Grand Committee

Wednesday 14th March 2012 Grand Committee

Wednesday, 14 March 2012.

15:45

Arrangement of Business

Wednesday 14th March 2012 Grand Committee

[The Deputy Chairman of Committees (Lord Colwyn)]

My Lords, welcome to the Grand Committee. If there is a Division in the House the Committee will, as is customary, adjourn for 10 minutes.

Auditors: EAC Report

Wednesday 14th March 2012 Grand Committee

Considered in Grand Committee

15:45

Moved By

[Lord MacGregor of Pulham Market]

That the Grand Committee takes note of the Report of the Economic Affairs Committee on Auditors: Market concentration and their role (2nd Report, HL Paper 119).

[Lord MacGregor of Pulham Market]

My Lords, pressures on the parliamentary timetable and the queue of Lords Select Committee reports awaiting debate have meant that it is almost a year since our report was published. There have been some important developments since then, progress on which it will be interesting to discuss today, but many of the issues are still alive and highly topical. As chairman of the committee I am therefore pleased to introduce the report.

When we first decided to look into the oligopoly of the audit profession, some, I think, thought it a somewhat dry and limited if not esoteric topic mainly of interest to the accounting profession. It became rapidly clear to us that this was not so. It was a fascinating inquiry, sometimes taking us in unexpected directions. The serious issues surrounding the current oligopoly I will touch on in a moment. However, as our inquiry progressed, two other important themes emerged on which we have made recommendations: namely the inadequacies of the roles played by auditors and of the dialogue between auditors and regulators leading up to and during the financial and banking crisis—and this became an important issue for us as a result of our probings at the hearing we had with senior partners of the big four auditors themselves—and, secondly, concerns about the effect on audit of the adoption of international financial reporting standards. I shall touch on all three. This widened our inquiry considerably. Our report contains 204 conclusions and recommendations. I hope to cover the main themes but inevitably I shall have to leave a number of issues to others.

Before I do so, I should like to thank most warmly our committee clerk, Bill Sinton, and his staff, Stephen Seawright and Karen Sumner, the committee assistant, for all their invaluable help and hard work. In particular, I thank our special adviser for this report, Professor Andrew Chambers, professor of corporate governance at London South Bank University, whose expertise and advice was invaluable.

First, I turn to the market concentration of auditors. The need for a reliable audit was recognised by this House as early as 1849, when a Select Committee looking into financial scandals in the railway boom was credited with helping to establish the accountancy profession. Certainly by 1872 the Great Western Railway had an audit committee and an external auditor, who was called Mr Deloitte.

Rigorous and trustworthy audit has long been recognised as vital to the proper running of capital markets. Without a clear and reliable system of assurance that accounts show a true and fair picture of a company’s financial state, there is no basis for investment decisions. It has long been a statutory requirement for large firms to be audited every year. The annual audit has become an essential underpinning of financial markets, especially since they have gone global. While offering a statutory service, audit has become a large and prosperous profession. Auditors have built on large firms’ legal obligations to buy their services by selling a range of other financial consultancy services to their semi-captive audit clients.

In recent decades, as financial markets became global, the main audit firms have become very much larger and more dominant as they spread beyond national borders and as they consolidated and concentrated among themselves. By the 1980s we had the big eight international audit firms, mostly international federations of national partnerships. By 2002 mergers and the disappearance of Arthur Andersen had brought the big eight down to the big four: Deloitte, PwC, KPMG and Ernst & Young. No regulatory barriers prevented this concentration in this country or elsewhere. The big four greatly outweighed second-tier audit firms in both size and global reach; and there is always the risk that withdrawal or disappearance of one of the big four could leave us with an even more dominant big three—a point to which I shall return.

So the problem is easy to identify: the big four firms’ oligopoly, especially in the United Kingdom. In the UK, the big four audit 99 of the largest firms listed in the FTSE 100 index. In certain markets, such as banking, there is not even a big four but effectively a big three, since Ernst & Young does not audit banks in the UK. It is questionable whether large banks in the UK have any real choice of auditor, and that may well apply to some other financial institutions as well.

An auditor to a FTSE 100 client remains in place for 48 years on average. Barclays has had the same auditor, PwC or its predecessors, since 1896. The picture is similar in the next ranking FTSE 250 large companies, almost all of which are audited by the big four. A FTSE 250 auditor remains in place for 36 years on average. This does not look like a competitive market.

Witnesses from the big four assured us that the large-firm audit market in the UK is fiercely competitive, but we were not convinced. The market is clearly an oligopoly, with all the attendant concerns about competition, choice, quality and conflict of interest. I must say that I was much struck during our hearings by the fact that almost all of our witnesses without exception agreed that there was a risk that the big four might become a big three, and then there would be a major problem. That included the representatives of the big four. However, finding solutions was not so easy.

The Financial Reporting Council—and I am delighted to see its current chairman, the noble Baroness, Lady Hogg, here today—produced a set of recommendations from its market participants group in 2007. However, in our view—and I think there is general agreement on this—this had little or no effect in lessening the dominance of the big four. The then Minister at the Department of Business, Innovation and Skills, Mr Edward Davey, outlined a number of measures that echoed the approach of the FRC, an approach that we described as having palpably failed. We would expect exactly the same results for the measures which he advocated to our committee as the FRC’s measures have had. As we have said in our report:

“It may be sensible to introduce these measures on their own merits. But they do not add up to a policy of creating greater competition and choice, of altering the current oligopolistic situation, or of addressing the risks of the Big Four coming down to a Big Three”.

We outlined in Appendix 3 of our report 34 individual measures which had been put to our committee in one form or another for dealing with this situation. In our analysis we read carefully through all of them and rejected a considerable number, including the proposal for joint audit committees which the European Commission has now advocated. At a seminar which I addressed in the City attended by senior accountants and regulators, one leading key participant described our report as a,

“road map for future action”.

I turn now to a few of the key recommendations. Although our committee contains members with much experience and expertise, our part-time committee simply did not have the time or the resources, including substantial dedicated staff, to address all the highly complex issues stemming from market concentration. By far our most important recommendation was therefore that the OFT should conduct an investigation into the audit market in the UK, with a view to a possible referral to the Competition Commission to analyse all the issues in depth. Frankly, this has been fudged for some years. We felt that such an investigation was overdue, and I have been delighted to see that the OFT, at our prompting, swiftly took up the matter and the Competition Commission is now carrying out that review.

We recognised the international dimension to the issues, but felt that the UK could give a lead internationally by undertaking such a review. Concurrently we have the European Commission’s inquiry, and our committee was able to have a hearing last month with Jonathan Faull, the Director-General of the Internal Market and Services Department of the European Commission. Like us, the Commission is concerned about competition and choice. It points out that in most member states the big four audit more than 85 per cent of large listed companies. The Commission’s proposals are now before the European Parliament. Some of them are in similar directions to our own recommendations, but the Commission’s remit does not cover pure competition issues, which are the preserve of national authorities such as the Competition Commission.

We had a range of other recommendations, which I have no doubt the Competition Commission will look at more fully, and I touch on them only briefly. We recommended that FTSE 350 companies should carry out a mandatory tender of their audit contract every five years, and that audit committees should be required to include detailed reasons for their choice of auditors in their report to shareholders. We recommended greater involvement of institutional investors in audit matters, although I have to say that I do not overestimate the likely impact of this. We took up the suggestion of the noble Baroness, Lady Hogg, that the abolition of the Audit Commission would provide an opportunity to increase competition and choice in the audit market if it formed the basis of a substantial new competitor to the big four. There have been developments on this, which the noble Baroness will no doubt comment on.

We put particular stress on the need for separate risk committees in banks and major financial institutions, and other large companies where appropriate. We believe that every bank should have a properly constituted and effective risk committee at board level. It should be one of the duties of the external auditors to ensure that this is done. This is relevant to the accountancy marketplace in the sense that such committees will increasingly require specialist skills and external advice. We saw scope for this advice being provided by a firm that is not the company’s auditor, which could open up opportunities for the second-tier accountancy firms.

Next, we were struck during our inquiry by the fragmented and unwieldy regulatory structure that governs accountancy and audit in the United Kingdom, with overlapping organisations and functions. This seemed to us inefficient and unnecessary. It also seems to offer too much scope for regulatory capture, especially since present or former big four partners hold so many positions on the various bodies and committees. Other professions have only one regulator—for example, the General Medical Council. We noted that the Financial Reporting Council has been seeking wider powers that would help promote some rationalisation of the regulatory maze. I look forward to hearing what the noble Baroness, Lady Hogg, has to say about progress on these matters, which our committee strongly supported. If it does not achieve real impetus towards rationalisation, we recommended that the Government should stand ready to impose a remedy. Perhaps the Minister will comment on that.

Finally, because of the concerns about the big four moving to a big three, we recommended that the Government and regulators should promote the introduction of living wills for big four auditors. There are many other recommendations that I have not had time to deal with and which others may wish to mention. As I said earlier, I hope that all of them will be considered by the Competition Commission in its inquiry.

I now turn to the other two areas. First, as our proceedings continued, it became clear that there were shortcomings of auditing during the financial crisis. Banks were audited and certified as going concerns just before they had to be rescued by taxpayers to avoid collapse. We were not particularly impressed by the defences produced by the auditing firms themselves, and there have of course since been highly critical reports on Northern Rock, RBS and HBOS. The value of audit here was at best questionable, even allowing for the issue—which we acknowledged—that panic might have followed if auditors had publicly questioned the accounts of banks. However, confidential dialogue between auditors and bank regulators does not run these risks, and it was on this that we focused. We were shocked to discover that the dialogue on these lines—which was required by statute under the Banking Act 1987, and which I am sure my noble friend Lord Lawson will wish to refer to—was virtually non-existent in the run-up to the crisis. We described the lack of meetings between bank auditors and regulators during that period as a dereliction of duty.

Part of the problem was the separation of powers and duties between the FSA and the Bank of England, which this Government have now rectified. However, we also recommended a statutory change to ensure that confidential dialogue between bank auditors and financial regulators takes place regularly. We welcome the introduction by the FSA and the Bank of England of a code of practice to encourage dialogue. I also note that the Institute of Chartered Accountants in England and Wales has just produced its good practice for bank auditors, audit committees and executive management in this regard. However, in its briefing for this debate, the ICAEW says that it does not see a need to prescribe this dialogue in law. That was not the view of our committee at the time that we did our report, and I for one still do not agree. If we are to avoid the bad habits and mistakes that emerged during the financial crisis, I continue to believe that the statutory requirement for dialogue between auditors and regulators is necessary. I will be interested to hear the Minister’s response.

Finally—and now I get on to the matters that are rather abstruse for many of us—on accounting standards, we heard considerable evidence that the introduction in 2005 of international financial reporting standards, the IFRS, in place of the old British generally accepted accounting principles, GAAP, had led to sharp reductions in the quality and reliability of large-firm audit, especially of banks.

Witnesses told us that under IFRS rules auditors cared more about compliance with rules than with exercising professional scepticism and careful judgment to reach a true and fair view of clients’ accounts as required by company law. In short, so it is said, the auditor’s abiding principle is now box-ticking instead of prudence. The argument runs that superficial conformity with the rules can disguise underlying faults that it was the auditor’s skill and duty to detect under the old system. Banks in the crisis were a case in point. Unlike GAAP, IFRS takes account only of losses already incurred, not of expected losses. In these litigious times it is perhaps understandable if auditors feel safer monitoring compliance with a set of rules and exercising judgment. However, the public interest is not served if, as critics allege, IFRS audits are failing to give a true and fair picture. I note that the new chief executive of the Royal Bank of Scotland has recently referred to the Alice in Wonderland nature of some aspects of the bank’s results.

This is a complex area, and I do not pretend that we will get to the bottom of it all—although there are members of my committee who are better equipped to do so than I am. The Government gave a lengthy but somewhat holding reply in their official response to our report on this, and we have since had correspondence with Norman Lamb, the new Minister for Employment Relations, Consumer and Postal Affairs in BIS, in which he states:

“I consider that the changes in IFRS introduced since the financial crisis and the further changes proposed to be implemented should help to achieve accounting rules for banks which are crisis-neutral, provided they are endorsed by the EU, and provided they are properly applied the next time that valuations come under pressure”.

That is pretty guarded. On the issue raised by Mr Andrew Haldane of the Bank of England that new standards are needed for bank audits, he referred to the preliminary report of the Sharman committee—under one of our colleagues, the noble Lord, Lord Sharman—and said:

“The Sharman panel are considering the responses to this Report at present. We await their conclusions with interest”.

It would be helpful to hear from the Minister when we can expect definitive government decisions on this matter.

To conclude, it has been a fascinating and rewarding inquiry that has led to action. I am most grateful to all my colleagues for their substantial contributions to it.

16:03

[Lord Hollick]

My Lords, I thank the noble Lord, Lord MacGregor, for his excellent chairmanship of our committee and for the very clear review of our report that he has just given. I apologise to the Minister and noble Lords for my early departure from today’s debate to catch a flight to Berlin this evening.

I shall focus my remarks on the committee’s work on how banks were audited before and during the financial crisis and on the impact of IFRS rules on the audit. Banks rely on the confidence of depositors, bond holders and investors to survive. That confidence is founded on the belief that the bank is a going concern. In his report Going Concern and Liquidity Risks, to which the noble Lord, Lord MacGregor, referred, the noble Lord, Lord Sharman, and his colleagues identify two elements to the going-concern test: solvency, which is the ability to meet liabilities in full; and liquidity, which is the ability to liquidate assets at the velocity needed to meet liabilities as they fall due.

If confidence is shaken, the flow of funds to the banks dries up and the fragile business model, which in essence is to borrow short and to lend long, is imperilled and a funding crisis ensues. That is what happened in 2007-08 and, to a considerable degree, the problem persists to this day. Indeed, eurozone banks, in particular, are wary of lending to one another and therefore place their funds with the ECB, which recycles the funds to other banks. That recycling was augmented at the end of 2011 by the ECB’s three-year LTRO—long-term refinancing operation—which is a programme to ease liquidity and introduce quantitative easing into the eurozone. However, that programme does not address solvency. Indeed, it could exacerbate solvency if the banks use the LTRO funds to add to their holdings of risky sovereign debt.

The annual audit, particularly the going-concern test, is crucial to building and maintaining confidence in banks. Without it, banks become uninvestable and unable to fund their day-to-day activities. Our report highlighted several areas of concern. We noted that, in recent years, as the noble Lord, Lord MacGregor, has said, the traditional principles-based approach of auditors has been replaced by a more rules-based approach. “Prudence”, “true and fair view” and “going concern”, all viewed through a sceptical set of spectacles, have given way to a close adherence to rules, which to some observers looks, as the noble Lord, Lord MacGregor, has said, like box-ticking supplanting mature judgment.

For the auditors, this approach makes life a little easier. There is less likelihood of litigation, which of course is a major issue in the United States, whose voice is probably the loudest at the global debate on audit rules, and there is less pressure to use judgment. Yet informed, experienced judgment by a professional sceptic is precisely what is needed. The recognition of losses on loans and other assets held by the banks is just such an issue, where judgment really matters. Instead, IFRS rules are now paramount and IAS 39 requires that provisions against these assets can be made only for incurred, and not expected, losses. This led to a procyclical reporting of bank profits, which Mr Timothy Bush of the Investment Management Association said was in conflict with the Companies Act 2006 requirement to prepare accounts prudently without crediting any unrealised profits. Professor Fearnley saw IAS 39 as far less prudent than its equivalent under UK GAAP because it substituted neutrality for prudence. As a result, the profits of banks were artificially boosted during the period leading up to the banking crisis—including, in some cases, unrealised profits, leading to unjustifiably higher bonuses and dividend payments, a practice colourfully named in the City as “skimming”. That “skimming” led, when the true state of affairs became apparent, to an even larger hole in the balance sheets of our banks, which of course had to be filled with taxpayers’ money.

IFRS rules require assets to be mark to market, which is fine if there is a liquid market, but all too often the assets held by banks—some devilishly complex and frankly beyond the ken of most bank directors—are either not traded or so infrequently traded that a market valuation is meaningless. Quite perversely, such practices could actually lead the banks to write up the value of certain assets, thereby recording unrealised profits which were deemed available for distribution but which turned out to be wholly fictitious when the asset matured or came to be realised.

Before the advent of IAS 39, banks and their auditors were able to apply prudence to loan asset provision and to provide against anticipated but not incurred losses. IAS 39 forbids that. It even has the absurd example in its practice note that a loan to a dead person who died before the accounting date can be provided against, but no such provision can be made if the death occurred after the accounting date. In the world of absurd things, this probably trumps Donald Rumsfeld’s “known unknowns”.

A judgment about the liquidity of the bank is critical to its going-concern status. In retrospect, it is clear that many of our banks were dangerously reliant on short-term money market funds. This risk of illiquidity was not spelt out by the directors or auditors in their report, yet it goes to the heart of the viability of the bank’s business model and its going-concern status, so essential to creditor and depositor confidence. The senior partner of PwC told us:

“It’s not the job of the auditor … to look at the business model of a business”.

This, as we conclude in our report, appears disconcertingly complacent. The noble Lord, Lord Sharman, in his report, says:

“The going concern assessment should focus on the risks the entity takes and faces that are critical to its success or which could cause its business model to fail”.

It is simply not good enough for the auditors to stand aside. It is their job to look at and analyse the business model, and to satisfy themselves that the bank is indeed a going concern. They cannot hide behind the director’s judgment. Indeed, they should recall that when, in 1879, banks were allowed to become limited liability companies, Parliament made it abundantly clear that it intended the auditor to be the last honest man standing, to protect the interests of depositors and investors.

Reliable and transparent bank accounts are essential to rebuilding confidence in our banks. Andy Haldane, the executive director for financial stability at the Bank of England, has called for a different accounting regime, which allows for judgment and prudence to be exercised. His colleague Andrew Bailey, the chief cashier, wrote:

“Current financial statement disclosures … despite being compliant with accounting standards are … not sufficiently granular or transparent … to support users’ understanding”.

The credit rating agencies offer no help. Leaving aside their calamitous record over the past few years, they too have to rely largely on published accounts.

What is the Government’s response to this urgent problem? They agree with the committee’s conclusion that financial institutions should build appropriate capital buffers to provide against downturn. They welcome signs that accounting standards boards are proposing to move to an expected-loss model that provides for a more forward-looking approach to how credit losses are accounted for. Then timidity creeps in. They say:

“Financial reporting however, is designed to convey a true and fair view at a point in time”.

That lets the auditors off the hook on the going-concern test and puts the auditors’ interests ahead of the users’ interests. I would like the Minister to tell us when the Government expect the new forward-looking approach to accounting for credit losses to be introduced. In their response they mention that it would be June 2011. It clearly has not been. As I understand it, there is a three-year backlog among the accounting standards setters, so the earliest that one could expect this would be the middle of this decade, by which time we will probably have another financial crisis.

I ask the Government how they respond to the Sharman report’s call for the going-concern test to be more qualitative and longer-term in outlook rather than, as they say in their response to our report,

“at a point in time”.

Also, what steps do they plan to take to put prudence and judgment back at the heart of accounting, as called for by the Bank of England, which echoes the principles in the Companies Act 2006 setting the requirements for audited accounts to give a true and fair view above all other standards?

16:12

[Lord Shipley]

My Lords, I, too, thank my noble friend Lord MacGregor of Pulham Market for chairing such a detailed and important inquiry, and for leading the committee to a set of very powerful recommendations.

When I draw back the curtains at home in Newcastle, I can see over the rooftops the new HQ building of Northern Rock that was under construction in 2007 when the bank failed and had to be nationalised. It is now owned by the city council, purchased under prudential borrowing powers, and earning a rental stream for the council. Here I should declare my interest as a member of Newcastle City Council still, and also as an account holder at Northern Rock in 2007 and now.

That view of that building each morning serves as a salutary reminder to me of what can go wrong; how trust in large, familiar institutions can be lost overnight; and how vital and essential it is that effective checks and balances are delivered through high-quality audit and risk management processes. We should never forget that a lot of people lost their shares in Northern Rock in 2007, nor that many employees lost their jobs.

Shareholders had a right to expect better than they got. They received annual reports and were entitled to think that the report was an accurate reflection of the health of the bank as a going concern. They still ask what went wrong. Was it a culture of box-ticking and telephone audit interviews rather than a detailed examination by the auditors of the Northern Rock business model? Did the auditors know or suspect? Was everyone too complacent? Had corporate memory of previous banking failures simply faded away?

We know now that, for many months before its collapse, Northern Rock was following a risky business model in its reliance on wholesale markets to sustain its very high lending levels. Yet auditors appear not to have been aware of, nor to have understood, the dangers—or, if they were, to have acted upon them. Today I still find myself astonished that, in 2006, not a single meeting between the FSA and the external auditors of Northern Rock or HBOS took place, and that only one meeting between the auditors of RBS and the FSA took place. In 2007, only one FSA/auditors meeting took place with each bank auditor.

In their response to the committee’s findings, the Government said that they had three clear policy objectives: high-quality audits which are independent of the body being audited; a competitive market in the supply of audits; and an audit market that is resilient and could withstand the withdrawal of one of the major firms. We can agree on that. However, there is a specific problem in the banking sector, because only three of the big four are active in it. In addition, choice of auditor can be limited by the need to avoid using a firm engaged by another bank. There is also a risk that, with only three audit firms active, the essential challenge theoretically provided by the audit system can end up being blunted. Familiarity, complacency and a lack of an alternative can dominate thinking. That is why the recommendations of the committee on the issue of risk are so very important, because we must separate risk from audit.

Risk and audit, however closely related, are actually about different things. Combining the two can lead to risk being seen as secondary to audit, and when an audit report gives no indication that a company is in trouble when it is, it suggests that the risk function has not been properly carried out. So, separation is vital.

There was, I think, a misunderstanding in the Government’s response to the committee’s report, regarding which audit company could give specialist advice to a risk committee. It is obviously important that the main auditor should explain any concerns it has directly to the committee. However, it would be inappropriate for a risk committee to be given continuing specialist advice on its work by the main auditor. I think that that was the committee’s overall intention. There is a related issue here in that there is a clear conflict of interest if an audit company provides other services to the company it audits. It surely must be better for other firms to provide such advice, and it would, of course, give companies not in the big four an opportunity to undertake such work.

I welcome the Government’s response that audit committees should meet formally with principal shareholders regularly, and I agree with the committee’s recommendation that published reports of audit committees should explain significant reporting issues raised during the course of an audit.

Shareholders bear responsibility too. It became all too obvious in our inquiry that shareholders did not question the choice of auditor as much as they should and that they tended, to their own potential detriment, to be insufficiently assertive in a company’s business.

We have at least learnt that, when concerns become apparent, there has to be a clear framework for bank auditors to talk directly and privately with the Bank of England. Too many people took their eye off the ball, forgot the examples of the past and made assumptions about viability that were deeply damaging to the reputations of many people. Supervisors, shareholders, board members, audit committees, risk committees—all need clarity about what is expected of them and a constant restatement of their role so that audit is not just left to somebody else.

Crucially, we have learnt that auditors have the clearest responsibility to advise on a company’s state of health. It is not enough to see annual audits as a snapshot in time. Auditors have a wider set of responsibilities, to shareholders, supervisors, customers and the taxpayer, to ensure that they fulfil the responsibilities placed upon them by others.

In conclusion, the committee’s report has been a major help in identifying how communication and the regulatory framework can be improved, and how we should learn from the lessons of the banking crisis. However, it requires continued vigilance, particularly in the years ahead, as corporate memory starts to fade yet again.

16:19

[Lord Lawson of Blaby]

My Lords, like my fellow members of the committee I should like to start by paying tribute to the outstanding chairmanship of my noble friend Lord MacGregor. I should also like to associate myself with his thanks to our small but hardworking corps of staff and advisers during this inquiry.

One thing came out loud and clear in the evidence we had: the change from GAAP to IFRS was a change from prudence to box-ticking. That is disastrous and it has to be changed—it has to be reversed. However, like my colleagues, I shall devote my remarks overwhelmingly to the issue of the banks. Not only are the banks of overwhelming importance to the health of our economy—we have seen what has happened as a result of the banking meltdown of 2007-08—but a move away from prudence in accounting is far more serious in banking than in other areas of business and industry. I shall make a number of points; it is a complicated subject. I do not expect my noble friend the Minister to reply to my points. I hope, however, that she will take them back to her department, that they will be properly considered there and that she will write to me in answer to the various points that I shall make.

Banks are particularly important, as I said, because prudence is more important in the case of banking than it is anywhere else—it is absolutely essential in the case of banking. However, there is another reason why banks are particularly important. In the normal course of events there is a sanction which auditors can impose in relation to a company’s accounts—they can qualify the accounts if they have concerns. However, no auditor will ever qualify a bank’s accounts when the bank is likely to be in difficulty, when the qualification is required, because it would lead to a run on the bank, which would be absolutely disastrous and clearly not in the public interest. Something needs to be done to rectify this, and I shall come on to that.

At the heart of it all, however, there is a cultural problem and a moral decline, both of which are very difficult to address by legislation. Some noble Lords here today may have read today’s New York Times, which contains a devastating article headed “Why I am leaving Goldman Sachs”, in which a senior Goldman Sachs executive who has decided to leave itemises in detail what he describes as the moral bankruptcy of Goldman Sachs. We should not be complacent and think that that moral decline was only in Goldman Sachs, or indeed only in the United States. Last week the FSA produced a report on HBOS—Halifax Bank of Scotland—which did not receive the attention that it merited. The report states that this bank was “guilty of serious misconduct” and ascribes this to a culture,

“of optimism at the expense of prudence”.

“Culture of optimism” is quite a nice euphemism—we all know what was going on. This included, incidentally, and I will come on to it, grossly inadequate provisioning, which is highly culpable in the case of a bank. What were the auditors—in this case KPMG, but I do not think that KPMG was any worse than any of the others—doing? To all intents and purposes it was doing nothing.

It is more than 50 years since I was the senior writer of the Lex column in the Financial Times, and I have watched with concern the decline in moral standards in the City of London and in finance. It might be part of a decline in the whole community, which we are not here to discuss now. However, the matter is particularly serious in the case of banking.

[The Deputy Chairman of Committees]

My Lords, I am sorry to cut the noble Lord off midflight but there is a Division in the Chamber. I suggest that we adjourn for 10 minutes, until 4.35 pm.

16:25

Sitting suspended for a Division in the House.

16:35

[The Deputy Chairman of Committees]

My Lords, I think everyone has returned. If that is the case—nobody is obviously missing—I invite the noble Lord to continue his remarks.

[Lord Lawson of Blaby]

As I was saying when I was so politely interrupted, we have a problem. Now I turn to what we are going to do about it. Andy Haldane, the executive director for financial stability at the Bank of England, has been mentioned once or twice already, and I have had the benefit not merely of reading what he has to say but of a number of private discussions with him over the months and, indeed, years. That has been a great assistance to me in clearing my own mind, but he is not necessarily responsible for any of the points that I am going to make. He may agree with some but not others.

I have seven practical proposals to make. First, however, I shall give a bit of background. My noble friend Lord MacGregor, our chairman, mentioned the Banking Act 1987, which I introduced with the enormous assistance of the Economic Secretary to the Treasury at the time, my noble friend Lord Stewartby. I could not have done it without him, and I am delighted that he is taking part in this debate. We produced an Act which was partly intended to deal with the problems of the banking sector, both the supervision and the auditing dimensions. Perhaps I may add in parenthesis that I had authorised the Bank of England, as the owner of Johnson Matthey Bankers—when Johnson Matthey Bankers went belly up it had to be rescued by the authorities, and I did that through the Bank of England—to sue the auditors, Arthur Young. The Bank sued Arthur Young and received a very substantial out-of-court settlement. This time, when the situation has been far worse, not a single firm of auditors has been sued. I find that baffling.

My first specific proposal is to recreate the Board of Banking Supervision, which was an important innovation in the Banking Act 1987. It was swept away by Mr Gordon Brown when he very mistakenly tore up the improved system of banking supervision and regulation that I had put in place and replaced it with his dysfunctional system involving the FSA. The present Government are doing something a bit like recreating the Board of Banking Supervision, but in not nearly as effective a way. I would like to see it recreated in the way in which my noble friend Lord Stewartby and I put it into the 1987 Act.

Secondly, before that Act it was illegal for there to be a dialogue between the auditors and the supervisors because the auditors would be breaking their confidentiality towards their client. The Act not only made that legal but stated that there must be that dialogue. It was there for a few years but with the Brown changes in the regulatory system it fell into desuetude. The Bank of England and, I think, the coalition Government are now proposing that there should be a code of practice in order to reinstate the idea of dialogue. As auditors are unable to qualify accounts in particular, it is particularly important that if they discover anything amiss with a bank’s account, they can tip off the supervisory authority, which is now the Bank of England.

Equally, if the Bank of England has some concerns, it can say privately to the auditors, “We would like you to look at this particular bank and see what it is up to in this regard”. The dialogue is crucial, and I do not believe—nor did our committee believe—that a code of practice is enough. Our committee concluded that this should be mandatory: there should be a legal requirement for the dialogue to take place, which is absolutely right. So, that is my second proposal.

The third proposal comes back to the problem of the qualification of accounts. As I indicated, in practice it is impossible—it does not happen, and it did not happen before the banking meltdown of 2008—for an auditing company to qualify a bank’s accounts. Under the present system the accounts are either qualified or they are not. Qualifying them is almost like using a nuclear weapon. It may well be worth considering using a gradation, rather in the way that the rating agencies grade financial instruments, starting with AAA and going down to wherever they eventually go. It would be possible for the auditors to grade the accounts, and there could be a requirement for them to do so. It is quite possible that the auditors would be less corrupt and more reliable than the rating agencies are. That is my third proposal.

The fourth proposal is that in order to recreate the culture of prudence in core banking, there should be a complete separation between retail banking and investment banking. I am delighted that, thanks to the Vickers commission, the Government are going half way towards that by creating the ring-fence. However, I do not believe that a ring-fence will be impermeable or wholly effective. Bankers are very clever, or most of them are, and they will find ways round it. We are also talking about culture, and the prudent culture of retail banking and the adventurous culture of investment banking are two diametrically opposed cultures. With the best will in the world it is difficult to see how we can have two quite different and opposed cultures within the same corporate entity. There should be a complete separation, not just the ring-fence.

My fifth proposal concerns the issue raised particularly by the noble Lord, Lord Hollick, about the problems of mark-to-market accounting and valuations of assets. Mark to market, as he indicated, can be pretty fictitious when the market is so thin. Of course, there is often no market at all, so they mark to model, which is a complete fiction. Is that a reliable form of valuation for establishing the profits of the bank and also its capital? At present, these paper profits add to the bank’s capital. If we are concerned that banks should have adequate capital, the idea that we are satisfied with paper capital—which of course disappears just when you really need it—is both absurd and deeply worrying. The paper profits are also used to pay out bonuses that are anything but paper; they are real. That has to be stopped. Unrealised gains should neither count as capital nor be payable as bonuses. There is an analogy with dividends in the latter point. It is not permitted to pay dividends out of purely paper gains, but it is permitted to pay bonuses out of them.

My sixth proposal concerns the question of provisioning. One of the many defects of IFRS is the way that the old idea of general provisions—which was certainly very important when I was a non-executive director of Barclays Bank, some 20 years ago—is no longer permitted; you can only have specific provisions. A moment of reflection makes quite clear that this is unacceptable, because specific provisions come about only when it seems as if the loan, or whatever it is, has been impaired. You need provisions when times are good. You do not need them when you are already in great difficulty because you have all these impaired loans on your book. You need to be able to make a general provision because you know as a prudent banker that although there are things that you do not know about specifically, you do know, because of the nature of things and the way that the world works, that something like it will happen. We have to get back to the general provisions that IFRS prohibits.

My seventh and last proposal concerns taxation. That may not be a matter for your Lordships’ House, but we can talk about it. It is particularly timely now, with a Budget coming up very shortly. The proposal addresses the problem of the treatment of loan capital compared with equity capital. If we are going to have a strong and stable banking system, it is essential that it has adequate equity capital. That is what makes it secure. However, we have a tax system in which the interest payable on loans is tax deductible but the dividends paid on equity capital are not. So there is always a perverse incentive for the banks to capitalise themselves as much as possible on a tiny little sliver of equity. The tax system tells them that that is what they should be doing. It should not do so, and the tax system in this regard has to be changed.

I commend these seven modest proposals to my noble friend. As I say, I am not expecting her to reply to them this afternoon.

16:47

[Lord Currie of Marylebone]

My Lords, in rising to speak in this debate on the Economic Affairs Committee’s report on concentration in the auditing market, I should start by declaring an interest as one of two non-executive directors at BDO. I will touch on that role and the experience that it has given me in some of my remarks. Because of that interest, although I am a member of the Economic Affairs Committee, I had to recuse myself from this inquiry. The loss was very much mine—my colleagues have clearly enjoyed a most interesting, wide-ranging and very rich inquiry and have produced an excellent report. I congratulate them, particularly our chairman, the noble Lord, Lord MacGregor. The report has been deservedly influential, with the very rapid adoption of its first key recommendation, of an OFT investigation of the auditing market, leading to a Competition Commission inquiry. We await the results of that inquiry later this year.

The appointment of independent non-executives to audit firms became mandatory in 2010 under the FRC governance code for audit firms. Under the code, the non-execs have a rather broad remit to look after the public interest in the activities of audit firms. Some of the points that have been made about the audit of banks bears very strongly on that role. Different firms have chosen different ways to incorporate their non-execs into the decision-making of their partnership governance arrangements. BDO saw advantage in non-execs rather earlier than its rivals. In 2008, it appointed me and my colleague Lesley MacDonagh, the former managing partner of the law firm Lovells. In contrast to the non-execs at other firms, we have been placed at the heart of BDO’s decision-making, sitting as part of the leadership team meetings. Lesley chairs those meetings, while I chair the firm’s risk committee. As such, we are involved in all the key strategic and operational decisions that drive the business forward. One could question whether such a central role in decision-making is not in conflict with the public interest remit given to us under the FRC code. I would strongly argue that that is not the case: public reputation is key to the success or otherwise of audit firms, as the unfortunate demise of Arthur Andersen demonstrated, so I see no conflict between the public interest and the successful development of the business.

In December, the FRC called a meeting of the independent non-execs across all the audit firms to monitor how the new arrangements code was working. It was welcome to hear that the non-execs of the big four saw as possibly the key public interest ensuring that four do not become three. As the report makes clear, the collapse, like Arthur Andersen, of one of the big four would turn an undesirably concentrated audit market into one where major companies faced no effective choice. It is therefore vital that none of the big four gets into difficulties that threaten its reputation and market standing. Were the worst to happen, regulatory intervention to prevent further market consolidation in those circumstances would be essential, however difficult.

My role as a non-exec of one of the leading mid-tier audit firms is rather different. The public interest imperative on us is to turn the four into five by enhancing the capacity and range of BDO, whether through organic growth or by mergers. BDO itself has grown to the size it has largely as a result of organic growth but also as a result of mergers, some large and many small. Small-scale mergers continue as small audit partnerships decide to join a stronger brand, and they are regular features of our leadership team meetings. They will undoubtedly continue as the flat-lining of the audit market induces further rationalisation.

My experience is that the directors of most FTSE 100 companies, and indeed many of those of FTSE 250 companies, underestimate the capacity and quality of what the leading mid-tier firms, such as BDO and Grant Thornton, can and do offer. It is a little-known fact that BDO is a $5 billion dollar business worldwide, operating in more than 120 countries but, as the report states, too few of the top companies look beyond the big four for audit services. The big four often claim to be the guardians of audit quality and to be the only ones who can undertake the audit of sophisticated businesses. Yet the AIU assessments of audit quality do not highlight any bright line between the quality of the big four and that of the larger mid-tier firms. What they show is that all audit firms experience occasional lapses of quality, but that quality is generally high and that there is little difference in standard between the big four and the mid-tier.

The large mid-tier firms would probably acknowledge that they do not have the capacity to audit all of the biggest, very complex and highly internationally diversified businesses—the global banks and the oil majors come to mind. That may be true, but I would make two points about it. First, as the report demonstrates very clearly—others have already alluded to this, particularly the noble Lord, Lord Lawson—the big four did not cover themselves with glory in their audits of the major banks. The FSA report of only last week pointed out that HBOS was able to conceal problem loans from its auditors, KPMG, in the run-up to its financial collapse, and KPMG raised no red flag over HBOS’s excessive risk taking. Secondly, if the major banks are exceedingly complex to audit, it is almost certainly the case that they are exceedingly complex to manage. Too big to fail goes hand in hand with too big to audit. The source of the problem is less the incapacity of auditors, big four or others, effectively to audit these complex businesses, but rather the incapacity of the human mind to grasp the complex interrelationships between these businesses. The answer is not bigger, more concentrated auditors, but rather less complex businesses that the human mind can understand and manage rather than delegating that to mathematical computer-based algorithms.

I would argue that the capacity and quality of the leading mid-tier audit firms, such as BDO and Grant Thornton, are not limiting their ability to acquire FTSE 100 and FTSE 250 companies, but rather it is market perceptions about them that constrain things. These perceptions should shift over time, were it not for the undoubted barriers to effective competition that the OFT investigation has highlighted and the Competition Commission is investigating, but there is no doubt that the quickest way to resolve such barriers is likely to be consolidation in the mid-tier part of the market. As I have already noted, the flat-lining of the audit market is providing a strong impetus to consolidation. I hope very much that the competition and regulatory authorities would not allow one of the big four to take over one of the mid-tier firms, since that would mean still more entrenched concentration. What could and should be allowed are mergers among the mid-tier businesses. That would help to create a still more viable alternative to the big four and should also help to overcome the perception that the mid-tier lacks capacity and capability.

However, we should not underestimate the difficulties that need to be overcome for such mid-tier consolidation to happen and to be effective. First, combining mid-tier firms will not automatically lead to a change in market perceptions. Secondly, most audit companies are partnerships, and there is no effective take-over mechanism for partnerships. Rather like universities, mergers happen only with the consent of both sides and, as for universities, this happy constellation does not often come around. Matters are made still more complex and difficult because we are talking about the merger not just of partnerships, but also, at some levels, of complex international networks of partnerships. Winning agreement for any merger of this kind is far from straightforward, even if the commercial logic is compelling. That is not to say that consolidation of the kind that I have been discussing will not happen, but it is to say that it is not assured. Without it, we are left with the current market position in which choice and competition are insufficient for FTSE 100 and FTSE 250 companies. Over time, continued investment and organic growth by the mid-tier companies could change the market structure, but that is a long-term outcome while market sentiments require something more urgent.

That leads me to the one area of this admirable report with which I take issue: its analysis of the case for changing the ownership rules for audit companies. Currently non-auditors are precluded from owning more than 49 per cent of the voting rights in an audit firm, as was the case for law firms until last autumn when the provisions of the Legal Services Act 2007, allowing alternative ownership structures—the so-called Tesco clause—came into effect. The Economic Affairs Committee did not see any immediate grounds for changing the law in respect of ownership, despite the strong advocacy of the FRC. It took this position in the light of evidence from BDO and Grant Thornton that they do not feel the need for greater access to capital to expand. I think the committee’s position on this is mistaken.

I would interpret the evidence from BDO and Grant Thornton somewhat differently. Within their preferred partnership model, they do not feel constrained by the availability of capital, but the partnership model undoubtedly places constraints on the strategic moves that these businesses can contemplate, as I can attest having sat through many strategic discussions. This is not in any way a criticism of their way of doing business, but it is to recognise that partnerships are only one way of organising audit business, or indeed any business. Given that, I think that there is considerable merit in allowing greater variety in governance: this would allow new entrants to come into the market with a corporate genetic structure different from the partnership model. That can only be good for greater choice and competition in this market. Indeed, not to do so could be seen as a form of professional restrictive practice, and that has fallen out of favour in almost every other area of business life. After all, we do not expect airlines to be owned by pilots or technology companies to be owned by nerds, although in the latter case some of them are, with great success. So I would argue strongly for the change in ownership rules that the committee turned its back on, but which are part of the European reform package proposed by Monsieur Barnier, and I would also note that BDO favours this change.

There is much else in this rich report that I have not commented on, and there is insufficient time for me to do so. They include: the very important weaknesses in IFRS; marking to market and marking to model which contributed to the financial boom and subsequent crisis; the need for risk committees; the much needed simplification of the regulatory landscape, which the noble Lord, Lord MacGregor, referred to; and the necessary enhancement of the powers and authority of the FRC that would come with that; the relationship between auditors and regulators; and much besides, but I have spoken long enough. I conclude by congratulating the noble Lord, Lord MacGregor, and my colleagues on the Economic Affairs Committee on producing such an excellent report. It has already achieved its key objective the form of the Competition Commission inquiry. This debate is merely a staging post. We must await what the competition gurus come up with. Let no one underestimate what is at stake. We cannot allow this critical market for corporate information to lack the choice and competition that we take for granted in all other walks of business life.

17:01

[Lord Stewartby]

My Lords, retrospectively, I declare some interest in this field, having been chairman of the audit committees of banks and building societies and having been involved in or with banks in some form or other during most of my working life. I would like to offer a few comments in light of that.

We have an admirable report here, but I kept asking myself, “Well, what would we do about that?”, and “Would this be an effective answer to the problem that we are looking at?”. It is very difficult to match it up. I am not in any sense criticising the committee for not having found some punchy answers to some of these difficult questions, but there are still a lot of unresolved issues that are going to need continuous attention.

It was helpful of my noble friend Lord Lawson to give us his seven recommendations and I thank him for his kind words about me. It was an interesting task, constructing the Banking Act in the 1980s. I was glad that my noble friend drew attention to the BoBS—Board of Banking Supervision—because we came to the conclusion that the best judges of whether things were all right or not would be those who had practical experience, rather than our relying on the detached co-operation that we would otherwise get. I am sure, as sure as my noble friend, that doing away with the BoBS represented a practical weakening of the system because, thereafter, it lacked this accumulated experience of practitioners in the area, and that had been extremely valuable.

This leads on to a question that I ask myself frequently: “Is there any obvious way around the dominance of the big four, and how on earth can competition operate effectively when you have so few players and the things they are competing in are not measurable by ordinary standards?”. If you are a big international company looking to change your auditors, what will you be looking for? The answer is reputation, high-calibre staff and probably, among the many other considerations, the right geographical coverage. It seems to me that that is what has driven the consolidation of the big auditors. After all, their major clients need a thorough service from experts.

For that reason, I think that it is likely that there is a limit to the number of well qualified big audit firms that there can possibly be. There is just no impetus to create another one. I have seen people suggesting that we should encourage the setting up of new firms, but I do not think that is realistic. I am much more interested in what the noble Lord, Lord Currie, said about whether there is an opportunity for upping the game for the medium players. It is not satisfactory that, when an audit company is looking for business, it cannot sell itself very easily on price or service because they are so difficult to compare, and that is an argument against moving too often. The most astonishing figure in this document is that to which my noble friend drew attention: on average, major companies change their auditors every 48 years. That is generations. It has come about because of a historical process that got huge stimulus from globalisation. Service companies had to adapt to dealing with much larger and more complex businesses than they had been used to. Although I very much welcome the discussion and thinking of ways of dealing with this, we are not all that far away from a situation where there are only three, or possibly fewer, companies that can do something on that scale.

That leads me on to the question of how much the competition among them does for the good of the business. If competition was operating effectively, you would expect it to have a significant impact on how audit firms, among many others, go about their business. Everything we have seen in the past few years makes us ask another question: why did auditors not recognise the risks? Of course, the setting up of risk committees is a useful development. Two of the committees that I was on had to make a change because of extraneous factors and other changes have been out of their desire to rotate activities, but on risks and losses they all seemed set in the same mould. There was not a readily identifiable characteristic of one type of audit work or another. I keep remembering the remark made by the Queen when she visited the Stock Exchange. She asked how come no one saw this coming if it was all so big. You could say that of the business community. If you had six firms instead of three that could do international banks, would you really get much alternative or would they all have made the same mistakes?

The thing that I find most extraordinary is that, across the board, there was a unification of attitude and outlook. I do not know how you could define that, but certainly the end product with the massive extra provisioning and losses that have come through in the past three years shows that something was seriously wrong with the process that was meant to identify risks and what they would do. You do not get the impression that this is how it was looked at. You could almost say that there was a suspension of critical faculties across the whole area. You have the managers and executives in the businesses, the internal audit departments, the audit committees and external auditors, so it is not all the fault of any one of those. Curiously enough, however, they are all involved in relatively the same process.

When I was dealing with investment managements a few years back, the absurd phrase “slicing and dicing” was often used. The idea was that you had a whole lot of loans and you put a little bit of each one in a package and walked around the corner to see the rating agencies. As it happens, they seem to have fallen over very badly on this. The point is that there were several different layers, so if you deconstructed the slicing and dicing you would find small parts of some very unsatisfactory businesses. Yet nobody in these operating roles managed to permeate this wall of almost wilful ignorance about what was going on in those sorts of businesses. It was not just the auditors or the banks, but a collective failing. It is appalling that we have not had any explanation as to how auditors, or anybody else, failed to test out on a sampling basis the decisions before them.

In particular, I welcome the recommendation about the Office of Fair Trading investigation. That is absolutely essential. I strongly support the elevation of prudence to a more prominent role, which was the second of the committee’s main recommendations, particularly because I thought that the introduction of Basel II and the IFRS was bound to lead to trouble as it would exaggerate rather than offset economic swings, and that is exactly what happened. The trouble is—and I must apologise if it seems like I am being overly critical here—the accounting profession is not always best placed to provide the sort of rules that we are all going to have to live by. Undoubtedly, the IFRS and Basel II made life more difficult and meant that a lot of provisioning was not as strong as it should have been.

Finally, I come to the point that my noble friend Lord Lawson spoke of: the dialogue between auditors and supervisors. A small point of definition is important here, because at the bottom of the first page of the abstract it says,

“the fact that, as our evidence revealed, confidential dialogue between auditors and bank regulators had fallen away before the financial crisis”.

That dialogue is immensely important. However, while on that page it talks about dialogue between auditors and regulators, at the end of the next page it says,

“dialogue between auditors and supervisors”.

It may seem to be a small point, but I draw attention to this because it is very important to remember that the functions of regulators are different from the functions of supervisors. They overlap, but the regulator makes the rules and sets the framework in which the whole business has to operate. The supervisors are meant to go institution by institution and satisfy themselves as to the soundness of individual businesses. Because these two words are often used interchangeably, I suspect that sometimes people have been doing what they thought was regulating but in fact should have been supervising, and vice versa. I do not want to overstate it because I do not think that it is the cause of too much mischief, but it is thrown up by the fact that, until the legislation, there was no statutory provision for auditors to talk to supervisors or regulators. The need for that has been revealed enormously by what has actually happened.

Finally, the move to a more judgmental approach rather than too many rules is essential, but you also need people who have the background and experience to cope with these things. It will be very important that audit committees have among their members people who have come across some of the real business questions of recent time and will more than take into account the fact there has been a lot of discussion on these things but there are still very many unanswered questions.

17:16

[Lord Hodgson of Astley Abbotts]

My Lords, I was not a member of my noble friend’s committee, but I add my congratulations to him and his fellow committee members on a really interesting—indeed, fascinating—report that raises many important issues, both within and without the banking system. I have a number of relevant interests declared on the register of your Lordships’ House, but I draw the committee’s specific attention to the fact that I am the senior independent director—the SID, as it is known in the trade—of one of the FTSE 250 companies. I am a member of its audit committee and chair of its remuneration committee.

I will focus my remarks not on the banking issues, which have been ably and decisively covered by my noble friends Lord Stewartby and Lord Lawson. I will focus my remarks on the first two issues that the committee looked at: the dominance of the big four and its effect on competition and choice and whether the traditional audit still meets today’s needs.

The committee hit the nail on the head when it mentioned in paragraphs 18.vi and 18.vii,

“the perception that big is best”,

and,

“the reputational assurance of using Big Four auditors”.

These things are at the heart of the difficulty that we face. I do not wish to press the noble Lord, Lord Currie of Marylebone, but I think it unlikely that my co-directors would be prepared to take on a firm outside the big four, even if it were demonstrably cheaper and probably even if the service was the same. We are reaching the tipping point, but we are not there yet. There is more to be done along the lines that I shall refer to in a minute and which he was hinting at in his remarks. The noble Lord, Lord Shipley, asked how we deal with conflicts of interest. Well, we have a fairly clear way of doing that, in the sense that we make sure that we measure the amount of non-audit work that we are giving to the firm, we measure the amount that we give to the firm in relation to the total in the office—in other words, how big we are in relation to that particular firm’s regional office—and we disclose in the annual report. Where we have areas where conflicts of interest are clearly irreconcilable, such as international law, we use another firm. We go outside for things where we cannot satisfy ourselves that we can have a proper divide-and-rule situation.

I was not at all surprised that the committee reached the conclusion that the Financial Reporting Council’s market participants group had not really achieved very much. The suggestion in paragraph 49 that the way in which to encourage more participation by firms outside the big four is by involving institutional shareholders is, I fear, doomed, as my noble friend Lord MacGregor said in his opening remarks. I am not hopeful because it is pretty difficult to get institutions or shareholders to engage at any level. It is very depressing, with a few honourable exceptions. Apathy and worse is the only description of their interest.

Why is that? In the company I am talking about, three of our top 10 shareholders are tracker funds, so they have no particular interest in what we are doing. In fact, they would rather not see us as it might bias them in a sense. They want us to follow the index exactly or they do not want to see us at all. For others, best governance practice suggests that the SID—senior independent director—should meet the major institutional shareholders once a year. Trying to get a meeting is extremely difficult. Most of the time they say that they are perfectly happy and do not want to meet you. Meetings are cancelled at the last moment. You turn up and find that the man with whom you had a relationship is too busy and you end up with a junior person who may have been in the investment business for only two or three years. There is nothing wrong with that; I am not trying to sound pompous and say that I will not talk to him. The nature of the relationship that you have with your institutional shareholders is transitory in that sense. We are talking here about the operations of a company itself, not the appointment of auditors, which by its nature is of another degree of importance.

A counsel of despair surrounds one, but things can be done. First, I share the committee’s conclusion that examination by the Competition Commission is a worthwhile exercise, so that we get examination in detail of the warp and weft of this difficult issue. As to the advantage of a big bang conclusion with the recommended break-up of one or more of the big four, I am more doubtful about that. I am far from convinced. To use the famous phrase, “You don’t strengthen the weak by weakening the strong”. The halo effect will continue and may well survive and you may have damaged the firm’s international reach in the mean time.

Clearly the Government have the reach and the scale to offset some of this halo effect, so I very much support the committee’s proposal about work previously undertaken by the Audit Commission being a possible way to build a new firm. The Government should go further than the committee suggests. There are a number of areas where the Government could help to create a situation where the smaller firms reach a tipping point. For example, within the Financial Services Authority— I know that it is unfashionable to say anything good about the FSA—a Section 166 report, or expert person’s report, is increasingly being used. There is a tendency to go for the big four firms there, but reports could easily be carried out by other firms. These and other reports carried out by the FSA, and no doubt by other government bodies that I do not know about, could usefully suggest that a wider range of firms should get involved with this. There are things such as encouraging banks and private equity houses to use firms outside the big four for due diligence purposes, and there are the trade bodies—the Investment Management Association and the British Insurance Association—that could also lend their weight to ensure that over time this situation could be improved. There is no silver bullet, but with a concentrated effort from within the profession, in whose interests this sort of development must be, something will be achieved.

In my remaining remarks, I will deal with whether the traditional statutory audit still meets today’s needs. Clearly many people feel that it does not. Many people feel that it lacks focus and priorities and emphasises process at the expense of judgment. At our annual general meeting, one of our more experienced private investors said that reading the annual report was like having a bucket of warm blancmange poured over your head. Perhaps I can illustrate that in a very simple way. The company of which I am the senior independent director is a simple company. We are entirely in the UK; we have no overseas operations. Our final salary pension scheme is closed. The only complication in our business is that we have some hedging and some derivatives for our longer-term borrowings. In 1995, our annual report was 25 pages long; in 2000, it was 41 pages; in 2005, it was 76 pages; in 2010, it was 104 pages; and it will be a bigger number in 2011. I cannot see that this—

17:25

Sitting suspended for a Division in the House.

17:35

[The Deputy Chairman of Committees (Lord Geddes)]

It is now 5.35 pm. The noble Lord, Lord Hodgson of Astley Abbotts, who was so abruptly cut off in mid-flow, may resume his speech.

[Lord Hodgson of Astley Abbotts]

I was winding up, talking about the value of the traditional statutory audit and whether it now needs some serious revision. I said that my company is a simple company, with market capitalisation of £660 million, all in the UK, no foreign exchange, none of those complications, no open final salary pension scheme and, apart from some hedging for our long-term debt, not a great deal of complexity. I pointed out that in 15 years our annual report has gone from 35 pages to 104 pages. I questioned whether that is a useful exercise and how many people read it. In the Companies Act 2006, we thought we were being extremely clever in introducing the e-mail opportunity for companies. In a strange way, that has taken the pressure off auditors to think about the thing because they can e-mail people. Many fewer copies of the report can be printed. Increasingly the default option is to send it by e-mail anyway, so some of the self-restraint has been removed.

I think the auditing profession needs to follow this report with some serious intellectual heavy lifting to provide a greater degree of focus going forward. I turn to another context: the City at the moment. Noble Lords will have received papers from banks recommending shares. On the back page there is half a page of tiny type containing disclaimers. An investment bank put halfway down that, “If you have read this far, call this number and we will send you a bottle of champagne”. In three months, it never had a call. That is how much all this stuff is being read. It has become boiler plate. Similarly, too much of annual reports has become box-ticking and verbiage read by almost nobody. I think the profession could do a really valuable service by introducing a degree of rigour and focus. I hope that above the desk of each of the members of that working party, there will be a banner reading: “Less is More”.

17:38

[Baroness Hogg]

My Lords, I, too, should like warmly to congratulate the noble Lord, Lord MacGregor, and his committee. First, however, I must declare my interests—which are in the register—principally, today, as chairman of the Financial Reporting Council.

The report was, as one would expect from this distinguished committee, rigorous in its analysis, but equally important, and much more unusual, have been the results. As a former member of this committee, I cannot think of another inquiry conducted by it in recent years that has had such a powerful effect. I am sure that the Minister will provide an excellent summary of the actions taken by government and regulators following this report, so I shall concentrate on those taken by the FRC.

As many noble Lords have said in this debate, these issues go to the heart of the effective functioning of capital markets. The FRC’s mission is to,

“promote high-quality corporate governance and reporting to foster investment”.

This reflects our recognition that the willingness of investors to provide risk capital—a vital link in the chain of economic growth—depends on their confidence in how companies are run and how their accounts are prepared and audited. So, after the financial crisis, this report was timely and influential.

I would diffidently say to the noble Lord, Lord MacGregor, that the committee did not have to tell us at the FRC that the efforts we were making within our remit to reduce concentration in the market had made very little difference. We have been shouting that loudly, hoping someone would take notice. We are delighted that the committee did and that the alarm it sounded penetrated more ears and led to the Office of Fair Trading asking the Competition Commission to take another look. This is a very important step which we hope will also lead to thinking, at national and international level, about what the government response would be if there were to be another crisis and a threat that the big four would come down to three.

We are also very pleased that a new point of alarm on domestic concentration that we raised with the committee has been taken up by it and then picked up by the Government. Like the noble Lord, Lord Hodgson, we welcome the action that the Government have taken to ensure that work flowing from the abolition of the Audit Commission is well spread among firms of a certain size and not concentrated among the big four.

The European Commission is right to see concentration as an international issue. However, the reason why we want a competitive audit market is to safeguard audit quality, not to endanger it. We have therefore made clear that we are opposed to certain EC proposals, such as the break-up of the audit firms, which we think would damage quality.

Equally, we want to encourage competition in order to empower choice of auditors, not simply to disrupt it. We believe that clearer guidance on non-audit services will both deal with conflicts of interest and stimulate market development. We will also shortly be publishing proposals that do not enforce a merry-go-round of compulsory auditor rotation but request companies to retender their audits after eight to 10 years. This should be introduced on a “comply or explain” basis and with transition arrangements to prevent market turmoil. We must not disempower the audit committee from choosing the best firm for the job.

Whatever improvements are needed, we must not shoot ourselves in the foot. Despite all its strictures, the committee noted much evidence to support the view that British auditing is among the strongest in Europe and indeed is arguably the world leader. Moreover, our approach to corporate governance, of which audit is a key component, has helped give us the deepest capital market in Europe. We must continue to strive for improvement. The audit inspection unit continues to highlight weaknesses—as the profession will tell you, sometimes through gritted teeth. However, in considering EU reforms, we must avoid a surfeit of prescription designed to raise standards elsewhere. Rules that are too detailed damage the willingness to exercise judgment; and judgment is what we most need in times of crisis, as the committee has rightly said.

Many of the key recommendations of this report chime with the proposals that we at the FRC have set out in our paper on effective company stewardship. I hope that all Members of the Committee have had the opportunity to read this report. I would be happy to send copies to those who would like it. They may have noted particularly the points on auditor scepticism in this report.

We are very mindful of the questions that members of the committee raised about the role of accounting standard-setters, preparers of accounts and auditors in the financial crisis. Put simply, the challenges were: did they do their job; if they did not, what is being done about them; and if they did, what does that say about the value of accounting, reporting and auditing?

The most far-sighted members of the accounting profession do not seek to answer these challenges simply by reminding us of the limitations of accounting and audit or by asserting that these are mysteries others cannot challenge. They are willing to engage in a more ambitious debate on how the value of audit can be enhanced and how accounting standards can be improved. The committee has challenged the monopoly of wisdom of the technical standard-setters. Our reforms at the FRC are designed to help us engage with the wider debate. Many of the weaknesses in IAS 39 that have been referred to have been addressed, in fairness to the technicians, but we are still concerned about the speed of implementation. Brussels seems to take the view that all changes should be saved up to do together. We believe this to be unnecessary delay.

Meanwhile, as the Minister will no doubt confirm, at the FRC we have taken the lead on a key issue by asking the noble Lord, Lord Sharman, to head an inquiry into the role and value of going-concern statements. His draft report has been published and we expect the final report shortly.

For this report raised a deeper challenge for the FRC. The committee criticised our structure, finding it confusing and overcomplicated. Indeed, we have at present some seven operating bodies to fulfil one objective. The result is that too much of our work is done in silos, and there are overlaps and underlaps between them. This is no criticism of the excellent people involved. Some of these barriers are statutory, others derived from the way in which the FRC was cobbled together. However, the committee was right to call for change, and we are glad that the Government have responded.

We need to share knowledge across the organisation in order to operate more effectively, both in our conduct role in the UK and in the international debate on codes and standards. Our international task has become a much more complex exercise, requiring us to mobilise all the expertise in different operating bodies for maximum effect, and for cross-silo challenge within the organisation.

We also need to ensure that the work of the audit inspection unit is useful to chairmen of audit committees and maximise the combined value of the work of the audit inspection unit and the financial reporting review panel. We also need to clarify the dividing lines between ourselves and the professions so that we can truly claim to be an independent regulator. Clarifying that status will also help us to work more effectively with other regulators. The noble Lord, Lord Lawson, rightly highlighted the breakdown in the arrangements that he put in place to ensure the Bank of England's assessment of macroprudential risk was informed by what the major audit firms were seeing. He also used this inquiry to probe at the gaps and overlaps between regulators.

Legislation is not for us, but with these challenges in mind we have with the Bank's help put in place a forum for information flow and discussion of risks and appropriate responses between ourselves at the FRC, the Prudential Regulation Authority, the Financial Conduct Authority and the Financial Policy Committee. The reform proposals that we put forward jointly with government would streamline our work on codes and standards on the one hand, and conduct—review, inspection and disciplinary action—on the other.

I welcome the prompt that the committee's report gave to fresh thinking about this in government and at the FRC. We have had a lively consultation on our proposals and done our best to respond to the points made without compromising our independence or losing the opportunity to match our organisation to today's challenges. I hope that we will receive a statement from the department on this soon, and look forward to hearing what the Minister has to say. I hope that the resulting reforms will lead the committee to conclude that we have responded to its challenge.

17:47

[Lord Northbrook]

My Lords, we are all grateful to the noble Lord, Lord MacGregor, and his committee for a thorough, detailed and important report. Like him, I am very sorry for the delay of nearly a year before we have come to discuss it.

As other speakers have said, the report covers four major issues: the dominance of the big four accountancy firms; whether the traditional audit still meets today’s needs; the effect on audit of the adoption of international reporting requirements; and how banks were audited before and during the banking crisis and what changes there should be. Having carefully read the report, I find that the second and third issues are well covered but, though very reluctant to disagree with such an eminent team on the committee, I find the conclusions on the first and fourth issues slightly unsatisfactory. I will go on to cover each issue in more detail.

There is no doubt about the dominance of the big four accountancy firms in auditing large quoted companies. As the noble Lord, Lord MacGregor, has already said, in 2010 the big four audited 99 out of the FTSE 100 leading firms, and around 240 of the next biggest FTSE 250 firms. They also had about 80 per cent of the FTSE smaller capitalisation firm audits.

I first make one comment based on my experience as an investment manager. I always had a comfort factor in seeing the name of a big four auditor, particularly when looking at a small and growing company's accounts. Several companies with smaller-sized auditors came to grief through, as it subsequently proved, being allowed to adopt overoptimistic accounting policies, which I am sure would not have been tolerated by the big four auditors. I am not sure that that is fully appreciated by the committee’s report.

The report also states that the chairman of the Hundred Group of finance directors of FTSE 100 companies said they were, in general, content with the service provided and the competition they noticed in the market today. I know it may be heresy to say so, but I do not know what is going to be usefully achieved by a Competition Commission investigation, even though the noble Lord, Lord Currie, has made an interesting argument for the merits of BDO and Grant Thornton, and I know it is supported by the Economic Affairs Committee and the noble Baroness, Lady Hogg, of the Financial Reporting Council.

What will it conclude? Are major companies going to be forced to change auditors? I cannot see the advantage of mandatory joint audits either, and nor can the Government in their response to the committee’s report. I also cannot really agree with the idea of compulsory tender for audits every five years. The reply from the Government—and that of the noble Baroness, Lady Hogg—suggesting a more flexible approach is better. I agree with paragraph 53, which refers to the noble Baroness’s view that,

“the expected abolition of the Audit Commission would provide an opportunity to increase competition and choice in the audit market if it formed the basis of a substantial new competitor to the Big Four”.

Paragraph 60 of the report also raises an important question about whether the limited liability partnership status of the medium and smaller-sized audit companies will be sufficient to protect them from unlimited liability. According to the noble Baroness, Lady Hogg, the situation is not entirely clear on this matter.

The third issue is the major impact of international financial reporting standards. Although I am far from being an expert on these matters, I note—as have many other speakers—with interest the sentence in paragraph 113 that states:

“In short, a box-ticking approach is replacing the exercise of professional judgment which allowed the auditor’s view of what was true and fair to override form”.

The report then moves on to the application of IFRS standards to UK banks. The letter by the noble Lord, Lord Flight, in Appendix 7 of the report is very interesting on this subject. He makes three interesting, if rather technical, points: first, that the accounting treatment of the granting of options to be booked through the profit and loss account both obscures the real trading position of the business and fails to advise shareholders of actual or potential dilution. It is significant that Adam Applegarth, then CEO of Northern Rock, told the Daily Telegraph in 2005 that moving to IFRS had introduced more volatility and led to “faintly insane” profits growth.

Secondly, as the noble Lord, Lord Hollick, discussed earlier, the IFRS mark-to-market standards served to overstate capital resources in buoyant times; subsequently they served to understate them in difficult times. Thirdly, he considered that the requirement to discount pension fund liabilities at a rate of interest measured by prime bond yields overstates effective liabilities and has been a major contributor to the demise of final salary pension schemes.

The committee overall concludes that IFRS standards are not fit for purpose. However, in their response, the Government disagree and do not accept that they have led to this loss of prudence. The results of the panel convened by the FRC and chaired by the noble Lord, Lord Sharman, which were published in November, identified lessons on going-concern and liquidity risk for companies and auditors. Again, as the noble Lord, Lord Hollick, reiterated earlier, the key sentence of its preliminary report, as far as I am concerned, is:

“Require the going concern assessment process to focus on solvency risks”—

to the entity’s business—

“as well as liquidity risk”.

The final major issue of the report is how banks were audited before and during the financial crisis and what changes there should be, including to auditors’ relationships with financial regulators. I think overall the committee is unfair in criticising the auditors so strongly in paragraph 142. I support the comments of the heads of KPMG, Deloitte and PwC: the role of auditors, in my view, is to count the score at the end of an accounting period. They are not trying to forecast next year’s profits. It is not the job of the auditor to look at the business model of a business; that is the job of management. Surely the job of monitoring the day-to-day activities of the banks should be for the regulators. Auditors look at the company at a set time, not throughout the year, as regulators should be doing. Otherwise, what can be the limits of the auditor’s responsibilities?

For instance, the FSA, in its report on Northern Rock, tells us that its insurance team was in charge of regulating the company. No wonder it totally failed to understand the dangers of the company’s business model. How could auditors influence the disastrous tie-up between HBOS and Lloyds TSB which was personally engineered by the Prime Minister? How could they have influenced the RBS takeover of ABN AMRO which Barclays was also interested in? It was a management decision and seemed justifiable at the time. Let us remember that neither the regulators nor the rating agencies foresaw the major problems which began in the USA with the abandonment of the Glass-Steagall Act and the US Government’s decision to allow cheap loans to NINJAs—those with no income, job or assets.

Finally, I would just like to requote paragraph 151 of the Economic Affairs Committee report which states that,

“very few in senior management positions in the major banks had more than a ‘cloudy’ grasp themselves of the mathematical models used to value the banks’ complex financial instruments”.

From my knowledge, I fear that that is true. Universities, such as Reading, offer highly detailed courses in financial instruments. This is a relatively recent development, so I am not surprised that senior management is not up to date. Surely they should do courses as well. Auditors should also go on courses to familiarise themselves more with these products. Overall I welcome this most interesting report despite my disagreement with parts of it. It has been an excellent undertaking, but the important dialogue in my view is not between auditors and regulators; it should be between regulators and companies.

17:57

[Lord McFall of Alcluith]

My Lords, I am delighted to contribute to this debate and congratulate the noble Lord, Lord MacGregor, and his colleagues on a very cogent report. When the auditors came before the Treasury Committee after the financial crisis in 2007 we concluded that they had done their job adequately in auditing, but that if these are the limits, what is the point of an audit? That question still haunts the audit profession to this day.

Progress has been made with accounting standards setters by the noble Baroness, Lady Hogg, and her colleagues and with the Sharman committee. However, the factors that led to the demise of RBS, HBOS and Northern Rock, such as the dependency on home sale markets funding in the case of Northern Rock, the high exposure to property in the case of HBOS and the very significant exposure to markets and businesses in the case of RBS, were all clear to accountants and auditors two or three years before the collapse. The problem was that no one paid any attention. The Bank of England and the FSA came before the Treasury Committee and said that they sent out warnings but nobody listened. There was no influence there and people were not talking to one another. That is the biggest issue in this financial crisis. The regulators were not talking to one another and there were black holes in between—that is the issue.

For the future, the question posed by McChesney Martin, the chairman of the Federal Reserve, is relevant: who will take the punch bowl away? We have to support the regulators and others to ensure that that is taken away. RBS was mentioned, where there was a 95 per cent shareholder endorsement. Where were the auditors? Where were the non-executives? How was corporate governance and risk organised? Abysmally—that is how. Auditors need to engage on a statutory basis with the FSA. It told us that it had six engagements with Northern Rock in the previous two years—four by telephone and two meetings with no minutes. If you had been secretary of your local community club or golf club, you would be thrown out at the AGM as a result of that.

That is the state we are in. We have to ensure an early warning system for the banks involved, which should involve a very measured risk profile. The problems were seen late. The issue with accounting is that it looks backwards and largely aims to reflect the transactions that have been committed to and not to affect future events. An audit will be effective only if it is underpinned by a thorough understanding of the business model. Auditors are close to the management, and they, above all, should have that understanding of the business model. That is why engagement is very important.

Simplicity of language is very important. One of the things that I regret not doing when I was in the other place was putting forward a 10-minute rule Bill to say that annual reports should be a maximum of 80 pages in length. When I was on the Treasury Committee, the HSBC report came to 500 pages. I challenged the main auditor to sit by a fire on a winter night with a nice good malt whisky and look at that report. I guaranteed that he would be asleep before he read it. Simplicity of language is hugely important. Given that we now have the Financial Policy Committee, that wider constituency should be used by auditors to report. I suggest an annual report from the FPC to Parliament to take these concerns into consideration.

I suggest the curriculum for auditors and accountants should be looked at. A result of the financial crisis was that the economics profession’s efficient-markets model was thrown out of the window. They have to look at that again. I think a wider constituency is important. I shall give my experience as an educationalist. I undertook a MBA part-time—three nights a week—at Strathclyde University. It was the best degree I undertook. Why? It was because everything was black and white and then went to grey as a result.

I shall give a six-point plan. Unlike the noble Lord, Lord Lawson, I know my place in this House. My six-point plan is: early warning; business model; wider engagement; education; corporate governance and risk; and culture and ethics.

18:02

[Lord Young of Norwood Green]

My Lords, I enter this debate with great trepidation, not being a financial expert by any means. I do not envy the Minister her task in trying to sum up. I am only going to touch on a few points. I did not read all of the report and did not have a single malt, but I certainly had a good look at it and at the government response. I think we should congratulate the committee on doing a good job. I am indebted to the noble Lord, Lord MacGregor, for the history. I was fascinated by Deloitte’s involvement as the first auditor of the Great Western Railway. Knowing Brunel’s propensity for raising cash from investors and very rarely giving them any return, I can see that it is a historic problem.

Some key points have arisen during this debate, which focused on the banking crisis. Time and time again, although not everybody seems to agree, the question of whether there should be a dialogue between auditors and regulators was raised. The noble Lord, Lord Stewartby, drew to our attention the subtle distinction between regulators and supervisors. I am sure the Minister will deal with that. It seems to me that that is part of solving this difficult problem.

Then we got to the nature of the audit and the IFRS and GAAP approaches. We had a debate between box ticking and prudence, and it seemed that most noble Lords erred on the side of prudence. I think it was the noble Lord, Lord MacGregor, who talked about professional scepticism and the feeling that it is important that auditors exercise their judgment.

I was also interested in what the noble Lord, Lord Lawson, said when he asserted that there has been a decline in moral standards in the City of London. In fact, he talked about moral bankruptcy. What we saw in 2007 and 2008 was quite clearly the product of a catastrophic failure of governance and the failure of regulators to understand the nature of the systemic risk in the financial system. It may be that we should be taking the opportunity to reassert the existence of the fiduciary duty on those who are responsible for managing the assets of savers and investors to act in their interests, exercise good judgment and be accountable for that judgment.

There has been a lot of discussion about the dominance of the big four, but no one has come up with a solution to that particular problem yet. I was exercised again by the noble Lord, Lord Stewartby, reminding us first of all of this 48-year relationship in what I would describe, in a variation on the word oligopoly, as a “quadropoly” and secondly that there seemed to be a “unification of outlook”—I hope I have not paraphrased him—and a “suspension of critical faculties”. None of the people involved seemed to have recognised the risk. He talked about the Queen’s comment that no one saw this train crash coming. Then he referred to the slicing and dicing of products, these financial derivatives that were so complicated yet nevertheless managed to achieve an AAA rating when we knew they were rotten at their core.

Clearly there is a need, as I think both the noble Lord, Lord Northbrook, and my noble friend Lord McFall of Alcluith said, for auditors and indeed management to be trained to recognise risk. That is something else I hope the Minister will address. On the question of risk and risk committees, that seemed to be one of the important recommendations, although the report seemed to refer just to banking and finance companies. I was thinking about that and reflecting that there were other companies that took substantial risks, which resulted in the Government footing some of the bill. The one that came to mind was Southern Cross, which became so leveraged that it could not sustain itself, and I recalled the impact the foundering of those care homes had on society as a whole. When it comes to big companies and risk committees, it seems to me that it is not just the banking and finance sectors that should be required to submit to them.

I am also indebted to, I think, the noble Lord, Lord Shipley, for reminding us of the human consequences of the Northern Rock crisis, which he saw every time he looked out of his window in Newcastle; and not just for shareholders, but for the employees who suffered as a result. It seems to me that a risk committee and auditors being involved in that is fundamental.

I am not sure how we are to resolve the dominance of the big four. I hope that the noble Lord, Lord Northbrook, is wrong that the Competition Commission will not be able to shed any light on that. We had the noble Baroness, Lady Hogg, suggesting—and she was not the only one—that now the Audit Commission is going this should present an opportunity for other auditing companies to emerge. Somebody else suggested that the FSA reports would be a good vehicle to assist in this process. I do not feel competent to comment on that but no doubt the Minister will, although she was given a get-out clause there when the noble Lord, Lord Lawson, said that she could deal with his seven recommendations by letter. I felt the Minister should be eternally grateful for that because they got more and more complex towards the end.

I think it was the noble Lord, Lord Lawson, who made the point that no auditors have been sued as a result of the banking crisis. Amazingly, nobody seemed to take any responsibility. There must be something wrong if everybody apparently was exercising their responsibilities and yet we had this financial crisis. As the noble Lord said, nobody at this point in time is willing to accept responsibility. We know that there is plenty of work to be done. When I look through the government response, I do not think that they have got it right in all cases. I gave the example of the question of risk. It is important that all companies should have that. The relationship between the auditors and the risk committee will be important. I look forward to the Minister’s response and once again thank the committee for its work.

18:10

[The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Baroness Wilcox)]

My Lords, I thank my noble friend Lord MacGregor of Pulham Market for calling this debate. We have heard some well informed and constructive contributions from the House. It has been a particular master class for me, and certainly for my civil servants behind us because they have had evidence today of what a Lords Select Committee can do with a subject all by itself. At the moment, every time we can show how well a Lords committee does, we should do so.

Of course, I will not be responding to the noble Lord, Lord Hollick, who asked my permission to be able to speak and to leave. He therefore knows that I will be writing to him rather than answering his questions while I am on my feet. As we have already heard, my noble friend Lord Lawson decided to let me off the hook today and gave us those seven biblical recommendations that he left us to reflect upon. We will, of course, write to him. As for the rest of the questions from your Lordships, I hope that I will be able to answer a goodly few of them along the way. Of course, I will write to anybody to whom I have not been able to immediately respond.

I start by paying tribute to the Economic Affairs Committee’s chairman, and to the report and recommendations, some of which have already resulted in action. One of the recommendations in the report was that the audit market should be investigated by the competition authorities. As my noble friends Lord MacGregor and Lord Stewartby, and the noble Lord, Lord Currie, noted, within two months the Office of Fair Trading had announced its provisional decision to refer the market for the audit of large companies to the Competition Commission, which plans to publish its provisional findings by the end of November. I emphasise what an important development the Government consider this investigation by the competition authorities to be.

The Select Committee report made several other recommendations. I recognise that the committee expressed disappointment with some of the elements of the Government’s response to its report. It might help if I start by covering two issues where I know that the committee continues to have concerns. The first is the issue of international financial reporting standards—IFRS. Under EU law, listed companies in the European Union are obliged to prepare their consolidated accounts in accordance with IFRS. My ministerial colleague, Norman Lamb, replied to a letter from my noble friend Lord MacGregor on this issue last week; I think that he is coming out with a Statement fairly soon. In line with the conclusions of the G20 last November, we continue to support the aim of a single international system of standards. These will develop with time and aim to address issues, on an international basis, as they arise. The Financial Reporting Council—FRC—is engaged in that process, as are the Government when revised standards come to be adopted in the European Union.

The other area where the committee expressed concern was the need for discussions between auditors of financial institutions and the prudential regulator. The Government continue to support the code of practice that now requires discussions twice a year, with one discussion including the relevant bank. The code of practice appears to be working. For this reason, and in accordance with better regulation, we will not be introducing a statutory requirement. The Government, the Bank of England, the FSA and the FRC all support this. However, we will be watching the issue closely.

My noble friend Lord MacGregor asked what the FSA code of practice requires. The code of practice now requires discussion about each of the banks between the relevant auditor and the prudential regulator twice a year, with one of those meetings including the bank itself. These discussions are happening and the code, as I say, appears to be working. My noble friend Lord Stewartby asked why auditors did not recognise the risks. The banking crisis had a range of causes. More or better assurance alone would not have stopped it, but we have certainly learnt lessons.

The systemic problems that caused the banking crisis have been well rehearsed and include a failure of credit judgment, a failure on the part of central banks to recognise asset bubbles, weaknesses in regulation and deficiencies on the part of credit rating agencies. Audit has never had a financial stability role, and is only one element of the regulatory framework that ensures that we have working capital markets. The issue of systemic risk falls to the regulator, as well as to the boards of companies, rather than to the auditors. In terms of the audit of banks, the Government are committed to the objective of improving bank corporate governance, and will continue to work closely with the European Union and internationally to increase transparency and accountability in a proportionate manner.

I now turn to some other recommendations of the committee, where the Government and the FRC have taken action. On the long tenures of some auditors of large companies, BIS and the FRC consulted separately last year as to how discussions between auditors and audit committees about the appointment of auditors might be improved. Amendments to the FRC’s corporate governance code and audit committee guidance will follow this year. This will include a new requirement for auditor retendering by FTSE 350 companies, on a “comply or explain” basis, every 10 years. My department will publish a summary of responses to the consultation on narrative reporting shortly and we will set out the Government’s position as regards wider assurances of corporate reporting beyond the audit of accounts.

My noble friend Lord MacGregor asked whether the Government are proposing to encourage company boards to form risk committees. Well, the Government are reviewing the structure of the corporate reporting framework. We propose splitting the current single corporate report into two documents: a strategic report and the annual directors’ statement. The strategic report, as its name implies, is strategic. It will allow companies to tell their story, describing their business model, the strategy to deliver this and the risks to this strategy through the directors’ remuneration. It is not the Government’s intention to create legislation to mandate that companies have specific risk commitments.

My noble friend Lord Hodgson asked why we need to change the current narrative framework. The results from the August 2010 BIS consultations, “The future of narrative reporting” and “A long-term focus for corporate Britain”, demonstrated a consensus among respondents that change to the current narrative reporting framework was required. They struggled to glean the key messages from the mass of data presented. We propose to divide the current annual report into two documents. The first is called strategic, as I have already mentioned, and the second—the annual directors’ statement—will contain information that is used by some, but not everyone. Our proposals will, I hope, help companies and investors concentrate on strategic issues for the business, and encourage more integrated reporting, giving a clear line of sight from the company’s results through to its business model, strategies and risks.

On the abolition of the Audit Commission, the Audit Commission announced the award of contracts to outsource its audit work to private-sector providers last week. This was very good news in terms of concentration in the audit market. Grant Thornton, from outside the big four, has been awarded the largest share of new work of any of the recipients. These contracts were awarded on the basis of cost and quality criteria, and demonstrate the confidence we can have in auditors outside the big four.

The noble Lord, Lord Currie, spoke of the need to promote the use of middle-tier audit firms by large companies. At present, under the EU directive, statutory auditors have to be majority-owned by qualified auditors. We are continuing to support an exploration of the likely demand for and consequences of alternative structures, and this might help smaller firms grow. It might also help recapitalise an audit firm in the event of its failure. We recognise that other member states have differing views on this and are continuing to discuss this issue with the presidency and the Commission.

My noble friend Lord Hodgson asked whether the Government are enabling non-big four firms to win public sector work. The answer is yes. The Government are committed to improving value for money from public procurement. We are centralising within Whitehall the procurement of common goods and services, including for audit and assurance. Central government purchases from small and medium-sized companies doubled to £6 billion in the past year as the coalition has pursued its pledge to realign its spending away from multinationals. The shift will see almost 14 per cent of Whitehall’s £44 billion budget secured by SMEs this year, up from 6.5 per cent in 2010.

The noble Lord, Lord Northbrook, asked whether proportionate liability or a statutory cap on auditor liability could serve to encourage more audit firms to bid for large company audits. The Government have no plans to do that. The Companies Act 2006 already allows for contractual limitation of liability, and some auditors’ liability agreements have been signed. The committee supported the exemption of more SMEs from audit. My department’s consultation closed in December, and we will be setting out our response to the findings in the spring. In Europe, we are making the case for raising the exemption thresholds. The committee expressed concern about fragmentation between regulators of audit, accounting and corporate reporting. In October, BIS and the FRC consulted on changes to streamline the internal structure of the FRC and improve its regulatory efficiency and effectiveness. My colleague Norman Lamb intends to make a Statement on this in the other place shortly. On non-audit services, my department has now amended regulations on disclosure of auditor remuneration to bring them into line with the revised ethical standards.

The noble Lord, Lord Shipley, talked of the conflict of interest if one company provides audit and other services and my noble friend Lord Hodgson said that he did not see a problem with it—I thought I would put both those pieces in. In answer to the noble Lord, Lord Shipley, as the committee heard during its inquiry, the standards were revised following the financial crisis. The disclosure framework is now in line with the categorisation of non-audit services in the standards. It also reflects the concerns the committee raised about internal audit services and tax advisory services, in particular, where the regulations ensure separate disclosure will be made. Shareholders can then question the audit committee on the discussions it had with the auditor on those services and the safeguards to the auditor’s independence.

On accounting standards for SMEs, the FRC is continuing to consult on how UK GAAP should be developed, including how it should apply to medium-sized companies. I recognise that I have not covered all of the committee’s recommendations. There were a number of others which the committee suggested should be taken forward as part of the Competition Commission’s investigation and there are others that the commission has voluntarily included within the scope of its investigation.

My noble friend Lord MacGregor spoke about living wills. The FRC has begun work with the six largest audit firms to develop a framework. It will be a sort of “how to” guide by a firm for regulators who might have to dismantle or separate various parts in an orderly fashion.

I would like to answer one of the questions from the noble Lord, Lord Young, because questions from the speaker for the Opposition always come at the very end and rarely get answers. The noble Lord asked about conversations between auditors, banks and regulators. That has been well received in the UK and by banking regulators overseas, which are looking at—or already are—implementing similar approaches in their jurisdiction. I will write answers to the rest of the questions that he asked.

The committee made some proposals that are now reflected in the European Commission’s proposals and which we welcome. These include removing the audit firm ownership rules from the directive, making big four-only clauses ineffective and making audit reports more informative.

As far as the Government are concerned, this has been a very useful debate and I am sure everyone else in this Room has enjoyed every single moment of the two and a half or three hours that we have been doing this. It has been a useful debate on an important subject and I thank noble Lords very much.

[Lord Young of Norwood Green]

Before the noble Baroness sits down, there was just one area I wanted her to elaborate on. Paragraph 184 is very emphatic. It says:

“We believe that every bank should have a properly constituted and effective Risk Committee of the Board”.

I do not want to go on to quote the rest of the paragraph but that is very firm. Despite the banking crisis and the concern expressed—almost unanimously, or at least by almost every contributor—the Government’s response was that it is “desirable” for banks and other institutions but not absolutely mandatory. It then goes on to say:

“There is a strong presumption that banks and insurers that are included in the FTSE 100 are examples of types of firm that should have separate risk committees”.

In the light of what has happened and the strength of that recommendation, I would like to understand exactly why the Government felt they should not go further than they have done in their response.

[Baroness Wilcox]

The answer to that is that we are still considering it.

18:28

[Lord MacGregor of Pulham Market]

My Lords, I thank my noble friend Lady Wilcox for that very helpful and comprehensive reply. We have had a high-quality debate, rich in contributions, and I am particularly grateful to the noble Baroness, Lady Hogg, for her kind words about our committee’s report. I cannot begin to sum up the debate properly as it would take much longer than this reply is conventionally allowed. However, I will quickly make five points.

First, it is unfortunate that such a high-quality debate has taken place in the Moses Room because of the pressure of legislation in the main Chamber. However, I hope that this report will be widely read and followed up. Secondly, we are probably going to face a House of Lords reform Bill, but if anyone had followed this debate they would have seen the high quality of debates that take place in this House and would not always necessarily occur in the other place. I say that fully aware that at least half of the colleagues who have taken part in this debate have, for a long time, been in the other place. I am not criticising the other place, but the contribution from those who would probably not have stood for election to Parliament has been very valuable in this debate and it shows the quality of the House of Lords on topics such as this.

Thirdly, I say to my noble friend Lord Stewartby, who was sceptical about whether we had found answers on the first part of our report, where the main thrust is about the oligopoly of our auditors, that we never expected to have a magic wand and find a magic solution. As I said at the beginning, finding solutions is not so easy. I hope that a number of issues that we have put forward and that have been pursued further will help to deal with a number of aspects of this. However, of course, the problem we face of finding a way of extending the major auditing firms beyond the big four is a very difficult one.

Fourthly, as I said at the beginning, some thought that this study would be rather dry and esoteric. I think that is largely because of the title we gave it, which probably put a lot of people off. However, it has been clear from this debate that the issues we have raised go to the heart of many aspects of our financial, economic and business life; not to mention, as my noble friend Lord Lawson pointed out, behavioural and cultural attitudes. It is a much more widely based debate than one just dealing with audit matters.

That leads me to my final point. The noble Lord, Lord Currie, very kindly said that this debate was merely a staging post, and I entirely agree with him. Clearly, this issue will be debated further and I hope that at some stage our committee will be able to come back to it again. This will not be immediate, because we have just agreed that our next topic will be the economic implications for the United Kingdom of Scottish independence, so that will obviously take up much of the next year. However, I hope that we can come back to address these issues in one way or another because there is clearly still so much to be followed through.

I thank all those who have contributed and particularly all my colleagues on the committee for all that they have done and all the hard work that they have put into it. I think it has been well worth it.

Motion agreed.

Committee adjourned at 6.30 pm.

House of Lords

Wednesday 14th March 2012 Lords Chamber

Wednesday, 14 March 2012.

15:00

Prayers—read by the Lord Bishop of Newcastle.

Leave of Absence

Wednesday 14th March 2012 Lords Chamber

15:06

[The Lord Speaker (Baroness D'Souza)]

My Lords, the Association of European Senates is meeting this week in Paris. Accordingly I seek leave of absence from your Lordships’ House on Friday 16 March.

Finance: Credit Rating Agencies

Wednesday 14th March 2012 Lords Chamber

Question

15:07

Asked by

[Lord Giddens]

To ask Her Majesty’s Government what is their assessment of the influence exercised by the credit rating agencies in the world ewDebaeconomy.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, investors value the role of credit rating agencies to provide market participants with a neutral opinion of credit quality. However, to reduce the procyclical effects of ratings changes, it is important that market participants do not rely mechanistically on credit rating agency opinions and that those ratings are not hardwired into legislation. Therefore, the Government strongly support G20 efforts to reduce the overreliance on credit rating agency ratings, and fostering competition through reducing barriers to entry.

[Lord Giddens]

I thank the Minister for that Answer. In the excellent report that was produced in this House, a whole range of proposals were made for the reform of the credit rating agencies, which I see as urgent and important for the world economy. One of those proposals was that the cartel of the big three agencies should be opened up to greater competition. How in practice does the Minister think this will be achieved? Has any progress been made to that end? Does he by any chance support the idea of compulsory rotation with some of the smaller agencies, a proposal that has been endorsed by a Treasury Select Committee inquiry that is going on at the moment?

[Lord Sassoon]

The noble Lord, Lord Giddens, has gone absolutely to the heart of the matter. Certainly your Lordships’ Committee, the Government and most commentators would like to see competition introduced, but that is extremely difficult, as the noble Lord knows. It is a highly concentrated industry and entry is difficult because it takes time to build up a track record. A number of steps need to be taken. As I have already said, the hardwiring of credit ratings needs to be taken out wherever possible from investor mandates and from legislation and regulation in many countries.

We need to improve the transparency and comparability of the ratings of the agencies and generally lower the regulatory barriers to entry. I believe that Europe has taken some steps, but it needs to take more. For example, under the new registration processes, 16 credit rating agencies are already registered in Europe and another 15 more have applied to be registered, so there are a lot more out there already than the three that get all the focus. As to rotation, it is actually part of one of the two rounds of European directives that have come in since the financial crisis that analysts need to be rotated within firms, which is probably the proportionate response.

[Lord Forsyth of Drumlean]

My Lords, will my noble friend indicate what view he thinks the credit agencies will take of the Government’s proposal to issue 100-year bonds. If these bonds are bought by the Bank of England as part of a quantitative easing process, what will be done to avoid the problem of the value of the bonds falling as interest rates rise and being eliminated by inflation over that period of time?

[Lord Sassoon]

My Lords, my noble friend conflates a number of interesting questions. The key point is that the UK is in a very strong position to look at ultra-long or perpetual bonds. We have historically very low rates of interest and significant investor demand, particularly from the domestic funds, for very long-dated gilts. In response to that situation, we think that it is right to consult the market, as my right honourable friend the Chancellor of the Exchequer has indicated we will do, and to see what it has to say, but we will not make any issue unless it represents good value for the taxpayer.

[Lord McFall of Alcluith]

My Lords, given that the credit rating agencies have demonstrated a consistent lack of accuracy, have failed in their governance, are flawed in that the person paying for the rating has to ask for it, and competition is non-existent, will the Minister encourage investors in the City to establish their own credit rating agencies on a not-for-profit basis? At a stroke, they would remove conflicts of interest, introduce healthy competition and establish accurate credit rating figures. Let us remember that all the credit rating agencies gave Northern Rock a AAA rating immediately before its demise.

[Lord Sassoon]

My Lords, while we should not underestimate the difficulties with the credit rating agencies historically, equally we do not want to make the situation sound more dramatic than it is. On sovereign ratings, the IMF’s analysis in the autumn of 2010 indicated that the rating agencies had performed relatively well and that, in all cases of sovereign default since 1975, they had had those sovereigns on speculative grade ratings at least one year ahead. I have already given some answers as to how we should introduce competition. If one of the vehicles that comes in is of the sort which the noble Lord, Lord McFall, mentioned, that would be up to the market and it should not be prevented from using it.

[Lord Harrison]

My Lords, I know that the Minister has read closely our report on the sovereign credit rating agencies, which was published last November and is available to Members of the House, but does he share my concern that the three major credit rating agencies are American? Does he also share our concern, as expressed in the report, that to generate an agency from within the European Union would not be well received by the markets and that it is therefore essential to ensure that there is open, free and fair competition to establish markets for new players to come in and compete with the existing three?

[Lord Sassoon]

I am certainly very happy to commend again the report, Sovereign Credit Ratings: Shooting the Messenger?, to which the noble Lord, Lord Harrison, referred. It is an excellent report, which said among other things:

“The criticism that credit rating agencies precipitated the euro area crisis is largely unjustified”—

so it offered a very proportionate and measured response to the criticism. I do not think that we should mind the nationality of the rating agencies; it is the competition that we want. In that connection, the Government believe that it would be wrong to create a public European credit rating agency because that would just serve, among other things, to crowd out the competition.

[Baroness Kramer]

My Lords, until the mid-1970s, investors paid the credit rating agencies, not the issuers. The change was driven very much by the awareness of credit rating agencies that they could gouge more money from issuers. Does the Minister agree that there is no evidence that the so-called private conversations that now take place between the credit rating agencies and the issuers because of their relationship have in any way improved the quality of credit rating? Does he further agree that returning to an investor-paid system would take out the key conflict of interest?

[Lord Sassoon]

My Lords, I agree that the conflict of interest question is important. I draw my noble friend’s attention to the fact that in the two rounds of legislation to date since the crisis, one of the things that has been done is to ban credit rating agencies from providing a paid advisory service. So some attention has already been given to this issue by Europe.

Education: Skills

Wednesday 14th March 2012 Lords Chamber

Question

15:15

Asked by

[Lord Addington]

To ask Her Majesty’s Government whether the key skills and functional skills requirements in the Apprenticeships, Skills, Children and Learning Act 2009 are compatible with the Equality Act 2010 in relation to accessibility for dyslexic and other disabled conditions.

[The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Baroness Wilcox)]

My Lords, the apprenticeships provisions within the Apprenticeships, Skills, Children and Learning Act are compatible with the Equality Act. Employers say that basic English and mathematics are essential for apprentices. The specification of apprenticeship standards for England sets out minimum requirements for apprenticeships. Key skills are being withdrawn as they are not fit for purpose and, from October, apprentices can choose between the GCSEs or functional skills for English and mathematics.

[Lord Addington]

I thank the Minister for that Answer and draw attention to my declared interests. Does my noble friend agree—I have shown this to her—that I have some legal opinion which might contradict that? Does she acknowledge that, at the moment, there are people who are failing to pass the English qualification because of dyslexia who could be helped through to degree level if they chose that path? There is also evidence which shows that people are having problems because those who administer these tests do not know what they could do. Under these circumstances, does not our Government have a duty to make sure that something which has been brought forward as a great saviour of our skill force—the apprenticeship—is made fit for purpose?

[Baroness Wilcox]

The noble Lord is an expert on this subject and I think carefully about the answers that I give him. Yes, he had already given me sight of the Question he was going to ask. There is no evidence to suggest that the Apprenticeships, Skills, Children and Learning Act is not compliant with the Equality Act. The Equality and Human Rights Commission is a critical friend in order for us to be assured of continued compliance, and it stays alongside us. On tackling the colleges and providers, where a college or provider is not using appropriate access arrangements they may lose their right to deliver these qualifications as an approved centre. We will be watching that situation very carefully. Both English and mathematics, of course, are ongoing problems for people with dyslexia but, where barriers to access remain, as a last resort individuals can be exempted from up to two or three of the assessed components within the functions skills—I have checked this and found it to be right—speaking, listening, communication, reading and writing. In the last event, two or three of those components can be removed to make it as accessible as possible.

Perhaps I might add that the employers are very keen that everyone should have basic English and mathematics, and we know how difficult this is for many people with dyslexia. However, it is important, if we can, to keep people with disabilities and dyslexia inside the system and to help them to be as much a part of our community as everyone else. So, wherever it is possible to keep people inside the community, we will. I am sorry that my answer was long but the issue is important.

[Lord Martin of Springburn]

My Lords, does the Minister agree that many of our excellent tradesmen and tradeswomen would readily acknowledge that when they were young they were not too good at passing exams? We must be very careful when encouraging young people to come into apprenticeships that we do not make exams a barrier.

[Baroness Wilcox]

That is absolutely right, and that is why it is important for us to have functional skills, which are much more accessible to people with disabilities. I would be happy to talk to the noble Lord further on that matter.

[Lord Storey]

My Lords, the Minister will be aware that those students who go to university who have special needs are supported, perhaps through a scribe or assistive software, but that is not the case with apprenticeships. How would the Minister advise on this case? An apprentice electrician had an outstanding report on his practical skills from his employer. However, as he failed his key skills component, his employer was unable to retain him and he is now, sadly, unemployed. What advice would the Minister give to that young person as to the support that we could give him and other apprentices?

[Baroness Wilcox]

I am very sorry to hear this. We have just commissioned Peter Little to carry out research and recommend improvements to the accessibility of these apprenticeships. In April we will publish his report and a plan setting out exactly what we will do to improve and to help the situation.

[Lord Foulkes of Cumnock]

My Lords, since this Question refers to disabilities other than dyslexia, is the Minister aware of the report published today by the Scottish Association for Mental Health about discrimination against people with mental illness in employment? Will she get a copy of it and consider its recommendations and applicability to England and Wales?

[Baroness Wilcox]

Thank you very much indeed. Yes, I will get a copy.

Police: Vehicles

Wednesday 14th March 2012 Lords Chamber

Question

15:20

Asked by

[Lord Hoyle]

To ask Her Majesty’s Government what recent discussions they have had with police authorities about the cars they purchase.

[The Minister of State, Home Office (Lord Henley)]

My Lords, Ministers frequently meet police authorities. In 2011 the Government made regulations that require police vehicles to be provided through a specified national framework agreement. Decisions about what to buy from that framework are for chief constables and their police authorities.

[Lord Hoyle]

My Lords, I thank the Minister for that reply, but does he agree with me that as all the police authorities in the north-west and many throughout the country are changing from buying Vauxhall vehicles to buying Hyundai, that is a kick in the teeth for Vauxhall workers who are trying to keep the efficient car plant in Ellesmere Port open? Could he give an indication that any Korean police authorities are thinking of buying British-built vehicles?

[Lord Henley]

My Lords, I do not speak for the Korean Government and cannot speak for the police authorities in Korea, so I do not know what police cars they are buying. I am aware of the noble Lord’s concern about matters in relation to his own police area, and I understand that it is buying Hyundai. But I can give an assurance that, if he looks at the figures, he will find that Vauxhall is still the largest supplier of lower and intermediate-performance police cars, which are manufactured in his own area of Ellesmere Port. The important point is that police authorities and chief constables should be able to buy the cars that they believe are suitable for their needs, and deal within the framework in doing so.

[Lord Low of Dalston]

I do not much mind what kind of cars the police use, but could the Minister use his influence with the police to persuade them to moderate their use of sirens, which are such a widespread source of noise pollution in our cities? The siren is for use in a real emergency, and not just when the officer is in a hurry to get home for his tea.

[Lord Henley]

My Lords, I am aware of this complaint from a number of noble Lords who have put it to me on a number of occasions. I understand that there might be one or two occasions when police cars are using sirens in an inappropriate way. Again, that should be a matter for the police authorities, but I hope that they will bear in mind what the noble Lord has to say.

[Lord Jones of Birmingham]

I draw noble Lords’ attention to my declared interests. Would the Minister agree with me that it is becoming increasingly difficult for the businesses of this nation to believe that Her Majesty's Government want business to employ more people and pay more tax when they buy their ships from South Korea, their police vehicles from Korea, their trains from Germany and their cars from Japan? Further, would he agree that the EU procurement rules talk about best value and not best price, and that the Government increasingly show that they know the price of everything and the value of nothing?

[Lord Henley]

My Lords, I would not want to go down the line that the noble Lord is suggesting, which smacks, dare I say it, of protectionism. I want the police authorities and chief constables to buy the cars that they feel are best for their needs. That is why I am particularly grateful, as I said in answer to the noble Lord, Lord Hoyle, that Vauxhall is the largest supplier of one category of cars, which are being built in Ellesmere Port, very close to where he comes from.

[Baroness Trumpington]

May I ask what the police do with their cars when they have finished with them? Do they send them to auction? A few years ago my husband bought the ex-chief constable of Cambridgeshire’s car and we drove happily at all kinds of reckless speeds because everybody thought it was the chief constable’s car.

[Lord Henley]

I am very grateful that I was not driven in that car by my noble friend or her late husband. Police cars do not last that long because they have a fairly heavy life. The police sell them at the end of their lives and try to get the best possible value for them.

[Lord West of Spithead]

My Lords, when I was a Minister in the Home Office I was shocked at how little co-ordination there was across police forces in terms of procurement, and I tried to change that. Can the Minister reassure us that, notwithstanding some differentials between police forces, they are quite minimal and there would be a huge gain to the public purse if we could co-ordinate procurement?

[Lord Henley]

My Lords, the noble Lord refers to his time in government. I was trying to make clear in my original Answer that there have been considerable changes since then. That is why we have brought in the framework, which brings in co-ordination of a great deal of procurement across all police forces that we believe will save something of the order of £350 million a year. This is money that we need to save.

[Baroness Doocey]

My Lords, do the Government agree that there is no justification for the Metropolitan Police keeping 32 luxury cars not for security purposes but to chauffeur senior officers to and from their homes?

[Lord Henley]

My Lords, obviously I cannot comment on decisions made by the Metropolitan Police Authority —that is a matter for the mayor’s office. If it is spending money inadvisably, I hope that it would look carefully at the circumstances in which it could possibly save money in the future.

[Baroness Worthington]

Would the Minister comment on the appropriateness of the list of activities in the leaked tender document by the West Midlands and Surrey police forces? Alongside the management of the vehicle fleet, these included a whole host of activities that ran to almost everything apart from the powers of arrest.

[Lord Henley]

My Lords, I am not sure that that is directly relevant to the Question. We are talking about the purchase of vehicles. I want to make it clear that that is a matter for the chief constables and we want them to buy the appropriate cars for the job that has to be done.

[Lord Grenfell]

My Lords, prompted by the very pertinent question put by the noble Baroness, Lady Trumpington, can I ask the Minister if, when these police cars are no longer considered roadworthy, they are put out to grass and placed at the disposal of the Prime Minister and his friends?

[Lord Henley]

My Lords, as I made clear in my earlier answer, they are sold for the best possible price.

[Baroness O'Cathain]

My Lords, can I ask my noble friend to make sure that the opinions in response to this Question do not make noble Lords go away with a feeling that the British motor industry is in a bad state? It is in the best state it has been in for about 15 years and we should talk up our industry rather than the reverse.

[Lord Henley]

I am very grateful to my noble friend for her comments. I remind her about the announcement made about Nissan and the extra jobs that will be available there as a result of decisions that Nissan has made about further inward investment in this country.

[Lord Brooke of Alverthorpe]

On the day when it has been announced that 2.7 million people in this country are unemployed, and the likelihood is that that figure will continue to rise for some time, is it not important that we take such factors into account when we address issues such as public procurement? Can one conceivably believe that the French, German or Belgian Governments would do some of the things that we do in this country?

[Lord Henley]

Yet again, the noble Lord is heading down the road of protectionism, which I do not believe is the right answer. The answer that I gave to my noble friend Lady O’Cathain about the success of Nissan addresses that point exactly. Why have we attracted so much inward investment? It is because we have the right conditions to do so. The Nissan announcement is one that even the noble Lord should welcome.

[Viscount Simon]

Is the noble Lord aware that ACPO is reviewing the use of police vehicles with a view to standardisation, which will result in reducing the cost of those vehicles?

[Lord Henley]

My Lords, again, I answered that point earlier when I dealt with the co-ordination that we have brought to this matter through the national framework. That is why we are looking to make savings of the order of £350 million a year, compared to what used to happen under the previous Government on proper co-ordination of all police procurement.

Armed Forces: Vehicles

Wednesday 14th March 2012 Lords Chamber

Question

15:30

Asked by

[Lord Empey]

To ask Her Majesty’s Government whether fighting vehicles supplied to British troops in Afghanistan provide adequate protection against Taliban attacks using improvised explosive devices.

[The Parliamentary Under-Secretary of State, Ministry of Defence (Lord Astor of Hever)]

My Lords, the current range of fighting vehicles supplied to British troops in Afghanistan has been optimised for that particular environment and offers the most suitable form of survivability in that theatre of operations. However, no vehicle can currently withstand a blast of infinite magnitude and there will always be gaps in a vehicle’s protection. The strengths and weaknesses of the different types of platform that make up the vehicle fleet give operational commanders the option to mix and match capabilities and to tailor them for a specific operation.

[Lord Empey]

My Lords, we were all shocked by the tragic deaths last week of six of our service personnel in Afghanistan. Can the Minister assure the House that the flat-bottomed Warrior fighting vehicle is the most suitable equipment to protect our Armed Forces from improvised explosive devices? Can he further assure the House that financial constraints on the provision of equipment or modified equipment are not delaying the deployment to Afghanistan of the best possible protection for the brave men and women of our Armed Forces?

[Lord Astor of Hever]

My Lords, my thoughts are also with the families and friends of those six soldiers. Every death and injury reminds us of the human cost paid by our Armed Forces to keep our country safe. The Warrior is optimised to protect our Armed Forces from IEDs and is suitable for the task that it is required to do. It has a good track record in both Iraq and Afghanistan. The protected vehicle fleet in Afghanistan comprises a mix of armoured capabilities, some of which have flat-bottomed hulls with tracks and others have V-shaped hulls with wheels. This provides commanders with a range of operational capabilities to match the threat. Despite financial constraints, there is a successful programme that allows the Treasury to fund urgent operational requirements to procure equipment within a shortened timescale. Since 2001, more than £5.5 billion has been spent on UORs for Afghanistan.

[Lord Morris of Aberavon]

My Lords, it is many years since I had ministerial responsibility, under the noble Lord, Lord Healey, for the equipment of all our Armed Forces. My advisers then sought to prioritise needs for research and development. I believe that the Taliban is skilful in simplifying the components of IEDs, which may be part of the problem. Has any priority been given to technological means of counteracting IEDs? If so, when was priority given to research and development in this field?

[Lord Astor of Hever]

My Lords, this is a very important question. Survivability is measured by a number of factors, not just the width of the armour. A vehicle’s ability to manoeuvre around a battlefield, its firepower and its situational awareness capabilities all contribute to its survivability along with other factors such as tactics and procedures. A platform’s relative strength in one of the areas of survivability will result in a corresponding trade-off against another. For example, a highly mobile platform will have to be lightweight and therefore cannot have heavy armour, such as the Jackal and the Coyote, whereas a well armoured platform will lack mobility, such as the Mastiff. The same is true of lethality as the greater the firepower the more the weight will increase, which means less armour and less mobility. As tactics change, so does the optimal platform of choice.

[Lord Burnett]

My Lords, as my noble friend knows, when assessing an armoured vehicle, a balance has to be struck between physical protection, mobility and firepower. All contribute to survivability and operational effectiveness. Is my noble friend satisfied that the upgraded Warrior meets these standards more effectively than other similar vehicles? Does it require a further upgrade? What is the opinion of those in our Armed Forces who have to use these vehicles?

[Lord Astor of Hever]

My Lords, the Warrior is very popular with our troops. I was out in Afghanistan two weeks ago and I spent quite a lot of time talking to members of the Armed Forces who work with this bit of equipment. They are very impressed by it. It is seen by insurgents as a tank and they will normally melt away on its arrival. It provides excellent mobility and survivability and is able to operate over the most difficult terrain. I need to be careful what I say for security reasons but I can say that the recent incident was a combination of several really unlucky combinations. No vehicle in theatre, including one with a V-shaped hull, would have survived a similar explosion. Warrior has been extensively upgraded, particularly to deliver enhanced protection against IEDs. I have copies of the upgrade work on the Warrior, which has been security cleared. I am very happy to distribute them to any noble Lords who would like to see them.

[Lord Davies of Stamford]

My Lords, anybody who knows anything about this subject will know that the noble Lord is absolutely right. There is a level of weight of explosive which will destroy any vehicle, including a main battle tank. That is just one unfortunate fact of life. In my time I think that I ordered eight new armoured vehicles, seven of which were procured specifically for Afghanistan under the UOR initiative. I hope that all of them were successful in their way. Does the noble Lord agree with me that the outstanding success among them has been Mastiff 2 and that there must be a very strong case, even though Mastiff 2 was ordered under the UOR programme, for keeping that permanently in inventory, where almost certainly its qualities will be necessary in any other deployment we make in a third world context?

[Lord Astor of Hever]

My Lords, this Government take the protection of our Armed Forces against IEDs very seriously. I know that the previous Government did so as well and I pay tribute to them for what they did in this area, particularly as regards equipment such as the Mastiff. I take seriously what the noble Lord says about Mastiff in the future. We are looking at that very closely.

Business of the House

Wednesday 14th March 2012 Lords Chamber

Timing of Debates

15:38

Moved by

[Lord Strathclyde]

That the debate on the Motion in the name of Lord Howell of Guildford set down for Friday 16 March shall be limited to three and a half hours and that the debate on the Motion in the name of Lord Sassoon set down for Thursday 22 March shall be limited to five hours.

[Lord Barnett]

I take the opportunity of asking the noble Lord the Leader of the House why we have not yet had an opportunity to debate the serious matter of access by Members of the House to the Peers’ car park. When I last raised it, the noble Lord’s deputy told me that it would be a matter of course. But in practice we have been prevented by putting down Written Answers. If an early opportunity is not given, I will have to put down a Motion myself to allow the House to decide.

[The Chancellor of the Duchy of Lancaster (Lord Strathclyde)]

Of course, the noble Lord is free to do whatever he wishes to do within the rules as laid down in the Companion to the Standing Orders. However, I am prepared to have a discussion with the Chairman of Committees.

Motion agreed.

Misuse of Drugs Act 1971 (Amendment) Order 2012

Wednesday 14th March 2012 Lords Chamber

Statistics and Registration Service Act 2007 (Disclosure of Social Security and Revenue Information) Regulations 2012

Immigration and Nationality (Fees) Regulations 2012

Schedule 5 to the Anti-terrorism, Crime and Security Act 2001 (Modification) Order 2012

Motions to Refer to Grand Committee

15:39

Moved by

[Baroness Anelay of St Johns]

That the draft orders and regulations be referred to a Grand Committee.

Motions agreed.

Legal Aid, Sentencing and Punishment of Offenders Bill

Wednesday 14th March 2012 Lords Chamber

Report (4th Day)

Relevant documents: 21st Report from the Constitution Committee, 22nd Report from the Joint Committee on Human Rights.

15:40

Clause 26 : Choice of provider of services etc

Amendment 119

Moved by

[Baroness Grey-Thompson]

119: Clause 26, page 21, line 11, leave out subsection (2) and insert—
“( ) Notwithstanding subsection (1), the Lord Chancellor’s duty under section 1(1) must include a duty to secure that a person eligible to legal aid advice is able to access it in a range of forms at the outset, including securing the provision of initial face-to-face advice.”

[Baroness Grey-Thompson]

My Lords, the amendment is also in the names of the noble Lords, Lord Bach, Lord Newton of Braintree and Lord Pannick. It seeks to remove the provisions for both a mandatory telephone gateway and the delivery of legally aided services exclusively by telephone. Instead, the amendment would insert a duty to promote the plurality of provision and the delivery channels in order to have regard to the needs of clients when procuring services.

The Government have said that they will introduce the mandatory gateway initially in four areas of law. However, the Bill gives the Government wide powers to make legal aid services available exclusively by telephone or other electronic means in the future. I move the amendment for several reasons. A telephone-only service may work for a large number of people. However, it may adversely impact the most vulnerable clients, who may struggle to explain complex problems over the phone. I should like to ask the Minister to share with us how the coalition Government will identify the groups of people for whom this service is not suitable, and the criteria that will be used, given that the Government acknowledged the difficulty in their impact assessment, which stated:

“Disabled people may … find it harder to manage their case paperwork through phone services. They may also find it harder to communicate via the phone or manage any emotional distress more remotely”.

Indeed, it may be hard for many people even to access a telephone suitable for dialling in. Many people in current times do not have a land line but only a mobile. Accessing a telephone gateway via a mobile could be expensive. Due to waiting times, credit may even run out before a conclusion has been reached. Also, fewer public phones are available, and they are perhaps not the best way to try to resolve issues. I am also concerned that people with language or speech difficulties may be deterred from seeking advice. Without early intervention, it is likely that their problems will become more complex and costly to resolve at a later date, and their problems will be pushed to another area.

We must also think carefully about training operators. It is my understanding that they will receive some training, but there will be no formal legal training. As a result, operators may not be able effectively to interpret the nuances of complex cases put to them, let alone cases put to them by clients who may be confused or have some difficulty in communicating.

The Government’s savings from their proposals will be negligible, and they may in fact cost more. The June 2011 impact assessment predicted savings of between just £1 million and £2 million—a relatively small amount. In fact, a study by the Legal Services Research Centre found that telephone advice can take longer to resolve problems than face-to-face advice. Face-to-face advice is important in many cases for fostering trust and building relationships in order to get to the right resolution.

We could also lose the current streamlining. Much good work has been done by local advice agencies, which collaborate to streamline advice, whereby clients need to go through the advice journey only once. The mandatory telephone gateway will fracture this again, because clients would need to phone in first and then be referred to special advice elsewhere.

During the Bill’s Second Reading and Committee stage in your Lordships’ House, Peers from all sides expressed the view that a telephone-only legal aid service would not be appropriate for all users. While I accept that it may suit many, those with language difficulties, learning difficulties or mental health problems may be disadvantaged. Vulnerable clients, perhaps those experiencing bereavement, loss of a job or debt, or those with low self-esteem or poor literacy or numeracy, are much more likely to be disadvantaged.

The Government risk excluding vulnerable people from accessing meaningful and effective legal advice. I beg to move.

[Lord Phillips of Sudbury]

My Lords, I started in a Suffolk solicitor’s office in the late 1950s. As was common then and now, a lot of preliminary advice, particularly to people who could not pay anything, was given by junior members of staff. Ever since, I have been imprinted by early recollections of how difficult it is for some people to give instructions at all. Later, I became non-executive director of a company that ran the first telephone helpline in the country, and observed first-hand, as one might say, how that worked. Of course, a great many people in the present age feel perfectly comfortable with telephones. Provided that there is no cost factor, to which the noble Baroness, Lady Grey-Thompson, referred, that may prove an adequate way to give instructions. However, we know that there are many, even now, who are not comfortable with telephonic communication and for whom, if the matter they are seeking advice on is painful to them or arouses great emotion, it is not a satisfactory way to try to impart instructions.

If one thinks of poor people—perhaps I should not have said poor people, because they can be highly articulate, but inarticulate people and those who cannot begin to analyse their problem and do not know quite what it is—the telephone is unlikely to be an effective means to impart information without which the adviser cannot hope to help them to best effect. We are all wholly aware of the Government’s need and wish to save expenditure on legal aid, but I put it to my noble friend that this is the falsest of false economies. Anyone who has given such advice will readily say that the cost in the adviser’s time is released when the client is in front of them, when they can help the client, who is often confused or emotional, to give them the precious information without which they cannot hope to do a satisfactory job. On cost grounds, the savings assumed for the telephone helpline as an exclusive channel of advice are misconceived. More importantly, I think we all agree, so it does not need emphasising any further, that justice cannot be done if there is no alternative to deliver advice by face-to-face means.

I end by saying that where the person needing help is poor, confused and deprived, the notion that one should add to that catalogue of disadvantage the inability to access the only advice that will work for them—face-to-face advice—would be a terrible indictment of our claim to be a democracy where we are equal before the law.

[Lord Wigley]

My Lords, I shall speak briefly in support of Amendment 119, moved so persuasively by the noble Baroness, Lady Grey-Thompson. The amendment removes the provision contained in Clause 26 for the Lord Chancellor to make legal advice services available by telephone gateway or other electronic means. It would instead place a duty on the Lord Chancellor to ensure that individuals eligible for legal aid advice are able to access that advice in the forms most suited to their needs, including initial face-to-face contact.

Clause 26 is perhaps one of the most controversial elements of the Bill and has attracted widespread criticism from disability groups and campaigners. The clause contains provisions to establish a compulsory telephone gateway and to make this gateway the only method by which advice in certain categories of law is available. These proposals will in effect disfranchise individuals with learning difficulties or disabilities that impair their ability to communicate efficiently from being able to access advice. As Scope has pointed out, many legal aid clients experience complex and multifaceted problems that would be difficult to explain over a telephone, while those with limited English or with language or speech problems may be deterred from seeking advice at all. Common sense suggests that cases that are not dealt with at an early stage will be more costly to resolve at a later stage.

The proposals represent a retrograde step that would put up shocking barriers to equal access to justice. The Government acknowledged this in their own impact assessment, recognising that:

“Disabled people … may find it harder to manage their case paperwork through phone services. They may also find it harder to communicate or manage any emotional distress via the phone”.

What is more, as pointed out once again by Scope, these proposals could end up costing the Government more money, as opposed to making savings. The impact assessment published in June 2011 predicted modest savings of about £1 million to £2 million, while a study compiled by the Legal Services Research Centre found that advice provided over the telephone can unnecessarily prolong cases, as was mentioned a moment ago, and thereby make them more difficult to resolve.

In summary, Clause 26 adds further stress to already distressing situations and risks excluding vulnerable individuals from accessing legal advice altogether. The proposals go against the principle of equality of arms before the law and, frankly, display a cavalier attitude towards the needs of those with disabilities or impairments. Individuals with disabilities should be treated with the utmost respect and dignity in all areas of society. It is our duty to ensure that they are not disfranchised by a scheme that aims to provide justice on the cheap.

[The Lord Bishop of Chichester]

My Lords, I, too, support the amendment. Quite a number of people find it quite hard to find their own voice and need the support of a friend. As a priest I know how many of the clergy spend a lot of time accompanying people and enabling them to speak for themselves: not providing a voice for the voiceless but enabling the voiceless to find a voice. It seems that a lot of people are simply not able to put their own case individually over the telephone and need to have friends and supporters with them. It seems essential that this alternative means, the face-to-face interview, is available for those people so that they can have friends and advocates with them.

[Lord Roberts of Llandudno]

My Lords, I join in supporting the amendment. In recent debates we have spoken about Jobcentre Plus and how, when young people are looking for work, face-to-face interviews are far more effective than sitting before a computer or dealing over the telephone. This also holds true for those who need advice. I understand that all those under the age of 18 will be able to have face-to-face interviews. This should be extended because people are asking for advice at the most vulnerable time in their lives, with turbulent economic situations, job losses and so on. They need advice, and as the right reverend Prelate stated, and as I know as a minister of the Methodist church, the telephone has its uses, a helpline has its uses, but you sometimes need to sit face to face with a person—to have a personal relationship within which they find far greater comfort and guidance than they would otherwise. I am happy to give my support to the amendment.

[Lord Newton of Braintree]

My Lords, perhaps I may intervene briefly once again in these debates, in complete support of the points that have been made, not least by the noble Baroness, Lady Grey-Thompson and my noble friend Lord Phillips of Sudbury but to a degree by everyone who has spoken.

As it happens, I have other recent brief experience of this in my capacity as a trustee, along with the noble Lord, Lord Rooker, of the National Benevolent Fund for the Aged, which is concerned with isolated elderly people. We have recently been lobbying Ministers about the apparent assumption that everyone can deal with things on the telephone or through the internet. That is essentially—dare I say it?—a middle-class presumption that does not necessarily apply to the areas that we are talking about now. To their credit, the Ministers whom we have lobbied are, I think I am right in saying, having a round-table discussion tomorrow on how the problem might be dealt with, and I recommend that the Ministry of Justice joins in.

Anyone who has been an MP will have been confronted in their surgery by people who just need to talk to someone, with a sense of the body language, to sort out one to one what may be important in their case, what is not relevant to an appeal and so on. I notice the noble Lord nodding. You can spend an hour listening to people who want to tell you their life story and it is only face to face that you can disentangle the points on which they might have a case. This is important to a lot of people who cannot really fend for themselves. I confess that even I, with a pretty high-quality, advanced education, still prefer, if possible, to go and see someone rather than talk to them on the phone because the body language and the feel of the conversation are important. Therefore, I do not think that we should underestimate these things.

In a curious way, the Government have acknowledged that in the briefing that I have here. It says that, although it is a telephone gateway, there has to be a careful assessment of whether the advice can be provided face to face or over the telephone. Indeed, they have already decided not to include in the single telephone gateway debt, in so far as it remains in scope, discrimination and special educational needs, as well as, I think, community care. What is it that makes these things so different from other forms of advice? There will be many community care cases, and there are also welfare benefit needs, as well as a need for advice on a lot of other aspects of people’s lives. Why is this to be exempted but not the other things? In a way, therefore, I think that the case has been conceded. The costs cannot be large and the need is great, and I think that we are entitled to ask the Government to reconsider this proposal.

[Lord Pannick]

My Lords, I added my name to the amendment and I did so for a very simple reason: this amendment is truly about access to justice. The concern surrounding the Bill is that legal aid should not be provided only by means that are simply inaccessible to a number of people, as explained comprehensively and persuasively by the noble Baroness, Lady Grey-Thompson.

[The Earl of Listowel]

My Lords, coming late to this debate, I regret that I may have missed some of its complexities, but I ask the Minister for reassurance on one point. I very warmly welcome the publication this week of the Government’s social justice strategy and the proposal for an early intervention foundation. The Secretary of State, Iain Duncan Smith, has recognised for a very long time how important it is to intervene early with families if their children are to have good and successful lives. Therefore, my concern over this issue is whether it is going to provide a further barrier to parents who need vital services. Will they find it difficult to attain those services and get access to the law, and will their children suffer as a result? I understand that children under the age of 18 will have access to a person if they need to speak to someone, but I am worried about disabled parents, parents who are very challenged and perhaps poor parents who, as a result of this change, may not get the support that they need and their children may suffer as a consequence.

16:00

[Lord Quirk]

My Lords, I very much support the amendment. As the noble Lord, Lord Newton, reminded us, communication is by no means dependent solely on ears and eyes. It is multisensory and—as the noble Lord, Lord Phillips, hinted earlier—the greater one’s need, the more senses one needs for satisfactory communication. I hope very much that the Government will accept the amendment.

[Lord Campbell of Alloway]

My Lords, I will take very little time. I am very concerned about the situation, for all the reasons that were given—and that were put better than I could have put them. I ask only that consideration be given, and an assurance of further consideration, so that this proposal will not simply be cast away in some form of dismissal. That is all I ask for: an assurance that consideration will be given.

[Lord Bach]

My Lords, I am proud to be associated with the amendment in the names of the noble Baroness, Lady Grey-Thompson, and the noble Lords, Lord Newton and Lord Pannick. The amendment is of the greatest importance, and many people outside the House are following it with exceptional interest.

It is perhaps important to remind the House that the mandatory gateway will apply only to those elements of social welfare law that are still in scope—including, of course, for the moment, welfare benefits because of a decision that the House took last week on an amendment moved by the noble Baroness, Lady Doocey. That is a statement of the obvious, because those areas of social welfare law that the Government intend to take out of scope will be quite irrelevant for these purposes. There is no possibility of legal aid in those cases. In effect, the Government are saying that people with those legal problems will have to fend for themselves if they have no money. That is a pretty shocking state of affairs.

We have had a short but powerful debate in this House today—and we had a very powerful one almost three months ago at the end of the first day of Committee, on 20 December 2011. Very powerful speeches were made. I have in mind that of the noble Lord, Lord Shipley, whose final words were:

“There are real dangers that some of those most in need of help will fail to secure it through a mandatory telephone gateway”.—[Official Report, 20/12/11; col. 1764.]

The noble Lord, Lord Phillips of Sudbury, made yet another powerful speech today. The one he made on that occasion was powerful, too. He said:

“If it is mandatory for those seeking assistance to go through a telephone gateway, we will cast adrift a significant minority of our fellow citizens who will never use a telephone gateway for the sorts of problems with which they are confronted”.—[Official Report, 20/12/11; col. 1766.]

The Minister says from a sedentary position that there is no evidence of that. What an unbelievable response. One only has to know from human nature—from living in the real world rather than the world of Whitehall—that that is how people are. It is about time that the Government started taking people as they are rather than as they want them to be. There were powerful speeches also from the Liberal Democrat Benches on that occasion.

I made the point that it was nearly three months ago because we have had no hint of a concession in all that time. We know from a letter that a telephone call will not be free, as was suggested at the time. There will be a cost to the client who has to make the call. It will not be huge, but it will be there—and that is another factor that will apply. It is simply common sense that to have a mandatory gateway for all clients seeking legal advice is absolutely inflexible and will almost certainly lead to a number of people who clearly should be helped receiving no help at all. It will lead to injustice after injustice.

The Bolton CAB is a large CAB which covers all these fields and has a legal aid contract. It runs an advice surgery from time to time. Yesterday it tried an experiment. Every client who came in had their tale told in general terms by way of a tweet, in other words on Twitter, so that one could read each one of these cases during the course of the morning and afternoon while this surgery lasted. One could see from reading these how the world of a busy CAB or law centre or advice centre actually worked in practice. There were 126 clients who sought legal advice on social welfare issues and they covered practically everything that you could think of. I have no doubt that some of those clients were well able to make a telephone call and start proceedings in that particular way, and I am an undisguised fan of telephone advice when it is appropriate. But are the Government really saying, as I suspect they are, that all 126 of those clients would have been able to do this? Are they saying it is not highly advantageous to have face-to-face contact in some cases? And are they really saying that someone who turned up to a CAB should be turned away and told to call a hotline, as will happen unless this amendment is passed? Can you think of a more bureaucratic, fussy and less efficient system and one that is less reflective of the way people actually live their daily lives? I would argue that it is an absurd proposition which is un-British in the sense that it is one-size-fits-all and too dirigiste and inflexible an approach.

Sometimes Governments just get things completely wrong and Parliament has some sort of duty to say so. It actually helps Governments in the long run if they do not charge off in the wrong direction. Here is a short story. I remember when I was a Minister sitting where the Minister is, in the same department, putting forward some foolish, to put it mildly, proposition and then seeing, when the vote was called, many of my own supporters walking past in order to vote in the Opposition’s Lobby and losing the vote for the Government by a large amount. It was the right thing for them to do. Actually, there was so many of them that none of them could be picked out and dealt with later. There is an advantage in numbers sometimes. And they need not even be afraid on this occasion of the noble Lord, the Deputy Chief Whip of the House. Frankly, I would argue that this is one of those instances. If the Government are defeated on this issue and if the Liberal Democrats could just bring themselves for once to vote against the Government, the world would not stop, the Government would not fall, but an enormous mistake might be averted and Parliament would have done the right thing.

[The Minister of State, Ministry of Justice (Lord McNally)]

My Lords, in case my colleagues on the Liberal Democrat Benches missed it, that was a subtle attempt by the noble Lord, Lord Bach, to woo them into the Aye Lobby. All that I can say in this technological age is, just think what the noble Lord, Lord Bassam, will be tweeting about them if they do not do as he suggests.

Throughout this Bill it has been very difficult to reply to a debate, trying to deal with very narrow, specific terms, when the noble Lord, Lord Bach, constantly makes his case in the broadest terms. We are not forcing everybody through a telephone gateway; we are doing a specific and very narrowly drawn test. I ask noble Lords to make their decision on the facts.

We make jokes about this House and its otherworldliness, but we are living in the most communications-savvy generation in our history. I do not just mean teenagers and young people; I mean silver surfers and people right through. They buy on eBay; they use telephones and new technology in a very broad way. It is patronising to assume that people cannot make use of it. Of course, we are aware that there may be exceptions. That is why, when noble Lords come to vote, it would be worth listening carefully to what we actually propose to do and what safeguards we are putting in place, rather than what I would call the broad-brush approach adopted by the noble Lord, Lord Bach.

There will be safeguards. Face-to-face advice will remain an option in the exceptional circumstances when there are callers for whom adaptations cannot be made to ensure that there is an appropriate level of service. Our starting point is that telephone advice is effective and efficient. The Community Legal Advice helpline figures for 2010-11 show that more than half a million calls were made to the service. The 2010 survey of clients who subsequently received advice from the specialist service showed that 90 per cent of clients found the advice given helpful.

The benefits of electronic services generally and the Community Legal Advice helpline service in particular are twofold. The first benefit is access. These services particularly help people with specific needs who find it difficult to get to face-to-face services; for example, those living in remote areas or who have a physical disability. Callers can access the Community Legal Advice helpline service at a time and place convenient to them. The second benefit is quality. Contrary to the assumption that face-to-face advice is always better, specialist telephone advice providers are currently required to meet higher quality standards than their face-to-face counterparts. For both these reasons, the Government believe that the Community Legal Advice helpline should be the mandatory gateway for applying for legal aid.

However, I can confirm today that the Government have listened to concerns and will not proceed with the proposal to include community care as one of the initial areas of law for which clients will be required to use the mandatory single gateway. We acknowledge particular challenges in delivering a quality service to community care clients. The Government have always recognised that this is a complex area of law and said in the impact assessment that around half of clients in this area would require face-to-face meetings with legal representatives even where only legal help is being provided.

We have heard since from stakeholders that individuals’ circumstances can be so unique that face-to-face meetings are frequently required to deal with problems in this area even where only legal help is being provided. We have accepted that the numbers of community care clients requiring face-to-face advice is in fact likely to be more than our original estimates, and we are therefore not proceeding with the proposal to include community care as one of the initial areas of law for which clients will be required to use the mandatory single gateway.

[Lord Newton of Braintree]

My Lords, I acknowledge that point. I would also like to acknowledge that I inadvertently misquoted the briefing. I referred to community care but I also said that debt, discrimination and special educational needs were covered—I got that wrong. However, I come back to my basic point. What distinguishes the potential recipients of community care from the recipients of welfare benefits and a lot of other things? The same people will have needs elsewhere, and they will need face-to-face help not only with their community care needs.

16:15

[Lord McNally]

That is what I call a second bite of the cherry on Report. However, I was in fact about to clarify, for the benefit of the House, that indeed the noble Lord was wrong, and that the first gateway areas of law will therefore be debt, discrimination, and special educational needs.

As the House is aware, the Government have been working with a range of groups, including equality organisations, to discuss the many adaptations and adjustments already in use through the existing community legal advice helpline. As a result of this work, we are comfortable that meaningful access to legal aid services for the majority of callers in the areas of law that are to be covered by the mandatory gateway is very much achievable. The mandatory gateway will, therefore, be relatively narrowly drawn, and we will proceed sensibly and prudently. This is precisely about ensuring that services remain accessible.

We believe that these are the right areas to begin with, because the community legal advice helpline already offers specialist telephone advice on debt, special educational needs and some discrimination cases. We trust that this provides sufficient knowledge on which to base our volume estimates and have a good sense about the realism of ensuring accessible services. Now that we have made further movement on the issue—a matter that I know the noble Baroness feels strongly about—I hope that she may be able to meet us halfway, particularly given the safeguards that we are also putting in place, which will apply across the three remaining areas.

The Government are not only committed to a review of the whole implementation, including operation, of the gateway in the three areas of law, but will ensure that face-to-face advice continues to be available where it is genuinely necessary. All callers will need to be assessed on a case-by-case basis to determine whether they should be offered advice only over the telephone. Those making the assessment will be required to have an awareness of the difficulties faced by callers, who may have various conditions such as learning impairments, hearing impairments, and mental health conditions. Where they assess callers as not being suitable, even with a reasonable adjustment, to receive telephone legal aid advice, callers will be referred to face-to-face providers. The key consideration will be whether the individual client is able to give instructions over the telephone and act on the advice given over the telephone.

As I have previously stated, specialist telephone advice providers are currently required to meet higher quality standards than their face-to-face counterparts. I understand that the LSC is reviewing the quality standards of all contracts in order to ensure that they remain appropriate and fit for purpose once this Bill is implemented. However, while the precise detail is still being developed, I can assure the House that the tender process, overall quality requirements and contract management approach for the specialist telephone advice providers will mean that they will continue to meet a higher service standard than that expected of equivalent face-to-face advice providers, and that this will include a specific requirement for appropriate training both in relation to understanding individual needs and the assessment process itself. Noble Lords should therefore rest assured that access will be protected under these plans.

A number of specific points were made. My noble friend Lord Roberts argued that the face-to-face guarantee for under-18s should be extended to age 25. Again, I must say to him that those aged 18 to 25 must be the most telephone-friendly generation in our history, and I do not think that we would extend it to 25.

The noble Baroness, Lady Grey-Thompson, made the point that helpline operators are not legally qualified. No, but they are fully trained to identify key words or issues from the client’s description, and then—and this is important—pass the client on to the appropriate legally trained adviser. She also asked how we will assess whether a person is in need of special attention. As I have said, all callers will be assessed on a case-by-case basis to determine whether they should be offered advice over the telephone or assessed for direct face-to-face advice. It is also possible for callers to have an authorised third party to make the initial call for them. Therefore, one should look past the broad brush swept by the noble Lord, Lord Bach, and the suggestion that this is a fundamental bar to access to legal aid.

I say to the noble Lord, Lord Pannick, that earlier this year I went to the Law Society awards ceremony for the best law officers of the year. I was extremely impressed by how many of the prize winners gave distance advice either by telephone or via the internet. It is the age in which we live.

In this explanation, I hope that noble Lords will understand that this is a narrow scope attempt at using a telephone gateway. Built into it, in training the people undertaking it, is the discretion to refer to other specialists and the right of those specialists to offer face-to-face advice if an inquiry warrants it. Noble Lords can see that that is a far road from that painted by some of the speeches today. We have also made a significant move in response to the representations made to us. Based on the facts and the arguments, I hope that the noble Baroness will withdraw her amendment and that, if not, noble Lords will support me in the Division Lobby this afternoon.

[The Earl of Listowel]

Before the noble Lord sits down, I thank him for clarifying the guidance to those who will take these telephone calls. Will the Minister consider giving these people guidance on the fact that a disabled person may have parental responsibilities, so that if they have children additional thought might be given to a face-to-face meeting? If for some reason this does not work, we harm not only the adult but also the children.

[Lord McNally]

I would certainly consider that. As so often with suggestions from the noble Earl, that is well worth considering. However, to put it to him the other way round, if the person phoning has children the benefit of being able to get advice at a distance by telephone at a time of their choice could also be an advantage.

[Lord Campbell of Alloway]

I thank the noble Lord. His speech opened the gateway, for which I am grateful, to the face-to-face, one-by-one necessity which arises in a lot of desperate cases. Therefore, on that basis, I accept that the Government will do the right thing.

[Lord McNally]

I am very grateful that my eloquence has won the noble Lord over. I would ask the House to consider what he has rightly drawn attention to: namely, that some people may be in need of an hour-long chat, which is why the gateway is important for the volume that we are dealing with and for making sure that people get the right and the best advice as quickly as possible.

[Baroness Grey-Thompson]

My Lords, I thank the Minister for his response and I recognise that there has been much positive movement. I also thank all noble Lords who contributed to the debate and have expressed their support. I will not précis each contribution, but I feel that there is significant support on all sides of the House. Perhaps I may quote the noble Lord, Lord Wigley, who said that this section is controversial. It is about respect and dignity.

In his response to the noble Lord, Lord Bach, the Minister said that there is no evidence that people will be reluctant to use the telephone gateway. I am afraid that I disagree, and I do not believe it is patronising to say that people will have difficulties with or will be put off from communicating in certain ways. The noble Lord, Lord Pannick, said that it is about access to justice. People should be able to access justice in the most appropriate way. I still do not feel that we are in the right place yet because some cases are incredibly complex. While I welcome the clarity on the training of operators—it is very positive news that the operators of the telephone lines will be better trained than those who do face-to-face interviews—it still comes down to the ability of the client to use the right keywords. If they do not do that or are not able to express things in the right way, I am very concerned that we will be doing a great disservice to a huge number of people.

Again, I thank the Minister, but I do not believe that he has gone far enough, and I wish to test the opinion of the House.

16:25

Division 1

Ayes: 234

---

Labour: 160
Crossbench: 56
Bishops: 5
Democratic Unionist Party: 2
Independent: 2
Conservative: 1
Plaid Cymru: 1

Noes: 206

---

Conservative: 125
Liberal Democrat: 63
Crossbench: 14
Ulster Unionist Party: 1

16:39

Schedule 3 : Legal aid for legal persons

Amendments 120 to 122

Moved by

[Lord McNally]

120: Schedule 3, page 157, line 43, leave out “for” and insert “to”

121: Schedule 3, page 158, line 16, leave out “for” and insert “to”

122: Schedule 3, page 158, line 20, leave out “for” and insert “to”

Amendments 120 to 122 agreed.

Schedule 4 : Transfer of employees and property etc of Legal Services Commission

Amendment 123

Moved by

[Lord McNally]

123: Schedule 4, page 164, line 4, leave out “1” and insert “37(1)”

[Lord McNally]

My Lords, with the implicit trust that the House has in me—I am glad to see the noble Lord, Lord Bach, nodding vigorously—I assure the House that these are minor technical amendments. They are really a belt-and-braces exercise to ensure that there are no gaps between the Bill coming into force in April 2013 and various contractual arrangements that we must have. They are minor technical amendments to cover an eventuality in which things did not quite knit together in passing from one Bill to another. I hope that the House will accept that assurance. I have written explaining in detail, and the letter is in the Library of the House. I beg to move.

Amendment 123 agreed.

Amendments 124 and 125

Moved by

[Lord McNally]

124: Schedule 4, page 164, line 4, at end insert “(subject to regulations under sub-paragraph (2))”

125: Schedule 4, page 164, line 7, at end insert—
“(2) The Lord Chancellor may by regulations amend or otherwise modify the definition of “the transfer day” in sub-paragraph (1).”

Amendments 124 and 125 agreed.

Clause 38 : Consequential amendments

Amendment 126

Moved by

[Lord McNally]

126: Clause 38, page 28, line 2, at end insert—
“(2) Where the Lord Chancellor considers it appropriate as part of the arrangements for effecting the transition from the operation of Part 1 of the Access to Justice Act 1999 to the operation of this Part of this Act, the Lord Chancellor may by regulations make provision requiring or enabling prescribed 1999 Act services to be made available to individuals or other persons under this Part for a period specified or described in the regulations.
(3) In subsection (2) “1999 Act services” means services which, immediately before the day on which the first regulations under that subsection come into force, may be funded under Part 1 of the Access to Justice Act 1999.
(4) Where the Lord Chancellor considers it appropriate for the Legal Services Commission to cease to exist before this Part is brought fully into force, the Lord Chancellor may by regulations make provision for the purpose of requiring or enabling the Lord Chancellor and the Director, or persons authorised by the Lord Chancellor or the Director, to carry out LSC functions for a period specified or described in the regulations.
(5) In subsection (4) “LSC functions” means functions conferred or imposed on the Legal Services Commission by or under Part 1 of the Access to Justice Act 1999.
(6) Regulations under subsection (4) may not include provision requiring or enabling the Lord Chancellor—
(a) to take decisions about whether services should be funded in individual cases, or(b) to give directions or guidance about the carrying out of functions under Part 1 of the Access to Justice Act 1999 in relation to individual cases.(7) Regulations under this section—
(a) may amend, repeal, revoke or otherwise modify Part 1 of the Access to Justice Act 1999, this Part of this Act, any other Act and any instrument made under an Act;(b) may describe a period, in particular, by reference to the coming into force of a provision of this Part of this Act or the repeal of a provision of Part 1 of the Access to Justice Act 1999.(8) The requirement for regulations under this section to specify or describe a period does not prevent the making of further regulations under this section.
(9) The powers to make regulations under this section are without prejudice to the generality of the powers to make regulations under the other provisions of this Part and under section 138.
(10) In this section “Act” includes an Act or Measure of the National Assembly for Wales.”

Amendment 126 agreed.

Clause 40 : Orders, regulations and directions

Amendment 127

Moved by

[Lord McNally]

127: Clause 40, page 28, line 11, leave out “specified period” and insert “period specified or described in the order, regulations or direction”

Amendment 127 agreed.

Amendment 128

Moved by

[Lord McNally]

128: Clause 40, page 28, line 28, leave out “subject to subsection (6)” and insert “unless it is an instrument described in subsection (6) or (9)”

[Lord McNally]

My Lords, the amendment deals with matters on which I have written to colleagues; the letter is in the Library of the House. It is in response to the report of the Delegated Powers and Regulatory Reform Committee, which recommended that the procedures for regulations under Clause 10(1)(b) should be subject to the affirmative resolution procedure. These regulations will set out the merits criteria for civil legal aid and set out rules around the prospects of success and cost-to-benefit ratios. The Government accepted this recommendation subject to allowing for a provision as in the Access to Justice Act to allow changes to be made without delay where appropriate. I hope that noble Lords will see this series of amendments as putting those recommendations into place. I beg to move.

Amendment 128 agreed.

Amendment 129

Moved by

[Lord McNally]

129: Clause 40, page 28, line 34, at end insert—
“( ) regulations under section 10(1)(b), other than regulations in respect of which the Lord Chancellor has made an urgency statement;( ) regulations under section 12(9);”

Amendment 129 agreed.

Amendment 130 not moved.

Amendments 131 and 132

Moved by

[Lord McNally]

131: Clause 40, page 28, line 41, at end insert—
“( ) regulations under section 38 that amend or repeal a provision of an Act (as defined in that section), other than regulations revoking such regulations or inserting or repealing provision previously repealed or inserted by such regulations;”

132: Clause 40, page 29, line 2, at end insert—
“(8) An urgency statement is a statement that the Lord Chancellor considers that it is desirable for the regulations to come into force without delay for the reasons given in the statement.
(9) Where a statutory instrument contains regulations under section 10(1)(b) in respect of which the Lord Chancellor has made an urgency statement—
(a) the regulations may not come into force before the instrument and the statement are laid before Parliament, and(b) the regulations cease to have effect at the end of the period of 120 days beginning with the day on which the instrument is made unless the instrument is approved by a resolution of each House of Parliament before the end of that period.(10) In reckoning the period of 120 days no account is to be taken of any time—
(a) during which Parliament is dissolved or prorogued, or(b) during which both Houses are adjourned for more than 4 days.(11) Where regulations cease to have effect under subsection (9) that does not affect—
(a) anything previously done in reliance on the regulations, or(b) the making of further regulations.”

Amendments 131 and 132 agreed.

Amendment 132A

Moved by

[Lord Beecham]

132A: Before Clause 43, insert the following new Clause—
“Qualified one-way cost-shifting and uplift in general damages
(1) Before making an order to commence sections 43, 45 or 46 the Lord Chancellor must—
(a) establish a one-way cost-shifting for civil litigation in accordance with this section; and(b) increase the quantum of general damages for pain suffering and loss of amenity by 10% above the levels awarded immediately before this Part comes into force.(2) A “one-way cost-shifting for civil litigation” means a regime that applies to a claimant regardless of means, where that person has entered into a funding arrangement by which he or she receives legal services to pursue proceedings against a defendant covered by insurance or self-insurance.
(3) Subject to subsection (4), the general rule that the court will order an unsuccessful claimant to pay the costs of a successful claimant shall not apply to a claimant within the regime.
(4) The court may apply the general rule where the court finds—
(a) the claim was fraudulent;(b) the claim was so unreasonable that it was or could have been struck out on the grounds that it was frivolous, vexatious or an abuse of process; or(c) in respect of a claim for damages, the cost consequences under Part 36 of the Civil Procedure Rules apply, save that the proportion of a defendant’s costs payable by a claimant within the regime, whether fixed or assessed, shall be limited to 10% of the damages awarded to the claimant.(5) In the event that a claimant within the regime discontinues his action, the general rule shall not apply, unless the court on application finds the action to have been fraudulent, frivolous or vexatious.
(6) In this section, a “funding arrangement” means an arrangement where the claimant has—
(a) entered into a conditional fee agreement or a collective conditional fee agreement which provides for a success fee within the meaning of section 58(2) of the Courts and Legal Services Act 1990; or(b) taken out an insurance policy to which section 58C of the Courts and Legal Services Act 1990 (recovery of insurance premiums by way of costs) applies.”

[Lord Beecham]

My Lords, once again I declare an interest as a non-paid consultant of a firm of solicitors in which I was a senior partner. Having slipped and fallen on my way to my office at Fielden House, I am tempted to declare an interest as a potential claimant against Westminster City Council. But even I would not have the effrontery to pursue such a claim. There may be no shortage of noble Lords who would proffer their services, although I am doubtful about that, but I may consult one of my clinical colleagues before the day is over.

Today we reach Part 2 of the Bill, a part that has received little scrutiny in either House or in the media. Yet it deals with matters of profound importance. The conditional fee agreements system, which replaced and supplemented some areas of legal aid, is as important in ensuring access to justice for people of moderate means and all people in certain areas of law not within the scope of legal aid as legal aid has been to the poorest. Without a robust and easily accessible civil justice system, victims of terrible wrongs—industrial disease, clinical negligence, privacy violation, such as that suffered by Bob and Sally Dowler, and even grotesque human rights abuses, as in the case of Trafigura about which we will hear more later this afternoon—will not get justice.

16:45

Today’s debate therefore matters to potentially millions of people in terms of securing access to justice and redress for harm. Part 2 is not driven by the need to reduce public expenditure, which is repeatedly cited as the justification for the drastic reductions in legal aid when we were discussing Part 1, and for which Part 1 now effectively provides. Part 2 instead seeks to implement some but, crucially, not all of the recommended reforms of the civil litigation system proposed by Lord Justice Jackson after an exhaustive review of it.

We heard in debates on Part 1 that the Government have studiously ignored the strong advice on retaining the scope of and eligibility for legal aid, but it does not stop there. They are also ignoring Lord Justice Jackson’s recommendations for a modest increase of general damages to help successful claimants meet the cost of success fees and “after the event” insurance. Hitherto these have been met by defendants under the conditional fee system. Furthermore, they are not implementing an important recommendation to protect claimants with an arguable case from paying defendants’ costs by introducing qualified one-way costs shifting, except in personal injury cases. Qualified one-way costs shifting would mean that an unsuccessful claimant would not be liable to pay the costs of a successful defendant.

In this new system the losers would be successful claimants who forfeit part of their damages to pay success fees and the cost of “after the event” insurance, and successful defendants and their insurers under the QOCS system. The losers also include people who would be deterred from bringing a claim by the cost of “after the event” insurance to cover their own disbursements. The winners will be unsuccessful claimants, whose liability for costs would be met by the defendants, and losing defendants. It might be thought a somewhat perverse set of outcomes.

It is as well to remember the rationale for introducing success fees in the first place. This was to encourage lawyers to take on riskier cases, some of which would be lost, at no cost to their clients; the lawyer is compensated for the risk by the success fees in cases which they win. The Lord Chancellor and some Members of your Lorships’ House have suggested that the Government’s proposals of limited success fees to be paid by successful claimants will lead to a competition between lawyers and drive down success fees. However, the corollary of that is that lawyers will be less disposed to take cases with a significant degree of risk so that the legally squeezed middle will find themselves denied access to justice in the same way that 650,000 people and their dependants will be denied access. For them, legal aid will no longer be available unless they have a high prospect of success.

We are proposing that QOCS, recommended by Lord Justice Jackson, should be embodied in the Bill and not be delegated as a subject for the Civil Procedure Rule Committee, a point made in Committee by the noble and learned Baroness, Lady Butler-Sloss. We agree with the Civil Justice Council that the system should be simple. It should apply to all forms of litigation, not just personal injury, and it should be neither means-tested nor subject to a minimum payment by the claimant, as has apparently been suggested by the Ministry of Justice. Perhaps when he replies the Minister will comment on the Government’s intentions in those respects.

Subsection (4) of my amendment identifies the circumstances in which liability for costs would not shift, including cases where a claimant fails to beat a reasonable offer made by the defendant. The second limb of the amendment deals with an uplift of damages by 10 per cent, proposed by Lord Justice Jackson, to help offset the cost to successful claimants of the new requirement to pay the success fee out of damages recovered—limited, it should be said, to 25 per cent of the damages. The cost of ATE insurance would no longer be recoverable from the defendant.

The Government appear to want to hand responsibility for such a decision to the courts. That is not acceptable. After all, it is some 13 years since the Law Commission called for general damages in injury cases to be increased by between a third and a half, and there has been very little movement in that direction. Three eminent cost judges who do not support the abolition of recoverable success fees and ATE premiums point out that 10 per cent would have been adequate to compensate for the additional amount that would be lost by a successful claimant. It is interesting that today’s Guardian reports that the Master of the Rolls has written to the Ministry of Justice, saying that the 10 per cent uplift cannot be assured unless it is included in the Bill. What is the Minister’s response to that? If he is confident that the Master of the Rolls is wrong, will he not accept that the provision needs to be in place before Clause 43 is implemented, if enacted? For our part, although we would have preferred a higher figure, we are prepared to accept the Jackson recommendation.

I have mentioned “after the event” insurance. It is not strictly the subject of the amendment but it is frequently prayed in aid by Ministers as the answer to the withdrawal of legal aid and for people above the financial limits in any event. However, I have received a letter from the Legal Expenses Insurance Group, which represents 60 per cent to 80 per cent of the “after the event” insurance market, which casts considerable doubt on ministerial assertions in this matter. Astonishingly, if it is correct, it would appear that,

“the government has not consulted with or approached the independent providers with a view to discussing alternative and workable business models”.

The Legal Expenses Insurance Group believes that,

“unless some form of ATE premium recoverability is preserved, access to justice will be significantly affected, both for personal injury and non-personal injury risks. ATE insurers have made proposals during the consultation process to assist the government but the proposals have been ignored”.

It goes on to say that without amendment—this is the crucial point—it would be completely unrealistic for the “after the event” market to respond positively to the intended reforms.

Even with the system of QOCS, “after the event” insurance will still be needed to cover a claimant’s own disbursements. According to another group of insurers, premiums could range from £900 for an employer’s liability claim to £1,900 for a disease claim and as much as £11,000 for a contributory negligence claim. The figures apparently reflect average success rates and are based on these insurers’ experience of unsuccessful claims. I call on the Minister to tell us what discussions have taken place over this critical issue, with whom and with what result, and what he has to say about this disturbing communication. This all demonstrates the need for the Jackson recommendation on QOCS to be implemented and, crucially, extended well beyond personal injury claims.

Having effectively demolished the legal aid system, Ministers are now, by their selective implementation of Jackson, threatening further to limit access to justice by undermining the conditional fee system. Their preference appears to lie with “before the event” insurance, which is beyond the reach of a significant proportion of the population and is, in itself, inherently uncertain, administered as it is by an industry second only to banking in the depths of public esteem.

Our amendment would ensure that the Government could implement the proposals to limit victims’ access to justice contained in the Bill only if they implement the counterbalancing proposals that Lord Justice Jackson envisaged as promoting access to justice. Together, they aim to bring down the cost of litigation for all.

Might it be that some reforms could be adopted later than others? The answer to that question is no. To target one feature of the landscape will not work. That question and its answer are not mine; the question was posed and answered by Lord Justice Jackson himself in a recent edition of the New Law Journal. Therefore, the question that the Government must answer, should they choose to oppose this amendment, is: if they intend to implement both aspects of Lord Justice Jackson’s plans, why do they oppose an amendment that would ensure that they are implemented simultaneously? In that event, how will the Government ensure that access to justice is continuously facilitated? I beg to move.

[Lord Thomas of Gresford]

My Lords, conditional fee agreements—no-win no-fee arrangements—were first permitted by the legislation introduced by the noble and learned Lord, Lord Mackay, in 1990. In the beginning they were limited to personal injury cases, insolvency cases and cases before the European Court of Human Rights. They were a radical breach with the principle that a lawyer ought not to have a financial interest in the outcome of a case, and drew at the time much opposition from Law Lords and the Law Commission. Your Lordships are familiar with the way this system now works. If the case is lost, the lawyer receives no fees and therefore he needs to win or to settle to earn a living. To recompense him for the risk of losing, he is paid a success fee when he wins, a percentage uplift of his standard fees, which in theory recompenses him for those completely unrelated cases he has taken on and lost. He recovers the standard fees, which are payable by the losing defendants, but the initial concept was that the winning claimant should pay the success fee—the uplift—out of his damages. When the scheme was initially introduced, the uplift was limited to 20 per cent of standard fees. That was increased in 1995 to 100 per cent uplift to cover the most unlikely case—that was how it was introduced—where the risk of losing was 50:50.

Under the normal costs-shifting rules, the losing claimant was open to pay the tax costs of the defendants. He was not protected, as he would have been under a legal aid certificate, from the costs that the defendants had incurred in defending the case. Under legal aid an order was very often made that a losing plaintiff—as he then was—should pay the costs of the defendant. However, it was almost never enforced, so effectively he was not at risk of paying the defendant’s costs; but if he was, he could not pay. In answer to a query from Lord Hailsham, who was concerned that defendant insurers were left out of pocket even when they won, the noble and learned Lord, Lord Mackay, said:

“I understand that the Law Society is in the final stages of organising a form of insurance policy to protect clients against a costs order under a conditional fee agreement … If that is implemented it will be a complete answer to the anxiety to which my noble and learned friend has just referred”.—[Official Report, 18/7/94; col. 5.]

So “after the event” insurance was born to protect the losing claimant against the defendant’s costs.

There are further matters to which I may refer later such as caps on damages, but in 1999 the noble and learned Lord, Lord Irvine of Lairg, as Lord Chancellor, extended conditional fee agreements to all civil proceedings except family law. However, the most radical change he introduced was that the success fee and the “after the event” insurance premium should then be paid by the losing defendant. In a debate on 23 July 1998 he resisted Lord Ackner’s amendment that success fees should be capped. I said on that day:

“There has been no research as to whether solicitors overestimate the risk in order to justify an excessive uplift of the fees. There may be a doubling of fees now that 100 per cent. uplift is permitted. But the solicitor who is charging the fees, who determines that uplift, has to justify that uplift, assessing the risk himself. Is he doing it properly?”.—[Official Report, 23/7/98; col. 1112.]

Even then, in 1998 when I was speaking, the evidence suggested that the cherry picking of risk-free cases was occurring. I was a teller for Lord Ackner on that amendment, which was, unfortunately, lost. I hope that your Lordships will forgive me for quoting my own speech but it indicates that I was involved at an early stage in the discussions that were taking place in 1999.

17:00

We now know what has happened. Whipped up by dubious marketing forces and claims farmers, litigation in smaller claims has increased. Success fees are charged at 100 per cent in every case that goes to trial, not the most unlikely cases—which was the original reason for the introduction of such fees. That occurs even under a system of fixed uplifts that have been agreed with the insurance industry. The claimant does not care. If he loses, he does not pay even his lawyer’s standard fees, only his disbursements for expert reports and court fees. If he wins, the defendants have been paying the standard fees and the uplift, or success fee. This is the point relating to the amendment of the noble Lord, Lord Beecham: after-the-event insurance premiums have sky-rocketed because the claimant never pays them and cost judges have failed to tax them down. There needs to be reform of this system, which has led to a completely unnecessary—I do not speak as a lawyer when I use that word—escalation in legal fees. They are out of proportion.

Ministers and Members of this House have been buffeted from all sides over the past few weeks by the lobbying of interested parties—claimant solicitors, defendant solicitors, “after the event” insurers, the Bar, the Law Society, concerned organisations of lawyers and so on. What is the best way forward? I have tabled some amendments that I shall deal with at a later stage. However, perhaps I may say in response to the amendment that it is essential, as the noble Lord, Lord Beecham, said, that the introduction of one-way costs-shifting in CFA cases should go hand in hand with any alterations that there may be to conditional fee agreements. I latched on to the word that was used—I think it was by my noble friend Lord McNally—in Committee: that it should be “synchronised” with the CFAs.

The only issue I have with the noble Lord, Lord Beecham, is whether that provision needs to be in the Bill or whether we on these Benches can accept assurances from our Government that these issues will be dealt with by way of regulations. It is government policy that has been announced from the Front Bench that there will be one-way costs-shifting. It has been announced that that will happen in synchronisation with any alteration to the CFAs and that there will be a 10 per cent uplift in general damages to cover the changes that are being made to conditional fee agreements. All I have to say to the noble Lord, Lord Beecham, is that the amendment seems to be unnecessary in the light of government assurances that we on these Benches are bound to accept.

[Lord Faulks]

My Lords, I should like briefly to add to what the noble Lord, Lord Thomas, has said. I entirely endorse his comments. One of the problems with ATE premiums is that they are, in effect, unchallengeable because there is an assertion of what a case costs a particular litigant and, when it comes to an assessment, no alternative is put forward. Thereby, a defendant will always have to pay that.

My second and final point is that the noble and learned Lord, Lord Wallace, said in earlier debates that the Government were proposing to increase bereavement damages by 10 per cent, along with damages for pain, suffering and loss of amenity—which, of course, are general damages assessed by judges. I understand that this proposal was made because those damages are statutory and there would need to be a formal amendment or some other device. I would be happy to accept the assurance, which I understand to be coming, that QOCS is on the way and that there will be the appropriate method of bringing it in.

[Baroness Kingsmill]

My Lords, I should like to speak to the amendments in my name. I am encouraged to do so because, as a former personal injury lawyer, I have a deep commitment and engagement with accessibility of claimants to fair and appropriate redress when they are suffering personal injury.

There has been a lot of discussion about the so-called compensation culture in our legal system, but I refute that: there is no such thing as a compensation culture. In fact, if you exclude motor claims, the total number of claims has fallen from 116,380 in 2001 to little over 100,000 in 2010-11. It is 15 per cent lower than that it was in 2001. The Motor Insurers’ Bureau states that total claims provision and expenditure fell by 10 per cent compared to 2009. It is important that we all understand that the so-called compensation culture is a myth, a perception which is very far from reality.

That is why I have tabled some of the amendments. They are technical. It is possible that there have been oversights by the Government. I know that a 10 per cent increase in general damages has been discussed as a possibility. The Government have said that they will implement the 10 per cent increase by unenforceable means, such as requiring the judiciary to increase damages all round, but that is not enough. It is appropriate and important that that should be in the Bill. I should like to hear the Minister's comments on that. When we are talking about something as important as access to justice, people should not be burdened with additional uncertainty about what the costs will be.

I speak also to Amendment 141ZC, which would protect claimants against excessive costs in the event that they lose their claim. It is fully in the spirit of Lord Justice Jackson’s recommendations. As other speakers have said, the amendment implements Lord Jackson’s proposals for qualified one-way costs-shifting by including them in the Bill. That seems a very sensible proposal. It means that claimants would not be scared off by the risk of astronomic costs in the event that they lose. That will encourage access to justice. There is nothing quite as scary for claimants as the feeling, when there is uncertainty about their case, that they will be stuck with a very large bill at the end of it. I would like that to be stated clearly in the Bill and I join noble colleagues in asking the Minister to consider the amendments.

[Lord Mackay of Clashfern]

What is the justification for the costs-shifting system in the case where a person has been able to get a funding arrangement? If a person decides to take his case without a funding arrangement, why should he not have the benefit of the costs-shifting system just as well as the other? Why should the fact that someone has managed to agree with his solicitor be an important point as between the claimant and the defendant? I have said before, and I repeat briefly, that I have heard many expositions from the late Lord Simon of Glaisdale about the unfairness of the legal aid provision in that it deprived successful defendants of their right to recover their costs. This is an even more difficult situation. This is nothing to do with the state and the state’s grant of legal aid but is a question as between the client and solicitor. The client may well decide, “I don’t want to pay this success fee in any event. I am prepared to take my case and if I lose, why should I have to pay the costs of the other side when my colleague, who decides to pay a big success fee to the solicitor, is going to be protected?”.

[The Advocate-General for Scotland (Lord Wallace of Tankerness)]

My Lords, we have, as the noble Lord, Lord Beecham, indicated, moved on to Part 2, but I open by saying that on my walk from Dover House to the House this afternoon, I, too, fell. I went over on my ankle on what I think was a crack in the pavement, so I have every sympathy with him and I trust that he will need neither medical nor legal assistance as a result. Indeed, I hope I will not either.

Part 2 implements the Government’s reforms to civil litigation funding and costs following, as has been discussed already in this debate, Lord Justice Jackson’s recommendations. These reforms have a number of important components. Abolishing the recoverability of success fees and “after the event”, or ATE, insurance is key to the Government’s aim of returning a sense of proportion and fairness to the current regime. My noble friend Lord Thomas of Gresford talked about premiums going sky-high. I will return to these issues in more detail in the course of responding to specific amendments.

As part of these reforms, the Government will introduce QOCS—qualified one-way costs shifting—for personal injury cases. This is an area of law where most claimants are individuals, acting under CFAs, and most defendants are insurers or other well-resourced organisations which can well afford to defend themselves. My noble and learned friend Lord Mackay of Clashfern asked a very specific question, to which I hope that by the time I conclude my remarks I can give him an answer, about those who are funding themselves and not acting under a CFA. The Government agree with Lord Justice Jackson that QOCS in these cases is the right way forward and strikes a fair balance between claimants and defendants. In particular, it means that in many cases claimants will no longer have to take out expensive ATE insurance.

On ATE insurance, the noble Lord, Lord Beecham, asked what engagement there had been with the insurance industry on these matters. I am advised that insurance both “after the event” and “before the event” can certainly help. It is self-evident that it could help with legal costs. The “after the event” insurance market has developed alongside the current CFA regime and, of course, there is substantial financial interest in seeing that regime continue. It is not surprising, therefore, that the ATE industry’s public stance is to lobby hard against the proposals that we are bringing forward. Ministry of Justice Ministers and officials have met a significant number of different insurers as the proposals have been developed since Lord Justice Jackson’s recommendations were published early in 2010. Although we acknowledge that some ATE insurance providers have said publicly that they will pull out of the ATE market if the changes go ahead, others have indicated that they will look positively at developing products which meet new market needs as the details of these proposals are finalised. We are also introducing a 10 per cent increase in damages for non-pecuniary loss, such as pain, suffering and loss of amenity, which is being taken forward by the senior judiciary.

17:15

I accept that the 10 per cent uplift in general damages could be achieved through primary legislation. It is something that we considered and discussed with the senior judiciary. However, the Government have concluded that it would be appropriate for the senior judiciary to take this forward. We believe that this reflects the historic position that such damages are for the senior judiciary to determine, as set out, for example, in the Court of Appeal case of Heil v Rankin, a case, picking up the other point made by the noble Lord, Lord Beecham, regarding the Law Commission report on damages. Heil v Rankin was a Court of Appeal bench that was established very much to take forward the proposals of that Law Commission consultation paper in 1996, Damages for Personal Injury: Non-Pecuniary Loss. The House may wish to note that in his report Lord Justice Jackson listed recommendations which would require primary legislation to implement. Increasing damages was not one of them. Indeed, in his response to the Government’s consultation, Lord Justice Jackson agreed with the Government’s approach that this was for the senior judiciary to take forward. Lord Justice Jackson said at paragraph 4.2 of his response to the Government’s consultation:

“Method of achieving the adjustment. The Consultation Paper states at para 97: ‘adjustments to the level of general damages have hitherto been regarded as a judicial issue for the courts rather than the Government’. I agree and have not included this item in the list of reforms requiring legislation. It will be recalled that in so far as the Law Commission’s recommendations for increasing personal injury damages were accepted, those increases were implemented by means of a guideline judgment handed down by a five member Court of Appeal, presided over by the Master of the Rolls: see Heil v Rankin ... The same procedure could be adopted for implementing any future increase in the level of general damages”.

We also want to ensure that the increase in the level of damages does not, unlike the proposal in Amendment 136E, apply simply to personal injury but, where appropriate, to general damages for torts, of which pain, suffering and loss of amenity are examples. It is not practical to identify all of these in legislation and any formulation that is designed to be a catch-all provision runs the risk of excluding some.

My noble friend Lord Faulks referred to the increase in bereavement damages under the Fatal Accidents Act. As he said, those damages are statutory and fall to be increased under the statutory process, whereas the general damages for non-pecuniary loss are different. However, I repeat what I said in an earlier debate—we are minded to increase these as well.

QOCS and the 10 per cent uplift in damages do not need to be implemented through primary legislation and so have not been included in the Bill. We believe that the same legal effect will be achieved through other means. I know that this is a matter of considerable importance not only to my noble friend Lord Thomas, who has raised it with me on a number of occasions, but to the House in general. We certainly intend to introduce QOCS at the same time as the relevant provisions in Part 2 are implemented in April 2013.

The noble Baroness, Lady Kingsmill, and the noble Lord, Lord Beecham, have tabled amendments that would seek to put QOCS in the Bill, rather than including it in the Civil Procedure Rules. Amendment 132A would also extend QOCS to areas of litigation other than personal injury. In Committee, I spoke about the reasons for including QOCS in the rules rather than in primary legislation. The Government do not believe that Amendments 132A, 136E, 141ZC and 151ZA are either necessary or proportionate. The rules are a much better mechanism than primary legislation for implementing a new costs regime. They provide flexibility and can be altered in the light of developments, as required. There is a risk in being too prescriptive in primary legislation, as it would prevent the development of QOCS in the rules.

On the extension of QOCS to different types of cases, the Government believe that Amendment 132A is too broad and that it leaves itself open to possibly unintended interpretation. It is not difficult to imagine the potential consequences if the amendment were accepted. Perhaps I may give two examples, because I think that the circumstances in which it is proposed that QOCS might apply would be in cases of breach of contract. We could have a situation in which a premiership footballer pursued a claim for contractual damages at no financial risk, or a builder could sue an insured homeowner over a building contract at no financial risk to what might be one of the country’s biggest building companies. We would be powerless to amend the rules to allow for some degree of financial risk for these claimants in such circumstances. We believe that Amendment 132A could become a speculative claimant’s charter, and it goes against the principles of the reforms in Part 2, which are intended to reduce the scope for speculative litigation.

The amendment would also restrict the future development of QOCS. Currently, any extension of QOCS to other areas of litigation beyond personal injury cases may be achieved through changes to the rules. Being too restrictive in primary legislation could restrict the scope for the expansion of QOCS in the rules. For example, while it may not be appropriate to have an initial financial means test for QOCS in personal injury cases, this is unlikely to be the case in, for example, defamation or privacy cases. To list in statute different types of cases where QOCS should apply would mean that any future expansion might also need to be effected through primary legislation, which could be a lengthy and complex process.

The noble Lord, Lord Beecham, asked about the financial test for QOCS. We agree that, for personal injury cases, there should not be an initial financial means test. We are in discussion about whether there should be a financial contribution, although we recognise the arguments that there should not be. The Civil Justice Council, chaired by the Master of the Rolls, is helping the department on the way forward. We are in full consultation with stakeholders and very much appreciate the considerable support of the Master of the Rolls and the Civil Justice Council.

My noble and learned friend Lord Mackay of Clashfern made a point about the applicability of QOCS in circumstances where a claimant raises his or her own funding. I recognise that it is fair to point out that there will be cases where someone cannot or is unwilling to obtain a conditional fee agreement. We have said that QOCS will apply in all personal injury cases, however funded. Although typically they are run under CFAs, different considerations may apply in other cases that we would need to consider carefully if the types of cases covered by QOCS were to be extended.

As I indicated, we do not believe that it is appropriate to put these provisions in the Bill. There is a precedent for the 10 per cent uplift being taken forward by the senior judiciary, and we would look to that happening in this case. I also give an assurance that QOCS will be brought in at the same time as Part 2 of the Bill, so the flexibility that will go along with having it in the rules will certainly outweigh the advantages of having it in primary legislation. We also believe that the extent of the noble Lord’s amendment is far too wide. For these reasons, I invite him to withdraw it.

[Lord Ramsbotham]

My Lords, before the noble and learned Lord sits down, perhaps I may ask whether he has considered the position of two groups of families who may be considering making civil claims against the Government following inquests. I refer to the families of members of the Armed Forces and of those who die in either police custody or prison.

[Lord Wallace of Tankerness]

My Lords, this may not be quite what the noble Lord was thinking about, but in some cases, as my noble friend Lord Faulks indicated, if there is a question of a claim following a bereavement, we have indicated that we intend that there should be an uplift in these cases.

On the question of why we are not introducing QOCS for judicial review claims—this may be the circumstance to which the noble Lord was referring—the responses to the consultation indicated that conditional fee agreements were less commonly used outside the area of personal injury and were not frequently used in judicial review proceedings.

[Lord Thomas of Gresford]

I hope my noble and learned friend will forgive me for mentioning that I have tabled an amendment dealing with precisely that point. It is for debate at a later time and proposes that QOCS should apply in cases where, for example, there is a death in custody—and to other matters referred to by the noble Lord, Lord Ramsbotham.

[Lord Wallace of Tankerness]

I am grateful to my noble friend. Debate on his amendment might allow a better exploration of the important point raised by the noble Lord, Lord Ramsbotham.

[Lord Beecham]

My Lords, that exchange was quite useful because it illustrated the argument against what the noble and learned Lord seeks to persuade us to agree to; namely, the proposition that these are matters for the Rules Committee. The noble Lord, Lord Thomas, has tabled a sensible amendment that covers the situation raised by the noble Lord, Lord Ramsbotham. However, under the Bill these will not be matters for Parliament. The scope of access to justice will not be in the Bill and will not be the subject of legislation. The matter will be in the hands of the Rules Committee. That is a delegation of responsibility too far in a very significant area of public policy. Therefore, I cannot accept the arguments of the noble and learned Lord.

The noble Lord, Lord Thomas, has tabled amendments that we will debate later. I say in advance that I have sympathy with some of them, including the one to which he referred. Perhaps he will forgive the obvious pun: we understand that there are not many doubting Thomases on the government Benches. He will also understand that we do not necessarily share that perspective and that a degree of scepticism is more naturally to be found on this side.

In respect of one or two other matters, the Heil v Rankin decision is based on a particular level of damages. It is not a binding provision, applicable across the piece, as is suggested in terms of the 10 per cent uplift. It seems to us, and not only to us, that it is imperative, given that we are now dealing with the matter of principle of access to justice via this particular method, that the legislation should encompass the range of issues that arise. It can do so in the form of a starting position and provide for additional regulations to be approved by Parliament later. That would have been an option. I would like to think it might still be an option but I am not getting much encouragement from the noble and learned Lord. I cannot accept that the Government’s position is satisfactory. I am grateful up to a point for an indication that one object of these amendments will take place—that is to say that change will be synchronised. I wish that the noble and learned Lord and I had not synchronised our stumbles today. But in terms of legislation, that is a welcome assurance. Nevertheless, there are significant points of principle here and in the circumstances I wish to test the opinion of the House.

17:25

Division 2

Ayes: 189

---

Labour: 162
Crossbench: 18
Independent: 2
Bishops: 1
Plaid Cymru: 1

Noes: 237

---

Conservative: 129
Liberal Democrat: 62
Crossbench: 38
Ulster Unionist Party: 3
Democratic Unionist Party: 2

17:37

Amendment 132AA

Moved by

[Lord Alton of Liverpool]

132AA: Before Clause 43, insert the following new Clause—
“Exception in respiratory (industrial disease or illness) cases
The changes made by sections 43, 45 and 46 of this Act do not apply in relation to proceedings which include a claim for damages for respiratory disease or illness (whether or not resulting in death) arising from industrial exposure to harmful substance.”

[Lord Alton of Liverpool]

My Lords, in speaking to Amendment 132AA, I shall speak also to Amendments 136, 141 and 142, which relate to Clauses 43, 45 and 46. In speaking to them I return to the issue of mesothelioma and its victims, the question that I raised on 22 November at Second Reading, at some length in Committee on 30 January, and during Oral Questions on 29 February. At the outset, may I thank the Minister for his courtesy in meeting the noble Lord, Lord Avebury, and myself yesterday, and for listening so carefully to the arguments that we advanced to him?

Anyone who has ever contested a parliamentary by-election knows that it is the most special way of entering Parliament. It is something that I share with the noble Lord, Lord Avebury, and it is 50 years to the day since the noble Lord, Lord Avebury, entered the political lexicon as Orpington Man. Over the many years that have passed since then I have always found myself wanting to be on the same side of the argument as the noble Lord, Lord Avebury, and nothing gives me greater pleasure than the fact that he is one of the signatories to this amendment.

Some 18 Members of your Lordships’ House are signatories to a letter supporting this amendment. They include the noble Lords, Lord Bach, Lord Beecham, Lord Brennan, Lord Elystan-Morgan, Lord McColl, Lord McFall, Lord Monks, Lord Newton, and Lord Wigley, the right reverend Prelate the Bishop of Blackburn, my noble and learned friend Lady Butler-Sloss, and my noble friends Lady Finlay, Lord Martin, Lord Patel and Lord Walton of Detchant. I give those names to your Lordships’ House to demonstrate the breadth of support for this amendment from all sides and they include distinguished lawyers, distinguished medics and representatives of working people’s interests.

Noble Lords may also have seen a letter which appeared in the Times on 3 March signed by several Members of this House. In conclusion, it states that,

“asbestos victims should not, and financially cannot, subsidise other claimants’ access to justice, nor can they afford to defend test cases run by rich insurers”.

In a nutshell, that is the principle we are debating today. We must decide whether it can be right that asbestos victims should be required to surrender as much as 25 per cent of their damages for pain and suffering to pay for legal costs. Let me repeat, the clauses we are now debating required terminally ill asbestos victims who succeed in a claim for compensation against negligent, guilty employers to pay up to 25 per cent of their damages for pain and suffering in legal costs associated with the conditional fee agreement system, the CFA.

Let us also be clear about what we are not debating. This is the Legal Aid, Sentencing and Punishment of Offenders Bill. Into which of those categories contained in the Title do people suffering from mesothelioma fall? As the Bill aims to restrict legal aid and to curtail what has been described as a compensation culture, it is worth nailing two myths at the outset. First, these mesothelioma cases have not been legally aided and are not legally aided now. They have not been legally aided for some 12 years. Secondly, they are not part of the compensation culture. I know that the Minister concurs with those propositions.

Mesothelioma cases receive no legal aid. They are not fraudulent cases and do not involve fakery. On that much we can be agreed. As one victim put it to me, “I can understand the need for legislation to prevent the trivial and no-win fee claims but how can the claim of a mesothelioma sufferer be ‘lumped in’ with ‘ambulance chasers’? Mesothelioma has only one outcome and that is loss of life. It is not trivial, and patients need help not hindrance”.

Currently, solicitors are paid a success fee by the losing defendant to fund very difficult but meritorious cases. This replaces the funding which was available under legal aid. One claimant will have to pay for another claimant’s chance to gain access to justice if we agree the provisions in the Bill. Important test cases which determine the right of mesothelioma sufferers to claim would never have been run under the new prescription. Those who tabled this amendment argue that asbestos victims should not, and financially cannot, subsidise other claimants’ access to justice, nor can they afford to defend test cases run by rich insurers.

What else do we agree about? We are all agreed that this is a terrible disease. The Minister movingly described to us in Committee how a member of his own family had their life cruelly ended by this fatal disease. We are all agreed that once diagnosed the victim’s life is drastically curtailed. Many doctors say that the average lifespan from diagnosis to death is likely to be around nine months to one year. Some 30,000 people have died to date and as many as 60,000, according to official figures, could die in the future.

What have been the lines of disagreement? The Government have argued that conditional fee agreements, as currently constructed, mean that win or lose a claimant risks nothing but that has encouraged frivolous and fraudulent claims to flourish. Yet those who tabled this amendment argue—as I have said, the Government have said that they agree—that the claims of dying asbestos victims can never be frivolous or fraudulent. So who is responsible for exploiting CFAs? The Government and the insurance industry are quite clear: road traffic accident claims, which make up over 70 per cent of all personal injury claims, particularly whiplash claims, are to blame. In total, whiplash claims add up to a staggering £2 billion annually. We argue that RTA problems will not be solved by punishing asbestos victims. As one victim explained to me:

“My life has been turned upside down, and I really didn’t want to think about anything except spending my last days with my family. I worked all my life and paid all my N.I. and taxes, so this seems unfair”.

That is expressing it with commendable understatement.

17:45

Those who tabled this amendment argue that the victims suffer enough. It is iniquitous that they should lose their modest compensation to reduce solicitors’ costs. Those costs can be reduced directly and access to justice preserved, but not by scapegoating asbestos victims. Many sufferers are so defeated by their illness that they never make a claim as things stand now.

The Government additionally argue that claimants must take some of the risk and have an investment in a claim—“skin in the game”. This in my view is an ugly, awful phrase and it is telling. If you consider that mesothelioma sufferers have given their health and their lives because unknowingly they took unwarranted and fatal risks, it is obscene that they of all people should have some “skin in the game”. A contributor to a family asbestos forum said:

“The whole point of making a claim is to make a guilty party pay attention and take responsibility. As the ‘victim’, why should we ‘pay’ again? Is our life not enough?”.

This is not like a win on the lottery or a windfall, it is about restoring victims to something like the position they were in before diagnosis, and making proper provision for them and for their families. Making mesothelioma sufferers pay legal costs will not result in greater competition, thus driving costs down, or give mesothelioma sufferers “skin in the game”. Instead, it will inhibit claims, thus adversely affecting access to justice.

Another perverse outcome will be that challenges to insurers’ appeals to limit liability for mesothelioma claims will be unaffordable, as will taking a case to trial, a point raised by me and by the right reverend Prelate the Bishop of Liverpool during our recent exchange at Question Time with the Minister. The perverse effect of making claimants responsible for success fees will be to make one claimant pay for another’s chance of taking a claim—an extraordinary prospect for mesothelioma sufferers.

Let me also say a word about “after the event” insurance. It has been said that qualified one-way costs-shifting will resolve the issue of claimants paying ATE insurance. Leaving aside the punitive qualifications, that is true, but the Government failed to add that mesothelioma sufferers will face heavy disbursements in the form of court costs, medical reports and so on, which are not covered by QOCS. If ATE insurance is available for disbursements, the premiums are expected to be about two-thirds of the present premiums. These fall to the claimant. If the punitive qualifications regarding the behaviour of the parties and their financial status are unchallenged, claimants will not risk their savings and perhaps their houses to make a claim.

Let me end by returning to the Government’s best argument, that changing the law will turn claimants into a rod for the back of recalcitrant lawyers. Let us think about that. What dying man or woman is going to do this? Would you or I? It is simply fallacious to argue that making claimants pay costs will mean that they will shop around for the best deal. Dying asbestos victims have already invested enough, and given their pitiable condition, it is risible to suggest that they will shop around. Terminally ill and dying people will simply not have the energy, and they have other things on their mind than looking for a lawyer to give them a better rate.

Whatever else now divides the House on how the increased costs of litigation should be resolved, surely we can see the force of the practical and the moral case to exempt people who are dying of mesothelioma from the strictures and provisions of the Bill. Once again, I am indebted to your Lordships for the widespread support for these amendments and to the Minister for the courtesy he extended yesterday in listening to the arguments. I hope that the amendments will commend themselves to a majority in your Lordships’ House and I beg to move.

[Lord Avebury]

My Lords, I congratulate the noble Lord, Lord Alton, on the effectiveness and the tenacity with which he has pursued the issue of mesothelioma victims, and I am also grateful to him for his kind reference to my 50th anniversary, which falls today. I also join him in the thanks he has expressed to my friend Lord McNally for the sympathetic and careful hearing he gave us yesterday to discuss these issues.

The horrors associated with these diseases go back four decades and more, when it first became known that the ingestion of tiny amounts of asbestos could lead to painful and invariably fatal diseases. Even then, it was in the teeth of opposition from the manufacturers of asbestos products that health and safety measures were finally enacted to remove the use of this deadly product from the workplace and pave the way for the existing health and safety at work legislation.

When we discussed these amendments in Committee, the first reaction of my noble friend the Minister was to classify them as yet another in the series of amendments calling for an exception to some aspects of the Bill’s architecture. As my noble friend Lord Thomas of Gresford pointed out, Lord Justice Jackson was not looking for an architecture that involved everything but for what was right in particular categories of case, which must be the right way to proceed.

As we know, this is not an area of the Bill where there is public money to be saved, other than in cases where public authorities are defendants. What we are arguing about is whether some of the costs of this very special group of victims of mesothelioma disease in CFA cases should be borne by the claimant rather than the defendant or the insurers. Nor is this one of the areas of the Bill on which there has been lobbying by lawyers or insurance companies, as the noble Lord, Lord Alton, said.

Furthermore, it is not an area in which, as my noble friend the Minister put it, we are trying to create a structure that squeezes out an inflationary element of the process. Between 2007 and 2011, there was a 6.6 per cent reduction in employer liability cases, of which most respiratory claims are a subset, and it is expected that mesothelioma claims will peak in 2015, or perhaps a little later, because of the elimination years ago of asbestos from the working environment. During that same period, 2007 to 2011, road traffic accidents increased by 43 per cent to nearly 800,000 cases. That is where there may well be the abuse referred to by my noble friend. Unscrupulous claimants may be able to fake road traffic injuries, but not mesothelioma or asbestosis. It is impossible for the victims of these horrible diseases to launch a frivolous or fraudulent claim, and it is unconscionable that people on their deathbeds should be mulcted of thousands of pounds out of the damages that they are awarded by the courts.

As matters stand, the claimant pays nothing if he loses. He takes out “after the event” insurance which will pay the defendant’s costs as well as the ATE premium if the case is lost, and the claimant’s solicitor bears his own costs if he loses under the no-win, no-fee arrangement. If the claimant wins the case, the defendant pays the claimant’s solicitor’s base costs plus disbursements, including medical reports, court fees et cetera, plus the success fee and the ATE insurance premium; that is, all the costs. So, with ATE insurance, the claimant pays no costs, win or lose.

Under QOCS, which is not in the Bill, as we have heard, but is due to be implemented by order—we are glad to hear that it will be coterminous with the introduction of this part of the Bill—the defendant again pays the claimant’s solicitor’s base costs whether the claimant wins or loses. ATE insurance will not have to be taken out to cover the contingent liability. Whether a market will develop in this area remains to be seen, as the noble Lord, Lord Alton, said, but assuming that it does, we are advised that the premium could amount to at least two-thirds of the current ATE premium in a similar case.

My noble and learned friend Lord Wallace wrote to me and the noble Lord, Lord Wigley, on 7 February, partly explaining how QOCS would operate. Yes, it removes the need to fund an ATE premium to cover the risk of having to pay the defendant’s solicitor’s costs if the case is lost, but that is not the full story, as the noble Lord, Lord Alton, has reminded us. Given the high costs of disbursements in mesothelioma cases it would be right to extend the recovery of the ATE premium to mesothelioma claims as it is already in clinical negligence claims.

My noble and learned friend omitted to say also in the letter that the claimant is now going to forfeit not only the ATE premium, which is no longer recoverable, but the far higher amount of the success fee, for which the defendant is no longer liable. The claimant is effectively to be fined 25 per cent of the general damages he has been awarded, losing perhaps £15,000 or more from the amount that has been awarded by the court. It is certain that when this and the ATE liability is explained to mortally ill claimants, many of them will decide that it is not worth the hassle of pursuing the case.

My noble friend Lord Thomas suggests that the claimant should pay only half the success fee, but our case is that victims of mesothelioma should receive the whole of the amount they are awarded by the courts, as hitherto. My noble and learned friend Lord Wallace says that solicitors will compete on maximising the damages that claimants can keep, an expectation which is unlikely to materialise in some of the very complex cases to which we are referring. However, if our amendments are accepted, the right way to reduce the legal costs would be to regulate them further, such as by providing that a success fee is payable only in cases that come to court.

My noble friend says that he cannot believe that lawyers will be unwilling to take cases after the Bill becomes law, and of course they will, but, in the opinion of those advising us, they will take far fewer of these cases. We are also told, not as a matter of opinion but as a fact, that fewer claimants will decide to pursue their cases under this regime. As matters stand now, the victims of these painful diseases are often reluctant to bear the mental stress of dealing with solicitors and court proceedings. Almost unanimously they have said to Tony Whitston, the expert who advises us, that the prospect of losing thousands of pounds out of the award that they may receive would mean that many of them will not go ahead with their claims.

We are not talking only about another concession in the range of issues discussed in Committee, as the Minister put it, but one that engaged the support of every one of your Lordships, of all three parties and the Cross-Benches, who spoke in that debate. The Minister, who has personal experience through his family of the dreadful fate of the victims of mesothelioma, as we have heard, recognises that we are dealing with cases that are sui generis. They have at least as great a claim to be dealt with in a different way from the run-of-the-mill CFA claims as clinical negligence cases, and conceding this amendment would involve no costs to public funds.

[Lord Howarth of Newport]

My Lords, as another co-signatory to the letter to which the noble Lord, Lord Alton, referred, I endorse the argument so ably put forward today by the noble Lord and the noble Lord, Lord Avebury. I do not need to add anything to what they have said. The speech of the noble Lord, Lord Alton, today follows the magisterial speech that he gave in Committee. These arguments are irrefutable. To trammel the access to justice of mesothelioma sufferers would be a terrible thing to do. I am sure the Minister, as a kind and good man, will agree with that.

[Lord Thomas of Gresford]

My Lords, I add my tribute to the noble Lord, Lord Avebury, for his 50-years’ celebration of Orpington. It was life-changing for me because I joined the Liberal Party a fortnight afterwards. Therefore, in a fortnight’s time it will be my 50th anniversary as a member of the party and, shortly after that, my 50th anniversary of failing to win a seat. That is how it goes.

The amendment seeks to retain the status quo in relation to one industrial disease—mesothelioma. Your Lordships will appreciate from what I said in Committee that these cases are terrible. I feel that completely. I told your Lordships about a lady who lives very close to me in Gresford. She came to this House and spoke, and no doubt a number of your Lordships will remember her vividly. Her husband died as a result of being exposed to asbestos in Brymbo steel works, which is perhaps three miles from where I live. But if you give mesothelioma a special, unique status, what about the people in my village who were in Gresford colliery—that has a certain resonance, as your Lordships may recall the disaster in 1934—or in Llay Main colliery, about two miles away, which was the deepest pit in the United Kingdom? I refer to those who suffer from pneumoconiosis, another industrial disease. How can I say, “I’m supporting that lady but I’m not supporting your claims to have the same treatment for pneumoconiosis”?

18:00

However, you could widen that to all sorts of industrial diseases and add in the person who has suffered catastrophic injuries in a factory or road accident, or multiple injuries that have severely disabled them. Should mesothelioma be given an exceptional status? To an extent, it already has that status because under the Compensation Act 2006, there are very special provisions. Providing that you can prove that a person has been exposed to asbestos negligently in the past, you do not have to prove that the mesothelioma that arises 30 or 40 years later has derived from that particular act. The responsible person under the 2006 Act is liable to all the damages, and the person suffering from mesothelioma can recover accordingly.

Of course, there are special provisions about tracing the insurers of employers some 30 or 40 years back. The Government have a scheme to identify insurers. I hope that they take it a step further, so that when they cannot identify insurers of employers who have long since departed they introduce something similar to the Motor Insurers’ Bureau. Your Lordships will recall that if you are injured in a car accident and either the driver cannot be traced or was driving uninsured, it is possible to bring an action against the Motor Insurers’ Bureau and recover damages as if they were the insurers of the person injured. In those cases of mesothelioma where the original employers’ insurers cannot be traced, a scheme like that should be introduced.

Furthermore, is the status quo for which this amendment argues the best model? I do not believe that it is. The model that the Government have adopted follows the Jackson proposals in part; it does not follow them entirely as it has left out some crucial caveats such as the retention of legal aid in all clinical negligence cases. The model adopted in this Bill is too crude and needs refinement. I have searched for a solution that would cover not just mesothelioma but pneumoconiosis and other industrial diseases, such as skin diseases in certain other employments, as well as the catastrophic and multiple injury cases. The model that I propose is not the status quo. As I said earlier, I have listened to so many people from all sorts and all sides, who have bombarded all of us with their briefs and submissions. The model that I argue for is this.

First, there is no rationale for paying claimants’ lawyers success fees in cases where liability is admitted, either by way of settlement before proceedings are commenced or by formal admission in the defence that is filed initially to the claim. In those circumstances, where liability is admitted at an early stage, the lawyers conducting the case for the claimant are not at risk at all. They know that they are going to win and that their fees will be paid. My Amendment 132C deals with that situation.

Secondly, if liability is an issue and is denied in the defence, at that point lawyers are at some risk and claimants’ lawyers may lose the case, but there comes a point in proceedings that is very important. Under part 26 of the rules of procedure, which deals with case management, a district judge allocates a case to a track; it is a formal stage in the proceedings. There is a small claims track for personal injuries of less than £5,000 and other cases less than £1,000, and some housing cases. Then there is a fast track, which is for claims up to £25,000—soon to be put up to a limit of £50,000, with no more than a day’s hearing—and a multi-track. The multi-track cases, which include judicial review and all serious personal injury cases, involve mesothelioma, industrial diseases and multiple and catastrophic injuries, fatal accidents and environmental and civil liberties cases.

Thirdly, for small claims and fast-track cases, the Government’s proposal is that the claimant should pay the success fee subject to a cap set at 25 per cent of the damages to date of trial, and he should be responsible. Of those cases—the small, whiplash cases that have bedevilled us, the RTA cases—70 per cent will come under that track. With damages at the top end of the scale of £50,000 in fast-track cases, the success fee could not exceed £12,500. That is all right; it means that the claimant’s damages are less, but he would not have been able to bring the case if he had not had a conditional fee agreement. The argument that the noble and learned Lord, Lord Mackay, put way back in 1990 was whether litigation should be completely risk free.

In multi-track cases, where there is so much more at stake, I consider that the success fee should be split 50:50 between the successful claimant and the losing defendant. It should be stressed that the success fee is a percentage uplift of the standard fees; the cap beyond which the uplift cannot go is a percentage of the damages that are awarded. The Government’s model is that the success fee uplift should be capped at 25 per cent of the general damages and losses to the date of trial. In a large case, that award of damages to the date of trial can be a small fraction of the total damages, future care and loss being by far the greater proportion. Yet we have to recognise reality. There is a need to ensure that such potentially difficult and risky cases remain commercially viable and attractive to experienced litigation solicitors. Some solicitors on the high street will take a case on a one-off basis. Is that the best way? Do we not want to have some speciality and experience? Commercially viable litigation will keep the solicitors who currently do those cases taking those cases on.

My argument is, further, that the cap should be placed on the whole award of damages, and not damages to the date of trial where it is multi-tracked—with a serious award of damages—as the noble and learned Lord, Lord Mackay, originally proposed in his scheme. From the claimant’s point of view, his share of the success fee cannot extend beyond 12.5 per cent of the damages, and that would be assisted by the proposed 10 per cent increase in the level of damages that we discussed in the course of the last amendment. To try to illustrate this, in a catastrophic case where the damages award might be £10 million, taking into account future loss, the claimant’s solicitors and barristers will get their standard fees but they will also get a success fee. Such a fee, which is a percentage uplift of the standard fees, is never going to reach £2.5 million. It is going to be a lesser sum.

In a lesser case where the damages are £600,000, to illustrate a different proposition, a success fee might reach £150,000 but it could not go any higher. Under my proposed model, that would lead to the claimant losing £75,000 of their £600,000 award and the defendants paying £75,000 themselves. What are the consequences of this? It is complicated and we have heard so much about it. It would mean that the claimant has an interest in the amount of the success fee and that lawyers would compete for his business. It is not too much in cloud-cuckoo-land to suppose that a solicitor would advertise, “My success fee will be nil”, or, “My success fee will be 5 per cent”, in order to attract business.

As for the “after the event” insurance premiums, we have already agreed that one-way costs-shifting will be introduced where there are conditional fee agreements to remove the burden of heavy defendants’ costs. One-way costs-shifting has operated in practice in legal aid cases since the inception of legal aid. I have tabled amendments which follow the amendments that we discussed last time. If one-way costs-shifting is introduced, the exorbitant “after the event” premiums to cover the risk of paying heavy defendants’ costs are removed at a stroke. You do not have to insure against the defendant’s costs because one-way costs-shifting means that the defendant will pay his own, even if he wins, as has happened in legal aid cases. It may be necessary to obtain “after the event” cover for disbursements which might cost in a typical case £3,000 to £5,000.

[Lord Bach]

I must be under a misapprehension. I thought that this group was about the amendments that the noble Lord, Lord Alton, had so succinctly moved and about my own amendments to which I also hope to speak, perhaps even more succinctly in due course. I am listening carefully to the noble Lord, as I always do, but it seems that his amendments are part of the group that begins with his Amendment 132B. I am surprised that the noble Lord has not waited to speak to his group as it appears on the Marshalled List. Perhaps he can explain to the House why he is doing this.

[Lord Thomas of Gresford]

I am very happy to do that. I will speak to it further in due course. Frankly, I am anxious not to make the 31-minute speech that I made when we last discussed this particular issue and to relieve your Lordships of that burden. I am splitting what I intend to say, which I think is necessary to cover the whole field, so that it becomes a little more understandable. I take the noble Lord’s rebuke in good part, but let me repeat that asking for the status quo in mesothelioma cases only is not the way to go forward.

[Lord Alton of Liverpool]

My Lords, I would draw the noble Lord’s attention to the actual words in the amendment and indeed in the amendment of the noble Lord, Lord Bach, which is in this group. We have corresponded about this and he has been good enough to share with me prior to the debate some of the points that he has made eloquently this afternoon. I am grateful for that. However, this amendment goes slightly wider than he is suggesting in his remarks today and would cover, for instance, pneumoconiosis as well.

18:15

[Lord Walton of Detchant]

My Lords, I support the amendments tabled by my noble friend Lord Alton. I do so as a doctor. I was brought up in a mining village in Durham County where as a youth I saw some of the ravages of industrial injury and the effects of pneumoconiosis on those who worked in the mines. Later, when I moved to industrial Tyneside, I had considerable acquaintance with industrial injuries of all kinds and industrial diseases caused by a variety of different agents. At an earlier stage of this Bill, I commented that I was asked not infrequently to make reports on people who had suffered neurological damage as a result of these agents. The noble Lord, Lord Beecham, responded by saying that when instructing me to give such reports he had been grateful for their nature and extent and also for the modest fees. Had I known that he took that view the fees might have not been quite so modest.

There is no doubt, as the noble Lord, Lord Thomas, has said, that industrial injuries of all kinds are prevalent in our society. Is there anything special about mesothelioma? There is indeed. It is a disease caused by exposure to asbestos. The cause is known. The clinical course is known. In this condition, the result of particles lodging in the lungs means that the pleura or membrane which covers the lungs becomes progressively thickened, causing compression of the lungs and respiratory failure. Unlike many other diseases, such as pneumoconiosis, this disease is inevitably fatal. It is a very special condition. It deserves special legal attention and for that reason I strongly support these amendments which I believe should be accepted by your Lordships’ House.

[Baroness Butler-Sloss]

My Lords, I apologise for not being present at the beginning of this debate. My name is on the letter and I want to underline my support for it. As a judge, I was involved with a number of these extremely sad cases, particularly at the Court of Appeal. The letter has been very helpful in setting out what is needed. I apologise to the noble Lords, Lord Alton and Lord Avebury, for not having heard most of what they said, but I have a shrewd idea that it was said extremely well.

[Lord Wigley]

My Lords, I support Amendment 132AA and wish to speak to the group which is associated with it, standing in the names of the noble Lords, Lord Alton and Lord Bach. I do so enthusiastically as I indicated in Committee. Whereas the noble Lord, Lord Thomas, may well have arguments in certain cases in relation to the legal processes that he outlined, I come to this from the point of view that compensation should be available in full to people, reflecting their suffering and the condition they have had, and that any legal fees should be other than the sum allocated as a response to that suffering. If this group of amendments is not accepted, the House will no doubt hear the noble Lord’s proposals in a later group of amendments. The scope not only of Amendment 132AA but also Amendment 132AB, which goes wider and covers a number of other equally distressing and deserving conditions, means that they can be supported when it comes to a vote if it does indeed come to a vote.

These amendments would have the effect of exempting cases involving claims for damages for respiratory illnesses following exposure to harmful substances from the range of changes proposed in Clauses 43, 45 and 46 of the Bill. The case for doing so was covered extensively in Committee but, unfortunately, the Minister has not so far moved towards accepting the changes that we hoped he might accept at that stage. A couple of weeks ago, at a St David’s Day dinner, I found myself sitting opposite a widow from my home area of Caernarfon. She had lost her husband to asbestosis six years ago. She described what he and they, as a family, had suffered. She received a modest sum of compensation. However, she told me that she had been following our debates in Committee and doubted that she would have got that compensation under the changes that are coming through. My goodness, if that is the effect that they will have on people who have suffered in that way, we have to make sure that the Bill is watertight and looks after people who have suffered as a result of the work that they have undertaken.

If Clause 43 is agreed unchecked, success fees under a conditional fee arrangement will no longer be recoverable from the losing party in all proceedings. Instead, in cases where claims are made against an organisation as a result of illness due to negligence, the fee will be recovered from damages awarded to the injured person, sometimes substantially eroding those damages. Likewise, if Clause 45 is agreed as it now stands, “after the event” insurance premiums will no longer be recoverable from the losing defendant and will also be taken out of the damages awarded to the injured party. Similar changes are proposed in Clause 46, which prevents organisations recovering their insurance premiums from a losing party. Unsuccessful cases involving more than one claimant can be highly expensive if there are multiple defendants whose costs need to be covered in the event of the case being lost. Without recoverable insurance premiums, these cases simply will not, in practice, be able to proceed.

Many organisations, including the Association of Personal Injury Lawyers, have been at pains to make it clear that damages are awarded for the pain and suffering caused by prolonged and debilitating illnesses. As I said earlier, damages were never intended to pay towards legal costs. Making an insured person or their family suffer an erosion of the financial compensation to which they are entitled on top of the physical distress they have endured is neither just nor dignified. It is wrong that the Government are intent on ploughing ahead with these changes without making exceptions where they are due.

In Committee, the Minister spoke of the Government’s overarching aim as being,

“to create an architecture which squeezes inflationary costs out of the civil justice system”.—[Official Report, 30/1/12; col. 1433.]

Those are grand words indeed but they cover a multitude of sins. As the noble Lord, Lord Alton, remarked, the only people who will be squeezed as a result of these changes are those who are already suffering from fatal diseases and their families. That does not sound like justice to me.

In Committee, the Minister also assured me that a number of possible routes of redress would be made available for individuals who had contracted diseases such as mesothelioma and asbestosis through schemes operated by the Department for Work and Pensions. We have heard reference to this but, as yet, I have seen no further detail on how these schemes may work. In the mean time, we should proceed on the basis that they are not there yet. However, I would welcome any clarification that the Minister might give and will listen carefully to what he has to say.

I support not only the group of amendments spoken to by the noble Lord, Lord Alton, but support very strongly Amendment 132AB in the name of the noble Lord, Lord Bach. It is relevant to a group of industrial diseases such as pneumoconiosis, silicosis and associated lung diseases, which are certainly of considerable importance to me and the community from which I come.

If these clauses are agreed unchecked, individuals who have suffered harm and distress will be dealt a further blow and access to justice will be severely undermined. It is perhaps futile to press the Government to agree to changes that they have already so utterly dismissed out of hand. However, I urge noble colleagues to support these amendments and to argue the case that individuals already suffering due to negligence should not face further hardship.

[Lord Newton of Braintree]

My Lords, may I briefly split up the Cross-Benchers, albeit in support of everything that they and most others have said? I have a couple of prefatory remarks. I cannot quite share the enthusiasm of the Liberal Democrat and former Liberal Democrat Benches for the anniversary of my noble friend Lord Avebury, although not because I do not have the highest regard for him. However, I was in the Conservative research department at the time and it was a major culture shock, which did not tempt me to join the Liberal Party. It could yet happen of course, but not today.

The Minister may be glad to hear my other prefatory remark. This will probably be my last foray on the Bill because, in general, I regard Part 2 as being above my pay grade. I have been reinforced in that view by the speech of the noble Lord, Lord Thomas of Gresford, which left me feeling—I hope he will not find this too rude—as though I had been enveloped in fog.

I spoke on this matter at an earlier stage and I do not intend to repeat myself. I simply endorse some points that have been made. In an earlier incarnation, when I was Minister for Disabled People, I was also the Minister for the Industrial Injuries Advisory Committee, so I know a bit about industrial diseases, including respiratory diseases such as this one. While they all have their problems and the scheme has its offerings, this disease is pretty unique for reasons that the noble Lord, Lord Alton, has outlined so clearly with his medical knowledge. This was reinforced by what the noble and learned Baroness, Lady Butler-Sloss, said about her experience of seeing and being involved in such cases. We cannot dismiss that.

I said earlier that we need to recognise that this disease is not only terrible but moves very fast. Someone gave the figure of nine months. To repeat something that I said earlier, we also need to acknowledge that this is one of those cancers—it is effectively a cancer—that is still growing. It is not diminishing. There is a long time fuse on exposure to asbestos. We have known about it for a long time and action has been taken; when asbestos is found, there is great expenditure on getting rid of it. However, there are still more cases to come than there have been because of that long fuse. One way or another, it is a pretty special case. I just do not like the idea that it can be dealt with only under CFAs, with the consequences that were so eloquently outlined by the noble Lord, Lord Alton.

This is not part of the mischief of exploiting whiplash injuries. It is very much sui generis and needs to be treated as such. The notion that someone who has just been told that they have nine months or less to live will engage in a lot of frivolous legal activity is far fetched in the extreme.

The noble Lord, Lord Thomas of Gresford, referred to all sorts of other ways of getting compensation, including schemes that the Government have and the possibility of a rival to the Motor Insurers’ Bureau. We are talking about people with nine months to live. It will probably take nine months for them to find out where to start under some of those arrangements, let alone to get some compensation. In any event, what we are offered here are not the alternatives that the noble Lord, Lord Thomas, outlined. They are not here and would have to be worked up. What we have is what is in the Bill. We need to look at that with care and, once more, we need to ask the House of Commons to think again.

18:30

[Lord Faulks]

My Lords, I agree with every speaker that this is a dreadful disease for which the sufferers deserve compensation. Just as importantly, they deserve compensation speedily. I am glad to say, as a practising barrister with some experience of cases of this sort, that the mechanisms and systems by which compensation can be achieved have greatly improved so that this can be done.

I agree that all these claims are thoroughly deserving. There can be no dispute about diagnosis. They are not the sort of cases that are covered by the much described “compensation culture”. The real question, though, is simply this: will these cases still proceed if the Bill becomes law? There is no doubt that they will become less profitable for lawyers, but will they become so much less profitable that these very deserving cases will be denied justice? That is the real question, I suggest.

The reason why lawyers do not take cases on CFAs—this is perhaps particularly so in clinical negligence cases—is that there are real difficulties and they might lose the case. In a series of cases on mesothelioma and other cases deriving from exposure to asbestos, the courts have done a great deal to help in terms of the law on causation. Not just through the 2006 Act but in a series of cases in the Court of Appeal and in the House of Lords, they have circumvented the difficulties in proving liability, particularly the so-called “single fibre” theory, where it was difficult to establish which of a number of employers was responsible. That difficulty is largely overcome. As I say, the noble Lord, Lord Walton, has confirmed that diagnosis is rarely controversial, so we do not have the situation of doctors disagreeing. So what is the real difficulty about these cases? There is a great deal of experience out there, both on the claimants’ and the defendants’ side, in taking these cases forward. One of the problems is not being able to identify the appropriate defendant or the policy. We have heard from the noble Lord, Lord Thomas, that steps have been taken through the ABI and other bodies to keep proper records of these matters.

However, where I have real difficulties, in agreement with all noble Lords who have spoken, is on the question of damages. A recent decision of the High Court has dealt with the quantum of damages in these cases. They are very modest. That is not because judges are not profoundly sympathetic to the claims, but simply because they are claims for pain and suffering and loss of amenity and do not involve long-term care claims or loss of earnings claims. Thus they are modest. However, I find it unattractive in the extreme that there should be 25 per cent taken off these damages, albeit that will be increased by 10 per cent. I very much hope that the Minister’s words are justified and that solicitors will not see fit—how could they?—to take a percentage of damages in these circumstances. I share with the noble Lord, Lord Alton, a revulsion of the expression “skin in the game” in the context of these desperately sad cases.

I suggest that Part 2 of the Bill is a very real and positive attempt by the Government to cope with what I have encountered as a disfiguring feature of the litigation world when inflated costs are involved and when cases become too much about lawyers’ fees and interests and insurers’ interests rather than the underlying dispute. This is a desperately sad series of cases. I share all noble Lords’ concern that damages should be recovered as quickly as possible. However, I venture caution lest, in the wake of these cases, we lose the structure and the architecture that Lord Justice Jackson put forward.

[Baroness Finlay of Llandaff]

I support the comments made by my noble friend Lord Walton of Detchant. As a doctor, I look after these patients and have found repeatedly that they do not even want to seek compensation but are persuaded to do so. They do not seek it for themselves as they know that their lives are over, but because they want to leave something behind for their bereaved families who will have to live on after their death, facing a loss in pension.

As has been said, a common feature of mesothelioma and the other respiratory diseases mentioned in other amendments in this group is that diagnosis is clear. Histological diagnosis under the microscope shows the fibres and fragments of substance to which these people have been exposed, such as asbestos fibres and small amounts of substances such as beryllium and silica. Another feature of these respiratory diseases is that they form a discrete group. Protection of the respiratory tract has been around for a long time but workers have not always been adequately protected. Sadly, there was a time lag in that regard. Indeed, as regards these diseases, blue asbestos was thought to be the culprit. It took some time before all forms of asbestos were identified as being fundamental pathogens. We must put the interests of the people suffering from these diseases before any other interests. For those reasons, I strongly support these amendments.

[Lord Mackay of Clashfern]

My Lords, obviously, the people who fall into this category should have our sincere sympathy. I certainly feel strongly that they deserve that. However, I want to mention one or two matters. First, when this system of contingency fees—or whatever name you want to call it—was introduced, there was no special rule for such cases. I do not know to what extent the noble Lord, Lord Alton, or the noble Lord, Lord Avebury, have looked into the situation as it was when the system as I introduced it was working.

Secondly, it will not have escaped your Lordships that the next amendment of the noble Lord, Lord Alton, concerns industrial disease cases generally. The amendment we are discussing deals with respiratory cases; the next amendment deals with industrial disease cases. I particularly draw to your Lordships’ attention the question of justice as between different claimants. I entirely accept what has been said by those highly medically qualified noble Lords who have spoken about the disease we are discussing. However, other troubles that are the subject of personal injury actions involve lifelong deprivation of practically all one’s faculties. That kind of long-lasting trouble comprises another type of personal injury action. If your Lordships wish to support this amendment, they have to think how they would justify treating the cases we are discussing differently from other terrible cases which those of us who have experience of personal injury actions know exist.

Long ago I was professionally involved in cases that concerned the National Coal Board. Pneumoconiosis cases were brought but other cases were brought involving people who had been injured while working underground. People who suffered those injuries were in terrible distress and eventually died. However, before they died they were in a very distressing situation. Therefore, one has to be careful about how one distinguishes between the different cases. Justice requires that similar cases be similarly dealt with.

If I understood him correctly, the noble Lord, Lord Alton, said that the cases in the group he was asking for should not be required to subsidise other cases. My understanding of this system is that you do not subsidise other cases: the success fee is dependent on the chances of success in your case. It is a factor which is dependent on a probability of success that works into the success fee. It is not dependent on other cases; it is dependent on the precise potential for winning that exists in the case that you have in hand. Therefore, I do not accept that this system in any way subsidises other cases across the board except in the sense that the probability of success in a particular case is what determines the success fee.

If the noble Lord, Lord Alton, wishes to press this amendment, I assume that he will not have the benefit of the 10 per cent uplift for his amendments in this group, which is on the way as a result of the undertakings given by the Government. There is also the question of the one-way shift. That would probably apply if it were done generally in respect of these cases, but the other may not.

This is a very difficult area. The sympathy of the whole House is with these people, and that is very much the case with me and my noble friend in particular, given his experience of this issue. However, justice requires us to do justice as between different claimants. Other claimants also have very difficult conditions. How do we say to X, “Your claim and the conditions to which you have been exposed are so bad, as distinct from the others, that we can justify treating you differently”?

I should perhaps have said that I of course associate myself with the congratulations offered to the noble Lord, Lord Avebury. I did not suffer from the difficulties that my noble friend Lord Newton of Braintree had.

[Lord Alton of Liverpool]

Perhaps I may put two points to the noble and learned Lord before he sits down. The system as it operated under his stewardship did not take funds away from the claimant when they were successful in litigation. That is surely the difference from the matter before your Lordships’ House. When the noble and learned Lord oversaw the system, it was fair and just, and did not raid any of the funds that the claimant was able to receive in compensation. We are merely seeking to maintain the status quo in the way that it operated during his time.

As to exceptional circumstances, surely, if someone is terminally ill, they are exceptional or sui generis, as described by the noble Lord, Lord Newton, and my noble friend Lady Finlay in their interventions. If people in this group are terminally ill, that is surely what makes their cases exceptional.

[Lord Mackay of Clashfern]

My Lords, it is possible to describe other types of illness and the basis for claims in very much the same language as that used by the noble Lord, Lord Walton of Detchant, and the noble Baroness. So far as the first point is concerned, in the system as I introduced it the success fee would be payable by the claimant out of his or her damages.

[Lord Bach]

My Lords, we have had a powerful and emotive debate and I want to be very brief because the House wants to hear from the Minister, who is obviously sympathetic, as was demonstrated by what has been said about his visits made and meetings with noble Lords on this issue. I am proud to support the amendment in the name of the noble Lord, Lord Alton of Liverpool, also supported by the noble Lord, Lord Avebury. I am delighted that the noble Lord, Lord Alton, supports my amendments in this group that deal with other industrial diseases—Amendments 132AB, 132D and 141ZB. In response to the noble Lord, Lord Thomas of Gresford, I say that if he thinks that other diseases are also important to deal with, he should look carefully at the amendments I may move in due course.

I shall cut down appreciably on what I wanted to say. We know that asbestosis is not the only problem, but speeches have been made in this debate by experts who suggest that it is a problem out on its own that should be considered separately, as it will be this evening. It is because asbestosis is not the only problem that I tabled my amendment that deals with other serious industrial diseases. I do not need to go through the types of diseases that I am talking about, but they are the by-products of hard work. All these are inflicted on hard-working people who have spent their lives contributing to our society and economy, often in industries that no longer exist, and in heavy industry, manufacturing and public services. As has been said by many noble Lords, many of these diseases do not manifest themselves for years and are the legacy of coal mining, our proud tradition of manufacturing, steel making and other professions.

18:45

I have here a letter received from the wife of a man who suffered from mesothelioma, to which the noble and learned Lord, Lord Davidson, referred in his Second Reading speech many months ago. The man was between 16 and 24 years old when he was exposed to asbestos as an apprentice lift engineer, erecting lifts on building sites. He stayed in that industry throughout his working life. He loved his job and most of his customers became his friends. His wife said:

“This disease has affected our lives in every possible way and stress levels have been extremely high for both of us”.

She went on to say many things that will move the House, and added that the stress and worry that go with what she described were unbelievable. Yet, she claimed, the Government were trying to make victims face additional stress and worry by making them decide whether they can afford to take out a civil action. She added:

“Compensation would be eroded by having to pay legal costs plus insurance to cover defendants’ legal costs, plus the worry of having to pay some fees upfront. This is an insult and will discourage people from making a claim to which they are entitled. This Bill should be designed to stop the ‘ambulance chaser’ brigade who contact prospective clients and advertise constantly, not workplace victims whose lives were put at risk by exposure to asbestos”.

Of course we are right to control the cost of litigation, but road traffic accidents and slip-and-trip accidents are quite separate and distinct. It is incongruous to somehow link them with what we have been talking about in this debate. It is unnecessary and rather cruel. It is with pleasure that I invite the Minister to accept the amendments in the name of the noble Lord, Lord Alton, and myself.

[Lord McNally]

My Lords, I should first say to the noble Lord, Lord Newton, that if he is thinking of joining the Liberal Democrats he would fit in very well.

This is not a debate about those who care about mesothelioma sufferers and those who do not. We all care, and many of us have been trying to address the problems associated with that dreadful disease. Indeed, the Department for Work and Pensions is working closely with all stakeholders to see what can be done to compensate people with mesothelioma and similar conditions who are unable to claim civil damages because their employer no longer exists and their insurer cannot be found.

It is true, as has been mentioned, that Governments of all parties have taken action to aid sufferers of industrial injuries and illnesses, and the legacies of our industrial past. However, it is also fair to put on record that legal aid was removed from this area of litigation by the previous Administration in 2000.

Before turning to the detail of these amendments, I wanted to say a few words about the importance of the changes we are introducing in Part 2. As we heard in the earlier debate, the changes we are proposing to no-win no-fee agreements were recommended by Lord Justice Jackson after his year-long review, and supported by the senior judiciary. The Lord Chief Justice said that the report addressed civil costs as a comprehensive, coherent whole. Our proposals were welcomed by the previous Lord Chancellor, Mr Straw, and by the opposition Front Bench in the other place when the current Lord Chancellor announced them on 29 March last year. The shadow Justice Minister said at Committee stage:

“the intention of part 2 is perfectly sound, and it is one with which we have a great deal of sympathy”.—[Official Report, 13/9/11; Commons, Legal Aid, Sentencing and Punishment of Offenders Bill Committee, col. 501.]

So there is broad agreement on the principles of our reform.

Part 2 addresses the way that the present system is—as I think that the noble Lord, Lord Faulks, described it—distorted. The agreement is perhaps not surprising given the high costs that have arisen under the current regime and the unfairness that has resulted between claimants and defendants.

I remind the House of that, because I am concerned that in making the position fairer between claimants and defendants, as we seek to do, we should not make the position less fair between different classes of claimants, as some of the amendments would, as the noble and learned Lord, Lord Mackay, just reminded us. The current regime of recoverable success fees and insurance premiums allows for risk-free litigation from claimants and substantial additional costs for defendants.

Allowing exceptions, so that the regime continues in relation to certain cases only, would introduce unfairness for those claimants in an otherwise similar position where the exception does not apply. Allowing an exception for defamation claims, for victims of industrial diseases or for claims of corporate harm by multinational companies, for example, would introduce an advantage to claimants in those specific categories which would be unfair to those in otherwise similar positions whose claims fell into a slightly different category. Clauses 43 and 45 are a fundamental element of the Government's reform in ensuring proportionality and fairness across the board. That is why we resist any substantive amendments to them.

I will take Amendments 132AA, 132AB, 132D, 136, 141, 141ZB and 142 together, as they are intended to retain recoverable elements in claims dealing with respiratory diseases or industrial diseases caused by an employer’s breach of duty to an employee. Amendments 132AA, 136, 141 and 142 would retain recoverability of success fees after the event, or ATE insurance payments and membership organisations’ self-insurance costs for respiratory disease cases. Amendments 132AB, 132D and 141ZB would do the same for employers’ liability claims relating to industrial diseases.

Although I will address all industrial disease claims in my response, I am aware of the keen interest of the noble Lords, Lord Alton and Lord Avebury, in mesothelioma in particular. They have been tireless and dedicated campaigners on behalf of sufferers of that fatal and tragic disease, and I commend them on that. Although we can agree on the tragic nature of the disease and its impact, I cannot agree that those cases should be exempted from our reforms. Noble Lords have argued that industrial diseases, including mesothelioma and other less serious conditions, are not part of the compensation culture. The Government accept that—I did so in Committee. There is no suggestion that those claims are brought improperly. Our reforms are intended to address high cost throughout civil litigation. This is not just about driving out fraudulent or exaggerated claims but about ensuring that legal costs are proportionate to the sums at issue. For that, wholesale reform is needed. To be effective, it must apply across the board.

Specifically on mesothelioma, I said in reply to an Oral Question from the noble Lord, Lord Alton, on 29 February that I am not aware of anything associated with those cases which makes them particularly expensive to bring. I have not heard anything since which persuades me that there is anything particular about the nature of those cases—the cases, not the disease—which makes them any harder to bring in legal terms than any other case. Indeed, it is quite the reverse. As my noble friend Lord Thomas of Gresford and the noble Lord, Lord Faulks, pointed out, significant steps have been taken in recent years to lower the barriers to bringing compensation claims for those diseases. Senior Master Whitaker, who oversees these cases in the High Court, has helped to introduce a fast-track procedure for mesothelioma cases. That has been incorporated into a practice direction ensuring that those claims are dealt with as quickly as possible—again a point brought up by my noble and learned friend Lord Mackay.

Various legal changes over the past few years, including primary legislation such as the Compensation Act 2006, and judgments of the Supreme Court, have removed some of the hurdles for sufferers of respiratory diseases to bringing claims. The Department for Work and Pensions has undertaken various initiatives to make it easier for claimants to trace their employers’ insurers. I understand that it can be difficult and expensive for those with what the noble Lord, Lord Wigley, I think, referred to as long-tail diseases, such as mesothelioma, to track down the liable insurer. In April 2011, the insurance industry set up the Employers’ Liability Trading Office, or ELTO. Supported by the Government, the ELTO provides an online resource through which claimants and their representatives can search for the relevant policy, reducing time and costs for those involved in such searches.

The Department for Work and Pensions continues to work with stakeholders to see what can be done to compensate people with mesothelioma and similar conditions who are unable to claim civil damages because their employer no longer exists and their employer’s liability insurer cannot be found. A response to the government consultation, Accessing Compensation Supporting People Who Need to Trace Employers' Liability Insurance, which reflects further on possible solutions, will be published in due course. I recently met the insurance industry to discuss ongoing work. I can tell the House that, as a result of this issue being raised in discussion on the Bill, I will be taking the matter up with my noble friend Lord Freud at the Department for Work and Pensions to discuss what progress is being made and how it can be advanced. As noble Lords will be aware, my noble friend told the Grand Committee yesterday that we will be increasing the mesothelioma lump-sum payments by 3.1 per cent from 1 April this year. I welcome my noble friend’s statement and his commitment to working with interested parties to offer further help to sufferers who have difficulty in tracing their insurer.

Noble Lords have spoken of the prohibitive costs of bringing industrial disease claims against well resourced defendants. There is concern that claims will not be brought if claimants risk being liable for high defendant costs should they lose. In response, I remind noble Lords that in personal injury claims, including industrial disease, qualified one-way costs-shifting will apply—that is, a losing claimant will usually not be at risk of paying a defendant’s costs. We discussed QOCS earlier in the debate.

We turn, then, to the claimant’s own disbursements, which noble Lords have argued will be unaffordable should “after the event” insurance premiums no longer be recoverable. On respiratory disease claims, my understanding is that only one medical report is required by rules of court in order to issue a claim. This report will cover the diagnosis, basic causation, prognosis and what the life expectancy might have been without mesothelioma. In exceptional circumstances, a forensic engineering report may also be necessary to show causation. However, the majority of mesothelioma sufferers will not need reams of expert evidence to bring their claim and consequently are unlikely to face high up-front costs for expert reports.

Claims for industrial diseases are not unique in requiring expert evidence to show the nature and extent of the illness. The same is true of many personal injury cases, where there may be disputes, if not of the causation or liability, of the extent of the damage caused. It is not true to say that such reports will be unobtainable without a recoverable ATE premium, particularly as a claim may be brought on the basis of one report. A claimant may pay for reports through their own means; solicitors may decide to bear up-front costs themselves; or a claimant may take out ATE insurance and pay the premium themselves. In any of those instances, either the claimant or the solicitor will have a direct interest in the costs that are being incurred—which is one of the main principles underlying our reforms.

It should also be noted that general damages for non-pecuniary loss, such as pain, suffering and loss of amenity, will be increased by 10 per cent—a point emphasised by the noble and learned Lord, Lord Mackay, but not mentioned in other speeches when there was talk about a raid on damages. That will help claimants to pay any success fee that may be due once their claim has ended. I also point out that the proposed cap on success fees of 25 per cent of damages awarded is not compulsory. It is a negotiated amount and excludes those for future care and loss. We expect solicitors to compete for business by offering lower fees. We also expect those who specialise in this area to offer fair and realistic terms for their clients that take into account not only the risk of the case but also the needs of the individual claimants and their families at what, of course, will be a particularly traumatic time in their lives.

19:00

I have previously explained the concerns of the Government around the current regime and the significant disadvantages it has for defendants, with no incentive for claimants to control costs. I must underline that those reforms in Part 2 are not about saving money for the public purse. Making savings is a benefit, of course, but that is not what Lord Justice Jackson was considering when he wrote his comprehensive report. The Government are determined to see more proportionate costs in civil litigation, with greater fairness in the risk borne by parties. Without our reforms, high and disproportionate costs in civil litigation will continue. Access to justice would not become more meaningful for all parties. If these amendments were accepted, claimants in these particular cases would have an advantage over others who may be suffering from equally debilitating conditions. This cannot be justified, but I am grateful to all noble Lords. I am grateful to my noble friend Lord Thomas for what was obviously deep thinking about alternatives and I will study his remarks and the issues he raised carefully. As I say, I will be taking these matters further with my noble friend Lord Freud and other ministerial colleagues with all due urgency, and, as I have indicated, I hope that we can make some progress.

As I say, I do not believe that this is a debate between those who want to help here and those who do not. It is about keeping the Jackson reforms in Part 2 in their place without producing a whole range of anomalies, and at the same time the Government taking forward with a sense of real urgency ways of giving practical help to those who suffer from this dreadful disease. I hope that the noble Lord, Lord Alton, in the light of that reply, will withdraw his amendment.

[Lord Alton of Liverpool]

My Lords, I am grateful to the Minister for the way in which he has addressed this issue this evening and, indeed, I reiterate my thanks to him for meeting the noble Lord, Lord Avebury, and me yesterday to discuss what more could be done to help this unique group of people—a point I shall return to in a moment. I am conscious that your Lordships want to come to a decision on this matter, so I promise that I will be brief.

There was no debate about this issue when it was before the House of Commons; there was no Division in the House of Commons. Your Lordships will be doing your job in scrutinising legislation by supporting these amendments this evening, because Members of the House of Commons will now, I think, welcome the opportunity to return to this question. I am told by my noble friend Lady Finlay of Llandaff, whom I spoke to earlier about this, that very small numbers of people other than mesothelioma victims would actually be caught by this amendment. However, if it should be that this is slightly extended from this exceptional group of people who are terminally ill and dying to one or two other groups, let us make this more generic and extend it to people who are terminally ill. That is the difference; that is why I disagree with the noble Lord, Lord McNally, when he says that this would be giving this category of people an advantage over others. This is a group of people who are entitled to an advantage. If you are diagnosed as terminally ill—if you are told that you only have nine months to a year to live—then you are not in the same category as others, and we have to do all we can to help.

The Minister said that his noble friend—in fact, it was the noble Lord, Lord De Mauley, yesterday, speaking on behalf of the noble Lord, Lord Freud, who was unwell—gave an assurance that there would be an increase in lump sum payments. That is extremely welcome but it has no bearing whatsoever, of course, on the litigation that we are talking about this evening, which people might embark upon to seek compensation. It is also welcome that there should be an uplift and I hope that no one is suggesting that that should not also be available to people who are terminally ill and dying as a result of mesothelioma.

The Jackson proposals have been referred to a great deal during the debates in your Lordships’ House, but we all know that they are a curate’s egg—they are there in part. They have been chosen where it suits those who are proposing these new arrangements and, where it does not, they are set to one side: this is a very good example of where that has happened.

Let me reiterate: this is not about public money. Legal aid, as the Minister himself has said, has not been available for the past 12 years, so this is not about public money. Nor is it about the compensation culture; we are all agreed about that. It is about an exceptional group of people, but it is also more than that. The noble and learned Lord, Lord Mackay of Clashfern, said that it is about justice. I simply ask your Lordships how it can ever be just to raid the compensation that someone has been awarded because they have proven their case in court—to take up to 25 per cent of what they have been awarded to help them through the last days of their life. How can it ever be a matter of justice to do that? It is for that reason that I would like to seek the opinion of your Lordships’ House.

19:05

Division 3

Ayes: 189

---

Labour: 142
Crossbench: 31
Independent: 3
Liberal Democrat: 2
Bishops: 2
Ulster Unionist Party: 2
Democratic Unionist Party: 1
Conservative: 1
Plaid Cymru: 1

Noes: 158

---

Conservative: 106
Liberal Democrat: 47
Crossbench: 4

19:16

Amendment 132AB

Moved by

[Lord Bach]

132AB: Before Clause 43, insert the following new Clause—
“Exception for industrial disease cases
The changes made by sections 43, 45 and 46 of this Act do not apply in relation to proceedings which include a claim for damages for a disease, condition or illness (whether or not resulting in death) resulting from any breach of duty owed by an employer to an employee.”

[Lord Bach]

My Lords, I beg to move.

19:16

Division 4

Ayes: 168

---

Labour: 133
Crossbench: 24
Independent: 3
Bishops: 2
Democratic Unionist Party: 1
Ulster Unionist Party: 1
Plaid Cymru: 1

Noes: 163

---

Conservative: 106
Liberal Democrat: 48
Crossbench: 6
Ulster Unionist Party: 1

19:27

Sitting suspended.

20:00

Amendment 132AC

Moved by

[Baroness Coussins]

132ACBefore Clause 43, insert the following new Clause—
“Exception for international human rights cases
The changes made by sections 43, 45 and 46 of this Act do not apply in relation to proceedings which include a claim for damages for international human rights cases.”

[Baroness Coussins]

My Lords, In moving Amendment 132AC, which was added as a manuscript amendment this morning, I shall speak also to Amendments 134, 135 and 138, which I believe are consequential to that first one and appear in the Marshalled List under my name and have the support of Members on all sides of the House. My amendments would ensure that in this country we retained effective access to justice in our courts for overseas victims of human rights abuses or environmental harm caused as a result of the operations of UK companies. These amendments would not involve any expenditure whatever from the public purse. I remind the House of my interest as a non-executive adviser on corporate social responsibility to various companies and I acknowledge the work of CAFOD, Amnesty, Oxfam and other organisations in the corporate responsibility coalition which strongly support these amendments.

I am grateful to the noble Lord, Lord McNally, and the noble and learned Lord, Lord Wallace of Tankerness, for meeting with me and others to discuss these amendments and for the subsequent letter the noble Lord, Lord McNally, sent. I am only sorry that I do not seem to have persuaded him of the need for these amendments but I will have one more go here today and make four brief points in response to the reasoning set out in his letter of 29 February 2012 to me and the noble Lord, Lord Stevenson.

First, the Government are clear that the effect of Part 2 of this Bill should be, and I quote from the impact assessment,

“a transfer of resources primarily from claimants and claimant lawyers to defendants. For many of the cases in scope, the defendant is a public body, funded by the taxpayer”.

There is the critical difference. In the type of cases that I am referring to, the defendant is not a public body. It is not the NHS, for example. The defendants here are multinational companies, often with huge resources and large teams of their own very expensive lawyers. The claimants, by contrast, in past cases have included rural farmers from remote areas of Peru or Colombia, South African asbestos miners, or citizens of the Côte d’Ivoire, one of the poorest countries in the world. So my amendments are about an exceptionally different type of claimant from those this Bill is really about, and I think that that must be acknowledged.

Secondly, the Minister has said that damages-based agreements, or DBAs, are the answer, but in my view he has not backed this up with evidence as to how DBAs would work specifically for these types of cases. Without my amendments, lawyers’ success fees would not come from the losing company; they would be taken out of the victim’s damages. Shifting the burden of payment for fees and insurance costs from the defendant to the victim risks substantially reducing or even wiping out the damages that victims receive. In such situations it is hard to imagine it being financially viable to bring the case in the first place.

Thirdly, the Government acknowledge that a potential impact of the Bill’s proposals is that fewer cases may be brought, especially where there is a lower probability of success or where cases involve highly disproportionate costs compared to the amount being disputed. That is exactly the case with these international corporate human rights abuse cases. This does not mean that such cases are not worth pursuing. It is still vital that vulnerable victims should get justice and at least some compensation. Companies need to know that they can be brought to account if they act irresponsibly. The proposed amendments to Clauses 43 and 45 would retain the current funding system for international human rights cases. I want to make it clear that creating this exception would not gut the overall aim of the Bill. It would not fundamentally undermine the Bill’s purpose at all. The offending company would have to pay out only if the case met all the existing prescribed criteria to do with public interest.

Finally, other countries will be looking to the UK to follow our lead in working out how to implement the United Nations’ guiding principles on business and human rights. What kind of example are we setting to other countries if we change our laws now to make it even harder for poor victims of corporate abuses to seek redress? I urge the Government to agree to carve out an exception for these rare cases, which the Bill was surely not intended to be about in the first place. I beg to move.

[Lord Judd]

My Lords, I strongly support and endorse this amendment. We have been reminded that a number of very significant organisations in this country which are working in the front line in the countries concerned feel passionately that this amendment is necessary. I declare an interest as a former director of Oxfam. All my experience during those years at Oxfam and since in my work with similar organisations has underlined the importance of this amendment. Not infrequently I found myself in a situation in which we were being asked to respond to need. In effect, by responding to need we were masking injustice because we were dealing with the consequences of what had happened instead of getting to the roots of what had happened. This seemed in a sense dishonest in that if we were serious about the issues that confronted us, we had to get to the underlying cause that had brought about the lamentable situation.

From that standpoint I reached a very firm conviction during my time at Oxfam and since that very frequently people in the Third World are not primarily asking for handouts or support, they are asking for justice. If they have not got justice, how on earth can they get themselves together to start self-generating progress and the rest because they are burdened by the consequences of what has happened to them as a result of abuse of one kind or another? That is fundamentally wrong. Of course, if people are desperate to start taking their situation forward themselves, we should ensure that that is possible and that they are not artificially and unnecessarily hindered.

I really do not know how a Government who set so much store by their commitment to the overseas aid programme—which is a great credit to them—in saying that it must be ring-fenced in the current economic situation do not see that the logic of that position demands that an amendment of this kind should be accepted. Failing to accept this amendment would be working against the very commitment of the Government. From that standpoint, I applaud the amendment and hope that the Government will feel able to take it seriously, even at this late stage.

[Baroness Miller of Chilthorne Domer]

My Lords, I have put my name to Amendment 134 in the belief that the Government are quite right, in general, on the principles in this part of the Bill but they are wrong not to have made an exception in this case. These are very modest amendments to allow exceptions to be made.

The noble Lord, Lord Judd, mentioned one reason why exceptions need to be made: DfID. This Government are working hard to follow the amount of aid that this country has committed—and I pay tribute to the Opposition. But it is not only DfID. The FCO realises that soft power is very important, and the Department for Business also realises that companies need to be socially responsible. Corporate responsibility has become a very important standard for this country.

This is recognised across almost all of government, and I urge my noble friend and the Ministry of Justice to join the other departments in making sure that companies listed here that have the potential to cause enormous damage—the extractive industries, in particular, whose work is accelerating at an enormous rate, and also agribusiness as commodity prices go up; there are a number of businesses whose turnover and impact in the world is growing day by day at a rate that was quite unimaginable even a decade ago—that needs to be balanced by better access to justice, not worse. It is for that reason that I support these amendments.

[The Lord Bishop of Newcastle]

My Lords, I too support this amendment, which I think is really important. It is about the impact this Bill will have on access to judicial remedies for victims in host countries who are harmed by the activities of multinationals. Under the existing regime, it is already difficult for these kinds of cases to be brought in the UK. This Bill will change that system to make it virtually impossible for such cases to be brought in the future.

The cases in question are typically brought by poor victims who have had their livelihoods destroyed, their homes despoiled or their health gravely damaged by the UK or a UK-based company. As it stands, the Bill makes it economically unviable for both claimants and law firms to bring such cases due to the high financial risks. Provisions on success fees and insurance premiums mean that even if they were successful, claimants would have to pay such fees and costs out of their own damages.

This fundamental change is inappropriate, surely, because damages awarded would be typically too low to cover the costs involved. Damages in these particular cases are assessed according to developing country standards, whereas legal costs are incurred in the UK. As a result, as others have said, the Bill will create a practical barrier to justice and it is very unlikely that such cases will continue to be brought.

There would be no additional cost to the taxpayer if this amendment were accepted, but the benefits would be hugely significant in enabling poor communities to claim damages where they have been harmed and, just as importantly, in showing companies that they cannot act with impunity. I hope that the Government will reconsider this aspect of the Bill and move towards accepting this amendment.

[Baroness Howe of Idlicote]

My Lords, my name is not on this amendment but, having listened to the arguments, there seems to be absolutely no good reason why the Minister should not agree to it. It is not going to cost the taxpayer anything extra and it means that companies that have been the cause of this sort of damage should pay the proper price and the proper compensation. I certainly back the amendment moved by my noble friend Lady Coussins.

20:15

[Lord Brennan]

My Lords, the arrival of globalisation as a world economic and human phenomenon, we hope, brings more benefits than disadvantages. However, reality tells us that globalisation produces serious adverse consequences from time to time, particularly in the developing world. It cannot be right that developed countries such as ours do not have a system of justice that provides remedies for those affected in such countries because of the liability of companies based in this jurisdiction. That reality in terms of what justice should provide should enable people from those countries access to our courts to seek appropriate remedies.

Amendment 134 in this group gives a power to the Lord Chancellor to provide regulations that would permit, in certain circumstances, our courts to deal with such cases. The numbers of cases that are likely to arise are few. Their cost and complexity is very large. To make provision for them would produce no consequence that would damage the Government’s policy in this Bill to save money and introduce cost control. None of that would be affected.

In my professional experience at the Bar I have done several of these cases. I have two examples to illustrate what I consider to be the validity of my submission to your Lordships. The South African resource of asbestos was a major benefit to companies in this country for decades. The standards of working practices and protection of ordinary workers were extremely low. I will not reveal anything that is not in the public domain by saying that I represented the plaintiff African miners—7,000 of them—many of whom were women, who were being used to break asbestos rock against granite to free the asbestos fibres for collection and use while bearing on their backs newborn babies. It is difficult to imagine that anyone would not think that that called for some remedy, if proved.

The case was dealt with in this country in the 1990s and it took three years of hearings in the lower court, the Court of Appeal and the House of Lords Judicial Committee before the plaintiffs finally got an order that the case should be heard in this country. Not surprisingly, it was eventually settled, a settlement that included compensation to all those people who had had to produce their medical records, their X-rays, from the very difficult administrative circumstances of the young South Africa of the 1990s and of the Government of South Africa, who were given money by the defendant company to contribute toward the clean-up of asbestos residues at the mines where they had been produced. All of that produced a trust settlement. All of that cost a huge amount in expense, with top class lawyers. Can it seriously be suggested that, under any of the reforms proposed in this Bill, such services by lawyers would be given these days? It is an absurd proposition.

I will move on to describe the second case, and then I will briefly come to a conclusion. I was involved in the Ivory Coast case in its early stages and I went to Abijan. We had tens of thousands of claimants, all of whom had to fill in questionnaires and produce medical evidence—often in French, in Francophone Côte d’Ivoire —and then come to England to pursue their case. By the time of this case, a few years ago, the law had changed, and I invite the Minister and his staff to bear this in mind. The law of the European Union now states that plaintiffs like that must sue the company which is alleged to be at fault in the jurisdiction from which that company operates. They are required to come to our country to pursue their claim. It is not a matter of form shopping—it is a requirement. That case cost a fortune, and it was settled, and it took years.

Companies such as this are often either insured, with enormous excesses that give them a lot of influence on the conduct of the litigation, or they are self-insured, because they are so big and powerful. For two or three years the programme is one of the plaintiffs producing all their medical and expert evidence and then going to court, hearing after hearing, long before trial, and spending a fortune. However, there was legal aid for the South African case and a conditional fee agreement for the case I have just mentioned. It worked and justice was done. That is all that I am asking the Government to consider should be done for this class of case in the future. These people have to come here. They do not have elite lawyers, funding or local remedies. They come to our country for justice. They come to where the company was based and where it should face justice.

This is a state of affairs which I commend to the attention of the Government and the House. How could it be said that any such case was properly catered for by allowing the previous system that was used in the Côte d’Ivoire case to continue? How could that adversely affect all the domestic factors that figure for local people? How could it benefit this country? Will we leave the Chamber having voted in favour of this, with our heads held high because we represent a country in which justice still prevails and access for the poorest, from wherever, is still available, or do we hang our heads in shame over something that cannot possibly be justified?

There is a risk that if this kind of exception is not made grave injustice will follow and the reputation of our country and our courts for just civil proceedings will be seriously damaged. It is time to think.

[Lord Stevenson of Balmacara]

My Lords, I thank those noble Lords who have spoken in this debate, in particular the noble Baroness, Lady Coussins, who, with her usual fluency and clarity, made the case extremely well. My noble friend Lord Judd, with his lifelong commitment to human rights, also drew attention to the many organisations who have written to us and who have supported the case that has been made tonight. My noble friend Lord Brennan, who has just spoken, has direct experience of many of the cases which we are talking about today and left us with a very powerful message about the impact that could be effected if the Bill goes forward unchanged. I thank the noble Baroness, Lady Miller, for her support of our amendment, particularly for drawing attention to the wider soft-power aspects which are so important in this area, and the right reverend Prelate for bringing into play the inevitable impact on poor communities of the Rome II regulations. Those will of course limit the level of expenses that they can possibly receive, and therefore create a completely unbalanced playing field in this area.

To apply the test that was proposed by the noble Lord, Lord Faulks, in the previous group, it is clear that the widely held view around your Lordships’ House is that once this Bill becomes law, it will not be possible to mount cases brought by vulnerable victims of corporate abuses perpetrated overseas by UK companies within the English courts. As we have been reminded, they have to be raised here. There can be little doubt that the Government really are on the wrong side of the argument tonight, and I join with the noble Baroness, Lady Howe, in not being at all clear why this is the case.

In his letter to me and the noble Baroness, Lady Coussins, of last month, which has already been referred to, the Minister argued that corporate human rights cases could still be viable under the measures contained in the Bill, and he helpfully highlighted the opportunity to use damages-based agreements—DBAs. This line of argument derives from the much quoted Jackson report which, it is worth pointing out, did not specifically deal with the cases that we are highlighting today. I will not go into the detailed arguments, as they have been well covered, but neither of Lord Jackson’s suggestions—under which the effect of lower damages recovery would be ameliorated, in his view—will work for typical corporate human rights abuse actions brought by claimants from developing countries.

We recognise, and indeed support in some ways, that one objective of this Bill is to reduce the costs of cases across the legal system as a whole, and one cannot be against that. Clearly there is a much better reason for this where these costs fall to be met in whole or part by the public purse but, as the Minister has already accepted, we are not dealing with this area in this part of the Bill. However, in the cases we have highlighted, not only is there no cost to the public purse, but there is already a system in place to decide whether the legal costs awarded are appropriate. Indeed, it was used in recent cases to significantly reduce the costs claimed by the winning side, although they did in fact settle.

It may be irritating to the department to have to create a carve-out in a Bill for such a small group of cases, but surely it is vitally important that vulnerable victims should get justice—and at least some compensation —for the trauma and harm that they have experienced, or for the loss of livelihood or even of life that has been caused by UK companies. It is equally important that companies need to know that they can be brought to account if they act irresponsibly. That is why we believe it is warranted to carve out an exception, so that the broader measures in this Bill do not close off justice in the UK for this small but very significant group of cases.

Our amendments would retain the current funding system in effect for human rights cases. Creating this exception would not be fatal to the overall aims of the Bill. The existing regime of success fees and “after the event” insurance premiums being paid by the losing company instead of coming out of the damages of the claimant are, in our view, the most sensible way of ensuring that these cases continue to be mounted. Moreover, it is unlikely to be more than a few cases a year, as stringent rules have to be met before such cases can be mounted.

In the debate last week, the noble and learned Lord, Lord Wallace of Tankerness, recognised that, in clinical negligence cases, removing the recoverability of ATE insurance premiums could create a real problem for claimants. The Government have therefore created a carve-out because expert reports are such an essential requirement for building clinical negligence cases successfully. However, the expenses of obtaining such reports would not necessarily be covered under the new regime. In the human rights cases that we are looking at, expert opinions and reports—for example, the analysis of alleged toxic waste or polluted water; or medical examinations in relation to asbestos ingested by miners in South Africa—are a vital part of showing that there is a valid case to answer. There is a very strong read-across from clinical negligence cases to the sort of human rights cases we are dealing with here.

I hope we can find an accommodation here. In plain terms, all the evidence suggests that the approach being taken in this Bill will kill off the chances of mounting this very small group of special cases in future. How poignant it is that at the same time as we are debating this amendment, the Foreign Office is leading valuable cross-governmental work on how we implement the UN guiding principles on business and human rights adopted in June 2011, which the Ministers told us in our meeting with them that the Government support. We were one of the countries most closely involved in UN Special Representative John Ruggie’s work. Indeed, the previous and the present Governments have been vocal in their support of the guiding principles and the present Prime Minister has committed publicly to implement them.

What sort of example are we setting and what message are we sending to UK companies if we now change our laws to make it hard for poor victims of corporate abuses perpetrated by UK companies to seek redress? They may be a small number of cases but they have had a direct impact on the lives of millions of people in the developing world. Each successful case has shone a harsh light on key areas of corporate misconduct in the developing world—from the dumping of pollutants in the water supplies of communities to appalling health and safety standards in mines and to direct corporate involvement in abduction and torture. Ultimately, it is surely important that businesses know that they cannot act with impunity. We do not want the majority of responsible UK businesses to be at a disadvantage because laggard companies get away with substandard, harmful business practices.

20:30

[Lord McNally]

My Lords, the noble Baroness, Lady Coussins, said that making this exception would not “gut” the Bill. But I hope that noble Lords who sit through these debates or perhaps read Hansard will see the pattern. Clauses 43 and 45 are a fundamental element of the package of reforms recommended by Lord Justice Jackson to deal with the problems of disproportionate costs in civil litigation under CFAs. I have called that the central architecture of the Bill. The clauses seek to reform and remove the inflationary defects introduced into the system by the previous Administration, which is the central point.

The Jackson reforms look at a specific part of our civil justice system. Throughout the passage of the Bill, we have had claims for exceptions to the central architecture. Certainly, in debates an adopter stands up and goes into the great clinical detail of an illness that we might be talking about, as if that is what the debate is about, and whether one should vote for or against it. Or the noble Lord, Lord Brennan, tells us of the suffering and the hardship of working in mines in South Africa as though that was the subject of the debate. Then everyone thinks, “Oh, we can’t be against poor women in South Africa in such conditions or people suffering from such terrible diseases”. In fact, that will remove the central reforms of the Bill.

In most of the examples that we have had so far, when one looks at what we are actually doing, they do not stand up to examination. It is of course always possible to make the case for an exception in a particular class of case, as noble Lords have done. But we believe that our changes must apply across the board. However, let me make it clear at the outset that we support claims arising from allegations of corporate harm in developing countries being brought and we support the protection damages for personal injury. No-win no-fee conditional fee agreements will continue on the same basis on which the noble and learned Lord, Lord Mackay of Clashfern, introduced them. Indeed, if the noble Lord, Lord Brennan, was referring to a case in the 1990s, it was probably brought under this regime, which is the basis on which it still operates in Scotland. We are also extending the availability of damages-based agreements, which are sometimes called contingency fees, to enable their use in civil litigation. Some of the objections to DBAs from the representatives of big business make me feel that they are a much more potent weapon than people give them credit for.

As I have said, we recognise how important these cases can be. We recognise also that, following the Rome II regulations, the damages in these cases can be relatively low. But the costs have been extremely high, as demonstrated in the now notorious Trafigura case, in which the Court of Appeal criticised the claimant lawyers for seeking costs of £100 million in a case which resulted in £30 million in damages. I should add that the defendant’s costs were only approximately £14 million, which was about one-seventh of the costs claimed by the claimants.

The reforms in Part 2 are about making costs more proportionate, while allowing meritorious claims to be pursued. As has been recognised by the noble Baroness, Lady Coussins, I and my officials have met on several occasions with representatives of NGOs which support these cases but we are not persuaded that they cannot be brought when our changes are implemented. We have asked for examples of further details of costs. If noble Lords want to engage between now and Third Reading, I will be happy to do so.

However, I continue to come to this Dispatch Box to answer attacks on this legislation that do not stand up to examination of the reality. It often means that the Opposition cleverly erase their own record in these areas and immediately adopt whichever hard case is being brought forward as the exception that will not damage the whole architecture of the Bill. We believe that Jackson was right in his reforms. We do not believe that those kinds of cases—I think the number referred to is about 10 such cases in the past 15 years —will be prevented from being brought.

We have listened carefully and we have sought to engage with relevant NGOs on this issue. As I said I would in Committee, I have now discussed this matter further with the Secretary of State but for the reasons that I have given we remain unconvinced that these cases cannot be brought under the new regime, as was suggested by the right reverend Prelate the Bishop of Newcastle.

[Lord Brennan]

The noble Lord is most gracious to give way. The points I was making were illustrated with cases. My principle point was that these cases are so expensive to run that you need a capital base which is not available to lawyers in this country. I should like the Minister to consider—if not now, later—in explaining to the House how it is that his advisers are telling him that lawyers in this country can raise £2 million, £3 million, £4 million or £5 million to run a case for three or four years. How will that be done?

[Lord McNally]

I will certainly take note of that. I realise the experience of the noble Lord, Lord Brennan, in these areas. When we asked the NGOs for hard facts and figures on costs, they were not forthcoming but perhaps there is time between now and Third Reading to re-engage. I also think that part of the problem is that whatever we have in civil law, conditional fee agreements or anything else, some of the problems raised by the noble Lord, Lord Brennan, in illustration will not be solved in British law courts or by changes in the British legal system. We are trying to reform what everyone who comes to the Dispatch Box acknowledges is a defect in our civil legal system and for which Lord Justice Jackson has produced a reform package that we are trying to put into law. Everyone agrees that we are right to do so, but for this, that and the other exception. Again, I am willing to discuss this further, but I do not think the case has been made—

[Lord Judd]

My Lords—

[Lord Martin of Springburn]

My Lords—

[Lord McNally]

I am sorry, but I am not going to take questions. We are hard-pressed for time. I have offered to re-engage, but as I said before, the evidence we asked for has not been forthcoming and I do not believe the argument that without this amendment, it is going to be catastrophic for these particular cases; that is, for those which people want to take through our law courts. I ask the noble Lord to withdraw his amendment—

[A noble Lord]

The noble Baroness.

[Lord McNally]

I am sorry, the noble Baroness, Lady Coussins. I am happy to re-engage between now and Third Reading, but at this point we are not convinced.

[Lord Judd]

So the earth is flat.

[Lord McNally]

No.

[Baroness Coussins]

My Lords, I thank all noble Lords who have contributed to this debate and I appreciate everyone’s support. I particularly appreciated the powerful contribution made by the noble Lord, Lord Brennan, who helped us to envisage what these amendments would mean to real people in the real world rather than just considering the administrative and legalistic matters that are set down on paper. I also thank the Minister for his thoughtful, if disappointing, response. It is all very well to support something in principle, but if in practice you cannot get at it, that support becomes meaningless. However, I appreciate the Minister’s offer to engage between now and Third Reading, and I can assure him that I will pursue that offer in order to look very carefully at what could be brought back at Third Reading. That is because if this Bill remains unamended, I fear that what we will end up with are poor, vulnerable people in developing countries who not only will be the victims of corporate human rights abuses, but the victims of the unintended consequences of this Bill. For now, however, I am content to withdraw the amendment.

Amendment 132AC withdrawn.

Amendment 132B

Moved by

[Lord Thomas of Gresford]

132B: Clause 43, page 30, line 10, after “are” insert “, subject to subsection 4C,”

[Lord Thomas of Gresford]

My Lords, this group of amendments sets out the refinements to the architecture of the Bill that I have previously suggested. Noble Lords heard from me at some length before and I do not propose to repeat everything I said. I would just remind your Lordships that the model I am suggesting is that lawyers’ success fees should not be paid if the case settles or liability is admitted before proceedings are commenced. The reason for that is that there is no risk to the lawyers that they will not be paid. Noble Lords will recall that I quoted from my own speech back in 1998 when I indicated then that the question of risk was important, but had never been properly assessed. That is the first limb of my argument, and it is set out in Amendment 132C.

I went on to draw attention to the significance of the point of allocation within proceedings where a case is sent to the fast track of small claims or becomes one of the multi-track cases. In the multi-track cases, I suggested that the success fee should be paid, but split 50:50 between the successful claimant and the losing defendant. While in this area, I suggested that the claimant would have an interest in the amount of the success fee and that there would be the possibility of competition. Those points are set out in Amendments 132E, 133B and 133E.

That is the point I reached when the noble Lord, Lord Bach, suggested that I had gone on for too long, and no doubt I had. It is interesting because we are supposed to have these discussions about legislation on Report. The last time I spoke on this issue, the noble Lord, Lord Newton, said that he was in a fog and someone leant across to ask, “What on earth is he talking about?”. That suggests that legislation on these detailed points should not be on the face of the Bill but should be dealt with in secondary legislation following negotiations between interested parties. This system builds in a form of solidity that it is very difficult to remove.

20:45

I want to make one or two points before I deal with the other matters. The first is ATE insurance premiums. The point has been made and accepted that one-way costs-shifting should be applied where there are conditional fee agreements. However, they should not only be applied in personal injury cases; rather, there should be a power along the lines proposed in my amendment to extend the areas of law to which one-way costs-shifting should be involved to when the Lord Chancellor thinks it is appropriate. Consequently I think there is far more flexibility, in the light of the experience available, in my Amendment 142B on one-way costs-shifting than was suggested by the noble Lord, Lord Beecham. It states:

“Rules of Court may provide that in proceedings of a description specified by order made by the Lord Chancellor”,

so that the introduction of other areas of law could come in by stages. I think that that is the way to go forward.

I shall give two specific examples of areas of law proceedings which I suggest should be subject to the one-way costs-shifting regime. The first and most important is environmental cases. These cases bring additional complexities. The United Kingdom is a full signatory to the Aarhus convention, which includes the requirement that the costs of environmental proceedings should not be prohibitively expensive. The Aarhus principles are themselves embedded in a range of European legislation which has been incorporated into a range of United Kingdom law. Indeed, I could quote cases in which those principles have been discussed.

I addressed in Committee the point that the changes which are to be implemented will mean that this jurisdiction is not compliant with the underlying requirements of the convention. Protective costs orders are not an answer. Your Lordships who were here in Committee may recall that my noble friend Lord Lester raised protective costs orders. Now that I have had the opportunity to consider them, as opposed to having a swipe from behind, I can give some answers to his arguments. First, a protective costs order is not available to claimants who want an injunction in nuisance or private proceedings. The whole arrangement is too uncertain and discretionary to be a reassurance for claimants who are contemplating environmental proceedings. The procedure is stressful, time-consuming and expensive. All sorts of satellite litigation are involved. The prohibition on a private interest in proceedings is of uncertain application and scope. If you have the private interest, if the nuisance is affecting you, you cannot apply for a protective costs order, which is an enormous limitation on its usefulness. The cap on the defendant’s costs of £30,000 may be sufficient in some cases, but there are certainly cases where a cap of £30,000 in a protective costs order will not be. It will ruin claimants, who will be put off taking proceedings. The application for a protective costs order has to be renewed at different stages of proceedings.

One-way costs-shifting is needed to ensure compliance with Aarhus and the international obligations which we have accepted, and they require specific provision; that is Amendment 142BA. Amendment 142BB deals with matters that were raised by the noble Lord, Lord Ramsbotham; that is, actions against the police, false imprisonment and deaths in custody. Such actions are pursued by civil liabilities firms and should be within the area of one-way costs-shifting, because the defendant is the state—in this situation, a powerful state, whether it is a police force or a prison; those are the sorts of cases that I am referring to.

The amendments make it clear that one-way costs-shifting should apply where there is a claim which entails either the protection of the environment or civil liberties. The Bill should import a specific definition which ensures that the rule is engaged only where the convention applies.

The model, which I have outlined in my past two speeches and which is fully supported by the personal injuries Bar, although it is not the solution that it originally argued for, strikes the right balance. It builds the house with a structure which is fair and will last. The claimant whose case settles before issuing proceedings receives his damages in total, free of any success fee deduction. The claimant who settles after issuing proceedings will receive most of his damages and there will be a commercial interest in driving down success fees. Claimants with smaller claims, such as for whiplash, will pay a limited success fee out of their damages, but there is an incentive for insurers to admit liability early and settle. If the case is allocated to the multi-track, that opens up liability to the insurers for 50 per cent of the success fee. There is an incentive for lawyers to engage in difficult cases where liability is denied on the multi-track, because they can earn a significant success fee if they win. A claimant with a difficult case on the multi-track will pay only half the success fee out of his damages and not, as the Government now propose, 100 per cent of the success fee. One-way costs-shifting will break the excessive “after the event” market, and premiums for “after the event” cover merely for disbursements will be much lower. Even then, my amendment would divide up those ATE premiums between the claimant and the defendant, whereas the Government propose that, if there is a premium, it should be payable by the claimant only. This is a refinement of the Government’s scheme. I know that the Minister is anxious to maintain the architecture of the Bill; my proposal does not destroy it but amends it in a way that is fair.

The reforms introduced by the noble and learned Lord, Lord Irvine, in 1999 were brought in in good faith but they were open to exploitation and abuse. I am not with those from the Opposition and Cross Benches who argue for simply taking their particular area of law out of the new arrangements. The current status quo has to be changed. It is no good saying that in this area, that area or another area we should maintain the status quo. It has to be reformed. We on these Benches pride ourselves as being the party of reform. It is in that spirit that I ask my noble and learned friend to continue the dialogue that we have had on these amendments and to come to some conclusions before Third Reading. I beg to move.

[Lord Beecham]

My Lords, I thought the party of the noble Lord, Lord Thomas, was a party of conscience and reform. Conscience appears to have taken a back seat. I have a good deal of sympathy with most of the amendments to which he has spoken and I shall briefly comment on them.

Although we would prefer that the success fee were not deducted at all from a successful claimant, the noble Lord’s proposal is clearly better than the Government’s proposal. So, to the extent that the Government might be disposed to listen to him on this, we would support that in lieu of what we regard as an even better position.

The other amendments to which the noble Lord spoke largely depend on matters being determined by rules of the court, which would appear to have a discretion to make the necessary changes, for example, under Amendments 142B, 142BA and 142BB, with the Lord Chancellor, in the case of Amendment 142B, identifying the proceedings but not necessarily requiring the change to be made.

I entirely share the noble Lord’s view about environmental claims, and a subsequent amendment in my name covers much the same territory. In Committee, I quoted at some length the legal opinions to which the noble Lord referred at that time and dealt with the point about the Aarhus amendment and the points made by his noble friend Lord Lester, which, I agree, misstate the position in respect of protective costs orders. The noble Lord, Lord Thomas, is absolutely right to say, as I said on that occasion, that they do not offer a sufficient defence, as it were, to those in that position.

I similarly agree in relation to the civil liberties claims and, again, we have tabled an amendment in somewhat similar terms, with the exception that under the opposition amendments the Lord Chancellor would effectively take the decision which would change the nature of the position in relation to those claims. As that would have to be, as the noble Lord implied at one point, through secondary legislation or affirmative resolution, it is a more accountable way of dealing with matters than simply leaving it to the courts to determine.

In these circumstances I apprehend that the Government will not be disposed to accept these amendments. Perhaps the Minister will be willing to undertake further discussions with his noble friend, if not with anybody else. If not, as the matter clearly will not be put to the vote tonight, I can only record our unfortunate disagreement with the position in which we will end up because it will not be satisfactory. I do not accept that it is undesirable and wrong to look at particular instances which might fall outside the general rules. The Government have acknowledged to some degree that this should be the case in relation to recoverability under clinical negligence. If they can do that in respect of clinical negligence, then they can equally extend a similar principle elsewhere. Having said that, we await the noble and learned Lord’s response.

[Lord Wallace of Tankerness]

My Lords, I thank my noble friend for his amendments. It will come as no surprise to the House if I yet again echo what has been said on numerous occasions on Report: the architecture, as my noble friend Lord McNally referred to it, of this part of the Bill seeks to ensure that there is fundamental proportionality and fairness across the board in these claims, and that is why we have adopted the proposals of Lord Justice Jackson.

The cumulative effects of Amendments 132B, 132C, 132E, 133B, 133E, 139D, 140A, 141ZA, 141ZB and 142B would be, as my noble friend said, a refinement on what has been proposed. When the noble Lord, Lord Beecham, talks about my party and my noble friend’s party as being a party of conscience, it is because we feel that some of the fees that have been charged have been unconscionable under the existing scheme. That is why we wish to address the issue.

My noble friend wishes to introduce staged success fees. I am very grateful to him for his complex set of amendments; he has set out what the fees would be at different stages, on the multi-track approach. His proposals would introduce staged success fees in ATE insurance premiums, the cost of which would be split between the losing defendant and the successful claimant. Some recoverability of success fees in ATE insurance premiums would therefore remain.

I assure my noble friend and the House that we have given the amendments careful consideration, even at this late stage. They are proposed as a compromise and are supported by some but not all personal injury claimant representatives. It is fair to recall that these proposals are not entirely new. In his report, Lord Justice Jackson made primary recommendations that have essentially been adopted by the Government in Part 2. He also made an alternative set of recommendations which, while not identical, bear some considerable similarity to the proposals put forward by my noble friend.

21:00

The Government consulted on both sets of proposals in their consultation. However, the respondents to the consultation expressed relatively little support for that alternative. Having given full consideration of all the responses, the Government announced almost a year ago their way forward in line with the primary recommendations of Lord Justice Jackson’s report. The proposals, which the Government essentially endorsed, amount to a package of measures which are carefully balanced to be fair to claimants and defendants. They are based on the abolition of recoverable success fees and insurance premiums, but have some supporting features which are intended to balance the abolition of recoverability. These include a 10 per cent increase in the level of general damages and the introduction of qualified one-way costs-shifting, or QOCS, in personal injury cases. In addition, measures to improve the arrangements for offers to settle under Part 36 of the Civil Procedure Rules are also seen as part of the package. Although the detail of all these proposals has not yet been finalised, the essential architecture is in place and is there to be seen.

Our concern would be that revisiting these essential features, which would be the consequence of accepting my noble friend’s proposals, would require us to reconsider the whole package, and in particular whether the balancing features, such as the Part 36 sanctions, or the specific exemption of clinical negligence cases, would remain as originally proposed. We do not believe that the alternative proposals would address the high costs under the current regime. As my noble friend indicated during the passage of the Bill, he generally supports the Government’s decision to transfer the burden of the success fee to the successful claimant. However, these amendments would allow elements of success fees to continue to be recoverable.

In the same way, the “after the event” insurers argue for their insurance premiums to be paid by the other side. In some of the more serious cases, these amendments would see successful personal injury claimants paying an increased amount from their damages in legal fees. Again, part of the architecture that we have talked about is a cap to protect damages, which would mean that damages for future care and loss, which can run into millions of pounds in catastrophic injury cases, would not be taken into account and would be free from any claim in terms of the success fee. Our concern would be that these amendments would see some of those carefully calculated, necessary but often substantial damages going not to the claimant but as additional fees to lawyers. While I accept my noble friend’s point that his amendments seek to limit recovery of success fees and ATE insurance premium at the point of allocation, we do not believe that this is right or fair. In particular, although we have no doubt that the amendments were moved with the best of intentions, they could lead to a continuation of the current problems by other means. They could see unnecessarily high costs for defendants, and a greater deduction from claimants’ damages than we propose.

The Government have tried to weigh up all the arguments, and balance the respective interests, and we believe that the proposals that we have introduced achieve that balance. They were consulted on and have been set out in the Bill, and we are not persuaded at this stage that this fundamental change—it is not a narrow refinement—is justified.

With regard to some of the specifics on QOCS to which my noble friend referred, we intend to introduce them at the same time as the relevant provisions in Part 2 of the Bill, as they are implemented in April 2013. My noble friend also seeks to place QOCS in the Bill—we had a debate about that earlier this evening—and he sets out limited exceptions for fraud, vexatious claims and abuse of process. I indicated earlier why we believe that this matter should be done by way of the Civil Procedure Rule Committee and should not be in the Bill. I do not intend to rehearse these arguments again, but it may be that through these rules we can get a kind of flexibility which would allow at a later stage some of the other points to be raised, perhaps more than would be possible if the rules were set out in statute and would therefore require primary legislation.

We believe that the rules allow for sufficient accountability. The Lord Chancellor would remain accountable for the policy of QOCS, and that would be set out publicly by the Lord Chancellor so that he could be answerable to it. The rules themselves would be made by the Civil Procedure Rule Committee, which includes the Master of the Rolls, and are agreed by the Lord Chancellor. They come into effect by way of statutory instrument. There is an established procedure which would involve consultation as appropriate. It would be relatively straightforward to devise a QOCS scheme regime for personal injury cases. Although there are many such claims every year, as a class they contain typical features which simply do not exist in other types of claims.

Other types of claims have been mentioned. My noble friend mentioned, particularly, environmental claims. Amendments 139 and 140 in a later group will no doubt explore this further, but as he may have anticipated the Government still believe that the protective costs order ought to provide better cost protection in environmental judicial review cases. We hope that it will be clear from the outset what costs the claimant would have to pay if the claim was unsuccessful while ensuring that some contribution is made towards the costs of public bodies that have successfully defended a claim. The Government believe that this is the right approach, but we are considering how best to deliver this in the light of recent developments. The Government are currently consulting on proposals to codify the current case law on protective costs orders in relation to judicial review claims which fall under the Convention on Access to Information, Public Participation in Decision-making and Access to Justice in Environmental Matters; it is much easier to say “the Aarhus convention”. That consultation closed on 18 January this year and the Government will announce their way forward in the near future.

The reason we wish to make a distinction is that, while personal injuries have typical features which allow us to go down the road of QOCS at this stage, different considerations apply in other types of cases. “Before the event” legal insurance may be available for professional negligence cases. Legal aid is available in judicial review cases. We will keep this under review, and having the matter dealt with by the Civil Procedure Rule Committee but with the Lord Chancellor setting the policy subject to consultation, and no doubt subject to accountability to Parliament, will allow greater flexibility for these matters to be looked at in the future if a case is made to extend the QOCS system.

We are not persuaded that the refinements proposed by my noble friend would lead to a fair or workable solution. We believe that we have struck the right balances, abolishing the recoverability of success fees, and ATE insurance premiums will mean that claimants have an interest in the cost being curbed on their behalf, which will help to restore proportion and fairness in the current regime. We are also clear that special damages for future care and loss, which provide for necessary care and equipment, should be protected and not apportioned among those representing the claimant. I cannot accept that to change the overall package in this way at this time would lower the costs of civil litigation across the board. Against that background I urge my noble friend to withdraw his amendment.

[Lord Thomas of Gresford]

My Lords, I am not so much disappointed as hurt by my noble and learned friend’s reply. I am hurt that he thinks that my amendments would increase the cost. The whole purpose of tabling these amendments was to come forward with a system that squeezes the excess costs of litigation out of the system. This is one area where he is wrong to make that suggestion.

The other matter that concerns me is that the Minister should suggest that I am in some way completely wrecking the architecture of the Bill. I am not; I am trying to make it better for one reason. The one factor that was missing from his response was whether litigation solicitors and barristers will take on difficult and risky cases under the regime that is now proposed. It is not about the Jackson proposals in toto, although various things are left out. This is the issue. Only time will tell. Will solicitors take these cases on when the success fee has been squeezed down in the way that is proposed?

I was suggesting that for one level—for settlements and so on—there should not be a success fee because there is no risk. That brings down the cost of litigation as a whole. However, where there are risky cases lawyers need a proper reward. That factor was not mentioned in my noble and learned friend’s response. I hope to talk to him more about this matter before we finally dispose of the Bill but, for the moment, I beg leave to withdraw the amendment.

Amendment 132B withdrawn.

Amendments 132C to 132E not moved.

Amendment 133

Moved by

[Lord Martin of Springburn]

133: Clause 43, page 30, line 24, leave out subsection (4)

[Lord Martin of Springburn]

My Lords, I am pleased to move this amendment. I understand that the night is getting on and we have all been here for many hours. I say in the nicest possible way that, as the hour gets later, the noble Lord, Lord McNally, seems to get a bit more edgy or, as we say in Scotland—I do not know if the term is used south of the border—a wee bit crabbit. The noble Lord would not give way.

The Jackson report has been mentioned many times tonight, and it sounds as though it is a commendable report. However, I put it to the noble Lord, Lord McNally, that we are not here just to take a report and rubber-stamp it. That would be easy. It has to be debated and thought through. It would be very easy for our democratic institutions if we just got a report and passed it through, saying, “It’s a good report”. It has to be tried and tested. In that spirit, I am moving this amendment.

I declare an interest. I successfully took the Times to task on a no-win no-fee basis. Even on that basis, it was very daunting to be up against a large media organisation. I have been in politics for a long time and I feel as though we have all been hardened to what the media do and say. It must be even tougher for men and women who never expected to be in a situation in which their reputation was tarnished. It is a great loss that we are losing no-win no-fee for libel damages. My thoughts go to Mr Christopher Jefferies, the landlord in Bristol who was accused of all sorts of things because he was in the wrong place at the wrong time. It was very sad for the poor victim of that murder, but Mr Jefferies was also a victim.

The media said all sorts of things about that poor man. He must have thought to himself that he must take them on, and he did so on a no-win no-fee basis. Mr Jefferies probably took them on knowing—or his lawyers would have known—that whereas he had one solicitor, every national newspaper has a whole team of solicitors. There is not a time in the day when a media editor does not have access to a solicitor. I do not need to reiterate the things that the media said about that poor man as your Lordships know what was said. I was appalled that when the editor—I believe it was the editor of the Mirror newspaper—spoke at the Leveson inquiry, his apology was so cold and unmoving that you would not have known from it that he had destroyed that poor man’s very reputation.

21:15

We all know that the media act as a pack. They have a pack mentality and when one of them went after the man, the others followed suit. I listened to that editor say, “I spoke to the night-shift lawyer and to the day-shift lawyer, and they both said that the story was all right to run. I therefore ran the story and I am very sorry about the difficulty that Mr Jefferies has had”. I think you would have made more of an apology to a next-door neighbour if you had forgotten to take the strimmer back after borrowing it to use in the garden. That is how cold these people are. Anybody else from any other sector, knowing what had been said about that poor man, would have said, “My God, we have done a terrible thing. Let us make sure that we never, ever do it again”. The fact that there was a night-shift lawyer and a day-shift lawyer indicates that the media have an absolute team of lawyers behind them, whereas the complainant gets a lawyer on a no-win no-fee basis.

Mr Jefferies is not the only victim of this: a lady in the Essex area sought damages, but not from the media. She was a local councillor and did her civic duty, which was recognised by the council which elected her as mayor. A very rich person who had more money than sense, as they say, decided that he would falsely allege that the lady was a shoplifter and was unfit to hold public office. He went to the extent of hitching a great banner to his private plane, and flew around Essex saying all sorts of things about this lady. That was not the only time that he had done that. He did the same thing to Christine Butler, a former MP. After the relevant lady had won her case, he said that she was falsely claiming incapacity benefits. The lady was seriously ill but she had to go to court again. At least with a no-win no-fee situation there is no concern about your mortgage or about any savings that you may have, and your lawyer will tell you whether your chances are good or bad.

We know about the things that some newspapers do because we have heard about phone hacking and the type of newspapers that were involved in that. However, I was disappointed in the Guardian as I have always found that newspaper to be very decent and reasonable. In my experience, its staff have not doorstepped people. If they want to make an inquiry or get a quote from you, they have done it through the usual channels or approached you directly in a reasonable way. However, somehow or other they got it wrong in the case of a career Army officer in the Intelligence Corps when they said that he was involved in torture. He took the newspaper to court—or, rather, he did not at first take it to court but sought damages. The newspaper offered him a derisory amount. He was then successful in obtaining a no-win no-fee case, which he won. It was disappointing that the Guardian should have pushed the matter to that extent. The judge awarded £58,000 in damages and described that man as a distinguished soldier. A former commanding officer gave evidence to the effect that the man embodied the best traditions of the British Army.

It is getting late in the evening. I have referred to cases, particularly that of the lady councillor who was on disability benefit. The no-win no-fee arrangement would have taken a great worry away from her, as it certainly did in the case of the soldier. I have declared an interest; the salary that I was earning as a Speaker was on public record, but there is still a worry if you are going to court and you have to engage barristers and lawyers, and take witness statements. You say to yourself, “Am I at risk? Will my mortgage and finances be at risk?”. I urge the Minister to think again. I know what he said about the Jackson report, but in this House and the other place you do not take a High Court judge’s report—no disrespect to High Court judges—fling it on the table and say, “There you are; it is a good report. We’ll all agree to it and go home”. That is not what democracy is about. It has to be tried and tested; and if it needs changing, then we change it. I beg to move.

[Lord Beecham]

My Lords, in fairness to the Government, they did not do what the noble Lord, Lord Martin, suggested. They did not put the whole report on the table and say, “We will have it”, but chose which bits suited them and left out the part of the report that dealt with legal aid, which we have debated at some length, among other matters. However, that is a little beside the point.

I support the noble Lord’s amendment, if only because subsection (4), which it seeks to delete, effectively locks and bolts the door to any subsequent change to the provisions on success fees without primary legislation. That is a formidable obstacle. The subsection is unnecessary and the Government could have dealt with the matter in a way that would have allowed them or a subsequent Government to review the situation without primary legislation. The way that the Bill is drafted does not allow that, and for that reason, if no other, I support the noble Lord’s amendment.

[Lord McNally]

Did the noble Lord, Lord Martin, say “crabby”? My goodness; I have always been thought of as a little ray of sunshine. Of course we have not accepted the Jackson report lock, stock and barrel. We have honed and polished it, and brought it to the House. We have of course accepted the proper role of this House, which is to revise and advise. I listened with a good deal of sympathy to the experience of the noble Lord, Lord Martin, although I have to say that I am not a lawyer, and I would have taken up the case of Christopher Jefferies, never mind anyone else. I think it was the Daily Mirror that accused him of being a Liberal Democrat, which would have been—I had better not say it.

[Lord Martin of Springburn]

My Lords—

[Lord McNally]

The noble Lord has come to my aid, because I think these cases are still going on, and I had better say no more. Whenever I hear the Opposition on the wickedness of the press, I have to remind them that from those Benches more than a decade ago I proposed a minor amendment on press accountability, and was told from this Dispatch Box by the Labour Minister of the day that I was proposing the “slippery slope” to a state-controlled press. We know today what slippery slope we were actually on.

I say to the noble Lord, Lord Martin, as I have explained in dealing with other amendments, that abolishing recoverability of success fees and insurance premiums from the losing side will rebalance the CFA regime to make it fairer for defendants by reducing the substantial additional costs which they have to pay under the current regime. Amendment 133 would retain the recovery of success fees from the losing side in all cases. I am not sure whether Amendment 133ZA was spoken to, so I shall not refer to it, but the noble Lord, Lord Martin, made it sound as though we were abolishing CFAs. I emphasise that CFAs will still be available to fund the same cases as they were under the original arrangements introduced by my noble and learned friend Lord Mackay of Clashfern.

However, I understand the concerns of the noble Lord, Lord Martin, about the press. I am not sure that they are best dealt with in this Bill. As the noble Lord will know, I hope that parliamentary time can be found to introduce a defamation Bill. It is in that Bill that we will look at the question of the balance of arms between the individual and large media interests. I hope that we can do that reasonably soon. In the light of that and what I have explained, I hope that he will withdraw his amendment.

[Lord Martin of Springburn]

My Lords, I am very pleased that the noble Lord has said that he hopes to bring in a defamation Bill. That at least is something, because my worry is that there is a great imbalance. I will not detain the House any longer. I beg leave to withdraw the amendment.

Amendment 133 withdrawn.

Amendment 133ZA not moved.

Amendment 133A

Moved by

[Lord Thomas of Gresford]

133A: Clause 43, page 30, line 24, at end insert—
“( ) In section 58A of that Act, after subsection (6), insert—
“(7) A costs order may include provision requiring the payment of any fees payable under a conditional fee agreement which provides for a success fee in the following proceedings—
(a) proceedings in England and Wales by a company which is being wound up in England and Wales or Scotland;(b) proceedings by a company which has entered administration under Part II of the Insolvency Act 1986;(c) proceedings in England and Wales by a person acting in the capacity of—(i) liquidator of a company which is being wound up in England and Wales or Scotland; or(ii) trustee of a bankrupt’s estate; (d) proceedings by a person acting in the capacity of an administrator appointed pursuant to the provisions of Part II of the Insolvency Act 1986.(8) In subsections (7)(a) and (7)(c) “company” means a company within the meaning of section 1 of the Companies Act 2006 or a company which may be wound up under Part V of the Insolvency Act 1986.”.”

[Lord Thomas of Gresford]

My Lords, I return to a subject which we addressed in Committee: proceedings brought by a liquidator of a company, the trustee of a bankrupt’s estate or an administrator appointed pursuant to the provisions of Part II of the Insolvency Act 1986 to recover the assets of a business or company which has gone into liquidation or has become financially insolvent.

The point is that insolvency practitioners who engage in that important work have to bring proceedings to recover the assets of the company, or money representing the assets of a company, from a company director or partner in the firm. They can be very expensive proceedings, because a lot of investigation has to be undertaken. Often, the director or partner who is in default has disappeared—or hopped it overseas—so it is not easy to bring those proceedings. The liquidators, and so on, cannot bring the proceedings themselves. They employ solicitors to do that and to carry out those investigations. From time to time, they are forced to go to court to try to get a court order against an individual. In so doing, a conditional fee agreement is entered into, and a success fee is part of that conditional fee agreement.

As all of us will know, one of the major creditors is Her Majesty’s Revenue and Customs. Consequently, it seems a little silly to employ insolvency practitioners to recover all this money and then to have a reduction, contrary to the interests of the Revenue and Customs, from whatever has been recovered in order to pay the success fee. It seems to me that the success fee, when these proceedings are successful, should be paid by the person who is in default—the person who has hopped it. That is the current situation.

I mentioned earlier today that back in 1990 when the noble and learned Lord, Lord Mackay, introduced conditional fee agreements for the first time, there were three categories: personal injuries, insolvency proceedings and applications to the European Court of Human Rights. So from the very beginning, from the inception of this type of agreement, insolvency practitioners have had this protection for the proceedings that they have to bring. From the point of view of making sure that the defaulter pays and in the interests of the Revenue and Customs and perfectly decent creditors which may be a large firm or a small firm, it seems only sensible that the amendment should succeed. I beg to move.

21:30

[Lord Bach]

I am happy to put my name to this amendment with the noble Lord, Lord Thomas of Gresford. I cannot think of anything he said that is not right on this. It seems an open-and-shut case—as it did in Committee, I have to say, when the noble and learned Lord, Lord Mackay of Clashfern, made the first speech in the debate on this subject. I have nothing to add to what the noble Lord, Lord Thomas of Gresford, said: he made the case. If the Government are to reject this, I very much hope that it will come back for final decision at Third Reading.

[Lord McNally]

My Lords, the Government accept that insolvency proceedings are untypical of our reforms to CFAs in an important respect. Across many areas of law—for example, in clinical negligence cases against the NHS—the Government are on the sharp end of our dysfunctional CFA regime as it is the defendants bringing cases against claimants, sometimes speculatively. However, as the noble Lord, Lord Thomas, has said, insolvency stands apart because it is one of the few areas where CFAs sometimes work to the advantage of government departments; for example where an insolvency practitioner recovers moneys for the taxpayer and other creditors. So if these amendments were to be accepted, they would effectively constitute a carve-out for the key place where CFAs can be useful to the Government—this at a time when we are asking everyone else to adjust to a new, more sensible regime.

We debated insolvency proceedings in Committee and I said then that we were considering this issue within government. I can report that we have thought about it carefully, but we do not agree that an amendment along these lines is the right way forward. I do not believe it is acceptable to say that CFA reform is good for everyone else, but is not good for the Government.

[Lord Bach]

I am sorry to interrupt, but it is not so much that this is good for the Government—it is good for the taxpayer. Surely that should be one of the main considerations. If it is good for the Government, that is fine; but if it is the taxpayer who will benefit, because creditors get their money, as it were—the HMRC gets its money by taking advantage of the amendment—I cannot see why the Government are resisting this.

[Lord McNally]

As the noble Lord will know, the interests of the taxpayer and the Government are synonymous, because one is working for the other.

[Lord Bach]

Which one is working for whom?

[Lord McNally]

It is far too late in the evening for such repartee. As I say, we have reached agreement across government, in respect of insolvency proceedings, that new ways will be implemented to deal with these cases without recoverable success fees and insurance premiums. We are working on a programme of implementation and we will set out the details in due course.

As with other areas now subject to a new CFA regime, the effect will be that claims occur at more proportionate cost, as claimants will have a stake in the legal costs being incurred on their behalf. We believe that the exemption proposed by the amendments in respect of insolvency proceedings is unnecessary and would breach the basic rationale of our reform policy. I therefore urge my noble friend to withdraw his amendment.

[Lord Thomas of Gresford]

Can my noble friend tell us when these proposals will be finalised and whether it will be during the currency of this Bill?

[Lord McNally]

I am trying to work out the vaguest reply that I can give to that. Discussions are going on and, as I said, we will make an announcement as soon as possible.

[Lord Thomas of Gresford]

I am very much enlightened by my noble friend’s formulation. The noble Lord, Lord Bach, made a very good point. It is the taxpayer’s money that we are talking about here, and not just the taxpayer but the worthy creditor, the small businessman or even the large businessman who has given credit to a firm that has gone into liquidation, sometimes through fraud and sometimes through incompetence. However, the taxpayer and the businessman are going to suffer because of this provision, unless my noble friend is saying that these proceedings are never going to be brought because there is some other way of doing it. The vagueness has left us all a little in the air. However, for the moment and subject to further discussions between now and Third Reading, I beg leave to withdraw the amendment.

Amendment 133A withdrawn.

Amendments 133B and 133C not moved.

Amendment 133CA

Moved by

[Lord Beecham]

133CA: Clause 43, page 30, line 25, after “proceedings” insert “, other than proceedings of a type listed in section 58(6A),”

[Lord Beecham]

My Lords, this amendment effectively deals with the position in which public authorities are the defendants to claims. In cases where the state is in fact the defendant—in other words, the converse of the previous situation that we discussed—the amendment would allow for success fees to be paid when a CFA is in place. To give a brief indication of the kinds of cases that might be involved, they would cover claims for assault, battery, false imprisonment, malicious prosecution, trespass to goods or land, and misfeasance in a public office, or claims in a judicial review or under the Data Protection Act and the Equality Act, negligence where there is a wider public interest in the claim being brought—a sort of localised Trafigura situation, one might imagine—or damages in respect of an act or omission by a public authority that involved a breach of convention rights.

Those are all potentially serious matters in which the state is, in one capacity or another, in the position of defendant. In those circumstances, it seems appropriate that the success fee position should not be that advocated for the rest of the legislation—although we have our differences about that too—but that the state should pay the success fee and not expect it to come out of whatever damages might be awarded to a successful complainant concerning acts that the state should never have committed. I beg to move.

[Lord McNally]

My Lords, I hope that my reply to the previous debate has shown our gritty determination to keep to the central architecture of the Bill. As I have explained, abolishing the recoverability of success fees and insurance premiums from the losing side is a key government reform which will reduce the substantial additional costs paid by defendants under the current regime. The reforms are intended to apply across all areas of civil litigation, and the Government do not believe that any exemptions are necessary, fair or desirable. If the amendments were accepted, claimants in these types of cases would have no incentive to control their lawyers’ costs. That cannot be right. Proposals to control legal costs should apply across the board. I urge the noble Lord to withdraw his amendment.

[Lord Beecham]

I decline the request to agree with the Minister. There is little incentive for the Government as a defendant to settle cases when they do not have the additional incentive of a success fee being awarded against them when they lose. However, in the circumstances I beg leave to withdraw the amendment.

Amendment 133CA withdrawn.

Amendments 133D to 135 not moved.

Amendment 135A

Moved by

[Lord McNally]

135A: Clause 43, page 30, line 30, leave out from “not” to end of line 32 and insert “prevent a costs order including provision in relation to a success fee payable by a person (“P”) under a conditional fee agreement entered into before the day on which that subsection comes into force (“the commencement day”) if—
(a) the agreement was entered into specifically for the purposes of the provision to P of advocacy or litigation services in connection with the matter that is the subject of the proceedings in which the costs order is made, or(b) advocacy or litigation services were provided to P under the agreement in connection with that matter before the commencement day.”

[Lord McNally]

My Lords, the government amendments in this group are minor and technical and will ensure that changes to the recoverability of success fees and the insurance element will apply consistently to all conditional fee agreements, including collective CFAs. I wrote to all Peers last week about the amendment. A copy of the letter was placed in the Library of the House. I beg to move.

[Lord Bach]

My Lords, I am not getting to my feet just to be difficult. When the Minister moves government amendments and describes them as technical, usually I sit absolutely still in my place. However, on this occasion I have a couple of questions. If he does not know the answers tonight, he is welcome to write to me and to other noble Lords. Will he confirm that the effect of Amendment 135A will be that a success fee as part of a CFA under which work for the claimant commenced before the Bill’s commencement day will still be recoverable from the defendant on exactly the same basis as it is now?

The second question is similar but concerns collective CFAs. Will the Minister confirm that the effect of the amendment will be that a success fee as part of a collective CFA under which work for an individual claimant commenced before the Bill’s commencement day will still be recoverable from the defendant on the same basis as it is now? I will not object to the amendment being agreed, but I would be grateful if in due course I could have answers to those questions.

[Lord McNally]

My Lords, I am sorely tempted to show that after months of total immersion in the Bill I can leap to the Dispatch Box and give the noble Lord a detailed response. However, as he knows, I did only one paper on English legal institutions in part 1 of my degree. Therefore, I will not pretend that I can give him a definitive answer. However, I firmly promise that a letter will go to him and into the Library of the House in response to those questions.

Amendment 135A agreed.

Amendment 136 not moved.

21:45

Amendment 136A

Moved by

[Lord Beecham]

136A: Clause 43, page 30, line 32, at end insert—
“( ) The amendments made by subsections (2) and (4) do not apply in relation to proceedings that include a claim for judicial review of a decision, or of a failure to decide, by a public body.”

[Lord Beecham]

My Lords, Amendment 136A is in another group of amendments that seek to modify the Government’s stance and I anticipate something short of a welcome from the Minister when he replies. Nevertheless, I want to raise these matters. The effect of Amendment 136A would be to permit the recoverability of ATE insurance in judicial review cases funded by a CFA. This is particularly relevant since at the moment there is no proposal to introduce QOCS for these cases. In addition, in any event claimants would have to fund their own disbursements via an ATE policy as well. Particularly in the absence of QOCS, recoverability remains an important issue in those cases.

Amendment 136B would effectively disapply the Bill’s provisions for breach of an employer’s duty leading to physical or psychological injuries—in effect, personal injury claims. I do not propose to repeat what was said in Committee or at Second Reading about the desirability of including personal injury cases within this proposal. The noble Lord will disagree but it strikes me as axiomatic.

Amendment 136C maintains the same approach in respect of professional negligence cases which can take a variety of forms, as we have said before, affecting members of the legal and other professions. The noble Lord will repeat the mantra that we should not be seeking to add to cases where the general principle is disapplied, but this is potentially important. In particular, the loss of money by professional negligence will be compounded by having to pay, potentially, a significant success fee out of damages, which does not seem at all reasonable.

Amendment 136D would give a complete exemption for clinical negligence cases as opposed to the partial exemption which is currently proposed. Amendment 139C would require the Lord Chancellor to make regulations to provide for cost orders to require payment where the applicant has taken out an insurance policy against the risk of liability to pay their own costs within a pre-action protocol period or 42 days in the absence of such a period. This is a potential stumbling block. In an earlier debate I referred to the potential scale of the cost of premiums to cover the cost of disbursements—leaving aside road traffic cases where it will be fairly nominal—ranging from £900 through to a very high claim of around £11,000 in respect of clinical negligence.

I am not anticipating a favourable response at this hour. It is a matter which will have be returned to if not at Third Reading then in future as we see an accumulation of cases in which claimants are put at a disadvantage or alternatively in which many people are deterred from taking proceedings in the first place by the potential cost of organising their own “after the event” insurance to cover disbursements—estimated by the Access to Justice Action Group to be something like 25 per cent of cases, following an extensive trawl through some 69,000 cases. That would represent a significant reduction in the number of claimants actually able to bring their cases before a tribunal. I beg to move.

[Lord Pannick]

My Lords, I am sure the Minister will tell us again that the general regime for success fees and “after the event” insurance must apply to all cases and one cannot have exemption for this type of case. But have the Government given any thought to whether it might be desirable to include in Part 2 a provision similar to Clause 8(2) of Part 1, giving some form of discretion to the Lord Chancellor to exclude from the scope of Part 2, in the light of experience of how Part 2 operates, any categories of case in respect of which it becomes apparent after this Bill comes into effect that the system is not working very well and is causing practical problems about access to justice? It might then be more sensible to go back, in relation to particular categories of case, to the old system under which the unsuccessful defendant would have to pay the success fee. Will the Minister give some thought to whether a general power for the Lord Chancellor to that effect might not be a good idea? Things might look rather different in a year or two from how they look now.

[Lord McNally]

My Lords, we have reached the stage of the evening when the noble Lord, Lord Pannick, not only asks the questions but gives the answers as well—cutting out the middleman, which is me.

I take note of his suggestion. As I do with all our deliberations, I will report back to the Lord Chancellor on this. I would have thought that his experience of the willingness of your Lordships to make exceptions, one after another after another, will make him think that giving such flexibility in the Bill will only encourage a constant stream of exceptions coming to his door.

We have thought very hard about this. We think that the architecture is right. We think that by going back to the system as it broadly was under the noble and learned Lord, Lord Mackay, repairs the damage that was done by the previous Administration—with the best of good will. I will report, and I will even tell the Lord Chancellor that it was an idea of the noble Lord, Lord Pannick, which I am sure will produce the appropriate response from the Lord Chancellor.

[Lord Bach]

I think we can almost see the response now.

[Lord McNally]

Amendment 139C, in the name of the noble Lord, Lord Beecham, seeks to amend Clause 45 to require the Lord Chancellor to make regulations to allow the recovery of ATE insurance premiums taken out to cover the risk of paying one’s own disbursements within the relevant pre-action protocol period. As I have already made clear, the Government’s position on ATE insurance is that it should no longer be recoverable from the losing party. Amendment 139C goes against the Government’s reform and we will strongly resist it.

In the same vein, I cannot accept Amendments 136A to 136D, which would retain recoverability of success fees for judicial review, employers’ liability claims, professional negligence and clinical negligence. I have touched on some of these issues before and I do not intend to detain noble Lords further by going into the details of each particular area or trying to assess which litigants should be classed as more deserving than others. As I have said, it would be invidious and unfair to set out exceptions for some claimants and not for others, and we do not intend to do so.

I urge the noble Lord not to press the amendments.

[Lord Beecham]

With my customary reluctance, I beg leave to withdraw the amendment.

Amendment 136A withdrawn.

Amendments 136B to 136D not moved.

Amendment 136E not moved.

Clause 45 : Recovery of insurance premiums by way of costs

Amendment 137

Moved by

[Lord Lloyd of Berwick]

137: Clause 45, page 31, line 38, leave out from “policy” to end of line 33 on page 32

[Lord Lloyd of Berwick]

My Lords, this amendment is concerned with one aspect of clinical negligence cases: the cost of expert reports. It would not have been necessary if the House had accepted my noble friend Lady Grey-Thompson’s amendment last week, but unfortunately it failed by a narrow margin.

Everybody, I think, agrees that the cost of expert reports at least should be recovered in one way or another. The trouble is that the Government set about it in the wrong way. In Committee on 16 January, I put forward some figures to show why. I did not expect that the noble and learned Lord, Lord Wallace of Tankerness, would deal with the figures there and then. However, I have to say that I did expect that I would get something rather better than what I got some weeks later, which said simply that the Government did not recognise or accept my assumptions. Nothing then happened for a further period of time, until 1 March, when the Government put forward their own alternative calculations.

On the following day, 2 March, the Government were given a detailed answer which showed that their calculations were simply wrong. On 7 March, the third day of Report stage, I again explained why, but on that occasion the noble and learned Lord, Lord Wallace of Tankerness, did not deal with the figures, any more than he had done on 16 January. Instead, he said that he would place the Government’s calculation in the Library of the House. However, he had not done so by the time I had left the House last night, nor when I arrived this morning. I did not in fact see the Government’s calculations until early this afternoon.

However, that delay, which I would humbly suggest was unforgivable, at least meant that the Government have now put forward—at my request, I may say—and placed in the Library, not only the Government’s own calculation but the response to it, which was prepared by Mr Andrew Parker, a partner in the firm of Beachcroft, to whom I am especially indebted. That response shows that by accepting this amendment the Government would make a saving to the taxpayer of something between £10 million and £19 million.

I suspect that the House will be glad to hear that I will not go into the figures again, since the Government have simply left it too late for further consideration of the figures. The House has accepted the amendment that I tabled last week, on the basis of the figures which I then put forward, there having been no other figures with which to compare them. However, that is not an end of the matter, because the savings that I have indicated will depend on the Government accepting this amendment, the second part of the coupled amendments now before the House, as well as the one that they accepted last week. If the Government are serious about saving money, as they have said so often in Committee and so far on Report, then that is what they ought to do.

The repeal of Section 29 of the Access to Justice Act, which would get rid of recoverable insurance premiums, is one of the two or three main planks on which Part 2 of the Bill rests. What, therefore, is the point of repealing Section 29 and then, in the same breath, making an exception in the case of expert reports, when expert reports are now covered by legal aid as a result of last week’s amendment? It simply does not make sense. The only explanation given so far is that the Government want to help those who are above the legal aid limit. But how does that square with the Government’s attitude to those many deserving cases, of which we have heard from all sides, who are being denied legal aid even though they are within the legal aid limit? It is in the highest degree ironic that one of the grounds given by the Government for spending the extra £10 million is the need to secure access to justice for those who are above the limit. How much better that money would have been spent elsewhere in the course of this Bill.

The truth is that the Government simply made the wrong decision. They listened to representations, as a result of which they decided to fund expert reports by way of ATE insurance rather than by way of legal aid. They chose the most expensive course but they now have the chance to mend their ways. It is not too late for them to put the matter right by accepting this amendment. I beg to move.

22:00

[Lord Beecham]

My Lords, I strongly support the noble and learned Lord’s amendment, which makes every conceivable sense from the financial to the legal and logical. I have to say that I do not at all blame the noble Lord, Lord McNally, or the noble and learned Lord, Lord Wallace, but it is a matter of some concern that those responsible were not courteous enough to ensure that the noble and learned Lord, Lord Lloyd, who, after all, is one of the most distinguished Members of your Lordships’ House, should have been supplied with a copy of the document lodged in the Library. Indeed, had I not chanced across it myself today and given him a copy, he might not even at this stage have known of its existence. That is not good enough and I hope that Ministers will have a word with the appropriate members of their staff.

More significantly, the noble and learned Lord makes an unanswerable case for this amendment and I hope that the Minister will be able to say that the Government will respond sensibly. It would assist justice and assist the finances. It seems to me that it would be absurd for the Minister not to accept this amendment.

[Lord McNally]

My Lords, if there has been any discourtesy to the noble and learned Lord, Lord Lloyd, I absolutely apologise and take responsibility for it. I should like to put that on the record. The noble and learned Lord has described our proposal in the past as expensive and inefficient, and has made much of the difference between his and the Government’s figures. As he knows, we have now put our calculations in the Library of the House and I can assure your Lordships that we have given careful consideration to the calculations that the noble and learned Lord has provided. In addition, I have met with the noble and learned Lord, as have my officials, and we have swapped calculations. We have explained that we believe that he is omitting some vital costs from his calculations.

The method we have used is open and transparent. Taking costs to legal aid and to public sector defendants, we believe that the costs to the public purse of the proposals from the noble and learned Lord, Lord Lloyd, to fund expert reports by legal aid is about £17.5 million a year, whereas the cost to the public purse of our proposal for recoverable insurance premiums is between £18.5 million and £19.5 million. The result is likely to be an additional cost of about £1 million to £2 million.

I understand that the noble and learned Lord does not accept our calculations, but we do not accept his. This is a matter on which we have to take a judgment. These additional costs, as he has said, will enable more people to gain access to justice than under his proposals, which are limited to those who are financially eligible for legal aid. For this reason, and for reasons that are set out in more detail in the paper in the Library, we believe that the powers in Clause 45 are the best way to support victims of clinical negligence in a relatively inexpensive and fair way. I realise that this is a clash of figures and a clash of judgments, but I am making my judgment and we are willing to defend it in this House. At this hour, I would urge the noble and learned Lord to withdraw his amendment.

[Lord Lloyd of Berwick]

My Lords, I am afraid that I do not find the answer satisfactory. I will withdraw the amendment, of course, but in the hope that the Government will think again and perhaps, between now and Third Reading, take further and better advice. On that basis, I beg leave to withdraw the amendment.

Amendment 137 withdrawn.

Amendment 138 not moved.

Amendment 139

Moved by

[Lord Beecham]

139: Clause 45, page 31, line 39, at end insert “, (2A) or (2B)”

[Lord Beecham]

My Lords, we return briefly to the question of environmental cases which we also discussed under the amendments tabled by the noble Lord, Lord Thomas. The distinction between these amendments and the previous amendments are that, in this case, the amendments provide the Lord Chancellor with the opportunity to provide by regulation for the changes that are sought; namely, that in respect of Amendments 139 and 140, disbursements related to ATE insurance would be recoverable and, under Amendment 142BC, that qualified one-way costs-shifting would apply, as it should, to these cases. That was recommended by Lord Justice Jackson and I cannot see why the Government would differ from his view. Therefore, for environmental claims and judicial reviews connected with them, QOCS would apply, as indeed they should. This is an important area of policy and potential litigation. As the noble Lord, Lord Thomas, pointed out fully, it needs to be addressed. As I have said, we prefer this iteration of the remedy, but in one way or another the Government should be seen to move in the direction of facilitating these claims under the conditional fee arrangement scheme. I beg to move.

[Lord McNally]

My Lords, Amendments 139 and 140 seek to allow the continued recoverability of ATE insurance premiums in environmental claims to cover the costs of expert reports. Environmental claims will generally involve a number of claimants who could contribute towards the costs of any reports. Alternatively, the reports could be funded under a “before the event” insurance policy should claimants have one, or under an “after the event” insurance policy should claimants wish to purchase one. Further, the claimant’s solicitors might agree to fund disbursements in exchange, perhaps, for an increased success fee. A variety of means of funding disbursements are available in environmental cases without the need for an exception for recoverable insurance premiums.

So far as the other side’s costs are concerned, the Government’s view, as I explained in Committee, is that a protective costs order ought to provide sufficient costs protection in respect of the other side’s costs in environmental judicial review cases, as we set out in our recent consultation. Under a PCO, it will be clear from the outset what costs the claimant will have to pay if the claim is unsuccessful. The order will also ensure that some contribution is made towards the costs of public bodies that have successfully defended the claim. As I said earlier, environmental claims will generally involve a number of claimants and it is right that they should contribute together to costs, at least to some extent. The Government remain convinced that this is the right approach in these cases. We will shortly set out the details of the way forward in the light of our consultation. I hope, therefore, that the noble Lord will withdraw his amendment.

[Lord Beecham]

I beg leave to withdraw the amendment.

Amendment 139 withdrawn.

Amendments 139A to 141ZC not moved.

Clause 46 : Recovery where body undertakes to meet costs liabilities

Amendment 141A

Moved by

[Lord McNally]

141A: Clause 46, page 32, line 44, leave out “party to proceedings” and insert “person”

[Lord McNally]

Amendments 141A to 141C relate to the self-insurance element where a body undertakes to meet a member’s cost liabilities. They are intended to have a similar effect to government Amendment 135A. I beg to move.

Amendment 141A agreed.

Amendment 141AA not moved.

Amendments 141B and 141C

Moved by

[Lord McNally]

141B: Clause 46, page 32, line 45, leave out from beginning to “before”

141C: Clause 46, page 32, line 46, at end insert “if the undertaking was given specifically in respect of the costs of other parties to proceedings relating to the matter which is the subject of the proceedings in which the costs order is made”

Amendments 141B and 141C agreed.

Amendments 142 and 142A not moved.

Amendments 142B to 142BC not moved.

Amendment 142C

Moved by

[Lord Thomas of Gresford]

142C: After Clause 53, insert the following new Clause—
“Third party litigation funding
(1) A third party litigation funding agreement which satisfies all of the conditions applicable to it by virtue of this section shall not be unenforceable by reason only of it being a third party litigation funding agreement; but any other third party litigation funding agreement shall be unenforceable.
(2) A third party litigation funding agreement is an agreement under which a third party (“the funder”) agrees to fund (in whole or in part) the provision of advocacy or litigation services to another person (“the litigant”) by a person other than the funder in exchange for remuneration.
(3) For the purposes of subsection (2), “remuneration” includes—
(a) a payment or any other transfer of value representing or calculated by reference to the value of a judgment or settlement; and(b) an assignment of the proceeds (in whole or in part) of any judgment or settlement.(4) The following conditions are applicable to a third party litigation funding agreement—
(a) it must be in writing;(b) it must not relate to—(i) proceedings which by virtue of section 58A(1) and (2) of the Courts and Legal Services Act 1990 cannot be the subject of an enforceable conditional fee agreement;(ii) a multi-party action, representative action or any proceedings which are the subject of a group litigation order; or(iii) any other proceedings of a description prescribed by the Lord Chancellor;(c) it must comply with such requirements as shall be prescribed by the Lord Chancellor.(5) Regulations under subsection (4)(c) may—
(a) require any person which enters into a third party funding agreement with a litigant to first obtain a license from a licensing body to be designated by the Lord Chancellor; and(b) set out conditions to be satisfied in order to obtain such a license.(6) In this section “advocacy services” and “litigation services” are as defined in section 119 of the Courts and Legal Services Act 1990.”

[Lord Thomas of Gresford]

My Lords, the amendment raises the issue of third party litigation funding. I made a lengthy contribution in Committee which I do not propose to repeat. The basis of the amendment is to bring under government control third party litigation funding. Your Lordships may recall that a voluntary code has been entered into by those who are concerned in third party litigation funding and I suggested in Committee, and I repeat, that it is far better that the Lord Chancellor should take a look at this and bring in something along the lines of what I have suggested in my amendment. I beg to move.

[Lord Bach]

We agree with the amendments in the name of the noble Lord, Lord Thomas of Gresford.

[Lord McNally]

My Lords, I have said before that we are grateful to my noble friend for raising this issue. It is a possible problem and a number of noble and learned Lords and lawyers outside have given warning signals. At the moment we are looking at how voluntary regulation is working in the area. However, my right honourable friend the Lord Chancellor is very aware of the situation and is keeping it under review. We do not think that statutory regulation through this Bill is either the right place or the right time but we welcome the fact that my noble friend has put this issue on the political radar. Both lawyers and legislators will have to follow the matter closely to see whether we will need to return to it at some future date. In the mean time, I ask my noble friend to withdraw the amendment.

[Lord Thomas of Gresford]

On this occasion I am grateful to my noble friend for his reply. My purpose was to highlight the insidious advance of third party litigation funding. It is essentially an American concept that has advanced into this country. So far it has reached commercial litigation, with which I have no quarrel. It has also got into family law and I shall be extremely concerned if it were to get into personal injury cases. The fact that the Lord Chancellor now has it on his agenda and will monitor the way in which the voluntary code operates is of great comfort to me and it is on that basis that I beg leave to withdraw the amendment.

Amendment 142C withdrawn.

Amendment 142D

Moved by

[Lord Thomas of Gresford]

142D: After Clause 53, insert the following new Clause—
“Third party offers to settle
It shall be an offence for a third party insurance company to solicit a claimant who has a cause of action for personal injuries against its policy holder, to make an offer to settle that cause of action unless—(a) it has obtained adequate medical evidence of the personal injury and has disclosed it to the claimant; and(b) the claimant is advised when the offer is made of his right to obtain legal advice; and(c) the offer is in full and final settlement of the cause of action.”

[Lord Thomas of Gresford]

This amendment concerns the third party insurance company, which approaches a prospective claimant and offers to settle without there being adequate medical evidence, without the claimant being informed that he has a right to legal advice and without the offer being in full and final settlement of the cause of action. In Committee, I hesitated to suggest that it should be a criminal offence, and suggested that the best way of dealing with the matter should be that such settlements would be void, which would enable a claimant who subsequently discovered that he was in a far worse condition than he had thought to reopen the matter and to claim damages for the injuries that he received. That is a practice that has crept in. It means that people accept settlements without proper advice or evidence of what is wrong with them and without a proper calculation of their losses. It seems to me that a lot of people are vulnerable to that type of approach. That is one side of the problem. The other side is that it encourages people with no basis for a claim at all to make one and accept a sum of money that means that, over a large range of cases, the insurance company benefits. That is just as bad as that people should be incited to put forward fraudulent claims.

My noble friend’s answer in Committee was that the FSA rules are sufficient to cover the matters of which I complain. That immediately makes me ask who enforces the FSA rules. What control is there over the employee of a third-party insurance company who, quite clandestinely, makes offers of this sort to settle cases that are perfectly valid and which he knows to be valid? So at this stage I put forward the suggestion that it should be a criminal offence for people to engage in this type of behaviour. That may be going a step further. Perhaps my original concept that the alleged settlement obtained should be void was the right way to go. But certainly there is an abuse going on and I expect the Government to do more than to refer to FSA rules when there is no one to enforce them. I beg to move.

[Lord Bach]

The Minister would be well advised to give serious consideration to the amendment proposed by the noble Lord, Lord Thomas of Gresford. This is not one that he moved in Committee—he has moved it for the first time today. The House knows that he has become an expert in this field of litigation over the months that he has spoken to me about it. He may well be right that it is no good the Government taking a position that looks like it may take some time to develop. It is something that needs to be done and thought about pretty promptly. Therefore, as far as we can, we support the amendment.

[Lord McNally]

My Lords, I think it was the noble Lord, Lord Martin, who talked about the proper role of the House of Lords. Although the hour is late, my noble friend Lord Thomas has demonstrated one of the benefits of this House in bringing to the Government’s attention an area where there already is or could be a malpractice that will have to be dealt with. As he explained, this is a practice where an insurer approaches a claimant directly, usually immediately after a road traffic accident, with a view to settling the claim, where an insurer’s own policyholder is at fault in a car accident. As I understand it, claimant representatives refer to this practice as third party capture, whereas defendant representatives call it third party assistance. As I indicated in Committee, I shall continue to refer to this practice as third party contact.

Amendment 142D would make it an offence for an insurer to make such an unsolicited approach to a potential claimant in a personal injury case. The amendment also specifies those requirements which must be met before an insurer may make an offer to settle such a claim. This includes a requirement to obtain adequate medical evidence of injury and to advise the claimant of their right to obtain full legal advice before accepting the offer and making it clear to the claimant that the offer to settle is full and final.

It is unclear what my noble friend means when he says that this practice should be an offence. If he refers to this as being a criminal offence, I do not believe that a criminal sanction is appropriate or proportionate. You would have to prove beyond reasonable doubt that something amounted to an unsolicited approach. As I explained in Committee, the Financial Services Authority regulates the insurance industry and requires insurers to treat their customers fairly at all times and that this covers third party claimants.

Third-party contact does not in itself cause detriment to the consumer and may be to their advantage, as a claim can often be resolved quickly. In addition, this practice can allow insurers to reduce the legal costs associated with handling a claim and this in turn reduces costs for all policyholders. However, I am aware of the concerns around the potential risk of conflict of interest and the need for the claimant to have independent legal advice before any settlement is agreed. This matter was looked at by the FSA in its review of third-party contact during 2009-10 and it did not find conclusive evidence that unrepresented third parties could have achieved higher compensation had they obtained independent legal representation.

Following the FSA’s review, the Association of British Insurers published a code of practice in June 2010. The code contains specific guidance for insurers on contacting claimants. This limits unsolicited contact. For example, and I quote:

“Insurers will not make unsolicited visits to an unrepresented claimant at their current address, including hospitals”.

The code also requires that claimants are informed of their right to seek independent legal advice and other options available for them to resolve their claim.

Most of the issues which this amendment seeks to address in respect of the handling of third-party contact claims are already covered by existing regulation. The FSA rules require that insurers fully inform third party claimants of their legal rights, including to independent legal advice and alternatives to settling directly with the insurer. The Government do not believe it is right or appropriate to introduce further sanctions or regulation in this area, especially when a scheme already exists to monitor insurers’ activities. That said, I can reassure my noble friend that if a serious concern arises in the future in this area—and we will keep it under review—we will not hesitate to take this up with the Treasury and with the FSA.

I am therefore grateful to my noble friend for raising this issue with us, but for the reasons that I have mentioned I hope that he will agree to withdraw the amendment.

[Lord Thomas of Gresford]

My Lords, I am grateful to my noble friend. I am glad that some publicity has been give to this practice which I believe to be fairly widespread and causing a great deal of concern. As long as the Government keep their eye on this area, I shall be satisfied. I beg leave to withdraw the amendment.

Amendment 142D withdrawn.

22:30

Clause 54 : Rules against referral fees

Amendment 142E

Moved by

[Lord Beecham]

142E: Clause 54, page 39, line 24, at end insert—
“( ) A regulated person is not in breach of this section if the body to which the payment is made for the prescribed legal business is a not-for-profit organisation and the payment is in the nature of a service that was provided before 27 July 1999.”

[Lord Beecham]

My Lords, this amendment deals with referral fees. The Bill provides rules against referral fees and defines the nature of regulated persons, who are effectively prohibited from receiving a payment for referring prescribed legal business to another person. Under Clause 54(4), the legal services in question relate to,

“a claim or potential claim for damages for personal injury or death”,

or where,

“the business is of a description specified in regulations made by the Lord Chancellor”.

I do not know quite what is envisaged by the latter provision, but it is clear that the aim is to inhibit the referral of personal injury claims in return for payment. The regulated person, who for these purposes would presumably be acting on behalf of an injured person, would also be in breach of the subsection if he arranged for another person to provide services to the injured party and was paid or had been paid for making the arrangement.

A number of issues arise from this. The first is that the payment need not necessarily be financial; it could also involve, for example, the provision of another service. It might fall within the scope of the clause—I am not sure whether this was intended—if an organisation referred a client to a solicitor and, as part of their service, the solicitor prepared a will for that client or gave legal advice on another matter that was not related to the personal injury or other category that the Lord Chancellor might specify.

The purpose of Amendment 142E is to make it clear that a person would not be in breach of this subsection if the body to which the payment is made—that is, the person referring the client—is a not-for-profit organisation. There are of course organisations, such as charities and the like, which refer their members or others to solicitors and perhaps other professionals, and receive payment in return. In particular, I understand that a number of medical charities do this. I suppose that at one time organisations such as the Automobile Association, or other motoring organisations that are no longer membership organisations in the traditional sense, might have done likewise. Since they are not-for-profit organisations, it does not seem appropriate that this bar should be in place.

The situation is not analogous to that which the noble Lord, Lord Thomas, dealt with in terms of third-party funding, about which he is absolutely right to be exercised. Therefore, it should not be caught within the prohibition that is envisaged here. It could certainly do considerable harm to organisations and, for that matter, limit the benefit to clients of being referred. As I said, they might be referred on the basis of free advice or advice at a reduced cost, which would presumably appeal to the Government—quite rightly since they are talking about reductions in cost.

Therefore, I hope that the noble Lord will look again at this situation, perhaps with a view to coming back to it at Third Reading if he cannot accede to this measure tonight. There are other amendments before us in this group and there is to be a further amendment which will be taken next Tuesday, so we are not quite in the position of closing the door yet—not before Third Reading in any event. In these circumstances, I beg to move Amendment 142E.

[Lord Hunt of Wirral]

My Lords, in speaking to Amendments 146A and 148A, I wish to say how strongly I support in principle the Government’s proposal to ban referral fees. I declare my interest as a partner in DAC Beachcroft, the international commercial law firm. My amendments are intended simply to clear up some possible loopholes. Having just heard the comments of the noble Lord, Lord Beecham, I caution how important it is to have a blanket ban because any ban that is implemented has to work. However watertight the ban is—my amendments are intended to help the Government achieve that objective—it is critical that we also remove the incentive for referral and profit share by removing the excessive legal costs from the system. There are many vested interests here and a lot of money is at stake—too much money in my view.

At present, solicitors acting for claimants can still afford to pay out more than half of their fees to a third party whose only role is to buy and sell on the details of an injured person. That cannot be right. Amendment 146A would make a minor change to Clause 54(4) by inserting,

“which consist of or include damages”.

I raised in Committee the spectre of the current wording permitting the payment of a referral fee for some non-injury element of an injury claim, completely bypassing the Government’s intentions. I look forward to hearing my noble friend the Minister’s comments on that.

Amendment 148A would insert,

“whether received by the person referring prescribed legal business or not”,

into Clause 54(8). I highlighted in Committee this gap in the drafting which could be exploited simply by the way in which payment is routed. Again, I await my noble friend the Minister’s answer.

Finally, I would also be very interested to hear whether my noble friend can give this House a commitment about just how much of the excess cost can now be taken out of the system altogether, which is, frankly, a more effective remedy than tightening up the drafting.

[Lord Martin of Springburn]

My Lords, I wish to speak to Amendment 146 in my name. In doing so, I declare an interest as I have been a member of the Unite union for a long time. I am not having a go at the media on this matter but, often when trade unions are mentioned in the media, reference is made to trade union leaders. Not much is known about the activities of the lay officials and junior officers of a trade union. Tonight we have spoken about asbestos victims. A trade union would probably be the first port of call for a person who felt that they were suffering from the effects of asbestos inhalation. Apart from the serious matter of asbestos inhalation, your Lordships may be aware that even a National Health Service kitchen can be a very dangerous place for workers. They can fall, be scalded or be cut by the knives that they are using. After any injury such as that or any other injury relating to a person’s work, the first port of call is to the local trade union office, and an investigation is made before the matter is referred to a lawyer. Any of us who has run an office knows that photocopiers, heating, lighting and cleaning all cost money. It means that there should at least be some compensation for the trade union that is prepared to try to help that member before the member goes to a solicitor.

[Baroness Deech]

My Lords, I declare an interest as chair of the Bar Standards Board, which regulates barristers and prohibits the payment of referral fees, which we regard as immoral—I think that I am not putting it too strongly—and which we disapprove of because they are anti-competitive.

While I have every respect for my noble friend Lord Martin and for the work that the unions do to help their members, the amendment has brought to mind one of the most reprehensible incidents of modern times relating to lawyers and referral fees. I will not give the House too much detail because it is late at night, and the story is probably well known to noble Lords here, especially noble and learned Lords. When very many miners were sick and 23,000 cases were referred on by the union to a solicitors’ firm, it ended up with reprimand and with the law firm taking far more money than did the sick miners. The solicitors were paying the union, and in the case that I am thinking of the amount came to about £10 million, because 23,500 cases were referred to one firm.

If a firm of lawyers knows that a number of cases of that order are to be referred to them without the firm making any effort, without it going out into the market and proving how good it is, it is not surprising that things went wrong.

[Lord Martin of Springburn]

I know it is late in the evening and I thank the noble Baroness, but I am sure she would agree that not every union or every solicitor would conduct their affairs like that. Tomorrow, there will be unions that refer their members to a solicitor, and they will do so in good faith and in the best interests of their members.

[Baroness Deech]

I am sure that the noble Lord is right, but what I am objecting to is the exchange of money. If you go to the website of the union, you may click through to the page where legal services are offered, click where the page directs you to a law firm, the law firm is named, and then you can continue to click until it says, “For every case referred to this firm, the firm will pay the union a sum of several hundred pounds”. If the unions wish to help their members, it would be very easy simply to refer them to a whole number of local firms without money changing hands. There is nothing to stop the good work done by the unions, which I praise. It is the exchange of money that I object to. In the case that I am thinking of, it was actually public funds that went to the solicitors’ firm. It illustrates what is wrong with referral fees: the issue is treated as commercial and the law firm can sit back, knowing that cases will flood its way, whether it deserves them or not.

There have been other reprehensible incidents such as this, with which I will not delay noble Lords, save to mention one other effect. Given that very large sums of money are paid to the union, whichever union it is, by the law firm, and we know that many unions are inclined to support one political party, we end up with money being paid—very indirectly, I grant you—to the political party because the money is coming from the funds that the union has accumulated, and part of those funds come from referral fees.

If the solicitors can afford to pay £200 a time, or whatever it may be, to the union in return for every case, that must logically indicate that the case could have been handled for less money than was charged. I am by no means saying that that is always bad, but there is definitely a risk in referral fees. In particular, there is a severe risk to the interests of justice where a firm knows that thousands of cases can come its way without it making the effort in the market to get them and handle them well. Therefore, with all due respect, I hope that the amendment will not be pursued, as I do not think that it helps the Bill.

22:45

[Lord McNally]

My Lords, I think that there is broad agreement across the House about the need to ban referral fees in personal injury cases, as we propose in Clauses 54 to 58. However, there is some disagreement about how it should be done, as this debate has shown.

It may be helpful if, in reply, I deal separately with those amendments with which we have some sympathy and those with which we do not. The Government agree with the intention behind Amendments 146A and 148A in the name of my noble friend Lord Hunt of Wirral. I give the House a commitment that we will bring back amendments at Third Reading to address the issues raised by those amendments. However, the Government cannot agree with Amendments 142E and 146. We believe that it is not in the public interest for payments in receipt of referral fees to be allowed in any personal injury cases, regardless of whether the recipient is a solicitor, a charity, a trade union or some other party. If the provision applies to solicitors who pay referral fees, it must also apply to the not-for-profit organisations which deal with them.

The Government intend to ban the payment and receipt of referral fees in all personal injury cases, and we are not persuaded that there should be special treatment for not-for-profit organisations, or for solicitors dealing with trade unions, to exempt them from the ban. However, trade unions will of course still be able to refer cases, without payment, to those best able to pursue them. Nothing in the clauses prevents lawyers providing services free of charge to registered charities.

A number of points were made in the debate. The noble Baroness, Lady Deech, made a powerful case in favour of what we are trying to do on referral fees. She referred to a case, which we all remember, which shows how the best of intentions can be misused when trying to deal with a problem. I say to the noble Lord, Lord Martin, that I certainly advocate the value of trade union membership, but that there is a danger of trade unions, charities and others having a sweetheart relationship with a firm of solicitors based on referral fees.

My noble friend Lord Hunt of Wirral asked me how much of the excess litigation costs can be taken out of the system. My right honourable friend the Prime Minister has announced that we will be extending the road traffic accident scheme to cover claims up to £25,000, and to cover employer and public liability cases. As part of that process, the Government intend to make an objective assessment of the existing costs involved in RTA schemes, and we expect fixed recoverable costs of £1,200 to be reduced significantly as a result. The new fees will come in when the Jackson reforms in Part 2 of the Bill and the ban on referral fees are implemented in April 2013. Although I cannot give a precise figure, the aim, as in other parts of the Bill, is to squeeze out of the system excessive costs, which are undoubtedly there.

I hope that, in the light of those responses, the noble Lord will withdraw the amendment.

[Lord Beecham]

My Lords, I will be withdrawing my amendment. I must disabuse the noble Baroness, Lady Deech, with whom I shared a law course at Oxford, on the question of the political aspect of union funding. Union funds for political purposes, of course, derive from their political funds and not from general income. The noble Lord, who has a long memory of these things, is acknowledging that, for which I am grateful. It is not just a question, however, of fees, as I have indicated. Other services offered to members, whether they be of trade unions or other organisations, would be caught, apparently, by the Bill as it currently stands. I cannot believe that that is really part of the Government’s intention. Not all unions have an arrangement of this kind, where a referral fee is paid, but unions do have extensive and expensive legal departments which have to be supported. It does not seem unreasonable that those organisations—and, indeed, other organisations; charitable organisations—should have a scheme. I agree that the noble Baroness has identified a particularly abusive situation which, of course, has been rightly dealt with, but that is very much the exception. Having said that, we will, up to a point, be returning to this matter on the next day of Report in a slightly different context. I beg leave, therefore, to withdraw the amendment.

Amendment 142E withdrawn.

Amendments 143 and 144 not moved.

Consideration on Report adjourned.

London Local Authorities Bill [HL]

Wednesday 14th March 2012 Lords Chamber

Returned from the Commons

The Bill was returned from the Commons agreed to with amendments.

House adjourned at 10.50 pm.