Grand Committee
(12 years, 4 months ago)
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The Deputy Chairman of Committees (Lord Haskel)
My Lords, if there is a Division in the House during the debate on the Financial Services Bill, this Committee will adjourn for 10 minutes when the Division Bell rings.
Future of Investigative Journalism: Communications Committee Report
(12 years, 4 months ago)
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Lord Inglewood
That the Grand Committee takes note of the report of the Communications Committee, The Future of Investigative Journalism (3rd Report, Session 2010-12, HL Paper 256).
Lord Inglewood
My Lords, before making my remarks to the Committee, I should explain that I am non-executive chairman of the CN Group, in which I have 1,740 shares, which I am told are worth approximately £6,000. The background for this report and today’s debate is quite simply what we described in our report as,
“the greatest political media scandal of a generation”.
As the weeks and months have passed, the steady drip of revelations from Lord Justice Leveson’s inquiry into the culture, practice and ethics of the press have shocked even the most seasoned observers, and I am sure that Members contributing today will wish to say a word or two about the direction of Lord Justice Leveson’s inquiry—what we have learnt and how we might mould the future. Certainly, the continuing general relevance of this topic is clearly illustrated by the headlines in today’s newspapers.
Before I set out the main findings of the committee’s report, I should say that I fully understand that it will be difficult for the Minister to say a great deal today. We are all awaiting Lord Justice Leveson’s findings, and the committee, I believe entirely sensibly, agreed with the Department for Culture, Media and Sport earlier in the year that any formal government response to our report, prior to Lord Justice Leveson reporting, would be premature. As such, we are in something of a limbo, a “phoney war”, before he reports. The Government, but also Parliament, the media and the public, can reflect on how his findings might be taken forward. Depending on what emerges, we might carry out a short report on Lord Justice Leveson’s findings and/or the Government’s response.
I should also like to say how pleased I am that the noble Lord, Lord Macdonald of Tradeston, is set to speak today. He left the committee at the end of the last Session, but he was a real stalwart and I know that his contribution was greatly valued by all members. I am glad, as I am sure we all are, that he can participate today, and we very much look forward to what he has to tell us.
When we launched our inquiry into investigative journalism last July, the phone-hacking scandal had already led to the closure of Britain’s best selling tabloid newspaper—the News of the World—as well as the resignation of former newspaper editors, senior members of the Metropolitan Police and others. The atmosphere was, as your Lordships will recall, febrile to say the least, with opprobrium being heaped on the media from all sides. There seemed to be no end to the revelations and public revulsion. It is notable, however, although it is often forgotten, that it was the media themselves—Nick Davies from the Guardian—who broke the phone hacking scandal.
The genesis of the report that we are discussing today emerged from my musings when having a bath at home one Saturday evening. It suddenly dawned on me that the committee had to engage with the extraordinary events that were unfolding in front of us. We had been set to launch an inquiry into broadband, which we have subsequently taken up and will report on very soon. But in my Eureka moment, I felt that we had to rethink and enter the prevailing, turbulent debate about the role of the press: in our case, specifically the role of investigative journalism. I am very glad that we did because, while I am sure that Select Committees should not necessarily chase every supposed new revelation, on this occasion I am absolutely sure that we were right to do so.
We began with the belief that investigative journalism is vital for a healthy democracy. It acts as watchdog, holding those in positions of power and authority to account by exposing wrongdoing, hypocrisy and corruption; standing up for the public interest; and, on occasion, campaigning for reform. Its contribution to democracy is just as valuable at a local level as at a national one: it is to hold individuals and institutions to account; to ensure that their work is visible to the people whom they serve; and to keep people informed about what is happening in their local town halls, schools, hospitals or businesses. In essence, investigative journalism allows people to find out what is actually going on, rather than relying on the establishment to say what they want us to think is happening. It is the oil in the engine of a free and open society.
Our basic proposition was that, while illegal activity is obviously to be deplored and should be punished appropriately, high-quality investigative journalism really matters, and that it was also of overriding importance that the current scandal, and the understandable outrage that it provoked, did not lead to hasty policy responses that might permanently damage the place of investigative journalism in our country’s governance. Investigative journalism’s history of exposing issues that are not in the public domain, and speaking truth to power, needed to be guarded and supported, not jettisoned amidst the rubble of the phone hacking scandal.
Our report did not set out to propose possible solutions to the plethora of questions that bubbled up last summer and which are still on the boil. They are often complex and profound, and surround the public interest, privacy and media ethics. Many were then, and still are, being considered in other fora, most notably Lord Justice Leveson’s inquiry. Instead, our report sought to explore the specific media landscape in which investigative journalism operates. We argued that, fundamentally, any change should not be rooted in the past but should seek to enable responsible investigative journalism to flourish in the future.
The key is that responsible—and I stress “responsible” —high-quality investigative journalism is of paramount importance in any democracy worth its salt. It is a vital constituent of the UK’s system of democratic governance and accountability. At its best, it informs and educates us, enhancing our democracy immeasurably. One only has to look at the types of countries and regimes where it is difficult for journalists to operate freely to realise that we must not take it for granted and that any erosion of a free and responsible press should make us all very nervous. After all, we all know that a clamp-down on journalists is so often the first response of an authoritarian regime or a deluded crazed dictator.
It became clear during our inquiry that rapid economic, technological and behavioural change was creating profound economic, legal and regulatory challenges for investigative journalism and how it might be carried out in the future. Furthermore, it emerged that, even before the current scandal started to unfold, the economic climate was threatening original journalism. There was declining newspaper readership, fragmenting television audiences and the migration of printed advertising to online—all exacerbated by the impact of the worst economic recession since the war. As a result, some local newspapers, as your Lordships will know, have been forced to close and many journalists have lost their jobs. That happened long before the closure of the News of the World.
I do not wish to take up your Lordships’ time with an account of all the lines of inquiry that we pursued and all the recommendations that we made. However, I will draw out what I believe to be the most important. These mainly gather around the delicate and sensitive issue of whether it is ever acceptable for journalists to break the law if they believe that exposing a story will benefit the public good. In other words, we considered the vexed issue of “public interest”. When one starts to consider the public interest, it is quickly apparent that little is entirely black and white. It is more a case of 50 shades of grey—if your Lordships will excuse that particular reference.
The concept of public interest, which in British law is used to effect the balance between Article 8 and Article 10 of the European Convention on Human Rights, is at the heart of the issues that we considered. The right honourable Jeremy Hunt MP, the Secretary of State for Culture, the Olympics, Media and Sport, hit the nub of this when he told the committee:
“No journalist is or should ever be above the law, just as no Parliamentarian is or should ever be above the law, but journalists do have a public interest defence”.
He obviously used those words in a layman’s sense.
We learnt that in fact journalists sometimes do just that; they break the law, even though no one argued that any journalist is above it. On occasion they may do so by pruriently hacking into celebrities’ voicemail messages, while on other occasions they may do so with a higher purpose in order to investigate a particular important issue. We heard from witnesses about where and how this might occur, and to what degree. Editors candidly told us that there are occasions when the law is broken because journalists break the rules. We heard, for instance, about the use of illegal methods such as subterfuge or secret filming in order to uncover information for investigations. After hearing the evidence, we concluded that the important practical as opposed to ethical issues to be taken into account by journalists and editors when considering whether to use potentially illegal methods in order to obtain information which they believe to be in the public interest are, first, whether a decision to prosecute would be taken and, secondly, whether a jury would convict if it were.
Considering and determining these issues during the course of an investigation inevitably falls to the journalist and the journalist’s editor, so ultimately the buck stops with them. This is right. Media organisations themselves should and must take responsibility for their decisions on how to investigate and whether to publish a story. However, crucially, in coming to such decisions, it is important that journalists and editors do so in a way that is rigorously structured and that leaves an audit trail for future external scrutiny.
While that conclusion may sound straightforward on the face of it, in real life it can be anything but, so we presented a number of recommendations with the potential, we believe, to make this process significantly clearer and simpler than it is at present. We recommended that media organisations should implement a two-stage internal management process whereby they track and formally record, first, their decisions to investigate and, secondly, whether to publish a story if it actually involves breaches of the law or the Editors’ Code of Practice as justified by the arguments of public interest. We also recommended that regulators should in turn take such an audit trail into account when evaluating the responsibility or otherwise with which investigative journalism has been undertaken. The regulator should also take into account the actions taken ex post facto in considering what penalty is appropriate for any actual breach.
On the critical issue of what the public interest might be, we discovered that investigative journalism is suffering as a result of inconsistencies and lack of clarity in the law. An example of this was highlighted by the evidence of representatives of the Index on Censorship, who told us that:
“Potentially, The Daily Telegraph could have run a public interest defence if prosecuted under the Data Protection Act for leaking MPs expenses claims—but not if it were prosecuted under the Official Secrets Act. This is clearly an anomaly”.
I might go further and say that, frankly, it is absurd. We therefore, without proposing a formal statutory defence relating to the public interest either generally or in other specific statutes, made recommendations that sought to provide clarity in a slightly different way on the complex and sensitive issues surrounding this matter.
As I have just mentioned, we did not actually recommend that all relevant criminal law be redrafted in order to iron out inconsistencies between different pieces of legislation. We did, however, urge the prosecuting authorities to publish their broad approach to determining which cases should be prosecuted or not where illegal activity undertaken by journalists in the course of an investigation might be considered to be in the public interest. We were therefore very pleased when it emerged —just before we reported, as it happens—that quite independently of us, the Director of Public Prosecutions was broadly persuaded of this approach and is already taking it forward.
We argued that the public interest should be characterised by reference to good and responsible behaviour, not least as defined by the relevant regulatory codes of practice, which contain examples of what could constitute a sufficient public interest justification for breaching a rule or regulation. In this regard, we very much welcome the changes made last December to the Editors’ Code of Practice, which required that to argue a public interest exemption to breaching a certain section of the code, an editor must not only show that he or she and the journalists involved had good reason to believe that the public interest would be served in doing so, but show how and with whom that was established at the time.
We also discovered that investigative journalism is suffering from a lack of proper investment and organisational support. To offer some respite from the financial crisis across much of the media, we suggested the creation of an investigative journalism fund. Any fines that are levied for the transgression of journalistic codes of conduct, including fines that might be introduced under a new system of press self-regulation and a proportion of fines issued for breaches of the Ofcom code, should be allocated to this fund, which might be used for investigative journalism itself or for training investigative journalists.
We were also encouraged by the number of new funding and organisational initiatives that have started to materialise as alternative means of promoting investigative journalism. In particular, we agreed that it is vital that measures that are taken to support and foster further initiatives are independent of public subsidies or state support. Charitable status has been suggested as one route to encouraging philanthropic investment in this area, and we therefore recommended that the Government give further thought to this and to possible legislative change in this area. Furthermore, given the vital contribution of investigative journalism to the well-being of democracy, we also asked the Charity Commission to provide greater clarity in this area and to take into consideration the current pressures on investigative journalism, as well as its democratic importance, when interpreting the relevant legislation.
While we recognise the enormous economic pressures on traditional media, we urged them not to vacate the vital area of journalism training. We see some of the new media initiatives as opportunities for training in the skills of investigative journalism, and recognise the invaluable training opportunities provided by the mainstream broadcasters and university departments.
In conclusion, we were well aware that analysis of the media was and still is a very crowded field, but we hope that our examination of the media landscape and investigative journalism’s place in it will help to inform the current debate and assist in influencing any regulatory or legislative reforms that may be forthcoming. I look forward to today’s contributions and to debating these matters again in the future, which the committee sees as part of its core work of assisting the House in this important area of policy, technology and the economy. Looking forward, implementing Lord Justice Leveson’s findings will be of fundamental importance; I sincerely hope and expect that Parliament will be given a clear opportunity to have its say. I look forward to the debate and the Minister’s response although, as I said at the outset, I appreciate that she is on something of a sticky wicket this afternoon. After events at the Oval earlier this week, perhaps I ought to say that she is bowling on a flat one. Finally, I thank our specialist adviser, Steven Barnett, for his enthusiasm and expertise, and record our thanks to Anna Murphy and Emily Davidson, our clerk and policy analyst respectively, both of whom have since moved on to other activities. I beg to move.
Lord Macdonald of Tradeston
My Lords, this inquiry was my last as a member of the Select Committee on Communications, and I congratulate the noble Lord, Lord Inglewood, on his adroit chairmanship of our exploration of possible futures for investigative journalism and on stopping our straying too often into matters that are probably best left to Lord Justice Leveson for now.
As I know from personal experience in both newspapers and television, investigative journalism can be time-consuming and expensive work, involving digging for concealed information, proofing allegations against legal challenge and then persuading risk-averse proprietors or regulators to publish or broadcast your findings. However, despite many wrangles over the years with the independent broadcasting authorities, my professional experience was largely positive. When hidden cameras had to be used, conversations recorded or some subterfuge employed, the regulators of ITV and Channel 4 would discuss the programme in depth, sometimes demand to view it in advance, and then almost always approve transmission as being in the public interest.
Our committee’s earlier inquiry into the governance of the BBC confirmed a similar approach and a shared belief across public service broadcasting in the importance of serious, revelatory journalism. A positive aspect of this inquiry was the continuing support for investigative series promised by the BBC and Channel 4, with ITV also looking again to strengthen its once formidable current affairs output. Our committee recommended that this commitment by public service broadcasters should be underpinned by Ofcom amending its guidance to include investigative journalism in its definition of the current affairs category. In its formal response, Ofcom acknowledged that encouraging investigative journalism in its quota requirements could be beneficial, and promised to consider our recommendation when its guidance is next updated. I hope that the evidence emerging from the Leveson inquiry will persuade Ofcom to act.
Our optimism about the future of investigative reporting on television was based on the relatively robust state of public service broadcasting. The BBC seems confident that it can maintain standards despite a freeze on its licence revenue. Viewing levels across television are holding up surprisingly well. The mass audiences of mainstream television are still more attractive to big advertisers than fragmented online options.
By contrast, however, the internet has drained classified advertising from newspapers. Traditional business models are being undermined, with editorial budgets slashed and journalists sacked. It is a pretty vicious downward spiral. Investigative journalism is always vulnerable because it is expensive. We heard in evidence that managements were increasingly concerned that controversial stories meant legal threats and unaffordable costs. As the noble Lord, Lord Inglewood, has said, our committee concluded that such risks might be reduced if a legal defence of publishing in the public interest were made clearer and more consistent. Like the noble Lord, Lord Inglewood, I therefore applaud the Director of Public Prosecutions for recently clarifying the more nuanced approaches his staff will now take in such cases. Additionally, our report welcomes the Government’s new Defamation Bill to make our libel laws less expensive and inhibiting. I also look to the Government to strengthen the protection that journalists can offer their sources—and whistleblowers, who often risk their careers in serving what they judge to be in the public interest.
The profound impact of the internet on traditional forms of publishing and broadcasting has yet to be fully understood. The damage already done to our press makes informed public debate of important social issue less likely and threatens a vital element of the UK’s system of democratic governance and accountability. However, in the specific area of investigative journalism, the new technologies are hugely helpful. At the press of a button, search engines offer information of extraordinary detail and scale. The quantity of information now in the public domain has created new specialisms such as data mining, which allow journalists to track trends, flag up problems and identify patterns of good and bad practice across society.
The Secretary of State for Culture, Media and Sport, Jeremy Hunt, assured us that the Government are committed to an open data agenda whereby public bodies make available online huge amounts of statistical information. Mr Hunt, in evidence to our committee, said:
“If we unleash citizen journalists on vast swathes of government data we are opening up big, big opportunities both to hold Government to account and also to learn things about our society that we never knew before”.
I take this rare opportunity to agree wholeheartedly with Mr Hunt. The growth of social media and the explosion of blogging show the astonishing potential for citizen journalism—a phenomenon that may soon see us looking back rather bemusedly to when the practice of investigative journalism was concentrated in a handful of small teams scattered across the higher peaks of British media.
Our committee welcomes the innovative use of social media by journalists in connecting with people around the world to access and disseminate information in utterly different ways. The so-called “crowd sourcing” of stories and visual evidence also has great potential. These novel forms of journalism will, of course, require training in new skills. We therefore applaud the important role played by universities in training journalists.
The urgent search continues for viable business models that will allow the best of traditional media to survive the disruptions of the digital age. National newspapers are testing online business models, erecting pay walls to collect subscriptions or offering free access to sell more eyeballs to online advertisers—as yet with modest results. Meanwhile, circulations and advertising revenues continue to decline and more titles are lost.
To date, more American newspapers have been harder hit than the national press here in the UK. However, philanthropy is a social force in the United States, and wealthy foundations are funding a number of projects to encourage the growth of investigative journalism online. We should monitor these pro-bono projects to see which, if any, can be transplanted to the UK. In Britain, charitable support is harder to find, but donors have helped the Bureau of Investigative Journalism do good work in its short life. The bureau is also earning income by working with newspapers and broadcasters on big stories. I suggest that this kind of co-operation could be extended to involve journalism students in universities. Young people are still surprisingly keen on careers in the media, despite its uncertain future. Perhaps they sense that a new order is emerging.
Sadly, our report found little solid evidence of viable business models evolving to support investigative journalism on any serious corporate scale. However, we are still in the early explorative stages of the digital revolution. I am optimistic that people in ever greater numbers will feel compelled to share information or opinion that they deem to be important with ever-wider audiences. Micropayments on an international scale may float or reward specific projects. Self-publishing is already transforming book publishing, and some of those books are in-depth investigations. Similarly, online ways of funding serious journalism will surely evolve. After all, who could have predicted that the original Private Eye, with its stapled yellow pages, could combine jokes and gossip with outstanding investigative journalism and still be thriving 50 years on? I suspect that the internet is already producing equally unorthodox online initiatives, and I hope that in some small way this report will help more to emerge.
Perhaps I am overoptimistic, but I believe that the emerging force of citizen journalists, with the power of new technologies and the potential of the global internet audience, will produce revelatory stories of a range and frequency that the traditional media, even in its prime, could never achieve. I invite the Minister to endorse at least some of the eminently sensible recommendations of your Lordships’ Committee on Communications.
Lord Stoneham of Droxford
My Lords, I declare my interests as a member of the News International and Johnston Press pension schemes. I congratulate the noble Lord, Lord Inglewood, and the committee on their report, which is timely and authoritative. I welcome the opportunity for this debate. I also feel honoured to follow the noble Lord, Lord Macdonald. We spent a month together at the London Business School learning about strategic management. The one press story that I remember from the time was the release of Nelson Mandela, so it was a long time ago.
The noble Lord, Lord Inglewood, chairs a local newspaper group, Cumbrian Newspapers, which is highly respected in the industry. It remains under the stewardship of the Burgess family, with its strong commitment to its communities and a long-standing commitment to well resourced journalism. I had the privilege to work for two family-dominated companies. Although one of them is now being treated like Marshal Pétain in France after the Second World War—you cannot find anyone who ever supported him—it is my view that family companies provided an ideal model for ownership of the press. They understood their reciprocal businesses. They respected the need for flair and professionalism in creative businesses. They invested heavily in editorial resources because they believed in strong products above all else. They worried constantly about their business and planned long-term, often for the next generation, and resisted the short-term mentality of the City investors.
Sadly, too few family companies remain, but it is no surprise that the strongest companies in the national newspaper world belonged to the Rothermere and Murdoch families. In the regional press, family companies have disappeared almost totally from the daily market, with the exception of the Burgesses and the Colman and Copemen families in Norwich. Their families are now more involved in weekly newspaper companies, and they may well yet emerge with a stronger future than the daily market for the regional press. That will be surprising, but no surprise to me.
Rupert Murdoch may have no friends currently, but in the past 40 years, in my view, he called all the right strategic shots in the media sector until he underestimated the reputational damage of his executives becoming too headstrong with their excessive power so that they thought that they were untouchable. In the report that we are discussing today, I welcome the commitment to investigative journalism, although we should be as much concerned for those local investigations into council fraud, consumer fraud, criminal activity and standards of care in hospitals and care homes as I would be concerned with the more dramatic national events such as the Watergate-style investigations of MPs expenses and hacking inquiries into the national press.
National press and broadcasters are always better funded than the local press, but the local press touches people’s lives directly. I broadly support what the report says on the need for better regulation and governance in the sector. We need to support sources and whistleblowers and to improve our libel laws if investigative journalism is not to be unnecessarily constrained. It is essential that the reputation of the industry is safeguarded and enhanced. However, I question the report’s recommendation that the Government should recognise the financial problems facing newspapers and should think creatively about tax breaks or other financial incentives that help them through this difficult transitional stage. I cannot believe that the public or a free press would really welcome that.
I am also sceptical as to whether an investment fund for investigative journalism could make a significant impact on funding investigations—there would be huge problems with administering such a fund—although a fund to encourage more training and improve the diversity of journalists has my support. I place more credence on that approach.
I will concentrate in my speech today on two aspects that are important to the future of investigative journalism. One of them the report slightly overlooked; it is mentioned, but I think that it is fundamental to the debate today: the business model and economic viability of newspapers. I will also say a little about the improved regulation of journalistic standards in the light of this. Newspapers are cyclical businesses. They are consumer products, dependent on advertising revenues, which closely follow the progress of the economy, as the noble Lord, Lord Macdonald, was saying. I have never forgotten going down to Portsmouth after that course at the London Business School to run the Portsmouth News Group. As the economy declined in the property-led recession at that time, I lost 50% of my profit in the first six months of my tenure and 50% of what remained in the second six months—a lesson I never forgot. As Tony Pidgley, who runs Berkeley Homes, says—house building is another very cyclical business—you should always make sure that you have enough cash for a disaster that may last for two or three years. In the media sector, it does.
Sadly, in the boom years of the 1990s, and until 2007, many publishers forgot that they were overgeared, overpaid for their purchases and never prepared for the merry-go-round to stop. Two of the four major regional publishers are now mired in debt and pension liabilities that are going to drain those businesses of resources when they most need it.
In the national press, only one quality newspaper is making money. The Telegraph makes between £40 million and £50 million on a turnover of £331 million. The Times is publicly losing £40 million to £60 million—maybe even more if the overheads were allocated differently. We know that the Guardian is losing £40 million, but it is supported by the assets of the Scott Trust. We do not really know about the Independent, but I imagine that its losses are significant. Tabloids are more profitable, given their circulation revenue, but Trinity Mirror has severe problems over its pension liabilities and gearing. Some of this is cyclical, but it is compounded by serious long-term threats to advertising and circulation revenues.
The noble Lord, Lord Macdonald, mentioned that the internet is taking over whole waves of classified advertising, but it is more serious even than he said. In time, no one will advertise second-hand cars in newspapers. Anyone who has used that medium will know that you spend your time ringing up cars’ owners to find that the cars have already been sold. The internet provides a responsive medium that is live, tells you instantly whether the car is available or already sold, and can provide film and information in much more detail than a paper product ever could.
Job advertising is the real measure of whether a monopoly exists. The rate for job advertising is the real measure of market power in a sector. It is the most expensive and profitable source of revenue and it has been dissipated by the cyclical downturn. I used to be responsible for printing the Sunday Times and my weekly nightmare was printing its jobs supplement. It was worth £2 million of revenue and ran to 30 or 40 pages in the boom. If you look at it today, it struggles to get four pages of advertising and is probably worth around £200,000. Most information on jobs is now found via the internet and submitted via the internet. Press advertising will never come back in such volumes as it had in the past.
There have been huge drops in circulation and readership. I was frightened to compare figures this week. The Guardian now sells 180,000 copies and the Independent sells 92,000. The Daily Telegraph sells 520,000 but its sales have halved in a decade. They are frightening figures and this year’s declines are of more than 10% for most of these titles.
Twenty years ago I went to the USA to study the future of newspapers. That was before the internet took off. However, the industry was already eyeing the concept of a convenient tablet. It has taken 18 years to get there, but in the iPad it has found something that has all the qualities of a newspaper but is better. It is portable, it can convey information as never before, it can customise its product and it is immediate, which a newspaper no longer is. To take our own example, although we are not allowed to read newspapers in the Chamber, we all refer to our iPads and smartphones. The problem is that the business model for newspapers through this medium is not yet proven. This is fundamental to the future of investigative journalism.
Advertising alone cannot sustain publishing. It needs a cover price or subscription to balance the product. Although vast investment in the industry has just been made, there are huge savings to be made on printing facilities, paper, transport and retail-wholesale margins if you eliminate the paper product. Stuck in the middle of all this is another key issue: the best websites for news are all currently free.
There are dangers in the Government intervening to subsidise the transition. This is a most difficult phase and it is where we need to concentrate all our creative thinking. The majority of newspaper readers are almost certainly retired. Increased longevity will prolong the life of paper products until those giving up newspapers because they can no longer read them realise that they can increase the print size on a screen and adapt to the electronic medium. That will give them a bit more life. These are the real issues when we look at the problems for investigative journalism and how we finance it.
I will say a little bit about regulation. I strongly support and congratulate the noble Lord, Lord Hunt, on the work he has been doing. I am delighted to see him with us today, although I understand why he is not speaking on this subject. It is fundamentally important. The work of the Press Complaints Commission, particularly on handling complaints and advising the public, is completely underestimated. Most of what we need is in the Editors’ Code of Practice, which has been developed over a number of years.
Of course, the Press Complaints Commission needs wider powers to ensure governance and compliance for the industry. It needs to have greater powers of enforcement and a system of fines. It needs the reality of independence from serving editors while retaining their commitment to the code. But we do not want to overlegalise the system so that it slows up and the costs and complexity become a barrier to the public using it. The case of employment tribunals should be a warning to us all.
However, there are two unresolved problems, and I am not sure that the report that we are discussing today manages to address them. How do you make sure that everyone is included in the proposed contracts we now have before us? It is not just Express Newspapers that is outside; it is all the other growing sources of publications we are going to have over the internet. They need to have some form of financial incentive or disincentive to make sure that they join up and are part of the system. As the noble Lord, Lord Macdonald, so wisely said, as publishing continues to accelerate on the internet, on blogs and social media, how do you ensure fair play with the traditional media and give protection to the public on regulation matters?
There are two great challenges to investigative journalism in the future. How can the business model for publishing respond to the technological and market pressures that in my view are now inevitable and coming much quicker than we think, and which are not transitory or temporary? There will be lower profitability during the transition, but I am not convinced that the state should get involved in subsidising the industry. Improved regulation must not concentrate on simply the traditional publishing model and publications; it has to absorb the new mediums at work if it is to win back public confidence and not further weaken the traditional press.
Baroness O’Neill of Bengarve
My Lords, we are all indebted to the noble Lord, Lord Inglewood, and his colleagues for a very interesting and timely report into the future of investigative journalism. A great deal of the value of the report lies in its detailed attention to the wider landscape, in particular the economic landscape, in which investigative journalism takes place—or does not take place. As the report makes clear, and as other noble Lords have already stressed, the transformations produced by new technologies and new media, by dwindling print advertising and shrinking revenues, and by the meteoric growth of a public relations industry with aims that are not well aligned with those of journalism, place particular pressure on what is unavoidably one of the more expensive but also more significant sorts of journalism.
The report shrinks from any definition of investigative journalism, which is the question I want to address today. Clearly the committee heard a variety of opinions on what it is, ranging all the way to the view that any form of journalism that investigates something or other is thereby investigative journalism. I believe that the latter view would spread the net too wide and leave us without any grasp of the distinctive and valuable features of investigative journalism or why it is important to protect it.
If a reporter summarises a debate at a meeting of a local council—or, for that matter, in your Lordships’ House—that is indeed valuable reporting, but it is reporting on matters that are not difficult to find out. Such reporting is an honourable activity, but it cannot really count as investigative journalism. What it adds for the public is convenient access, but it is not really a matter of investigation.
We tend to keep the term “investigative journalism” for work that penetrates more deeply; that draws on sources that are not, or not wholly, public; that informs readers, listeners and viewers in ways that are not merely accurate but that would have been hard to discover by other means; and that aims not merely at accuracy but specifically at accuracy about matters that the public have an interest in knowing about.
Investigative journalism, I suggest, is a specific sort of journalism. Indeed, it should count as a luxury brand within journalism. As others have said, it costs more to produce than many other sorts of journalism. It is more difficult and it attracts more attention. The distinctive features of investigative journalism are reflected in some of the most widely made claims about its importance. Investigative journalists, it is said, seek to speak truth to power—or at least sometimes; to let light in when some, including some who are powerful would prefer secrecy; and to expose misdeeds and corruption. That might be a somewhat romantic version of these matters, but it is the sort of thing we often hear.
A standard and much cultivated image of the investigative journalist sees him or her as courting danger, as an intrepid but secretive sleuth, as taking risks yet protecting informants in the face of the malign demands of power and authority. Luxury brands usually need special protection since they offer great temptations to counterfeiters, who serve up mislabelled and inferior goods, passing them off as examples of the coveted brand. We can all think of handbags that are allegedly handmade by prestigious Italian manufacturers that, surprise surprise, are available for a song in the back streets of many cities. We all take pleasure in the surprisingly overt trade in fake diplomas, degrees and qualifications that can be found online; it is hardly hidden. There are many other cases of mislabelling and mis-selling prestigious coveted brands, and we should learn from that reality.
The same difficulties arise with investigative journalism. We cannot afford to be too generous about its definition if we are to devise structures that enable and protect the genuine article without providing protection for the fake article, thereby ultimately destroying the brand value of the genuine article. By this I do not mean that we should aspire to find a tight definition of investigative journalism, and I agree with the recommendation of the report for a definition that sets out the complete, necessary and sufficient conditions for anything to count as investigate journalism, although I am sure that there will always be borderline cases.
However, there are at least three conditions for anything to count as investigative journalism that should be recognised in our debates. The first is that a piece of writing or a programme does not count as investigative journalism if it does not even aim to report accurately. Secondly, something does not count as investigative journalism if it aims to report accurately but the matters on which it reports are in any case in the public domain. Thirdly, something does not count as investigative journalism even if it aims to report accurately matters that are not in the public domain but coverage of those matters is not in the public interest. That, of course, is a topic to which the report devotes considerable attention and makes interesting proposals.
No doubt other noble Lords will say more about conceptions of the public interest, so I shall not say anything about it today. It is important to look at how we can give regulatory or legal protection to that specific and valuable form of public interest journalism that is genuine. Rather, I am going to talk about some of the other standards that investigative journalism needs to meet if it is to be the genuine article. A great deal of media content does not even aim to report accurately because it is not aimed at matters of fact; it is not aimed at the truth. It is overtly and quite properly concerned with comment or culture, with entertainment or fantasy. We do not fault the horoscopes because they are inaccurate; indeed, let us be honest about it, they are invented. However, everyone understands that that is what they are.
A great deal of media content does not even aim to report what is the case; a fortiori it is not about speaking truth to power. That is why it is a great mistake to base arguments for press freedom on considerations about the importance of investigative journalism. There are a number of arguments for press freedom. However, those who try to link it too closely to claims about the importance of investigative journalism aim too low. They seek a justification that will ignore freedom for much that has a proper place in media content. Therefore, we should not link arguments for investigative journalism too closely to our basic arguments for media freedom.
Investigative journalism is distinctive in seeking to report what is the case. However, as we know, it is not the only sort of journalism to do that. Much reporting aims at accuracy and there is no need to dignify all of it with the label “investigative journalism”. Again, an example is the summary of a parliamentary debate that is fully reported in Hansard. This is very useful but is not investigative journalism. Those who report based on a company or charity press release are not investigative journalists. Indeed, those who do not mention that their articles are merely an extract or rehash, or perhaps a repetition, of someone else’s PR work are very far from investigative journalists. They are misleading the public into thinking that this is an independent report, when it is in fact paid-for content—or, rather, content freely provided by interested parties.
This is why investigative journalism works by seeking not merely to report accurately but—and this may seem surprising—to be open about its sources where possible. A need to protect sources arises in some cases but always in the context of journalism that seeks to be evidence-based and to provide readers, listeners and viewers with such evidence as can be made available for the claims that are made. Sometimes we are mesmerised by the special reasons that can exist for protecting sources in some cases, and we forget that serious, good journalism is directed towards reporting what is the case. It works by providing readers, listeners and viewers with evidence when this can be done.
We both romanticise and demean investigative journalism if we view it simply and misleadingly as work that hides its sources. Investigative journalism is much more than that. On the contrary, the best investigative journalism achieves credibility by carefully providing evidence when this can be done without risk to sources and certain others. We have reached entirely the wrong position if we think that an automatic appeal to the need to protect sources is the hallmark of genuine investigative journalism. Instead, it is a special case that must be dealt with. It has credibility and importance only within journalism that respects the disciplines of truth seeking and generally provides for readers, listeners and viewers the evidence needed to assess what they read, hear and see wherever possible.
However, it is not always possible. In some cases, sources will be at risk if they are named. In other cases, evidence may only be secured by practices that breach conventions or laws. For example, seeking employment using bogus credentials or false names in order to discover what is happening in a nursing home. Here, the report of the Select Committee points in a plausible direction by suggesting that the defence offered in such cases could in part consist in providing a clear audit trail that could be used in litigation for breaches committed. That defence should not require demonstration that what was reported was true—we can only aim at but not guarantee the truth. However, it should require that journalism aims to discover the truth using the relevant, routine but demanding disciplines of truth seeking for the particular area and citing evidences and sources where this can be done without risk to sources and others. Journalism should rely on a public interest defence only where needed. The specificity of the defence creates its plausibility.
Other noble Lords have said more already about public interest defences. There will be more said today. I try to set investigative journalism in the wider context of seeking and communicating what is the case. This context is necessary if we are to see its specific importance and the importance of distinguishing it from counterfeits in which the alleged protection of sources is in fact used to hide from the public a lack of sources, or credible sources, and evidence—indeed, at its worst, to lie to the public.
The river of change is running very fast and there is a lot more technical change ahead. We are in a flowery spring, perhaps the 1968 of this transformation, in which we imagine that new possibilities will enhance citizen journalism and forget that they may also protect poison pens. In the next year, we shall have to test whether the draft regulation on data protection is fit for purpose in the new climate. I do not know whether it is and it will be very difficult to see whether that transformative approach to protecting personal privacy fits with the views that we reach about investigative journalism.
I understand very well why the Minister can make only a limited response today to the committee report because of the work still being undertaken by Lord Justice Leveson’s inquiry, but I hope that in the course of dealing with the vast range of legislation bearing on data—the EU draft directive, the Defamation Bill and others—your Lordships’ House will return to this report in the coming year and take its recommendations into careful consideration.
The Lord Bishop of Norwich
My Lords, it was a privilege to be a member of the Select Committee that produced the report that prompts our debate, and I learnt a great deal, not least from my fellow members. When the MPs’ expenses scandal was at its peak, I recall someone remarking that politicians had fallen even below journalists in the league table of public esteem. Since then, the phone hacking scandal has seemed to restore the customary pecking order, while bankers have contrived to plummet so far that they now seem in the relegation zone. I dare not speculate where bishops now lie in these hierarchies.
What is odd is that the British public has long had a lack of esteem for journalists, yet is the same British public that has shown great interest in reading what journalists write. Historically, newspapers have had a major influence on public opinion. Politicians of all parties would not have met newspaper editors and journalists quite so often if that was not so. The public seem to have a great appetite for celebrity exposés. The methods sometimes used have hardly always been models of fair scrutiny or investigation, yet there is a sound and ethical tradition of investigative journalism that has been well described in the report and to which the noble Baroness, Lady O’Neill, has referred. The public are right to feel justice has been done when authority figures and institutions are revealed to have done things which they would have preferred the general public not to know. Investigative journalists have helped to put injustices right when the courts or public authorities have not done so.
During this inquiry, the committee received plenty of evidence about the value of investigative journalism. Some people might still be in prison unjustly were it not for the ferret-like doggedness of journalists such as the late Paul Foot. Whether it is the Sunday Times Insight team—now drastically reduced, I am told—journalists working for “Panorama”, or a single journalist such as Nick Davies, sure that he is on to something with phone hacking and just will not let go, stories are uncovered and the body politic is healthier for it. Yet strangely in the UK such journalists are rarely honoured or become household names like Bob Woodward and Carl Bernstein in the United States in relation to Watergate. The British are great consumers of investigative journalism, but they, and we, have not done all that much to honour investigative journalists. We have rather taken them for granted, as if investigative journalism will always be there. Perhaps it will be.
Paragraph 240 of the report comments that while it is easy to paint a pessimistic picture of the economic problems facing investigative journalism—they have been well illustrated already—there was no evidence to suggest that investigative journalism would disappear. The Channel 4 investigative journalism training scheme is but one example of initiatives continuing to nurture this tradition. The number of courses on journalism in our universities has grown enormously, too. While some suggest that these have proliferated at a rate beyond the capacity of the industry to employ even its good graduates, journalists with a passion, even obsession, for investigation often find an outlet. Even so, a serious issue is emerging that should concern this House.
The most striking statistics in this report are to be found in table 1 on page 16 concerning national newspaper circulation over the past 10 years, to which the noble Lord, Lord Stoneham, has already referred. Total circulation has declined from 27 million in 2001 to less than 20 million last year. That is the loss of more than one-quarter of all sales in a single decade. It is accelerating. The past three years have seen declines in newspaper circulation of more than 1 million copies a year. The losses are felt profoundly in local and regional newspapers, which have had to cope with a massive reduction in advertising revenue, too. I should perhaps declare an interest as the Bishop of Norwich because the Eastern Daily Press in Norfolk still outsells every national title, which I think is unique in this country. I thank God for the fact that we get in a regional newspaper not just local news but Westminster and international news. However, we have heard about Port Talbot as an example of a substantial community now served by no significant local media. Elsewhere, an increasing number of council meetings go unreported, and there are courts where the press gallery is empty.
The fourth estate can fulfil its role only if it is present. The decline in local and regional newspapers has been partly offset by the still significant presence of BBC local radio, which has been reprieved from the worst cuts recently proposed, and which means that we still have some local media. But we also need partiality and passion as well as balance to ensure that those exercising power and authority are called to account. If in due course council decisions are reported only through the newspapers and magazines published by councils themselves, it is hard not to think that the consequences will be far from happy.
Even so, there does not have to be a physical presence at council meetings for investigative journalism into all the work that for example councils do, to flourish. It was intriguing in our evidence to listen to Clare Sambrook, an outstanding investigative journalist, referring to the amount of work she does online, drilling down through what seem like unpromising data. There is a vast amount of information online that is published in an undigested way and which needs careful analysis by someone with a hypothesis or two to test. A line from TS Eliot in his Choruses from the Rock is pertinent:
“Where is the wisdom we have lost in knowledge?
Where is the knowledge we have lost in information?”.
We are often misled into thinking that the transparency and publication of data leads inevitably to knowledge. It does not. It needs investigation and interpretation, and only when the knowledge is reflected upon and digested might wisdom come.
If there is a frustration about this report, it is that the committee has discovered no single solution to deal with the difficulties diagnosed. There are few quick wins in this area. Certainly, the proposals for audit trails and greater legal clarity and consistency in issues related to the public interest make good sense, as does the proposal that where a news organisation develops more than a 25% share of the market through organic growth, a public interest test should be applied just as it is in relation to proposed mergers now.
Perhaps the most hopeful element of this report, however, was the discovery that many news organisations remain committed to investigative journalism since they regard it as the cutting edge of journalism itself. It is what makes journalism worth while. That, alongside the very different ways of promoting investigative journalism, illustrated in the USA by ProPublica and here with the Bureau of Investigative Journalism, brings hope. It is clear that there exist funding streams that are neither strictly commercial nor use taxpayers’ money but that are essentially charitable. This has not been an area where UK philanthropy has needed to be operative in recent decades, because commercial and public finding models have worked, but there may be more potential there than has been imagined. Given the zero VAT rating on UK newspapers, it does not seem too much to ask the Charity Commission to clarify which activities related to investigative journalism might be charitable within the current state of the law.
The note sounded in this report is one of hopeful concern. Hope is an underrated virtue, but not here. I will forbear to preach a sermon on hope, noble Lords will be glad to hear, but the value of this report in relation to investigative journalism is that hope here should still outweigh anxiety.
Lord Black of Brentwood
My Lords, I declare an interest in this debate as executive director of the Telegraph Media Group and chairman of the Press Standards Board of Finance. I draw attention to my other media interests in the register.
There could not be a better time for this House to consider the future of investigative journalism on the back of this admirable report. Having heard about its genesis, that goes to prove the point that all the best thoughts occur in the bath. For over a year, journalism has been subject to an intense and often excruciating spotlight. Three police investigations, a judicial inquiry with sweeping legal powers and a number of extremely thorough Select and Joint Committee inquiries have all placed British newspapers and those who work for them under unparalleled scrutiny. The force of the law, whether through police investigation or the sweeping powers invested in the Leveson inquiry under the Inquiries Act 2005, has been felt in the newsrooms of every national newspaper—and, indeed, of some local newspapers. This has been a period of unprecedented pain in the long and proud history of the British press.
It is worth emphasising that no one would ever do anything other than condemn a breach of the law. Where crimes happen, in the press or in any other walk of life, they must be punished. We have seen in the events of the past day or so that justice does, indeed, take its course, but in looking at the future of the press, particularly investigative journalism, what is crucial now is a sense of perspective. Many of the inquiries have concentrated on a small number of journalists and on events that in the main date back many years. Some of the evidence at the Leveson inquiry related to incidents in the late 1980s. What has often been ignored during this period is the fact that the vast majority of journalists are decent, honourable, hard-working individuals who came into the business to serve the public interest and their local communities. I think in particular of the regional press, as the noble Lord, Lord Stoneham of Droxford, said; it is vital to the fabric of local democracy in this country, and its proud record of investigative journalism and civic engagement has often been overlooked in recent months.
That is why I strongly welcome this excellent report from the Communications Select Committee. My noble friend Lord Inglewood and all his colleagues are to be congratulated on it. It is a report that is solidly grounded in the real world and in the day to day practicalities of the industry. In eschewing headline-grabbing issues, it is full of common-sense practical ideas to ensure that investigative journalism has a future in this country. I am not going to talk about the training recommendations. I echo what noble Lords have said about training, which is often one of the first things to go when times are tough.
I do not want to dwell on what precisely investigative journalism is or why it is important. That is set out extremely well in the report. It is, as my noble friend said, to speak truth to power, whether that power be national or local, and to do so without fear or favour.
At the moment, investigative journalism is under threat from two different sources. First, as has been touched on a number of times in the debate, the industry is facing serious commercial difficulties as a result of profound and rapid structural change. Then there is the increasing burden of law, which is having a chilling impact on freedom of expression. I should like to look briefly at each in turn.
First, I shall look at the economics. Investigative journalism costs money, but money is in increasingly short supply. Chapter 2 of the report deals with these issues in a thorough and cogent fashion. This is an industry whose business model is crumbling. To survive, it has to find new revenues from digital operations, and the most innovative publishers are working extremely hard to do so. However, print revenues are declining more quickly than new income streams are growing. For some years there will therefore be a period of serious commercial dislocation within the industry, as indeed the most recent results from the Guardian Media Group, which recorded a pre-tax loss of £75.6 million for the last financial year, showed.
At his inquiry last week, Lord Justice Leveson described it as, “all rather depressing”. It is a lot more than depressing; it is deadly, because if newspapers cannot afford to invest in investigative journalism, no one else is going to do it—and that then puts democracy itself in jeopardy.
Personally, I am an optimist about the long-term future of the industry, because change and creativity is in its DNA. I believe that the best will adapt and flourish, but there will certainly be difficult times ahead before that happens. The report recommends that the Government should “think creatively” about ways in which they can,
“help the industry through this difficult transitional stage”.
There are a number of ways in which they can do that. First, they can seek to ensure that expensive and unnecessary regulatory burdens on the industry are kept to a minimum and, where possible, lifted. Let there be a bonfire of red tape. That would be of massive importance to the regional press in particular.
Secondly, particularly with regard to the local and regional press, the Government must move to ensure that consolidation can occur among local publishers without the impossible burden of Competition Commission inquiries. The report rightly refers to the recent shameful example of the closure of a number of local newspaper titles in Kent following a Competition Commission referral. If we are serious about seeking to safeguard the long-term health of our newspaper industry, these anachronistic takeover procedures must go. The report is absolutely right on that.
Thirdly, we should ensure that our copyright laws support investment in journalism rather than undermine it. In the absence of state subsidy—no one in the newspaper industry would want that—an independent press ultimately depends upon robust copyright laws for protection of its editorial content and as the foundation for any financial return on this investment. This is particularly important in the digital age. The noble Lord, Lord Macdonald, was absolutely right to point to the profound impact of digital technology. Nowhere is that impact set in sharper focus than in the whole question of the protection of content.
The UK’s copyright laws, and in particular the Copyright, Designs and Patents Act 1988, have allowed editors to edit, publishers to publish and media companies to innovate, in print and online, so that our content can always be available in whatever form, manner and media that our readers and customers want. It is vital that the bedrock protection of the 1988 Act cannot be chipped away through creation, amendment or removal of exemptions by secondary legislation, as Clause 57 of the Enterprise and Regulatory Reform Bill would allow, to the concern of the publishing industry, even if that were not the intention of the clause.
Nor should the law’s protection of publishers’ rights be eroded to allow others to exploit our news services and editorial content without permission, payment or punishment. Again, if we are serious about investigative journalism, we must be serious about copyright. I should be grateful to hear what the Minister can do to reassure the industry on that point.
Moving on from economics, an increasing burden of law is impacting on investigative journalism. In recent years, the Human Rights Act 1998 has handed to those with something to hide, and the resources to use the legislation, significant new powers with which to threaten newspapers. Then there is the Data Protection Act 1998, the terms of which are so wide that they encompass virtually all journalistic activity. There is also the Regulation of Investigatory Powers Act 2000, which was used to convict journalists accused of phone hacking back in 2005, and more recently the Bribery Act 2010. Taken together, all this legislation has a significant chilling effect on investigative journalism. In addition, we still have antiquated defamation laws, which underpin and magnify that effect.
On that last issue, the reform of our repressive libel laws, we can thankfully at last put a big tick in the box, as the noble Lord said. The Defamation Bill, which should reach this House in the autumn, goes a very long way to creating the new, robust and workable defences needed to protect investigative journalism in the digital age in the 21st century.
However, there is much more to be done. One of the most serious issues highlighted by the report is that a great deal of legislation impacting on the media has no public interest defence in it. The Regulation of Investigatory Powers Act has none; the Bribery Act has none; nor does the Official Secrets Act 1989 or the Computer Misuse Act 1990. The noble Lord, Lord Inglewood, touched on this issue. I readily appreciate that there is a limit to what can be done as so much statute is involved, but there are two practical areas where action can be taken.
First, I have no doubt that concerns about the application of the Data Protection Act continue to have a chilling impact on investigative journalism. The DPA is drawn extremely widely and touches on every part of the investigative process. There is currently a public interest defence for breaches of Section 55 of the Act, but it is not robust enough. As matters stand, a journalist could breach the terms of the Act in the course of an investigation because he or she believed that they were pursuing a story that turned out to have no basis. This happens because not every hunch or tip-off turns out to be accurate and therefore provide a story in the public interest.
The previous Government recognised that this was a weakness in the Act and amended it by adding an enhanced public interest defence to new Section 55(2) in Section 78 of the Criminal Justice and Immigration Act 2008. That defence is based on the fact that a journalist was acting in,
“the reasonable belief that in the particular circumstances the obtaining, disclosing or procuring was justified as being in the public interest”.
Such a defence could be a real boost to investigative journalism. It sits on the statute book but has never been brought into force. Given the weight of legislative burdens on the press, now would be a good time to do so.
The second area, which my noble friend has referred to, relates to the manner in which the prosecuting authorities operate, which is dealt with in paragraphs 86 to 88 of the report. As we have heard, since the report was published, the Director of Public Prosecutions has produced his interim guidelines for prosecutors on assessing the public interest in cases affecting the media. I strongly commend these guidelines. They will be a protection for good journalism and, rightly, a scourge on the bad.
The DPP is currently consulting on the guidelines, and I believe he has had a constructive response from across the industry. I hope that the guidance may be amended to include due regard for a journalist’s belief that his or her investigation served the potential public interest and that he or she was acting in compliance with a relevant regulatory code, as I believe this is right for professional standards within the industry. In any case, the DPP’s guidelines will go a substantial way to dealing with the paucity of public interest defences in legislation impacting on the press, which the report rightly highlighted.
Those are two practical and straightforward areas in which we could help the craft of investigative journalism. I would like to finish with a few words about the future of regulation, which is in many ways the elephant in the Moses Room.
First, noble Lords will be aware that I have been involved, with my noble friend Lord Hunt of Wirral, in putting together a proposal for a system of modern, robust, proactive and independently led self-regulation. Based on legally binding contracts, it will for the first time give a new regulator powers of enforcement, compliance and sanction, which the noble Lord, Lord Stoneham, was talking about earlier. Not only will this system provide real protection for the public from unwarranted intrusion, it will work to protect the public interest and investigative journalism. One of the ways it will do this is by ensuring that there is a real renewal of internal governance within newspapers themselves. This works with the grain of the excellent recommendations made by the committee on internal management issues.
Secondly, I have to warn noble Lords that the biggest threat imaginable to investigative journalism in this country will come from any form of regulation based, however slender in manner, in statute. To give a regulator a power in statute would be to give those under the scrutiny of the press some form of control over it. That would be the beginning of the end of investigative journalism. The single most important guarantor of the future of investigative journalism lies, I believe, in the maintenance of self-regulation, which is the only form of regulation that can protect what the Lord Chief Justice has rightly described as the “constitutional principle” of the independence and freedom of the press. That principle recognises that journalism is the exercise of a fundamental human right—that of free speech—which no regulated profession exercises. No other trade or profession has the responsibility of holding politicians and Governments to account, so limitations on journalists must therefore be self-imposed rather than imposed by those under its scrutiny.
While there are practical ways in which we can support investigative journalism, both by seeking to protect the commercial position of newspapers and by breaking down legal obstacles, as this commendable report sets out so clearly, this remains the single biggest issue which all those interested in and passionate about the future of a free press have to face.
Lord St John of Bletso
My Lords, I join in thanking the noble Lord, Lord Inglewood, for his able chairmanship of this fascinating and timely inquiry. Clearly, as all noble Lords have mentioned, there are not just major financial challenges facing the future of investigative journalism, but the challenge of expensive litigation. Therefore it is appropriate that this report is being considered ahead of the Defamation Bill, which will come to the House later in this Parliament. I am firmly of the belief that every effort has to be made to promote a sustainable future for this vital aspect of democratic governance and accountability in the United Kingdom.
While the National Union of Journalists believes that investigative journalism is still flourishing, there is no doubt that it is under threat against the backdrop of a decline in newspaper sales and advertising revenues. I cannot add any more to the strong and compelling arguments put forward by the noble Lord, Lord Stoneham, about the need to address the business model of the print media.
There are rays of hope for the future of investigative journalism with the rise of journalism bureaux, the active involvement of the campaign sector and a new generation of networked web-savvy journalists promoting the field. However, I find it particularly alarming that local and regional newspapers are closing down with up to 40% job losses in many local newspapers.
Our report recommends that a fund should be set up that would be used to promote both investigative journalism and the training of investigative journalists. While I agree that this is an excellent idea, I query the logistics and the viability of the implementation of such a fund. However, a lot more needs to be done to promote financial investment to support this form of journalism.
Clearly, some journalists and senior newspaper executives have behaved extremely badly and let the industry down. I do not need to elaborate on that. Reporters are under increasing pressure to come up with exclusive stories and news scoops. This has led many to believe that the balance of power has shifted too much from reporters to executives, who are dictating the news agenda. Even though regulations prevent excesses and codes of good practice, I am firmly opposed to more statutory regulation of newspapers. It is generally accepted that the present system of voluntary self-regulation, as administered by the Press Complaints Commission, is in need of reform and various suggested models have been put forward. I firmly support the recommendation of the noble Lord, Lord Hunt, who cannot speak today, for the establishment of a new regulatory body that would have real powers to investigate serious breaches by the press and set firm boundaries.
The noble Lord, Lord Inglewood, pointed out that investigative journalism is suffering from inconsistencies and a lack of clarity in the law. I shall not elaborate on the sensitive issues surrounding the definition of public interest, which has been fully covered. Some have suggested that newspaper editors should be subject to regular public hearings, which would provide greater transparency and accountability. I somehow doubt that this will happen. However, one of the key recommendations of our report was that media organisations should take responsibility for their actions when deciding how to investigate and whether to publish a story. We recommended implementing the two-stage internal management process. I firmly support these recommendations. Should journalists and editors do this in a regular and structured manner, this would certainly leave an audit trail for future external scrutiny.
Every effort must be made to promote responsible, high-quality investigative journalism. We need a good seed bed of high-quality questioning. However, we also need popular programmes where a broad profession of good journalism can be nurtured. Most of the speeches today have covered the printed media and the internet. “Panorama” programmes, which I will come to later, have not been covered so much. My noble friend Lady O’Neill made a strong case for investigative journalism to hide its sources. While I agree with much of what she said, investigative journalists should be offered some form of protection for their sources, particularly the whistleblowers.
As every speaker has mentioned today, there must be incentives to provide more journalism training. The demise of the local paper industry has meant that new recruits to the national newspapers are not doing apprenticeships in local papers. Universities play a very important role in training investigative journalists. In the report, we recommend that the Government should support these educational facilities in providing useful and practical training opportunities. It is certainly encouraging that charities and trusts are now taking the lead in funding many investigative inquiries. There was a call for more clarity with the Charities Commission. It is hoped that this model can be replicated more widely.
The new scrutiny of the media and possible regulation should not just apply to the press. The public relations industry should also be more tightly controlled and held to account, particularly if they publish something that is wrong or deliberately misleading. The big question in the future is whether people will turn to other forms of media that are not regulated. One example is Twitter, which has been taking the lead, particularly among younger people who simply do not buy newspapers. It is therefore essential that we do not regulate our free press out of business.
The noble Lord, Lord Macdonald, spoke of the digital revolution and the power of search engines. Given that by its nature investigative journalism is a public interest matter and covers subjects of passion and concern to those affected, these stories are now getting out on the web through the efforts of myriad semi-professionals and people in the know, and are becoming accessible in a way that could not have been imagined 10 or 15 years ago. However, while the use of social media has greatly assisted journalists in accessing content and information expeditiously and cost-effectively, it is important that the Press Complaints Commission tightens its guidance on ensuring that materials on the net are validated and their sources verified.
I was hoping to elaborate on the future of “Panorama”, but I shall just refer to paragraph 275 of the report, which deals with penalties for breaches. In considering sanctions that could be imposed on broadcasters, I notice that Ofcom’s response to our report states that it will consider imposing a sanction only against a broadcaster that,
“has seriously, deliberately, repeatedly, or recklessly breached a relevant requirement”.
I sincerely hope that more incentives can be given for more use of the media, particularly the broadcast media, in bringing investigative journalistic issues to the fore.
In conclusion, while hacking has put journalism under the spotlight and the business model of printed media has certainly come under increasing strain, investigative journalism is in the public interest and absolutely invaluable to our society, and every effort should be made to promote it.
Lord Smith of Finsbury
My Lords, I join all other noble Lords in this Grand Committee in giving a very warm welcome to this extremely valuable report from the Select Committee. I commend the noble Lord, Lord Inglewood, and his colleagues on a perceptive analysis of the issues and a range of rather interesting proposals, which could offer some beginnings of solutions.
The committee and today’s discussion began from first principles: that in our society, statutory control of the press is potentially seriously detrimental to democracy; that there is great public benefit from the free exercise of intelligent investigatory journalism; that investigative journalism can hold government, politics, business or journalism itself to account; that the widest range of robust opinion should be available to the public; but that there have been occasions, especially in the recent past, when the press, through sloppiness, intrusiveness, deliberate misrepresentation or illegal activity, falls far short of the standards to which it ought to aspire.
I add that this is not a regulatory issue. Some tabloid journalism in particular, although by no means all, has assisted a cheapening of public discourse and cultural awareness over many years. The balance between the importance of free expression and the unacceptable lengths to which the press sometimes goes is, and I suspect always will be, a central dilemma in policy-making in this area. However, in recent years, that balance between freedom and personal privacy has clearly not been right in some newspapers. Therefore, I have two proposals in light of the discussions that the committee has brought forward in this report.
The first is in relation to the public interest test on mergers, cross-media ownership and a glomeration of media power. At the local level, reflecting some of the points already made in the debate, I suggest that there is substantial scope for the further relaxation of controls. Local newspapers and radio are struggling for their very survival at the moment. Freeing up the ability to come together seems to be something that is much to be desired.
However, at the national level, I suggest that there could be automatic thresholds for referral to the Competition Commission or its successor. Whether 25%, as considered in the committee’s report, is the right threshold probably needs further discussion. However, referral should not in such circumstances rest in the discretion, however quasi judicial, of a Secretary of State. The committee’s proposal to give Ofcom a right to refer of its own initiative seems to be a rather good one as well.
The second area to consider is what kind of regulation for the day to day press stories and activities there should be. I believe fundamentally in the importance of self-regulation where policing is done by a non-statutory process, but it must be robustly conducted. In recent years, it has probably not been as robustly conducted as it should have been. I declare an interest as chairman of the Advertising Standards Authority. The ASA is a very good example of self-regulation that works—effectively, robustly and independently. It can also be more fleet of foot than a statutory process would be in responding to changes in the media advertising landscape. The recent extension of our powers in the digital arena is an obvious case in point.
One other important point to make, however, is that the ASA works because there is buy-in to its system and its activities from the entire advertising industry. The importance of getting buy-in from the entire newspaper industry to any self-regulatory process cannot be overestimated.
I therefore suggest four possible changes to the PCC and the way in which the self-regulatory process operates. The first is a clearer degree of independence for the PCC council. Having a number of serving editors sitting on the council is not perhaps the ideal way to enhance public confidence in the system. Secondly, there must be stronger sanctions. At the very least, there should be equal prominence for corrections to the original story and a system of fines.
Thirdly, there should be the regular and widespread reporting of the adjudications of the council, so that the public know a lot more about what it is doing. Fourthly—this is the difficult bit—I think there is scope for having a statutory backstop for the decisions that the PCC makes. This is not, I emphasise strongly, the Government making the decisions or adjudicating, or any government body or government-appointed body making the decisions and doing the adjudicating but giving the PCC a statutory authority to enable its self-regulatory decisions to be enforced. At the moment, the ASA is able to refer non-broadcast advertising transgressors in extremis to the Office of Fair Trading or, potentially, its successor. In the broadcast field, we can refer a broadcaster to Ofcom for consideration of its licence and franchise. Giving that ultimate power of statutory backstop would enhance the power of the PCC, or whatever body emerges from the current discussions.
I suspect that we will never achieve a perfect world in this field. The difficult balance between freedom and privacy will never be reconciled completely. However, measures can be taken that would make that balance better, and I hope that out of this debate, this excellent report and the current public discussions that are under way, such proposals may emerge.
Baroness Deech
My Lords, I welcome this chance to discuss the report of the Communications Committee, of which I have the privilege of being a member, serving under our able chairman, the noble Lord, Lord Inglewood.
Investigative journalism goes back to biblical times. Perhaps I might remind noble Lords in this Room that Moses sent 12 investigators on a 40-day mission into Canaan to report on the state of the land. Two of them, Caleb and Joshua, reported well of it; the other 10 did not. Reliance on a misleading majority report was one of the reasons why the Israelites spent 40 years wandering the desert.
Today we expect more accuracy. Investigative journalism is vital for holding the Government and others who have power over our lives to account, for shining a light on things that we ought to know but have not been disclosed, and for providing the material for the national debate that takes place every day and that enables every citizen to be included and informed.
There has been one significant change in our recent source of such journalism. The print newspapers are not as powerful as they were, nor as much of a threat as we have been led to believe; nor are they, arguably, any longer the main source of investigative journalism. The generation represented in your Lordships’ House, and the politicians, are in thrall to print journalism. However, Ofcom recently reported that 10% of the population say that they read fewer paper magazines, and 8% say that they read fewer newspapers. Long-term trends in radio listening are down: 22% of 15 to 24 year-olds listen less, and use other devices instead.
The young get their news from the internet and social media. Digital sources outstrip papers as a source of news for them, and increasingly for the rest of the population. Newspaper circulation has declined markedly in the last decade, as has been said, and therefore the revenue from advertising is less, although I lack a certain sympathy because job advertisements, as referred to by the noble Lord, Lord Stoneham, killed themselves off by exorbitant charges. The local press has suffered even more, and that is regrettable as traditionally it was a source of investigative journalism and training in that skill.
I am somewhat sceptical when it comes to believing that newspapers can persuade people to vote one way or the other. It is not clear to me whether the police and politicians are, allegedly, manipulating the journalists or the other way round. The Leveson inquiry and the facts that led to it might be the last gasp of an old order of reporting.
Does this mean that there is a grave danger that there will be no funding for investigative journalism? I think not. The philanthropic funding of investigative journalism is always going to be problematic and cannot substitute for publishers’ funding because it is impossible to dispel the perception that the funder would want his special interests investigated. Government funding would be equally suspect.
The internet, however, opens up new and more inexpensive possibilities of investigative journalism. It is worth noting that some of the most important investigative stories have come about in this age of recession and hard times for papers, such as MPs’ expenses and phone hacking. Therefore, the vigour of investigative journalism is not necessarily dependent on traditional funding. It has become cheaper because of the internet and the contribution of individuals online to the gathering of evidence. The internet is more efficient than library research, when libraries are under threat; freedom of information and social media give leads and official data to anyone who goes online. The risk with internet stories is that we need to distinguish truth from untruth and inaccuracies. Once they take hold in the digital world, untruth can be piled on untruth like Chinese whispers. The young need to be educated, more than ever, in critical analysis and the dangers of treating everything online as gospel truth.
The internet has no editors, no legal control. It crosses international boundaries and information on it has no kite mark. Some of it is fabrication, some is discriminatory, and there is no check. The young may be too trusting of Twitter and Facebook, too often taken in, and prey to those who betray their trust and privacy. This attitude may spill over into their trusting any facts online. School instruction in the use of computers ought to teach such awareness and discrimination just as much as software skills.
Because of the changes in the way we receive our news, the need to study convergence has become important. We need to consider whether there is still any utility in distinguishing, for the purposes of law and control, between newspapers, online papers, publication on tablets, mobile phones, TV on digital devices and so on. The Press Complaints Commission’s reach is therefore very narrow, but we need no more statutory regulation. Moreover, given choice in what to watch digitally in this age of downloading chosen programmes, there is a real possibility that the programmes of investigative journalism will not be chosen.
What does this mean for regulation? This arises in connection with the recent spates of law breaking in the creation and researching of news. MPs’ expenses details came from private information that was sold, arguably contrary to the Data Protection Act. Can journalists break the law in order to expose the truth? We all praise them if they break the local law to film in Syria, expose abuse in an old persons’ home by undercover methods, or unearth a Royal Family scandal. In an inchoate way, we believe that the public interest may justify breaking the law to get the story. Certainly, in order to prevent fishing expeditions, the claim of public interest should be registered with the editor, if we are dealing with newspapers, before the investigation starts to ensure agreement that the expected end result can be regarded as being in the public interest, as outlined by the noble Lord, Lord Inglewood.
It is a welcome development that the current Defamation Bill contains a public interest defence. Recent events have persuaded me that we no longer have a national view of what should be private and what should be brought to light, whether by investigative journalism or freedom of information. To me, some phone hacking of celebrities might be less of an invasion of privacy than material forced out into the public domain by the Freedom of Information Act and the Data Protection Act—certainly when it comes to references, as I have said before. Sometimes it seems pointless to try to protect any information, given the reach and uncontrollability of the internet. If we have to decide between more regulation of the press or not, we should err on the side of freedom, not least because of the impossibility of attempting control in an era of declining sales and the convergence of media.
This is not to say that the press or contributors to the internet should be allowed to get away with everything. Whenever I have been closely involved in a reported story, I have been shocked, even distressed, by the level of inaccuracy and the difficulty of resolving matters through apology and correction. The Communications Committee in an earlier report already recommended that the BBC improve its complaints system. I repeat my own view that there should be an external ombudsman for the final stage of appeal against a BBC report. Only if that comes about will the public be satisfied objectively.
Today, transparency reigns. Journalists are at the forefront of those calling for openness, the declaration of interests and conflicts, and the recording of background for the purposes of monitoring equality and diversity. I therefore support the noble Baroness, Lady O’Neill, who, in her Reuters memorial lecture 2011, called for journalists to face the same scrutiny that they apply to others. They, too, should reveal their financial and other interests, gifts and payment for content and their ethnicity and schooling, in the same way that politicians, professionals, judges and trustees have to. Diversity of perspective from our journalists is needed here as much as anywhere.
The current furore should not mean an end to investigative journalism or more brakes on the press. There is sufficient law to control reporting if it is applied, and there really is little that can be done about the internet, save educating its users. Investigative journalism needs our support and encouragement, and I hope that your Lordships’ House will give it that.
Lord Stevenson of Balmacara
My Lords, I thank all concerned for this debate, which demonstrates once again the ability of your Lordships’ House to gather together a great range of expertise and quality when debating issues of the day. I also think it is a good sign that so many members of the Communications Committee have been present to debate the report that they produced. That adds a different style from simply reading the report because individual members pick out particular aspects of the report, leaving us with ideas or topics that they think should be given further consideration. We are grateful to them for that.
I am particularly pleased that we were able to hear from my noble friend Lord Macdonald of Tradeston in his valedictory appearance on behalf of the committee. I am sure it will not be the last time he speaks, either here or in the main Chamber. He has been able to add a sense of realism—as have other members—because he has actually been in the areas where decisions of the nature discussed in the report have been taken.
In welcoming the report, I draw attention to the fact that this was authorised for publication in January and published in February, but we are only debating it in July. There may be reasons for that that I am not aware of, but I do not think it does the work of our Select Committees any good if they are held in the dark and not allowed to reveal themselves fully in debate as has happened today. Perhaps the Minister can comment on that.
We have heard of the genesis of the report: the noble Lord, Lord Inglewood, in his bath on a Saturday night, date unspecified. I do not think that we need to know any more, thank you. However, no one reading the report or listening to the high-quality debate can be in any doubt of the salience of the work of your Lordships’ Communications Committee, or fail to be impressed by its ability to spot the key topics of our time, and provide the vital evidence that gives us a chance to discuss the issues it raises.
As the report says, in recent months the role and practices of investigative journalism have received, and will continue to receive, unprecedented scrutiny—I think the noble Lord, Lord Black, called it “pain”—in terms of Lord Justice Leveson’s ongoing inquiry and various other reports and pieces of legislation that could bear on this issue. The report says that the purpose of its work was to look at the future of investigative journalism in the light of the problems currently facing the media and the technological revolution unfolding in the area. However, the report goes much further than that; it is not simply a review of the situation because it produces a number of rather important recommendations. I shall go through some of those that we should focus on today.
On reading the report, we are left with the sense that there is a real and present danger that responsible investigative journalism will not flourish in the future as it has in the past. Today I shall argue that many of the report’s recommendations could and should be implemented immediately, as well as feeding into the action that will need to be taken on Leveson and the other initiatives. I shall cover three main issues: why responsible, high-quality investigative journalism matters and what the issues that threaten it are; what ought to be done immediately to begin to remedy that situation; and what we should be looking at from other agencies, such as Leveson, to secure the future of responsible, high-quality public interest journalism, to borrow a phrase from the noble Baroness, Lady O’Neill. The report states:
“Responsible, high quality, investigative journalism matters; it is a vital constituent of the UK’s system of democratic governance and accountability. At its best, it informs and educates us, enhances our democracy, and is a force for good”.
I say, “Bravo!” to that.
In a world experiencing many changes, few are greater than the revolution in media and communications. New ownership structures, changing consumer habits and technological innovation have together eroded the traditional distinction between broadcasting, newspapers, online news provision, blogs and social networking. These are threats to a way of communicating news that challenges newspaper proprietors, editors and TV news executives across the world. The traditional media have responded to this threat by changing the way that they do business.
First, our mainstream media are no longer “mass” in the old sense. They cater to niches and have become fragmented. Secondly, new technology has created “24 hours a day, seven days a week” media industries. News now moves in real time, tracking and reporting events, great and small, as they happen. The imperative to keep up with competitors and steal a march on them means that the premium for broadcasters and online news sources is to get the story out with the greatest speed possible. Because news breaks during 24-hour news days, the daily or evening newspapers find it increasingly difficult to generate audiences for what they produce.
Thirdly, as a result of increased competition and the consequent need to fuel new stories every hour of every day, the premium for the media now is sensation and scoop not accuracy, headlines not substance, and angles on a story rather than depth of coverage. Therefore, one of the casualties of this new media world is the quality of news itself. Stories now break based on rumour and gossip. People are aware of breaking news but, if it is not substantiated, the audience rarely finds out that the story was fiction, not fact. The line between news and comment is ever harder to find because news comes so fast that a newspaper or TV channel becomes less the reporter of the news and more the commentator on the news. Comment now infuses the very way that news is reported, the issues that are selected, the campaigns that newspapers mount and the framing within which news is presented. Therefore, a question of concern for all citizens in a democracy such as ours is whether a comment-based and scoop-driven media can reflect our common culture and provide the forum within which democratic debate about public life can take place. This is a point to which I shall return.
My second point is to press the Government to take on some of the report’s recommendations to begin the urgent work that is needed to improve the situation—yes, even before the report from Lord Leveson and in advance of other ongoing work. Piecemeal action is rarely to be recommended but on this occasion it is justified, as we really do have a looming crisis.
Several noble Lords mentioned the question of whether, as the report says, investigative journalism is suffering as a result of inconsistencies and a lack of clarity in the law. This is the “50 shades of grey” point made by the noble Lord, Lord Inglewood. An additional point was made by the noble Lord, Lord Black: there are several other areas in which the law needs to be clarified. We have heard that the DPP is consulting on what the report describes as the publication of his,
“broad approach to determining which cases should be prosecuted or otherwise in cases where illegal activity undertaken by journalists in the course of an investigation might be considered to be in the public interest”,
which is welcome. I would be grateful if the noble Baroness, when she responds, could give us some idea of the timescale for this and whether it is imminent.
The report recommends that every news organisation should have sensible internal procedures to track and formally record its decisions first to investigate and secondly to publish a story if such decisions rely on the public interest defence. In its response to the committee, Ofcom makes some points about this. I read it as saying that it thinks they are already broadly doing this in a way that would be satisfactory to the committee. Again, I wonder whether this is right. It would be helpful if the Minister could respond on this and see whether she could work with Ofcom to make sure that this becomes a standard and not just one of the number of ways in which this activity is documented.
As we have heard, the report repeats a recommendation that the Communications Act 2003 should be amended to enable the public interest test to be invoked at the discretion of either the Secretary of State or Ofcom. Again, there has been some action on this and we would be grateful if the Minister could update us on where we are.
Finally on this point, the report recommends that the Charity Commission considers the current pressures of investigative journalism, as well as its democratic importance, when interpreting the relevant legislation. This is a serious point. However, we are helped by the excellent Hodgson report that just came out. This may require some primary legislation. Therefore, it may be possible to work this in together. Perhaps the Minister could take this proposal and give us some advice, either today or later, on whether the department might consider moving with this.
My third point concerns issues the report flags up for other committees or agencies to take forward when they report. However, I hope that much in the report is already being acted on because so much of it is salient. Again, perhaps the Minister could reflect on the progress on a number of these points when she replies. I shall go through my list very quickly and not dwell on it. It includes: the question of tax breaks and other financial incentives that might help broadcasting and newspaper industries through this difficult transitional stage; regulating online content, which currently falls outwith the scope of regulation; triggering the public interest test when a news organisation develops a more than 25% share of the national newspaper market through organic growth as well as proposed mergers; and strengthening media ownership rules to protect plurality. I know that Ofcom is dealing with the latter two issues, so an update would be useful.
The report also requests that the charter review process takes on board the suggestion that the BBC should provide high-quality investigative content in both its television and radio services, including at a regional level. Presumably this is something the department is beginning to shape up to, so a comment would be useful. We have talked about the Defamation Bill and I think we are all looking forward to the debate on that. It was also mentioned that there needs to be more consideration for the role of whistleblowers so that they are properly protected.
Finally, I shall deal with the money. I am struck by how today’s debate has largely focused on how to regulate the industry and, highly relevant in view of the newspaper headlines this morning, how to punish malfeasance. Is there not also the question of how to protect and support the good? One of the casualties of the new media world is the quality of news itself. Stories now break based on rumour and gossip. People are aware but they are not told absolutely whether the story was fiction or fact. As I have said, the line between news and comment is harder to find. As news comes so fast, the TV channel becomes more the commentator than the reporter.
As we have heard, the advertising business model of today’s print media is being destroyed as advertising gravitates from the ordinary news media to the internet. The happenstance of a triangular and interdependent relationship, whose common interest happened to coincide between owners, advertisers and consumers, is breaking down. The question arises: who will sponsor, pay for and underpin quality journalism? Who will fund the in-depth research and publish the quality writing we have enjoyed to date, which, at its best, is the envy of the world? Few people believe that the newspapers we have today will exist in their present physical form in 10 or even five years’ time. No private proprietor of the type described by the noble Lord, Lord Stoneham, will be able to sustain broadsheet losses in the order of £40 million or £50 million a year at a time when advertising and readers are deserting these newspapers. Even if shareholders can be persuaded by John Kay to think longer term, they will still want growth and rising profits in the bad times as well as the good.
We need to look at the mechanisms by which we not only deal with abuses in the press but enhance and incentivise good standards. The report observes that public funding is a potential model for financing investigative journalism. It works in other worlds. Many noble Lords have referred to philanthropy. I have my doubts about that, as others have expressed. It would be interesting to hear the Minister’s thoughts on the report’s specific proposal that a proportion of all media fines should be allocated to a fund reserved for financing investigative journalism or for the training of investigative journalists.
However, the real problem here, and something that the committee might consider returning to in a future report, is that there are features of good-quality investigative journalism that, in a purely market-based system, the market by itself cannot produce. Of course we want journalism that meets diverse consumer tastes and of course we want publishers who compete to innovate in meeting those tastes—and they will—but we also want journalism to meet certain standards irrespective of whether they limit profit maximisation.
We can deal with the bad issues arising from journalism by refining and enforcing the law, but as a matter of public policy we need to begin to think about how we incentivise the good as well; in other words, as the standard of journalism declines—and I think there is an issue in the internet age about declining standards—we must have a means by which we incentivise the good, always remembering the challenging words of the noble Baroness, Lady O’Neill, about being certain about what exactly investigative journalism is.
We faced similar problems at the start of radio and then TV broadcasting, and out of those emerged the BBC licence fee, so perhaps that licence fee should be available to the internet and for publications that go beyond broadcasting. I offer this idea to the noble Lord, Lord Inglewood, the next time he is ruminating in his bathroom of a Saturday evening: that the committee considers this issue for possible future study, as I am certain that it is something we shall return to.
Baroness Garden of Frognal
My Lords, I add my thanks to my noble friend Lord Inglewood and his committee for producing an insightful and topical report. I join the noble Lord, Lord Stevenson, in welcoming the contributions made to the debate today by several members of the committee. Although the report was printed in February, its findings are no less relevant today. However, I will relay to the business managers the concerns of the noble Lord, Lord Stevenson, over the delay in holding the debate. Even so, these topics are still very much front page news at the moment. The phone hacking scandal has meant that some parts of the press are under greater scrutiny than ever—scrutiny that is both entirely right and necessary. In that connection, Lord Justice Leveson’s inquiry continues, and in due course it will make recommendations on a regulatory framework that should restore confidence.
The free press in this country has a long and proud history. It underpins our democracy and as the fourth estate it plays a fundamental role in holding the powerful to account. It brings vital matters of public interest to the fore, it informs citizens and enables them to exercise their democratic rights. This excellent report highlights the good work of newspapers and the important role that investigative journalism plays. Quality investigative journalism is not restricted to the press. Other media such as television, radio and increasingly the internet, which has come up in our debate, are all valued contributors, but the report considers the positive aspects of the media with a timely reminder of why it must continue to flourish. As my noble friend Lord Inglewood has highlighted, and indeed as the Guardian is not backward in pointing out today, there would have been no Leveson without the scrutiny of a newspaper that asked the questions that others would not ask. I also listened with interest to the noble Baroness, Lady O’Neill. She stressed that investigative journalism should be a luxury brand aimed at fact and at speaking truth to power.
The report warns that rapid economic, technological and behavioural change is creating profound economic, regulatory and legal challenges for investigative journalism. Newspapers continue to face the twin challenges of cyclical and structural change. Their very survival is dependent on advertising revenues as well as retrieving cover price charges. We heard from my noble friend Lord Stoneham about some of the implications of that. Circulations have been falling, particularly for local newspapers, and online newspapers often find it difficult to adapt. However, the right reverend Prelate the Bishop of Norwich was right to remind us that the Eastern Daily Press is thriving as a local newspaper. Indeed, the Government are taking forward new provisions to try to curb local authority news sheets, thus leaving the local press to provide, rightfully, an independent source of local news and politics, as well as addressing what my noble friend Lord Black referred to as the “bonfire of red tape”. The noble Lord, Lord Smith, also raised that as an issue.
On the question of government assistance by way of additional tax breaks or other financial incentives, noble Lords will know that the Government already provide zero-rated VAT for newspapers, which is a decent tax break for the industry, and there are certainly no plans to change that. The report suggests that the continuation of zero-rated VAT could be limited to those who are members of the press regulator. Lord Justice Leveson may comment on this, but I note that the proposal might breach the VAT principle of fiscal neutrality. The noble Lord, Lord Stoneham, expressed disquiet over public reaction to further public funding for newspapers.
The committee addresses the internet as a potentially disruptive force for newspapers, which need to find new and different business models in order to monetise their products online, and invites Lord Justice Leveson’s views on bringing certain online content into the remit of the regulatory body. This came up numerous times in oral evidence and is a critical area of consideration, which noble Lords have raised again today. The noble Baroness, Lady Deech, made some strong points about that. The noble Lord, Lord Macdonald, raised the benefits and opportunities of new technologies, which enable citizen journalists to join the debate. We must not forget that these things come with benefits as well as disadvantages.
The Secretary of State for Culture, Olympics, Media and Sport has emphasised in his evidence to Leveson that any change to the regulatory structure should stand the test of time and avoid the risk of obsolescence. I also pay tribute to the noble Lord, Lord Hunt of Wirral, for his work in this regard. My noble friend Lord Stoneham also raised concerns about the regulatory side, as did a number of other noble Lords. In response, perhaps particularly to the question raised by the noble Lord, Lord Smith, we should note that there is a spectrum of options for future press regulation from voluntary to statutory options. It is not a black and white binary choice between self-regulation at one end and state control at the other. There are a number of different models that might be used on this.
On defining the public interest, the committee recommends that the criminal law should not be redrafted in order to create a formal, statutory defence relating to the public interest. We note that Lord Justice Leveson is taking into account potential unintended consequences that could come about if a statutory approach was taken. Relevant codes of practice may provide a potential alternative to legal reform.
As my noble friend Lord Inglewood set out, we agree that a clear definition backed by a body of case law such as that set out in the Editors’ Handbook is invaluable to editors who have to make day to day decisions against a backdrop of fast-changing events and tight deadlines. We also note a further clarification in this area might come from the prosecuting authorities. In his witness statement of 7 February to the Leveson inquiry, the Director of Public Prosecutions said that he had decided to draft an interim policy setting out the approach that the Crown Prosecution Service takes and to publish it for public consultation. This will include its approach to the prosecution of journalists, who, in the course of their work as journalists, breach the criminal law. This guidance is in draft and the CPS is considering responses. The consultation closed on 10 July, and we await the findings from that.
The noble Baroness, Lady O’Neill, and my noble friend Lord Black, were among those who raised concerns about the Data Protection Act. Of course, the Leveson inquiry is looking at data protection in the context of media regulation before deciding whether to introduce custodial sentences under Section 55, which means that the introduction of the enhanced public interest defence is under review too. However, I would point out that prosecutions of journalists under Section 55 are incredibly rare. In any event, the Government are not aware of any having taken place in recent years.
On civil law, the Government’s Defamation Bill will be relevant to the changes that the committee recommends, particularly in respect of libel laws. The Government recognise the need to protect responsible investigative journalism on matters of public interest. The Defamation Bill, which I am glad to hear was welcomed by a number of noble Lords, including my noble friend Lord Black, will introduce for the first time a statutory defence of responsible publication in the public interest but expressed in clear and flexible terms. It provides a defence where the defendant can show that the allegedly defamatory statement is or forms part of a statement on the matter of public interest and that he or she acted responsibly in publishing it.
The noble Baroness, Lady O’Neill, the noble Lord, Lord Macdonald, and others made salient points about sources. Journalists must be able to offer adequate protection to their sources. The Government recognise the importance of protecting whistleblowers, as set out in the Public Interest Disclosure Act, which is designed to protect most workers from being unfairly dismissed by their employer or suffering other detriment whenever they have reported their concerns to the employer or the regulatory authorities.
On media ownership, the committee made some considered suggestions both for Leveson and for Ofcom. The noble Lord, Lord Smith, raised the matter of thresholds for invoking the public-interest test. As the Committee will know, the Government recently received a report from Ofcom on media plurality and are awaiting the response to some further questions. The response is expected in September, and a seminar on media plurality is planned for October. I was pleased to see the committee’s welcome for the Government’s action last year to relax rules relating to local cross-media ownership, a measure that offers local media organisations the opportunity to develop a sustainable business model. The noble Baroness, Lady Deech, had some valuable words to say on that subject.
The issue of funding was raised in many speeches. The report makes a number of recommendations in respect of additional potential funding sources for investigative journalism. Interesting initiatives in this area are beginning to emerge, such as the introduction to the UK of a more American approach to independently funded investigative journalism. We note in particular the work of the Bureau of Investigative Journalism, which has successfully worked in partnership with a number of notable news outlets in the UK, including the BBC’s “File On Four”, “Panorama”, Channel 4’s “Dispatches”, the Financial Times, the Daily Telegraph and the Sunday Times, all of which have good records in investigative journalism.
The committee makes an imaginative proposal for a new investigative journalism fund, which could be funded through fines levied on press organisations found to have broken the editors’ code. Once again—and I am sorry if this is repetitive—the Government will be waiting with interest to see what Lord Justice Leveson says in this area, but I note that the noble Lord, Lord St John of Bletso, was among those who expressed concerns about this particular recommendation.
As for the BBC, we note concerns about cutbacks made in the BBC “Panorama” programme, also mentioned by the noble Lord, Lord St John of Bletso. This programme has an acknowledged commitment to investigative journalism. The licence-fee settlement is fair to the BBC and a very good deal for licence-fee payers. We shall have to await further consideration from the BBC Trust’s strategy review, and find what comes out of that.
The noble Lord, Lord Stevenson, and others raised interesting points about charity law and the benefit that could be gleaned if the law could be amended to include investigative journalism as a charitable benefit. The existing list of charitable purposes has, as has been mentioned, recently been reviewed by my noble friend Lord Hodgson of Astley Abbotts. The Government are now considering his recommendation that no change should be made to the current list. Some aspects of charity law may make it unsuitable for many aspects of investigative journalism, for reasons including that any new organisation seeking charitable status would need to demonstrate public benefit, which is distinct from the concept of public interest, and that the constraints of charity law would also include a requirement for political impartiality. That might also be something to be further addressed.
A number of noble Lords raised the issue of skills and training required for investigative journalists. The noble Lords, Lord Inglewood and Lord Macdonald, said that young people were still keen on journalism, despite the bad press it has had, but then young people are still quite interested in becoming Members of Parliament, despite the bad press we as politicians have had from time to time. Some of the evidence in the report mentioned that investigative journalists were a “strange breed” who were “bloody determined” and whose “brains are wired differently”. We need people like that, but probably not too many of them, to move this forward. We support the opportunities within the media industry of internships, even apprenticeships, as well as the university programmes in investigative journalism that were highlighted in the report.
I shall pick up some other disparate points made in the debate. The noble Lord, Lord Macdonald, mentioned the wonderful case of Private Eye, which is thriving 50 years on, and I know that my latest copy thudded through the door as I was leaving this morning. That publication has pushed the bounds of investigative journalism to new levels, and the fact that it continues to thrive is probably a mark of a healthy democracy.
My noble friend Lord Stoneham mentioned family-dominated businesses in the media. Quite rightly, the family-dominated media business that we know more about at the moment is the Murdochs, which is not an undiluted good news story, but of course he is quite right that there have been some philanthropic media families in the past who have made great contributions to the nation. He also gave us some fascinating insights into the dynamics and economics of the newspapers, and the fact that the iPad may itself be a major further challenge to the printed news.
The right reverend Prelate the Bishop of Norwich again commented, to which I have already referred, on politicians having falling even below journalists. Let us hope that at the end of the Leveson inquiry when all this has been weighed and recommendations have been made, that, as the right reverend Prelate says, hope will outweigh anxiety. The noble Lord, Lord St John of Bletso, also talked of rays of hope. This report sets out both the importance of investigative journalism and the fact that there is undoubtedly a future for it.
The noble Baroness, Lady Deech, raised the conundrum that has always puzzled me. When we read the newspapers about a story we do not know, we believe it. Yet we are all absolutely outraged at inaccuracies when we know something of the background information. This strange mismatch of disbelief about the media might fade into the background as newspapers become more accurate.
My noble friend Lord Black raised a number of concerns. I note his concern about the copyright in the Enterprise and Regulatory Reform Bill. I assure him at this stage that the Government have no intention of playing fast and loose with copyright law. Of course, there will be a great deal of further debate when the Bill reaches the House.
On the Competition Commission, the noble Lord will be aware that the Department for Business, Innovation and Skills undertook a wide-ranging consultation of competition regime between March and June of this year in order to invite views on options to reform the regime, recognising that there is scope for improvement. The Government have announced that we will be bringing the Competition Commission and the Office of Fair Trading together into a single body to streamline the process for business. We hope that that will indeed be one of the improvements. There were other matters in his speech too, but I think I have covered the main points there.
On the point made by the noble Lord, Lord St John of Bletso, on the freedom of the press, I again emphasise that the Government have absolutely no intention or wish to impose on the freedom of the press, which has been raised throughout this debate. It is something that we value and treasure. We certainly would not wish to see it suffer in the cause of some of the incidents that have infringed that freedom in recent years.
I am conscious that there has been a wealth of expertise and thought in today’s debate, and that I might not have answered all the questions that have been raised. If there are questions specifically for the Government, I shall try to come back to noble Lords in writing. I am also aware that a great many of the issues raised in this report are dependent on the findings of Lord Justice Leveson. I assure noble Lords that the Government will be making a full and formal response to this Communications Committee report once it has received the report of Lord Justice Leveson and we are able to put all the evidence together in our response.
Meanwhile, we very much recommend this report with its wide-ranging recommendations. I note that, while two members of the committee have suggested that this is such a good report, there are so many matters still outstanding that we might perhaps await Inglewood mark 2. There will certainly be material from this debate and into the future, which would benefit from some further investigation from your Lordships’ committee.
Once again, I thank my noble friend Lord Inglewood for introducing this debate and all noble Lords who have contributed and brought such an immense range and depth of experience on these matters.
Lord Inglewood
My Lords, when a Select Committee is conducting an inquiry, a central part of its chairman’s role is to try to draw together the views and evidence of the expert witnesses, and the expertise and experience of the members of the committee, to try to achieve common ground that is both constructive and sensible. On an occasion such as this, the chairman’s role is to try to present to the Committee an epitome of the consensus that is reached. I—and, I am sure, all the other members of the committee—very much welcome the support that has been given to our report.
We also welcome what I might describe as the reverse engineering that has been carried out on it without breaking support for its consensus. We all know that there are a wide range of views and perspectives about the current political issues surrounding the press and more widely. Of course, it is unfinished business. Our report is not an end in itself. It is meant to be a contribution to the wider political debate and challenge that is posed by what one might call the matter of the media.
Thinking back to my school days, I know that the last day of term is not an occasion to be verbose. I will conclude merely by saying that I hope and believe that my bath-time musings have not been in vain, even if I recognise that they will not bestow immortality on me, as they did on Archimedes.
Adoption Agencies (Panel and Consequential Amendments) Regulations 2012
(12 years, 4 months ago)
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Baroness Butler-Sloss
That the Grand Committee takes note of the Adoption Agencies (Panel and Consequential Amendments) Regulations 2012 (SI 2012/1410).
Baroness Butler-Sloss
My Lords, in putting my name to this Motion, I should like to make clear that it is not in any way a Motion of Regret, nor indeed any intention to criticise the government policy on adoption. As chairman of the Select Committee on Adoption Legislation, I feel that I should highlight possible implications in relation to the statutory instrument that comes into force on 1 September. I am extremely grateful to the noble Lord, Lord Hill, and Tim Loughton MP for seeing the noble Baronesses, Lady Morris and Lady Howarth, and me last week. We had a most constructive discussion on the statutory instrument and other aspects of the work of our committee.
To start with, I was rather taken aback by the statutory instrument being laid and coming into force so quickly, when we are actually hearing evidence about the duty of adoption panels to recommend whether a child should be placed for adoption. I should correct an error on my part during our evidence-taking, when I suggested that the Government were saying that panels were to be abolished. I was wrong and apologise for saying it. I now understand that the statutory instrument we are discussing today was already in the pipeline while our committee was being set up. However, it raises a rather more important issue in that it will come into effect while we are hearing conflicting evidence about the benefits as well as the disadvantages of this part of the work of the panels. This is evidence that the committee of which I am chairman believes should be brought to the attention both of the department and of all those who are engaged in the adoption process.
The Deputy Chairman of Committees (Baroness McIntosh of Hudnall)
My Lords, a Division has been called in the Chamber. The Committee will therefore adjourn for 10 minutes and reconvene at 2.47 pm.
Baroness Butler-Sloss
Before I continue, I should, with a further apology, make a correction: I went to see the two Ministers with the noble Baroness, Lady Morris, and the noble Baroness, Lady Hamwee—not the noble Baroness, Lady Howarth. I apologise to the noble Baronesses, Lady Hamwee and Lady Howarth.
As a former judge, I have my doubts whether the adoption judge hearing a placement application would be able to carry out a task similar to the panel, and whether they would have the evidence and the opportunity to carry out the detailed scrutiny expected by the Norgrove committee. I have some questions for the Government. On the assumption that the Government go ahead with removing this duty from panels, what will be put in its place? Will an independent person other than the decision-maker pull together all the relevant evidence about the child at an early stage and advise, or will there be a gap, with the potential for drift? Will the whole burden be placed on the decision-maker alone?
Is the department looking at active involvement of the IRO and, if so, recognising that the IRO would have to have a much reduced current case load? The adoption committee has not yet—and I emphasis this—formulated any conclusions on any of the issues that I have raised. However, we are concerned that there is a conflict of evidence and consequently some degree of confusion over the removal of the panel from this task. When the statutory instrument comes into effect on 1 September, the committee is concerned about this degree of conflict and confusion and what advice the department is going to give, particularly to local authorities, to resolve these issues and to avoid drift, lack of momentum and possible delay, with the case not being in order for the judge. I beg to move.
Baroness Hamwee
My Lords, I thank the noble and learned Baroness very much for bringing this matter to the Committee, and for her quite splendid chairmanship of our committee. I thank the Minister and Tim Loughton for the meeting last week. I am very flattered to have been confused with the noble Baroness, Lady Howarth, I must say. The meeting was extremely useful and I hope that we made it clear that members of the Select Committee share with the Government the objective of the best possible outcome. We have received powerful evidence about the impact of lack of permanence, particularly in the early years.
Given the jigsaw of interlocking procedures, it is important for the Government to explain why they are taking one step of several steps that may be available, and which I suspect will be taken quite soon, when a number have been identified. It is not always entirely clear why one step should be taken in isolation. I appreciate that one can argue it the other way—that if you have identified a step you should get on and do it—but this is quite a complex area.
The Explanatory Memorandum says that the objective of the regulations is to remove both delay and duplication. Delay is, of course, a loaded term. I am sure that the noble Baroness, Lady Eaton, has experienced, as I have, that when one is arguing planning applications in local government, delay does not actually go to quality. She is agreeing with me. Taking time may sometimes be necessary. Taking time unnecessarily is a bad thing, of course. The duplication that the Explanatory Memorandum refers to, as the Norgrove report did, is between the panel and the court. The noble and learned Baroness, Lady Butler-Sloss, will know how long a judge is typically given to read the papers—I suspect less time than a panel is, although I am always amazed at how quickly panels assimilate information.
The Government are not pointing to duplication between the panel and the decision-maker, who does not need the prior work of the panel, in the view of the Government. It seems to me that the decision-maker must need the same information as the panel, and Coram, to which the noble and learned Baroness has referred, regards the panel as providing quality assurance. Coram has given us some very helpful evidence, and the noble and learned Baroness has referred to the possible slippage in quality because of the loss of the independent element.
Coram also talks about adoption decision-making being delegated to less senior staff or the creation of a dedicated role that would not be integrated in the same way that the current post is. It also talks about the removal of independent panel chairs, and we have heard some very forceful evidence, particularly from BAAF, about the contribution made by independent members. The expertise from outside the authority brought to panels is really quite important. Alongside that, we are hearing quite a lot of concern about the lack of experience of adoption work among social workers. We asked the Local Government Association for its comments on these regulations, and, after a moment’s thought, one of the councillors who was at our session more or less said that authorities would invent a structure to replace panels. Admittedly, she might have been thinking about the abolition of panels as a whole, but it was a very practical response. If an authority sees a need to bring in outside expertise, it will find a way to do so.
The Government say that panels add no value, but I wonder whether the converse of that is the risk of abolishing what is excellent practice. We have heard that, in practice, panels meet frequently—weekly if necessary. If they do not meet often enough and are causing delay, their practice needs to be improved. I also wonder whether, if a panel is retained for matching a child with a family, that panel would not need to cover much of the groundwork that would have been covered by the panel dealing with placement.
When we met the Minister, Mr Loughton, he told us about the visits that he has made to sit in on and observe panels. He commented on the amount of material that panel members are expected to absorb, but he did not seem to say that they are failing. There are professionals, sometimes from different professions, who become skilled through the job that they are doing. I have to say that, as a society, we are very lucky that there are people who are prepared to do this job. I am not convinced that they should lose this role.
Baroness Howarth of Breckland
My Lords, I do not intend to repeat the very clear, coherent points made by the noble and learned Baroness, Lady Butler-Sloss, but I shall add to them. I am delighted that this debate is being held because the committee was extremely concerned when it saw the instrument. It is important to make the point that if the Government ask a Select Committee to undertake a task—in this instance to look at adoption—the committee should be kept well informed and other decisions should not be made without cognisance of the evidence that it is hearing and has heard. If it is not, we might as well all go home, rather than continue to work hard on the issues. I know that the chair is unable to say that but I think I can.
I shall say a little about some of the work around the family justice review, which was extremely complex and fraught. I know that because while it was being undertaken I was chair of CAFCASS, which was central to the disputes and discussions about delays and whether systems should be changed. David Norgrove did not say a great deal about panels but they are what I call low-hanging fruit. In looking at structures and systems, panels are one layer that you might be able to take out. You would then have removed a level of what looks like bureaucracy to move things forward. However, David Norgrove found an extreme level of mistrust between all the partners. I am sure the noble Lord, Lord Hill, spoke to him during that period. He was almost obsessed by the relationships between judges, social workers, CAFCASS and the other stakeholders in dealing with the issue. Therefore, finding good recommendations was important to him, and there is much in his report that takes us forward.
It is clear that, at present, many children spend far too long in care, moving in and out of it before decisions are made, and that we have to find ways of speeding this up. Views about adoption panels and whether they help or hinder the process are mixed. There is no systematic evidence. There has not been any decent inquiry into the working of panels. Again, I will not repeat what the noble Baroness, Lady Hamwee, and the noble and learned Baroness, Lady Butler-Sloss, have said about the evidence that we have heard from other parties, but people have anecdotal evidence that is as strong as any that might come from a review. I think that that would be useful. Personally, I am agnostic about panels and I suspect, as CAFCASS said, that they could be reviewed; that they come far too late in the process; and that the important thing is that the multi-professional information is gathered appropriately together to properly inform the decision. I do not think that the way in which that is processed has been properly looked at in relation to the decision to remove panels. Those are the things that would make a difference.
One of the other things that we know—I shall repeat this—is that when information gets to the judges, if they do not believe that they have enough expert information, they will commission experts to give it to them. A piece of work we have done recently is that of reducing the number of experts in court, particularly in the family courts, in order to reduce delay and speed up good quality decision making. It is quite clear that social workers and CAFCASS officers have a high level of expertise, but we also know that local authorities vary hugely one from another. What is the Minister going to do to make sure that when information goes to court, it does not add to delay because the judge is looking for the right information which he or she does not think has been quality tested? At the moment, they have the assurance that it has gone through a number of experts in a panel. It may be that there is an answer to this; I am looking for it.
I am also extremely concerned about the amount of work that falls on the shoulders of both decision-makers and independent reviewing officers. We have seen examples where the level of caseloads—certainly for independent reviewing officers and, I am sure, people up and down the country who have to make these decisions—is quite inappropriate in terms of being able to make the quality of decision that is needed. If Tim Loughton, when sitting in on panels, thought that they had a lot of material to digest, imagine what it would like for the decision-makers if they have to digest the material for themselves without having an expert opinion across a range of issues. They will be looking at psychiatric problems in some children who are going to be placed, or children with learning difficulties. We know that children who are being placed for adoption and coming through care are not straightforward babies with no difficulties. The panels help to assess that information before it is given to the judge in relation to the placement.
However keen you are on adoption, it is necessary to remember the balance between birth families and prospective adoptive families. There is a danger that, if you do not have good information on their families, which social workers in local authorities have to assess, there will be miscarriages of justice. That is of deep concern to me.
I would ask the Minister to answer the questions from the NSPCC which were repeated by the noble and learned Baroness, Lady Butler-Sloss. It is extremely concerned about the mix of practice across the country. I also ask him to tell me how he, being responsible in central government, can ensure that local government, with all the decentralisation, do not overwhelm those who have to make these decisions so that quality decisions continue to be made. I will rest my arguments there.
Viscount Eccles
My Lords, I will follow the same theme but I hope that I will not be repetitive. A great deal is going on in the area of adoption, whether it is the Norgrove review, the March action plan or the existence of the Select Committee on which I am very pleased to serve.
I want to draw attention to paragraph 78, which records the decision and has already been quoted by the chairman, the noble and learned Baroness, Lady Butler-Sloss. It ends with the sentence she has already quoted:
“We believe that the court’s detailed scrutiny of these cases should be sufficient”.
It does not say “is sufficient” or “is known to be sufficient”: it says “should be sufficient”. It is quite important that that sentence is conditioned. Indeed, the Explanatory Memorandum should have quoted paragraph 78 in full and not selected the middle sentence. In my view, the Explanatory Memorandum to this instrument has a tendency to short-cut.
Let us take the words “should be” and look at what this enormously comprehensive report, with more than 100 recommendations, said on the relationship between courts and local authorities in paragraphs 3.45 and 3.46. It is worth reading this into the record:
“Our recommendations are intended to restore the respective responsibilities of courts and local authorities”.
If I may interpose, the word “restore” is a quite strong use of language. It implies that something is not as it used to be, even if not quite that it has broken down. The report continues:
“But to change the law does not tackle the root cause of the difficulties. This stems we believe from a deep-rooted distrust of local authorities … This in turn fuels dissatisfaction on the part of local authorities with the courts, further damaging relationships.”
Paragraph 3.46 states:
“The result is that the relationship between local authorities and courts can verge on the dysfunctional. For the system to work better it is not acceptable for each group to sit on the sidelines and criticise the other.”
It may be right to have taken away one of the responsibilities of panels. It could be right to remove the second opinion which may be provided very helpfully either to local authorities or to courts which might need it. It may be right to make them face up to the need to work successfully together. Perhaps I may be allowed to say that that is the Norgrove motivation. But it seems very risky.
We know that the performance of local authorities is uneven, for some quite good reasons such as the size of the authority or the ethnic mix in the authority. Political persuasion may have entered into it at some stage. We also know that the performance of the courts is very uneven. Our committee has not yet received as much evidence on that as we will have done when we come back in the autumn. Indeed, the government literature—the action plan in March or the Explanatory Memorandum—is quite cautious about criticising the courts. It is perhaps overcautious in the balance between its opinions on local authorities and the courts.
However, Norgrove is very clear. I think that he is saying that the front-line troops—the local authorities, the IROs and the social workers, and the courts with the judges—need to be in the front line. They need to get together and to perform without being intervened upon by outside experts and interests, which may be right as a long-term objective. Certainly, one would hope to find relationships between local authorities and courts in general becoming much better than they apparently are if this review is to be believed—and I see no reason to doubt it.
However, the Government will have to watch what happens very carefully, because it is not self-evident that removing this second opinion, this ability to put things together to the benefit of both the local authority and the court, will enhance the process of adoption. Delay has been mentioned as a reason. The evidence for it does not stand up. The evidence for duplication is dependent on there being confidence that the ability to perform exists both in the local authorities and the courts. If it does not, the duplication argument does not stand up either.
Baroness Jones of Whitchurch
My Lords, I am grateful to the noble Baroness for putting down this Motion today. She has enormous expertise in this area and, as I had anticipated, it has been very instructive listening to her speak not only about her past experience but about the work of the scrutiny committee. It has been interesting also to hear the details of the ongoing work of that committee that other noble Lords have been able to share.
I hope that noble Lords will forgive me if other people in the Room have more expertise in this area than me; I see myself as being on a learning curve. However, I believe that we have so far failed to get the balance right between scrutiny and decision-making in adoption procedure, leading to unacceptable delays in the processing of applications for children to be adopted. As has been said today, this matter has been debated on many occasions over many years. It is also addressed in detail in the Family Justice Review report. As we have heard, the amended regulations before us today implement one small change in a much bigger set of recommendations contained in that report.
Having looked at those recommendations, we are persuaded that a one-stage process of scrutiny by either an adoption panel or the courts through a placement order should be sufficient to protect the interests of children and parents, with the emphasis being clearly on the primary interests of the child. However, the questions posed by the noble and learned Baroness, Lady Butler-Sloss, chime with several of our concerns.
The Explanatory Notes accompanying the regulations make it clear that this change is part of a larger package of legislative reform affecting adoption practices and that the Government will consult on these wider proposed changes. We look forward to participating in the consultation, and I would be grateful if the Minister could take this opportunity to update us on the timetable and scope of the planned consultation. Is it the intention, for example, that the outstanding recommendations from the Family Justice Review relating to adoption and the conclusions from the adoption scrutiny committee will be incorporated in the consultation?
This leads to the fundamental question, which the noble Baroness raised, of the timing of the proposals. We wonder at the wisdom of introducing this change to such an important piece of public policy on a seemingly piecemeal basis. Perhaps the Minister could clarify why the changes are being introduced now, when the scrutiny committee’s work is ongoing and when more radical issues relating to the role of local authorities and adoption panels are on the cards. The noble Baroness, Lady Howarth, asked powerfully why the scrutiny committee’s work was commissioned if it was to be pre-empted in this way as it now appears to be.
Given the sensitivities involved in dealing with adoption issues and the need to ensure that safeguarding the interests of the child is built into everything that we do, can the Minister confirm whether the changes, if introduced, will be monitored and reassessed over time? It is vital to ensure that child protection at this fundamental level is not being compromised. I look forward to hearing what the Minister has to say.
The Parliamentary Under-Secretary of State for Schools (Lord Hill of Oareford)
My Lords, like others, I am very grateful to the noble and learned Baroness, Lady Butler-Sloss, for raising the issues that she has today and for giving us all the opportunity to discuss the role of adoption panels. I was glad that she came in last week, with my two noble friends, to see my honourable friend Mr Loughton. I know that he was glad to have the opportunity to meet her and other noble Lords, and to respond to the concerns put to him. I think that we had a useful discussion on that occasion.
I will make sure that Mr Loughton sees the evidence to which the noble and learned Baroness and other noble Lords have referred today because I do not think that the submissions to which she referred have yet come through. I also take the wider point, which was also made by the noble Baroness, Lady Howarth, about the importance of making sure that the various strands of what the Government are doing and the work of the committee are joined up.
That also relates to the question put to me by the noble Baroness, Lady Jones of Whitchurch. There are a lot of separate strands, on some of which consultation is taking place and on some of which it is not. It might be helpful—I will commission this from colleagues—if I pull together where we are on various issues; for example, the timescales, the proposals around consultation and so on. Like the noble Baroness, Lady Jones, but unlike all other noble Lords here, I am relatively new to this as well. As I am trying to understand where we are on a number of fronts, it might be helpful if I can pull it together and set it out.
I hope that that also responds to the point put to me by the noble Baroness, Lady Howarth: in laying the regulations on adoption panels, the Government were not seeking to pre-empt the conclusions of the committee. Nor, obviously, did we intend any disrespect to the committee. It was simply that the Government had announced that they had accepted those recommendations from the family justice review on that specific point on the adoption panels back in February before the committee, I think, was convened. This relates to a point made by my noble friend Lady Hamwee. We know that the lives of vulnerable children can be improved by making rapid progress, which makes us want to make progress as fast as we can. However, we have to recognise the whole time that we need to strike the right balance between wanting to make progress where we can identify issues that we are able to knock off and move on, and needing to make sure that the safeguards are there so that we do not end up approaching it in a piecemeal way but with a consistent approach across the piece.
As has already been alluded to, the Government accepted the recommendations of the family justice review as part of their overall drive to speed up the system, which we all agree has become too slow. Noble Lords know better than me that the delay damages a child’s development. Where adoption is right for a child and subject to proper safeguards, the adoption process should work as smoothly and swiftly as possible. It is not right that children should have to wait more than a year for care proceedings to be completed by the courts or that it takes an average of one year and nine months for a child taken into care to move in with their adoptive family.
The previous Government recognised this when they set up the family justice review. Tackling delay in care proceedings was one of their key objectives. The 55 weeks for a child’s case to progress through the courts is a very long way from the 12 weeks—I think it was that—envisaged when the Children Act 1989 was introduced.
This Government, like the previous one, are keen to reduce delays. In March, we set out our plans in An Action Plan for Adoption, to which my noble friend Lord Eccles referred. On 6 July, the Prime Minister announced further measures to see children, particularly the youngest, moving in with their adoptive parents as quickly as possible. I know that the Select Committee is looking at this issue through its call for evidence and discussions with expert witnesses. We look forward to hearing the committee’s views in due course.
In the overall context of wanting to reform the system, we have brought forward the adoption agency regulations we are discussing today and which we plan shall come into force in September. I will briefly set out what we do and do not propose. I know that Members of this Committee are clear on them, but this is an opportunity for me to put on the record the Government’s stance because I know that many people are interested in them.
Adoption panels will continue, as now, to provide independent scrutiny in cases where parents have relinquished their child for adoption, and in cases where a child has been taken into care and parents have then consented to the child being adopted. That is because in cases where the birth parents support the decision that the child should be adopted, there is no further role for the courts and so no independent scrutiny of the local authority’s decision; therefore, we can clearly see the need for panels. That means that the adoption panel function is not removed in any circumstances where the case is not scrutinised by the courts, and only in cases where there is parental consent to the adoption under Section 19 of the Adoption and Children Act 2002.
The regulations do not propose to change the role of adoption panels in assessing the suitability of prospective adopters, or in the matching of children with approved prospective adopters. These will continue, and we have an open mind about the future. It is important to say that my honourable friend Mr Loughton is considering whether future changes, including to the size and membership of the panels, would strengthen and speed up the system. He would very much welcome the views of the committee on this in due course.
The change that we are proposing concerns the decision-making process at the point where adoption becomes the plan for a child in care. The amended regulations relate to those cases where a social worker’s recommendation that a child should be adopted need to be scrutinised by the court through the process of a placement order application. In these circumstances we propose that the adoption panel should no longer have a role. Rather than refer the case to the adoption panel, social workers will send their recommendations directly to the decision-maker, an experienced social worker and senior local authority official. If the decision-maker agrees with the recommendation, the local authority will make an application to the court for a placement order.
I have been asked why the Government are proposing this change, and we have talked about duplication and delay. In cases where the court will need to consider an application for a placement order, the role of the adoption panel is duplicative. I am grateful to the noble Baroness, Lady Jones of Whitchurch, for making the point that if we have a system in which we have confidence, having just one system is desirable in principle. The courts see the same evidence as adoption panels. They provide independent scrutiny of the local authority’s adoption plan. Having adoption panels and the courts both providing independent scrutiny seems unnecessary and, indeed, a potential cause of delay. As noble Lords know, that was the conclusion of the family justice review. The recommendations of that review were widely consulted on and, over time, they have received broad support. The review heard evidence from the judiciary, local authorities and the Family Justice Council which showed that children’s cases were being delayed while the courts waited for adoption panels to make their recommendations. Although there were respondents to the review who opposed the recommendation to remove panel scrutiny of these cases, the majority of respondents recognised that detailed court scrutiny was a sufficient safeguard.
We have discussed whether panels add delay. The noble and learned Baroness, Lady Butler-Sloss, referred to the Ofsted survey and questioned whether there is any evidence for this. When the family justice review looked at this, it concluded that it does. A judgment published last year by Her Honour Judge Lesley Newton highlighted that the adoption panel had added 83 days to the process. I recognise the point that has been made forcefully by noble Lords that there is conflicting evidence around this, and therefore the core argument that the Government would make is around duplication. However, we have also concluded that there is evidence of delay as well.
I want briefly to put these changes into a historical perspective. I hesitate slightly to do so because again I know that there are noble Lords here who have helped to construct these systems over many years. Adoption panels have been part of the decision-making process for the best part of 30 years now. They were originally introduced in 1984 because of the changing face of adoption. The majority of children being adopted were no longer babies; rather they were older or disabled children with more complex needs. The panels certainly provided independent scrutiny of adoption agencies’ plans. Before the Adoption and Children Act 2002, an adoption agency could place a child with the prospective adopters without any intervention by the court. The court’s role was limited to making the adoption order which the prospective adopters, then as now, would apply for after the child had lived with them for at least 10 weeks. However, the 2002 Act changed how local authorities could place children for adoption. A major change was that they could no longer place a child for adoption unless they had the authority to place either as a result of parental consent or under a placement order made by the court. The courts are therefore involved much earlier in the process if the birth parents will not consent to placement for adoption or there are pending care proceedings. Having the court’s early agreement to the adoption plan and sorting out consent before the adoption order stage is better for children and their adoptive families. It reduces the risk that a court would not make an adoption order.
It is arguable that the function of the adoption panel covered by the amendment regulations could or should have been removed in December 2005 when placement orders came into force. It was at that point, when the change was made, that the element of duplication came into the system. A decision was not taken then, but we think that now is a sensible time to address it.
We have also touched on the issue of independent scrutiny. Noble Lords are rightly concerned that we should retain sufficient independent scrutiny of what is a momentous decision about a child’s life. We are confident that this will remain the case. There will be independent scrutiny in all cases, whether from the adoption panel or from the court. In all cases, the local authority decision-maker will hear the views of those with specialist expertise, for example, on medical or mental health issues, before reaching their decision.
We have also heard evidence today from some noble Lords who believe that the courts do not necessarily have the time, the expertise or the opportunity to reflect on children’s cases in the way that panels do. We think it is the case that the courts have the expertise they need. In making decisions on complex issues, they consider the information provided by experts. They do not simply rubber-stamp the local authority’s adoption plan or recommendation of the children’s guardian. Before the court can make a placement order, it must be satisfied either that the parents have consented or that the child’s welfare requires that parental consent should be dispensed with. The court must also be satisfied that the child is suffering or is likely to suffer significant harm. In making its decision, under the 2002 Act, the court must give paramount consideration to the child’s welfare throughout its life and must apply a list of criteria concerning the child’s welfare.
Therefore, the court will continue to play its vital role. The work of the social worker and the adoption team in drawing together and assessing the evidence will not change, nor will their work be added to because they no longer have to seek a recommendation by the adoption panel before decisions are made. We would argue that a simple system with no duplication where the local authority decision-maker is fully accountable for the recommendation that he or she puts forward to the court will function better. Good decisions will be taken quickly in the best interests of children.
I was asked a number of detailed questions. I shall do my best to respond to the main points, but if I fail to answer some of the more specific points, I will follow them up. There was a recurring theme of what the impact would be for local authorities and the burden on the decision-maker. I was asked by the noble and learned Baroness, Lady Butler-Sloss, what advice and support the department would give to local authorities. Alongside the regulations, we have published amended statutory guidance to help local authorities and other professionals understand how we expect the change to work in practice.
Baroness Butler-Sloss
My Lords, I thank all the speakers. I am particularly grateful to my fellow members of the adoption committee for having come this afternoon on the last day of term, and to all those who have spoken. I am also very grateful to the Minister for his thoughtful response. I do not at all doubt the commitment of the Minister in the other place to adoption. I very much admire his commitment. I am just not entirely sure that he and the noble Lord the Minister have totally taken on board my major concern, which is about independent scrutiny of the work of the decision-maker. I am not certain that the decision-maker will, pulling everything in together, have quite the same opportunities as somebody else who can advise, assess and monitor. Will the team behind the Minister look at whether they accept that there is a potential gap, and how they might give advice to the local authority on that potential gap, which may not be entirely met by the decision-maker, who will end up with a greater burden?
The points made by Coram, in particular, about the task of the decision-maker—the Minister will see this when he gets the Coram written evidence—are very interesting. I would be grateful if he would reflect, with those behind him, on whether the removal of this particular work of the panel will leave something that will need to be filled at some stage. The inspection by Ofsted will be absolutely crucial. I hope any inspection by Ofsted will move into that area and not simply look at issues of delay, but look more keenly. If not Ofsted, somebody will have to look at it because something is being lost, although I understand the reasons why the Government are doing it. Having thanked everybody very much, I beg leave to withdraw the Motion.
House of Lords
Health: Diabetes
(12 years, 4 months ago)
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Lord Harrison
To ask Her Majesty’s Government what actions they are taking to ensure effective treatment of diabetes in minority-ethnic communities.
The Parliamentary Under-Secretary of State, Department of Health (Earl Howe)
My Lords, the Government are aware of the growing issue of diabetes in minority-ethnic groups. The NHS is taking a range of actions to ensure effective treatment. The recent publication of clinical guidance on type 2 diabetes by the National Institute for Health and Clinical Excellence identifies those at high risk and how best to manage the risk. It specifically mentions ethnic minorities and identifies pathways to ensure effective management.
Lord Harrison
My Lords, given that the worrying rise of type 2 diabetes among our ethnic communities is absorbing an ever increasing share of 10% of the NHS budget, which itself is shrinking for diabetes care, will the noble Earl institute an increase in the number of diabetes nurses, who are at the heart of communities, support the Diabetes UK campaign for ethnic-community champions and, finally, heed the advice coming from the dedicated research team at the University of Warwick that matching health professionals tutored in the cultural knowledge and understanding of our ethnic communities can give enormous benefits?
Earl Howe
My Lords, I agree wholeheartedly with the thrust of the noble Lord’s question. As he will know, Diabetes UK has pioneered a programme of diabetes community champions from ethnic-minority communities to raise awareness of the condition in their communities. The Department of Health has awarded Diabetes UK a grant through the volunteering fund national awards for the programme to be rolled out across 12 English cities over the next two years. I gather that 111 community champions have already been recruited in London. This is exactly the sort of initiative that we need if we are to reach those who are most at risk of developing or, indeed, being diagnosed with diabetes.
Lord Singh of Wimbledon
My Lords, for many years, the Network of Sikh Organisations has been active in working in clinics in gurdwaras, or Sikh temples, to promote an understanding of health issues and to do checks for blood sugar and raised cholesterol. These tests and other health advice have been very effective. Will the Minister consider ways of giving impetus to such initiatives and perhaps extending them to other faith groups and centres in order to combat the evil of bad genes and the subcontinental taste for sweetness and sugars?
Earl Howe
My Lords, I am aware of several local initiatives that are doing great work in accessing those in both black and minority-ethnic communities along the lines mentioned by the noble Lord. We have made important progress in strengthening our approach to promoting equality in health and social care and in tackling these inequalities that exist. That is especially important in relation to the Asian community. I am thinking in particular—the noble Lord mentioned the need to roll out initiatives—of the NHS Heath Check programme supported by the guidance on prevention issued by NICE and the Change4Life Programme, which now has a bespoke element to it targeted specifically at ethnic-minority communities.
Baroness Gardner of Parkes
My Lords, are separate statistics kept about ethnic groups? If not, would it not be an advantage to do so in terms of research, particularly as type 2 diabetes is very much dependent on diet and might be quite different in different sections of the community? What is the prevalence of diabetes in the ethnic community as opposed to other communities and what is the prevalence of type 1 diabetes as opposed to type 2 diabetes?
Earl Howe
My advice is that type 1 diabetes is not a particular issue in ethnic-minority communities. We are talking about type 2 diabetes, which is five times more common in black and ethnic-minority groups, six times more common in south Asian ethnic groups, and three times more common in areas of social deprivation than in the rest of the population. There are particular clinical risks associated with those from ethnic minority communities who have diabetes. Complications include particularly heart disease—south Asian people are 50% more likely than the general population to die prematurely from coronary heart disease—and the prevalence of stroke is also much higher in African, Caribbean and south Asian men.
Baroness Masham of Ilton
My Lords, can genetic problems be a cause? Are not exercise and getting fit an important part of stopping diabetes?
Earl Howe
Exercise is recommended under the Change4Life programme and under the advice given by NICE. However, the noble Baroness is absolutely right to mention a possible genetic cause. The cause of diabetes is not fully understood and is multi-factorial. Healthy eating, weight control and exercise can help reduce the risks, but that is not the full picture. It is suspected that there is a genetic component in the case of black and ethnic-minority communities.
Baroness Howells of St Davids
My Lords, I have some of the statistics that have already been mentioned. We now know that manifestations of diabetes are three times higher among the Afro-Caribbean people who came to Britain to assist after the war than among the majority population. We also know that deaths are three times higher and 40% are at a higher risk of morbidity, kidney failure and blindness. As a result, they really do put a higher cost on the NHS. Some who have returned home have to come back here for treatment because this is where they paid their way. I would like to know whether Her Majesty’s Government have really taken on board the NICE recommendations that health programmes should be culturally appropriate and that cooking guidance should be given and tailored to the needs of people and to what they eat at home. We believe that educators are necessary to inform sufferers of their needs, so that they can make a choice, not only about what they eat but also about how they prepare it. I ran classes for a group of people and I can assure your Lordships that there has been a change in the way they respond. If the Government have not taken up that particular part of the NICE recommendations, why not?
Earl Howe
My Lords, the advice given by NICE makes 20 specific recommendations, many of which are highly relevant to the population group mentioned by the noble Baroness. She is absolutely right that there is a need to educate those in black communities about a healthy diet. There is a lot of work going on in that area, which is too detailed and complicated for me to mention at the moment, and in the area of self-education to enable patients to understand their own condition and to manage it better.
Armed Forces: Military Corrective Training Centre
(12 years, 4 months ago)
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Lord Trefgarne
To ask Her Majesty’s Government what is the present number of inmates in the Military Corrective Training Centre; and what is the average percentage of inmates who are successfully returned to their units on completion of sentence.
The Parliamentary Under-Secretary of State, Ministry of Defence (Lord Astor of Hever)
My Lords, as at 24 July there were 101 detainees at the Military Corrective Training Centre, Colchester. On average, over the past five years 56 per cent have returned to their unit to continue serving on completion of their sentence. This demonstrates that the centre is very effective and enables the Armed Forces to capitalise on the training, investment and operational experience of those individuals being retained, which otherwise might be lost.
Lord Trefgarne
My Lords, I am most grateful to my noble friend for that very reassuring reply. Are there not some lessons to be learnt in this regard, maybe in the civil sector, but particularly by the young offender centres whose performance in this area is sometimes deplorable?
Lord Astor of Hever
My Lords, I am grateful for the positive response from my noble friend. The programme of educational courses and military training that detainees undertake reinvigorates them with the military ethos. On return to their units, the vast majority go on to achieve promotion and to have a successful military career. Direct comparison with the civil sector is difficult because those in Her Majesty’s Prison Service have committed criminal offences, while the majority of those at MCTC have committed non-criminal conduct offences. However, last year 13% of detainees at MCTC had previously served periods of detention whereas some 90% of those sentenced in England and Wales in Her Majesty’s Prison Service had offended before.
Lord West of Spithead
My Lords, does the Minister not agree that the statistics are even better than that because quite a lot of people sent to Colchester serve time there and are then sent for discharge, so of those who are able to go back the percentage is even higher?
Lord Astor of Hever
My Lords, the noble Lord makes a very good point. Indeed, the latest report from Her Majesty’s Inspectorate of Prisons is exceptionally positive and has graded the centre as good for its four tests of a healthy custodial environment: safety, respect, purposeful activity and resettlement—something that it very rarely does.
Lord Ramsbotham
My Lords, I declare two interests: one as adjutant-general, when I was responsible for the MCTC, and one as Chief Inspector of Prisons. I visited the centre when the noble Lord, Lord Howard of Lympne, sent young offenders there under the mistaken impression that it was a boot camp. In fact the experience of being in a disciplined environment, particularly in the way that they were treated by staff, was wholly positive for those young offenders sent there. Is consideration being given to sending young offenders to the MCTC as part of their sentence, particularly if they want to join the Armed Forces and their level of criminality is not great? Armed with the experience there, they are more likely to have a proper career when they join the regular services after that. If they misbehave, they can of course always be sent straight back to custody.
Lord Astor of Hever
My Lords, I am very sorry to disappoint the noble Lord but the answer is no. It has been the policy of successive Governments since 1963 that our Armed Forces are manned by volunteers. We have no shortage of applicants who have not committed any crime. In 1996, the Glasshouse was set up as a trial at MCTC for approximately 30 civilian young offenders aged 18 to 21. They underwent a military-style regime, including drill, physical training and room and kit inspections. In 1997 the Government ordered that young offenders tough enough to cope with this would be sent to MCTC, but the scheme was stopped in 1998. I understand that it was too expensive.
Lord Cormack
My Lords, there is so much sense in what the noble Lord, Lord Ramsbotham, said. Could not consideration be given to sending people from the Armed Forces to places such as the young offender institution at Brinsford in my former constituency? I am sure that many of those young people have given up hope. What they need is some discipline and some hope, and they could have those instilled in them at Colchester and elsewhere.
Lord Astor of Hever
My Lords, my noble friend makes a very good point. However, our primary objective is to have a professional, volunteer Armed Forces.
Lord Rosser
My Lords, how many inmates of the Military Corrective Training Centre have been deported after sentence or at the completion of their sentence in the past two years? Of that number, how many have been charged and sentenced through the military judicial system rather than the civilian judicial system? What rights of appeal against deportation do they have, and to which individual or body?
Lord Astor of Hever
My Lords, the Ministry of Defence does not track the numbers of deportations or rights of appeal. It is a matter for the Home Office. I will undertake to get these figures for the noble Lord and write to him.
Lord Addington
My Lords, does my noble friend agree that comparing anybody in a civil prison with anybody in a military prison is very difficult because the overriding characteristic of people in a civil prison is probably that they are educational failures, usually having left education at the age of 14? That should be remembered every time we look at this.
Lord Astor of Hever
My Lords, my noble friend makes a very good point. Our objective in the military is to get these guys and girls back as quickly as possible to carry on serving in the Armed Forces.
Taxation: Avoidance
(12 years, 4 months ago)
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Lord Campbell-Savours
To ask Her Majesty’s Government on how many occasions since 2010 officials of HM Treasury received reports and recommended action on the operation of the K2 offshore loan tax avoidance scheme, and on tax avoidance generally.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, HM Revenue and Customs was investigating the K2 scheme prior to recent press articles. HMRC does not report operational details on the specific schemes to HM Treasury but advises if a change in the law is needed. Since 2010, action has been taken on 26 occasions to close down avoidance schemes by legislation. The Government are consulting on a general anti-abuse rule and on extending the disclosure of tax avoidance schemes rules.
Lord Campbell-Savours
I thank the noble Lord for that Answer, and I am sure that we will be returning to this issue later in the Session. On the second part of my Question, is it not true that tax evasion through the failure of United Kingdom citizens and foreign nationals to pay tax on rental income from private residential property held within the United Kingdom is costing the country millions if not billions of pounds annually? Is there not an argument for local authorities to be required to register all private rented property in their area, with declarations of ownership accessible by HMRC?
Lord Sassoon
My Lords, the important broad picture here is that on the latest annual figures, those for 2010-11, HMRC collects approximately £469 billion a year. The estimated tax gap is 7.9%, a percentage that compares favourably with, for example, the USA at 14% and Sweden at 10%. Nevertheless, there is a gap of £35 billion and it is very important that HMRC does all that it can to close it, which is why it is prioritising this area in many respects. I hear what the noble Lord says about a specific issue and I will take his suggestion away, but I can assure the House that HMRC is prioritising it right across the board.
Lord Forsyth of Drumlean
My Lords, does my noble friend agree that if Treasury Ministers wish to minimise avoidance and maximise revenue they should leave delivering moral guidance to the church and concentrate on delivering simpler, lower, flatter taxes as our manifesto promised?
Lord Sassoon
My Lords, the lowering of the top rate of tax, for example, makes my noble friend’s point very clearly. By putting the top rate of tax at 50%, the previous Government, as the analysis has now shown, delivered absolutely nothing—or very little at best—in terms of revenue, and made this country uncompetitive. So we need wherever possible lower and broader taxes. I agree with my noble friend on that.
Lord Willoughby de Broke
Could the Minister just remind the House, further to the question from the noble Lord, Lord Forsyth, that tax avoidance is not illegal—that it is legal to avoid taxes—and that when individuals see the Government wasting a lot of their hard-earned money, they have a duty to avoid those taxes?
Lord Sassoon
I can certainly confirm that tax avoidance is not illegal. I can also say, building on the figures that I gave before, that of the £35 billion tax gap, £30 billion is estimated to be evasion and a relatively small part, £5 billion, to be avoidance.
Lord Strasburger
My Lords, could my noble friend tell the House what the annual cost is to the Exchequer of the tax breaks that this country gives to non-doms? Which other countries are so generous to their rich foreign residents?
Lord Sassoon
I suspect that it would be very difficult to estimate the benefits of the non-dom tax regime. The principal benefit is that we derive an enormous amount of business and employment from the fact that this country is relatively open to non-doms, and those benefits we must retain while at the same time making the non-doms pay their fair share. That is why the annual charge of £50,000 has been introduced by this Government and why we are clamping down on areas such as avoidance of stamp duty. We need to strike the right balance.
Lord Davies of Oldham
My Lords, the House will have noted that the noble Lord who supports UKIP is in favour of rich people not paying taxes against a background of the nation expecting the Government to pursue a vigorous drive to ensure that those liable for tax pay tax. The Minister indicated somewhat complacently that at 7.9% the deficit is lower than in some other advanced countries. But would he indicate whether that figure has been going down since this Government came into office and whether he anticipates a better figure two years from now?
Lord Sassoon
My Lords, the estimate of the tax gap in 2004-05 was 8.5% and it is now 7.9%. It still means that there is a tax gap of £35 billion, which HMRC will vigorously pursue. That is why only this week we made further announcements and consultations to make sure that aggressive tax schemes and the people who market them are targeted more effectively and why HMRC has reinvested £900 million of its spending in this spending round to target this area.
Lord Phillips of Sudbury
My Lords, is it not seriously damaging to social cohesion—and demoralising in the literal sense of that word—when some of the highly paid and some would say highly overpaid public company directors are paying a much lower rate of tax on their grotesque earnings than the lowest paid employees in their companies?
Lord Sassoon
My Lords, what is important is that we have a tax system that is fair and which means that those with the broadest shoulders pay the most, which is exactly what the most recent Budget did, and that we have a tax system whereby in all parts of the earning scale people are incentivised to work. That is why raising the tax threshold on the way to our target of £10,000 is one component of making a real, radical change to the tax system in this country.
Lord Howarth of Newport
Can the Minister tell us how much revenue is forgone in consequence of higher-rate pension tax relief? Does he consider that either fair or useful?
Lord Sassoon
My Lords, this is another area where we need to strike a fair balance. We need to encourage savings in this country; we need to get the savings rate up; and we need to make sure that people are incentivised to save for all eventualities, including their pensions. The noble Lord would be right to say that we and the previous Government have taken measures to ensure that there is a fair balance.
Food Security Summit
(12 years, 4 months ago)
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Baroness Miller of Chilthorne Domer
To ask Her Majesty’s Government what is the agenda for the Food Security Summit that the Prime Minister has called during the 2012 Olympic Games and who will attend.
Baroness Northover
My Lords, my right honourable friend the Prime Minister will host a major event on hunger during the London Olympics. He will bring together leaders of Governments, business and civil society organisations to galvanise global efforts to tackle undernutrition.
Baroness Miller of Chilthorne Domer
My Lords, I thank my noble friend for her Answer. I am sure that she shares my concern that recent extreme weather events in the United States, the Ukraine and lots of other parts of the world have meant that food prices are already spiralling in anticipation of food shortages. In the light of that, will she make her best endeavour to ensure that the summit addresses the issue that at the moment lots of perfectly good food stuffs are being converted into ethanol? We really need to move to second-generation ethanol production because the need of the poor to eat must be more important than the need of the rich to drive.
Baroness Northover
The noble Baroness is right that prices for maize and soya beans have now exceeded 2007-08 highs. It is too early to say how rising world prices will affect the poor in developing countries, because production for 2012 is still expected to exceed consumption. Regarding her point on ethanol, the Government are committed to ensuring that biofuel production does not jeopardise food security in the way that she indicates. Biofuels can, of course, play a positive role in promoting development, provided their production benefits smallholder farmers. The focus of the event in August is on child malnutrition.
Lord Alton of Liverpool
My Lords, in the context where a malnourished child is eight times more likely to die than a child of normal weight, and where 3 million children are estimated to die of malnutrition every year, will the Minister undertake to look at the reports of our previous ambassador in North Korea, Peter Hughes, and our present ambassador, Karen Wolstenholme, who have reported on stunted growth, especially among children, in a country where 2 million died during the famine in the 1990s? Will she accept that, however much we may despise a particular ideology, it should be no part of our policy, or indeed that of the United States or other nations, to try to drive a country into submission by using food as a weapon of war?
Baroness Northover
The noble Lord is right to say that there is a very high level of malnutrition across the world, which has a terrible impact upon the health of children. That is why the Government have focused very much on trying to ensure that this issue is addressed. I take on board what he says about this report. I will make sure that DfID sees it, if it has not already done so; I should think it is highly likely that it has already. It is extremely important that we ensure that food—and support for the ability of people to feed themselves—is available worldwide, whatever the regime.
The Lord Bishop of Exeter
My Lords, in dealing with the challenge before us, does the Minister recognise how crucial the need is to support through both aid and trade agreements those smaller-scale ecological food production systems practised by millions of small-scale farmers and producers, many of them women, which currently deliver food for 70% of the world’s peoples? They could provide more, if properly supported and protected. They could not only increase availability of food and eliminate hunger but increase equity, create employment, build community and reverse environmental degradation. What assurance can she give that this important dimension of the problem of food security will be given proper consideration by those gathered for this summit?
Baroness Northover
The right reverend Prelate is absolutely right to emphasise the need to support those working in agriculture in their various countries. It is striking that 75% of the world’s population live in rural settings dependent on agriculture, and we are acutely aware that they are very vulnerable. People in developing countries spend 60% of their income on food, unlike in the UK, where the figure is about 10%, so one can see how vulnerable people are in these situations. We are targeting our support to try to help smallholding-farmer households and women in particular in those circumstances.
Lord McConnell of Glenscorrodale
My Lords, will the summit look at the consequences of conflict on food security and, in particular, the fact that the consequences of conflict can sometimes have an unintended impact in neighbouring countries, as we see today in the Sahel region of west Africa? Is it possible for the summit to look at how we address these issues of conflict in the context of dealing with food security?
Baroness Northover
All these factors interlink. The fragility of some of these countries feeds into their problems in terms of food, and that is clearly the case in the Sahel, where the United Kingdom is supporting the feeding of 400,000 people. We are well aware of how these things interlink and I am sure that that will be part of the discussions at this event.
Baroness Jenkin of Kennington
I welcome this initiative as an important part of the legacy of the Games, but is my noble friend aware that the number of obese people globally is approximately the same as the number of those who are malnourished, hungry or stunted? While the latter group is, thankfully, reducing in number, partly because of well-targeted aid, the number of obese people is growing exponentially, with enormous additional costs in relation to health and health services internationally.
Baroness Northover
That is why it is extremely important that we support education. That is what we do, as can be seen in, for example, Bangladesh. Although here we are addressing the need to reduce undernutrition, obviously the rise in the incidence of obesity that my noble friend has just flagged up is also a concern, although not among the same populations. It is extremely important that education is supported so that people can address both those areas.
Alan Turing (Statutory Pardon) Bill [HL]
Standing Orders (Private Bills)
The Chairman of Committees
That Lord Rodgers of Quarry Bank be appointed a member of the Select Committee in place of Baroness Thomas of Walliswood, resigned.
Online Infringement of Copyright (Initial Obligations) (Sharing of Costs) Order 2012
Baroness Garden of Frognal
That the draft order be referred to a Grand Committee.
Northern Ireland Act 1998 (Devolution of Policing and Justice Functions) Order 2012
(12 years, 4 months ago)
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Earl Attlee
That the draft order laid before the House on 11 June be approved.
Relevant document: 3rd Report from the Joint Committee on Statutory Instruments, considered in Grand Committee on 18 July.
Renewable Heat Incentive Scheme (Amendment) Regulations 2012
Lord Marland
That the draft regulations laid before the House on 11 June be approved.
Relevant documents: 3rd Report from the Joint Committee on Statutory Instruments, 5th Report from the Secondary Legislation Scrutiny Committee, considered in Grand Committee on 23 July.
Baroness Smith of Basildon
My Lords, there are six quite complex statutory instruments here and my noble friends Lady Worthington and Lord Grantchester spoke to them in Grand Committee. Questions have been raised on a number of complex issues and I know that the Minister is always unfailingly courteous in responding to questions. I would be grateful if he could undertake to write to noble Lords to address substantive questions that were not answered. I also thank him for his courtesy in arranging for his office to send me an e-mail at around 10 o’clock last night announcing that a Written Statement would be made today on the renewables obligations banding review, which is generally welcome but there are a number of questions. The noble Lord will know that he is very popular in this House—on our side as well—which makes it all the more surprising that he chose to make a Written Statement and not, given that he is at the Dispatch Box today anyway, an Oral Statement, which we would have welcomed. I hope this is not going to be part of a trail of sneaky Statements being released. We would welcome the opportunity to ask him questions on this at the Dispatch Box.
Lord Foulkes of Cumnock
My Lords, I noticed that the last three of these statutory instruments start with the words “Green Deal”. I wonder if I am being overoptimistic in anticipating that the Minister of State for Trade and Investment will come along and speak to one of them.
The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Lord Marland)
Well, I wish the noble Lord a very good Summer Recess as well. We had an extensive debate in Committee; the noble Baroness sadly was not available to be part of it. It was very satisfactory and as always I have responded in writing to the questions which sometimes, and almost often, I cannot answer. The noble Baroness knows I am committed to that and the process is in train. As to the Statement today, good news, which I am glad noble Lords welcome, should always be given at every opportunity so that everybody can go away for a wonderful Summer Recess and enjoy themselves with that good news.
Lord Cormack
My Lords, in that convivial spirit, can my noble friend tell me when this House will have an opportunity to debate the absurdity of too many onshore wind farms?
Lord Marland
I guess my noble friend should just table a Motion for that debate. There have been plenty of opportunities in the last Session to discuss this subject. I am always delighted to debate it, as are all of us who have been involved in the energy side of things, and I look forward to him tabling a Motion.
Lord Teverson
My Lords, I welcome the Minister’s Written Statement today about the ROCs. We need to get on with that. It is an excellent declaration. I congratulate him particularly on making sure that we have efficient onshore wind power but that it is still financially viable for investment.
Lord Marland
I was hoping to catch a plane; I think people knew it. I am very grateful to my noble friend and for all the support he has given during the last Session on energy matters; it is a civil partnership and the word “civil” is underlined.
Electricity and Gas (Smart Meters Licensable Activity) Order 2012
Lord Marland
That the draft orders and regulations laid before the House on 11 and 13 June and on 5 July be approved.
Relevant documents: 3rd and 6th Reports from the Joint Committee on Statutory Instruments, 5th Report from the Secondary Legislation Scrutiny Committee, considered in Grand Committee on 23 July.
Neighbourhood Planning (Referendums) Regulations 2012
Baroness Hanham
That the draft regulations laid before the House on 11 June and 4 July be approved.
Relevant documents: 3rd and 6th Reports from the Joint Committee on Statutory Instruments, 7th Report from the Secondary Legislation Scrutiny Committee, considered in Grand Committee on 23 July.
Education (Amendment of the Curriculum Requirements for Fourth Key Stage) (England) Order 2012
(12 years, 4 months ago)
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Lord Hill of Oareford
That the draft order laid before the House on 11 June be approved.
Relevant document: 3rd Report from the Joint Committee on Statutory Instruments, considered in Grand Committee on 23 July.
Public Bodies (Abolition of the Commission for Rural Communities) Order 2012
Lord De Mauley
That the draft order laid before the House on 16 May be approved.
Relevant documents: 3rd Report from the Joint Committee on Statutory Instruments, 3rd Report from the Secondary Legislation Scrutiny Committee, considered in Grand Committee on 23 July.
Financial Services Bill
(12 years, 4 months ago)
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Baroness Drake
(e) the ease with which consumers can identify and obtain services which are appropriate to their needs and represent good value for money”
Baroness Drake
My Lords, the FCA’s objective to promote “effective competition” will deliver fully on the Government’s commitment to putting the consumer at the heart of the financial system only if there is no ambiguity about the FCA’s authority to tackle hidden and rip-off charges. The FCA can judge the effectiveness of competition only if it is explicitly required to take into account the ease with which consumers can identify and obtain services that are appropriate to their needs and represent good value for money. The amendment provides for that.
During the Commons Committee stage, the Financial Secretary argued that the FCA had,
“the powers and the mandate to intervene on matters of price and value for money, if the case to do so is made. It does not need bespoke powers”.—[Official Report, Commons, Financial Services Bill Committee, 1/3/12; col. 261.]
Unfortunately, experience does not reinforce such confidence. We are all too familiar with the industry’s willingness to mobilise its resources to mount a legal challenge to the regulator if ambiguity exists. When the OFT decided to investigate unauthorised overdraft charges, the banks challenged its ability to do so. Two years of uncertainty, nearly £1 million in legal fees and many other resources later for the OFT, the legal case eventually concluded with a ruling that the OFT could not assess the fairness of those charges. In respect of payment protection insurance, the banks put up a sustained legal fight before accepting that they had mis-sold a product to millions of people. The FCA ran up around £900,000 in legal fees when the industry asked for a judicial review into its judgment on PPI complaints. In the face of a powerful industry, the absence of bespoke powers may make the FCA reluctant to take action and could lead to successful challenges against the authority in the courts.
The FCA is not a price regulator but that must not be interpreted as a reluctance to act on charging structures. The FCA’s competition objective as drafted requires it to have regard to innovation, ease of entry to market, ease with which consumers can change providers and the consumers’ need for information to make an informed choice. As is so well documented, so many consumers struggle to process the information provided and there is a danger of too much reliance on disclosure and informed choice to protect the consumer, given the systemic imbalance in knowledge and understanding between consumer and provider—a view shared in Professor Kay’s recent report. Similarly, the financial needs of most people are probably pretty simple but the industry often sells the more complex products because they attract higher charges. This is not an argument against innovation but a recognition that more complex products give rise to the need to ensure that they represent good value for money.
The FCA’s authority will be strengthened by such an explicit reference in its competition objective. The public’s loss of trust following the litany of product mis-selling has to be addressed. Just look at some of those products. “Behind-the-scenes” prices reduce direct price competition as apparently low “headline” prices mask the true costs once ancillary charges, such as for unauthorised overdrafts or rejected transitions and default charges, are accounted for. Consumers need to be confident that once they have entered into a contract they will not be subject to any unexpected or nasty surprises. Which? recently published research which showed that banks’ fee structures are so complicated that even a maths PhD student found it virtually impossible to compare charges between banks and to calculate how much a bank charges for using an unauthorised overdraft. Some particularly toxic forms of payment protection insurance paid commission rates of 87% of the premium to the bank that sold the policy. That means that if a consumer pays out £10,000 on a PPI policy, £8,700 goes back to the bank in commission.
Some consumers who took out an equity release plan at the turn of the century now face substantial early repayment charges amounting to 25% of the outstanding loan. On an equity release loan of £200,000, the consumer could now face early repayment charges of over £50,000. More recently, in the sale of products to protect small firms taking out loans against rising interest rates, the FSA found a lack of clarity about the cost of stopping a product, failure to check whether a consumer understood the risk, and selling based on personal rewards rather than on the needs of those businesses. Time and time again we see products sold to consumers that are not value for money, do not meet their needs and take advantage of their lack of understanding.
Furthermore, consumer credit regulation is to transfer to the FCA, affecting a market for consumer and small business credit of about £270 billion, where vulnerability to high charges is a significant issue. The FCA’s competition objective will, I understand, apply to consumer credit products, which is another compelling reason for placing a requirement on the FCA to have regard to value for money.
Opacity and complexity in the pensions and savings market results in excessive charges, fuelled by the increasing subcontracting of investment activity to a lengthy chain of agents. Each has access to more information than the consumer, which helps them to maintain charges which deliver generous revenues for them and less real value to the customer. The recent plethora of reports on charges reiterates the evidence of a problem which we know has persisted for a long time and which the regulator has got to tackle.
The mathematics of an annual management charge is too complex for most savers. That charge is not a true statement of the total expenses ratio, and even that ratio excludes other hidden costs. As the noble Lord, Lord Turner, said in his City speech yesterday, there is far greater potential in retail services than in other sectors for producers to rip off customers. I beg to move.
Lord Peston
My Lords, this is a very important amendment. It is important in its own right, but it also exposes what is fundamentally wrong with this Bill, which is that it is based on an economics model of the rationally informed consumer.
No one doubts that there are large numbers of rationally informed consumers out there, able to take optimal decisions, but a vast amount of research has been undertaken in recent years that shows that there are considerable numbers of consumers who are not best described as part of the rationally well informed model. Indeed, one can go further. I have seen research papers that show that even for what one might call brilliant consumers, the complexity of the instruments they are dealing with is so great that it would take them several years to do all the calculations required to make an informed decision. Therefore, what is wrong with this part of the Bill is its fundamental philosophy of the rationally informed consumer.
The other point to bear in mind is that the objective of the financial intermediaries that this applies to is not, in any sense, to be helpful to anybody. Their objective is to make money. What they are looking for are instruments, some of which are so complex—like CDOs, and so on—that you have to be a genius to understand what they amount to in the first place. There are several other examples of that that have got my head spinning.
What this leads us to is a matter that arose the last time that the Committee met and the subject of duty of care was raised. You will not find anything like that in this Bill or any of the philosophy behind it. What is required in the Bill is that everybody acting as a financial intermediary should be instructed that they have a duty of care. That duty of care should involve presenting information in a way that quite ordinary people can understand and pointing out the perils of all the mistakes that can be made.
I myself am not that rational a consumer in this regard. As for the idea that I would look at every bank and work out the optimal one that I should deal with, I take the view that there is more to life. If I end up paying rather more for any financial intermediation that I am involved with, I have to bear that cost because there are other things I want to do with my time. Then again, I am not badly off and I can afford to do that. But very poor consumers need something much more. I repeat that what needs to be in the Bill is the equivalent of a duty of care on the part of all financial intermediaries dealing with ordinary consumers and an acceptance of responsibility for what they are offering them.
Lord Phillips of Sudbury
My Lords, I support the purport of the amendment moved very effectively by the noble Baroness, Lady Drake, and supported entirely fairly by the noble Lord, Lord Peston. I confess that for 26 years I tried to deal with the British public’s legal problems as the legal eagle on the “Jimmy Young Show”. I suppose that I take a particular interest in the effect of legislation such as this on the ordinary consumer. There are a number of practices at large these days in what I call big business that leave the individual consumer way behind in terms of any fairness of dealing. The big battalions will call in aid lawyers, often paid on a conditional fee basis, and it is frankly terrifying if you are a small bloke and have a dispute with a large company. You will quickly be given the clear indication by the large company that if you do not buckle and pay up you will be crushed. I put that a little dramatically, but not much.
As it happens, I have been dealing with one of the large energy companies lately over a disputed electricity Bill. I have been astonished at the general tenor of the dealings and the way in which it so organises its affairs that if I were not an old fart of a lawyer I would easily have been overborne by its tactics and approach.
Lord Phillips of Sudbury
I am glad to see that my noble friend doubts that I am an old fart of a lawyer, but I am—55 years in the saddle and still riding.
I appreciate that the Minister has, at all stages along the way, tried to protect the Treasury, the FCA and so forth against all these vague and difficult notions of fairness. Indeed, he might like to clarify in summing up whether he thinks that the ill to which the amendment addresses itself could be healed by the integrity objective. The amendment is to the competition objective, but the integrity objective could enable the FCA to take account of the matters raised by the noble Baroness, Lady Drake, in order to improve things. But I seem to recollect from one of the amendments in my name and that of my colleagues that the Government think that the integrity objective is not about fairness: it is about the mechanics of the system, if I can put it that way. I have the same general misgiving as the noble Lord, Lord Peston, and many others in the House, that the Bill does not address issues of fundamental fairness that affect ordinary citizens. I shall be very interested if there is any consolation that my noble friend can give.
Lord McFall of Alcluith
I support the amendment in the name of my noble friend Lady Drake. JK Galbraith said a number of years ago in one of his books that there is nothing about money that the ordinary person of reasonable intelligence and diligence cannot understand. That proposition has been turned on its head by the financial services industry over the past 20 years or so, and now not many of us can understand it. Somebody mentioned CDOs. The noble Lord, Lord Smith of Kelvin, as an accountant, asked me, “Do you know how many pages are in an ordinary CDO, John? There are 350 pages”. Who can understand it? The ordinary person cannot understand it. Worse still, the people making it up cannot understand it. That is why we are in a financial crisis today. The core of this amendment is to rebalance the asymmetric relationship between the industry and the consumer. The Government have paid insufficient attention to that issue and it will come back and haunt the Government and haunt the political classes in the future if we do not pay attention to it and get it right.
I will give an example of my own. In 2005—the year of the general election, which I won in my constituency—I crashed my car, so I decided that I needed another one. I went into my then bank, Barclays, and asked for a loan. Although the counter staff were very courteous and offered me the loan, they also said, “Sir, we advise you to take out PPI—payment protection insurance”. I asked what the payment protection insurance was for. “Well”, they said, “if you become unemployed this could be paid out”. It was the Victoria branch. I pointed over to the Houses of Parliament and said, “Look, I’m in there for the next five years, whether I turn up or not, so my money is secure until the next general election. I do not need PPI. Thank you, sir”. I then received eight letters pointing out the folly of my mistake in not taking PPI. The lesson I learnt from that is that the industry knew that there was a problem. It knew that this was unsuitable for certain consumers, but there were good returns, so it kept on going.
Subsequently, the chairman of one of the major banks spoke to me confidentially, shook his head in amazement and anger and said, “With any product line which is getting a profit of more than 80%, surely someone should have asked the question: ‘Is this a product which is operating in a fair market? Is it doing justice to the people who are buying the product?’”. The answer, he said, was no, but the industry kept going. I was chairman of the Treasury Committee at the time. We referred it to the Competition Commission and then the OFT in 2005 and yet, three years later, the industry was still trying to sell it. I know from talking to some non-executives that executives were even bullying or trying to bully non-executives to maintain the product line—the combined rage of the consumers, the politicians and the regulators meant nothing to them.
This is all about imbalance, asymmetry of knowledge and value for money. The Government need to see this amendment as iconic in terms of that relationship and ensure that, before we get this on to the statute book, the consumer can at least start to get a fair deal.
Lord Lucas
My Lords, I very much support the spirit of this amendment; I will let my noble friend on the Front Bench answer for the technicalities. We have got ourselves into a position in which people do not trust the financial system and it is immensely damaging for us. It means that people cannot save in a sensible way; they do not want to expose their savings to what they believe to be a bad and unsafe part of the financial system, and with good reason. When one looks at what the banks have been up to, one just thinks that they have lost their sense of judgment as to what is right and proper and how things work in the long term. The things that have been going on at HSBC and Barclays pensions mis-selling, the problems with PPI and these extraordinary financial products which were sold to small businesses, all speak of a complete lack of interest in being trusted.
We must get back to a state where the financial system enjoys a proper level of trust. Otherwise, when people come to choose where to save their money, they will divert it into the likes of houses and push house prices ever further up. They will be tempted into deeply unsuitable investments because they cannot trust what is going on in the mainstream. That is all deeply undesirable. Getting back to us trusting them by the banks’ own actions will be difficult; they have blotted their copybook to such an extent. We are relying on the FCA to be an effective regulator and ensure that, if there are problems in the works of the likes of PPI, they do not go on for years, so that when they burst they are enormous headline issues affecting millions of people, but are picked up early and the banks are politely requested to mend their ways, perhaps without most of us knowing what is going on.
We need a regulator that is quicker and more effective at picking such things up early if we are to restore confidence in the system. We know that there are problems out there which have not been dealt with. There are pension funds charging 4% a year to people investing in them for managing the funds. That is a continuing iniquity which needs to be dealt with. The amendment is aimed squarely at such practice: at ensuring that what is offered to consumers, when one takes all the hidden charges into account, is fair and good value for money and that people are being invited to take proper decisions.
This is a valuable amendment in its spirit. If my noble friend can convince me that such provision is already in the Bill, I shall be delighted.
Lord Barnett
I strongly support the amendment moved by my noble friend Lady Drake. As usual, my noble friend Lord Peston spoke about the average consumer and the complexity of the Bill. I doubt that an average consumer will ever read the Bill. This is not an ordinary Bill. I do not pretend that the FSA was perfect, but we are now to have an FCA. I think it is in Clause 5—although that itself is not easy to find—but then it is in proposed new Section 1E. You and I may find that easy—I do not, because this is the most complex Bill I have read. I apologise, because over five years I introduced many complex Finance Bills—two a year on average—so I know about complex Bills and have dealt with them both in government and in opposition, but I find this one incredible.
The Bill is about the competition objective and helping the consumer. The amendment is modest. If the noble Lord, Lord Sassoon, is in a good mood—I see that he is not; he is shaking his head—he should look at the amendment to see whether it would do any harm to the consumer. I should have thought that it might help them. The consumer will not read it, but the new FCA would have to read it and be responsible for it. First, the noble Lord must be in favour of good value for money—he is nodding. The last phrase of the amendment is that it should be “good value for money”. It deals with,
“the ease with which consumers can identify”.
That cannot do any harm to the Bill and the idea of helping consumers. Even if the noble Lord is in a bad mood today, as he indicated, I hope that he will see the amendment not in principle but in fact. It is a very modest amendment asking for very little.
The noble Lord, Lord Sassoon, does not always answer my questions positively, but this one is simple. This is not my question but that of my noble friend Lady Drake in her excellent introduction to the amendment. Is the amendment going to do any harm to the Bill? Is it going to help the FCA to help the consumer? If the answer is yes, can the Minister say that he will at least examine the Bill, take the amendment away and look at it with a view to including it at Report? That is all I ask, and I am sure that that is what my noble friend Lady Drake asks. I hope that he feels in a better mood when he comes to reply.
Viscount Trenchard
My Lords, I also recognise the good intention of the noble Baroness, Lady Drake, in moving this amendment. However, I think that the FCA is best helped to help the consumer by having clear objectives and principles, or matters to which they must have regard in pursuing the objectives. I worry that this is becoming overcomplicated.
I also suggest that new Section 1E(2)(a), which states that the FCA must have regard to,
“the needs of different consumers who use or may use those services, including their need for information that enables them to make informed choices”,
overlaps substantially with the effect of the amendment. Furthermore, I am not sure whether it is a good idea to put in the Bill,
“services which are appropriate to their needs”,
and,
“represent good value for money”.
Those two concepts are not defined and may be interpreted in very different ways by different consumers. Who is to say what represents good value for money? The important thing, which has been much too lacking in recent years, is that we should have complete transparency. However, I would like to hear the Minister’s view on this.
I would also like to ask him whether the words,
“The matters to which the FCA may have regard in considering the effectiveness of competition”,
mean that the FCA is prohibited from having regard to other matters, or is this intended to restrict—or to broaden—the matters to which the FCA can have regard? If the provision is intended to broaden the matters, surely the best way is to leave it as simple as possible so that the FCA can use its own judgment in deciding to which matters it should have regard.
Baroness Noakes
My Lords, the noble Baroness, Lady Drake, has made a powerful case for her amendment. I think that it is widely acknowledged that the needs of consumers require greater emphasis in the financial services industry as it moves forward, and I believe that that is why the consumer is being placed at the heart of the FCA. However, I am puzzled that the noble Baroness, Lady Drake, has chosen to put her amendment within the competition objective for the FCA. It seems to me that what she was talking about is quintessentially part of the consumer protection objective, which is in new Section 1C. A number of things are already listed within that consumer protection objective, including,
“the general principle that those providing regulated financial services should be expected to provide consumers with a level of care that is appropriate having regard to the degree of risk involved … and the capabilities of the consumers in question”.
It seems to me that if proper regard was paid to that in the development of the FCA’s policies, that would meet almost all of what the noble Baroness, Lady Drake, seeks to address in her amendment.
Lord Whitty
My Lords, I support my noble friend’s amendment and much of what has been said about it. I would also like to counter what the noble Lord, Lord Flight, said because the amendment goes much further than providing information to consumers.
Lord Phillips of Sudbury
Rather than the noble Lord remain in rather dangerous flight, I believe he means the noble Viscount, Lord Trenchard, does he not?
Lord Whitty
My Lords, I do. I was looking at the Marshalled List and saw the name of the noble Lord, Lord Flight, to the next amendment. I beg the pardon of the noble Viscount, Lord Trenchard.
When faced with issues of consumer care and consumer protection, the FSA, in its early days and for much of its time, tended to resort to stipulating the information that the consumer needed to be given. By the time that had gone through the corporate lawyers of the various banks and insurance companies, it amounted to five, six or sometimes 25 pages of close 10-point type, which was even more difficult for the average consumer to understand than it is for the average Member of the House of Lords to understand this Bill.
That is a very passive form of consumer protection and it is a very passive definition of customer care. The amendment attempts to put an obligation on the FCA to ensure that companies operating in this sector operate positive customer care, not simply passive provision of information which a large number of consumers cannot understand. To answer the noble Baroness, Lady Noakes, one reason why I believe that it is appropriate for it to be in the competition area is that when the FCA looks at where competition is succeeding, one of the measures of the proper outcome of competition that it considers is the way in which companies compete, as regards customer care, for their consumers.
Competition is not an end in itself. Competition policy and the enforcement of competition should protect and enhance benefits to consumers. One of those benefits is that the truly competitive company looks after its customers in a positive way and competes with its competitors in that regard. The passive provision of information is not customer care. This clause goes a significant way towards ensuring that customer care is seen as an objective both of consumer protection and of competition policy.
Baroness Hayter of Kentish Town
My Lords, along with most other speakers, I support the amendment moved by my noble friend Lady Drake. As I have argued in Committee before, it is no good having a competitive market for banking and insurance—not that we have one—if consumers effectively cannot enter the market, if they cannot identify what they need and if they cannot get value for money. As we have heard, all sorts of people find it challenging to know what services are suitable for them. How else could HSBC have sold bonds designed to be held for five and more years to 2,500 with an average age of 83? It is a little like people trying to sell PPI to my noble friend Lord McFall, or Barclay, HSBC, Lloyds and RBS mis-selling interest rate swaps to 28,000 businesses.
My hope is that Amendment 117 will give the FCA an explicit mandate to put a stop to unfair overdraft charges, excessive fees and complicated price structures, all of which hinder competition, which is probably why I think the amendment belongs within this area. The FCA has to be able to tackle hidden charges if it is to promote effective competition, given that, as we have heard, individual consumers simply cannot do this for themselves. If we, as consumers, buy a theatre or an airline ticket, there is a pernicious little booking fee—at least we can see it. I have just had to pay £2 on a £10 ticket to go to the Noel Coward Theatre, which seems a bit high. At least we can see such a charge and we can choose whether to pay it or not to go to the theatre, but that is not the case with bank charges.
A recent Which? survey found that 60% of those polled said that they paid what they felt to be an unfair bank charge and half paid a charge which they thought was disproportionate to whatever benefit they received. It is not clear, from the current language in the Bill, that the FCA will have the necessary mandate to tackle hidden charges. I know—and my noble friend Lady Drake quoted it earlier—that the Financial Secretary in the other place said that the FCA had,
“the powers and the mandate to intervene on matters of price and value for money”.—[Official Report, Commons Financial Services Bill Committee, 1/3/12; col. 261.]
The Financial Secretary argued that the FCA does not need these bespoke powers, given that it can take action under the competition and consumer protection objective. However, a Queen’s Counsel advised Which? that the current wording of the objective could allow the industry to challenge the FCA’s mandate to tackle hidden charges, which could lead to a repeat of those failed and expensive test cases to which my noble friend referred. Any such uncertainty would make the FCA very risk-averse; it would be reluctant to take action for fear of being challenged. Unless the FCA has a really clear, unambiguous mandate to tackle hidden charges, I can share its reluctance to be at risk of legal challenge from the industry. Therefore the Bill must give this power to the FCA; it is absolutely key to promoting competition. At present there is insufficient responsibility on firms to ensure that products are appropriate for the consumer in terms of meeting their needs, accessibility and reasonable value for money, as Consumer Focus argued to the Joint Committee. The Council of Mortgage Lenders said that the regulator,
“should have an appropriate degree of protection for consumers and should reflect a differential approach not only between market and retail consumers, but within the retail market itself”.
The amendment is simple; and can only promote confidence in the industry. Who, after all, could argue with appropriate services and value for money? Not even, I think, the Minister. We need to get back to trusting the banks and the pension providers, as the noble Lord, Lord Lucas, said. Therefore we trust that the Minister will accept Amendment 117. In the words of my noble friend Lord Barnett, it can do no harm; it can do good.
Lord Sassoon
My Lords, this has been an interesting and wide-ranging debate to kick off today’s Committee session. I will deal first with the amendment on its own terms and then pick up some of the wider important points, although perhaps they may not be directly relevant to the key reason why I cannot accept it.
As we have heard, this amendment seeks to add a new have-regard to the FCA’s competition objective. I know that it has been promoted by the consumer group Which?. As we have heard, it drives at the same issues as a number of amendments discussed in another place—namely, that the FCA should have, in the words of Which?—which were quoted by the noble Baroness, Lady Hayter of Kentish Town—an explicit mandate to,
“put a stop to unfair overdraft charges, excessive fees and complicated pricing structures where they hinder competition”.
I agree, of course, with what lies behind this amendment. Consumers should have access to the right financial services and products; they should be able to buy in the confidence that they know what they are getting and what they are paying for. That must be clear and transparent; there ought to be no place in financial services for a culture where consumers are kept in the dark.
However, let me put on the record what the Government have said a number of times before—both in publications and during discussions in another place—which is that if the FCA finds problems in pricing, charging or in the ability of the consumer to obtain value for money that cause it concern, it will have the mandate and the powers to act. It has the mandate both under the effective competition and the consumer protection objectives, a point that has been made by a number of my noble friends and other noble Lords in this debate. It can apply its extensive regulatory toolkit in pursuit of price intervention, should it think it appropriate to do so. The FCA does not need new powers nor do its objectives need expanding. We simply do not agree with Which?’s legal analysis. Fundamentally, it is a narrow legal point.
Having said that, a range of important issues have been raised which I will spend a minute or two addressing. The noble Baroness, Lady Drake, in introducing this amendment, talked among other things about the OFT bank charges case. It is important that the Committee understands that the powers available to the FCA are far broader than those available to the OFT at the time of the bank charges case. The OFT was in fact relying on the Unfair Terms in Consumer Contract Regulations. I suggest it is incorrect to draw a line somehow between what the OFT was or was not able to do and what the FCA will be able to do, because the FCA has much wider powers.
In terms of what the FSA can do now and what the FCA might do in future, first, as we discussed in Committee on previous occasions, the FCA will have additional product intervention powers. The noble Baroness I think gave an example of a low headline price to attract new customers that is then offset by high ancillary charges. That is a very good example—and one that I might have given if challenged—of precisely the sort of situation where the FCA might well intervene and where the FSA has already begun to take a similar approach, as set out for example in its consultation paper on the mortgage market review. I do not think there should be anything between us there.
Looking more widely, I think the noble Baroness said at one point that the FCA “must” be required to have regard to ease of access to value for money. However, the amendment does not achieve this—it simply adds to the list of matters to which the FCA may have regard. Linked to that, I can assure my noble friend Lord Trenchard that the have-regards listed in this new Section 1E are of course not exhaustive. The FCA is not precluded from taking other matters into account in assessing the effectiveness of competition. That takes me to the point made by the noble Lord, Lord Barnett, where we would get into difficulties. The easiest thing would be to say, “I agree with the sentiment behind this, let’s put it in”. One of the arguments in favour of putting it in is that the FCA would be vulnerable to legal challenge if it is left out. However, as I have clearly stated, our legal analysis is simply different—I have not seen what lies behind Which?’s legal analysis but we disagree on that. If we were to go down the line of putting in a longer list of have-regards, we get more and more into the difficulty of suggesting somehow that the list is exhaustive and that the FCA cannot do things that are left off the list. Potentially, the more we add to the list, we risk getting into legal difficulties that we are not in at the moment, because the FCA will have all the legal powers it needs. The noble Lord, Lord Barnett, put it as a reasonable challenge, as he always does to me, but I think there is a danger in going down the route of this amendment.
Lord Phillips of Sudbury
I seek to help my noble friend. Regarding the language of new Section 1E(2), where it states:
“The matters to which the FCA may have regard”—
there is no danger of the kind he suggested in the amendment of the noble Lord, Lord Barnett. This is because there is the crucial word “include” at the end of the preamble to the new section, which states:
“The matters to which the FCA may have regard … include”,
paragraphs (a), (b), (c) and (d). That is a clear indication that this is non-exhaustive. One could therefore add a number of further provisions without endangering the ability to think more widely.
Lord Sassoon
My Lords, my clear legal advice is that the FCA does not require this additional “have regard” and that there is, notwithstanding the wording to which my noble friend draws attention, a danger that if the list becomes longer and suggestive that it is intended to be exhaustive, that may give rise to legal challenge. That is the advice that I have received from the best legal advisers that the Government have to hand and it is all that I can say on the matter.
I want to wrap up this discussion by going back to some of the things that noble Lords have drawn attention to in new Section 1C on the consumer protection objective. The noble Lord, Lord Peston, for example, is of course quite right to say that some or the majority of consumers of financial services are not “rationally well informed,” to use his term. This is precisely why, among other things, new Section 1C(2)(b) refers to,
“the differing degrees of experience and expertise that different consumers may have”.
This is also why, among other things, we have discussed the important work of the Money Advice Service in improving the ability of consumers to make informed choices, which we will come back to. I therefore agree with the noble Lord’s starting position, but I suggest that the way to deal with it is not through this amendment. I could point to a number of the other provisions in the consumer protection objective which go to the heart of many of the concerns raised in this debate. Coming back to my fundamental analysis that the legal analysis on which this is based is, in the view of the Government, flawed, I ask the noble Baroness to withdraw her amendment.
Lord Peston
I am full of despair because the noble Lord seems to have missed the whole point of what we are discussing. He keeps going back to technicalities, which is exactly the wrong way to view this matter. I think it was the noble Lord, Lord Lucas, who focused on why this Bill is a wasted opportunity, particularly in the way that it is being handled by Ministers. The real disaster that has hit this country is the destruction of the reputation of the financial intermediary sector. We in your Lordships’ House have a chance to do something about that. The way to do this is not to talk about technicalities and to say, “My lawyers say this, and your lawyers say that”. The way to do it is to place in the Bill a particular amendment—I do not really care where it is put. I will not object if the Minister does not like the wording as long as he makes the wording better. We have a chance to save the reputation of an industry which matters enormously to this country.
I find it very upsetting that in the last opinion poll I saw, the financial intermediaries had fallen nearly as low as politicians in terms of their public reputation—we can live with that because in some sense we do not matter. This is enormously important and I implore the Minister to listen to what his noble friend Lord Lucas said. We have a chance here to make a contribution to improve and, indeed, eventually save the reputation of a vitally important industry. This Bill simply does not do that, but it could. That is why I call it a wasted opportunity.
Lord Sassoon
My Lords, we are in Committee and discussing a very specific amendment. I therefore make absolutely no apology to the noble Lord, Lord Peston, who raises extremely important Second Reading-type debating points.
Lord Sassoon
I will not give away again to the noble Lord for a minute, if he will forgive me. We are discussing a very specific amendment. I have explained why I believe it is defective. The sentiment underlying that is completely shared by the Government: we do not believe it is necessary. The noble Lord raised matters which, although somewhat different, are also related to the capabilities of consumers. I have attempted to address a very serious point by pointing out that his concern will be at the heart, right at the centre, of the new regulatory body’s objective and thinking.
When it comes to his new point, which is not the one I was addressing before, about the standing of the industry, again, I completely agree with him. However, we are now talking about a regulatory structure. The Joint Committee of both Houses has been set up and will look very quickly at some of the wider questions of integrity and standards in the industry. This morning, I am trying to focus on the specific matter of this amendment.
Lord Peston
My Lords, I find it almost impossible to cope with the way in which the Committee stage of this Bill has been handled. It is completely different to any other Bill which I have taken part in. My point was not a Second Reading point. It was germane to this specific amendment, to what lies behind it, and to the philosophy of it. The Minister’s absolute refusal to even say, “Some good points have been made and I would like to go away and think about them some more”, is what annoys me about this Committee. My experience with the Ministers that I have usually dealt is that when a good point has been made, they always say, “I will go away and think about it some more”, without making any promises. However, the noble Lord, Lord Sassoon, never says anything like that. I have not heard him once in five days suggest that there is anything wrong with this Bill, or that he would like to think again. There comes a point when one has to say that, in order that people know that their Lordships have rather high standards.
Lord Sassoon
Does the noble Lord, Lord Peston, agree that the Government came forward with a package of very substantial amendments that have already been discussed in Committee? I refer the noble Lord to the number of government amendments that have already been laid and debated, and to the number of times in Committee when I have indeed said that I will look at things or have made concessions. I do not accept for one minute his statement about the attitude with which I have come to the Committee.
Lord McFall of Alcluith
Can I suggest that the noble Lord does not get so het up? There are issues and principles here, and we want to tie them down. Looking at Amendment 117, if I am correct, it is for the FCA to include,
“the ease with which consumers can identify and obtain services which are appropriate to their needs and represent good value for money”.
This goes to the heart of consumer interest. Given the Minister’s position—and let us get rid of the legalese jargon—does he think that this Bill, in this area or elsewhere, ensures that the type of scandals which we have seen going on for years and years without being addressed will be nipped in the bud by the new powers? Will we see the FCA step in straightaway, without prolonged pain for both the industry and consumers? That is what is behind the amendment and the points put by Members.
Lord Sassoon
My Lords, all I can usefully say is that while I believe that this amendment is well meant, it is based on a legal construction that the Government do not accept. The FCA has all the powers that it needs and there are some dangers in putting this amendment in. That is what we are discussing.
Baroness Drake
My Lords, perhaps I might respond to some of the issues that have arisen in the debate and in the reply from the noble Lord, Lord Sassoon. The Minister is arguing that the FCA has a sufficient mandate through the competition and consumer objectives, as drafted, to tackle these matters. My problem is that I do not share that confidence in the absence of the amendment to the competition objective that I seek. I accept his point that the FCA’s powers are much broader than those of the OFT, but with the bank charges case I was trying to illustrate the disposition of the industry to mobilise quite effectively if there is ambiguity in the statutory or regulated provisions. Rather than arguing whose legal advice is better, I was seeking simply to nail this issue by saying clearly that effective competition means that consumers have to be able to identify whether services are appropriate to their needs and represent good value for money. The lawyers could then argue as much as they like, but that provision of what effective competition embraces would be laid out in the Bill.
The Minister made too much of my use of “must” in my speech, rather than “may” as it is in the Bill. I am seeking not to challenge the word “may” but to establish with clarity that competition cannot be effective without it being value for money for the consumer. My amendment does not seek to establish a long list but it seeks to give clarity on a very important issue, which goes to the heart of what effective competition is. I think that 20 million people out there are with me, based on their personal experiences of the financial services sector in recent times.
In response to the noble Baroness, Lady Noakes, in my own defence I have tabled amendments to both the consumer and competition objectives. My noble friend Lord Whitty very ably answered the question in part. However, I am seeking an amendment to the competition objective because on this occasion, at the risk of repetition, I am trying to give clarity to the definition of effective competition in terms of the matters that the FCA has to have regard to which, I reiterate, is the ability of consumers to identify what is appropriate to their needs and represents good value. At the heart of my argument is that the FCA cannot judge effective competition unless it has regard to those matters. I feel they are so fundamental to a judgment of effective competition that they are worthy of being spelt out in the Bill as a matter to which the FCA may have regard.
On the market integrity point, there is consistency in my amendment in terms of what I am arguing in respect of both market integrity and the competition objective. My argument would be that a key characteristic of well functioning markets is that they can provide consumers with products and services having value for money. The wording of the market integrity clause does not address or mitigate my concern, hence the amendment I have tabled.
Lord Lucas
Before the noble Baroness withdraws her amendment, I wonder if I might take the opportunity to make a couple of points to my noble friend on the Front Bench. He has been saying that his lawyers are better than theirs, which I of course accept, but it really is not a matter for either set of lawyers. It is for the lawyers that the FCA will have when it comes into existence to interpret this Bill. One problem with the FSA is that the limitations it imposed on itself as to the speed and determination with which it has pursued some of these other problems have resulted in them ending up much worse than they might have been.
It would help if my noble friend was prepared either to say now or to consider allowing me to give him an opportunity to say on Report that the sentiments expressed by this amendment—indeed, the particular courses of action envisaged by it—are ones that he would expect the FCA to undertake on the basis of the powers that it already has in the Bill and that he would expect it to act quickly, as the noble Lord, Lord Peston said, to nip things in the bud rather than waiting until it is absolutely sure that it has identified the exact nature of the problem. In other words, it should be able to take swift and pre-emptive action. If nothing else, under Pepper v Hart this would give the FCA’s lawyers some comfort when they come to interpret the Bill in future.
Lord Sassoon
My Lords, I briefly draw my noble friend’s attention to a couple of things that I have already highlighted this morning. First, there are the additional product intervention powers that the FCA will have, as opposed to those which the FSA has had. Those go to the heart of his concerns, because we are certainly not giving those powers to the FCA, and it is not receiving them, without an intention to use them. Secondly, I drew attention to the consultation on the mortgage review, which indicates a developing line of thinking that goes precisely to his points. The evidence points in the direction that my noble friend is looking for.
Baroness Drake
My Lords, I had come to the point where I was reserving this for Report and begging leave to withdraw the amendment.
Baroness Kramer
“(3) Section 21 of the Financial Services and Markets Act 2000 (restrictions on financial promotion) is amended as follows.
(4) At the end of subsection (2) insert “or
(c) the content of the communication is for the purposes of a social investment.””
Baroness Kramer
My Lords, this amendment takes us back to social impact investments. In moving Amendment 118AZA, I also very much support Amendment 121A in the name of my noble friend Lord Hodgson; it is also in mine. However, I know that he will speak eloquently to that amendment so I ask noble Lords to assume my support in the interests of the time pressures that we have today, and I will confine myself to speaking to the first amendment in this group.
Again in the interests of time, I will not go through the issues that define why social impact investment is so important and so beneficial, yet it currently feels very constrained. That has been done already, very eloquently, by my noble friends Lord Phillips and Lord Hodgson, both of whom are in their places here today, so I will talk within the narrower terms.
I want to make two points about social impact bonds, which are the primary form of social impact investment under general discussion. These bonds are, by definition, small. If the sector develops as it hopes, the range typically will be £1 million to £5 million. The bonds are small because they deal with very specific, local social problems, which might include building new social housing within a particular community or the resettlement of prisoners from a particular prison. That small size is key to understanding the regulatory environment in which these bonds need to live and thrive.
Secondly, qualified investors are not likely to provide a very large market for social investment bonds. Certainly the one that has been offered in Peterborough for prisoner resettlement is indeed funded by qualified investors, but that will be a less frequent occurrence. The real market for these bonds is people who live in the community and whose primary objective in purchasing the bonds is social good, with a financial return being secondary. That is the market that has to be reached if we are to develop this sector effectively.
That brings me to the problem that is addressed by this amendment, which is Clause 21 of FiSMA on the financial promotions order that sits underneath it. Under these rules a financial instrument cannot, in effect, be marketed except by an authorised person. Under the order there are a few exceptions but they do not apply at present to social impact investments. To become an authorised person requires going through a process that costs some £150,000. We have talked directly with the FSA and the FCA, with independent financial advisers and with others who do structuring, and there is a general consensus around that number. In a traditional investment, which might include a fund for £20 million, £30 million or £40 million, £150,000 is nothing. However, for a bond issue of £1 million, £2 million or £5 million, £150,000 is a very large amount of money and effectively makes it impossible to develop the instrument and market it to the general public. Therefore the rules as they stand make it impossible, in practical terms, for social impact bonds to actually be marketed to their primary would-be buyers, who are the general public.
That strikes all of us, I think, as a real flaw in this legislation and it has to be tackled. We have the irony that a charity could come to any Member of this House and say, “We have a very good cause. Please give us some money to fund this cause”—no problem with that at all. However, if that charity were to go to any of your Lordships and say, “We have a very good cause. Please give us some money and, no promises, but I will try to get you back your original investment and maybe even a small return on it”, that is handcuffs at dawn; it is actually breaking the law. That is an insane situation in which to be placed, but it is where we currently sit.
I say to the Government, to the Minister and even to the Bill team that, since the Government themselves are considering whether they should enter the field of promoting social impact bonds, I would hate to see members of the Civil Service finding themselves serving at Her Majesty’s pleasure as the consequence of having promoted these kinds of investments. It is an anomaly, and we seek to address it by this amendment. I will not pretend that the amendment is brilliantly crafted, but our goal is to get the Government to sort this problem out before the law of unintended consequences has a severe impact. This rule is already inhibiting the development of this market for no good purpose. It needs to be dealt with promptly, and I ask the Government to consider this issue seriously.
Lord Hodgson of Astley Abbotts
My Lords, I proposed Amendment 121A in this group. I am grateful to my noble friend Lady Kramer for her support. She has covered some of the ground that I wish to cover, and I will endeavour not to repeat the very powerful arguments that she has made. My amendment proposes inserting into the Bill a new clause with a further consumer protection objective, as stated in its subsection (a), in situations where consumers are,
“engaging in investment activity … to benefit society or the environment”,
so it comes at the problem in a slightly different way.
As some noble Lords will know, I have just completed a review of the Charities Act 2006. My terms of reference, given to me by the Government, were widely drawn. One of them stated:
“Measures to facilitate social investment or ‘mixed purpose’ investment by, and into, charities”.
My report, published a week ago, ran to 159 pages and contained 130 recommendations, a large number of which—15 or 20 or so—were concerned with social investment. I think that there is a great opportunity here, as my noble friend mentioned, and we are in danger of missing it.
So far my noble friend Lord Sassoon’s comments on this, no doubt written for him by the Treasury, are disappointing. As my noble friend Lady Kramer pointed out, we have this counterintuitive situation where you can give money but you cannot invest it. As long as you give it away and cannot possibly get it back, you are fine. However, you cannot say, “I will give you this money. I might lose it but I might get it back, and I might get it back with a small incremental return”, perhaps linked to gilts. You cannot do that, which must be counterintuitive. As the Government seek to develop social impact bonds—covering school exclusion, prisoner reoffending, getting people back into work—where charities and voluntary groups can do better than the state, which is therefore prepared to share some of the savings with these very effective voluntary groups, it must be sensible for us to try to find ways to facilitate the flow of money from the private sector into these sorts of schemes.
As we said in earlier debates, this idea is at an early stage, and there are many challenges. The first, not least, is to find some corporate form that can encompass all the different strands of funding: the charity itself, other funding charities, the Government and the private sector, which subdivides into corporate investors and individual investors. All these have different timescales, different legal requirements, different tax structures and different objectives. It is on the last of these—in particular, the objectives of private individuals—that I think we should focus and that my amendment seeks to focus.
Research suggests that if people could invest relatively modest sums—say, £500 or £1,000—in a social investment proposal with which they sympathised, with the possibility of getting their money back but no certainty, and perhaps with a modest incremental return, it would attract substantial support from across our society. One would hope that successful operators in this field might create a record of success that would enable them to raise larger sums of money and provide increasing services in the future.
Lord Phillips of Sudbury
My Lords, I support totally the tenor of the amendments in this group, which have been so well spoken to. I add some practical examples of where I believe that these amendments or amendments like them would be of immense social utility. It is generally accepted that community life in our dear land is breaking down everywhere. At the same time, there is a general perception and I think agreement that anything that can be done by a community or a group within a community to shore up its social assets is doubly valuable against the background. For example, a local scouts organisation might want to build a new hut; a local sports club may want to build a pavilion or buy some boats or a bus to take teams away; or a local amenities society may want to improve a local building or acquire one. A local church might want to do something. One can go on and on. Local organisations every day of every week in every part of the land want funds to do something that they all agree would be of great benefit to that community. At present, the regime that my noble friend Lady Kramer so vividly described is a complete road block against having a general appeal to the community to chip in perhaps £10, £20 or £100—it need not be £500 or £1,000.
What is needed is for my Government to be imaginative enough, although I realise that the Treasury is not the homeland of social imagination, to see that if we could amend the arrangements provided for by this Bill, realising that one size does not fit all, we could unleash an unpredictable but extraordinary outpouring of funds. Many will be reluctant to give but much readier to lend, even though they appreciate that the basis on which they lend is somewhat uncertain. As my noble friend Lady Kramer said, the upfront costs of having to comply with the present regime are simply prohibitive. She mentioned social impact bonds of £1 million to £5 million, but I am talking about appeals of £50,000.
The value of those small local appeals, which can be met by people lending in small amounts but large numbers, is double. They provide badly needed social facilities and, in the process, bring the community together and give them the sense of achievement. They shore up community and are of inestimable public benefit. My noble friend the Minister has had a horrendous job steering this Bill through its stages and has dealt with it in an exemplary fashion. I hope that the Government will think again over the two next months and come back in the autumn realising that they have to make major concessions on this part of the Bill for the good of us all.
Lord Tunnicliffe
My Lords, I hope to set a precedent whereby the commitment of our Benches is not necessarily proportionate to the length of the speech. I support the amendment in the names of the noble Lord, Lord Sharkey, and the noble Baroness, Lady Kramer. Social enterprises are businesses that trade to tackle social problems and improve communities, people’s life chances or the environment. They make their money from selling goods and services on the open market and reinvest their profits back into the business of the local community. When they profit, society profits. We believe that Amendment 118AZA would contribute to their formation and therefore we support it.
On our Amendment 128AA, in the names of the noble Lord, Lord Eatwell, and the noble Baroness, Lady Hayter, we believe that given the consensus in at least part of this Chamber that social investment is a good thing, it would be appropriate for the FCA to have a social investment panel that would sit alongside the small business and market practitioners and consumer panels. The FCA would have a duty to consult. The panel would represent the interests of organisations that specialise wholly or mainly in social finance or investment. Today’s debate has shown that if we can persuade government to go into this area it will be complex and will need an appropriate panel to help to develop the regulations around it.
Lord Flight
My Lords, I support the common sense of these amendments. However, charities are regulated by the Charity Commission. Although one hopes that all these social endeavours are extremely honest and properly run, it is important to be clear about what charges are involved, and that the people organising them are fit and proper people. There is a very real issue to address here. It would be fine to say, “Here is a green light. Be an investor like a sophisticated investor”, but behind this territory lie quite big issues concerning good conduct.
Lord Sassoon
My Lords, we have already, quite reasonably, spent considerable amounts of time discussing issues of social finance and social investment. I want to reiterate, at the start of my response, that I do share the aims of those who wish to nurture the social investment sector and see it grow. I am pleased that there are plans for some of the noble Lords who are interested in these matters to have a discussion with the Bill team over the recess. I am happy to encourage that to happen. There are a couple of other ways to address this issue, which I will refer to as I proceed. So I hope that the Committee will bear with me for a moment or two. I will explain why I think that Amendment 118AZA and Amendment 121A are not appropriate; but there is another channel as well as further discussions between me and the Bill team where it might be possible to make some progress during the summer on practical steps. So I ask noble Lords to bear with me for a couple of minutes.
I am, of course, aware that my noble friend Lady Kramer had a meeting with the FSA on this matter two weeks ago, which she was good enough to tell me about. Those discussions informed Amendment 118AZA. I completely agree that if we are to help social investment grow we must make it possible for social investment vehicles, and in particular smaller schemes, to market themselves. I take her point about costs. In parenthesis, when my noble friend Lord Hodgson of Astley Abbotts talks about the costs being high, they are high. I do not challenge the numbers of my noble friend Lady Kramer but when my noble friend Lord Hodgson of Astley Abbotts talks about the prospectus directive and half a million pounds, we are in the territory of listed investments, which are rather beyond the sorts of investment fund we want to target. I am sure he wants to target them initially, but I accept the costs are high.
The effect of this amendment and why I cannot support it is that it would have the effect of making all financial promotions that relate to social investment exempt from all the requirements placed on firms and investment schemes, about how they can market their products and investments. I agree with my noble friend Lord Flight that we need to be careful. An essential component of a successful financial services sector, as came up in the discussion of the previous group, is that of trust. We already know what a huge job there is for the sector to rebuild trust. We do not want to undermine trust in the social investment space, because an advertisement or a financial promotion might well be the first point at which matters go wrong if a consumer buys a product or service on false or misleading information. So we do have to make sure that the marketing of financial services is regulated; that financial promotions are clear, fair, and not misleading, whether they are related to social investment or to any other product. In particular, we want to make sure that unscrupulous providers do not see some wide exemption in this area as a loophole—my noble friend is nodding in agreement. We must ensure that there is not a loophole to exploit consumers by offering products around claims of social purpose and getting around the rules. We need to be careful about that, because that will undermine the sector.
Lord Hodgson of Astley Abbotts
I am extremely grateful to the Minister for suggesting that we might be able to make some progress over the summer. His example of an industrial and provident society underlines exactly the point we are making. That is one of the areas that falls between the stools. At the moment it is neither a charity nor a proper regulated body, and this is exactly what we are trying to get at. We are trying to get our arms around this space in a way for which the present regulations do not provide coverage as regards the IPSs.
Lord Sassoon
I entirely accept that. However, the effect of these particular amendments would be to take away all regulation and protection. We certainly do not want to go from the current situation, which it appears people are already seeking to exploit, to one where merely because the apparent purposes of the investment were perfectly worthy and the overwhelming majority of promoters would obviously be people of the highest standing, others would be allowed to fly under their banner.
Lord Sassoon
Perhaps I may make one other point and then I will let my noble friend in. My noble friend Lord Hodgson mentioned the exceptions to the financial promotions order for sophisticated persons. Although I should not discuss the advice I gave Ministers in my previous life as an official, all I would say is that I am extremely familiar with the construction of that order in that particular respect. In my view, Ministers at the time made a very wise decision about that particular provision. I do have form, as it were, in this space. I encourage practical ideas for amending, which will be seriously considered, and although it is not easy to amend the financial promotions orders as regards the Red Tape Challenge, Ministers will look at them. Specifically, Amendment 121A is not needed in order to make that happen.
Lord Phillips of Sudbury
In his final remarks, my noble friend pre-empted what I was going to ask him, which was to confirm that it is not beyond the wit of this House to take account of the very proper points he raises and, at the same time, to take account of this big, potentially vital sector of social investment. However, I think that he has already impliedly agreed with that.
Lord Sassoon
I have drawn the Committee’s attention to the opportunity that exists at the moment, and of course the Red Tape Challenge is a cross-government initiative. No. 10 and others take it very seriously; it is not simply a Treasury matter; and it goes with the wider drive in this area. I shall leave it at that.
I should say just a little about Amendment 128AA. I do not believe that the FCA needs to have a dedicated panel for representatives of social investors. As the FSA’s panels already do, the FCA’s panels will advise on a wide range of policies and regulations from a broad range of perspectives, and I do not believe that it is necessary or proportionate to establish another panel, at additional cost, purely to represent the interests of social investors and social sector firms. Social sector organisations will be able to feed in their views through public consultations. The interests of socially oriented financial services firms can be adequately represented by the Practitioner Panel and Smaller Businesses Practitioner Panel, and many of the FSA’s Practitioner Panel members belong to firms which are involved in social investment.
However, again in the spirit of wanting to be helpful in response to the amendment, and accepting that the interests of smaller specialist firms also need to be appropriately represented, I have sought and gained assurance from the FSA that from now on it will approach trade associations which represent social investors, such as the UK Sustainable Investment and Finance Association, asking them to put forward nominations to the Smaller Businesses Practitioner Panel. I hope that that will give additional reassurance to the noble Lord, Lord Tunnicliffe, about the approach in this area. Given all that, I ask my noble friend to withdraw her amendment.
Lord Lucas
My Lords, all of us in this House wish for that sort of reply from my noble friend, although some of us are not so lucky. I am sorry that the noble Lord, Lord Peston, was not present to hear that so that his scepticism on this matter might have been calmed. It was indeed an excellent reply from my noble friend and I very much hope that my colleagues will be able to take advantage of it.
Perhaps I may draw my noble friend’s attention to an organisation called lendwithcare.org, which is an excellent example of how to do things right in this area. It is concentrating on micro-lending in the third world but the pattern it follows would fit very well the sort of projects that my noble friend Lady Kramer and others have outlined. It takes proper steps to make it absolutely clear to those who lend that there is a serious chance that they will never get back any money. That is crucial. There is far too much opportunity here to induce in those who sell something as a loan the idea that they have a reasonable chance of getting their money back, and that can be very dangerous in unregulated investment.
Baroness Kramer
I join in thanking the Minister for a very positive reply. It sounds as though we have real hope of making progress in this area. I very much appreciate the process that the Government have gone through to get to this point.
I also appreciate the comments of my noble friend Lord Phillips. I read into them that, with his legal-eagle mind, he and some of his colleagues may now be turning to this clause and to this area of the legislation to work out an amendment which, if properly drafted, could both address the issues which I, together with my noble friends Lord Hodgson and Lord Phillips and others, have raised and cover the absolutely fair and relevant point made by the Minister, which is that we have no wish to expose people to scams or to create an opportunity for this to be used as a back door to taking unfair advantage. That is extremely important.
Feeling very positive about all these issues, I beg leave to withdraw the amendment and I look forward to the summer discussions.
Lord Davies of Oldham
“( ) money laundering and the financing of terrorism”
Lord Davies of Oldham
My Lords, I beg to move Amendment 118F tabled by my noble friends Lord Eatwell and Lady Hayter. I assure the Committee that, as time is pressing, this contribution will be brief. We are rather more interested in the Government’s response at this stage, which we hope will be as positive as their responses have been to the last few amendments, and I hope that I can ride that happy tide until lunchtime.
The Bill defines financial crime as including an offence involving,
“fraud or dishonesty … misconduct in, or misuse of information relating to, a financial market, or … handling the proceeds of crime”.
We wish to add to that list money-laundering and the financing of terrorism. It will be evident to all noble Lords why we should put the emphasis on these two issues at present.
There was cross-party agreement on terrorist asset-freezing during the passage of the Bill passed at the beginning of this Parliament. It had a considerable genesis in the work which Labour Ministers had done in the previous Government but the Bill was taken through by the Conservative Government and of course we fully supported it so that it became an Act. The Act’s purpose was to continue the asset-freezing regime that we had previously sought to put in place. Of course, this amendment is moved two days after the allegations of money-laundering activity at HSBC made in a Senate committee hearing led to a matter that has exercised this House over the past couple of days—that is, the position of the Trade Minister. I do not want to dwell on that—it is something to be dealt with on other occasions—but the issue is clearly pertinent, and terrorism is bound to be at the forefront of all our minds against the backdrop of the enormous security arrangements which we are obliged to make for the Olympic Games.
The Bill seeks to define financial crime and lists three categories of crime, which I am sure the noble Lord will say are not meant to be totally exhaustive. However, the list surely ought to contain the two issues to which I have given expression and which are contained in the amendment. Why refer to fraud and dishonesty but not to money-laundering or the financing of terrorism? I am sure that the Minister has thought about these issues deeply and will have a convincing reply. However, it may just be that on this occasion he will say that he will consider the matter further and that we can come back to it on Report. I beg to move.
Lord Sassoon
My Lords, I can be brief on this. As the noble Lord, Lord Davies of Oldham, has explained, the amendment seeks to add money-laundering and the financing of terrorism to the list of matters that are considered to constitute financial crime. First, I should make it clear that the FSA is already able to take action in both these areas because the definition here is broad and the list of matters is indicative and not exhaustive.
On the issue of money laundering specifically, financial crime is defined as including the offence of,
“handling the proceeds of crime”.
Money laundering is plainly part of that—it is one way in which a person can handle the proceeds of crime—so there is no need to list it separately in the Bill.
Turning to the next part of the amendment, it struck me as somewhat odd that the definition of financial crime did not list as major an element as terrorist financing. It seemed a strange omission. I did a bit of research and actually the definition, which is picked up in the draft Bill, stems from FiSMA, the previous Government’s Bill drafted in the late 1990s. I do not intend to be critical of the drafting of the previous Bill but it was drafted when terrorist financing was not as significant a concern as it has since become. I think it would be a good thing to include terrorist financing in the non-exhaustive list in this Bill. The world has moved on. I can confirm that we will consider whether and how to amend the Bill on Report to include terrorist finance in Section 1H.
I am sorry that the noble Lord, Lord Davies of Oldham, seemed to think that I would not pick up his excellent suggestion that we have a look at this again. I am very receptive to all good ideas from the Committee, big and small. I am very sorry that the noble Lord, Lord Peston, is not in his seat because this is one of many concessions and willingnesses to listen to arguments. I should make it clear that I cannot promise that I will continue in this end-of-term spirit for the rest of the day. Even though this will make no substantive changes to the duties and objectives of the FCA, I am grateful to the noble Lord for drawing it to the attention of the Committee and I would ask him to withdraw his amendment on the basis of the assurance I have given him.
Lord Davies of Oldham
My Lords, there is a character in “Cabaret” who expresses herself with “I am overwhelmed,” and that is the only phrase I can think of that is apposite at this moment. I am very glad that I am able to catch the Minister in his wonderfully benign mood. If he can just sustain it to the end of the day we can probably deliver this part of the Committee stage by 7 pm. He has given warning that not all amendments will commend themselves to this extent but I am glad that this one has. I am grateful for his response and I beg leave to withdraw the amendment.
Criminal Injuries Compensation Scheme 2012
(12 years, 4 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
14:36 - Division on Baroness Royall of Blaisdon’s amendment to the Motion. - Ayes: 117 / Noes: 171 - Amendment disagreed.
Lord McNally
That the draft scheme laid before the House on 2 July be approved.
Relevant documents: 6th Report from the Joint Committee on Statutory Instruments, 8th Report from the Secondary Legislation Scrutiny Committee.
The Minister of State, Ministry of Justice (Lord McNally)
I shall speak also to the draft Victims of Overseas Terrorism Compensation Scheme 2012.
Our vision for the criminal justice system is that it is able to respond in a flexible way to the needs of victims and the communities it serves. This must include proper protection and support for victims to help them recover and to overcome the effects of crime. In some instances, financial assistance will play a part in this recovery process. Successive Administrations have grappled with these schemes. Our system of criminal injuries compensation goes as far back as 1964 when awards were made on the basis of common law damages. When the then Home Secretary, Michael Howard, broke the link with common law damages some 30 years later by introducing the first statutory scheme, based on a tariff of injuries, it cost the Government £179 million a year, or more than £250 million at today’s prices. The previous Administration sought to reform the tariff scheme in 2005 by refocusing payments on the most seriously injured and removing less serious injuries. In the end these proposals were never implemented.
We are still resolving claims from before 1996 that were made under the pre-tariff system. When this Government came into office there were estimated liabilities of nearly £400 million. This Administration are now tackling this and are allocating funding to cases so that awards are paid as these remaining cases come to an end. Last year about £237 million was paid in such cases. A total of £449 million was paid in compensation last year—the largest ever in a single year—after the Criminal Injuries Compensation Authority was provided with additional funding. This includes payments to cases under the current scheme and also to pre-tariff cases.
However, despite this cash injection, total liabilities currently stand at around £532 million. This includes an estimate of the cases that are likely to fall due in the future but have not yet been lodged with the Criminal Injuries Compensation Authority. It also includes the remaining rump of pre-tariff cases. Nevertheless, with new liabilities arising at around £200 million each year under the 2008 scheme, this simply is not sustainable in the current economic climate. The revised domestic scheme will focus, as the Government were considering focusing in 2005, scarce resources on those victims most seriously affected by the injuries they suffer as a result of deliberate, violent crime committed in England, Wales and Scotland. This is part of a long-term aim to put this scheme on a more sustainable footing.
We envisage that the cumulative effect of these changes should help deliver savings of an estimated £50 million a year to the taxpayer. This does not mean we are reducing the overall spend on victims. The Government are committed to substantially increasing the amount offenders contribute to victims’ services. In England and Wales, we intend to raise up to an additional £50 million a year through the victim surcharge and other financial impositions, investing this money in support services for victims.
The noble Baroness, Lady Royall of Blaisdon, will speak to her amendment shortly but I would like to make it clear that our proposals will protect injury payments to victims with the most serious injuries. In addition we are protecting payments to the bereaved, to all rape victims, to victims of any other sexual assault and to those, including victims of domestic violence and children, who are subjected to a repeated pattern of abuse. We are removing payments from those with less serious injuries.
The additional money that we will raise from offenders will be used to pay for new services for victims. We believe that it is much better to use this money quickly to support victims who are trying to cope with the impact of crime than to give people small amounts of money for minor injuries some time after the event.
Noble Lords will have seen a number of briefings about the reforms to the scheme including on behalf of postal workers and shop workers. I want to acknowledge the valuable job that these people do, often in very difficult circumstances. However, as with any other applicant to the scheme, if their injuries are sufficiently serious they will still be eligible and I hope that the additional services funded by offenders will better support those with minor injuries.
We have listened to those who responded to our consultation and have made changes to some of our proposals as a result, as set out in the Government’s response. Notably we have changed our original proposals relating to payment for those with criminal convictions and to establishing a connection to the UK.
Let me make the House aware of the changes that we are making—first, on eligibility. Eligibility is tightly defined in the draft scheme so that only those direct and blameless victims of crime who fully co-operate with the criminal justice process may obtain compensation under the scheme. We will continue to pay secondary victims under the scheme in certain circumstances. Applicants will need to be able to demonstrate a connection to the UK through one of a number of factors, though as a result of consultation responses, we have removed the original requirement that an applicant be resident in the UK for six months prior to the incident that led to their injury. Bereaved relatives of victims who die as a result of their injuries will also continue to be able to apply as long as they meet the revised eligibility criteria. Those with unspent convictions will not be able to claim if they have been sentenced to a community order or have been imprisoned. Those with other unspent convictions will be able to receive an award only in exceptional circumstances. This is a change from the options put forward at consultation, following comments made by respondents. These changes to eligibility are in line with the core purpose of the scheme of compensating blameless victims of violent crime.
Secondly, on the tariff, we want to strike the right balance between protecting the most seriously injured and making reductions to the overall cost of the scheme. So tariff payments will be available only to those most seriously affected by their injuries and for those who have been the victim of the most distressing crimes. What this means in practice is that bands 1 to 5 of the current scheme have been removed; bands 6 to 12 have been reduced; and bands 13 and upwards—to band 25—are protected in their entirety at their current levels. Tariff awards for fatal cases, sexual offences, patterns of physical abuse and loss of a foetus are also being protected at their current levels—no matter where they currently appear in the tariff. As a result of a consultation response from the First-tier Tribunal we have also broken down some of the payments made for degrees of paralysis with the aim of ensuring that we avoid both over and undercompensation in these very difficult cases.
Thirdly, let me turn to loss of earnings. These payments do not currently reflect actual loss for all applicants, being capped at a salary of one and a half times the median gross weekly earnings but already making up a significant proportion of the costs of the scheme. The new calculation will be a flat rate based on statutory sick pay which should be simpler to administer. Payments will no longer be subject to deductions for benefits. These payments will be available only to those who can no longer work or who have very limited capacity to do so, in line with the focus on those most seriously affected by their injuries.
Fourthly, there are no major changes to these special expenses payments. They will continue to be available for the same categories as under the current scheme, with the exception of private healthcare. We chose to retain these payments because they are generally awarded to those who suffer the most serious injury. However, we have made it clear that the scheme should be one of last resort in relation to special expenses, and that payments will be made only if the claim is reasonable. Fifthly, with regard to payments in fatal cases, we are protecting the awards for bereavement and parental services payments. In the interests of consistency and fairness, dependency payments in fatal cases will be made in line with the revised plans for loss of earnings. The scheme can never compensate someone fully for the death of a loved one but we believe that some financial compensation is appropriate in these cases. Reasonable funeral payments will be made up to a maximum of £5,000.
Finally, I turn to the process. One of the aims of this reform is to make the scheme easier for applicants to understand. For the first time the evidence required to make a claim is being put on the face of the scheme. We are tightening the circumstances in which the authority will meet the costs of obtaining medical evidence and reducing the timescales for submission of review and appeal applications.
Baroness Royall of Blaisdon
As an amendment to the above Motion, at end to insert, “but that this House regrets that, despite the Government’s claims to be on the side of victims, this scheme would actually cut financial compensation for an estimated 92 per cent of victims of crime, many of whom will be considerably worse off through no fault of their own and will find redress much more difficult in the future because of cuts to legal aid; and also expresses concern over the ability of the Government to levy a substantial surcharge on offenders”.
Baroness Royall of Blaisdon
My Lords, I will also speak briefly to the draft Victims of Overseas Terrorism Compensation Scheme 2012. I am grateful to the Minister for his presentation of the two draft instruments before us. I am also grateful to the Association of Personal Injury Lawyers, the trade unions—USDAW and the CWU—and the Association of Convenience Stores for their excellent briefings, all of which expressed deep concerns.
The Minister said that we needed a system able to respond to the needs of victims, and then he made it sound like a very reasonable step to cut £50 million from the criminal injuries compensation scheme. He did not say so, but I suggest that the catalyst for the proposed changes is the cuts faced by the justice department and the notion that we are all in it together. As is evident from the amendment, we on these Benches fundamentally disagree. Victims do not choose to be victims; they have suffered through no fault of their own, and in proposing the draft Criminal Injuries Compensation Scheme 2012 the Government are putting deficit reduction before humanity. I do not underestimate the need to reduce the deficit, although the Government have cut too far and too fast. Nor do I dismiss the need to introduce changes to the scheme from time to time. As the noble Lord rightly said, my own Government considered changes but we chose not to make them. I am sure that when the noble Lord was himself in opposition, he applauded that fact.
Why are the Government seeking to exclude 42% of innocent victims of crime from the scheme and making life more difficult for those who might still be eligible? Like the Association of Personal Injury Lawyers, I believe that the withdrawal of compensation from innocent victims of crime goes against the very purpose of criminal injuries compensation and ignores a view held by successive Governments for decades that victims of crime deserve more than words. What is happening to similar schemes in other European countries that are also coping with a financial crisis? Are they cutting entitlements for victims or do they regard compensation for victims as a matter of national honour? I suspect that they would not agree that innocent victims of violent crime should bear the brunt of austerity.
In the foreword to the Government’s consultation on the criminal injuries compensation scheme—CICS—the Lord Chancellor and Secretary of State for Justice says that the current scheme for providing compensation to victims of violent crime,
“has never been properly funded”,
and must be put on a “sustainable footing”. As the Minister said today, the document painted a picture of schemes that were not sustainable and had historic liabilities of nearly £400 million. However, as he will know, these figures are disputed.
The 2011-12 accounts, together with an analysis of the previous three years’ figures, show that the scheme is both stable and sustainable, with an average annual cost to the MoJ of existing tariffs of £192 million, and that historic liabilities have been reduced to 73 cases, estimated at less than £153 million. So why is the budget being cut by £50 million? In relation to the consultation, I also take issue with the very partial and extraordinarily subjective references to the results of the consultation in the Explanatory Memorandum, which do not reflect many of the real concerns expressed during the consultation.
The noble Lord gave a clear explanation of the CICS and the band system, but frankly it is not acceptable that the first five bands, which represent almost 50% of all payments, are going to be cut. They will be not cut just a little, but abolished. In human terms this means that more than 18,000 people a year who have quite serious and permanent injuries will receive nothing.
These include injuries such as partial deafness, post-traumatic epileptic fits, and burns and scarring causing minor facial disfigurement. To date these people, if their claims are successful—which is not easy—might receive between £1,000 and £2,500 compensation. The Minister said this is a small amount. Indeed, for some of us it is, but for others this money is not just compensation and recognition of an injury. It means being able to cope, not having to cross the line into a personal financial crisis, and retaining the dignity and self-esteem that enables them to continue to work or to seek work.
Among the people we are talking about are shop workers, far too many of whom are subject to physical assault, and the thousands of post men and women who are attacked by dogs every year. Of course, the other bands are not unscathed. Indeed, compensation for claims between £2,500 and £11,000 would be slashed by up to 60%. These claims are for injuries such as permanent brain injury resulting in impaired balance and headaches, fractured joints resulting in continually significant disability, and punctured lungs.
In addition, victims of violent crime who are still eligible for compensation under the new scheme and who are unable to work due to their injuries will also suffer as a result of changes to the scheme. The Minister suggested that changes along these lines were necessary for simplification. However, people will be worse off due to the changes in the arrangements for future loss of earnings, which will now only pay statutory sick pay—currently £85.85 a week. If someone were to work a 37-hour week on the minimum wage before they were injured, they would be worse off by £139.15 per week, which could result in serious financial hardship.
Then, there is the failure to take into account the current employment market. To be eligible for a loss of earnings payment, the victim will have to have been in regular paid work for at least three years immediately before the date of the incident giving rise to the injury. What would happen to a person who sustained the injury while moving between temporary jobs, or who had a period of unemployment in those three years?
I recognise that, as the noble Lord, Lord McNally, said, the Government have proposed to retain awards at their current level in respect of domestic violence, sexual offences and physical abuse, and I welcome that. But what compensation would a woman be entitled to if, for example, she were the victim of rape and other physical abuse such as a broken arm and the loss of an eye? Would she be entitled to compensation for rape and each of the other two injuries sustained?
There are many questions to be answered about the proposed new scheme, but most importantly I believe that thousands of innocent victims of crime will be considerably worse off through no fault of their own, and because of the pernicious cuts in legal aid that have been debated long and hard in this House they will find redress much more difficult in future. For these reasons, I hope that noble Lords will support my amendment.
I turn briefly to the draft Victims of Overseas Terrorism Compensation Scheme, which is welcome, and I endorse the views expressed by the Minister. I am glad that the Government intend to show solidarity with British and European Union victims who are part of our community and have been caught up in acts of terrorism overseas, by making payments to those who have been seriously injured and who could not have reasonably anticipated the significant threat to their safety or security when travelling abroad.
I pay tribute to my noble friend Lord Brennan, who cannot be in his place today, who introduced a Private Member’s Bill in 2007 which led to a section on victims of overseas terrorism in the Crime and Security Act 2010, and as a consequence, as the Minister said, to the statutory instrument before us today.
One important question for the Minister is: why is the scheme not retrospective, so that payment can be made to the victims of acts of terrorism in Bali, Sharm el-Sheikh and Mumbai? I understand that the cost of such payments would be between £3 million and £5 million, and to exempt the victims would seem to me rather mean-spirited. However, the Minister said that there would be an ex-gratia scheme backdated to 2002. I would be grateful if he could give me some further information on that point. I look forward to the answers from the Minister, and I beg to move.
Lord Davies of Coity
My Lords, we have all heard about the big society. We have all heard that we are all in this together.
I am driven to the belief that the proposed cuts in the draft Criminal Injuries Compensation Scheme 2012 are another example of the most vulnerable people in our society being expected to make the greatest sacrifices.
Before coming to your Lordships’ House 15 years ago, I was an officer of USDAW, the Union of Shop, Distributive and Allied Workers, for 28 years, the last 12 of which were as general secretary. Then as now the retail sector was dominated by women workers, a large number of whom were part-time workers struggling to combine employment and home responsibilities and duties. All these workers are in the front line when criminal activity is perpetrated by the most vicious of criminals. Yet this coalition Government are now going to deny criminal injuries compensation to many of these workers.
The Union of Shop, Distributive and Allied Workers, which has never merged and has represented shop workers for over 150 years, demonstrates that this Government have ignored in their consultation all opposition to these proposed cuts. Some 50% of victims currently eligible for compensation will receive nothing if these cuts go through. Over 40% of the remainder would see their compensation reduced by £1,500 to £2,000. This is not a great sum for a millionaire, but by any standard a great sum to a shop worker already on low wages and injured by vicious criminals. If this proposal goes through, what next, I ask? Child labour, then slavery?
If there is to be a vote on this draft Criminal Injuries Compensation Scheme 2012, I for one will be voting against the government cuts.
Lord Howe of Aberavon
My Lords, I rise to make perhaps a selfish contribution and not to invite the House one way or the other on the issue that has just been raised with some vigour. I speak because of an egocentric pleasure in the existence of the scheme and in the fact that it exists at all. It takes my mind back almost exactly half a century to the annual conference of the Conservative Party at Brighton in 1961. At that conference at that time, on behalf of the Aberavon Conservative Association, modest though that organisation was, I tabled an amendment for consideration challenging hanging and flogging and urging instead a liberal motion calling for a prison-building programme, strengthened probation services, longer sentences and, crucially, the establishment of a scheme to compensate the victims of violent crime.
To my surprise, some weeks later when we were on our Norman holiday near Coutances, a telegram came inviting me to ring up the then deputy chairman of the party, Sir Toby Low, or Lord Aldington, as he is better known to us. I wondered what on earth he wanted. He asked me whether I would be willing to move my motion as an amendment to the usual hanging and flogging motion. I was flattered to be involved with such a question. But he added, “The people here would be much happier if you dropped the last bit about compensation for violence”. The Treasury was worried about the cost, the Home Office about the principle and so forth.
It was a tough choice to throw at a thus far unsuccessful candidate, but I responded by saying, “Certainly not. If I am going to have to take this on, you must not take the sugar off my pill”. Sir Toby Low agreed to consider my point. A few days later came a reply that disappointed me. “Reluctantly”, he said, the authorities had nevertheless agreed to give me a chance. When the debate came it was one of the high points of the conference. Tempers ran high. Our reforming amendment was carried by a large majority and a few months later I was invited by Henry Brooke, the then Home Secretary, to join a committee that he set up to consider detailed proposals for compensation. Within two years, a suitable scheme was established without having any resort to legislation. It was one of the first in the world and has served us well, as the House recognises, for many years.
For me, it was an early lesson in the importance of sticking to one's guns and may be one reason why I have remained such a tiresome creature ever since then. But I commend the subject of the debate. I am tempted to say a little word of sympathy about some of the criticisms, but not so as to offend my noble friend Lord McNally. I am sure that he will deal with them in his reply in a suitably positive way.
Lord Davies of Stamford
My Lords, I am sure that the whole House will have listened with great respect and interest to the intervention of the noble and learned Lord, Lord Howe. The incident that he has retailed from 50 years ago shows what a very humanitarian politician he has been during 50 years of extremely distinguished public life.
My noble friend the Leader of the Opposition and my namesake, my noble friend Lord Davies of Coity, spoke powerfully on this subject and I agree with them. There would be no point in repeating what they just said. But I rise to ask the Minister a question. Can he tell the House what is the average time taken to process applications under the criminal injuries compensation scheme? My noble friend gave us some rather different figures, but if the noble Lord’s figures are correct and annual disbursements are of the order of roughly £200 million and the total liabilities of the scheme are about £500 million, it implies that rather a long time is taken to process each individual claim.
If my noble friend’s figures represent reality, the situation may be slightly better, but it is important for the House to know exactly the effectiveness of the bureaucracy handling this important scheme and therefore what sort of time is taken.
Will the noble Lord also tell us the cost at the present time of administering claims? Perhaps he could break down the average cost of the claim so that we can see how much of taxpayers’ money that goes into the scheme is used for the benefit of victims and how much goes to the administration of the bureaucracy involved.
Lord Stoddart of Swindon
My Lords, I, too, support the amendment moved by the noble Baroness, Lady Royall, and I support the remarks made by both noble Lords, Lord Davies. It will be interesting to see the answer to the question that the noble Lord, Lord Davies of Stamford, posed.
I support the amendment because I believe that the people who are being disadvantaged are the very people whom the Government say they want to look after. They are also the people who make this country work, such as postmen, people in shops and people on the shop floor. They are the people who are likely to be worst affected by these cuts.
It puzzles me why we make cuts of this sort for essential compensation while at the same time we spend huge sums on matters that appear not to matter. We also ladle money out to foreign countries, which perhaps should start looking after themselves.
I had a Question answered about the £10 billion that many countries have agreed to make available to Afghanistan. I asked how much that would cost Britain. The Answer came back that it would cost £170 million a year between 2013 and 2025, so it seems that we can find money to support people abroad. I have no objection to that, but I want decent treatment of the people of this country.
The amount of money that is involved is relatively small. If the Government really believe in this big society in which we will all be treated properly, perhaps they should reconsider what they are doing in the matter of this compensation order.
I do not believe everything that I read in the newspapers about the Government being completely out of touch. But, frankly, almost every day we have an indication that the Government are completely out of touch. For example, the Exchequer Secretary to the Treasury, Mr Gauke, suggested that people who pay cash to some of those who might be injured are immoral for doing so. The Government do not appear to realise that millions of people in this country do not have a bank account. There is only one way in which they can pay and that is in coin of the realm.
I put that forward as an illustration of how the Government appear to be completely out of touch with what is happening in the country and the needs of people, particularly those who are unfortunately victims of accidents or other incidents.
Baroness Donaghy
My Lords, I support the amendment moved by my noble friend Lady Royall. First, there is the issue of people being attacked by dangerous dogs. This particularly concerns the UCW, the trade union representing postmen and women, but has also been raised by a wide range of other organisations, including the Police Federation, the Royal College of Nursing and the Local Government Association. The MoJ consultative document proposed to tighten the current policy under which claims have, in some cases, been considered from applicants attacked by dangerous dogs not kept under proper control. The Government’s response to the consultation claims that:
“A small number of respondents expressed concern”.
That is a travesty, as widespread concern was expressed. We should not forget that not so long ago this was the subject of cross-party support and I regret that that is no longer the case.
The Government acknowledge the complexity of defining a crime of violence. They believe that these cases involve injuries sustained in incidents outside the core purpose of the scheme and that proper redress in these circumstances would be found elsewhere, through an insurance claim, a compensation order as a result of criminal proceedings or a civil claim. This is the height of cynicism. The Criminal Injuries Compensation Scheme is the very last resort when all else has failed. The options suggested by the Government would offer no recompense, as the Minister well knows. A further suggestion by the MoJ is that postmen and women injured in dog attacks could sue their employer, the Royal Mail. However, the Royal Mail has a good record in discharging its duty of care to reduce risks and it is virtually impossible to secure personal injury compensation from an employer in a civil court in respect of criminal injury, with employers liability insurers resisting such claims vigorously and the courts, when tested, holding that the employer is not liable, on the whole.
The determination of deliberate attack, as the Government themselves acknowledge, is extremely complex. I live in an area of London where dogs are often kept as aggression accessories. To close off the opportunity for compensation to people who have suffered mental and/or physical injury as a result of dog attacks is inhumane. These cuts will also affect thousands of people who work in shops and public offices. Compensation is very important to the innocent victims. At present, only injuries that disable the victim for at least six weeks are compensated. It gives public recognition for pain and suffering, helps to pay off debts and can help recovery from trauma. Those who work part-time, as my noble friend Lord Davies has already said, which is 35% of retail staff, earn too little to qualify for SSP. The Government’s own impact assessment admits that the scheme has very stable running costs—around £210 million per year—and,
“we assume that in the absence of reform this will continue”.
There has been too much emphasis on the CICS as a demand-led scheme when it is, in fact, reasonably stable. As the general secretary of USDAW, the shopworkers’ union, John Hannett, has said:
“We do not believe that the innocent victims of violent crime should bear the brunt of austerity, or that these cuts are justified by the £50 million projected savings”.
Victims are to be asked to pay up to £50 upfront to obtain their initial medical evidence. If they are off work or still shaken from their experience, this could prevent genuinely injured victims from bringing a claim. The proposals for future loss of earnings could be worse off by £139.15 per week, which could result in serious financial hardship. The changes, as my noble friend Lady Royall said, fail to take account of the current job market, by demanding that people be regularly paid for a period of at least three years when temporary periods of unemployment are reasonably common nowadays.
The Government’s stated intention was to cut the lower awards to provide better protection and support for the most seriously injured victims. There is no evidence that this has happened. Even those with the most serious injuries will suffer as a result of these changes. In conclusion—and we have already heard from the noble and learned Lord, Lord Howe, about what happened 50 years ago—it will be 50 years ago in December that the then Lord Chancellor, Lord Dilhorne, said in this House:
“For the innocent victims of such crimes we all feel sympathy, but we feel that sympathy alone is not enough”.—[Official Report, 5/12/62; col. 305.]
If the Government’s proposals go through, this will be a very sad anniversary indeed.
Lord Christopher
My Lords, I am anxious not to repeat what has been said, but there is little doubt that we have, day by day in recent months—indeed for a year or two—heard nothing but sad news for those who are represented by the people that this order will affect. There is a callousness about so much legislation at the moment that is very hard to believe. Perhaps there has been a little hope raised by the noble and learned Lord, Lord Howe, that the heart of the party is not wholly stone. Having heartily enjoyed a number of years negotiating with him across a table, usually, I think, to mutual benefit, my feelings are, come back, Geoffrey, all is forgiven.
What is the benefit that has been received by the country for all these cuts? The news at one o’clock was that we are now in the third quarter of recession. There is no sign at all that what is being done by the Chancellor is having any material helpful effect. It is extremely sad that we are now dealing with what, in money terms, is a minority issue to the Treasury, but is a very significant issue to those affected by these cuts. We have a useful audience in the Gallery, but I think it is important for the record that we have some indication of what we are talking about, because there is no precision, as things stand.
There have been two broad groups affected by attacks. I was surprised that the number is as high as it is in the USDAW field. We certainly had them in the days when I was responsible for the staff in the Revenue. They could be serious and every attempt was made by the department to ensure that these were kept to a minimum. What sort of injuries are we talking about for those who are receiving the higher award? We are talking about significant facial scarring; permanent brain injury resulting in impaired balance and headaches; penetrating injury to both eyes; fractured joints including elbows, both knees and vertebra, resulting in continual significant disability; and a punctured or collapsed lung. This is the nature of the injuries for which there is now to be significantly reduced compensation.
I conclude with one of three examples provided by USDAW of the kinds of practical changes which will take place. I shall read about Simon, aged 33, the manager of a convenience store in Stoke on Trent who risked his own safety when he disarmed an axe-wielding man during an attempted robbery. He says:
“I saw a man at the till waving an axe and shouting at the checkout assistant. As I went to grab the handle of the axe there was a bit of a tussle and it fell to the floor. I managed to kick it out of the way. Two customers came to my aid and we held him down until the police arrived. He became more aggressive and started lashing out, then he bit my leg”.
Simon received £1,250 compensation for his injuries and the mental trauma he suffered, which, I suspect, was considerable. He received a public bravery award from the local police. Under the new proposals, he would receive nothing. I regard this as utterly outrageous, as I am sure does the Gallery, and it is high time that there was a rethink and that these sorts of changes were removed from your Lordships’ agenda.
Lord McNally
My Lords, first, I say to the noble Lord, Lord Christopher, that the reality, which apparently still takes time to sink in across the House, is that we are all a lot poorer than we thought we were four years ago. Whichever Government had come in would have carried out drastic cuts in public expenditure. That has been acknowledged by the Opposition in their moments of candour. Therefore, every time that the Government come before the House with some saving in public expenditure, the Opposition say, “These are not the kind of cuts that we would have made”. The Liberal Democrats have neither the resources nor the inclination to do this, but I know of parties who keep a running total of cuts in expenditure which the Opposition would not have undertaken, and it adds up to something that questions their economic competence.
As for my noble and learned friend, Lord Howe, I hear his story. I have been in a few small parties myself, but the Aberavon Conservatives, which he led, must have been almost of Liberal Party size in its gatherings. The scheme that he pioneered in the 1960s cost £6 million. We are debating a scheme that costs more than £200 million. Also included in his long and distinguished career was a period as Chancellor when, like me, he must have stood at Dispatch Boxes listening to the impact of cuts that were necessary at the time. That is one of the responsibilities of government.
Lord Stoddart of Swindon
I have a simple question. What would £6 million be in today's money?
Lord McNally
That is in current prices. The actual scheme cost less than half a million pounds when first introduced, so I was not trying to belittle it. We have all known schemes which have been introduced with the best of intentions but have had long-term consequences. As the noble Baroness acknowledged, the previous Government took a hard look at this in 2005 and then backed off from making similar decisions.
Lord McNally
I suggest that some of the roots of the economic problems that we later faced was that they backed off too many difficult decisions—something that we are not doing.
The noble Baroness asked me how the ex gratia schemes compare. People who are victims of terrorist attacks which took place between 1 January 2002 and 16 October 2012 will, in general, have until 16 October 2012 to claim. The scheme is based on equivalence to those in tariffs under the existing domestic scheme. Eligibility is restricted to those with an ongoing disability as a direct result of an injury sustained in a designated act. Only injury payments are available, in accordance with the tariff of injuries; bereaved relatives are not eligible for an award. Tariff payments are in line with those in Criminal Injuries Compensation Scheme 2008. The maximum payment for a single injury on the tariff of injuries which forms part of the scheme is £250,000.
The noble Lord, Lord Davies, raised the issue of the impact on shop workers, as did other noble Lords. Shop workers, and all trade unionists who have been named, are still covered by the scheme, but not for small payments for minor injuries. I heard the example given by the noble Lord, Lord Christopher. Perhaps those in the Gallery also ask whether £1,250 for a very noble, brave act is not enough. Should we build into a scheme which is supposed to address real victims of crime pay-outs of significant sums—not life-changing but, for low-paid workers, significant sums—for injuries that also are not life-changing? We are removing the lower end.
Lord Christopher
The examples, which the noble Lord says that he has read, are life-changing.
Lord McNally
My Lords, those are examined by CICA under the scheme and some of them, frankly, I cannot believe would be outside the scheme, but that is something that the authorities take account of.
The reforms that we have discussed today not only put the criminal injuries compensation scheme on a more sustainable financial footing but will achieve our aim of focusing compensation on those most seriously injured as a direct result of deliberate violent crime.
I touch on a couple of other points made. The noble Baroness, Lady Royall, asked what happens with multiple injuries. The situation will remain as now: 100% for the most serious injury; 30% for a second-rated injury; 15% for the third most serious injury. The noble Lord, Lord Davies, and others mentioned shop workers. They are treated as other victims are, but where they suffer long-term mental injury lasting for more than six weeks, they will still be able to claim. The noble Lord, Lord Davies, heard the cost of running CICA. The time to process claims is seven to eight months for a first decision and about five months to review a decision.
I heard what the noble Baroness, Lady Royall, said: that somehow the backlog is not real. What is real is that we paid £480 million—the largest sum ever—in compensation this year in part to deal with claims that go back beyond 1996.
Lord Brookman
I say to the noble Lord, Lord McNally, that it is quite evident to me and, I am sure, to the whole Chamber and the Gallery, that you have not had one voice from the coalition government Benches in support of what you are saying. It is obvious that in this Chamber there is strong resentment about the changes proposed, even from your Benches.
Lord McNally
You may make that assumption. We will see what happens when we come to a vote. I am fully aware, as has been readily acknowledged, that the trade unions, which have been readily represented on the opposition Benches—and rightly so—today have argued against the changes. I understand that. I understand less the willingness of those on the government Benches—sorry, the opposition Front Bench—to leap on this passing bandwagon.
It is no use pretending. We are dealing with relatively small payments from the scheme for temporary injuries. In return for that change—I notice that the noble Baroness did not mention this—we are substantially reforming the amount of money that will go into victim support. I think that I will have support in this House for this concept that rather than paying small amounts here and there—small penny-packet amounts to various minor injury claims; some maybe justified, some very much less so—it is better to devote that money to real victim support and to dealing with the trauma of crime at the sharp end, when it happens, in a way that is effective. That is the basis of these reforms.
I understand where the trade union members are coming from, but I do not know where the noble Lord, Lord Stoddart, is coming from when he throws in overseas aid. One of the things I am very proud of is the way that this Government have sustained overseas aid.
Lord Stoddart of Swindon
I gave that example because I had just received an Answer that we are going to spend a further £178 million in Afghanistan—that is, after billions and billions of pounds for our military presence there. I raised this amount because we have people who need to be looked after in this country. We are talking about some of them now. If we can afford to spend £178 million to help people in Afghanistan, which is fine, surely we can find an extra few million to help unfortunate people in our own country.
Lord McNally
We are finding it for unfortunate people in our country, but Afghanistan remains one of the poorest countries in the world. I am proud of our aid programme there. If the noble Lord rereads what he said he will probably find echoes of that great conservative sentiment of “hang ’em and flog ’em” and “don’t give it to foreigners”.
Lord McNally
Noble Lords know exactly what I am talking about. In the past, in some of the battles over civil liberties, human rights and the way that we treat people in overseas aid I would have relied on the Labour Party. The Labour Party has gone a long way from the one that I remember in many of these areas.
Lord McNally
We have had the whole gamut today of the Labour Party never supporting a cut and never facing up to a responsibility. I listened to what the party opposite has said, and we have taken the tough decisions. Not only have we done that; in this case we have also made the sensible decision to move victim support to where it is needed, at the sharp end. We are finding the resources by these reforms and I commend them to the House.
Baroness Royall of Blaisdon
My Lords, I answer this debate as the Leader of Her Majesty’s Opposition, a very responsible Opposition. I am also a proud trade unionist. I am not leaping on a bandwagon that was put together with a bunch of trade unionists. I am doing what I believe to be right and I am proud that the trade unions have sought to support the workers whom they represent. However, I have to say that many of the representations that I received prior to today’s debate were from lawyers who are also concerned about victims.
Today we are talking about victims. Yes, we are living through a financial crisis; we are living through a double-dip recession which one might say was made in Downing Street. However, as noble Lords will know, my party is rightly being extremely careful in relation to financial commitments, precisely because we are entirely realistic about the financial situation that this country faces.
The Minister says that we are against all cuts. That is not true. We simply believe that some of them are too far and too fast. When making financial decisions one is also always faced by a choice. We believe that the choice that the Government have made in relation to victims is the wrong one. Victims do not choose to be victims. They have suffered through no fault of their own. In proposing the Draft Criminal Injuries Compensation Scheme 2012, the Government seem to be putting deficit reduction before victims. I wish to test the opinion of the House.
Victims of Overseas Terrorism Compensation Scheme 2012
(12 years, 4 months ago)
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Lord McNally
That the draft scheme laid before the House on 10 July be approved.
Relevant document: 6th Report from the Joint Committee on Statutory Instruments.
Financial Services Bill
(12 years, 4 months ago)
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Lord McFall of Alcluith
Lord McFall of Alcluith
My Lords, I can assure the Minister that this amendment will not increase his blood pressure. We have a common aim here. Quite simply, it is for the FCA to appoint individuals to the smaller business practitioner panel. Given that the membership of the FPC adequately reflects the four constituent parts of the United Kingdom, we wish this to mirror what happens with the FPC. Given that more people work in financial services outwith London than in London, it is important to reinforce that the financial services industry is not London-centric but is a UK financial services industry. It says that in the Bill on page 20 at new Section 1I:
“In this Act ‘the UK financial system’ means the financial system operating in the United Kingdom”.
I feel that it is important to reflect the four constituent parts of the United Kingdom. I beg to move.
Baroness Hayter of Kentish Town
My Lords, I support the amendment with, predictably, an interest in ensuring that Wales is well represented on panels. Too often these westerly people are forgotten, especially as they have rather less of a financial sector. The needs of Welsh citizens are perhaps greater, given how poorly served they are in rural areas. The financially excluded, many of whom are found in Wales, are also poorly served by financial services. I thank my Scottish friend, my noble friend Lord McFall, for his concern for my country and, I am sure, for Northern Ireland.
I turn to Amendment 128 in this group, which provides that the panel should represent households using products. That seems to be key, if only to emphasise the importance of the financial services sector to the whole community. In effect, it is a public utility with some of the same obligations on the industry to provide a universal service even in non-profitable areas. It is equally important to ensure that users of the less profitable services are part of the system of regulation or its scrutiny. It is individuals and families who often rely most heavily on the financial services, even if they do not feature on a CEO’s radar.
Perhaps I should fess up at this point that I was vice-chair of the Financial Services Consumer Panel, so I am acutely aware of the absolute necessity of a broad range of experienced views and backgrounds on the panel. The new panel would deal with a range of issues that impact on a wide variety of consumers. That is part of the reason we so need a panel, because consumers are not a homogeneous group. Their needs, capabilities, life experience and expectation, as well as their interaction with the sector, cannot easily be slotted into a “consumers” box and ticked off by the regulator. The panel would need to draw on the policy, research, intelligence and expertise of those people long embedded in the consumer world, who bring with them in-depth knowledge and understanding of consumer behaviour, consumer detriment and—equally important—consumer law, debt management, credit, insolvency, complaint handling, redress, retail sales, the financial world and possibly even Europe. I am particularly pleased that the noble Baroness, Lady Wilcox, who is very experienced in consumer matters, particularly when speaking on redress, is in the Chamber at the moment. However, aside from that expertise, the panel will also need some streetwise input, perhaps from people less exposed to the intricacies of regulatory regimes, Europe, consumer law and research, but who know what the world feels like from less exalted heights than the portals of Canary Wharf.
I now turn to the major issue, which is Amendment 136ZA standing in the names of my noble friend Lord Eatwell and myself. It is about the need to balance the caveat emptor principle—buyer beware—with an equal responsibility on those advising or providing services to consumers to act in the “best interests of clients”. We have heard of the challenge facing consumers in judging whether a company is prudentially secure, or whether the product they are buying is fit for purpose, presents value for money or even covers the risk they assume it will. Added to that, as mentioned earlier today, the very pricing of products, their complexity and people’s lack of understanding of their own risks, let alone the risks inherent in products, makes it very hard for consumers to have the knowledge to take responsibility for the choices they make. The level of risk left with consumers is often unclear. The meaning of “guaranteed” or “tracker” may differ quite substantially from their common-use meaning. Consumers often bear a level of risk unknown to them and seldom explained; they are effectively making choices blindfold.
In an ideal world, of course, we support the responsibility principle. Markets are made to work by consumers shopping around and driving up standards. However, in this market, with those long-term “credence” goods, opaque structures and the asymmetry of information, we need to reintroduce some trust and transparency by balancing consumer duties with provider duties. It is an industry beset with low levels of compliance and high levels of complaints; there are no agreed standards for complex long-term products, so it is hard to expect consumers to adopt a higher degree of responsibility than is already legally acknowledged.
I have concerns, therefore, that by writing consumer responsibility into the Bill, new section 3B(1)(c) appears to “up” the existing situation. In law there are no obligations placed on consumers other than to act honestly. It is not clear what a greater emphasis on consumer responsibility might achieve. Why impose this possibly new principle of consumer responsibility without any countervailing responsibility on the service provider? Amendment 136ZA expresses the need for that balance, at the point where the industry might otherwise grab hold of this wording and say, “See—it was their responsibility and their choice”. The noble Lord, Lord Turner, whose chances of becoming Governor of the Bank of England I might now damage by quoting him approvingly, said yesterday that people,
“doubt banks’ values; and they doubt whether banks have their interests at heart”.
He went on to say that the boards of directors and managers must introduce,
“effective controls against dishonest behaviour”,
in order to change the perception of bankers. This amendment seeks to ensure that providers act in the best interests of clients, which would be just one way of guaranteeing the good behaviour for which the FSA chair awaits. Why should only consumers accept responsibility for their own decisions? Why not regulated firms, and authorised firms? It is as if the Bill’s draftsmen are at pains to ensure that consumers should have only themselves to blame. If this phrase “consumer responsibility” is to mean more than the current legal position, then the Minister needs to explain that to us. If it is only common law, then why include it?
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, I will take Amendments 122 to 127 and 128 first of all. As the noble Lord, Lord McFall of Alcluith, has explained, these would require the FCA to appoint persons representing the constituent parts of the United Kingdom to each of its consultative panels. The role of the panels is to provide a forum for focused consultation. I believe that the current provisions, which require the persons appointed to be representative of consumers and practitioners in particular sectors, provide the right focus here. To do this requires the FSA now, and the FCA in the future, to seek a diverse range of panel members. I am satisfied that the FSA already takes account of these matters in making appointments. For example, as a matter of practice in making appointments to the consumer panel, which is done through a fair and open process, the FSA aims to make sure that the panel as a whole not only encompasses a broad range of relevant expertise and experience but also represents the constituent parts of the UK. That is as it already is.
The FSA also looks for some geographical spread in the smaller business practitioner panel membership, where that is possible. The large retail firms that sit on the other practitioner panel, by definition, tend to have a large geographical spread that they bring to the table as national firms. Diversity in terms of geographical spread of representation can, therefore, be achieved in the existing model where members are appointed to represent the interests of consumers and practitioners rather than to represent parts of the UK.
For these reasons, although it is important to have on the record how this operates now and how I would expect the FCA to operate in the future, I would be concerned that these amendments could reduce the effectiveness of the panels as forums for focused consultation on the issues which matter most to those most affected by the FCA regulations. I would not want in any way to either dilute or change the focus of the panels on what they are ultimately there to represent.
Baroness Noakes
“(7) The Bank must consult with the Markets Practitioner Panel on the regulation of clearing and settlement infrastructure when the FCA agrees that proposed changes will have an impact on the regulation of trading infrastructure.
(8) The Markets Practitioner Panel will be able to request information from the Bank via the FCA to enable them to provide appropriate advice to the FCA.”
Baroness Noakes
My Lords, with the leave of the Committee and at the request of my noble friend Lord Northbrook, I rise to move Amendment 127ZA and also speak to Amendment 128AAA in his name. My noble friend is unable to be with us to speak to these amendments due to other commitments.
The new regulators will have many new powers to add to the formidable armoury of powers already held by the FSA. Consultation with practitioners in the industry about the practical aspects of policy, rules and practice is crucial. Amendment 127ZA concerns consultations carried out by the Bank of England in relation to the clearing and settlement systems that it will regulate in future, together with the role of the FCA in that. In general, the consultation arrangements in the Bill for the market areas covered by the FCA are welcomed by practitioners. In particular, the Bill, which mandates several panels to be used for consultation, includes a specific markets panel. However, there is concern in relation to the clearing and settlements systems, which are to be regulated by the Bank of England rather than the FCA. I understand the reasons that led to that decision, but it results in some fragmentation of regulation. Clearing and settlements systems will now be separate from the rest of markets regulation and practitioners are concerned that, in the absence of provisions in this Bill for consulting practitioners about clearing and settlement aspects, there could be problems.
Amendment 127ZA sets up a consultation requirement in this respect by requiring the Bank of England to consult the markets practitioner panel, which is set up under new Section 1P as part of the FCA’s consultation mechanisms. This amendment also allows the panel to request information from the Bank via the FCA in order that the panel can then advise the FCA on any related issues—for example, regulatory changes made by the Bank in relation to clearing and settlement systems, which may well have an impact on trading infrastructure, which the FCA itself will be regulating.
I thank the Minister’s officials for explaining to me how the Bank’s new powers will work legislatively and how the consultation provisions fit in. As I understand it, there will be a statutory requirement for the Bank to consult generally on the exercise of its new regulatory powers in relation to recognised clearing houses, but the consultation with practitioner panels or the FCA is not mandated. The Bill is silent in relation to settlement systems, and we have to wait to see what the eventual regulations will say.
Will the Minister explain how the Government intend consultation to work for settlement systems? Can he also say how the Government see proper co-ordination between the FCA and the Bank of England in this area? Is there, for example, any intention to involve the markets panel—and if not, why not? In respect of clearing houses, can the Minister explain why the requirements in respect of consultation by the Bank for clearing houses in Schedule 7, which applies the general PRA requirements for consultation on rules, specifically remove the requirement for the PRA to consult the FCA and has no requirement to consult panels?
Amendment 128AAA in this group tackles a rather broader issue. Under new Section 1R, the FCA must consider representations made to it by the panels and must publish responses to representations. The corresponding FiSMA requirements were for the FSA to respond in writing with reasons for disagreeing with a panel’s recommendations but this has been omitted from the Bill. The amendment of my noble friend Lord Northbrook reinstates that requirement.
Everybody understands that the FCA will not accept every single recommendation or view put to it, but it is not acceptable that the FCA can merely ignore any recommendations put to it by the panels and merely publish a response “from time to time”, which is all that new Section 1R requires. The FCA ought to be open to the possibility of dialogue with the panels. It is entirely possible, for example, that the FCA could misinterpret a comment or recommendation made to it. The Bill might make the FCA near-omnipotent, but it should not be predicated on the FCA being near-omniscient.
Both these amendments have been suggested by the existing financial services practitioner panel, which has done good work since the FSA was set up. It knows what it is talking about and if it is concerned, I believe that the Committee should be too. I do not claim that the drafting of my noble friend’s amendments is perfect but they are probing amendments. I beg to move.
Viscount Trenchard
My Lords, I support the amendment in the name of my noble friend Lord Northbrook and moved by my noble friend Lady Noakes. While I understand very well the reasoning behind splitting regulators into a multitude of new regulators, it nevertheless remains very necessary to make sure that regulation is well co-ordinated, not duplicated, and made as understandable as possible to practitioners and consumers alike. It is very sensible indeed that the regulation of trading infrastructure also be brought within the sphere of influence of the FCA. The requirement that,
“The bank must consult with the Markets Practitioner Panel on the regulation of clearing and settlement infrastructure”—
deals with that. I agree with my noble friend that the drafting is not yet perfect. In particular, I find somewhat confusing the second paragraph, which states:
“The Markets Practitioner Panel will be able to request information from the Bank via the FCA to enable them to provide appropriate advice to the FCA”.
However, in principle, this is a move in the right direction and I strongly support it.
One of the problems with regulation is that regulators, even if they have practical experience of banking, insurance or other financial services, very rapidly become out of date because markets change so rapidly. There are many very competent former bankers working for the FSA who are out of date with the way markets actually operate today. Therefore, I think it very necessary to have a practitioner panel for the PRA as well as for the FCA. However, that is the subject of a subsequent amendment.
Amendment 128AAA also deserves support for putting the requirement back on the FCA to give a statement in writing of its reasons if it disagrees with a view expressed by the practitioner panel. That is very sensible.
Baroness Hayter of Kentish Town
My Lords, I shall speak in support of Amendment 128AB in the name of myself and my noble friend Lord Eatwell. I shall also speak to Amendments 128AAA and 130ZB. Accountability means not just listening, but a dialogue: a conversation which hears and responds, and gives written reasons for disagreements. As the noble Baroness, Lady Noakes, said, they will not always agree, but that is quite healthy: we just want to know why. It has really worked very well with the FSA panels under the old Section 11. The proposal would just take that forward and continue it in the new Bill. This encourages transparency and forces the panels to think very hard about what they say and to do their homework well. It also makes the regulator consider submissions carefully and set out where and why they have problems, either with the analysis or with the conclusions. This adds to the openness of the regulator’s thinking, but also to that of the panels, so that consumers and practitioners can also track the record and impact of those who purport to represent their interests, and know how well they are impacting on the regulator’s work. I hope this is one of the areas where the Minister is able to “say yes”.
Lord Sassoon
My Lords, to manage expectations before the break I attempted to say that I was not going to be as accommodating all through the day. In qualitative terms I will be as accommodating, but I can only work with the material that is in front of us. In this case, it is possibly a matter of explanation and reassurance. I hope that some, if not all, of the matters here are going to be covered satisfactorily.
Amendment 127ZA to which my noble friend Lady Noakes spoke would mandate some quite complicated arrangements for the Bank of England to consult the markets practitioner panel of the FCA, in certain cases. I do not make a comment about the drafting, but the general arrangements here would be quite complicated. In addition, the markets practitioner panel would also have the ability to request information from the Bank, but only via the FCA and only for the purpose of assisting the FCA. I had not been quite sure what the amendment was trying to achieve, but I now understand from my noble friend that it is a matter of strengthening the co-ordination between the Bank and the FCA in relation to market infrastructure, as well as strengthening the consultation arrangements in relation to infrastructure matters. I understand why this is important, but will attempt to explain why I believe it to be unnecessary.
There is of course nothing to stop the Bank of England consulting the markets practitioner panel or any other panel, or their members or anyone else. It is worth remembering that. It is also important to bear in mind—it may be more important in this case—that the Bank of England will be regulating only a very small number of institutions in this highly specialist area. That really is the key point. I suggest that there is not a lot to be gained by trying to institutionalise consultation arrangements in this way because of the small number of specialist players.
The Bank will indeed be able to consult each of the entities that it regulates individually, should it wish to do so. That is of course an inconceivable position for most of the other subsectors of financial services, where a panel arrangement is therefore necessary to corral views efficiently. I am not sure what a requirement to consult the markets practitioner panel would necessarily add here. More generally, the Bill already introduces a requirement for the Bank and the FCA to have a memorandum of understanding relating to infrastructure regulation, while there is of course nothing to stop the Bank and the FCA working together in any way that they want, subject to the framework of the Bill.
I think that panels are not required in this area. I hesitate a bit because my noble friend Lady Noakes may come back at me on the settlement question. I accept that on that aspect I should possibly take a bit more time to reflect on my noble friend’s views, just to make sure that all angles have been covered in what I have said and in what has been indicated by the Bank and the FCA, so far as it is relevant to them. However, specifically on settlements, I appreciate that I might reflect a little further.
I turn to Amendments 128AAA, 128AB and 130ZB, the first two of which require the FCA to provide a statement in writing to any panels it establishes where it disagrees with any of the representations. Amendment 130ZB would make a similar provision for the PRA. I note that these amendments replicate the existing provisions in FiSMA. It may help if I explain the thinking behind why the Government consider it right to depart from the existing approach in FiSMA. It is because the Bill imposes a general duty on the regulators to publish responses to the representations they have received, which is wider than the current requirement in FiSMA. The regulators must respond to all representations, rather than simply those with which they may disagree. That was a conscious change because it did not seem right that the only responses the regulators should have to give to the panels are where they disagree with them.
We do not want to promote an antagonistic relationship between the regulators and any of the panels that they may establish. We have also required the regulators to publish their responses to help inform public understanding and enhance accountability. I reassure the Committee that this duty will, in practice, require the regulators to give their reasons for rejecting or departing in any significant way from a recommendation of one of their panels. With those explanations, I hope that my noble friend will feel able to withdraw her amendment.
Baroness Noakes
My Lords, I thank my noble friend Lord Trenchard and the noble Baroness, Lady Hayter, for their contributions to the short debate and I thank my noble friend the Minister for his response. I note that he will look again at the settlement system, which raises slightly different issues because of the different way that it is dealt with legislatively. I doubtless await a letter from him during the summer, which I shall look forward to.
The Minister said that there was nothing to stop the Bank of England from consulting anybody—it may be that he was playing that for laughs. The real purpose of tabling this amendment was because there is no specific mention of panels, and there is a concern that the Bank of England will not use its general obligation to consult the right people. The right people are not necessarily just the people they are regulating but also those who are impacted by regulation, such as the people you would find on something like the markets panel. That is also why I tried to press my noble friend the Minister on why the Bank did not have to consult the FCA when dealing with regulatory matters in this area. I put it to my noble friend that he has not quite addressed those issues. I hope that he will think further on this before we get to Report, and I will certainly reflect on what he has said.
In respect of the second amendment in this group relating to explanations in writing, the Bill states:
“The FCA must from time to time publish in such manner as it thinks fit responses to the representations”.
This does not convey the sense of what the noble Baroness, Lady Hayter, referred to, which is dialogue. At the moment the panels operate in a much more collaborative mode, feeding through ideas as well as making formal representations, and they are being seen here, I think, as just another consultee to be dealt with along with responses from any other consultee. The sense that the practitioners have is that the quality of relationships will deteriorate going forward, and that is a matter of concern.
These amendments were tabled by my noble friend, as I said, following the comments made by the financial services. I know that my noble friend will want to talk to them before we return to this Bill at Report. I thank my noble friend the Minister for his reply today but I do not think that I can regard the issues as settled. However, I am prepared to withdraw the amendment today.
Baroness Noakes
Baroness Noakes
My Lords, I shall speak also to Amendment 130A in this group. These amendments deal with value-for-money studies for the FCA and the PRA respectively. I am delighted to see that the noble Lord, Lord Eatwell, and the noble Baroness, Lady Hayter, share my enthusiasm for value-for-money studies for the FCA and I hope to persuade them that they should be enthusiastic about value-for-money studies for the PRA as well.
Amendment 128B amends new Section 1S of FiSMA, inserted by Clause 5 of the Bill. The new section states:
“The Treasury may appoint an independent person to conduct a review of the economy, efficiency and effectiveness with which the FCA has used its resources in discharging its functions”.
My amendment would change that “may” to “must”. Amendment 130A does exactly the same thing to the equivalent new Section 2M for the PRA. These are probing amendments. As a veteran of may/must debates, I am well aware that the Government will argue for flexibility to respond to circumstances and not be tied to any particular course of action, so my noble friend need not spend a long time reading out all of those comments from his notes.
My purpose in tabling these amendments is to ask the Government to state how they intend to use the powers. There is a similar power in FiSMA in respect of value-for-money reviews of the FSA, but the only time that I can recall it being used was when the C and AG was asked to carry out a review around 2007. I believe that my honourable friend Mr Mark Hoban last year described Section 12 of FiSMA as being “underused”. Because the existing power was used so sparingly, the simply rollover of the FiSMA formulation into this Bill is surprising.
My amendments say that the Government “must” set up independent reviews, but I accept the criticism of the Minister’s officials that I have not rounded that off by saying how often such reviews should be conducted. My own view is that they do not need to be conducted absolutely every year but they do need to happen reasonably often—for example, every three years. I hope that the Minister will set out how the Government intend to use the powers to subject the FSA and the PRA to VFM reviews.
My noble friend will be aware that the FSA was much criticised by large swathes of the regulated community for lack of economy, efficiency and effectiveness. The FSA raises its moneys through fees, and the only thing that appeared certain was that fees would go up, often by significant amounts. Consultation on its key proposals did little to silence its critics. Subjecting the FSA to an independent VFM review was seen as important as there are no natural downward pressures on the FSA’s costs. It obviously has no marketing wish to compete and it is not accountable to the Treasury for its use of resources. This is a recipe for inefficiency, and it is important that the successor bodies to the FSA are genuinely put under pressures to deliver regulation at a cost that is proportionate to the benefits.
The FSA’s current budget is going up very considerably and people understand in part why that is, although not all sections of the regulated community understand why their particular share of the costs is going up. Generally people accept that the costs of regulation will rise, but I hope that the Government will agree that lack of efficiency or effectiveness must not be allowed to shelter behind the banner of tougher regulation and that the successor bodies to the FSA must routinely be exposed to an examination of how well they spend their money.
I would also like to use this amendment to ask how the Minister explains the relationship between the reviews that can be set up under the new Sections 1S and 2M and the annual audits of the new bodies. Under Schedule 3, the Comptroller and Auditor-General will carry out the annual audits of the bodies, which is fine, but will the C and AG be entitled and expected to carry out regular value for money reviews of the FCA and the PRA? Will value for money reviews therefore happen when the C and AG wants it to happen or only if the Treasury uses its powers under this Bill? I hope that my noble friend will be able to respond positively to the thrust behind these amendments.
Lord Eatwell
My Lords, I support the noble Baroness, Lady Noakes, in the amendment that she proposes. I have added my name, as has my noble friend Lady Hayter. It is clear that there must be a satisfactory set of amendments for reviewing the effectiveness of this new regulatory structure and whether it provides value for money as conceived, particularly given the added complexity of what the noble Viscount, Lord Trenchard, referred to as the multiplicity of regulators now created out of this single structure.
I speak, too, to Amendments 128BB and 130AA in the name of myself and my noble friend Lady Hayter. Amendment 128BB adds to a definition of an independent person that a person appointed to review the FCA must be independent of the FCA but also of the Bank of England. We should have somebody standing outside this regulatory complexity who should be deemed to be independent. I suggest that if the person appointed is a staff member of the Bank of England, the notion of independence will be compromised, even though the FCA stands outwith the Bank of England. I hope that none the less there will be continuous regulatory dialogue between all the elements in the regulatory apparatus that we are designing here and that it will therefore be necessary, if somebody is independent, that they should stand outside that regulatory community, of which the Bank of England will be a leading part.
The point with Amendment 130AA is that the Treasury in appointing an independent person to conduct a review should inform the Treasury Select Committee of the nature and arrangements of the review, the idea being that that committee itself conducts reviews of the operations of regulatory institutions and will greatly economise on and facilitate the overall operation of a review procedure if there is no duplication and if there is clear communication and understanding between what the Treasury Select Committee and the independent person are doing. These two scrutiny agents should be co-ordinated and we should not have further segmentation; we have too much in this Bill already, and we should not have further segmentation in the procedures that we are designing.
Lord Sassoon
My Lords, first, I will make some comments on Amendments 128B and 130A, and explain who can initiate reviews. One of the main points made by my noble friend was essentially about how things are different from the way they have been up until now, and who can initiate reviews. I am sure we all agree that the Treasury’s power to appoint a person to carry out a value-for-money review is important to support accountability to the Government, to Parliament and to the public, not least because those reports of reviews must be published and laid before Parliament.
However, regarding my noble friend’s particular point, in future the NAO will also be able to initiate its own VFM reviews. As she identifies, that flows as a result of the Bill making the regulators subject to the NAO audit. I hope that provides reassurance to her on that important point. Clearly our expectations should be in the right place. The NAO can only conduct a certain number of VFM reviews each year across the whole of the public accounts which they audit, but I think my noble friend explicitly said—and I agree with her—that it would not be a question of an annual review. At the same time, the Government need to be able to order a review of the FCA at any time, with the option to focus on areas of the FCA’s activities they see as a priority, and be accountable for the way they exercise this power. In practice, the Treasury is likely to choose to appoint the NAO to carry out such a review. As such I do not see what would be added by placing an obligation on the Treasury to order reviews under new Section 1S, particularly as the amendment does not specify the time period or any of the other circumstances in which a review should be held; I think my noble friend recognises that. Particularly in the light of the fact that the NAO itself will be able to initiate VFM reviews, it would be too early to say how frequently the Treasury will use its power, because it will clearly dovetail to some extent with what flows from the audit. However, in response to my noble friend’s key point—she quoted my honourable friend the Financial Secretary—I am confident that the arrangements we have proposed will deliver a step change in the FCA’s accountability to Parliament, as compared to the way it has been with the FSA, for the way in which the FCA uses its resources to achieve value for money.
Amendment 128BB seeks to amend the requirement that a person appointed by the Treasury to conduct a review must be “independent of the FCA”, by adding the requirement that they must also be independent of the Bank of England. I absolutely agree that it is important that VFM studies of the FCA are carried out by someone independent of the FCA itself. That is what is proposed in the draft of the Bill itself, not least to provide assurance that they are objective and impartial. As I have said, in practice the Treasury is likely to choose the National Audit Office to carry out such a review. However, the Treasury will have the discretion to appoint an independent expert or a commercial firm with relevant specialist expertise to conduct a review. In that context the amendment is too wide, in that it could prevent any firm or expert which had done any significant amount of work for the Bank of England from carrying out such a role. From what the noble Lord said I appreciate that that was not the intention, but ruling out that population of firms or experts would be the effect of requiring the FCA reviewer to be independent of the Bank.
Lord Eatwell
If I may say so, that is absolute nonsense. Are we actually suggesting that any independent firm or individual who has done work for a government department is thereby compromised and no longer an independent person? Are we saying that an independent person who has happened to write a few papers for the research department of the Bank of England is now no longer an independent person and is thereby compromised because he is not independent of the Bank of England? That is a misuse of language.
Lord Sassoon
First, I am not sure why the noble Lord, Lord Eatwell, talks about advisers to government departments. Here, we are talking about finding firms to carry out value-for-money reviews of the FCA, and independence from the FCA would seem to be the overriding concern. We are not talking about the Bank of England itself or some part of the Bank of England’s wider group doing the review. As I am sure the noble Lord knows, with all the increasingly tough professional codes that exist, the definition of independence is becoming ever tougher. Therefore, although the noble Lord and all of us might like to go back to a sort of common-sense, gentlemanly world that once existed, I absolutely stand by what I said. The amendment—whose effect incidentally goes wider than the noble Lord indicated in speaking to it—would capture a range of firms just because of the way that professional independence has come to be defined these days. Therefore, I stand by my analysis of the amendment.
Amendment 130AA would require that when the Treasury orders a review of the economy and efficiency of the PRA, it informs the Treasury Select Committee of the nature of, and arrangements for, the review. I understand that the amendment is driving at the importance of accountability to Parliament. The Government agree that that is important, which is why there is already a large amount on this subject in the Bill, including the provision for NAO audit, which we have discussed.
Requiring the Treasury to inform the Treasury Select Committee of the nature of, and arrangements for, the review at such an early stage might have some benefits of the sort that the noble Lord identified but I fear that it is more likely to be seen as an invitation for the Treasury Select Committee to comment on or even attempt to change the remit of these important reviews. I suggest to this Committee—I would not suggest anything to the Treasury Select Committee—that adding another political hurdle could slow up the process of producing these reviews. It may even make it less likely that they will be commissioned in the first place if there has to be a negotiation of the sort that I fear.
I hope that those explanations are sufficient for my noble friend to be able to withdraw her amendment.
Baroness Noakes
My Lords, I am grateful for the contribution of the noble Lord, Lord Eatwell, to this debate and for my noble friend’s reply. Perhaps I may comment on Amendment 128BB in the name of the noble Lord, Lord Eatwell, concerning independence. I think that my noble friend has stretched even the most stringent modern interpretation of independence way too far. On his interpretation, the NAO might not be independent of the FCA and therefore might not be able to carry out any further reviews of the FCA. I hope that my noble friend will reflect on the need for independence. We have to remember that when the Bank of England, rather belatedly, appointed people to carry out reviews of itself recently, independence was not exactly plain in the appointments that were made.
I thank my noble friend for his responses on value for money. It is slightly odd that the Government intend to use the NAO to carry out value-for-money studies, but they have set up the NAO to be appointed the auditors, so it might carry out value-for-money studies. I am still left with the feeling that the carryover of the ability to appoint somebody to do a review is just repeated legislation which might lay fallow, as the FiSMA legislation largely lay fallow. However, I thank my noble friend for his response and beg leave to withdraw the amendment.
Baroness Noakes
“1SA Report to Treasury Select Committee
(1) The FCA must conduct reviews of its own policy and performance if requested by the Treasury Committee of the House of Commons.
(2) On completion of a review, the FCA must make a written report to the Treasury Select Committee setting out the result of the review.”
Baroness Noakes
My Lords, in moving Amendment 128BC I shall speak also to Amendment 143B in this group. These amendments are in the name of the noble Lord, Lord McFall, and myself and are part of the suite of amendments we have tabled to ensure that the views of the Treasury Select Committee in another place are given a proper hearing and receive a proper government response.
Amendment 128BC introduces a new Section 1SA which requires the FCA to review its own policy and performance, if requested by the Treasury Select Committee, and to send a written report of the review to the TSC. We have just debated the Government’s powers to initiate value-for-money reviews of the FCA. This amendment goes further and allows Parliament, through the TSC, to require reviews.
The cause célèbre which underpins this amendment is the FCA’s review of the failure at RBS and its own role in that. I should remind the Committee that I am a director of RBS, but, thankfully, I was not involved at all during the period covered by the report. It took huge pressure from the Treasury Select Committee to get that report into the public domain.
The Government’s response has been that such reviews and their publication are a matter for the Executive, rather than Parliament. However, the problem that the Government have is that it did not work in the case of the RBS report, which leaves Parliament without any direct means of dealing with any similar cases in future. It is not always self-evident that the Government of the day have the same interest in transparency and accountability as Parliament, especially when the Government have themselves been so closely involved in a particular event or series of events.
Amendment 143B features another aspect of the role of the Treasury Select Committee—this time in relation to the appointment of the chief executive of the FCA. Under the new Schedule 1ZA of FiSMA the chief executive is to be appointed by the Treasury and the amendment would add the words,
“following consideration by the Treasury Select Committee of the House of Commons”.
On our first Committee day, which I was unable to attend, there was much discussion of the role of the Treasury Select Committee in relation to the appointment of the Governor of the Bank of England. The Government’s position appears to be that the Treasury Select Committee is to have no role whatever in the appointment but that it may hold pre-commencement hearings. My noble friend Lord McFall—sorry, he is not my noble friend; it feels like he is my noble friend but he is actually the noble Lord, Lord McFall—asked the Government to think again about that.
The reasons usually trotted out by the Government are unproven assertions. In particular, the role of the governor is said to be so market sensitive that it has to take place without any parliamentary involvement. I am not sure that there has been any empirical evidence to back that up, but it is much more extraordinary that the Government are citing market sensitivity for the appointment of the chief executive of the FCA. The Treasury Select Committee does not accept this assertion, and it calls into question exactly how the Government think that markets work in practice.
The age of parliamentary examination of candidates for major public offices is already upon us. In general, they go well; but there have already been reports of cases from committees in another place which have not gone well. In at least one pre-appointment hearing the candidate withdrew because the hearing did not go well. Provided that this can be handled with dignity, it seems to me that this is a sensible part of a parliamentary democracy. However, post-appointment and pre-commencement hearings raise quite different issues. I recall a distinctly lukewarm if not completely damning report by the Treasury Select Committee in respect of one of the MPC appointees. It did not invalidate the appointment but it got off to a difficult start and certainly undermined the credibility of the individual involved.
If the Government stick with post-appointment hearings only for posts such as chief executive of the FSA, it is only a matter of time before the Treasury Select Committee, or a similar committee, reaches a different conclusion from the Government and makes its views plain, as indeed it should do. Where does that leave the position of an appointed but disapproved of chief executive of the FCA?
The Government need to think this through again. If, as I suspect, the evidence which stacks up shows that the case for market sensitivity is not convincing, it would be wise to ensure that Parliament’s view is taken fully into account before executive decision-making. I beg to move.
Baroness Hayter of Kentish Town
My Lords, I rise to give particular support to the second amendment to which the noble Baroness has spoken. I shall not repeat the very strong arguments that she made about the need for this to be pre rather than post-appointment. I would just add a few comments about the importance of the role of the chief executive of the FCA to consumers—as may be a bit expected of me now. After all, consumers are the people on whose savings, or need to borrow, this industry depends.
The Financial Conduct Authority has been called the consumer champion, albeit the word “consumer” no longer appears in the title. That is how, I am delighted to say, the newly appointed chair described it to me. I know that that is what consumers will want it to be. We need this new architecture to have the confidence of the public—some of whom undoubtedly hold financial products at the moment, while some may have done so in the past, and some might do so in the future. Without the confidence that this sector will behave and conduct itself in their interests—with integrity, professionalism and high standards of behaviour—what chance is there that those individuals will save for their homes or pensions, or that small businesses will borrow to produce growth and jobs?
The people who can hold the FCA to account and to scrutiny on behalf of all those millions of small savers, borrowers and those with simply a bank account are, of course, our Members of Parliament. They should, therefore, through their Treasury Select Committee, hold a pre-appointment hearing of the chief executive. This will establish in successful candidates’ minds that they are responsible to the people for the performance of their organisations. Chief executives will know that they will return to the Treasury Select Committee from time to time to account for their record and explain their decisions. That will be a healthy relationship. It does not give the Treasury Select Committee a veto, but it makes clear that the candidate needs to establish the confidence of that committee before taking up the post, and that before appointment she or he has the capability and the vision to stand in the shoes of clients and safeguard their interests. That is not too much to ask.
Lord De Mauley
My Lords, my noble friend’s Amendment 128BC would require the FCA to conduct reviews of its policy and performance if requested to do so by the Treasury Select Committee, and to report to it on that review. It is clear that, under the current system, the regulator is not sufficiently accountable when things have gone wrong, so the regulator itself needs to take primary responsibility for initiating reviews. The Bill provides a much clearer framework for when the FCA should initiate a review into regulatory failure. It includes a number of measures intended to rectify this.
In future the FCA will be required to conduct an investigation and report on possible regulatory failure with the triggers set out in statute. This is supplemented by the power of the Treasury to order an investigation when it considers that an investigation would be in the public interest. The Treasury must, subject to limited exceptions, then lay such a report before Parliament. There are also the value-for-money and NAO audit powers to which my noble friend referred in the previous group. This is an extensive framework that should significantly enhance the ability of Parliament to hold the regulators to account in future.
I understand that the Treasury Select Committee has recommended that the Bill should go further, and clearly Parliament has an important role in calling for reviews. However, it does not need additional powers to do so. If the Treasury Select Committee believed that a review under Clauses 69 to 76 was required but was not being conducted, it could request such a review. The FCA will in any but the most unusual circumstances comply, as is the convention. Of course, the FCA would be available to report back to the Treasury Select Committee. This is, in fact, what happened in the case of the FCA’s report on the failure of RBS. Additional wording in the Bill is not necessary.
Amendment 143B seeks to create a statutory requirement for pre-appointment scrutiny of the FCA chief executive. This is something that the TSC recommended in its report on the FCA. The Government believe that it is more appropriate that the appointment should be subject to a pre-commencement hearing. Let me explain why. This is the same approach that has been taken for the appointment of the chair of the FSA, and appointments to the MPC. Pre-appointment Select Committee hearings are not convened for all public appointments and, indeed, have seldom been held for chief executive posts. They are not held for the appointment of chief executives at other sectoral regulators such as Ofcom and the Office of Rail Regulation. They are generally used for appointments where the post plays a key role in regulating government itself, or in protecting public rights, or where independence from Ministers is particularly vital to the credibility of the post.
Although this process is appropriate for some offices and non-executive appointments, it introduces scope for delay and public disagreement over whether a candidate is fit for an appointment, which risks damaging confidence and undermining the effective operation of the ultimate appointee. It would not be appropriate for appointments to a regulator of financial markets and services, which is, additionally, a market-sensitive appointment. Pre-commencement hearings will provide the right balance between allowing for TSC scrutiny and protecting markets from undue uncertainty.
I therefore hope that noble Lords can accept that the Government’s proposal will significantly enhance the Parliament’s ability to hold the regulators to account, and that I have explained why I do not believe that it is necessary or appropriate to go further in the way that the amendments suggest. I therefore hope that my noble friend will feel able to withdraw her amendment.
Baroness Noakes
My Lords, I thank the noble Baroness, Lady Hayter, for her response to Amendment 143B, and I thank the Minister for his reply.
In connection with the reviews, my noble friend relied heavily on the provisions which are in the Bill—which we will come to later—in respect of regulatory failure leading to reviews, as if that was the beginning and end of it. My amendment and the amendment suggested to us by the Treasury Select Committee itself—or by the clerks to the committee—provide that the FCA must conduct reviews of its own policy and performance. That is to say, it is much broader. It does not wait until things have gone very badly wrong before asking the FSA to carry out a review. I am not sure that the Minister’s response has dealt with that point. It seems that he is still keeping all the power to the Executive, except when there is clear and manifest regulatory failure, when all the pressures would build up and the Treasury Select Committee might be required again to argue its corner, as it had to do in the case of the RBS report.
On the pre-commencement as opposed to the pre-appointment hearings in respect of the chief executive, I hear what my noble friend says in respect of chief executive appointments, and I would like to reflect on that. However, I think that he was making up policy on the hoof in relation to other public appointments. It is a relatively recent phenomenon that public appointments have been subject to pre-appointment hearings, and it is my impression that they have been expanding, not declining, in scope in recent years. It may be that my noble friend is indicating that the Government are now trying to significantly row back on what was regarded as an important expansion of the ability of Parliament to be involved in these important decisions and to hold the Executive to account.
I would like to think more carefully about what my noble friend has said in response to that, and possibly discuss it further before coming back at Report. However, I beg leave to withdraw the amendment.
Lord Sassoon
(d) a qualifying EU provision that is specified, or of a description specified, for the purposes of this subsection by the Treasury by order.”
Baroness Noakes
Baroness Noakes
My Lords, I feel a bit like a number 11 bus—it does not come along for a long time and all of a sudden four come along at once. In moving Amendment 128BF, I shall also speak to Amendment 128BG in this group. Both amendments stand in my name and that of the noble Lord, Lord McFall, and deal with a further issue that the Treasury Select Committee in another place believes was not dealt with properly before the Bill left the other place.
Amendment 128BF amends the PRA’s general objectives in subsection (2) of new Section 2B. The objective currently says that it is for promoting the safety and soundness of PRA-authorised persons. The amendment would mean that it would promote competition among PRA-authorised persons.
Amendment 128BG is similar, but adds a subsection to new Section 2B requiring the PRA to discharge its functions in a way that promotes effective competition in the interests of consumers. But that has to be compatible with its general and insurance objectives.
The Treasury Select Committee was concerned that the PRA’s low tolerance of failure, as expressed in particular by its former chief executive, would entrench the market position of larger market players. The committee noted that competitive markets needed what it called the freedom to exit as well as freedom to enter, although I doubt that a failing bank would regard its impending implosion as a freedom. The theory is that a market that artificially restricts exit will almost inevitably inhibit entry as well.
The Government have said that no firm is too important to fail and they point quite rightly to the fact that the legislation is predicated on allowing failure. I fully accept that. I also accept that the FSA has been clear that it does not regard the job of the prudential regulator to prevent failure at all costs. But—and this is a big but—it is also clear that the new regime will be failure averse. New rules on regulatory capital, liquidity and leverage are designed to make banks safer and the implementation of the Vickers proposals in the way recently announced by the Government will do the same. Bail-in capital will also tend to work in that direction. The resolution plans that banks are working on are themselves in effect partly about preserving the status quo. Ownership may change, but large chunks of banks will remain in the market.
We all want financial stability, but a consequence of that is that the default assumption will be that bank failure is a last resort. Even then, resolution will preserve much of what has failed. All that the amendments do is to correct that balance. Without upsetting the core prudential objectives, the PRA has to have regard to the desirability of effective competition.
While supporting the thrust of the amendments, I do not wholly support their wording and I believe that “promoting competition” may go a little too far. I do not really like Amendment 128BG to the extent that it refers to competition in the interests only of consumers, because competition benefits not only the consumers but the wider economy by creating efficient businesses that can compete internationally to the benefit of everyone, not just the people who use their particular services. For that reason, I also support my noble friend Lord Hodgson’s Amendment 129ZA in this group, which is rather more rounded and balanced approach to ensuring that the PRA does not forget the wider environment of the business that it will be regulating. I beg to move.
Lord Hodgson of Astley Abbotts
My Lords, my Amendment 129ZA in this group follows the line of argument ably put forward by my noble friend Lady Noakes. It is about how we set the regulatory bar at a level that does not discourage and squeeze out innovation if it is too high but not so low that there is a free for all and loss of reputation. As someone who briefed me on this said, “This is the Goldilocks’ porridge issue: not too hot and not too cold”.
As my noble friend said, there is a danger of regulators becoming risk averse and, as she put it, having a low tolerance for failure. Innovation stifled because the bar is too high will not cause problems for the regulator because the innovation will disappear, but the failure of a firm trying innovation obviously does. We have a particular interest in the UK because our financial services industry is vulnerable; it is not backed, as is that of the US, say, by a very large domestic market and therefore we have to be smarter, quicker and more innovative. That is what my amendment intends to facilitate.
To give a real-life example of what I mean, some noble Lords may have seen the briefing from the Equity Release Council, which is the industry body for equity release, which allows individuals aged 55 and over to respot money from the property they live in without having to make any monthly repayments. They have a no-negative-equity insurance policy so that people cannot go overdrawn. This equity release is a thriving, growing industry with 150,000 customers and about 25,000 new customers each year.
We have discussed in this House the problems of funding old age. Of course, equity release enables people to stay in their home, either by withdrawing some equity to pay for care, or to make physical alterations to their home to make it easier for them to stay there, but it is not a concept that has taken root anywhere else in the EU, so if the PRA does not have a competition objective, there will be no formal requirement for the regulator to strive for this effective balance between financial stability and an appropriate level of market competition and growth. This could lead to the PRA taking the default position of, first, increasing capital buffers in response to any market issue; and, secondly, disproportionately gold-plating future EU legislation when transposing it into UK law, which could be to the disadvantage of UK firms.
As I say, this will be a particularly difficult issue where EU regulations are being promoted which effectively do not cover any country but the UK because the practice is not carried out elsewhere in Europe. Other noble Lords will have had other briefings; there was one from the Council of Mortgage Lenders that mentions:
“The uncertainty that the FCA’s product intervention powers can have the potential for stifling innovation within the market. There are few details of how these powers might be used and under what circumstances. It is crucial, therefore, that a clear set of governing principles are developed”.
Therefore the four sub-paragraphs (a), (b), (c) and (d) of my Amendment 129ZA, which inserts a completely separate clause on Page 26, deal with the point made very ably by my noble friend, but do so in a slightly wider way.
Baroness Kramer
My Lords, Amendment 128BG stands in my name and that of my noble friend Lord Sharkey, and I am delighted to hear that the noble Baroness, Lady Noakes, and the noble Lord, Lord McFall, are adding their names. Their names have not made it onto the Marshalled List, but it is very good to know that they actively support the amendment. I think that all of us would look at the wording in more detail, but it is, as are others, a probing amendment. The language was supplied by Which?, an organisation that I help, and it seems to me to be reasonably well drafted.
The PRA, as your Lordships will know, is the body which will authorise new banks. The track record of the regulator in authorising new banks in the United Kingdom is pitiful: one new banking licence in 100 years, for Metro Bank. Other banks which people may think of as new are organisations which have purchased an existing banking licence. It is a sharp contrast to virtually every other developed and, frankly, not-yet-developed country. We have seen consolidation in our high street banking services, not expansion and added competition.
The regulator, if spoken to, would argue that the reason so few licences have been issued, or only one, is that new investors are not coming forward with proposals for new banks.
I think that it would acknowledge that some have come forward, gone part of the way down the process and then reached such hurdles that they have essentially been required to withdraw. It is also true that most potential investors are discouraged before they begin. The Metro Bank case is publicly known; we know that it cost it between £25 million and £35 million to get through the approval process. That is not the regulatory capital; that is simply getting through the regulatory hurdles. That took about two and a half years. Anyone to whom I have spoken who would pick up the role of working with a potential investor has said that their advice today would be, “Do not even think about it. Find yourself an existing banking licence or give up the idea altogether”.
We have some new players in the industry. There is Virgin Money. The Co-op has picked up some Lloyds branches. All that is very good news and will add to competition on the high street. There is a new small bank in Cambridge, which has picked up the banking licence of the old pension bank in that area. I am not saying that there are no new players in the market. I just point out that they are appearing off the collapse of RBS and Lloyds, so this is a one-time only event; it is not a step change or a door opening to bringing new and effective players to provide competition.
I understand that, even without any assistance from the Bill, the PRA will reduce at least one barrier. In the past, the regulator has asked for a higher capital requirement from a new player than from existing players. I understand that that is likely to change, so that at least that playing field will be level.
We in this country are missing an entire layer of banking. We have spoken about this before in several debates. The small, local, community bank, frequently with social impact obligations as part of its core philosophy and mandate, often sponsored by a charity or supporting a social enterprise, plays a significant role in the economies of competitor countries. Germany has its savings bank structure; the Swiss their cantonal bank structure; the United States its community development banks. We all know that those small banks behave in a very different way from high street banks.
First, they are willing to work with vulnerable individuals in the community in a way that our major high street banks have no interest in doing—they provide basic bank accounts, but under duress and have no interest in such consumers. Because those small institutions are committed to a particular community and rise or fall with the success of that community, they are also committed to small businesses—both new start-ups and existing small businesses—within those communities and stick with them through thick and thin.
Looking at the German and US experience, savings banks, in the one case, and community banks in the other, increased their lending to small business during the recent financial crisis and period of austerity, because they knew their borrowers, they knew when management was capable, they understood the microclimate for a particular company. They could do the level of credit work that our major high street banks ceased to be able to do some time ago; they are largely sellers of commodity product, they are not real credit managers in the way that banks used to be.
We are missing that whole layer of banking. I argue that, for the sake of our communities and community growth, we need to rebuild that whole sector, but we cannot if we have a regulator so utterly resistant to any new entrants. For a small bank to serve a narrow community, perhaps within a single borough in London or a portion of, say, Liverpool or Sheffield, to set the hurdle that it must raise between £25 million and £35 million to get through the approval process means that it cannot even think about getting off the ground. We need an entirely different regime. Those are banks which are never going to put us at systemic risk.
I recognise that, to allow those new banks to come in, perhaps with a more modest banking licence, which would be a good way to do it, and certainly with lower capital levels, the regulator must accept that a number of banks will fail. We have a good example in the United States where these banks fail. Within seven days they are under new ownership and masterminded by the FDIC. This acts as the regulator to make sure that the depositor and the business book are protected. The shareholders may be wiped out, which is fair and appropriate, but the banks then revive in a new environment. From the depositor’s perspective there is no hiccup. That is an appropriate kind of failure regime.
Lord Flight
My Lords, I support all three of these amendments. I declare an interest as a director and founder-member of Metro Bank.
Part of the total objective for the PRA of a safer banking system and banking stability is a need for more competition in the UK. One of the main sources of our problems has been a cartel. Whenever there are cartels bad habits tend to creep in. There is a history behind the cartel coming in, going back to Walter Bagehot in wanting to consolidate banks for safety, but there needs to be a balance. The PRA cannot achieve its major objectives without staunchly advocating greater competition and helping it to come about.
From my experience, it was agony going through a year and a half with the FSA getting the licence for Metro Bank. The sums of money that we had to spend were not quite as great as the noble Baroness reported but they were very substantial. The FSA kept changing its mind. The proposals for capital were out of all proportion to the risk of the bank. At the time, I wrote to the Minister reporting on the experience. Strangely, I do not think that there was ill intent by the FSA. It was very much about individuals wishing to protect their own position and not wanting to be attacked in some way in the media for having been too lenient on licensing a new operation. Memories go back to the early 1970s, when banking licences were given out too easily, and that was a major cause of the secondary banking crisis in 1974. However, it is absolutely right that a more competitive environment in banking should be a key factor which the PRA supports.
On international competitiveness, I have understood recently that the Government’s main objective is that they feel that this is somehow related to light-touch regulation that has got into trouble. I do not see that at all. It seems to me just silly for the UK to shoot itself in the foot with regard to an important industry that employs a lot of people, earns a lot of invisible earnings and so on. I would have thought that, in terms of regulating, it would be normal to consider the effect on international competitiveness. What was wrong with light-touch regulation—I remember it well—was the doctrine: “You don't need to regulate large institutions too much because they can look after themselves”. The weakness of that doctrine was that, if they got it wrong, as subsequently transpired, the problems for the whole system were that much greater. I think that was what was wrong and it has little or nothing to do with the competitiveness of the UK’s international banking services.
I do not accept at all the argument that a brief to keep watch on international competitiveness relates to inadequate or inappropriate regulation. Taking the point to absurdity, to ignore a debate about particular measures, which were clearly going to be highly damaging to the UK industry, would just be silly.
Viscount Trenchard
My Lords, my noble friend Lord Flight is, of course, completely correct in his assertion that the proposed new regulatory framework makes far too little mention of the need to preserve competitiveness of the marketplace, not just competitiveness from the point of view of the consumer but the very competitiveness of the marketplace for practitioners to participate in. For that reason, financial services companies from all over the world have come into London and that has helped to provide more consumer choice, and it will continue to do so in the future, as well as providing the Exchequer with a very large proportion of its annual revenue. It is a huge pity, as my noble friend has pointed out, that the Treasury mistakenly believes that preservation of international competitiveness implies approval of inappropriate or inadequate regulation.
All three amendments have some merit but of the three I tend to prefer the amendment proposed by my noble friend Lord Hodgson because it gives a duty to the PRA to have regard to competition. I would have preferred that the PRA had an objective to protect the competitiveness of the marketplace as well but I realise that there are some valid arguments against that. To have a duty—“duty” is a strong word—to have regard to competition is the preferred of the three amendments put forward. The points in my noble friend’s amendment are all to do with minimising adverse effects, or avoiding restrictions or unnecessary regulatory barriers to entry; they are all negatives rather than positives. I would prefer this issue to be expressed in a more positive manner. I have worked for a Japanese-owned financial institution; I am not sure whether this is a UK institution under proposed new paragraph (d) in my noble friend’s amendment. It is, of course, a UK-incorporated plc. Could my noble friend clarify what “UK institutions and companies” means? It is very important for London that the level playing field for all participants is preserved and I hope that the amendment refers to UK incorporated or UK resident financial institutions and companies.
My noble friend’s amendment also makes it very clear how necessary it is to have collaboration and co-operation between the PRA and the FCA. Proposed new paragraphs (b) and (c) impact on matters that are of great concern to the FCA. I hope that these matters will be properly covered in the memorandum of understanding to be drawn up between the PRA and the FCA.
Lord Sassoon
My Lords, the most important issues to be addressed in this group of amendments are those around barriers to entry linked to resolvability. A sea change is needed and is coming. If the Committee bears with me, I will get to this issue, because it is at the heart of the concerns in this area, as identified in particular by my noble friends Lady Kramer and Lord Flight.
Let me start with Amendments 128BF and 128BG in the terms in which they are drafted. My noble friend Lady Noakes says that in some respects they go too far in terms of the duty to promote competition. However, I should do the amendments justice by speaking to them as drafted, although I accept that my noble friend put somewhat of a qualification around her amendment.
There are three reasons why the Government do not agree with the proposition in the amendments. First, all PRA-authorised firms will also be regulated by the FCA according to their objectives, and will therefore fall under the FCA’s objective to promote effective competition in the interests of consumers. To correct one point, it is also the case that authorisation has to be carried out by both the regulators. For those that are seeking a PRA authorisation, the PRA will lead, but others will be led by the FCA.
Secondly, the Government’s view—this goes to the heart of the new structure—is that the FSA simply has an impossible job in trying to balance so many competing objectives, which has led to its lack of institutional focus on prudential matters. In order to avoid repeating this mistake, we have decided that the PRA should have a single, general objective, supplemented by tailored, focused objectives, which are specific to particular regulated activities, such as the insurance objective set out in new Section 2C.
Lord Hodgson of Astley Abbotts
I ask my noble friend one practical question. I entirely understand what he says about the competition objective of the FCA on page 17. In his argument, that is a reason why it should not be on the PRA. There is no way that the PRA, without its competition objective, can overrule the FCA: that is, there must always be a competition objective in all cases where the PRA cannot outgun the FCA. If there are any occasions where the PRA can outplay the FCA, then of course the competition objective falls away, if there is not one for the PRA. Reading this, it looks to me as though there is a danger that the PRA will be the established centre—the capital centre and so on—and the FCA will be, in some senses, implementing what has been decided as a strategic framework by the PRA. If I have got that wrong, I am delighted to be put right.
Lord Sassoon
I do not think that my noble friend has got it quite right. However, I cannot hide from him the fact that we believe that, because it is right and goes to the heart of the flaws in the present tripartite arrangements, the PRA should have as its single objective the one that I have described. Therefore, the nub of his concern remains, and I cannot pretend that it is not there. All I can say is that we consciously want to have the architecture as I have described it. However, the mitigation—and I think it is an important one—is that the PRA must consult the FCA before taking any steps that could in any way harm the FCA’s objectives, including, in this case, the competition objective. I think it is a reasonable check on the PRA’s action, given the basic architecture which we think is important.
Baroness Kramer
One issue that I have raised to which I have never had an answer, no matter whom I have asked, is where the PRA is expected to move in terms of the cost of getting regulatory approval. The Minister made mention of the capital requirements—and there is a whole set of issues around that—but one does not even get to the capital requirements if one cannot get through an approval process without a phalanx of lawyers, accountants and submissions which frankly act as a complete barrier to any potential small and local banking institution. I do not understand where there is any commitment from the PRA to tackle that set of problems.
Lord Sassoon
The fact that it has already started on the work which will lead to the document in the autumn and which goes to the most expensive element of getting authorised—namely, the amount of capital required—is a fundamentally important and good start. I do not pretend that that completes the business, but it tackles first the most expensive element: the cost of putting that capital aside. This is a start. It is not before time, but it is happening as we speak.
Baroness Noakes
My Lords, I start by apologising to the noble Baroness, Lady Kramer, for having appropriated her amendment incorrectly in my opening remarks. I do not quite know when I made the mistake, but I made it quite early and perpetuated it. I latterly discovered that I did not quite like the drafting, and so was slightly disobliging about the amendment of the noble Baroness, which I thought was my own. With apologies to the whole Committee and particularly to the noble Baroness, Lady Kramer, I did not intend to add my name to her amendment. I would not have signed up to the precise wording but, as has come out in this debate, I think we are all speaking from the same territory.
That apart, I believe that there has been quite a lot of agreement among those who have spoken that the Government have not quite got this right. I am concerned that the Government keep saying that they will not repeat the mistake of giving conflicting objectives, which is alleged to have been one of the causes of the problems of the FSA, so this body has to have a single focus. However, I cannot see that a single focus is going to be good for the financial services industry or for the consumer, particularly where competition is just not in its lexicon. If it is not good for them I cannot see how it is good for the UK, so it seems to me to be bad policy.
The amendments that we have put forward today, in varying ways, have been trying to make it a slightly better policy by giving the PRA a broader remit. My noble friend the Minister said that he had undertaken to come back at Report to give a wider economic context, as he had already undertaken to do on the FCA. With respect, that does not meet the points that have come out from the debate today. I believe that there was quite a lot of agreement between my noble friends Lord Flight, Lord Trenchard and Lord Hodgson and I on the amendment tabled by my noble friend Lord Hodgson. When my noble friend the Minister thinks carefully about what to come back on Report with, I hope that he will look again at this issue. Expecting the FCA’s objectives to bear all the burden of reflecting competition in the way that the PRA operates is just bonkers. With that, I beg leave to withdraw the amendment.
Lord Eatwell
Lord Eatwell
My Lords, this amendment and Amendment 128BFB seek to ask the Government to clarify their definitions of the scope of the markets in which UK financial institutions operate. We have already seen some very peculiar UK-centric views in proposed new Section 9C of the Bank of England Act 1998, which I hope we will see extensively modified on Report. In this clause, however, the Bill currently refers to having,
“any adverse effect on the stability of the UK financial system”.
This fails to recognise the global nature of UK banking, and that risks may arise anywhere in the world where UK financial institutions operate.
We want to ensure that the actions of UK financial institutions are such as to sustain the stability of the entire financial system in which they operate. Why? It is because destabilising actions in foreign markets may destabilise subsidiaries of UK financial institutions and, ultimately, the home institution. However, this could not be said to refer to the UK financial system. I will put it again: if in a foreign market a subsidiary is destabilised by actions here, that subsidiary ultimately destabilises an institution here—not the system but an institution. Can the noble Lord please explain how the current wording of the Bill deals with the fact that the balance sheets of UK financial institutions are typically written on a global scale?
Lord Sassoon
My Lords, these amendments seek to give the PRA a global financial stability remit. Instead of the PRA looking at UK financial stability, the amendment would have it looking at the financial stability of every market around the world in which any PRA-authorised person operates. The PRA would have a new responsibility for the financial stability of many markets where it has no powers, no jurisdiction and no tools. I suggest that this is plainly an absurd position. Although cross-border co-operation is vital to ensure the effective supervision of international firms, it is ultimately for each country and its regulators to ensure its own financial stability, or a single currency bloc may decide that financial stability needs to be supervised ultimately on a currency bloc basis.
Lord Eatwell
My Lords, I think that the noble Lord has misunderstood the amendment. If he inserts the amendment and looks at subsection (3)(a), it would refer to,
“seeking to ensure that the business of PRA-authorised persons is carried on in a way which avoids any adverse effect”,
on markets in which PRA institutions operate. The noble Lord is suggesting that the PRA would not have jurisdiction, whereas the PRA does have jurisdiction over PRA-authorised persons.
Lord Sassoon
I have read and reread these amendments and discussed them with officials on a number of occasions because I cannot believe that this was the effect that the noble Lord, Lord Eatwell, wanted. Actually, it is entirely the effect of his amendments to require that the PRA’s general objective is to be advanced by,
“seeking to ensure that the business of PRA-authorised persons is carried on in a way which avoids any adverse effect on the stability of the”—
if amended—
“financial markets in which UK financial institutions operate”.
They would have to regulate in a way that had regard to the financial stability of all these markets around the world, which does very directly get the PRA into the protection of financial markets way beyond its own control in the UK.
I will explain why I think the Bill adequately covers the noble Lord’s justifiable concern. What I have said so far in no way means that the PRA will ignore the stability of any financial market outside the UK that is relevant to PRA-authorised firms. The PRA will take an interest in the stability of any market that has a significant impact on the safety and soundness of one or more PRA-authorised persons. It will do this not in order to improve the stability of this market but to understand the potential or actual impact on regulated firms and to take steps so that this impact is minimised using all the powers available to it. I cannot identify anything in the Bill that limits the PRA or prevents it from taking account of all those factors. It is quite a different thing to put in wording, as suggested in these amendments, that would make the PRA in some way responsible for the effects on the stability of financial systems outside the UK. With that explanation and reassurance, I hope that the noble Lord will feel able to withdraw his amendment.
Lord Eatwell
My Lords, it is very difficult to be reassured by a statement that the PRA would sit back quite happily and watch PRA firms take actions that would destabilise foreign markets. However, given that the Treasury seems to have no concern about PRA firms destabilising markets outside the UK, I beg leave to withdraw the amendment.
Lord Eatwell
“( ) seeking to minimise, as far as possible, the costs to the FSCS or the use of public funds to support or rescue parts of the UK financial services industry”
Lord Eatwell
The amendment seeks to add to the overall objectives of the PRA the requirement that it operates efficiently, seeking to minimise costs,
“to the FSCS or the use of public funds to support or rescue parts of the UK financial services industry”.
It seems remarkable that the PRA has a series of objectives that it is required to pursue to the very best of its ability and with the application of all necessary resources, but there is no constraint on the utilisation of those resources. It seems to be able to pursue its objectives without any concerns for the costs to the public purse in these particular contexts. The amendment would provide a balance in the approach of the PRA, with the desirable objective of ensuring stability and, in doing so, minimising the costs both to the FSCS and the public purse.
Lord Sassoon
My Lords, this amendment reflects a recommendation from the Joint Committee that a secondary general microprudential objective be given to the PRA. It seeks to specify a further means by which the PRA’s general objective should be achieved, by minimising the costs to the FSCS or the use of public funds to support or rescue parts of the UK financial services industry. A similar amendment to this was tabled and debated in another place.
The Government acknowledge that there are some attractions to reframing the objective in terms of the prudential outcomes that the PRA will seek to achieve, as the Joint Committee suggested. However, specifying particular desired outcomes creates difficulties. For example, whether the failure of a firm results in a call on public funds will depend to an extent on the actions of the Government of the day—for example, in taking a decision to nationalise or recapitalise a failing institution. In some circumstances, the orderly failure of a firm followed by an FSCS payout may be the best way of protecting depositors and taxpayers while maintaining market discipline. The effect of specifying such outcomes could be to encourage the PRA to take a highly aggressive and expensive approach to supervision with an end goal of ensuring that, if a firm failed, its potential costs of failure to the FSCS and public funds would be zero or negligible. To ensure this outcome, the PRA would need to intervene extensively in a firm’s day-to-day affairs, undermining the responsibility of firms’ management for running their firm. Ultimately, in an extreme case, it could turn PRA supervisors into shadow directors.
To place such a duty on the regulator would be against the Government’s intention, endorsed by the Joint Committee and confirmed in new Section 2F inserted by the Bill, that the new regulatory regime should not be a zero-failure regime. The amendment would bias the PRA towards a zero-failure regime. On balance, the Government believe that it is better to frame the objective more broadly, requiring the PRA to focus on the safety and soundness of individual firms, so as to improve financial stability. This objective gives the PRA a clear mandate to intervene to address risk-taking by firms.
I hope I have been able to make clear to the Committee why I cannot accept this amendment, and why I ask the noble Lord to withdraw it.
Lord Eatwell
The Minister has exposed some very interesting arguments here in the relationship between the degree of protection which should be provided to consumers and the public purse, balancing that against the degree of supervision of firms. The Government seem to want to err on the side of jeopardising the public purse a little rather than providing supervision that would protect the public purse. However, in the context I can see that a balance is being discussed here, and the Minister has made clear where the Government’s view of that balance lies. In that light, I beg leave to withdraw the amendment.
Lord Flight
Lord Flight
My Lords, the focus of the insurance objective is rightly on policyholder protection. I do not really understand why the drafting includes those who “may become policyholders”. If they do become policyholders, they will surely be covered automatically. If they do not become policyholders, they will not be covered. I am not aware of any other area of financial services where there is any focus on future potential customers. I have a very simple question: why does this include those who “may become policyholders”? What is the logic, if any, behind this inclusion?
Baroness Drake
My Lords, I shall speak to Amendment 141 in my name. The PRA is the prudential regulator of the insurance companies. It has an insurance objective, which will include a requirement to contribute to securing an appropriate degree of protection for policyholders, understandably reflecting the correlation in the insurance sector between the management of risk and the consumer outcome, especially in with-profits policies. The PRA has no explicit consumer protection remit. The FCA does.
The Treasury has, as far as I can see, recognised the need for the PRA to seek advice from the FCA in achieving the balance between the interest of the policyholder and the prudential strength of the company when it comes to with-profits policies. While I understand that the responsibility for that balance should remain with the PRA, it is intended that these matters will be covered by a memorandum of understanding between the PRA and the FCA. However, that memorandum of understanding has to be compatible with the PRA’s view of how to advance its prudential objective. That is where I remain concerned, because this leaves the PRA with a very wide discretion as to what is an appropriate degree of protection for with-profits policyholders.
Unless I am misinterpreting the government amendment in this group, which I will have to wait to hear, the effect of that amendment is to strengthen or give even greater clarity to the fact that it is the PRA which holds the ultimate authority for determining that balance between the prudential strength of the company and the interest of the policyholder. Given that, I believe that it would be desirable if these matters were not left to a memorandum of understanding alone, but that the Bill should guide the approach of the PRA with respect to the regulation of with-profits policies by providing a set of principles which this amendment seeks to set out. Perhaps I may set out my reasons.
The PRA’s focus will be on the prudential regulation of firms, and the stability of the financial system. It will not have the culture to proactively protect consumers who hold with-profits policies, and yet the regulatory framework of with-profits policies has been subject to sustained criticism from the Treasury Select Committee, observers, academics—large numbers of people. However, with-profits policies are still a significant consumer issue. There are around 25 million policies, worth about £330 billion. These policies typically state that the policyholder will share in the profits from the fund, which are distributed to the policyholder in the form of bonuses. The policyholder’s contract normally states that they receive 90% of the profits from the fund, and the shareholders receive 10%.
Baroness Hayter of Kentish Town
My Lords, I trust that the first amendment in this group, moved by the noble Lord, Lord Flight, will not find favour in the Committee as it would substantially weaken the thinking, role and responsibility of the PRA.
First, it would exclude consideration of those currently excluded altogether from financial products, especially in insurance but also in banking. Unless the regulators take exclusion from financial products seriously, we will be failing in our duty to a large section of our community. Our regulators should act in the interests of the whole community, not just those who are already within the charmed circle.
Secondly, there may be issues of promotion and advertising of financial services or products—indeed, to the sophisticated as well as to the earlier group—which must be taken into consideration by the regulators.
Thirdly, it is now acknowledged, including by your Lordships’ House, that regulation should cover future as well as present consumers so that it can take account of changes in consumer needs, the environment and product development. This is the case with, for example, legal services. The Legal Services Act 2007 specifically adds in,
“those who are using (or are or may be contemplating using)”,
legal services.
Amendment 141 in the name of my noble friend Lady Drake is clearly an essential addition to the Bill if those who have bought with-profits policies are to have any confidence in their outcome. The funds must be husbanded in their interests, the profits must be shared according to the policy’s rules, profits must be justly distributed and any discretion must be used fairly and equitably.
There is surely not a word about this amendment with which the Minister could argue. As John Kay wrote in his report this week:
“Financial intermediation depends on trust and confidence: the trust and confidence that savers who invest funds have in those they choose to manage these funds”.
Amendment 141 is part of recreating that trust and confidence, and we are happy to support it.
Lord Sassoon
My Lords, let me first speak to government Amendment 140E. When considering the regulation of discretionary payments in with-profits business there is no easy split between prudential and conduct issues. The Bill deals with this by giving the PRA sole responsibility for issues relating to discretionary payments. The FCA remains responsible for all other conduct regulation. However, under the Bill as drafted, use of “includes” in new Section 3F(1) could be interpreted to suggest that the PRA is responsible for other elements of conduct regulation as well. This amendment simply clarifies the drafting, by removing the implication that the PRA could be responsible for other conduct issues.
I turn to the non-government amendments in this group. Amendment 128BH would remove the reference to those “who may become policyholders” from the PRA’s insurance objectives. However, I can assure my noble friend that the inclusion of this reference to future policyholders is both deliberate and important. It is there for completely different reasons from those advanced by the noble Baroness, Lady Hayter, with whom I agree in rejecting the amendment but for much narrower and more technical reasons related to the nature of a with-profits fund.
Let me give an example of what we are thinking about here. If one considers the scenario where the PRA is considering whether a with-profits insurer should be permitted to make a very large distribution to its policyholders, and if the PRA is only required to consider the interests of current policyholders, it might be inclined to allow the distribution. However, that might leave insufficient assets in the fund to ensure that policyholders coming into the fund—if it is operating on a going-concern basis—obtain fair and adequate payments from the fund.
I should reassure my noble friend that the reference to those becoming policyholders does not require the PRA to go out in some proactive way to protect those who have no current plan to take out a contract of insurance, but who might at some point decide to do so. The PRA is only obliged to provide an appropriate degree of protection and what is appropriate will depend on the facts of the case. In this case, it is the needs of a person who is about to sign on the dotted line for a with-profits policy who needs to be assured by the regulator that the fund to which they are about to subscribe is appropriately strong according to the rules. This provision allows for that.
Amendment 141 would require the PRA to regulate with-profits funds on the basis that the fund should be managed for the purpose of distributing profits to policyholders, as opposed to any other purpose. This is an important issue and I welcome the opportunity to set out broadly how with-profits will be regulated under the new system. It might be worth just pointing out to the noble Baroness, Lady Drake, that new Section 3F—the “With-profits insurance policies” section on page 31 of the Bill—makes it quite clear that the PRA must secure an appropriate degree of protection for policyholders. That is very clear. It is different from the looser wording, to which she referred, about the insurance objective “contributing” to securing protection. It is clear that the language in new Section 3F for with-profits is stronger than in new Section 2C on the insurance objective. That is an important background to the consideration of this amendment, and a point to which the noble Baroness drew attention.
When regulating a with-profits firm, the regulator is concerned with ensuring that the firm recognises a proper balance between the different interests in the fund. These interests include one that is highlighted in this amendment—the interests of with-profits policyholders to the distribution of profits made by the fund. However, there are other legitimate interests in a with-profits fund. They include the interests of the members of the insurer in the case, for example, of a mutual. In a proprietary firm, the shareholders also have an interest in the profits to be distributed. There are also considerations to be balanced between different types of policyholder. I do not suggest for a minute that the noble Baroness seeks to disapply all these other interests in the with-profits fund. Maybe she does—no, I see that she does not. I am glad about that as we would be fundamentally rewriting the law. That would be the effect of the amendment.
I am grateful to the noble Baroness for bringing up this issue. I must say that a balance needs to be struck between the interests of current policyholders, who will be keen to see all available funds distributed, if they are distributed to them, and the interests of future policyholders, which we have discussed, who will pay the price of excessive generosity to previous generations of policyholders. There is also the overriding concern to ensure that the fund remains solvent and able to make distributions.
As I said, under the Bill, the PRA is required to secure an appropriate degree of protection for with-profits policyholders in new Section 3F, and it will have to take all of these factors into account. Although the factors to be taken into consideration are complex, in essence the objective of regulation remains the same for with-profits as for any other type of business. The objective fundamentally is to ensure the firm’s safety and soundness, while ensuring its proper conduct, including the fair treatment of consumers. In asking the Committee in due course to support the Government’s amendment, I ask my noble friend Lord Flight to withdraw his amendment.
Baroness Drake
There is an issue that I am not sure the Minister has addressed. The PRA will be focused on prudential regulation, so its approach on how discretion should be applied on with-profits policies could be influenced by a preoccupation with the prudential responsibility, and through that focus may become unfair in how it has balanced the consumer’s interests.
Lord Sassoon
My Lords, I do not believe that to be the case but it might be helpful if I write to the noble Baroness, copying in the Committee, with a fuller explanation of how that will be taken care of.
Lord Flight
I thank the Minister for answering what in essence was a question. In my view, with-profits policies have been and continue to be useful instruments for the man in the street, and I now understand the reason for the phrasing as it is. I beg leave to withdraw the amendment.
Lord Eatwell
Lord Eatwell
My Lords, this is a probing amendment seeking clarification of the role of “the specified objective”, as it is called in the Bill. An aspect of regulation that is important is that it should be transparent and predictable. The characterisation of the specified objective is neither. Indeed, the boundaries of regulation now seem to be rather arbitrary in the sense that the Treasury can regularly, perhaps, introduce specified objectives and change the boundaries of PRA activities. This cannot but have a dampening effect on financial innovation, because financial innovation depends upon some notion of predictability. Innovation has, as a result of the crisis, a rather bad name at the moment, but there have of course been entirely beneficial innovations over the years, and regulators stifle innovation at their peril.
Of course, the problem is how to secure good innovation while discouraging bad innovation. This is where clear objectives come in, and clarity and transparency are important. This section, I am afraid, seems notably unclear in that the boundaries of regulation would not be predictable. Having such a degree of unpredictability is bound to have a dampening effect.
I understand that any order under this section will require parliamentary approval under new Section 22A, but it is not at all clear how changes will acquire a sense of being anything other than arbitrary, since no concept of consultation with those institutions which would be affected is referred to. Could the Minister please explain?
Lord Sassoon
My Lords, the noble Lord, Lord Eatwell, raises an important point here that we want to on one hand future-proof the Bill, and on the other hand make sure that the future ring-fence around regulated activities—the regulatory perimeter—is not widened on a whim. It is not an easy line to draw. If it required primary legislation—not that the noble Lord was suggesting that—to extend the PRA’s objectives to bring other activities within the regulatory perimeter, that would be a complicated 12-to-18 month process that would not allow for a timely response.
The situation that I generally envisage is one where the FPC would ask for the regulatory perimeter to be widened. That, I suggest, is sensible and necessary future-proofing that enables the authorities to react to changes in financial markets and financial risks in a pragmatic way, whether it is to allow for innovation, or for any other reason. To give a couple of examples which could come up where the FPC could recommend such an extension of the perimeter, it might relate to some or all shadow banking activities or to peer-to-peer platforms or activities, which we have discussed fairly regularly.
I am looking to see whether my noble friend Lord Lucas is here, or some of my other noble friends—the noble Baroness, Lady Kramer, and the noble Lord, Lord Sharkey, among them—because at some point activities like this could well be recommended by the FPC to the Treasury to be brought within the regulatory perimeter. The Treasury would then make an order to make these activities PRA-regulated ones, and if necessary apply additional objectives to these activities.
I assure the noble Lord that in this context, in accordance with convention and Cabinet Office guidance, the Treasury, as the relevant department, would of course conduct the consultation in the normal form at that point. I hope that explains why this part of the Bill is drafted in the way that it is, and that there are protections in there.
Lord Eatwell
My Lords, that was very interesting because the FPC has not been mentioned at all and it is suddenly being prayed in aid in support of this section. I remain puzzled as to why the Government are willing to risk the Bill appearing to be so restrictive by not including some notion of general consultation. Of course, if the FPC were involved there would be consultation issues around which the FPC itself is hedged. But changes could appear on a whim, as the noble Lord himself put it. I would not expect the Treasury to behave on a whim, but it might appear that way to the industry.
Lord Sassoon
I am sorry, but I am pretty sure that I did not say that the Treasury would do anything on a whim: far from it. I would not like the record to say that. Of course the Treasury would not do something on a whim. I would expect recommendations to come from the FPC, which, as the noble Lord said, has its consultation procedures. It does not need a reference in the Bill to say that if the Treasury makes recommendations or an order under this clause nothing else needs to be said. Of course the Treasury will follow the normal consultation processes applicable to this form of order.
Lord Eatwell
One should hope so too. One would have hoped that new Section 22A and other relevant sections, perhaps to be added, would recognise that fact. However, having had an interesting discussion of responsibilities and whims, I beg leave to withdraw the amendment.
Lord De Mauley
“2DA Strategy
(1) The PRA must—
(a) determine its strategy in relation to its objectives, and(b) from time to time review, and if necessary revise, the strategy.(2) Before determining or revising its strategy, the PRA must consult the Bank of England about a draft of the strategy or of the revisions.
(3) The PRA must determine its strategy within 12 months of the coming into force of this section.
(4) The PRA must carry out and complete a review of its strategy before the end of each relevant period.
(5) The relevant period is 12 months beginning with the date on which the previous review was completed, except that in the case of the first review the relevant period is the period of 12 months beginning with the date on which the strategy was determined under subsection (3).
(6) The PRA must publish its strategy.
(7) If the strategy is revised the PRA must publish the revised strategy.
(8) Publication under subsection (6) or (7) is to be in such manner as the PRA thinks fit.”
Lord De Mauley
My Lords, I will speak to the government amendments in this group. Amendment 128BJ specifies that the PRA board must set and publish the strategy in relation to its objectives, having consulted the Bank of England. It must review the strategy annually. The Government have come to the view that it would be helpful to define more clearly in the legislation how the relationship between the PRA and the rest of the Bank group will work in practice.
The amendment makes it clear that the PRA board will set the PRA’s strategy and will be accountable for the success or failure of that strategy. It also requires the PRA board to consult the Bank about the strategy. That will help to ensure that the PRA’s supervisory approach is co-ordinated with the wider financial stability strategy of the Bank. The PRA must publish its strategy. That will help to ensure that Parliament, the financial services industry and the wider public are clear about the PRA’s direction of travel and priorities. That will assist with calling the PRA to account for the way that it carries out its regulatory and supervisory responsibilities.
Government Amendment 147A makes it clear that the PRA may not delegate responsibility for setting the strategy, which is clearly appropriate. Government Amendment 147B makes express that the Bank should approve the PRA’s budget. In practice, the PRA board will draw up the budget, looking at the strategic priorities for the year ahead, and propose this to the Bank. If variations to the budget are required during the course of the year, that will also require the approval of the Bank. This arrangement will ensure that the PRA must account fully for any budgetary increases. Of course, its expenditure will also be audited by the National Audit Office under the provisions already in the Bill. This will provide strong accountability for costs incurred—costs which, as noble Lords have pointed out during previous debates, are ultimately borne by industry.
It would be appropriate if I respond to the other amendments in this group when the noble Lords who tabled them have spoken to them, so, for the moment, I beg to move.
Lord Flight
My Lords, I rise to speak to Amendment 144K, which is intended to ensure that the non-executive members of the PRA board have relevant experience and expertise. In particular, the board should have the benefit of members who have expertise in the sectors regulated by the PRA.
As others have already said, the insurance industry has been something of an orphaned relative. Indeed, I think that the Governor of the Bank of England is on record as saying that the arrangements do not entirely match his wishes. I believe that the Government’s intention is that this should be the case. It is clearly desirable, however, that the PRA should have appropriate representatives from that industry with the right experience, and, indeed, they should be equipped to contribute if the life industry balance sheets get into a position where there needs to be a temporary suspension of the rules, should equity markets plunge dangerously.
Lord Sharkey
My Lords, I rise briefly to support Amendment 144K, in the name of my noble friend Lord Flight, and even more briefly to support Amendment 144L, in my name, which covers some of the same ground but is more focused on the need for the PRA board to have non-executive members with relevant experience and expertise in the insurance sector. I am sure that neither of these amendments should be at all controversial. It would be very hard to argue that the PRA non-executive members need not have among them people of experience and expertise across the regulated sectors, but I think that it would be wrong to argue that this provision is not needed in the Bill. There is no reason for this to be left simply to the discretion of the Bank and the PRA and every reason why they should have an obligation to act in the way that both amendments suggest.
Amendment 144L in my name focuses on insurance because I am concerned that the PRA—as a subsidiary of the Bank, and with a special financial stability purpose and a number of Bank officials on the board—will be much more explicitly focused on the banks. It is also true, I think, that the Bank of England has no history of regulating insurance. The FSA currently does this, in succession, I think, to the DTI. In order to make sure that the PRA also effectively and properly focuses on the insurance sector it seems right that it should have, among its non-executive members, people with the appropriate experience and expertise in that sector. That is what my amendment and the amendment of my noble friend propose.
Baroness Noakes
My Lords, I support Amendments 144K and 144L, which are driving in the same direction, particularly in relation to insurance. Insurance companies have been the orphans: they have been tossed around Whitehall with the DTI and the Treasury; then they went to the FSA, where they were not the most important part of the FSA’s responsibilities; and now they know that they are being taken, rather grudgingly, into the Bank of England. They are worried that the particular features of their industry will not be given due weight, so the appearance of somebody with the requisite experience at board level is a minimum requirement. Because of the degree of concern in the industry, I do not think that it is enough simply to say, “Well, the Bank will do the right thing”—as I am sure the Minister is going to tell us in a minute. It is right that the Bill should reflect the concerns that exist in the industry.
Lord Davies of Oldham
My Lords, it is for the Minister to respond to those arguments for the specific interests regarding representation on the PRA, and I will be very interested in his response. The concern of the opposition amendments in this group is of a rather more general nature with regard to governance, which, as the principal rule by which it is all going to operate, is of the greatest significance.
Amendment 139B would ensure that each regulator must act in a way which follows principles of good governance, including having regard to the UK corporate governance code. I hope that the Minister will find no difficulty at all in accepting that broad principle on which the regulator should operate. Our two other amendments, Amendments 144M and 146A, are rather more specific.
Amendment 144M extends the principles to which the Bank must have regard when making public appointments to the PRA. The Bill states that it must have regard to general principles. We want them spelt out more specifically; that is why we have proposed the insertion of the words, “merit, fairness and openness”, in front of “good practice”, to give specific illustration of what we mean by good practice in this area.
Amendment 146A is a minor addition but an important public safeguard with regard to remuneration. No one in this House can ignore that remuneration at any level in financial services is an issue of great public concern and therefore will certainly be of concern with regard to the governing body of the PRA. At present, the PRA must pay its members,
“such remuneration as may be determined by the Bank”.
We want to add,
“with the approval of the Treasury”,
so that we have the necessary public safeguards on this issue.
Lord De Mauley
I thank noble Lords for introducing their amendments. Let me go through them. Amendment 139B would make explicit that both the PRA and the FCA should have specific regard to the UK Corporate Governance Code. That is an important point. The code is the benchmark for good governance. The Bill makes clear that both the PRA and the FCA will be required to have regard to such principles of good corporate governance as it is reasonable to apply to them. That includes principles from the UK Corporate Governance Code. The Government fully expect the regulators to comply with the relevant principles of that code.
However, generally accepted principles change over time—it is worth noting that just two years ago the UK Corporate Governance Code was called the combined code. I hope that noble Lords will accept that it would not be appropriate to put an explicit reference in the Bill to a specific document which may change from time to time, or the name of which may change completely.
Amendment 144K would require that the Bank must be satisfied that the non-executive members of the PRA board have relevant experience in the sectors that the PRA will regulate, including banking and insurance. Amendment 144L would require that the Bank must be satisfied that the PRA board must include members with insurance expertise. I thank my noble friends for raising this issue, which is also important. The Bank and the FSA have been clear that they understand that the nature of insurers’ business models exposes them to a different set of risks than banks, and that therefore the regulation of insurance requires a different approach.
I can categorically confirm to the Committee that the Government and the Bank are clear that the PRA board will have members with the necessary expertise in each of the sectors that the PRA regulates, including insurance. It will also be important for the PRA board to have expertise in investment banking, building societies and credit unions, for example.
My noble friend Lord Sharkey said that insurance expertise on boards should not be left to the discretion of the Bank. He is right; it will not be; the Treasury will approve the appointment of PRA non-executives. I hope that noble Lords will therefore accept that it is unnecessary to make such detailed provision in the Bill.
Amendment 144M would make explicit that appointments to the PRA board must take place in accordance with the principles of merit, fairness and openness. Of course the Government agree with the intention behind the amendment. Paragraph 10 of Schedule 1ZB already requires that the appointments to the PRA board should take place in line with,
“generally accepted principles of good practice relating to the making of public appointments”.
The clearest articulation of those principles is the Code of Practice for Ministerial Appointments to Public Bodies, published by the Commissioner for Public Appointments. The aim of that code is,
“to ensure that public appointments processes are fair, open and transparent, command public confidence and result in appointments which are made on merit”.
Although some of the principles in the code are relevant only to ministerial appointments, some have wider application. Merit, fairness and openness clearly fall into that category.
Amendment 146A would require that the Treasury approve remuneration of the PRA board. Let me respond to this amendment in the context of the Government’s approach to the FCA and the various policy committees of the Bank. The Treasury has no role in relation to the setting of remuneration for the FSA board, nor will it have any such role in relation to the FCA board. This is as it should be. The FSA is, and the FCA and the PRA will be, independent of government. The Treasury has no role in the setting of the remuneration of external members of the MPC because the Bank is separate from government. The Bank determines how much it needs to pay to get the right people, while still ensuring value for money.
Similar considerations apply to the PRA board. The Bank will need to assure the quality of the leadership of the PRA, so it must be able to determine the remuneration of the PRA externals in the same way as it determines the remuneration of other parts of the Bank group. The Bank and the PRA operate separately from the Treasury and they account separately to Parliament. Parliament has a key interest in whether the PRA is delivering value for money, which is why the PRA falls within the remit of the National Audit Office.
I hope that I have persuaded noble Lords to accept the government amendments and not to press their own in this group.
Baroness Noakes
My Lords, could I clarify with the Minister what he said about the composition of the PRA board? I think he said that the Government were clear that there would be a member with insurance expertise. Did he mean any member, or a non-executive member? There only has to be a majority of non-executive members. I think that my noble friend said that, under that formulation, he believes that that could be met by having an executive member with insurance expertise. The drive of the amendments that we have been discussing was that there should be a non-executive member in an oversight role on the PRA board, bringing in insurance expertise.
Lord De Mauley
My Lords, I categorically confirmed to the Committee that the Government and the Bank are clear that the PRA board will have members with the necessary expertise in each of the sectors that the PRA regulates, including insurance. I did not specify, in answer to my noble friend’s question, but I will write to her if I may.
Lord Sharkey
Lord Sharkey
I will also speak briefly to Amendments 129ZC and 130ZA in this group.
All these amendments address the PRA’s general duty to consult. As the Bill stands the PRA must consult PRA-authorised persons or, where appropriate, persons appearing to the PRA to represent the interests of such persons. This consultation is to be on the extent to which the PRA’s general policies and practices are consistent with its general duties under new Sections 2B and 2G. These general duties include, for example,
“contributing to the securing of an appropriate degree of protection for those who are or may become”,
insurance policyholders. This is a very wide if not universal category, as the noble Lord, Lord Flight, has pointed out. They also include a duty to have regard to the regulatory principles in new Section 3B, which include,
“the general principle that consumers should take responsibility for their decisions”.
In both these cases it is clear that the PRA will need to know what consumers want and need; what their experience is and has been; and, particularly when it comes to the caveat emptor clause, what information consumers need to be able properly to take responsibility for their decisions.
These three amendments simply add “consumers” and “the Consumer Panel” to the list of groups that the PRA must consult or whose representations it must consider. Quite apart from the obvious justice of consulting those who may buy the end products, consulting consumers can also have the beneficial effect of preventing the PRA being totally isolated from the real world and the real consequences of their actions. We can all see from recent events the danger of any part of our financial system, regulatory or otherwise, losing contact with what is actually happening or what people are actually experiencing.
These are simple and clear amendments with a simple and clear purpose. I hope that the Minister will give them sympathetic consideration. I beg to move.
Baroness Noakes
My Lords, I have Amendment 129A in this group and it concerns practitioner panels. With the leave of the Committee, and at the request of my noble friend Lord Northbrook, I shall also speak to his Amendment 130ZZZA and to Amendment 130ZAA in this group. When a Marshalled List has to resort to using the letters “ZZZA” there is something wrong.
My amendments concern consultation with practitioner panels. A number of amendments in this group concern consultation with consumers and the noble Lord, Lord Sharkey, has just spoken to his amendments. I am sceptical about the role of consumers in relation to consultation on prudential regulation. I shall be interested to hear what my noble friend has to say in response, but I shall concentrate on practitioners.
Of course it is very good that the Bill contains a requirement for the PRA to consult in new Section 2K. However, the Bill merely enables—it does not require—the PRA to set up practitioner panels. That is in stark contrast to the existing requirement on the FSA to set up practitioner panels and the very detailed requirements in new Sections 1N to 1Q for the FCA to set up various kinds of panels as part of its consultation arrangements. My Amendment 129A would require the PRA to set up one or more practitioner panels as part of its consultation arrangements.
My noble friend Lord Northbrook’s Amendment 130ZZZA mandates a single practitioner panel, and it goes a little further than my amendment by setting out what it should do—namely, it should be a regular forum for policy debate for the PRA and also consider the cumulative regulatory impact of the FCA and the PRA; that is, it should not merely be reacting to specific concentration exercises by the PRA but should also be involved, on a more in-tune basis, as a conduit for practitioner views. That harks back to the concept of dialogue that we talked about earlier when we spoke of consultation in relation to the FCA.
There ought to be clear advantages for continuing with practitioner panels for the PRA as well as for the FCA. The panels have been a well understood and welcome part of the FSA’s interaction with the financial community, certainly from the perspective of the industry. I believe that they are generally regarded as having worked well.
These amendments are supported by the Financial Services Practitioner Panel. Its chairman, Mr Joe Garner, has written to me to say that his panel very much hopes that this Bill will be amended so that the practitioner panel will be able to continue to help the PRA in future as well as the FCA. He sees its role as making a positive contribution to regulation. I have also heard from several industry bodies and other bodies which also support the continuation of practitioner panels.
I have very great respect for the work done by the pre-legislative scrutiny committee on this Bill, but I believe that it was wrong to reject the practitioner panels as involving regulatory capture. I believe that that misunderstands the nature of the quite detailed and technical nature of the work that is carried on by the panels. The FSA did a lot of things wrong, but I do not believe that one of them was being captured by its practitioner panel. Amendment 130ZAA in the name of my noble friend Lord Northbrook seeks to put that beyond doubt by specifically providing that the PRA is not accountable to practitioners if it rejects their recommendations.
The issue of practitioner panels might be less important if there were confidence that the PRA’s approach to consultation would be carried out well. Unfortunately that has got off to a bad start, with considerable concern about the draft of the PRA’s approach to consultation which was recently issued by the FSA and the Bank of England. As I noted at Second Reading, there has been considerable dismay at the dismissive and patronising language used. If the document which is on the Treasury’s website is representative of the kind of thinking which would permeate the PRA, I believe that it is a problem in the making. I could list the problems with the published PRA guidance at consultation but I am conscious of time today. However, I am happy to give the Minister the litany of problems identified with the draft to date. These problems are serious from the perspective of those who are expected to be consulted.
Even if the shadow PRA had pretended that it really embraced consultation, I do not believe that it would have removed the need to set up in legislation a definite structure of consultation, such as the existing practitioner panel arrangements. However, the evident lack of enthusiasm on the part of the Bank of England and the PRA rather strengthens the case for recognising in this Bill the need to have practitioner panels.
Lord Flight
My Lords, I support the noble Baroness’s amendment and will also speak to my own Amendment 129B, which goes slightly further. As well as calling for practitioner panels, my amendment argues that there should be PRA consumer panels,
“and where appropriate consumers falling within the scope of the insurance objective”.
It is a mistake to leave the decision as to whether to have panels simply to the PRA, rather than being a requirement in the Bill. This is a fair point; it is appropriate to provide proper safeguards for regulated persons and for consumers. Although it is at a slight tangent, the Treasury Select Committee has made valid points about the tendency to too much arbitrariness on the part of the Bank of England, and the structure. I can see no reason why appropriate panels should not be provided for.
Further—the noble Baroness also raised this point—where the PRA disagrees with the representations made to it by such panels, as under the FSA, I cannot see why it should not be required to have the courtesy to explain why that is the case.
Baroness Hayter of Kentish Town
My Lords, in a way these amendments ask for quite simple things. First, the PRA must have arrangements in place to consult consumers or their representatives and report annually on these arrangements. Secondly, the PRA should consider any representations from the FCA’s practitioner or consumer panels. Thirdly, practitioner representatives should similarly be hardwired into the PRA’s working practices. We welcome Amendment 130ZAA in the name of the noble Lord, Lord Northbrook. It is key to have practitioners involved, but for their expertise, not as representatives. On our side we are content that no new panels need to be created either for practitioners or for consumers, provided that the PRA is committed to enter into dialogue with the FCA panels and respond to other relevant submissions.
However, the need for the amendments in our name and that of the noble Lord, Lord Sharkey, are more important perhaps, given the paper released on Monday. I do not know whether that is the same one referred to by the noble Baroness, Lady Noakes, but I think not. This one is entitled The PRA’s Approach to Consultation. This is a slightly different concern from the one she has, but to have a whole paper on consultation in which the word “consumers” is not mentioned seems a particularly alarming reflection of its approach.
The probing amendment in our name—Amendment 130ZZB, which proposes an annual report of the arrangements, rather than the content, of consultation activities—now becomes rather more of a real than a probing amendment. We have grave doubts as to how a paper on the PRA’s consultation could omit any reference to consumers, concentrating only on regulated firms. That is not even-handed or very sensible.
In response to the query from the noble Baroness, Lady Noakes, I will just say why consumers do have an interest in the role of the PRA. This is not of course simply about the prudential issues but about some of those raised by my noble friend Lady Drake earlier. Consumers have many interests in issues that are the responsibility of the PRA, particularly, as the noble Baroness mentioned, with-profits policies but also leveraged ratios and even bank charging policy, about which we have heard things from the putative head of the PRA. It would be strange for the PRA not to hear input from consumer representatives on these matters and simply for it to respond to the panel when it takes a different view. Unless the Bill is amended as suggested, consumers will be excluded from the PRA’s decisions on prudential matters. The PRA will lead on regulation of with-profits policies, but there is no requirement on it to consider representations from anyone representing the consumer interest on that. There are a number of issues relating to with-profits policies, orphan estates and others, which they do have an interest in.
My noble friend Lady Drake talked earlier about £330 billion, I think, being under management in with-profits funds. That is 25 million policyholders, and it is essential that the interests of these policyholders are properly considered, which can only be achieved by working with consumer groups and not simply seeking the views from the FCA. It is the same issue with mortgages, where prudential requirements can have huge implications for consumers. Decisions about the stability of the market potentially restrict the availability of mortgages to a large number of people who, up until that moment, had been servicing their mortgages without any problem. It is vital that the application of any prudential controls treats all customers fairly. The existing consumer panel has been involved in the regulation of insurance and prudential issues in relation to the mortgage market review, and I understand that its advice has been acknowledged as particularly valuable. All we are asking is that consumers get a hearing, which does not seem too much to ask, but also that the expertise of practitioners similarly gets an appropriate hearing.
Baroness Cohen of Pimlico
I support the amendments proposed by my noble friend Lady Hayter and the noble Baroness, Lady Noakes. Both consumer panels and practitioner panels are extremely important and it is very difficult to see an argument against them, particularly because the PRA will be regulating insurance companies. I declare at this point that my own background includes being a non-executive director of a couple of smaller insurance companies in the 1990s. The accounts and concepts are difficult, but such firms are of enormous importance to the economy and to everything that matters to us. Pensions, whole-life policies and insurance in general are important to us all, and it seems quite irrational not to have a consumer panel and, indeed, a practitioner panel, which should include people who really know about insurance policies. It could be the next disaster waiting to happen in financial services, simply because people do not know very much about insurance companies. Their accounts and the way they are managed are quite difficult to understand. For that reason, I support both amendments.
Lord Sassoon
My Lords, this is a big group to do justice to, but I will make a start with Amendments 129ZB and 129ZC, which would require the PRA to make and maintain arrangements for consulting consumers as well as practitioners. I agree that consumers have a key interest in the outcome of the PRA’s decisions. In particular, consumers will be one of the beneficiaries of a safer and more stable financial system. However, the PRA will not focus on consumer protection as an end in itself—that will be the job of the FCA. In its regulation of insurance outside the special arrangements for regulation of with-profits business, the PRA will deliver its policyholder protection mandate through effective prudential regulation. Of course, consumers will be able to respond to public consultations on rules and to the PRA’s annual consultation following publication of its annual report. However, the main way in which the consumer interest is represented will be through the FCA. The FCA will provide the PRA with advice and expertise wherever consumer interests need to be taken into account. The draft MOU that has been published by the Bank and the FSA makes clear that such consultation will take place at an early stage.
Amendments 130ZC and 130ZZC would require the PRA to make and maintain arrangements for consulting consumers, and to consider representations made to it by the FCA consumer panel and practitioner panels. On the first element of this, as I have explained, where the PRA needs input on an issue of consumer protection, this will be provided by the FCA. I therefore do not think it necessary to require the PRA to consult consumers or their representatives directly. However, just because the FCA will advise the PRA on consumer issues, that does not mean that the FCA panels should be tasked with a formal role to advise both authorities.
Under the Bill, the FCA panels rightly focus on issues of concern to the FCA and will not have the expertise or mandate to examine the PRA’s approach. The PRA and the FCA will develop different approaches to regulation, consistent with their different objectives and the fact that the PRA will be regulating a much smaller number of firms. The panels are free to make representations when the PRA consults on rules, or indeed at any other time. However, I do not think that it would be right to require the PRA to give special attention to representations made by bodies designed and maintained for the purpose of advising the FCA on its work.
Amendment 130ZA would require the PRA to consider representations from the FCA’s consumer panel. The Government value the work of the panel and its important contribution to the development of consumer protection policy. However, as I have explained, the Government’s view is that it should continue to play this role through engagement with the FCA rather than the PRA.
Amendment 141A would require the PRA to make and maintain effective arrangements for consulting the consumer panel, consumers, or their representatives in relation to the PRA’s responsibility for with-profits insurance policies. The Government acknowledge that there are particular issues around with-profits regulation, balancing questions around the fairness of with-profits policies with the effect of making payments from with-profits funds on the safety and soundness of the firm. The PRA will have to consider these carefully and put in place appropriate arrangements for consulting others with relevant expertise, and is specifically required to seek the FCA’s advice in discharging its sole responsibility for with-profits regulation to ensure that it is taking account of the FCA’s consumer protection expertise. In giving its advice, the FCA is of course at liberty to consult consumer protection experts and panels as it sees fit. Taking all this into account, the Government do not think that a separate consumer panel for with-profits regulation is either needed or proportionate.
I now turn to the amendments in the group that would require the PRA to maintain consultative panels. Amendment 129A would require that the PRA’s arrangements for consulting practitioners under new Section 2K must include the establishment and maintenance of one or more panels. The Government agree that in order to carry out effective regulation, the PRA will have to consult industry in order to gather information, expertise, and outside perspectives on its work. That is why new Section 2K puts the PRA under a high level requirement to consult. However, the Government remain of the view that the PRA should have discretion as to how it goes about this consultation.
Given the PRA’s greater focus on firm-specific prudential decisions, a standing panel might not be the most effective way of ensuring a productive dialogue with industry. I should be clear that the future management team of the PRA have made clear that it does not envisage that maintaining a panel would be the most effective way of gaining the information that it needs to deliver judgment-led prudential regulation. The PRA will also have a much smaller community of regulated firms than the FSA, or indeed the FCA, and so may wish to tailor consultation exercises on individual rules or measures more precisely to the firms most affected by them. A single, industry-wide panel is not ideally suited to this kind of consultation.
Baroness Noakes
My Lords, can the Minister explain in a little more detail why the FCA is not allowed any discretion about whether it has panels but the PRA does have discretion? Is it just because it is the Bank of England, and the Bank is saying that it has to have discretion?
Lord Sassoon
No, my Lords, of course it is not because it is the Bank of England and it says that it has to have discretion. This is government legislation and the Government are presenting a Bill that we believe is appropriate to the new financial architecture. Of course we consult the Bank of England, the FSA and all sorts of other people. We have also had the input of the Joint Committee. My noble friend is quite right to challenge me on this but I am quite clear on it. As I have tried to explain, it is understandable but simplistic of people to read across that there are panels now that would like to continue to be engaged with both new regulators. I can understand where the panels come from and why, as I have explained, since consumers have a considerable interest in the decisions taken by both bodies, consumers superficially may say, “Actually, we would like to be engaged directly with both”.
Lord Sassoon
If the noble Baroness will allow me a moment, the PRA is a very different animal. We risk, in some of this discussion, slipping into a frame of mind of thinking that the FCA and the PRA are somehow going to be two peas popping out of the same sort of pod. They will be very different regulatory and supervisory bodies with very different mandates and very different numbers of firms that they are regulating. It would be quite wrong to have a one-size-fits-all approach to consultation in these circumstances.
Baroness Hayter of Kentish Town
But consumers are not asking for this superficially. It is their money that is being looked after and overseen by bits of the PRA, and they make a very serious request. As I said, we are relaxed about it not being a specific panel, but the existing panels should have a right to be heard. It is simply not enough to depend on the FCA, whose chief executive comes from the industry—as does its new chair, with 27 years in banking and enormous experience. However, they do not represent the consumer interest.
Finally, my fear is that if there is no right to be heard, consumers, and maybe practitioners as well, will retreat to the other way of getting a hearing: to go to the press. One of the great things about the consumer panels is that you very rarely hear about them because they have a back-door entrance. They can go in and have early dialogue. Deny them that and I am afraid that we will revert to the other way, which is an open dialogue through the press.
Lord Sassoon
I understand all that and I know very well that the consumer panel in which the noble Baroness played an important part has had and continues to have an extremely important role. It is not as if the PRA will not be consulting consumers and the public; it must consult publicly on draft rules, for example, and that would involve consulting not just practitioners. Generally, however, the FCA will be the expert on consumer issues and it is right that it should be the primary channel to focus the PRA’s approach.
I repeat that the PRA will be a supervisor with a much more firm-specific, prudential decision-making focus—as opposed to the FSA and the FCA, which will have a much broader rules-based approach. We are talking about very different animals. Indeed, it is worth recognising that, if we are talking on the practitioner side, the FSA tends not to consult the current practitioner panel on firm-specific prudential decisions any more than I would expect the PRA would or should. The dynamic is very different. Therefore, for the reasons that I have given and will continue to give in going through the rest of these amendments, and for the reasons that my noble friend Lord Flight put very clearly in relation to consumers, I believe that what we have put in the Bill is right.
I believe that we are at Amendment 129A. There is no more that I can usefully say on that amendment, so I will move on to Amendment 129B, which would require that the PRA’s consultation arrangements should include industry panels and, where appropriate, a panel representing insurance policyholders. I should start by being clear that where the PRA consults on issues with particular impact on insurers, the Government agree that it should ensure that it engages with insurers in order to understand their views. Such consultation might be done as part of its general consultation under new Section 2K or through consultation on specific rules. Regarding consultation with insurance policyholders, as I have said, where consumer interests are engaged, the PRA will be provided with advice and expertise by the FCA. The Government do not expect it to be necessary for the PRA to make specific arrangements for consulting policyholders any more than other consumers.
Amendment 130ZZZA would require the PRA, as part of its consultation arrangements under new Section 2K, to establish a panel for policy debate with senior representatives of firms and to consider the cumulative impact of regulation by the PRA and the FCA. Policy debates about regulation take place in many forums—for example, between regulatory authorities at the European level, in the FSB and at the IMF, and of course in your Lordships’ House. However, I do not think that it would be right for the PRA to be engaged in policy debate with those that it regulates. Regulated persons are free to make representations to the regulator. There are mechanisms for this is in the Bill. However, to enshrine in legislation the idea that firms should enter into a policy debate with the regulator is contrary to the concept of judgment-led regulation. The PRA will listen to firms but it will form a view based on its own regulatory objectives and priorities, not on the commercial objectives and priorities of firms.
On the second element of the amendment, I agree that the PRA should consider cumulative regulatory burden. It will do this as a matter of course when it considers proportionality under the general duty to co-ordinate. There are already numerous opportunities for industry to comment on the effectiveness of co-ordination. In particular, the PRA and the FCA are required to include in their annual reports an account of how they have complied with the general duty to co-ordinate. Industry and the general public will be able to make representations, for example, at the annual general meeting of the FCA, and as part of the PRA’s annual consultation on the effectiveness of its strategy.
Amendment 129ZD would amend new Section 2K to require that:
“When carrying out a consultation, the PRA”,
should,
“have regard to the desirability of ensuring a broad representation of practitioners and consumers”.
I have some sympathy with the sentiment. I agree that, in order for the PRA to regulate effectively, it will need to consult widely. For example, if it is considering putting in place a new framework for the purposes of supervising credit unions, I would expect it to form a comprehensive view of the sector by talking to credit unions, large and small, based in different parts of the United Kingdom. Where appropriate, I would also expect it to talk to academic experts and other interested parties. However, I do not think that this needs to be underpinned with a specific provision in legislation. The PRA will need to consult effectively if it is to deliver its statutory objectives, and it will be held to account by Parliament for doing so. New Section 2K already requires the PRA to consult the full range of PRA-authorised persons and not just those who are practitioners.
Amendment 130ZZA would provide that the arrangements for consulting PRA-authorised persons may include consultation with persons with specialist knowledge of PRA-regulated activities. Again, I agree entirely with the sentiment. As the Government have made clear, the PRA will consult expert individuals when developing policy. It need not rely solely on industry experts, but also those in academia and other experts. At present, new Section 2K makes express reference to consultation with industry because industry will be directly affected by regulation. It is appropriate to recognise that fact in the Bill, while making it clear that the PRA may decide how to engage with them. But consulting industry is different from consulting “persons with specialist knowledge”. The PRA may of course consult such individuals, whether as part of a public consultation or for a specific purpose, if it will help it to better deliver its objectives. It might also wish to consult all sorts of other categories of person—for example, international organisations such as the FSB and Basel committee. It seems unnecessary to include that level of prescription in the Bill.
Amendment 130ZAA would clarify that the PRA is not to be deemed to be accountable to those firms that it regulates. I am glad that my noble friend has raised this point, as it is an important one. The Government and the Bank of England have been absolutely clear that the PRA should not be seen as accountable to those it regulates. We agree. Firms are accountable to the regulator, and the regulator is accountable to Parliament. However, the lines of accountability are clear in the Bill, and it is not clear what such a declarative statement would add.
Finally, Amendment 130ZZB would require the PRA to report annually on its consultation activities. The Government fully agree with this intention, and indeed the PRA is already required to so do as part of its annual report by new Schedule 1ZB, in paragraph 18(1)(c) on page 186.
I come back to the fundamental point. We have considered carefully the separate consultation requirements for the two regulatory authorities. I understand all the concerns, some of which I hope I have been able satisfactorily to address. But others have consciously been left on the table, reflecting the very different nature of the beast, which the PRA will be as a focused regulator with its small community and one very clear objective. On the basis of that rather long canter through the group of amendments, I ask my noble friend to withdraw his amendment.
Baroness Noakes
Before the noble Lord, Lord Sharkey, decides what to do with his amendment, I would like to come back to a couple of points raised by the Minister. I do not believe that he has given a rationale yet for why the PRA has a free-for-all in this. I believe that the Government should be concerned about the PRA’s potential attitude to consultation. The Minister said that the PRA was not going to set up consultation panels—that has been clear—because it did not need them to gain the information that it needed. The Government seem not to get the concept that the panel is about a form of dialogue, feeding back concerns as well as responding to specific questions.
I skimmed over the quality of the consultation paper. I do not know whether it is the same one as that of the noble Baroness, Lady Hayter. I have had mine for several weeks. I did not discuss earlier the kind of problems that there are; there is no commitment to a minimum period of consultation, to proactive consultation, to consulting on the exercise of national discretions on the implementation of EU policy or to decent implementation periods. I could go on. There is a very serious concern about the attitude to consultation in the PRA, which would be partially resolved if there were a more definite requirement in the Act not simply generically to consult but to make sure that groups were consulted. I have to say to the noble Baronesses, Lady Hayter and Lady Cohen, that I think that I am persuaded that consumers, too, should be formally recognised within that structure. I hope that the Minister, even if the noble Lord, Lord Sharkey, lets him off this afternoon, takes this away and looks at it again over the summer, because I do not believe that the Government have got it right.
Lord Sassoon
Of course, I note what my noble friend says. She is always very clear and direct. I absolutely refute that the PRA has anything approaching a free-for-all. I have explained the many general and specific requirements it has to consult on, whether they are individual rules or setting things out on an annual basis and so on. Earlier on, I think she promised to send me a letter setting out some of the concerns, which she has just summarised, on the recent consultation. I will be very happy to receive that, and the Treasury will of course look at it as well.
Lord Sharkey
My experience in commercial life has left me with a deep respect for the wisdom of consumers, and a deep conviction that consumer groups, properly constituted and properly consulted, are a source of sound guidance, and a vital way of making sure that decisions are properly grounded in current experience, views and expectations. Critically, this wisdom and this learning is always best delivered directly and not through an intermediary. I continue to think that the Government are mistaken in excluding consumers from direct consultation with the PRA, and I think it is unwise to rely on second-hand unmediated input. I suspect, given the comments around the Chamber this evening, that this is an area we might well return to on Report. In the mean time, I beg leave to withdraw.
Lord Flight
Lord Flight
My Lords, I address Amendments 130B and 144B. I am not entirely clear why these have been grouped together as they cover very different territories.
Amendment 130B reverts to points which I endeavoured to stress much earlier on in the process of this Bill: at the end of the day it is the consumer who pays the costs of regulation; the new twin-peak arrangements are likely to be inherently more expensive because they double up in certain areas; there is no shared overhead cost and there is not that much in the legislation which is at least there as a discipline to keep costs of compliance to a minimum. Amendment 130B seeks simply to write into the Bill that the PRA and FCA should use their resources efficiently and economically towards minimising the cost and burden of compliance on individuals.
Amendment 144B is in very different territory. The Bill provides for the FCA to have product intervention powers, which in the main I accept is a sensible proposal, because without those intervention powers time drags on before faulty products get addressed. In the mean time, consumers get hurt. However, it seems to me that everyone should be learning from that process. Therefore the amendment provides that the FCA should report annually on the use of these powers and on how it has complied with its statement of policy, including an evaluation of the outcomes of the regulatory actions and whatever intervention powers have been used.
Lord Hodgson of Astley Abbotts
My Lords, I have Amendments 131, 132, 133, 134 and 135 in this group. I certainly support Amendment 130B moved by my noble friend Lord Flight but my amendments go rather further and are rather more prescriptive in their approach. They relate to the attitude, approach and culture of the regulator, which we have been discussing. There has been a lot of hollow laughter about culture in the banking system, which I understand, but the financial services industry covers much more than the banks—it covers the IFA community, the insurance community and Lloyds. I think that in recent years the regulator has moved from a reasonably open, even-handed relationship with its regulated firms to one of much greater risk aversion. Of course, I understand that safeguarding client money and avoiding financial crime are very important indeed, but the regulator seems to have forgotten many chunks of the introduction to FiSMA, which sets out other objectives, requirements and issues that it has to consider in carrying out its regulation. Nowhere has this shift in culture been seen more than in the relationships with the smaller and medium-sized firms. Very often these are firms where innovation and some of the most exciting developments are taking place.
Specifically, I should like to draw to the Minister’s attention three or four things which I hope we can agree are being practised in an undesirable way at present and which are regulatory commercial approaches that henceforward we should try to avoid in the structure.
The first is Section 166 inquiries—the expert person investigations. These were designed to be used rarely but there are now 840 outstanding. A rough estimate of the cost of a Section 166 inquiry in professional fees for the regulated firm is £100,000, although it could be £200,000. Therefore, we are talking of between £84 million and £150 million of costs, and that is without the cost in terms of the management time spent providing the information needed for the professional firm carrying out the inquiry on behalf of the FSA.
This is sub-contracting regulation. There is really no restraint at all on the FSA in undertaking these inquiries. Such an investigation costs it nothing; it simply has to engage a professional firm to carry it out and away it goes. That is without the Section 404 thematic reviews, and without TC4, which are the run-off requirements when a firm is closing down. Of course, closing down a firm requires some very difficult judgments to be made about what you will be able to realise from the assets, the time over which you will be able to realise them and the consequent costs incurred during that period. If you make a series of extremely negative and conservative estimates, then of course you can put a firm in a very difficult position and make it almost impossible for it to carry on.
Last but not least is the position of the SIF—significant influence function—committee. I should like to give a real-life example of this, which I want to use to underpin the detail of my amendments. I have recently resigned as the chairman of a regulated firm. In April 2011 we took on from another regulated firm a new finance director, who came with good references. In July, he was told by the SIF committee that he was not able to take up the role of finance director. I went to the FSA and asked why. It said it could not tell me as there was an investigation and it was confidential. I asked the FSA if it could tell him what he had done. It said it could not do that either as it was confidential. That was June or July 2011. He is still waiting to hear the outcome a year later. He cannot find out what he has been accused of and is in a Kafkaesque situation. This is the sort of culture and risk-averse nature of the situation we now find ourselves in. My amendments are designed to prevent this being carried over into the new structure.
In the regulatory principles to be applied by both regulators in new Section 3B on page 28, I seek to add “operational rules” after “burden or restriction” because it is the unofficial stuff that can be made extremely expensive and difficult. It should cover firms as well as people. In particular, in Amendment 134, after “proportionate” I want to add “reasonable and fair”.
I have just given in some detail—and I apologise for going back to it—the example of the SIF committee. I can see how the regulator could argue that, if you have a person who has been involved in a firm which is under investigation, preventing him operating might be proportionate but to hold him in limbo for 13 months cannot be reasonable or fair. It offends the principles of natural justice.
I hope very much that my noble friend, when he comes to wind up and reply to this important set of amendments, can give me some assurance as to how we are going to make sure that the culture going forward is more even-handed and better than it has been over the past couple of years. It is absolutely vital that the future regulatory architecture enables financial services firms to play an effective role in the economy. To enable this role to be fulfilled, the regulatory regime needs to take an approach that considers whether interventions are proportionate, reasonable or fair.
My set of amendments would address a number of concerns. There would be assessment of business-specific risks—for example, the insurance sector presents very different risks from those of banks and has a very different business model. If the regulators are required to consider whether their approach is reasonable and fair, they should ensure that consideration is given to whether it is appropriate to apply regulations drafted with banks in mind to other industries in the financial services sector, including insurance. Then there is the question of the culture. My noble friend has said many times that the Government wish to avoid the stability of the grave. A requirement to have regard to what is reasonable and fair will help to ensure the regulators take a more measured approach. For example, the PRA has signalled a desire to make greater used of skilled persons and external auditors in its approach to supervision. While you have to recognise that these are important regulatory tools, it is imperative that they are used appropriately and in relation to those firms which represent a significant risk to the PRA’s objectives. This set of amendments is designed to help these considerations.
Baroness Noakes
My Lords, I have Amendments 144A and 147C in this group. They are in the name of the noble Lord, Lord McFall, and myself. I want to start by saying that I support what my noble friends Lord Flight and Lord Hodgson have said in respect of their amendments.
My amendments are much more modest. They just deal with Schedule 3, which sets up new Schedules 1ZA and 1ZB to FiSMA, which deal with the much more routine aspects of the FCA and the PRA. These little amendments simply add one requirement to the list of things that the FCA and the PRA have to include in their annual reports to the Treasury. That requirement is to include an analysis of the costs and benefits arising from regulation for which the bodies are responsible. It is important that this report is then laid before Parliament so the issue is kept visible.
These amendments come from the Treasury Select Committee’s first report of this Session, as do others in my name and that of the noble Lord, Lord McFall. The Treasury Select Committee has received a lot of evidence from the financial services sector about the rising cost of regulation—I have mentioned that once already this afternoon. I know that in particular the non-bank parts of the financial services sector feel that they are paying a price that cannot be justified by reference to the risks related to their own activities, which is why the issue of costs and benefits is particularly important.
Lord Teverson
My Lords, I shall speak to the amendments in my name and that of my noble friend Lady—
Lord Teverson
My apologies to my noble friend Lady Kramer. I am thinking ahead and getting too far ahead in my own mind.
Amendments 144C, 144D, 144E, 147D and 147E refer to Schedule 3 and are very much in the area of the annual duties of the FCA and the PRA to make public their actions over the previous year. Apart from producing annual accounts, three methods of accountability are mentioned in Schedule 3. There is the annual report, which is the responsibility of both the FCA and the PRA; there is a public annual meeting for the conduct authority, but not for the PRA; and there is a consultation process for the PRA on the annual report that is followed by a further report by the PRA on that consultation. It seems to me that all three processes are not only admirable but essential for the full accountability of these important and key organisations both to the industry and the public.
My amendments would put the same responsibilities on both those organisations so that the FCA will also have a consultation process on its report, and a report on that, and the PRA would also have an annual public meeting. I note with interest the Minister’s remarks about one size not necessarily fitting both these organisations because they are very different. Clearly their responsibilities, actions and how they work are different but, in terms of their responsibilities to the broader industry and to the public, their responsibilities are very similar. That is why I think it is important that, as in my amendment, the Prudential Regulation Authority should have an annual public meeting. Again, the reasons seem to me to be pretty straightforward. Although the PRA has a relatively limited clientele compared with the FCA, its work, as we have seen through the financial crises of the past few years, is very relevant to the remainder of the financial services industry, customers of those institutions and to all taxpayers, who at the end of the day, if the regulators of those major institutions have been ineffective, carry the can for the cost of that regulation not working. For those reasons the very admirable process of annual accountability should be reflected in both organisations. On that basis I hope that the Minister will look favourably on these amendments.
Lord Davies of Oldham
My Lords, I have little to add to this debate. I will keep my remarks very brief, but they are remarks of some cheer. I never thought that I would from this Dispatch Box congratulate the noble Lord, Lord Flight, on an amendment, but I very much approve of his Amendment 130B, and the precision with which he spoke, as well as the noble Baroness, Lady Noakes, who has made such a contribution to our proceedings today.
Lord Sassoon
My Lords, I fear that again this is going to be relatively long one in which I will not be able to satisfy all my noble friends. I hope that my arguments will speak for themselves, but I have a suspicion that I might not quite be able to do it. Let me give it a go, because this is a series of important amendments.
Amendment 130B would add to the efficiency principle to which both regulators will be required to have regard when carrying out their general functions. The efficiency principle ensures that the regulators should have regard to using their resources in the most efficient and economic way. This is the principle in FiSMA at the moment, but we are going further. We have made the accounts of the FCA and the PRA subject to audit by the National Audit Office and provided that the NAO will be able to carry out value-for-money studies into the new regulators, as we discussed earlier today. This ensures an important line of accountability for the regulators to Parliament, through the Public Accounts Committee, in how they use public money.
If the regulators are required to consider minimising burdens on firms without any counterbalancing provision, they may be distracted from pursuing their focused objectives, particularly if one considers that minimising burdens on firms could be used as a rationale for inappropriate regulatory forbearance. Instead, the proportionality principle ensures that costs of individual regulation are balanced against the pursuit of regulatory objectives that will benefit the whole financial system and its consumers, by requiring the regulators to consider whether the burdens imposed on firms will be proportionate to the benefits brought about by that imposition.
Amendments 131 to 135, in the name of my noble friend Lord Hodgson of Astley Abbotts, look to amend the proportionality principle to which both regulators will be required to have regard when carrying out their general functions.
Given the importance of the proportionality principle to the new structure, I am very glad to have the opportunity to discuss it further via this series of amendments. Amendments 131 and 135 would add to the proportionality principle a requirement on the regulators to consider whether an operational rule or operational requirement is proportionate to the benefits which result from that rule.
I can assure my noble friend that the existing reference to a burden or restriction already includes burdens or restrictions which relate to operational matters. So when the regulators make rules or impose requirements which require firms to alter the manner in which they operate their business, they will be required to have regard to the proportionality principle.
In fact, my honourable friend, the Financial Secretary to the Treasury, tabled amendments to the Bill on Report in another place to ensure that the regulators will have to demonstrate how they have considered such matters when making rules.
Specifically, they will have to set out in the compatibility statements that they are required to publish when consulting on new rules, how they consider the proposals to be consistent with the principles of regulation in new Section 3B, including the proportionality principle. Amendments 131 and 135 pick up the important point that much of it comes in the operational matters but that it is picked up, and specifically that the requirements of the Bill were extended in another place, which makes Amendments 131 and 135—and Amendment 132, which is consequential—unnecessary.
Similarly, Amendment 133 seeks to add “firm” to the proportionality principle, so that the regulators will have to consider the burdens and restrictions placed on firms, adding to the current wording which uses the term “persons”. We may have touched on that before, but again, for the avoidance of doubt, if we have not mentioned that in Committee, I would like assure my noble friend that “person” is defined in the Interpretation Act 1978 as including,
“a body of persons corporate or unincorporate”.
Thus “person” includes individuals and other forms of legal person such as companies, partnerships and unincorporated association. So Amendment 133 is unnecessary.
Finally, Amendment 134 would add the words “reasonable and fair” to the proportionality principle. I agree that the regulators should be both reasonable and fair in the way that they pursue their objectives. I understand my noble friend’s concerns. He has taken us through a number of examples where he feels that the current regime is operating unfairly. I will certainly not detain the Committee by giving the other side of the case in each of those examples, but there is one. Part of what we are doing will work right through the structure only if there are changes of attitudes in lots of ways in which people go about their business.
I appreciate the argument that the best way of making people change their attitudes is to include certain things in the Bill. However, I know that the FSA and the PRA are reading these debates carefully and understand the spotlight that they are under. All these exhortations to them to do what, in this case, is my noble friend’s direction of travel, which I fully appreciate, are being listened to carefully. But the provision itself in Amendment 134 is unnecessary. The regulators have a duty under public law to act reasonably and can be challenged in the Upper Tribunal or by way of judicial review if they fail to discharge that duty, which would be broadly the case if the requirement were on the face of the Bill. The regulators are already under a duty to comply with the rules of natural justice—in other words to follow procedures and processes which are fair.
Amendments 144A and 147C would require the regulators to set out the costs and benefits of the regulation for which they are responsible in their annual reports. The regulators are already required to include in their annual reports a significant amount of information about how they have adopted a proportionate approach to delivering their objectives for the FCA, in new Schedule 1ZA(10) and for the PRA Schedule 1ZB(18). They must set out how they have complied with the regulatory principles, including the proportionality principle.
The financial services regulators are being brought within the statutory remit of the NAO, which I have said before, which will be able to carry out its own value-for-money studies. It would be excessive to add to this an annual requirement for the regulators to conduct their own cost-benefit analysis of the entirety of their regulatory activity.
Amendments 147D and 147E would require the PRA to hold an annual general meeting, as is required for the FCA. Amendments 144C to 144E would require the FCA to put in place arrangements to consult on its annual report, as is required for the PRA.
The Bill provides for the PRA and FCA to take different approaches to annual consultation on the effectiveness of their regulatory approach, and I welcome this opportunity to explain why that is the case. The provisions for an annual meeting under FiSMA provide a useful opportunity for stakeholders to make high-level comments on the FSA’s strategy and approach. Like the FSA, the FCA will supervise the conduct of all financial services firms. Given the wide range of issues under consideration, and the large number of firms, it is useful to have a single annual forum where stakeholders can voice their views. But as I said in discussing the last group, the PRA will be looking in much greater detail at a much smaller number of firms, and will be focused on complex issues of prudential risk. Given the PRA’s narrow focus and the complexity of the prudential issues it will tackle, a written consultation will be a more effective way of obtaining input from industry about how it has performed against its objectives. This will enable firms, consumer groups and others to put in detailed submissions addressing the PRA’s prudential approach in a level of detail that they would not be able to do in an annual meeting.
These are alternative, rather than complementary, mechanisms—horses for courses—and it does not seem necessary to subject both regulators to both mechanisms, and in doing so create additional cost.
Lord Teverson
My Lords, I understand that argument about the PRA and a public meeting, but it seems to me that all of us that are in public bodies, in politics or whatever, know that there is nothing that makes you feel more accountable than knowing that you have to face an audience face to face once a year and people can turn up and ask you live questions. That is why corporate annual general meetings are not perfect, but at least they can be effective in that way and be quite focusing for the board of that company, or, in this case the members of the prudential regulation authority. It seems to me that since prudential regulation is so important to the financial health of the country, it would be a good thing for that reason.
Lord Sassoon
I well understand my noble friend’s argument. It is, of course, far from the case that the PRA and the Bank of England will be able to hide from direct questioning of what they do because I am sure that they will be in front of the Treasury Committee much more frequently than annually, under the full spotlight of television cameras and so on. It is not like a normal corporate situation in which the board may be able to hide away from that sort of scrutiny except annually. There will be very regular public challenge, principally through the Treasury Committee, and I can only repeat that it would have been the simple, easy answer to just put both requirements on both the successor bodies, but I come back to the underlying point: we must remember that we are creating two bodies that have to be, in very many respects, different from what we have with the FSA at the moment. If it is merely shifting the chairs around, we need not be spending the many hours that we are spending over the Bill.
Lord Sassoon
Well, that is why we are not merely shifting the chairs around; there will be a very fundamentally better structure in place for all sorts of reasons that we have debated, but as a consequence of that, some of the easy solutions of “one size fits both regulators” is not the right way to go and in this case it is essentially a disproportionate imposition of the public meeting on the PRA, for the reasons I have given.
Amendment 144B seeks to require the FCA to account in its annual report for how often the FCA used the product intervention power in Section 137C and financial promotions power in Section 137P, what the outcome of each intervention was, and how the FCA complied with the statement of policy concerning the temporary product intervention rules in Section 137N. Both powers are very important, but they are also a departure from the current regime and therefore it is important that the regulator accounts for how it uses them. As such, I fully agree with the sentiment behind this amendment, but I reassure my noble friend that it is not necessary. Paragraph 10 (1)(a) of Schedule 3 requires the FCA to report on the discharge of its functions and the FCA’s general functions include making and policing of the rules. The Government therefore fully expect the regulator to account, in this area, for how it has used these powers.
I think that I have dealt with all the amendments in the group.
Lord Hodgson of Astley Abbotts
I return momentarily to Amendments 131 to 135. I am extremely grateful for the Minister’s comments and the comfort that he gave on operational rules and the exchangability of “person” or “firm” under the Interpretation Act 1978, of which I was not aware. On the point about “reasonable and fair”, I think that he said the firm could always take the regulator to the Upper Tribunal. That is not an answer at all. No firm, particularly not a small one, will want to take the regulator to the Upper Tribunal. That is only in theory an answer. There is no way that any firm will want to go through the risks—in publicity, time and reputational damage—to ensure that the regulator has been reasonable and fair. I am not asking my noble friend to come back on this; I understand his point; but his officials should not think that that is an answer, because it is not a practical answer in the real world.
Lord Sassoon
My Lords, I appreciate that the processes of challenge, whether it is by the Upper Tribunal or under the rules of natural justice, are very much back stops and expensive and difficult for firms. That does not mean that large firms have not challenged the FSA and in some cases been successful over the years. I am not sure that it would be any cheaper and easier if such requirements were written into the Bill.
It just remains for me to ask my noble friend Lord Flight to withdraw his amendment.
Lord Flight
I thank my noble friend for his response. With regard to my Amendment 130B, I hope that, by the time we get to the end of the process, he may have some more effective thoughts as to how to ensure that costs are managed economically. I observe that, since the FiSMA, a great deal of forest wood has been cut down, a great deal has been added and little achieved for the consumer as a result. It is a difficult nut to crack, but, in the mean time, I beg leave to withdraw the amendment.
“(g) the need to ensure that each regulator employs staff with the necessary knowledge, experience and expertise of the sectors that they regulate, and of policy making at the European level.”
Lord Hodgson of Astley Abbotts
My Lords, Amendment 138C proposes a new paragraph (g) to the regulatory principles referred to in new Section 3B. It would ensure that,
“each regulator employs staff with the necessary knowledge, experience and expertise of the sectors that they regulate, and of policy making at the European level”.
The FSA has had issues in retaining quality staff in recent years, and recruitment will remain one of the biggest challenges facing the new regulatory bodies. A failure to address the issue of experience and expertise will undermine the introduction of the new regulatory framework—in particular, the proposed move towards a more judgment-based supervisory approach. The amendment is intended to probe the Government on how they and the regulators plan to address those staffing challenges.
I argue that there should be a commitment that the regulators will ensure that they recruit and retain staff with the necessary knowledge, experience and expertise to apply the regulatory regime in an appropriate and proportionate manner. It will be particularly important that the staff have a balance of sector expertise reflecting the range of industries that they cover, and that appropriate expertise is present at all levels and in all functions. Without proper staffing the regulators will be unable to make sound judgments about the strategies, plans and actions taken by individual firms. They will also struggle to understand the potential impact that regulations and supervisory actions taken against individual firms might have on the financial system as a whole.
Staff employed by the new regulatory bodies will also need to acquire skills and expertise to aid their interaction with the new European supervisory authorities. The ESAs will drive more of the regulatory agenda in future and it is essential that the new authorities play an increasingly influential role in the early stages of development and throughout the process governing the agreement of new regulation. To succeed in this area staff will need the necessary negotiating and influencing skills and require a high level of awareness of the political processes at a European level. We touched on this point during our debate on Amendment 96A, moved by the noble Baroness, Lady Hayter of Kentish Town, at our meeting on 10 July.
I have already referred in slightly unflattering terms to the significant influence of the function committee that authorises individuals on a case-by-case basis before they can take up their roles. A major part of the interview with the SIF committee is taken up with questions designed to discover if the interviewee has the necessary knowledge, expertise and experience. If this test is to be applied to those who run the financial services industry, it should surely also be applied to those who regulate it. I beg to move.
Lord Tunnicliffe
My Lords, I am somewhat surprised to find myself agreeing with the noble Lord, Lord Hodgson of Astley Abbotts. I have been involved in a lot of reorganisations and all too often people do not think about the human content of the organisation, the size of the jobs that they are creating and the extent to which a reasonable human being can do them—whether even an unreasonable human being can be found to fill those roles.
At first sight it is a matter of motherhood and apple pie. To try to get a feel for this Bill and speaking particularly about the PRA, I searched the internet and came across a splendid document by the Bank of England and the FSA, published in May 2011. It is called The Bank of England, Prudential Regulation Authority: Our Approach to Banking Supervision. It is written as a narrative and really it is a gripping one. All that the Minister says about the PRA is that it is going to be focused. It is going to be much more than focused. It is going to be based on a judgment-based supervision, and I quote from paragraph 15 of this document:
“The PRA’s proposed approach has, at its centre, supervisors making judgements, when needed, about current and future risks to an institution’s safety and soundness and about the action it should take to address these risks. It is recognised that this will mean that, at times, the supervisor’s judgement will be at variance with that of the institution. Furthermore, there will be occasions when events will show that the supervisor’s judgement, in hindsight, was wrong. This is inherent in a forward-looking system”.
This is a very significant intervention. Later the document describes the proactive intervention and at stage 3 points out where,
“significant threats to a firm’s financial safety or soundness may have been identified”.
It continues:
“The PRA may require any of the following actions: a change to management and/or composition of the board; limits on capital distribution; restrictions on existing or planned business activities; a limit on balance sheet growth and/or stricter leverage limits; and setting tighter liquidity guidelines and/or capital requirements”.
I am sorry that the noble Lord, Lord Sassoon, is not with us at the moment, but he said that the PRA will not become a shadow director. It is pretty clear that I do not understand what a shadow director is, but this is a significant level of intervention. Then you look at the role. A lot of the time, the people in this role will be doing base-level supervision. Let us hope that we have some financial tranquillity. We are now looking for people who will be capable of taking that level of intervention at pretty short notice, interfering in major institutions’ affairs, and having effects which, it is admitted, could be wrong decisions. That will have to be done with enormous care by people of very high quality.
I am pleased that the amendment brings Europe into play. In front of us we have a very complex set of organisational changes. It is not clear how it will fit with Europe. There will almost certainly be a number of jarring edges. We need people in this organisation who are capable of overcoming the ambiguities and smoothing the path of the relationship with Europe.
I am sure that the Minister will say that this is not the sort of thing that should be on the face of the Bill. If I were in his place, I know that my brief would say that. Nevertheless, it is for the Minister to assure us that processes will be in place, particularly in the PRA, given the intention to use these powers, which already exist, in such a significant way to meet these very serious challenges.
Baroness Noakes
My Lords, the noble Lord, Lord Tunnicliffe, reminded me that this morning I carried out my annual clearing out of documents to be binned or not to be retained. One of those that I reviewed was the document to which he has just referred, the Bank’s announcement in relation to how it would manage the PRA. That document did not go into the bin; it was saved for another day. However, it reminded me of the importance of the issue.
My noble friend Lord Hodgson referred to the number of staff who have left the FSA over the past year and a half. It is a very significant number of people at many levels, and often very senior people. The organisation is trying to live up to this new judgment-led supervisory approach and to cope with major organisational change, as the FSA is split into two organisations. My question to my noble friend on the Front Bench is: what confidence do the Government have that new regulatory organisations will have the staff? I am sure he will say, as the noble Lord, Lord Tunnicliffe, anticipated, that this amendment is not necessary. That may be so, but it is important to know from the Minister whether the Government believe that these organisations are ready for the responsibilities that they are to take on.
Lord De Mauley
My Lords, my noble friend’s Amendment 138C would make the FCA and the PRA consider whether their staff are appropriately experienced and endowed with the requisite level of expertise and knowledge to carry out their general functions. That would be inserted into the list of principles of regulation to which both regulators will be required to have regard. Of course, we agree that it is absolutely critical that the new regulators employ the right staff—staff who have the necessary skills and experience to use their informed judgment will be the defining factor in the success of the new regulatory system. Likewise, we agree with the Joint Committee’s assertion that the PRA and FCA will need to attract staff with the appropriate approach and experience. As my noble friend suggests, it is important that staffing decisions are made by the regulators themselves. Specifically, they should be empowered to consider whether they are appropriately staffed in order to meet their statutory objectives.
In that regard, the FSA paper setting out its vision for the FCA’s approach to regulation, published in June 2011, highlighted the importance that the FCA will place on such matters. It says that,
“the FCA will need to retain and attract professional and dedicated staff, equipped with the skills and knowledge to tackle the difficult issues ahead. It will need to be a dynamic and learning organisation, committed to developing individuals within a career that includes management and specialist paths. It will put a premium on flexibility and team-working where resources are allocated flexibly across the organisation”.
There is a similar commitment in the PRA approach to the banking document:
“The PRA will maintain its own in-house specialists including staff with particular expertise in risk management and risk modelling”.
I also understand my noble friend’s concerns about the requisite experience of the European policy-making process. Indeed, engagement with international regulatory bodies will be crucial for the regulators. I confirm, therefore, that I would absolutely expect the regulators both to employ staff with the requisite knowledge of European policy-making and to provide comprehensive training for staff who work in areas where knowledge of this is desirable. However, again, these will rightly be operational matters for the regulators.
My noble friend Lady Noakes asked whether the Government have confidence in the ability of the regulators to find the necessary staff. Yes, we do: we will draw on the best of the staff of the FSA and of the bank cadres and I am confident that, with focused objectives, they will quickly develop deeper expertise in their areas.
Baroness Noakes
Could I have a follow-up to that one? Has the FSA managed to recruit for all the staff it has lost, particularly those it has lost at senior levels over the last 18 months?
Lord De Mauley
My Lords, I cannot answer that here and now, but I will write to my noble friend on that point.
Meanwhile, I assure my noble friend Lord Hodgson that while staffing is not a matter for the Bill—as the noble Lord, Lord Tunnicliffe, suggested—we regard it as absolutely key for the regulators themselves to consider. On this understanding, I ask him to withdraw his amendment.
Lord Hodgson of Astley Abbotts
I am grateful to my noble friends Lord De Mauley and Lady Noakes and to the noble Lord, Lord Tunnicliffe, for their support. Inevitably, we get down a bit to motherhood and apple pie on these things. However, I say to my noble friend on the Front Bench that the reputation of the regulators will be made quite early on, because the firms will say, “Are these bodies with whom we can have a sensible, grown-up, informed, well judged set of discussions, or have they sent boys to do men’s jobs?”. If they send boys to do men’s jobs, the relationship will never recover, because the regulated firms will not feel that the regulators have the capacity, ability or knowledge to be able to make the informed judgments that this Bill expects of them. I will withdraw the amendment; however, my noble friend must emphasise to the regulators that this will be a once-in-a-lifetime opportunity. If they get it wrong, their reputation will be damaged from the start.
Lord Flight
“(d) that the exercise of their functions in relation to persons regulated by both the PRA and the FCA is coordinated with a view to avoiding the making of duplicative requests and the imposition of inconsistent requirements on such persons.”
Lord Flight
My Lords, Amendment 140 and Amendments 140B, 140C and 140D are really about the same territory of the co-operation and collaboration between the PRA and the FCA. Amendment 140 is very concerned to focus on the actual, practical dealing with firms in everyday business; it seeks to avoid the making of,
“duplicate requests and the imposition of inconsistent requirements on such persons”.
Those in the industry will be moving from regulation by one body; virtually everyone regulated by the PRA will be regulated by the FCA as well. There is an inevitable tendency for duplication. As we will come to later on, some of that is not necessary. This amendment calls for an addition to Clause 5, which puts in the Bill the objective of avoiding such duplication.
Amendments 140, 140B, 140C and 140D are essentially about the memorandums of co-operation between the two bodies. With regard to Amendment 140B, there are certain exemptions which could significantly limit the territories in which co-operation is required. The amendment seeks to require that additional guidance be given which makes clear the extent to which these exemptions must be used to disapply the duty to co-operate.
Amendment 140C relates to the MoU, which is required to be reviewed regularly and published. However, there is no requirement in the Bill for the PRA and FCA to consult on the changes from year to year and this amendment provides that such consultation should take place. New Section 3E(8)(b) allows technical or operational issues relating to co-operation between the two authorities to be left out of the MoU, but I cannot see any particularly good reason why this is so. Again, this could have a material impact on firms, where important things end up being omitted. Amendment 140D redrafts new subsections here so that they only cover items where publication would be against the public interest, and removes the references to technical and operational issues as being able to be left out.
Lord Hodgson of Astley Abbotts
I have added my name to Amendment 140, moved by my noble friend Lord Flight. I underline the importance of co-ordination and think some means of measuring the effectiveness of the co-ordination mechanisms and processes between the FCA and the PRA should be established. Some annual review would bring significant benefits, and changes could then be incorporated in the MoU that exists between the two bodies, and would help control costs.
As I am sure other noble Lords have, I have had briefings from London First and the Council of Mortgage Lenders stressing the importance of this co-ordination and the need for these two bodies to work closely together. One swallow does not make a summer, but a very large firm rang me up to say that their chief executive was having to have a get-to-know-you session with the FCA and the PRA, talking about the generality of the firm, but they refused to co-ordinate the meeting. The FCA said, “Come down here and we will see you one time but then come down a second time to see the PRA”. He is going to have to make two visits to these organisations. It is a swallow and a cost, but also denotes an attitude, which is the very attitude that I think has to some extent poisoned the present relationships. In order to work in a cost-effective and business-friendly way, the regulators have got to understand that these firms have to operate and cannot just be at the beck and call of the regulator. They have commercial lives to live and the chief executives of these big companies are busy men. It is not beyond the wit of man, and common politeness, for the regulators to be able to agree a common diary approach for what is a getting-to-know-you arrangement, not an inquiry about something relating to their own particular functions. I very much underline what my noble friend’s amendment says. There is an awful lot of work to do if we are not to set off down the wrong road in this very sensitive and potentially extremely costly area.
Baroness Kramer
My Lords, I will speak to Amendment 140A, which is in this group. It is slightly different but we did not seek to have it regrouped, just in the interest of time. Amendment 140A would establish in the Bill that the PRA and FCA are considered equal in status. We have a letter from the noble Lord, Lord Sassoon, dated 18 June, which indicates that it is the Government’s intention to have parity of status, but I would defy anyone to read the Bill and come away with that particular conclusion. In the Bill, as your Lordships will be aware, the PRA has the right to veto certain of the FCA’s regulatory actions. I have no problem with that—it can be right and proper—but it reads over very quickly into a sense that the PRA is the superior body. The PRA is also part of the Bank of England family, a very powerful family. The FCA stands outside of that, which is right and proper. However, it creates the issue about the balance between those two regulators, particularly since the Governor of the Bank of England chairs the PRA as well as the FPC and the MPC. The FCA therefore stands in a different relationship to the governor and has a very different role. The governor is a very important individual in the international community in terms of public recognition and public standing.
Building a little on the comments just made about culture and behaviour by the noble Lord, Lord Hodgson, we must recognise that within departments there tends to be a sort of default behaviour to live in a silo. It is very difficult to persuade organisations to co-ordinate effectively with each other, and to have the kind of respect that goes with parity. Although there is a memorandum of understanding, a great deal of judgment is involved in that memorandum in terms of deciding when it is appropriate to share information, to consult and to co-ordinate. It depends a great deal upon attitude. I have been in at least two meetings with members who were a fairly broad representation of the financial services sector when it has been evident that the assumption of the sector is that the PRA is the lead institution and the tough guy, and that the FCA plays a somewhat secondary role.
This is of particular concern because of the range of financial services sectors that the FCA will regulate. It comprises 27,000 firms contributing £63 billion in tax revenues, providing over 2 million jobs, two-thirds of which are outside London. We must be very careful that it is not regarded as second class in its role. The London Stock Exchange is particularly concerned about this issue because of the role that the FCA must play in Europe. As your Lordships know, it has the seat of ESMA, which is highly significant. The UK market accounts for between 60% and 80% of EU securities trading but has only 8% of the vote on ESMA. Therefore, the status, standing and significance of the FCA will matter enormously in those European discussions which affect the City, the financial services industry, and the international world of finance more generally.
This amendment seeks to, in a sense, make it clear in the Bill that the FCA does not have second-class status and that it is equal in its standing with the PRA. It seeks to make sure that that then gets embedded into the culture of how these regulators relate to each other and co-ordinate with each other, and that the FCA has standing in international eyes, and is recognised by international regulators as the body they can appropriately talk to, and not as a body that they must go around in order to speak to the genuine powerhouses.
Lord Stevenson of Balmacara
My Lords, I rise to speak to Amendments 140A, 140BA, 140DA, 143C and 144JA. Amendments 140AA to 140DA appear to be, to use the words of the noble Lord, Lord Flight, in the same territory as those amendments that he was proposing and which have also been supported by the noble Lord, Lord Hodgson. Therefore, I do not think that we need to say much more except that we support them. We hope that our points will also be taken into account—they are relatively self-explanatory. We look forward to hearing the Minister’s response.
Amendments 143C and 144JA, raised in the other place, are intended to probe the practical aspects of co-ordination behind the FCA and the PRA on the ground—for example, across the membership of the boards. Schedule 3 on page 177 makes provision for the Bank’s deputy governor for prudential regulation to be on the FCA board. However, paragraph 6 states that:
“The Bank’s Deputy Governor … must not take part in any discussion by or decision of the FCA which relates to (a) the exercise of the FCA’s functions in relation to a particular person, or (b) a decision not to exercise those functions”.
Similarly, new Schedule 1ZB(5) states that:
“The chief executive of the FCA must not take part in any discussion by or decision of the PRA which relates to”—
I do not need to quote it further, it is very similar. There we have two deputy governors, supposedly sitting on these two boards to aid the co-ordination of these two bodies and to have cross-membership, and yet there is a provision that gags those two individuals and prevents them getting involved in discussions in certain areas. There may be a rational reason for this but it beats me as to what might be.
There is a further point. Paragraph 5 on page 177 of the Bill states;
“The validity of any act of the FCA is not affected”,
if there is a vacancy in the office of deputy governor, or if there is
“a defect in the appointment of a person”,
to those boards. However, if a deputy governor happens to stray in discussions into areas that relate to a particular person or to a decision on exercising a function, might there not be a serious risk that on judicial review—for example, a third party could challenge the validity of any act of the FCA—should it be discovered that the deputy governor had uttered a phrase or misspoken in a particular way about a particular person or issue?
One must be concerned about enshrining restrictions on the things that board members can and cannot utter so that they cannot take part in a decision. How would that be implemented? Would they have to leave the room when one of these topics came up? Would every single decision of the FCA and the PRA have to be separated into generic and operational questions? It would surely not be right to fetter internal discussions in this way. If it is right to put them on the boards of both organisations, it must be right to let them discuss everything that comes up on those boards. I look forward to hearing the Minister’s response to these points.
Baroness Cohen of Pimlico
I support the amendment in the name of the noble Baroness, Lady Kramer, and particularly her remarks about the importance of the status of the FCA in relationship to European negotiations. I remind the House that I am a non-executive director of the London Stock Exchange and that until 2010 I also chaired the sub-committee of the European Union Committee that is concerned entirely with difficult negotiations on wholesale finance. It is extremely difficult, particularly in the present climate of financial panic in Europe, to make progress—nay, even to hold our own—in negotiations with fellow European countries. The FCA must, as a very minimum, be seen to be of equal status to the PRA. I cannot emphasise how important this is. Over there in Europe, they have got used to having the FSA and they will be totally puzzled as to who is important unless it is made clear in the Bill.
Lord De Mauley
My Lords, these amendments have in common that they concern the relationship between the PRA and FCA and mechanisms for co-ordination between the two. Amendment 140A would insert a declarative provision that the PRA and FCA are considered equal in status. I agree with the sentiment. The PRA and FCA have very different remits: the PRA for prudential regulation and the FCA for conduct regulation. These are equally important. The Bill gives the PRA and FCA the necessary powers to deliver their objectives. Within their area of competence and expertise, each will have discretion as to how they exercise those powers to achieve their objectives.
Clearly there are differences between the regulators, in structure as well as in their objectives. Indeed, some of them could be construed as making the PRA appear to be the junior partner—for instance, it is the subsidiary of the Bank while the FCA is a wholly separate body. However, nothing in this arrangement should be taken to imply that one is superior to the other. My noble friend Lady Kramer, echoed by the noble Baroness, Lady Cohen, emphasised the importance of the FCA’s equality of status, particularly in the international context. The fact that the FCA will attend ESMA underlines that it will be the UK’s pre-eminent markets regulator.
Amendment 140 would require the PRA and FCA to co-ordinate their actions in relation to dual-regulated persons to ensure that they avoid duplicative requests and do not impose inconsistent requirements. Co-ordination is indeed a key point—one that has been emphasised by both industry and consumer representatives. The Government have considered this carefully. The general duty to co-ordinate is designed to address exactly the points that the amendment raises.
Subsection (1)(c) of new Section 3D specifies that one of the three purposes of co-ordination is to allow the regulators to use their resources in the most efficient and economic way, and to act in a proportionate manner. An efficient and proportionate approach will require the regulators to minimise duplicative requests wherever possible and avoid inconsistent requirements. This is supported by the new power for the Comptroller and Auditor-General to conduct value-for-money reviews of the financial services regulators and to report back to Parliament. The NAO will of course be able to look into co-ordination between the PRA and the FCA. I hope that noble Lords can agree with me that these mechanisms, already described in the Bill, are sufficient and that we do not need further provision to support them.
Amendment 140B would require the FCA and the PRA to publish guidance explaining the circumstances where the duty to co-ordinate does not apply. I agree that it is important to have clarity about this. The MoU will set out how the regulators will comply with the duty as a whole, including the limitations on the duty established in subsection (2).
Amendment 140AA would modify the general duty to co-ordinate to make it explicit that an objective of co-ordination is to minimise “unnecessary additional expenses” that might arise as a result of the separated administration of the PRA and the FCA, and to,
“maximise any common administrative savings”.
The Government agree that, where possible, costs arising from duplication of effort should be avoided. That is why the duty to co-ordinate requires the regulators to co-ordinate so as to act in a proportionate manner. This will include, for example, co-ordinating their information gathering in a way that will minimise costs. The regulators will be scrutinised by the NAO to ensure that they are delivering value for money. However, if the Bill were amended in the way suggested, I fear that it could be a distraction. There is a risk in requiring the PRA and the FCA to focus too much of their attention on co-ordinating at the expense of focusing on delivering their own separate regulatory objectives. The Government’s view is that this amendment goes too far in that direction.
Amendment 140DA would require that the co-ordination MoU between the PRA and the FCA contains an estimate of the additional annual costs when compared with the estimated costs of the administration of the FSA. I reiterate the point that the Financial Secretary to the Treasury made in another place: a core purpose of these reforms is to reduce the frequency and severity of future financial crises. This will require much tougher and more effective regulation. As we acknowledged in the impact assessment published alongside the draft Bill, there may be additional costs as a result of the separated administration of the PRA and the FCA. However, these costs pale into insignificance when compared with the cost to the economy of the recent financial crisis.
Amendment 140D would remove the provision stating that the MoU between the PRA and the FCA need not include technical or operational matters that do not affect the public. The MoU must set out enough detail to make clear the standards against which the regulators can be held to account, and to enable the public and regulated firms to see the principles and agreements that are driving the regulators’ approach to co-ordination. However, as I am sure noble Lords will accept, it is important that it does not become simply an impenetrable technical manual. The purpose of this is provision is to make clear that it need not include a great deal of detail that is of no interest to Parliament or the public. I think that is a suitable test of the kind of material that need not be set out in the MoU.
Amendment 140BA would require the regulators to include in their MoU provisions about how they would co-ordinate their activities,
“in relation to the promotion of high standards of stewardship by institutional investors”.
The FCA will be the regulator of the conduct of all asset managers, including their conduct in looking after institutional investments. The PRA will take a regulatory interest in asset managers if they also have permission to carry on PRA-regulated activities; but even in those cases the PRA will not be responsible for regulating their conduct as asset managers. It is not clear what activities in relation to stewardship the PRA and the FCA would need to co-ordinate or why they should be specifically required to provide for that co-ordination in the MoU. The MoU will, of course, already cover any necessary co-ordination in relation to PRA-regulated firms that also happen to be asset managers.
Amendment 140C would require the PRA and the FCA to consult publicly on any proposed changes after their annual review of the MoU. It is essential that industry has the opportunity to make representations about the contents of the MoU and the way in which the regulators comply with it. The draft MoU has been published, and the Bank and the FSA have invited comments. The Bill makes provision to ensure that industry and others can make further representations. The FCA and the PRA are required to include an account of how they have complied with the duty to co-ordinate in their annual reports. After publication, they are required to consult publicly on the effectiveness of their strategy. The FCA will do this by holding an annual public meeting, while the PRA will use a written consultation arrangement. Respondents to those consultations will have ample opportunity to comment not just on the content of the MoU itself, but also on the way in which the regulators have put it into practice.
Lord Flight
My Lords, empires will be empires. The comments of my noble friend Lord Hodgson were pertinent; the early signs of co-ordination and co-operation are not particularly encouraging and, when I have encountered members of the PRA team, they have given the impression that they think that it is the superior body. The Government might keep an eye on this territory before the Bill is finally enacted because I do not think that what is in it is strong enough to counter those natural tendencies. I beg leave to withdraw the amendment.
Lord De Mauley
Lord De Mauley
“(a) a local weights and measures authority in England, Wales or Scotland, or(b) the Department of Enterprise, Trade and Investment in Northern Ireland,for the provision by the authority or department to the FCA of services which relate to activities to which this subsection applies.(5A) Subsection (5) applies to activities”
Lord Stevenson of Balmacara
In moving the amendment, I shall speak also to Amendments 143ZB to 143ZD as well as Amendment 144EA. This group of amendments relate to the consumer advice functions of the FCA, currently delivered through the Money Advice Service, and the separate responsibility that the MAS has for co-ordinating debt advice. I declare my interest as a chair of the Consumer Credit Counselling Service, the country’s leading debt advice charity, which has helped more than 1.3 million people in the last few years to deal with their unmanageable debts.
I start by asking the Minister if he can confirm the Government’s intention to retain the status quo in this area in so far as the body known as the Money Advice Service is concerned. MAS has responsibility for delivering money advice to members of the public as part of its consumer education function and has recently assumed responsibility for co-ordinating debt advice, which is currently delivered by a number of charitable bodies, including Citizens Advice, the Money Advice Trust and the Consumer Credit Counselling Service.
As your Lordships’ House will be aware, although the Bill continues the FSA’s current responsibilities regarding these functions to the FCA, new Section 3R in Clause 5 confirms that a consumer financial education body undertakes this function on behalf of the FSA at present and it is intended in this section of the Bill that the body corporate, originally established by the FSA under Section 6A of FiSMA, will continue to deliver these services for the FCA. So the Bill assumes that the MAS will continue.
I invite the Minister to clarify the situation, because rumours have begun to circulate, following the hearings held recently by the Treasury Select Committee on the Money Advice Service. These were fairly rumbustious sessions, and for long parts of them the committee was focusing on what it clearly saw as an unsatisfactory situation regarding the FSA’s current responsibilities for the MAS, its business plans and its operations. I gather that it would not surprise many observers if the Government intended to bring forward amendments on this topic. I will not repeat the rumours that have reached me, but the stories authoritatively report a range of decisions including the abolition of the MAS, to giving it its own statutory position within the Bill. I would be happy to give way to the Minister if he would like to clarify what the position is at this point. He does not wish to do so now so I shall continue.
These amendments seek to clarify the role of the Money Advice Service in respect of its money advice services, to ensure that it focuses with laser-like intensity on the needs of members of the public on low incomes and to ensure that it provides,
“targeted, proactive and easily accessible advice to those encountering economic disadvantage, financial exclusion or financial exploitation”.
In respect of the co-ordination of debt advice, the amendments seek to make sure that this means that the MAS will be explicitly focused on promoting the work of registered charities such as the MAT, CCCS and the citizens advice bureaux, so that people struggling with debt are made much more aware of the excellent free, independent and impartial support that is available to them.
There is one point which I hope the Minister will be able to help me with when he replies. While the MAS is a direct provider of money advice, it is not the Government's intention that the MAS should become a direct provider or regulator of debt advice, in direct competition with and duplicating the work of these long-established registered charities. He will recall that in the other place, the Treasury Minister, Mr Mark Hoban, said:
“The role of MAS is to commission free debt advice, not … to provide [it].”—[Official Report, Commons, Financial Services Bill Committee, 6/3/12; col. 345.]
That having been said, there is an issue here which it would be good to recognise—about whether it is credible to view money advice and debt advice as separate activities. We in our charity certainly take the view that when people come to us with debt problems, our priority is obviously to get them to repay their debts in as short a time as is possible, without jeopardising their basic needs and livelihood; and we are not into debt forgiveness.
However, another of our functions is to use the process that they are going through to educate them about how to deal better with credit in the future. In that sense, I have sympathy with those who argue that money advice and debt advice are two sides of the same coin, if you will excuse the pun. However, that may be an issue for the future. For the moment I am anxious to ensure that the Government are not seeking to complicate the debt advice space. There is a need for co-ordination, a reduction of duplication, and for all concerned to bear down on costs, as well as increase throughput. However, there is no need for additional direct provision of services by the Government. The registered charity sector can and will deliver a brilliant service here.
Recent research by the Financial Inclusion Centre has shown that there are 6.2 million households in the UK that are financially vulnerable. Half of those are already behind with debt repayments or face insolvency action; 3 million are living so close to the edge that they do not know how they would cope if there were to be even a small increase in their regular household bills. That is why the MAS needs to focus on those members of the public who are on lower incomes, and to target advice to those encountering economic disadvantage, financial exclusion or exploitation.
Around half of our debt advice clients have struggled on their own for more than a year before seeking help and many feel ashamed of their financial problems. When people do summon up the courage to ask for help, they need advice about the best remedies for them, and we would argue that they should seek free advice. Around 400,000 people in the UK are thought to be on commercially provided debt management plans, which cost them £250 million in fees every year. We estimate that for a typical debt of £23,000, a client of a debt management company pays more than £4,000 in fees to that company. Clients of charitable providers by contrast only pay back what they owe, and the time taken to get free of their debts is about 18 months less than with a commercial provider.
That is why we suggest in this group of amendments that a key function for the Money Advice Service must be to get financially vulnerable consumers to seek help earlier from charities such as National Debtline, Citizens Advice and CCCS by promoting free debt advice. The public interest here, surely, is to encourage people with debt problems to recognise the free debt advice sector as the best place to go for rehabilitation. Raising the profile of the free debt advice sector is necessary if we are to counter the aggressive advertising of fee-charging debt management companies which seems to be everywhere. However, this is difficult for the charitable sector to do under its own steam, as its charitable funding should really be used to deliver direct charitable benefit. In December last year, the chief executive of the Money Advice Service said that he wanted to build the profile of the free debt advice sector so that ultimately, everybody in need of debt help sees the free debt advice sector as the “better option for them”. I welcome that approach and beg to move.
Baroness Kramer
My Lords, I want to comment on Amendment 143ZE. I have great respect for the CCCS and the work that it does, but there is also at least one commercial player—I am thinking of Payplan—which, I understand, provides free debt advice on a basis very similar to that of the CCCS, and in fact Citizens Advice frequently refers people to it to deal with debt management. Like the CCCS, it gets its funding from the creditor and not by turning to the individual who is in debt.
Although I entirely agree with all the statements that have been made about those—perhaps not all but certainly many—who advertise and often provide a very unsatisfactory and highly questionable service to individuals who are in debt, leaving them in a worse situation than when they started, I am slightly cautious about the suggestion that only the charitable sector can provide free debt advice. We need all the players we can get in this business and, provided they do it in the appropriate way, we should surely encourage all of them.
I question why the companies that seek to have the debts repaid to them should not be more influential in this process. My understanding is that they would far rather work with those who provide free debt advice than those who muddy the waters by essentially taking the fee-paying attitude and offering and delivering a less satisfactory solution for everybody involved.
Lord De Mauley
My Lords, this group of amendments relates to the Money Advice Service and to charities involved in the provision of debt services. Amendments 143ZC, 143ZD, 143ZE all relate to the role of the MAS in the provision and co-ordination of debt advice.
Before I address the amendments, it may be helpful if I explain the MAS’s role in this area, which is to offer free and impartial information and advice on money matters to help people to manage their money better and to plan ahead. Through taking charge of their finances, fewer consumers should fall into unmanageable levels of debt. However, those consumers who do find themselves with high levels of debt will continue to need specialist debt advice.
The MAS, with its consumer financial education remit and national reach, is well placed to take a role in the co-ordination and provision of debt advice as part of its existing service. The Bill therefore includes provision to clarify that the MAS consumer education function extends to assisting members of the public with the management of debt and to working with other organisations to improve the availability, quality and consistency of debt services. However, the MAS does not directly deliver debt advice services itself, as the noble Lord, Lord Stevenson, said; rather, it delivers funding to providers of debt advice services, such as Citizens Advice, and it helps members of the public to access high-quality debt advice services.
Amendment 143ZC seeks to replace the existing requirement at new Section 3R(4)(f) under Clause 5 for the MAS’s consumer financial education function to include,
“assisting members of the public with the management of debt”,
with a requirement to include,
“providing high quality information about, and promoting awareness of, registered charities which provide debt services”.
I reassure the noble Lord, Lord Stevenson, that the Government are committed to the continued existence of the MAS and that there is no intention that the MAS should displace existing funding streams or existing services. The MAS intends to work with a large cross-section of the advice and creditor sectors to keep them up to date with its plans. I also reassure noble Lords that the MAS already signposts to other organisations which provide debt advice services and it will continue to be able to do this.
There are a number of amendments in this group and I have copious notes which address all of them. From the speech that the noble Lord made, I sense that I have dealt with his key points. If he wants me to go on, I shall be very happy to do so. However, if he is happy with that assurance, I hope that I can ask him to withdraw his amendment.
Lord Stevenson of Balmacara
I am not quite sure what I did agree to—I was nodding so hard and trying to get across the message that I slightly lost what the noble Lord said. I would like to read Hansard as I might want to get into correspondence with him, but we were seeking clarification that MAS would continue to be part of the Government’s plans and they were not intending to change its formal position in statute, according to the rumours that were circulating. If that is the case then that is very good. The Minister was also going to confirm that it would continue to operate as a provider of direct services on financial education advice for people, which he has done, but that its role in debt advice was very clearly that of co-ordinating and funding, not of delivering a service which would be otiose and, in any case, a duplication. I am very grateful for that.
There is a longer conversation to be had on Payplan. This is not the time to have it but one has to bear in mind that we are talking about people who are entering debt management plans. That is quite a small proportion of the total needs people have for debt advice. It is true that the funding mechanism looks quite similar to Payplan but it is not the same as a donation given to support the work of charities such as Citizens Advice which, as we all know, do such a huge job across a whole range of activities. The commercial aspects of Payplan bear against that ability to operate. That is why we were so keen in these amendments to reinforce the suggestion that the publicly funded MAS—soon to be funded by levy but still operating in a very public space—should focus very closely on the free advice from the charitable bodies and not try to build up, for some faux competition idea, another group of bodies that could be taking money from people who are already distressed financially and therefore would not be in a position to operate.
I think that we are on the same page. Perhaps we might exchange pages later to find out. I beg leave to withdraw the amendment.
Lord Sassoon
Lord Sassoon
“Publication of record of meetings of governing body9A (1) The FCA must publish a record of each meeting of its governing body—
(a) before the end of the period of 6 weeks beginning with the day of the meeting, or(b) if no meeting of the governing body is subsequently held during that period, before the end of the period of 2 weeks beginning with the day of the next meeting.(2) The record must specify any decision taken at the meeting (including decisions to take no action) and must set out, in relation to each decision, a summary of the deliberations of the governing body.
(3) Sub-paragraphs (1) and (2) do not require the publication of information whose publication within the time required by sub-paragraph (1) would in the opinion of the governing body be against the public interest.
(4) Publication under this section is to be in such manner as the FCA thinks fit.”
Lord Sassoon
“(3A) Neither section 1A(6)(d) nor the definition of “functions” in paragraph 1 applies for the purposes of sub-paragraph (2).”
Lord Sassoon
Lord Sassoon
“Budget17A (1) The PRA must, for each of its financial years, adopt an annual budget which has been approved by the Bank.
(2) The budget must be adopted before the start of the financial year to which it relates, except that the first budget must be adopted as soon as reasonably practicable after the coming into force of this paragraph.
(3) The PRA may, with the approval of the Bank, vary the budget for a financial year at any time after its adoption.
(4) The PRA must publish each budget, and each variation of a budget, in such manner as the PRA thinks fit.”
Lord Sassoon
“(3A) Neither section 2A(6)(d) nor the definition of “functions” in paragraph 1 applies for the purposes of sub-paragraph (2).”