noble Lord has raised the issue of LPG profiteering again today. Concerns were similarly expressed at the time by Consumer Focus. In particular, there was the suggestion that the standard assessment of energy performance used for the Green Deal was inapplicable to park homes. There were added complications about single metering arrangements on some sites. The noble

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Baroness, Lady Hanham, indicated that the matter had the attention of the Prime Minister, no less, and that work was under way with DECC officials to see what might be done to improve the position. Will the Minister give us an update on progress?

Noble Lords will doubtless also be aware of the recent Westminster Hall debate initiated by Annette Brooke MP, which focused on the perceived inequity of the commission—up to 10% of the sale price of the pitch—payable to site owners. I raise this point not because we consider that there should necessarily be changes to those arrangements at this stage, although the issue of basis on which they are levied, raised by the noble Lord, Lord Best, seems worthy of review; we acknowledge that the mechanics of the payment are changing—but because it was an obvious opportunity for any perceived failings of the 2013 Act to be aired, and none was.

Two residual questions flow from this. How confident is the Minister that the fundamental changes that the Act brings about are being effectively communicated within the sector, and what more is planned? The legislation was intended to prevent unscrupulous behaviour of site owners and managers, who hitherto have harassed, ill treated and made life intolerable for too many vulnerable people. What arrangements are in hand for the routine monitoring of the legislation’s effect and what early warning systems are in place to identify avoidance of its rigours? As we have heard from my noble friend Lord Graham, these abuses are still going on despite the Act, and we have a concentration of ownership that is deeply worrying.

The efforts of my noble friend over so many years have been the major factor in bringing significant improvement to the lives of thousands of people. We owe it to him to make sure that this legislation stands the test of time, just as my noble friend’s persistence and commitment have endured.

6.50 pm

The Parliamentary Under-Secretary of State, Department for Communities and Local Government (Lord Ahmad of Wimbledon) (Con): My Lords, I am pleased to be answering this Question. Perhaps I may begin, as have other noble Lords, by acknowledging the tireless advocacy of the noble Lord, Lord Graham, on behalf of park home residents. I am therefore pleased that the noble Lord lent his support to the Mobile Homes Act 2013, which, as he rightly acknowledged, puts in place many of the reforms that he has campaigned and argued for over many years. I welcome the noble Lord’s acceptance that the Government have shown determination to provide protection to home owners. However, I totally agree that it does not end with the Act. The noble Lord mentioned Park Homes in Cornwall as an example of good practice. It is entirely appropriate that where we see good practice it should be shared across the country.

I should also at this juncture acknowledge the great efforts and skill of the noble Lord, Lord Best, in his navigation of the Private Member’s Bill last year. The Bill received Royal Assent on 26 March 2013 and, as the noble Lord, Lord McKenzie, said, received support from all sides of the House.

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Before I answer some of the specific questions that were asked, I remind the Committee that the Act puts in place measures that will enable the park home industry to develop on a sustainable footing, where site operators who run a decent and honest business can prosper while those who abuse their home owners and have no regard for health and safety will no longer be able to profiteer.

The Act is the biggest shake-up in the law relating to park homes in 30 years. It marks the Government’s commitment to providing greater protection to the rights of park home owners and ensuring that sites in which they live are safe and healthy places. However, we are not complacent and recognise that more work needs to be done to change the culture of the sector and crack down on the rogues operating in it, about whom we have heard today. To achieve this, we will continue to work with partners, the police and cross-government enforcement agencies to raise standards generally and remove criminality from the sector.

On enforcement, we are clear that there needs to be engagement with and education of site operators so that they have the opportunity to put matters right voluntarily before authorities go down the route of formal enforcement action. To that end, the department has set up a licensing working group comprising local authority practitioners, the industry trade bodies and representatives from national resident groups to look into best practice in setting licence fees and enforcement, and to provide guidance on the new licensing provisions for local authorities and site operators.

As acknowledged by the noble Lord, Lord Graham, very little professional advice was available to home owners prior to the Mobile Homes Act 2013. Since last May, we have funded the Leasehold Advisory Service—known as LEASE—to give home owners and site operators free and impartial initial advice on their rights and obligations. Our funding of LEASE, to help people understand and know their rights, is an important step in empowering home owners to stand up for their rights, which was a concern expressed by the noble Lord.

LEASE has already advised about 1,000 customers and is working to increase its outreach. Last summer, the Government also launched a leaflet campaign aimed at every park home resident in England to raise their awareness of the new law and where they could gain further information about it. In that regard, more than 180,000 leaflets were distributed and feedback has been very well received and informative. We recognise that there is also a need for better education of their obligations and responsibilities among site operators and a greater understanding and empathy from them on the rights of home owners. We will continue to work with the industry trade bodies to achieve this.

Turning to some specific questions, the noble Lords, Lord Graham and Lord Best, referred to the 10% commission paid to the site owner when a home is sold as being unfair. Indeed, it has been suggested previously that it should be abolished. It is our belief that commission is an important income strand for park home businesses, enabling them to ensure that sites are properly managed and maintained. If their commission were reduced or abolished there would be a need for a compensatory

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increase in pitch fees to cover the shortfall in income. As noble Lords will know, in 2006 under the previous Administration, the department consulted on the appropriate maximum rate. In 2012 the Communities and Local Government Select Committee also held an inquiry into the park home sector and considered the issue of commission. The committee recommended that the right of site owners to receive up to 10% commission from the sale of a home should remain in place. Given the balance of views and the committee’s recommendation, the Government do not see a strong case for changing the current system.

The noble Lord, Lord Best, also referred to Ministers recently saying that 10% was an important income strand. The 2013 Act introduced important provisions on site licensing, which came into force on 1 April this year. These are hugely important changes, giving local authorities for the first time powers to take enforcement action against the rogues who refuse to maintain their sites. The issue about a fit and proper person was raised by both noble Lords, Lord Best and Lord McKenzie. The Act enables the Secretary of State to introduce a fit and proper test through secondary legislation should that prove necessary. However, the position cited by the noble Lord, Lord McKenzie, as set out by my noble friend Lady Hanham, has not changed thus far, and the Government are not currently committed to introducing these measures. It is important to see how important the other measures in the Act will be in delivering changes in behaviour in the sector before we introduce such a system. In some cases, that could be bureaucratic to run and could impose additional costs on all owners, good or bad. Therefore, the Government do not intend to bring forward secondary legislation until they have conducted a full review of the effectiveness of the legislation, three years after the licensing provisions in the Act have been introduced—and only then following a public consultation on the proposals.

The noble Lord, Lord Best, raised the issue of energy, and the important issue of park owners being subject to overcharging for liquid petroleum gas and unfair administration charges in connection with the supply of gas and electricity. I understand that the Upper Tribunal Lands Chamber has ruled that charges for things such as reading electricity meters and sending out bills are not eligible unless the park owners are expressly allowed to be charged under the pitch agreement. In any such case, such charges would need to be reasonable.

The Government are committed to providing a fair deal for park home owners in relation to energy charges. Noble Lords may be aware that the Department of Energy and Climate Change will shortly—I qualify shortly by saying imminently—be publishing a call for evidence around energy issues on park home sites. All I can say is: watch this space. The noble Lord, Lord McKenzie, raised several questions on deferment benefits. We have allowed local authorities time to prepare for the new regime. He also talked about the level of fees charged by local authorities. We have not monitored this, but on average fees are about £12 per pitch per annum. In terms of the specific question on how many authorities have protected sites, I shall take the liberty to write to him and other noble Lords in that regard.

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Turning to the review of the Act, which was raised by the noble Lords, Lord Best and Lord McKenzie, as I have already alluded to, we will carry out a review of the effectiveness of the legislation in 2017. Although it is too early to say what the terms of the review will be in measuring effectiveness, it is likely to look at: whether poor and unacceptable practices, such as sale blocking, which has been highlighted today, have ceased; whether professionalism in the sector has improved; and whether conditions on poorly managed sites have improved. Ministers will then decide whether there is a need to introduce through the reserve powers in the Mobile Homes Act 2013 the “fit and proper” registration requirements.

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