Grand Committee

Tuesday 30th October 2018 Grand Committee

Tuesday 30 October 2018

15:30

[The Deputy Chairman of Committees (Baroness Henig) (Lab)]

If there is a Division in the Chamber, the Grand Committee will adjourn for 10 minutes.

Further Education Bodies (Insolvency) Regulations 2018

Tuesday 30th October 2018 Grand Committee

Considered in Grand Committee

15:30

Moved by

[Lord Agnew of Oulton]

That the Grand Committee do consider the Further Education Bodies (Insolvency) Regulations 2018.

[The Parliamentary Under-Secretary of State, Department for Education (Lord Agnew of Oulton) (Con)]

My Lords, these regulations were laid before the House on 5 September. In the Technical and Further Education Act 2017 we introduced a special administration regime for the further education sector. This included provisions for insolvency in the rare instances that it might be needed. It has been some time since we have discussed further education insolvency in this place and it is worth taking the time to set out some context for the benefit of those less familiar with this regime and the primary legislation.

Colleges are statutory corporations but operate independently of government. They have the ability to raise debt funding in the same way as a commercial body, through bank or other lending, although they are not for profit. A financially resilient further education sector requires strong leadership and an efficient structure to operate in. Since 2015, we have been working with the sector to strengthen that leadership.

Additionally, through a programme of area reviews, we have supported the restructuring of the sector so that colleges can meet the needs of learners and employers in their area as efficiently as possible. The Government have supported the sector to share best practice and to help weaker colleges to improve and raise standards. Coupled with the FE strategic leadership programme offered by the Education and Training Foundation, the aim is to drive up professional standards in the sector to help colleges to improve quality and become better equipped to deliver sustainable provision serving local needs. The Government also provided access to a restructuring facility, set up in 2016, to support the implementation of recommendations that came out of the area reviews. As that work is coming to an end, the restructuring facility closed to new bids at the end of last month.

Although we are seeing merged colleges and more robust arrangements developing as a result of the area reviews, we cannot guarantee that no college will fail in the future. We recognised that we needed a suitable mechanism in place to deal with colleges in an orderly manner if they should fail in the future. Therefore, in 2016 the Government announced that they would develop an insolvency regime for the sector. This includes a special administration regime with the objective of avoiding or minimising disruption to the studies of existing students of the FE body as a whole, while ensuring that the education administration is no longer than it needs to be—thus it benefits both students and creditors of an insolvent college.

The main provisions for the regime are in the Technical and Further Education Act 2017. The legislation provided clarity on whether and how insolvency law applies to FE bodies. The new regime ensures that there is an orderly process in place for managing a college insolvency. It also introduces, in the unlikely event that a college should become insolvent, a special administration regime known as education administration, which prioritises the protection of learner provision. Once commenced, the regime will give the Secretary of State the power to apply to court for an education administration order, appointing an education administrator. This could happen as a result of a creditor taking insolvency action of its own, in which case the Secretary of State can use his powers to put in place a different form of insolvency proceeding to protect provision for learners. Alternatively, he may be persuaded that the FE body is insolvent and that an application to court for an education administration order is the best course of action.

The 2017 Act applied certain provisions of insolvency law to the FE sector subject to modifications set out in the Act and specified in the regulations that we are considering today. These regulations modify insolvency legislation as it applies to FE bodies, both in the Insolvency Act 1986 and in wider legislation that concerns insolvency, to make it work effectively for further education bodies.

I also draw the Committee’s attention to the fact that there will need to be another piece of secondary legislation enacted before the special administration regime can be commenced. This will be a statutory instrument setting out the rules that apply to the education administrator’s conduct of an education administration. That instrument will follow the negative procedure. The insolvency regime provides the framework for insolvency practitioners to work within when dealing with the further education sector and specifies how education administration can be used to protect provision for existing learners at a college in financial distress. It is not the purpose of this legislation to seek to close colleges. It is a necessary tool to deal with the worst-case scenario, as the hard edge of a broader intervention system providing a structured and measured approach to preventing and responding to failure.

Colleges enjoy a high degree of financial independence, and it is right that they should be responsible for the decisions they take. This wider intervention system will start with the monitoring of colleges that are experiencing difficulty. If things get worse, then there will be a wide range of intervention tools. The insolvency regime is the mechanism of last resort, and we would expect it to be used only rarely. I wish to be clear that, where a college becomes insolvent, it will not necessarily lead to provision being closed. The aim would be to deliver the best scenario for the local area in the manner that is least disruptive for the learners at the college.

I turn to the purpose of this legislation. The draft regulations before the Committee today are quite technical. Their main purpose is to modify provisions of the Insolvency Act 1986 and to have legislation made under those provisions apply effectively to college statutory corporations. This not only ensures that a regime works technically, it also deals with practical issues to allow for the fact that FE bodies are autonomous and will have different provisions within their instrument and articles of governance. Therefore the regulations make provisions to manage insolvency proceedings in a standard way. These regulations also set out provisions for filing documents with Companies House, so that insolvency procedures are transparent for further education corporations, as they are for companies.

The role that the governors play in the UK education system is a crucial and well-established one. They bring a wealth of outside experience and knowledge to the sector. They are, rightly, already subject to important duties and liabilities as trustees of a charity and should already be well used to the responsibility that these duties bring. Governors should respect good practice, following proper process and ensuring that they take and carefully consider appropriate professional advice before taking key decisions.

The regulations have been drafted purposely to exempt student governors from certain offences and duties normally contained within insolvency legislation. The Government took the view that there would be some situations where student governors could not possibly have a meaningful say in decisions that gave rise to particular offences. It follows that it would not be right to expose them to liability for those offences. It is common for student governors under the age of 18 to be excluded from voting on decisions by the board that have financial outcomes. We have taken the view that if they cannot have a say in financial decisions, they should not be liable for offences linked to those decisions. Equally, student governors should not have to prepare a statement of the affairs of the college corporation, which includes a summary of the corporation’s assets and liabilities and details of its creditors—details that they might not be expected to be privy to. However, let me be clear that there is an onus on all governors—student members, staff members and other governors alike—to co-operate with the insolvency practitioner appointed by the court. This includes not making false statements when they are required to supply evidence of events.

I turn to the more technical detail of the regulations that we are considering today. Part 3 of the regulations modifies provisions of the Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016 as they apply to FE bodies that are statutory corporations. Part 4 of the regulations applies provisions of other legislation relating to insolvency to FE bodies, subject to modifications. For example, the Land Registration Rules 2003 need to be modified to enable the Land Registry to make an entry in the register that an administrator or liquidator has been appointed over a statutory corporation. Part 5 modifies provisions of the Companies Act 2006, applied to statutory corporations by Regulation 3, to ensure that they work effectively for FE bodies that are statutory corporations. This is to facilitate the correct filing of key insolvency documentation.

We carried out consultation on the position adopted in the regulations with insolvency practitioners, lenders, colleges and organisations that represent the sector. This included the Association of Colleges and the Sixth Form Colleges Association. The department has also worked hand in hand with Companies House and the Insolvency Service to ensure that these regulations work effectively for their intended purpose. The regulations apply to FE bodies and companies conducting designated further education institutions in England and Wales, and Welsh Ministers are fully supportive of the approach taken in the development of this legislation. I commend these regulations to the Committee.

[Lord Watson of Invergowrie (Lab)]

My Lords, I thank the Minister for introducing these regulations, which will bring a new college insolvency regime into effect by the end of the year. We believe that they are necessary and will not be opposing them, although we have some caveats that I shall bring to the Minister’s attention.

The Government are right to regulate in this area to bring more legal certainty, but we believe they should use the new powers only in exceptional circumstances because of the risk that they could damage confidence in an important sector. As I argued in Committee on what was then the Technical and Further Education Bill—before the noble Lord, Lord Agnew, was in your Lordships’ House—there is a danger that highlighting the need for a statutory insolvency regime that has not hitherto existed may alarm governors, banks, employers, international partners and others whose support is necessary to ensure that colleges provide the education and skills that the country needs. That is even more important now that the country is about to leave the EU and faces an uncertain economic future into the 2020s.

These regulations are technical and take a sensible approach to fitting out the structure of the legislation. The continuing underfunding of further education and the growing financial weakness of some colleges heightens concerns that the Government could unintentionally force a college into insolvency, with the serious consequences that that would bring. The new statutory college insolvency scheme can be traced back to early 2016, when the Government were overseeing the rationalisation of the sector through the national area review programme. No clear rules currently exist as to what happens should a college run out of money and the Government did not effectively indemnify it. When colleges were taken out of local government in 1992, a new type of statutory corporation was created to run them but no rules were ever established to apply in circumstances where colleges simply ran out of money. Instead, to protect a college’s students, courses and assets, central government—through a succession of funding agencies—has ended up being the funder of last resort. This has meant that the banks have always been paid in full or been able to replace an old loan with a new one.

The Government’s post-16 area review was designed to put all colleges on a sustainable financial footing and has resulted in more than 50 mergers since 2015, the majority of which have been self-funded by colleges. The process of restructuring colleges has proved to be more complicated than was anticipated when the area reviews started. Colleges have found that it takes more time than expected to satisfy their banks, resolve pension issues and navigate rules devised by Ofsted, the Home Office and the Education and Skills Funding Agency. We understand that the Treasury insisted on a college insolvency regime as a price for providing its restructuring loans, and this is what was legislated for in the Technical and Further Education Act. These regulations will put this into effect and are intended to provide clarity about what happens when a college gets into severe financial problems. The law creates a special administration regime for colleges akin to that put in place in recent years for energy companies, train operating companies and housing associations—strange comparators, noble Lords may feel. But it is to be welcomed that the special administrator will have duties to protect learners, as well as creditors, in a situation where a college has run out of money.

The new college insolvency regime has been described as a last resort rather than a normal route to secure change. Once the new arrangements come into force, there will be several lines of control in place: the governing bodies will of course have a duty to ensure the solvency and viability of colleges; the ESFA will have financial oversight; the Further Education Commissioner will intervene where the college has a notice to improve; and there is the independent business review, a new pre-statutory process that will apply for colleges in severe financial distress. Only if and when all the above fail to resolve matters will the new college insolvency regime apply.

15:45

Just as the vast majority of companies and charities never come into contact with a normal insolvency practitioner, so almost all colleges will be unaffected by the existence of a special administrator. Given that there are four players in the game, the possibility of overlap clearly exists, so can the Minister explain how the various bodies I listed will interact to avoid any confusion or duplication?

The regulations clarify issues associated with the statutory process, the position of colleges that are also companies—a handful of adult learning institutes—and the fact that student governors will not be covered by director disqualification rules. The bigger issue is that the circumstances have changed considerably since spring 2016 when the Government drafted the legislation for these changes. Despite widespread agreement that education and skills matter for the country’s future and the Government making noises that suggest they agree, the financial outlook for the 266 colleges in England has further deteriorated in the past 12 months.

I refer to the Explanatory Memorandum that accompanies the regulations; it is towards the end of the bundle of documents. On page 3, using wording that would do Sir Humphrey proud, the first sentence of paragraph 7.1 reads as follows:

“A proportion of FE colleges have fallen into financial difficulty for a variety of reasons”.

That is an understatement. I read on, interested to see whether any of these reasons were listed; there was not a word. That is all the document says, with no attempt to specify what the reasons are. That is, at best, unfortunate. It may not be the role of the Explanatory Memorandum but drawing attention to the issue then casting it aside as if it is of only relatively minor importance is not very helpful.

However, it fits to some extent with the fact that the Government remain in denial about the serious underfunding of the college sector. The cost of recruiting and retaining the staff needed for high-quality academic and technical education is rising but the Government refuse to acknowledge inflation in their funding decisions. The funding rates paid to colleges have been fixed in cash terms since 2013. The hope that apprenticeships would provide more income has not been realised because of their falling numbers, although the one ray of light for colleges to emerge from yesterday’s Budget was that the co-investment rate for smaller, non-levy-paying employers will be cut from 10% to 5%, which hopefully will have an effect on those hitherto prevented from participating.

Despite the mergers that have resulted from the area review process, some colleges remain in a financially fragile state. The Minister may question my raising funding in the context of these regulations but I believe their relevance should be clear. Over the past 10 years, colleges have had to deal with an average funding cut of 30% while, at the same time, costs have increased dramatically. Further education is the only part of the education budget to have had year-on-year cuts since 2010, with funding for students aged 16 to 18 suffering an 8% cut in real terms since 2010. Funding for adult education has had a cut of 62%, so it is little surprise that the past 10 years has seen total enrolment for adults drop from more than 5 million to less than 2 million. That explains why banks are removing or withholding investment from the sector, leaving some colleges exposed in terms of cash flow.

I finish with a word of caution to the Government. Given the chilly financial climate that their policies have created for colleges and the uncertain future to which I referred, they should be very careful about using the new rules contained in these regulations without considering the consequences.

[Baroness Garden of Frognal (LD)]

My Lords, I too thank the Minister for introducing the regulations. It is always somewhat frustrating that discussion of regulations offers no chance to amend, but of course it gives us an opportunity to challenge and seek clarification from the Government on rationale, detail or implementation.

We on these Benches found the Technical and Further Education Act a deeply depressing piece of legislation. Our further education sector makes an enormous contribution to education and the economy but continues to be overtasked, underfunded and underappreciated. The Bill was largely about potential insolvency in further education—hardly a resounding message of support. Of course, it introduced the baffling T-levels, which were not sought by the sector and continue to be baffling months after their inception. They risk undermining the highly regarded vocational qualifications that have served this country well for generations, but we will keep the perplexities of T-levels for another debate.

I declare an interest as a vice-president of City & Guilds, an organisation I worked with for some 20 years. For more than 140 years, it has been an immense source of employment skills for the nation. City & Guilds has always worked with FE colleges, which play a crucial part in delivering world-class qualifications that are highly regarded in the UK and overseas by employers across the whole range of work-related skills.

We note that a number of FE colleges have fallen into financial difficulties. Can the Minister tell us how many of them have actually become insolvent? I note that the Explanatory Memorandum indicates that,

“in reality we expect that FE colleges entering insolvency would be a very rare event”.

One wonders why, in that case, so much of the Act was devoted to such insolvency. We gather too that:

“The Department will publish two sets of guidance before the instrument comes into force”.


Will the Minister say when we can expect these sets of guidance? Apparently there is to be no monitoring to assess whether there are,

“any unexpected burdens or tensions within the FE sector”.

Any legislation that imposes additional burdens and tensions on an overburdened sector should surely be dismissed instantly. Would it not be prudent to have some sort of review?

Will the Minister also say what part in those financial difficulties has been played by the unwelcome and damaging burden of providing GCSE resits in maths and English? If ever a policy was designed to reinforce failure in learners, these resits are that policy. Young people who may have brilliant workplace skills are forced into taking exams again and again which have little, if any, relevance to the work they wish to do, and they fail time and again. This is hardly encouragement for the future. Colleges have been tasked with this depressing and resource-intensive duty. When will the Government realise the negative and counterproductive impact of their obsession with academic qualifications, regardless of the talents of young people or the relevance of those qualifications to the things that young people actually want to do? Can the Minister say if and when the Government have plans to review the GCSE resit policy?

I share the concerns of the noble Lord, Lord Watson, over the drop in funding for FE, which is surely unacceptable with all the pressures put on it.

Can the Minister say what provision has been made for private providers? What progress has been made in developing comparable safeguards for apprentices and other learners who are with private providers, especially in view of the collapse of 3aaa? What about the looming collapse of learndirect? Do these regulations have any implications for protecting learners if there are subcontracting arrangements, for instance? We know that colleges and private providers are entangled in highly complex subcontractors. The Minister may have an answer on this, but if he does not, perhaps he could write to me.

We do not seek to challenge these regulations, but we express again our deep concerns over government policies towards vocational, or even technical, education. We hope that wise heads will appreciate that it is in the national interest, and in the interest of learners, to give every possible support and status to those who seek to acquire the work skills the country so desperately needs. I look forward to the Minister’s reply.

[Lord Jones (Lab)]

My Lords, I thank the Minister for his cogent introduction and my noble friend for his eloquent steer in a debate such as this. My remarks will be very brief. The regulations refer to Section 124A of the Insolvency Act, which is headed “Petition for winding up on grounds of public interest”. Will the Minister expand on how he perceives the public interest in the context of this sphere of education? The matter is complicated, and obviously the provision is necessary, but can he give a recent instance of where a specific further education establishment has been perceived to be insolvent? Has that happened? Does he know of a sixth-form college that has been wound up? Has that happened?

Paragraph 7 of the Explanatory Memorandum on the policy background is helpful. Does the Minister know whether exceptional financial support has been given to one of these institutions? Like others in this debate, I think the further education sector is crucial to the future of Britain’s economy. In particular, FE colleges might help us save what remains of our manufacturing base.

[Lord Storey (LD)]

My Lords, I preface my remarks by saying that we value further education. It will go through a renaissance and the need for vocational courses, skills development and apprenticeships will help it to blossom. This instrument is technical but it is absolutely right that we should agree it.

However, I have a number of concerns. We have had the area reviews, of course, but why do we allow a further education or sixth-form college to become insolvent? One would think that further down the line we would take strong and robust action to ensure that that does not happen. If a college closes down the effect on the local community and economy can be devastating. If we allowed a further education college in, say, Northumberland to close down because we had not kept our finger on the pulse, imagine the effect that that would have in a predominantly rural area.

It is important that we understand the mechanisms for ensuring that this does not happen. I see in the document that 37 further education colleges published notices to improve financial health. What do the Government do to make sure that that support is given?

I agree with the comments of the noble Lord, Lord Watson, about cuts, but it is not always about cuts; it is about management as well. An institution might not have all the resources it needs but it might be so well managed that it thrives nevertheless. It is about the management of the college as well as its finances.

I have three further questions. First, the Minister said that insolvency will not always mean closure. Will he expand on that and say what other actions can be taken? Secondly, do these regulations apply to university technical colleges? Thirdly, if we want to create the level playing that the Minister talked about, should we not ensure that all sixth-form colleges are treated equally and that those that have to pay VAT will no longer have to do so? Will he perhaps explain why sixth-form colleges that are not in a multi-academy trust have to pay VAT?

[Lord Agnew of Oulton]

My Lords, I thank noble Lords for the interesting points they have raised. There have also been a number of questions which I will certainly try to address.

I say to the noble Lord, Lord Watson, that we are adamant that this provision is for exceptional circumstances. I made that clear in my opening comments. In answer to noble Lords who raised questions about our commitment to this sector, it might be worth summarising the extent of that commitment. In the current academic year, 2018-2019, we expect to spend some £7 billion, which includes apprenticeships. That gives a sense of the proportion of our public spending that we are putting into this age group.

I can reassure all noble Lords that this instrument is designed as an exceptional mechanism. The main reason for it is that under traditional insolvency arrangements, the lenders take control of the process. The provisions in these regulations make sure that learners are given more priority. That is the overarching principle of why this is being done.

On the specific question that the noble Lord, Lord Watson, asked about how the various bodies involved in the sector would interact with one another, we are still developing intervention systems so that we can respond effectively to the early signals of poor financial health to focus on preventing colleges from getting into positions of insolvency. This allows the FE commissioner and his team to go into colleges at an early stage, work with principals and governors and share best practice on better financial management to help college boards develop sustainable plans for financial resilience. College boards may need to make tough decisions to make to become more resilient. We will rely on their engaging with us early on, as soon as they know there is a problem. That goes somewhat to the point that the noble Lord, Lord Storey, made about the quality of management and governance. That is very much what we are pushing for, to ensure that when the canary in the coalmine sings, it is listened to and early action is taken.

16:00

I turn now to the question asked by the noble Baroness, Lady Garden. First, I pay tribute to the great work of City & Guilds, which is a vital part of the framework for education post 16. She asked specifically about the numbers we expect to become insolvent. I cannot give a number on that, but I restate what I said a moment ago—that we see this as a last resort. On her question about resits, I know that this is a matter of some emotion for people. It is worth saying that employers value the fact that young people have to face up to the basics of English and maths; they appreciate it. I understand that this can be demoralising. I come from a family of seven children. Only two of us passed maths O-level, so I know what it is like to be in a family of low-achievers. However, most jobs today include a high level of technical involvement. Not grasping the basics of good English comprehension or basic maths skills will put young people at a disadvantage for the rest of their lives.

[Baroness Garden of Frognal]

There is no objection to the fact that young people are helped by being able to read, write and add up. The point is that GCSEs are very academically focused and the content of those syllabuses is completely inappropriate for many people who have technical skills and could happily do a functional test paper but not the academic papers of GCSE; it is the GCSE exam that is the bugbear, not the fact that people need to be able to read, write and add up.

[Lord Agnew of Oulton (Con)]

I will certainly take the noble Baroness’s views back to the department and reiterate them; I understand exactly what she is staying. She also raised a question about providing guidance to governors. We are committed to providing clear guidance, particularly on their duties and liabilities under insolvency law. The general College Governance guide, last published in 2014, will be updated. Both sets of guidance have been drafted and are being developed with the stakeholders—the Insolvency Service, the Association of Colleges and the Sixth Form Colleges Association—ready for publication in, we hope, the next few weeks.

The noble Lord, Lord Jones, asked whether I have any specific examples of colleges that have become insolvent. The short answer is no, as they have so far resolved their issues. In 2016 we created the restructuring facility, a fund from which some £330 million has been drawn across the sector. That has been used specifically to help them carry out the restructurings and some of the mergers to which other noble Lords referred, so there has been a period of consolidation over the last two years.

The noble Lord also asked about sixth-form colleges. There is a provision—this also addresses the point made by the noble Baroness, Lady Garden—for sixth-form colleges to convert to academy status. If they do that, they get the benefit of VAT recovery. The question was: why cannot everybody do that? The reason is that it is a complicated process. It is an option that we have offered to sixth-form colleges but not all of them have taken it up.

[Lord Storey (LD)]

There are all sorts of reasons. If a sixth-form college chooses not to become an academy or part of a multi-academy trust, it is penalised by having to pay VAT; but if it chooses to go down that route, it gets the reward of not having to pay VAT. Is that what the Minister is saying?

[Lord Agnew of Oulton]

That is, in essence, correct. However, one of the advantages of the FE sector is that colleges are allowed to borrow money commercially. If that is a route they want to take or have taken, that can be a barrier to conversion to academy status.

The noble Baroness, Lady Garden, asked about the role of private providers in subcontracting. These regulations are specifically designed simply for the further education sector, not for independent subcontractors. If a further education college were to become insolvent, a subcontractor could become one of the creditors.

I hope I have answered all the questions that have been raised.

[Lord Storey]

There was the question of university technical colleges.

[Lord Agnew of Oulton]

These regulations do not apply to university technical colleges. A UTC is framed under the academies legislation and has a funding agreement in the same way as an academy has, but UTCs are a separate legal entity.

As I have outlined, these regulations make necessary modifications to insolvency law so that it effectively applies to FE bodies and can bring the further education insolvency regime into effect. Cases of insolvency are rare and will continue to be so, but we cannot afford to be complacent. It is essential that this legislation is put in place for the FE sector to provide legal certainty and, most importantly, to ensure that learners are protected in the event of financial failure.

Motion agreed.

Newcastle Upon Tyne, North Tyneside and Northumberland Combined Authority (Establishment and Functions) Order 2018

Tuesday 30th October 2018 Grand Committee

Considered in Grand Committee

16:07

Moved by

[Lord Bourne of Aberystwyth]

That the Grand Committee do consider the Newcastle Upon Tyne, North Tyneside and Northumberland Combined Authority (Establishment and Functions) Order 2018.

Relevant document: 40th Report from the Secondary Legislation Scrutiny Committee

[The Parliamentary Under-Secretary of State, Ministry of Housing, Communities and Local Government and Wales Office (Lord Bourne of Aberystwyth) (Con)]

My Lords, this order was laid before the House on 4 September. At Budget 2017, nearly a year ago, we announced that we were minded to agree a North of Tyne devolution deal with the three areas which will be the constituent councils of this combined authority: Newcastle upon Tyne, North Tyneside and Northumberland. The deal will devolve major powers and budgets, including £20 million a year of devolved funding over the next 30 years, control of the 19-plus adult skills funding, and powers for the combined authority to acquire and dispose of land. The mayor will have powers to take forward compulsory purchases and establish mayoral development corporations as a foundation for the North of Tyne’s housing and regeneration ambitions. In return, the area has agreed appropriate governance for these new powers and budgets centred on a combined authority with a directly elected mayor. Such mayors can provide a focused single point of accountability for the powers and budgets being devolved, and can be a powerful voice raising the profile of their area with business, with government, and internationally, helping to promote inward investment and growth.

The order before the Committee, if approved by Parliament and made, will implement this deal—a deal which is yet another step along the way of our devolution agenda. It recognises that North of Tyne is a coherent economic area, which generates almost £17 billion in economic output, has a number of significant growth sectors and is home to more than 815,000 people. The deal will support the delivery of the North East local enterprise partnership’s strategic economic plan, which sets a forward direction for industrial growth across the north-east.

The background to this deal is that when in September 2016, the four authorities south of the Tyne—Durham, Gateshead, South Tyneside and Sunderland—chose not to participate in the agreed North East Combined Authority devolution deal, the Government were clear that they would continue to work with those authorities committed to devolution. As a result of this, the three North of Tyne authorities that supported the original deal have worked with government to agree this new mayoral devolution deal on this smaller North of Tyne geography. Although ideally we would have wished to see a deal that covered the area of all seven councils, we are clear that this North of Tyne geography is an economic area that can rightly support a devolution deal that will bring considerable benefits to both that area and the wider north-east. As my honourable friend the Minister made clear in the other place, we in the Government pay tribute to and thank the leaders of the three North of Tyne councils—Nick Forbes, Norma Redfearn and Peter Jackson—for their vision, work and commitment, which have led to this deal and the benefits it will bring to both their communities and the north-east more generally.

If approved by Parliament and made, the draft order will implement the deal. It is made pursuant to the provisions of the Local Democracy, Economic Development and Construction Act 2009 as amended by the Cities and Local Government Devolution Act 2016. It will put in place the necessary governance arrangements. It will establish a combined authority for the areas of Newcastle upon Tyne, North Tyneside and Northumberland. It makes provision for a directly elected mayor for that area, to be elected by all the local government electors for that area. The first mayor will be elected on 2 May 2019 for a term of five years, with the next election taking place in May 2024, then every four years subsequently. The initial five-year term is to bring these mayoral elections in line with mayoral elections in other city regions where there are elections of metro mayors, such as Greater Manchester and the West Midlands.

The order also makes provision for an interim appointed mayor in the period before the mayoral election takes place. This interim mayor will be appointed by the members of the combined authority, and while he or she will be chair of the combined authority they will not have any powers devolved to them. The order is equally the instrument through which certain powers, as envisaged in the deal, are devolved to the area to be exercised by the combined authority and, in some cases, by the mayor, once he or she is elected. These include local authority powers of compulsory purchase and the power to create and establish mayoral development corporations.

To allow for the establishment of the new mayoral combined authority, this order removes the local government areas of Newcastle upon Tyne, North Tyneside and Northumberland from the area of the current Durham, Gateshead, Newcastle upon Tyne, North Tyneside, Northumberland, South Tyneside and Sunderland Combined Authority and changes the name of that combined authority to the Durham, Gateshead, South Tyneside and Sunderland Combined Authority.

Most importantly, to ensure the continuity of the delivery of integrated transport arrangements across the two combined authorities across the north-east, the order also makes provision for the establishment of a joint transport committee. The new combined authority will appoint three members to this committee, one of whom must be the mayor unless the mayor decides that he or she does not want to be a member. The existing combined authority will appoint four of its members to this new joint transport committee. The new joint committee will exercise all the transport functions of the two combined authorities. It will produce a joint transport plan covering the area of both combined authorities. As with all combined authorities, an overview and scrutiny committee, as well as an audit committee, will be established for this joint committee.

In laying the draft order, we have followed the statutory processes specified in the 2009 Act as amended by the 2016 Act, which I mentioned. Establishing a combined authority is centred on there being a triple lock: a combined authority can be created only if the councils concerned consent, the Government agree and Parliament approves the necessary secondary legislation. The three councils that will be the constituent councils of the new combined authority—Newcastle, North Tyneside and Northumberland—have consented to the provisions in this order that will create the combined authority. The original combined authority and the three councils leaving it have consented to the change of that combined authority’s area. All seven councils and the original combined authority have consented to the establishment of the joint transport committee and the associated constitutional changes that this order brings.

We have considered the particular circumstances of this proposal in relation to establishing a new North of Tyne combined authority and the changing of the boundaries of the existing combined authority, as the law requires. We have concluded that all the statutory conditions are met. We also consider that it would be appropriate to establish this combined authority while having regard, as the 2009 Act requires, to the need to reflect the identities and interests of local communities, and to secure effective and convenient local government.

16:15

Finally, we have considered the public consultation carried out by the three North of Tyne authorities on the proposals, and we are satisfied that no further consultation is needed. I can confirm to the Committee that we believe that the conditions have been unambiguously met and therefore seek the approval of the Committee to this draft order today. In short, when it is approved and made the order we are considering, which has already been approved in the other place, will establish a mayoral combined authority to which will be devolved wide-ranging powers and significant budgets. It opens the door to a new era for the area to promote economic growth, to improve productivity and, as the area itself believes, to lead to the creation of 10,000 jobs. I therefore commend this order to the Committee and I beg to move.

[Lord Beecham (Lab)]

My Lords, I refer to my interest as an elected councillor in Newcastle, and one who will be seeking re-election next May. Next Sunday will be the 14th anniversary of the referendum on the proposal at that time to create an elected regional authority for the north-east. Forty-eight per cent of the electorate cast their votes and, I am sorry to say, resoundingly rejected the idea by 77% to 23%. Disappointing as it was to those of us who saw in the concept a real opportunity to create a body capable of promoting the interests of the region as a whole, the result was not a great surprise. Local rivalries have never been confined to the football pitch.

In the mid-1960s, at a time when local radio was being promoted by the BBC, the then leader of Gateshead Council declared that nobody in Gateshead could possibly be interested in anything broadcast from Newcastle. In the mid-1990s I wrote a paper advocating the establishment of a north of England councils’ association, incorporating the counties of Northumberland, Durham, Cumbria and Tyne and Wear—the latter of which has since vanished—and their constituent city and district councils. Knowing that if such a proposition was seen to have emanated from Newcastle its prospects of success would have been negligible, I passed it to the then leader of Northumberland County Council, who circulated it without attributing its source. The association was accordingly established with Hugh Little of Cumbria as its first chairman. When Cumbria departed, it became the North East Assembly and when Tees Valley in turn departed, it became the Association of North East Councils.

It is unfortunate that the four councils south of the Tyne have so far declined to join the new combined authority—I should add that part of Northumberland is south of the river but will be within the boundaries of the new authority. I can understand some of their concerns. The new structure will be led by an elected mayor, a requirement imposed by the Government on all new combined authorities. Newcastle itself voted 62% to 38% against having an elected mayor when it was compelled to hold a referendum—for just the city itself—in 2012. This time, people are being denied a voice completely on that issue.

Moreover, the much-vaunted investment by the Government of £600 million over 30 years, which is all of £20 million a year shared between three councils, is frankly pitiful. Newcastle alone is facing cumulative cuts which, by next year, will amount to £280 million annually, and there is no suggestion from the Government that there will be any benefits flowing our way under any changes in the local government finance system. The same would apply to the neighbouring authorities.

There are, however, some promised changes which are welcome. These include local control of the budget for adult education, with enhanced powers to promote development, and a joint committee to manage public transport. Can the Minister say whether the latter will include a role in relation to rail transport, including the east coast line? Can he give any assurances about the future of the region’s airports? If, as has from time to time been suggested, the Scottish Government abolishes air passenger duty, will the region’s airports, and in particular Newcastle Airport, be able to follow suit?

On the housing front, I understand that the current chairman of Homes England is to chair a housing land board. Can the Minister explain how this will work in relation to the role of the councils in the provision of social housing? Will it be possible for the councils to provide more social housing for rent? Who will determine the size and nature of local housing provision and the provision of the necessary services for residents?

There are ambitious claims for job creation and new housing, with apparently 9,500 people to be helped into employment and 10,000 houses to be built. Can the Minister indicate over what period these goals are expected to be achieved? How many of the 10,000 homes will be provided respectively by local authorities, social housing providers and for sale?

Transport is an important issue for the whole region. It is to be hoped that both the new combined authority and the four councils which will remain from the existing authority will continue to work together through the joint transport committee.

The Metro, which serves Newcastle, North and South Tyneside, Gateshead and Sunderland, is a critical service covering all the authorities in the currently established set-up. There is clearly a potential to expand the service, not least to the west end of Newcastle, one of whose wards I represent. Will the department invest in this important area? It is a modest task in the light of the vast amounts being spent on Crossrail and HS2.

Will the Minister’s department put pressure on the Department for Transport to tackle the dreadful performance of the laughably misnamed TransPennine Express in the service between the north-east and the north-west, a more important project in the eyes of many of us than HS2?

The region is one of 10 bidding for funding from the £1.7 billion transforming cities fund. Six mayoral authorities have already shared £840 million. Given the problems facing the north-east, which are threatening to worsen after Brexit, it is vital that we secure investment of this kind. I understand we are looking for funding in the range of £50 million to £100 million. I hope the Minister will support our bid from the region.

There are some issues which cross the boundaries between the new combined authority and the four south of Tyne authorities. Two further education colleges, on either end, in effect, of the Tyne tunnel, are now combined. One will be in each of the two combined authorities hereafter and I am not clear what the implications of that will be. I do not know whether the noble Lord is in a position today to respond to that. He may need to consult the Department for Education. However, there will be services which cross the river, as it were, which will not apparently be affected directly by the new authority structure and there will have to be arrangements to deal with that.

It is similar in the National Health Service. We have, for example, a Newcastle and Gateshead clinical commissioning group which also crosses the boundary of what will be the two combined authorities. Is it envisaged that any change will be made in the NHS area, given the changing boundaries within local government and the important connection between local authorities’ social care provision and the NHS?

The justice system is another area which merits consideration, especially the probation service, which hopefully is to be restored as a single service in the light of the systemic failings of the split between probation and Chris Grayling’s community rehabilitation companies. Will the combined authority have oversight of both the custodial and probation services in its area and, indeed, of the court system, where court closures are having a serious impact on the working of the courts? It may well be that at least oversight of these areas could well be placed within the province of the new combined authority.

Many of us are hoping that, whatever doubts we may have about aspects of the changes in bodies in the order, they will help the region to address the serious problems it faces, constantly exemplified for me by the presence in the council ward that I have represented for the past 51 years of the busiest food bank in the country. I look forward to the evolution of a North East Combined Authority with the determination and resources to help transform the life chances of our citizens. I endorse the conclusion of the Secondary Legislation Scrutiny Committee’s report:

“It will be important that all involved keep under review the success of cooperation between the new mayoral Combined Authority and the other councils, against the objective identified by DCLG in 2014 of promoting more effectively economic growth and prosperity for the area concerned; and that the Government should be ready to adapt arrangements in the light of experience”.


We are in a period of change. There is real potential for improvements to be made, but it will not be enough simply to rely on that reorganisation, not least in relation to the necessary funding to address the very serious economic and social problems that the area faces. This is a step forward. There is still a long way to go to transform the life chances of people living in the north-east, and in particular in the area covered by these changes.

[Lord Shipley (LD)]

My Lords, it is always a pleasure to follow the noble Lord, Lord Beecham, in a debate. He reminded us of the history of devolution and of some of the current problems in public investment and governance across the wider north-east. I agree with him that this proposal is a step forward. He used the word “unfortunate” to describe the fact that the four councils south of the Tyne have refused to take part. I think I might have used a stronger word, but for the moment “unfortunate” will do. Indeed the Secondary Legislation Scrutiny Committee said:

“Progress towards establishing a mayoral Combined Authority in this part of the North East has not been straightforward”.


Let us all agree with that. I have been very critical of this and of the failure of local councils across the wider combined authority area to speak with one voice. As the Secondary Legislation Scrutiny Committee reminded us, key business stakeholders appear to view the latest proposal as a second-best option. It is the only option on the table. It is a second-best option, but the final sentence in the Secondary Legislation Scrutiny Committee’s comment is,

“the Government should be ready to adapt arrangements in the light of experience”.

I very much hope that the Minister will be willing to confirm that that is exactly what the Government plan to do.

I support this proposal because I believe that the north of the Tyne should not be left behind because of the approach taken south of the Tyne. Indeed, there are powerful combined authorities elsewhere across the north of England that have mayors. They give focus to strategic planning and to the delivery of growth, jobs, higher education and skills standards. For that reason this proposal should be supported. It is a very great pity that the area to the south of the River Tyne decided not to take part.

The Minister referred to the transport arrangements. It is true that the current structure will remain in place. There will be a statutory joint authority to bring all the councils and passenger transport executives together on key issues. The seven local authorities are said to be confident that these arrangements will work. Well, they need to work. There will have to be an agreed clarity of purpose for the whole subregion, because this could come unstuck when a critical decision has to be made.

16:30

I noticed recently, for example, that Nexus has parked the issue of where future investment in the Tyne and Wear Metro system might go. At some point, a decision will be needed on whether the first extension of the system will be into south-east Northumberland or towards Washington. Such a decision on priorities will need open public debate. The decision will need to command general support based on evidence, for without that it is likely to cause differences of opinion where we need to speak with one voice to ensure that the necessary funding gets to the region.

Whenever we have debated the combined authorities, I have been concerned that the issue of scrutiny and the openness of meetings should always be foremost in our minds. There are proposals for a scrutiny system, which I understand will be all-party, as it needs to be. That system needs to be open. The scrutiny process is only as good as the issues that it is able to discuss. It is important that, in the scrutiny system, officer support is available to the scrutiny members, so that they can put things on the agenda and do their job properly. Decision-making also needs to be open to the public. In other words, there needs to be media access. It would be a bad thing if this new North of Tyne mayoral combined authority began to be perceived as a secretive organisation that did not explain what it was doing and why it was doing it. For that reason, I hope that great attention will be paid to how public scrutiny will work.

Let me also express a concern about hyperbole in the expectations of what will apparently be achieved if the combined authority comes into existence. I give two examples from briefings that I have received. The first says:

“The new body will have a £600m investment fund, worth £20m a year over 30 years, which is expected to generate £1.1 billion for the local economy, create 10,000 new jobs and leverage £2.1 billion in private sector investment”.

I hope that I am not the only Member of this Committee who thinks that these are big figures to commit oneself to for £20 million a year, which is not a substantial sum. I therefore exercise a note of caution. Delivery could well be difficult. It will probably be made more difficult by the consequence of Brexit, if it happens. Even if it does not, it is difficult to see how such figures can be achieved.

There is then a further piece of hyperbole:

“The minded-to North of Tyne devolution deal represents value for money to Government”.

Of course, giving only £20 million a year probably is value for money for the Government. The briefing goes on to say that the deal represents,

“a cost effective contribution to rebalancing the national economy by … Generating almost three quarters of a billion pounds (£734m) in income tax and NI contributions to HM Treasury … Saving £93.9m in welfare payments as more people move into employment”,

and,

“Increasing business rates by approximately £298m”.

It would be marvellous if all these figures came to pass. I just issue another note of caution that achieving these sorts of figures is difficult from additional spending of £20 million a year. Somebody might hold the North of Tyne combined authority to commitments of this kind. I urge a note of caution on big numbers that common sense suggests might be difficult to deliver.

The North of Tyne combined authority needs to be open and honest in its objectives; it needs to win public support—given that 38% of those consulted opposed its creation; and it needs to be seriously focused on delivery. If it does these things well, it can build public support. But it will need to: ensure that it addresses public concerns; bring together urban and rural; ensure local accountability, not top-down decision-making from a centralised mayoral office; and ensure the fullest consultation on all its plans. Having expressed those concerns, I very much hope the North of Tyne combined authority will be a success and I wish it well in its endeavours.

[The Lord Bishop of Newcastle]

My Lords, I welcome this proposal for a North of Tyne combined authority. I was present when the minded-to agreement was signed and there was a real sense of purposeful energy around the room. I agree with my noble friends Lord Beecham and Lord Shipley who talked about the level of investment that this combined authority will pull in; it is good, but very modest. I hope that nobody, including the Minister, will feel that this is anything like a sufficient answer to the critical lack of investment in the north-east. This development is a necessary but not sufficient condition for a proper level of investment in the north-east economy.

I hope, however, that I can offer some encouragement in the face of undoubted disappointment that we are looking at three authorities joining together in this combined authority, not seven. Most people would absolutely have preferred it to be seven. The governance review decided that there is an economic coherence between the three authorities that have been brought together; I agree with that. I share a bit of hope that, beyond economic coherence, there is also social and cultural coherence.

Towards the end of the 19th century, the Church of England and Parliament looked at the structure of Church of England dioceses to see whether they were fit for purpose for the development of new areas of industrial and manufacturing population. In 1878, an Act of Parliament created two new dioceses in the north of England—Liverpool and Newcastle dioceses. The area of the proposed combined authority was at that time part of Durham diocese. The diocese of Newcastle, which came into being in 1882, is almost exactly coterminous with the proposed combined authority. When my diocese came into being, St Nicholas Parish Church in Newcastle became Newcastle Cathedral; Queen Victoria then granted a royal charter and Newcastle became a city, so there is a real coherence.

In the life of the diocese, which has existed since 1882, we have found that, when it works, it works because there is a real sense of identity in these three areas. It works only when we recognise a degree of mutual dependence and support, one for the other. When we look to our own interests in either Newcastle, North Tyneside or Northumberland, we are not served—but in the sense of belonging together there is enormous strength, far greater than any of the three areas have separately.

I am well aware of the degree of political risk in this proposal. I commend the real commitment from all sides of the political spectrum to accept that risk but to set it aside and come together around what everybody believes will be to the benefit of the communities in the new proposed combined authority. I want to honour those who have shown such political leadership. I hope the Minister will assure us that the Government too will honour this genuine commitment to flourishing, which, in the region, is a sign of hope for us.

[Lord Beith (LD)]

My Lords, I admire the optimism of the right reverend Prelate, which she has brought to her work; she is a welcome arrival in the Newcastle diocese.

When asked which of the two would have a more profound impact on the region, this measure or Brexit, most people I talk to in the north-east are pretty clear that it is Brexit. An awful lot of people recognise that, unless we bring the Brexit process to a halt or somehow get a miracle deal that allows the just-in-time provision of spare parts to the Nissan factory and further investment in the north-east by firms from abroad, there will be a profound and adverse economic effect that will put what we are discussing today very much in the shade. Viewed from rural Northumberland—the vast area of north and western Northumberland that forms part of this combined area—it all seems a bit distant. I doubt whether many people there are even aware that it is happening.

One thing that many people will remember, as we were reminded of by the noble Lord, Lord Beecham, is that there was a referendum on whether there should be a regional structure for the north-east. It was a referendum under which the proposed body had too little power, and that was a powerful criticism made by its opponents. But those opponents, of course, included many prominent people in today’s governing party, the Conservative Party, who said that they did not want another tier of government in the north-east or any addition to the structure, and did not want any more politicians. But this order provides specifically not only for a mayor but for the mayor’s political adviser —the only two jobs you can be certain will be created as a result of it. So here those people are bringing before us what I think is a deeply defective scheme. It will be a miracle if real good can be achieved by it.

The scheme’s fundamental failure is that it slices through the middle of what it is supposed predominantly to be dealing with: transport and other urban issues in the conurbation of Tyne and Wear. We talk about having a system of government that is accountable, but how are people expected to understand a system that, to simplify government, brings together three authorities which will still exist and carry out their functions but will be part of a combined authority? Just as you have grasped that, you are then told that that combined authority will also be a member of a joint committee made up of two combined authorities, and that only this joint committee can deal with the transport issues because of the folly of creating an authority that exists on only one side of the river and goes right through the middle of the integrated transport system, the Metro.

Here, perhaps I can pay passing tribute to my noble friend Lord Rodgers of Quarry Bank, who has either just celebrated or will soon celebrate his 90th birthday. It was he who signed off on the Metro, in his Labour governmental days, many years ago. What a valuable feature it is of the north-east and how valuable it would be to see it extended into south-east Northumberland and Washington to bring more unity to the conurbation. Other aspects of transport that we want to see integrated in the conurbation—both its heavy-road system and its bus system—require a lot more work. The joint committee will be busy if it is going to address that. But it remains absurd to split the conurbation in this way.

The point I most want to make is this: in rural Northumberland, we are still suffering the consequences of the loss of accountability at district council level. Local government already seems extremely remote—it is 50 miles away from people living in Berwick or Bellingham and beyond. It is very distant indeed.

16:45

Now we discover that certain functions will no longer be exercised at that level, but at one of two levels further up. This is really a new three-tier system of local authority, combined authority and joint committee. Things such as the transport issues faced in rural areas are distant from the world of the conurbation. Whether your bus pass gets you from Berwick to the Borders General Hospital outside Melrose is a world away from discussing cross-Tyne transport issues. Whether there is a bus at all to travel on between villages in the Cornhill area to get into town is a rural problem that seems very distant. It looks unlikely to be resolved satisfactorily by a mayoral system in which power is concentrated in one person, who will no doubt owe his or her election primarily to what happens in the urban area where the votes are and will feel under constant pressure from that area.

I find it sad that we are having to approve a structure which no one has sought to defend logically simply because of things that come with it. The Minister had difficulty keeping a straight face when he started reading out a list of the names of the two authorities and their details. Nobody will come along and defend this as a structure. We have got into it because the Labour Party north and south of the river could not agree, and a much more determined attempt should have been made to arrive at a more rational structure.

My noble friend Lord Shipley has made it quite clear that this structure will be tested against the extraordinarily optimistic claims that have been made of large numbers of jobs and large amounts of investment. If that has to be achieved in the context of Brexit, it will be an even more difficult task. I would like this structure to succeed in those aims, and I would like it to ensure that it attends to the needs of rural areas, not just urban areas, but I have to have the optimism of the right reverend Prelate the Bishop in order to think that.

[Lord Wrigglesworth (LD)]

My Lords, I declare my interest as chairman and shareholder of the Durham Group and a former chairman and shareholder in UK Land Estates, which, among other things, owns Team Valley, still the single biggest industrial estate in the UK, with some 800 acres of businesses of all sorts.

I speak in this debate not just from that point of view but from having been the regional chairman of the CBI and of the Northern Business Forum. I was a member of the board of the Northern Development Company, which succeeded in bringing Nissan, Fujitsu, Komatsu and a variety of other businesses to the region in years gone by. I was delighted and honoured to be the founding chairman of the NewcastleGateshead Initiative as a result of an invitation from the Labour leaders of Gateshead and Newcastle city councils. As a result of an invitation from Gateshead Council, I was chairman of the Baltic Centre for Contemporary Art, which was in financial difficulty and which we managed to pull back from the brink.

I have also been chairman of the Port of Tyne. It dominates a large part of the business life of the region. All the cars from Sunderland are exported to the rest of Europe and other parts of the world from the Port of Tyne. It is the fourth-biggest import- export car terminal in Europe. It is the biggest trust port in the country. It is bigger than Dover. It makes an enormous contribution to the whole of the subregion.

Colleagues will understand that in all those different roles I have had a fair amount of interest in and experience of dealing with local authorities and other bodies in the Tyneside area. Although I support what the Government are doing and I have every sympathy with the Minister in trying to bring these things about, it is a tragedy for the area that we have not been able to bring all the authorities together as was envisaged. It would have been better to have had a separate Wearside LEP and a separate Wearside combined authority, with Sunderland and Durham working together. There has been an historic problem of Sunderland being overshadowed by Newcastle and the Tyneside area, which seems the natural conurbation for the region, rather than including Wearside in it. If we had been able to get a combined authority for the whole of the seven authority areas, it would have been very much to the advantage of the region. This is very much a second-best solution.

It is also in sharp contrast with the success that there has been on Teesside, which includes my home area and which I represented in the other place for many years. There, the Conservative mayor and the Labour local authorities are working extremely well together, bringing resources to the area, developing the area and working together for the benefit of the whole region in a way that I have never seen in my lifetime in the north-east. The contrast between what is happening in the south of the region and what is happening in the north of the region illustrates the damage that is being done by the parochialism and the antagonism across local authority boundaries by the leadership of the local authorities in the southern part of Tyneside.

Although I am happy to support this first step—as it has been described—we should not in any way underestimate the damage that this mix-up and this weird split of the north part of the north-east into these two areas—north and south of the Tyne—will have. As I said, I was chairman of the NewcastleGateshead Initiative, the destination marketing agency for both sides of the river, which made an enormous impact. We put in a bid for European Capital of Culture. It has had a massive impact in the area on both sides of the river. How is the NewcastleGateshead Initiative going to work with a combined authority on one side of the river and the other authority on the other side of the river? It is going to be extremely difficult at times. It will certainly make life much more complicated, as it has been in the past.

The Port of Tyne, on the north bank of the River Tyne, straddles both sides of the river. On the north side is the international passenger terminal, with 30 cruise ships every year, paying visits and bringing an enormous amount of money and economic activity to the area. There are car and other activities going on on the north bank. On the south bank, we have the major dock facilities, with all the cars and the exports going out of there. There are wood chips and coal coming in, a whole pile of scrap being exported, and tea and a whole range of goods being imported on the south bank of the river, where the port will have to deal with South Tyneside. Instead of dealing with one authority for the whole area, the port will have to deal with a combined authority on the north bank and two authorities on the south bank. It will make the best of it, but this illustrates the difficulties when there is such a split of responsibilities and staff.

I mentioned the Team Valley. For 25 or 30 years, I have been developing factories and offices, probably creating more jobs throughout the region than I have ever done in Westminster. You have to work with the economic development departments of different local authorities. If I build a big shed in South Tyneside and I want to let it to somebody, I will have to go to the LEP, to the combined authority and to Gateshead Council. I will have I do not know how many economic development departments to deal with in trying to fill that factory with people working there for a company. If I am going to embark on a project like that, I will have to work with all those bodies to make a success of it. That makes life very complicated.

I do not know what will happen with representations from the area on economic regeneration. I think of MIPIM, the great property event in Cannes in the south of France every year, and more local ones here in London. Are all the authorities going to be sending representatives down? They probably will. But if there were one combined authority for the area, we would have one group of people and one strategy and everybody would know who they were dealing with. Frankly, it would also be much cheaper for the rate payer and taxpayer if that were to be the case.

Although I support what is happening as a first step, it is a tragedy for the area that we do not have a single united authority. I would prefer one for Tyneside and one for Wearside. We already have the successful one on Teesside.

The transport issue illustrates the problems—it will be the same on housing and other areas—where all the bodies have to work together and staff will have to be employed to carry out the work in different bodies. It will be less efficient and less effective and it will not have the impact of one authority for the whole area.

I support the regulations with a heavy heart. I shall be interested to hear from the Minister if any discussions are going on with the authorities south of the river to try to bring them to their senses and join in, so that everyone knows where they stand, with one authority for the whole area.

[Lord Bourne of Aberystwyth]

My Lords, I thank noble Lords for their contributions and I shall seek to deal with the points that have been raised.

No one on the Government side seeks to suggest that this is an ideal arrangement. We would have much preferred the councils south of the Tyne to participate in the deal. I agree, therefore, with the points that have been made by all speakers—with differing amounts of stress—that this is not the first choice. That said, it takes us forward. Again, most participants would agree with that, with the possible exception of the noble Lord, Lord Beith. I do not think that he was fair in suggesting that I was not keeping a straight face about this—it was probably said tongue in cheek; he is normally very fair—because I have no doubt that this is a good step forward for the region. I emphasise that, given the circumstances, this is the best way forward.

I shall try to deal with some of the points that were made. I agree with the noble Lord, Lord Beecham, that this is not the most desirable arrangement and that anyone who did not know would think that Gateshead and Newcastle were as remote from each other as Sydney and Melbourne, rather than being connected by the Tyne Bridge. It is a mystery to me, but that is where we are.

I do not want to suggest that £600 million over 30 years—although we should not underestimate the amount that will be put into the deal—will solve all the problems of the north-east. That is clearly not the case. Nor is it the sum total of the investment that goes into the north-east. Significant amounts, for example, go into the LEPs and the borders growth deal, of which the noble Lord, Lord Beith, will be aware. The Northern Spire Bridge attracted £82 million of government money and the International Advanced Manufacturing Park is another example. I shall come on to the money earmarked for the Metro system.

We cannot both say “Let us set up this devolution deal” and “What is the Government’s policy on x, y, and z?” It is for the combined authorities and the mayor to decide. It will not have escaped everyone’s attention that, although some metro mayors are Conservative, they are not all Conservative. This one—although I have no doubt it will be a close run thing—may not be a Conservative. I remind the noble Lord, Lord Beecham, that we are giving significant power to the mayor and the combined authority to decide on policy in the areas that we devolve.

The noble Lord mentioned the airport and air passenger duty. That issue will not be devolved. The Government are looking at that to balance all the needs of the different parts of the UK. He is right to refer to the problems of Scotland in competition with Newcastle; similar problems are felt in relation to Bristol and Wales. The Davies review has formed some of the policy in this area.

There is a significant housing element here, but that will not affect, for example, the existing provision for social housing, nor the £2 billion that the Prime Minister recently announced from 2022. There is no doubt that that will be bidded in for.

Adult education is not devolved by this. I agree with the noble Lord about the need for authorities to work closely together, as they do at the moment in many cases. The NHS is also not devolved by this arrangement—of the metro mayors, I think only the Mayor of Greater Manchester has that devolved power. Similarly, justice will not be devolved and so probation will not be directly affected, but I agree with him about the need to work across borders and to adapt arrangements in the light of circumstances. That is a fair point and we will approach it very much on that basis. The noble Lord asked about investment in the Metro system. In Budget 2017, £337 million was announced.

17:00

The noble Lord, Lord Shipley, expressed many of the same concerns as the noble Lord, Lord Beecham. I bow to their combined experience in the north-east. Indeed, everybody who has spoken has massive experience in the north-east and I thank them very much for participating in this debate so that we are able to get a flavour of what is happening on the ground and what some of the concerns may be. The noble Lord, Lord Shipley, said that this is a second-best arrangement. It is—there is no getting away from that. He also gave fair warning about hyperbole. We need ambition and aspiration, but we should not overreach ourselves and I do not think that it would be wise to suggest that this solves all the problems of the north-east. That said, it will contribute to success.

To pick up the point made by the noble Lord, Lord Wrigglesworth, on the experience in Teesside, this can generate work across parties for the greater good of the area. We have seen that with many of the metro mayors. None of them has solved all the problems of the area, but in all areas we can see some successes. They are making a significant difference to governance in their area.

The noble Lord, Lord Beith, commented on another layer of administration. Still on the subject of hyperbole, I think that we have to be a little careful here. He said that we are introducing an elected mayor and a political adviser, but we are not adding an extra layer of politicians; it is people from the combined authority participating in the way that things are governed. However, I agree that that is a concern that has to be guarded against. This is not the only money going into the north-east, although a significant amount will, and I agree that it will not solve all the problems.

I thank the right reverend Prelate for her contribution. It is always good to hear from someone with her experience and knowledge of the challenges in the north-east. I thank her for the encouragement that she has given and agree that it is important that we seek to make this a success by working together for the good of the area in facing the challenges that there are. I had not appreciated the history of the diocese and it was extremely interesting to hear about Newcastle. As I recall, a similar thing happened with the university: Newcastle University was initially an offshoot of Durham and is now very much a proud university in its own right.

The noble Lord, Lord Beith, spoke in the other place with massive experience of his area, rural Northumberland, and is still a powerful voice for the interests of Berwick and that area. I therefore take seriously the points that he makes. He is right to say that this is a joining of two very different traditions and areas: rural Northumberland, which is massive, and urban Newcastle. However, there is a shared economic, cultural and social interest, so we look to this being driven by the three leaders, who have so far shown real political leadership.

The noble Lord talked about the challenge of transport for the joint committee. It is a challenge. I have travelled on the excellent Metro system many times and know that it works very well now, as I am sure it will in the future. That is why we have provided for the committee, which needs to meet those challenges.

The noble Lord, Lord Wrigglesworth, has great experience in the north-east—as he said, more in Teesside than Tyneside. I thank him for the business analysis that he provided on the importance of ensuring that the areas work well together. That is the essence of the success of metro mayors: they bring people together at a regional and local level to work well together. I do not seek to suggest that this is a panacea that will solve everything overnight, but I think that it is a constructive way forward and I think that that view is shared. Once again, I thank noble Lords for their contributions.

Motion agreed.

Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018

Tuesday 30th October 2018 Grand Committee

EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018

Considered in Grand Committee

17:06

Moved by

[Lord Bates]

That the Grand Committee do consider the Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 and the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018.

Relevant document: 1st Report from the Secondary Legislation Scrutiny Committee (Sub-Committee B)

[The Minister of State, Department for International Development (Lord Bates) (Con)]

My Lords, HM Treasury is currently undertaking the necessary preparations to ensure that, in the event that no deal is agreed when we leave the EU in March 2019, a functioning legislative and regulatory regime will continue to be in place for financial services. The aim of the work is to maintain continuity at the point of exit as far as possible. The European Union (Withdrawal) Act 2018 will transfer existing EU legislation on to the UK statute book at the point of exit. It also gives Ministers powers to amend this legislation to ensure that it will operate properly in a UK context. The Treasury is laying the necessary statutory instruments to complete this work for financial services legislation. This is the third debate in this Committee as part of this programme of work and there will be many more over the coming months.

Last December, the Treasury announced that legislation would be brought forward to establish a temporary permissions regime enabling EEA firms operating in the UK to continue their activities in the UK for a time-limited period after withdrawal. At the same time, it was also announced that a temporary regime would be brought forward in relation to non-UK central counterparties. The two SIs being debated today deliver on these commitments. They are both extremely important to the financial services sector, as they make a key contribution to our aims of maintaining service continuity at the point of exit.

The EEA passport rights regulations deal with references to the EEA financial services passport in UK law and establish a temporary permissions regime to provide for continuity once the UK leaves the EU and passporting no longer operates in the UK. Many will be familiar with the passporting system, which allows firms in an EEA state to offer services in another EEA state on the basis of the authorisation granted by their home state regulator. In a no-deal scenario, the UK would be a third country outside the EU financial services framework and therefore outside the passporting system, meaning that any references to EEA passport rights in UK legislation would become deficient at the point of exit.

The Government therefore need to repeal provisions in the Financial Services and Markets Act 2000 that implement the EEA financial services passport. This would mean that any EEA firms currently operating in the UK via a passport would no longer be able to do so from exit day, just as UK firms would no longer be able to passport into other EEA states. EEA firms would then need to obtain authorisation from the UK’s regulatory authorities if they wished to continue doing business in the UK. In such a scenario, the volume of applications received by the UK regulators would increase significantly as many hundreds, perhaps thousands, of EEA firms submit applications for UK authorisation. This will include applications from large and complex businesses with a substantial UK presence.

The need for a large number of firms to submit these lengthy applications for authorisation before exit day, and have the UK regulators process them in time, therefore poses a substantial cliff-edge risk for firms and regulators. Ultimately, this would affect UK individuals and businesses who rely on services from passporting EEA firms and cause disruption to them. To mitigate those risks, in line with the Government’s commitment on 20 December last year, the Treasury has therefore put forward this legislation to establish a “temporary permissions regime”. This regime would enable EEA firms operating in the UK via a passport to continue their activities in the UK for up to three years after exit day, allowing them to obtain UK authorisation or transfer business to a UK entity as necessary.

To alleviate the potential scenario where some EEA firms cannot be authorised within the three-year period, this SI also gives the Treasury the power to extend the regime. This could be done only where it is “necessary” to do so, and it could be extended by only 12 months at a time. Any extension would need to be based on a robust assessment from the FCA and the PRA regarding the effects of extending and not extending the period. The instrument that would extend the regime would be subject to the negative procedure, which was drawn to the special attention of the House of Lords by Sub-Committee B of the Secondary Legislation Scrutiny Committee in its report published on 18 October. The Treasury judges this choice of procedure appropriate given that the power to extend the regime is conferred by this instrument, which itself is subject to the affirmative procedure. I assure Members that we take parliamentary scrutiny seriously. Although this affirmative instrument introduces a power to make regulations via the negative procedure, the Treasury believes that if a like provision were to be made by an Act of Parliament, it would also be via the negative procedure because the power is so tightly drawn.

The temporary permissions regime would ensure, first, that firms can continue servicing UK businesses and consumers for a temporary period after exit day and, secondly, that firms will have appropriate time to prepare for and submit applications for UK authorisation and complete any necessary restructuring. Finally, the PRA and the FCA can manage the expected applications for UK authorisation from EEA passporting firms that were previously operating in the UK via a passport in a smooth and orderly manner.

This SI is a pragmatic response to a complex issue. It is necessary to minimise disruption to users and providers in the UK financial services sector in a no-deal scenario. I note that the Secondary Legislation Scrutiny Committee report acknowledged the importance of these regulations in achieving this objective.

It is with similar considerations for minimising disruption and enabling the UK’s regulators to manage a no-deal scenario in an orderly fashion that I turn to the second of these SIs, which covers central counterparties. Central counterparties are central to the UK and global financial system. They reduce risk and ultimately improve the efficiency and resilience of the system as a whole. They stand between counterparties in financial contracts, becoming the buyer to every seller and the seller to every buyer. They guarantee the terms of trade even if one party defaults on the agreement, reducing counterparty risk. UK firms currently receive services from non-UK central counterparties under the framework set out in the European Market Infrastructure Regulation, known as EMIR.

Under EMIR, non-UK central counterparties are permitted to provide services to UK firms if they are either located in the EU and authorised by their home regulatory authority or located in a third country deemed equivalent by the Commission and recognised by the European Securities and Markets Authority. In a no-deal scenario, when the UK leaves the EU and is no longer within the single market for financial services, those non-UK central counterparties would be unable to provide services to UK firms until they were recognised under the UK’s domestic regime. Such a sudden dislocation in the provision of services would introduce substantial risks to UK firms, many of which rely on non-UK central counterparties to provide clearing services and for mitigating transaction risks. By extension, this could impact on customers of those UK firms. Day one disruption to these services would pose risks to UK firms, as well as stability risks to the broader financial system.

17:15

The central counterparties SI therefore provides a number of measures to mitigate these risks, and ensure that a day one scenario can be properly managed. First, the SI establishes a UK framework for recognising non-UK central counterparties, while maintaining the same regulatory criteria for non-UK central counterparties to provide services in the UK. The Treasury will take on the European Commission’s responsibility for determining whether a third-country jurisdiction’s regulatory and supervisory framework is equivalent in respect of EMIR. The Bank of England will take on functions relating to the recognition of individual central counterparties located in third countries, which up until now has been the responsibility of the European Securities and Markets Authority.

Secondly, the SI makes it possible for the Bank of England to take the necessary steps to recognise non-UK central counterparties as soon as possible following exit day. This is done by providing powers to the Bank of England to consider recognition applications ahead of exit day, as well as to enter into supervisory co-operation arrangements with non-UK authorities.

Finally, the SI establishes a temporary recognition regime for central counterparties, in a similar fashion to the temporary permissions regime provided by the EEA passport rights SI. Subject to certain conditions, the regime provides temporary recognition for a period of three years to non-UK central counterparties that notify the Bank of England of their intention to continue to provide clearing services in the UK. The purpose of temporary recognition is to allow additional time for applications to be processed and equivalence decisions to be made by the Treasury. While non-UK central counterparties are encouraged to engage with the Bank of England as early as possible, the temporary recognition regime will ensure the continuity of services if it happens that a recognition decision cannot be made ahead of exit day. As with the EEA passport rights SI, this SI would give the Treasury the power to extend the regime for 12 months at a time if it is satisfied that an extension is necessary and proportionate to avoid disruption to financial stability.

The measures in both these SIs are, we believe, a pragmatic response to ensuring service continuity for the UK on leaving the EU without a deal. The importance of their provisions is reflected in the announcement last December, which made it clear to the industry well in advance of exit day that the Treasury would put forward legislation to deliver these regimes. The regulators are now in the process of consulting industry to ensure that these regimes are properly applied in the UK when it leaves the EU. Further information has been made available to firms through dedicated sections of the regulators’ websites. The Treasury has continued to engage the financial services sector on issues relating to no-deal legislation and will continue to do so.

These SIs are an important part of the work to provide a functioning financial services regime in the event of a no-deal scenario. It is important to stress that if, as expected, we enter an implementation period when we leave in March 2019, the access to each other’s markets would remain the same during that period: passporting will remain in place and non-UK central counterparties that meet the current requirements will continue to be able to provide services to UK banks. However, these SIs should provide reassurance to Parliament and, more importantly perhaps, to the UK financial services sector as a whole that the UK is prepared for all possible outcomes. The City’s success is based on being the most open and dynamic financial centre in the world. Ensuring that EEA financial services firms and non-UK central counterparties can continue to operate here after exit day will help to maintain this status, protect jobs and preserve tax revenues to fund our vital public services, while also preserving an efficient and resilient financial system. I hope noble Lords will join me in supporting these regulations and I commend them to the Committee.

[Lord Kirkhope of Harrogate (Con)]

My Lords, I would like to intervene briefly to ask my noble friend a couple of questions. Although we all hope for a deal scenario, not a no-deal scenario, nevertheless the practical approach to these matters should perhaps be thought through a little more. My first point is a procedural one relating to the statutory instrument—I refer particularly to the EEA passport rights matter. I spent some years—not many, thank goodness—as a member of the Select Committee on Statutory Instruments in the House of Commons, which was chaired by the late Bob Cryer. He was scrupulous about determining the nature of approaches towards statutory instruments.

I am concerned that we have, effectively, a hybrid—an affirmative resolution, but nevertheless with the prospect of a negative procedure in the event of any extension of time, for registration of the various bodies that may need registration in due course. I find that rather concerning. I would like my noble friend to confirm that we are not getting dangerously close to a ban on negative approaches. Clearly that could happen when the affirmative approach is required but where there is a fee involved for a function which a UK public authority would exercise.

I believe the registration itself must by implication—although it is not revealed in this document—carry with it some financial implications; some fees will have to be paid, although they are not referred to here. If that is the case, would it not be more appropriate for affirmative resolution to be carried through to those extensions as well as to the rest of the item? That is my first point.

My second point is that while the FCA seems capable of handling quite large numbers of registrations for companies under EEA processes, the Prudential Regulation Authority does not. That is a deep concern. So far, the PRA seems able to manage only 10 or 12 applications per year. It has already indicated that it expects that there will be between 100 and 200 applications in the event of a no-deal scenario under these proposals. How does my noble friend believe this can be dealt with, without some form of massive increase in resources or powers, particularly in the hands of the PRA? I would be grateful if he would allow that.

I come to my third and final point. He has talked about the extension of the extension, which requires six months’ notice from either the PRA or the FCA as to the needs arising. To my mind, that is an almost indefinite process; we would see these extensions going on ad infinitum, or certainly for a considerable time. Surely that must be a disadvantage to the entities applying for registration and, indeed, to the position of this country in relation to the financial services in which it is at present so pre-eminent. Can he assist with that? I am grateful to him for his introduction.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I thank the Minister for his introduction and I concur with him that these are necessary instruments. I declare my interests as in the register and, in particular, as a director of the London Stock Exchange.

Starting with the EEA passport rights regulations, I fully understand the need for temporary or deemed permissions and some flexibility, but in the longer term there are risk and competitiveness issues to consider, so I shall explore further the time periods and how the policy surrounding them might operate. There are two time periods: two years from exit before a formal application for authorisation has to be made, and three years from exit, extendable, within which the relevant regulator makes a determination. Supervisors can require a formal application to be made before the two-year period is up, and presumably that could be exercised for a variety of reasons, such as phasing in for size or complexity of entity or for other risk-based reasons. As the Minister has already mentioned, the two-year period is also potentially useful to EEA firms trying to decide what to do, getting used to UK supervision and having time to organise themselves before having to seek authorisation. It can also be that the two years is simply a waiting room until the regulators have the capacity to carry out the authorisation determinations. How is it envisaged that the two-year period will operate? What is the policy? Is it a phasing mechanism? Will the regulators be controlling that phasing? Is it wholly in the hands of the firms that want their passports replaced? Is it expected that everyone will have two years and then there will be a sudden rush of applications; or, as I asked before, will there be some kind of risk-based assessment about which applications must be brought forward in time?

I now turn to supervision, because the entities in the temporary regime will come under supervision. Can the Minister assure us about the regulator’s capacity to supervise and that significant supervision will take place? If it is envisaged that there may be an unmanageable, or at least long, queue for authorisations because of capacity issues, what is the capacity situation with supervision?

Does two years really mean a fixed two years that cannot be extended? I cannot find anything to say that it could be, and there is nothing in the Explanatory Memorandum. But just in case I might have missed something, will the Minister clarify whether the construct of the regulation stating that “Section 55U” of FiSMA “has effect as if” is a good way of keeping the two years unamendable by any power to make changes that might be embedded in FiSMA or anywhere else? I am still learning the tricks of some of the parliamentary drafting that goes on here, and that is quite a good one to remember.

As to the three-year limit allowed for determination of applications, it can be extended, as has already been said. How necessary that is might in part be determined by the policy over the preceding two years. Is extension available only if the regulators do not have the capacity to conclude within three years? I think that is what the Minister said. Has three years been set assuming a rush of applications at the two-year stage, or will an extension be inevitable if that two-year rush happens?

As the noble Lord, Lord Kirkhope, said, it would clearly not be appropriate for the extension to be used on a rolling basis to allow businesses that might not measure up to full UK authorisation standards to continue to operate in a temporary regime because there had been no determination of their application. That is one of the reasons why I share the view expressed by the Secondary Legislation Scrutiny Committee that there is a good case for an extension requiring the affirmative procedure. I do not agree with the reply from the Treasury Minister John Glen in the correspondence. It is not satisfactory to say that some affirmative permission somehow flows from this SI so that the negative procedure is enough at the time of the extension. That might have been the case if the policy on these time periods had been more clearly elaborated, but it was not. In fact, it seems to be in the hands of the regulators, and if that is the case, then I cannot see how avoiding affirmative procedure is the right way to go. If the Government had set the policy and embedded it in here, that would be different, but this does not include the policy on how it is going to be used.

17:30

A positive case for extension somehow has to be made to Parliament. An important part of the extension process is the report under Regulation 27, made by the relevant regulators to the Treasury six months ahead of expiry of the time period. What arrangements are there for that report to be made available to Parliament in a timely way, not just as background once the regulation has been laid and it is too late? For example, will at least all the relevant Select Committees be briefed?

There are undeniable risks if temporary measures drag on too long, and it could mean unfair competition with domestic entities. It is one thing for UK companies to have to absorb the cost of seemingly more strenuous conditions being applied to them in EU countries, and quite another if there is somehow a lighter-touch temporary regime here at home for competing EU-based companies. I am sure noble Lords will see that there is a prospect for a double whammy to UK companies if they lose out on both sides of that for a significant period.

I will move on now to the central counterparties regulation. The temporary regime has some parallels with the passport regulation, and covers making the Bank of England the regulator and the EMIR recognition and equivalence regime. I acknowledge the wisdom of saying that the Treasury and the Bank of England can get ahead in the recognition and equivalence. That is very important. I repeat the concerns on time limit extension. There is good reason why that should have been made using the affirmative procedure. In some ways, I see even less reason for extending it here because central counterparties are relatively few—they may be important and systemic when they are large, but there are not huge numbers of them. Will the Minister tell me what reasons are envisaged for not being able to get out of the temporary regime and needing an extension? It might be that, despite the best endeavours, the necessary co-operation arrangements have not been put in place for whatever reason.

I am also slightly puzzled by the fact that Regulation 12 says that an application has to be submitted before Brexit, but Regulation 19 says that the game is up if you have not made one by six months after Brexit. Either there is some discontinuity there or I have missed something—which is not impossible when going through lots of these things very quickly.

The final point I want to make is not a question that can be easily answered. One of the criticisms that was constantly made against the EU equivalence regime in the various Brexit reports that came out was that it could be withdrawn with little notice—in fact, they feared that could happen under political influence of the Commission. Can the Minister explain whether such criticism could also be made against the UK regime in due course, bearing in mind that it basically follows the EMIR regulation, or have the conditions in Regulation 19(7)—that the Bank of England can withdraw only because of financial stability; although that can obviously be used very widely—made it in some way more binding?

Finally, when the Commission was making equivalence decisions under EMIR, it was sometimes quite difficult to fit within the wording of EMIR Article 25(2)(b) because some countries simply do not have regulation and authorisation provisions. These are not the major countries, but nevertheless there may be CCPs. Due to the capital charges that apply to other bodies if a CCP is not recognised, there is an incentive for recognition of CCPs in what one might call less-developed countries in the financial services sense. It then became necessary for the Commission to consider comparable mechanisms and use a very flexible interpretation of the language of the legislation. Indeed, it had to resort to things like looking at the rules of the exchangers that were using the CCPs, with that replacing, if you like, the legal provisions. It raises the question of whether there is any language in the way equivalence is to be done that is drawn so tightly in this statute that it will become inflexible and you will not be able to recognise some of those types of CCPs, particularly where you are referencing the legal constructs that are available in the country. Those legal—in legislative terms—constructs simply may not be there, and you are looking for something else that you have to use to replace them.

[The Earl of Lindsay (Con)]

My Lords, I want to ask my noble friend a couple of questions on the CCP side to clear up any confusion, in my own mind at least. The first refers to the requirement in the Explanatory Memorandum for,

“non-UK CCPs (including CCPs established in the European Union)”,

to apply to the Bank and receive recognition from the Bank in order to continue their activities after Brexit day. The paragraph thereafter refers to the opportunity for temporary recognition, and there it refers only to third country CCPs. I assume that third country CCPs include CCPs established within the European Union, but the slightly different terminology used in those two paragraphs left a doubt in my mind as to whether there was some distinction. If indeed the temporary recognition is not available to CCP establishment within the European Union, what is the reason for that? From the way the memorandum is written, it could conceivably be that the term “third country CCPs” does not apply to European Union-established CCPs.

My second question, which reflects a question raised by the noble Baroness, Lady Bowles, is about the length of the temporary recognition timeline. If I understand it correctly, it is set initially at three years and can be extended by 12-month intervals. Is it envisaged that a non-UK CCP can, at the end of three years, still be operating under a temporary recognition regime and can continue thereafter to enjoy 12-month extensions to its—as it were—permitted activities in the United Kingdom?

[Lord Tunnicliffe (Lab)]

My Lords, I will speak to these two instruments in the order they appear on the Order Paper. I found these two instruments difficult to understand and therefore have consumed considerable intellectual effort in actually understanding them, which has left very little effort in reserve to produce an elegant speech. I would like to thank two officials: Greg Stump, for his tutorial on the CCPs, and Richard Lowe-Lauri, for his tutorials on the passporting. I have to say that the disadvantage of having an excellent tutorial is that all the questions I could have asked have largely been answered, so I will not be making a very long speech.

One of the biggest problems in understanding the instruments is that they, particularly the one on passporting, refer frequently to the Financial Services and Markets Act, which we all know as FiSMA. I do not have available a fully amended version of it to refer to so I want to ask the Minister something; I definitely do not want a reply because he will have to take this back to the ranch. Some years ago, a precedent was established when a 50-page Bill came from the Commons and left the Lords 150 pages long—it involved introducing bail-ins, et cetera—and the Treasury was good enough to provide an electronic copy of FiSMA, fully amended. That made understanding what the revisions of the instruments were doing much easier. I request formally that the Treasury does that again. Clearly the Government have a fully amended copy of FiSMA available on their machines because otherwise the creation of the instruments would be virtually impossible.

The regulations on passporting seem very simple. Basically, they say that an EEA CCP can continue trading in the UK, initially under a temporary recognition before moving into permanent recognition. It is as simple as that. As I understand it, this cannot be done unilaterally because moving CCPs into a full recognition environment will be dependent on memoranda of understanding with the host nations of those CCPs. I would value confirmation of that if it is true. Even in an extreme no-deal scenario, there will still need to be international understandings between nations in that situation.

There is no reciprocity in the instruments, as I read them. We have a situation where we are saying to EU CCPs, “Please carry on as before”, and to UK-based CCPs, “We have secured nothing to allow you to continue your business in Europe”. In the case of CCPs, not continuing on a reciprocal basis will be very difficult for both Europe and ourselves. I believe that there is some discussion in Brussels about there being reciprocity, even in a no-deal situation. I would value any news the Minister may have on the development of such a reciprocal understanding.

In the event of a loss of recognition by a foreign-based CCP, it is not clear what the enforcement mechanism would be. For instance, would the loss of recognition mean that trade contracts would become ultra vires or lead to a very messy situation? The statutory instrument contemplates the loss of recognition but does not set out how that would be managed. I would value anything that the Minister might be able to tell me about what would happen.

Equally, my understanding of the passporting instrument is, once again, that it is extraordinarily simple. It means that EEA firms can carry on trading in the United Kingdom on virtually the exact same terms as they do now. In other words, a no-deal situation has no negative consequences for non-UK firms because the mechanism for a more or less automatic granting of temporary authorisation, and then the transition to permanent authorisation, is set out in this instrument. The converse is not there; as far as I can see, it does nothing for UK firms. The Minister may put me right on this but, as far as I know, there are no effective World Trade Organization rules for services that would allow UK firms to trade in Europe.

17:45

I have only one or two small questions on the instrument, if my one-line précis is substantially accurate. First, some of these foreign firms are covered by the Financial Services Compensation Scheme—the FSCS. Customers of those firms in the United Kingdom therefore have that protection. Can I be assured that with a temporarily—and subsequently fully—authorised firm, such protection as consumers now have will continue uninterrupted as we go through exit day into, perhaps, a temporary period and a more permanent period? Again, the instrument seems silent as to what happens if a firm, having been in a period of temporary authorisation, is subsequently denied it permanently if it is found to be lacking in some way. What would be the consequence for UK customers? Would they in fact find that their investments or trades, or whatever services are provided by these financial firms, are in some way at risk?

The sequence of events if there is no deal, which we all hope will not happen, will in some bizarre way end up as an audit of passporting because its concept, as I understand it, is that each member nation of the EU has equivalent and appropriately powerful rules for regulation. Those rules and regulations can be accepted by other members of the EU as sufficient to allow trading across borders. This would imply that any firm trading in the UK now through a passport ought to be trading at such a standard that it would, beyond reasonable doubt, expect to be authorised. I would value any comments that the Minister might have on that concept.

Other noble Lords have spoken about the extension being for 12 months at a time. I am sure the Minister will try to assure us that these extensions will happen only in exceptional circumstances, but they always are exceptional circumstances. I suspect that those from the 17th century, when the Army went from being a standing army to being authorised every year by a vote in Parliament, would be surprised to find the practice still happening today—which it does, because I have to vote on it every year. I fear that “12 months at a time” could go on for many years. For that reason, I support the general request that this should be under an affirmative procedure, not a negative one.

The question about regulators’ resources is also very valid. I believe that in a year, the PRA makes authorisations that are in single figures and, although I cannot remember the figure I have been given, that the number of firms that might be under its purview could be something like 70.

My other concern is about the Bank of England. My understanding of the instrument is that the Bank of England will have supervisory responsibilities towards these firms from exit day. I assume that will include supervision of what I think is called the reform and resolution regime—that is, how you manage a bank that is going broke. I know that the Bank of England has a significant directorate that looks after that for UK banks. Presumably it would pick up a similar responsibility. Can the Minister assure us that all features of supervision for which the regulator has immediately become responsible, as I understand it, will be properly resourced?

I do not know whether I am getting this wrong, but this seems to me to be the most significant SI in the financial sector that we have had so far and that it is not likely to be overtaken by a more significant one. It says that in a no-deal situation the UK capitulates on the matter of international financial services. It creates a regime where EU and EEA firms carry on trading more or less as if nothing had happened and it implies that the UK cannot trade in Europe as it does today. As far as I can see, there are no mechanisms to allow it to trade. I hope that I am wrong, that out of the hat comes a rabbit and that the Minister will say there is a WTO rule or something like that, but I do not believe that is so. I think the situation is catastrophic. Perhaps I am over-exaggerating. Perhaps it is really not a big problem. Lots of eminent politicians for whom I do not have natural sympathy have expressed how wonderful no deal would be. I think this is the classic example of where no deal would be really bad for the industry. What is the Government’s estimate of the effect of no deal on financial services in terms of employment, tax revenue and the health of the economy? Aside from these instruments, because presumably the Government are, as we speak, working flat out to secure a better deal for financial services, what is the Government’s aspiration in this area? What position do they hope to reach to make up for the lack of reciprocity in this deal? Will it be a fully reciprocal situation where UK firms will have the same privileges as EU firms have trading in the UK?

[Lord Bates]

I thank noble Lords for participating in this debate. It has lasted for 46 minutes, of which my introductory remarks were 13 minutes. In the 33 minutes, noble Lords have, by my calculation, managed to generate 24 questions which I will attempt to work my way through. I simply flag that up for colleagues on the Front Bench who are waiting for immediate business.

These are crucial issues. Noble Lords are quite right to raise them and seek further clarification. I commence by saying that I agree with the noble Lord, Lord Tunnicliffe, in this respect: this is not the outcome we are seeking or that we want or desire. It is not the outcome that we expect. We expect to secure a deal that will allow us to continue to have a good trading relationship in financial services with the European Union. We believe that that is in the interest of not only the UK but the EU as well. We are working very hard to secure that.

[Lord Tunnicliffe]

I want to explore that question a little bit further. Surely the test would be whether this is, in its elements, reciprocal to the privileges that EU firms will have as a result of this instrument.

[Lord Bates]

I will come on to that.

[Lord Tunnicliffe]

I am sorry.

[Lord Bates]

I do not want a 25th question; I will keep it at 24 and work my way through to that one. I have some remarks to address that particular point.

The noble Baroness, Lady Bowles, asked whether there could be a scenario in which a firm cannot be authorised within three years, which would extend the time limit. The answer is yes. The position is that although the PRA and the FCA have credible working estimates of the number of EEA firms that will apply to them for authorisation, there is an unavoidable degree of uncertainty about this process. That, coupled with the varying degrees of complexity in some of these firms’ applications, means that a power to extend the length of time is necessary. This will be crucial to mitigate the potential scenario in which some EEA firms cannot be authorised within three years from exit day, which could force the regulators to reject authorisation for the firms’ applications. Clearly, we do not seek that outcome.

The noble Baroness also asked whether there is enough flexibility to make equivalence decisions for CCPs. The powers in the EU withdrawal Act limit the fixing of deficiencies to retain EU law when the UK leaves the EU. It does not allow for policy changes beyond this element. The aim is to provide certainty to non-UK CCPs and their UK users during the period immediately following withdrawal from the EU. The criteria for recognition of non-UK CCPs will remain unchanged and will be onshore. This would allow recognised non-EU CCPs to resubmit the application used for EU recognition.

The noble Baroness then asked about the process for the joint assessment by the regulators. As set out in the statutory instrument, the PRA and the FCA would need to submit to the Treasury a joint assessment outlining the effect of extending or not extending the time period on the regime, on firms in general, on the UK financial system and on the ability of the regulators to discharge their functions in a way that advances their statutory objectives. That assessment would need to be submitted to Her Majesty’s Treasury no later than six months before the end of the regime. The Treasury would then make regulations to extend the duration of the regime only if it considers them necessary on the basis of the assessment.

The noble Lord, Lord Tunnicliffe, asked what protections would be available following exit day to UK customers who currently have access to the Financial Services Compensation Scheme. No one should lose FSCS protection as a result of this SI. If a UK customer is currently protected by the FSCS, they will be protected as long as the firm enters the temporary permissions regime.

The noble Lord also asked about the consequences for UK customers if a firm is denied authorisation. Any firms in the temporary permissions regime that are denied full UK authorisation by the UK regulators will lose their temporary permissions. Further legislation will be laid before Parliament at a later date to enable such firms to wind down their UK-regulated activities in an orderly manner. This legislation will ensure that the existing contractual obligations of these firms with UK customers can continue to be met. UK customers would no longer be able to enter into new contracts with these firms unless the firms had successfully reapplied for authorisation from UK regulators.

The noble Lord then asked what a firm being denied authorisation says about the passport regime and whether it suggests that it is not equitable, let alone equivalent. The EEA passport regime system is underpinned by the co-operation of EEA member states’ competent authorities. Each member state’s competent authorities supervise the activities of firms under its jurisdiction, even if those activities take place elsewhere in the EU. Once we leave the EU, we cannot rely on this co-operation continuing. We are therefore making these preparations.

18:00

The noble Baroness, Lady Bowles, asked what organisational preparations are being made by the FCA and the PRA for the challenges of supervising new firms. As the CEO of the Prudential Regulation Authority, Sam Woods, explained to the Treasury Select Committee, the PRA has significantly increased the number of staff working on these issues and has reprioritised its activities to ensure that the right resources are focused on its authorisations work. The FCA stated in its 2018-19 business plan:

“A significant proportion of our resources are already focused on the forthcoming exit, including arrangements to implement the change”.

I am confident that the PRA and the FCA are making adequate preparations and are effectively allocating resources ahead of March 2019 and the start of the temporary permissions regime.

The noble Baroness, Lady Bowles, asked whether there is a contradiction between Regulations 12 and 19 about when the application needs to be made. The central counterparties may apply before exit day but are not required to. They have up to six months after exit day to apply for full recognition.

[Baroness Bowles of Berkhamsted]

Regulation 12 states:

“A central counterparty established in a third country”,


that,

“intends to provide clearing services … on and after exit day”,

has to make an application and that the application “must” be submitted before exit day. I do not think that is quite what the Minister said. I realise that time is short now, and there are quite a few things that the Minister has had to gloss over. I hope he will review what I have said, and I would welcome a written response.

[Lord Bates]

We may have misunderstood the point that the noble Baroness was making. I am very happy to undertake to write to her on that specific point and copy it to members of the Committee.

The noble Baroness asked why a CCP might not have been recognised within the initial period. While the Bank of England has credible working estimates of the number of CCPs that will apply to it for recognition, there is an unavoidable degree of uncertainty about this.

My noble friend Lord Lindsay asked whether third-country CCPs includes EU CCPs. EU CCPs will be treated as third-country CCPs post-exit. EU CCPs and third-country CCPs will be eligible for the temporary recognition regime if they were permitted to operate prior to 29 March 2019.

My noble friend Lord Kirkhope asked whether the regime could be extended continually each year. It is in everyone’s interest for firms to transition from the current system of EEA passporting rights to full UK authorisation as quickly and efficiently as possible. There would be no circumstances in which it would be desirable for the regulators or the Treasury to extend the length of the regime on a continuous basis. He also asked whether the negative procedure is an appropriate instrument. I respect the work of the Secondary Legislation Scrutiny Committee, whose report we have before us today. I addressed this in my opening remarks. We believe that the choice of procedure is appropriate, given the overall powers being scrutinised now through this affirmative instrument. The negative procedure would just be an extension of that. The power to extend the time period is not a provision which relates to fees and so would not, if made alone, attract the affirmative procedure under Section 8 of the Act, to which my noble friend referred. He also spoke about the process for registration with the PRA and its ability to deal with the volume of applications. I reiterate what I said to the noble Baroness, Lady Bowles: I am confident that the PRA and the FCA are making adequate preparations to deal with the scale of the challenge which they face, but it is a significant challenge.

The noble Baroness, Lady Bowles, asked whether the regulators may ask firms to apply for authorisation sooner than the two-year deadline set out in the statutory instruments if they so choose. The EEA Passport Rights (Amendment, etc., and Transitional Provision) (EU Exit) Regulations will give regulators the ability to direct firms to make an application for authorisation during a specified period within two years from exit day if they have not already applied for authorisation. This will help regulators manage the flow of applications in a smooth and orderly manner. I draw the Committee’s attention to the FCA’s recent consultation paper published on 8 October, in which it set out its intention to allocate each firm a three-month landing slot within which that firm will need to submit its application for UK authorisation. It plans to issue a direction shortly after exit day setting out which firms have been allocated to which landing slot.

The noble Baroness, Lady Bowles, asked how the two-year application period will operate. I dealt with that earlier but I did not cover one specific point: the two-year deadline for applications to be received cannot be extended.

The noble Lord, Lord Tunnicliffe, asked whether this is a one-sided arrangement and whether there will be any reciprocation. The Government are only able to take legislative action in relation to EEA firms’ passport rights to the UK; they cannot through unilateral action influence the status of UK firms. That is why we are seeking to agree a deep and special partnership with the EU, as well as an implementation period, so that important preparations can take place in an orderly manner.

The noble Lord asked what the impact on the financial services sector would be if there is a no-deal exit. Reaching a deal is in the mutual interests of both sides. We are focusing on the negotiation of the right future partnership based on a proposal published in the White Paper on 12 July. That White Paper outlined the Government’s position on financial services and Brexit. We propose a framework for financial services that will provide stability for the EU-UK ecosystem, preserving mutually beneficial cross-border business models and economic integration for the benefit of businesses and consumers in the UK and the EU.

The noble Lord asked what it says about the regime if a firm is denied authorisation. Once we leave the EU we cannot rely on this co-operation continuing and therefore we are making these preparations. It is important that these regulations go ahead so that consumers in this country have confidence in the financial services put forward here.

I have addressed the Financial Services Compensation scheme and I will now deal with one or two points relating to central counterparties. The noble Lord, Lord Tunnicliffe, made a point on the memorandum of understanding with the host state. Yes, there are a number of necessary steps for a non-UK CCP to be recognised in the UK. These include that the Treasury must determine that the relevant third country’s regulatory and supervisory framework is equivalent to EMIR; the bank must agree supervisory co-operation agreements or memorandums of understanding with relevant competent authorities of the CCP applicant; and the non-UK CCP’s application for recognition to be assessed by the bank must include information on its financial resources, internal procedures and various other relevant information.

The noble Lord asked what would happen if the central counterparty is not recognised. If a non-UK CCP were to continue to provide clearing services to UK firms without recognition, it would be in breach of a general prohibition under the Financial Services and Markets Act, which prohibits anyone carrying out a regulated activity unless they are authorised or exempt. The CCP would be guilty of an offence and subject to a fine or imprisonment. However, further legislation will be laid at a later date to enable such firms to wind down their activities in an orderly manner by being treated as being recognised for a short period.

I hope that has addressed many of the questions.

[Lord Tunnicliffe]

In the unlikely event that the Minister has missed anything, will he review his answer and, if he has missed the odd point, send a letter covering it?

[Lord Bates]

I am happy to give an undertaking to do that. We are in uncharted territory here—we have not been through this process before. The Economic Secretary to the Treasury, John Glen, is being incredibly diligent in engaging with the regulators on a regular basis and being guided through this process. That is why the announcement was made in December. We will continue to keep this under review. The noble Baroness, Lady Bowles, made a suggestion about how we might keep the House informed of developments and made particular reference to perhaps involving the Select Committees. If I may, I will take that back to the Economic Secretary to the Treasury because, in some of these areas, once we know the lay of the land—we hope it will not come to that but if it does—then we will clearly need to review these provisions. I am happy to take that suggestion back and include it in my answer to the noble Lord, Lord Tunnicliffe, which I will copy to my noble friends Lord Lindsay and Lord Kirkhope.

Motion agreed.

Electricity and Gas (Energy Company Obligation) Order 2018

Tuesday 30th October 2018 Grand Committee

Considered in Grand Committee

18:10

Moved by

[Lord Henley]

That the Grand Committee do consider the Electricity and Gas (Energy Company Obligation) Order 2018.

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Henley) (Con)]

My Lords, this order was laid before the House on 19 July of this year and I beg to move that it be approved. The Government place great importance on supporting low-income families and ensuring that their energy bills are as low as possible. To that end, we continue to provide direct financial support to vulnerable households through the warm home discount scheme, while the energy price cap will protect around 11 million energy customers who have been stuck on poor value deals. Our election manifesto restated our commitment to tackling fuel poverty by increasing the energy efficiency of homes and the energy company obligation, or ECO, is the key policy in meeting those commitments.

Under ECO, energy suppliers in Great Britain are regulated to reduce domestic energy bills by installing energy efficiency measures. Since its start in 2013, more than 2.4 million measures have been installed in around 1.9 million homes. In 2015, the Government stated their intention to reform ECO to provide more help to those who need it most. The ECO order that we are debating completes that reform and will result in the whole scheme being focused on low-income and vulnerable households until March 2022. We will continue to fund the scheme at £640 million per annum until 2022, and in the Clean Growth Strategy we committed to funding domestic energy efficiency at least at that level until 2028. The Government consulted on proposals for the new scheme in spring and received 239 responses. Most responses were broadly supportive.

Currently, energy suppliers become obliged to act under ECO when they have 250,000 customer accounts. These thresholds were set in 2013, when the “Big Six” energy companies dominated the market. There are now more than 70 domestic suppliers in the market and we consider it appropriate that more are covered. Therefore from April 2019, suppliers with 200,000 customer accounts will be covered, falling to 150,000 from April 2020. We have expanded the eligibility criteria of the scheme so that households on certain disability benefits, their Ministry of Defence equivalents and low-income working households in receipt of child benefit are newly eligible for support. This increases the number of households eligible for support from 4.7 million under the affordable warmth part of the previous scheme to 6.6 million households under the new scheme. We believe this strikes the right balance between supporting those households most in need and keeping delivery costs low. We have also increased the proportion that can be delivered under the local authority flexible eligibility scheme from 10% to 25%. This allows local authorities to refer households for help, including people with health conditions exacerbated by cold homes.

To support the industrial strategy and the clean growth challenge, suppliers will be able to deliver up to 10% of their obligation using measures not previously supported under ECO. While encouraging a broader mix of measures, we will continue to maintain safety and installation standards. The scheme allows the equivalent of 35,000 broken heating systems to be replaced each year so that low-income households can receive support, should their heating system be beyond repair. While other forms of energy efficiency may have greater long-term benefits, a broken boiler can be the immediate crisis point for a struggling family.

18:15

We are allowing oil systems to be replaced so that rural households without a viable alternative can continue to receive support. However, coal heating is ineligible. Only ground source heat pumps will continue to qualify for support under both ECO and the renewable heat incentive. We have limited the potential for double subsidy, but have made an exception for ground source heat pumps due to their high up-front costs and the long-term value of ground loops. Energy suppliers will have to deliver at least 15% of their obligation to rural households, maintaining this important safeguard for households with a greater propensity for fuel poverty.

To encourage installers to take a broader approach to improving the energy efficiency of homes, inefficient heating systems can be replaced if they are delivered alongside high-value insulation. We have retained a solid wall minimum requirement at the equivalent of 17,000 solid wall homes per year, but we have introduced flexibility by allowing suppliers to meet this minimum through a combination of other measures if they deliver the same bill savings as solid wall insulation.

The changes that we have made to the scheme are important. They will help to upgrade the homes and reduce the bills of more than 1 million low-income and vulnerable households during the period of this order, while paving the way for new measures. This will add further impetus to meeting our fuel poverty and carbon reduction goals by encouraging more cost-effective, customer-friendly solutions. I commend the order to the Committee.

[Lord Teverson (LD)]

My Lords, I thank the Minister for his very detailed explanation of what this secondary legislation does, although I have a few questions. This is an example of where we pretend we are not taxing consumers. As this is not public expenditure, we have to put it through energy companies, which are in the private sector. They decide and spend a lot of time working out who should get these things when it could all be done a lot more simply if we did not go through this public expenditure pretence. When I go through ECO, it always seems to me that it would be so much better if it was administered by local authorities. They know households with problems and have all sorts of obligations towards private renters, who are a real problem in terms of energy efficiency and getting landlords to implement these sorts of schemes. It would be so much easier if we were honest with ourselves. This is a form of taxation, it is public expenditure, and we should just sort it out, rather than go through all the bureaucratic inefficiency that we have.

Having said that, I welcome the scheme very much in terms of moving this agenda forward. The present scheme, as I understand it, ran out at the end of September. We now have this instrument in front of us. I do not know how long it will take to get the thing started. I understand that there are some roll-over functions, and I welcome that, but so often with this sort of funding—even more so with European funding—there is always a risk that the companies and installers involved in this have a cash-flow crisis because we stop and start these programmes. I may be worrying unnecessarily, but I would be interested to understand how that gap is coped with and when the scheme is expected to really take off.

I noted with some amusement paragraph 7.20 of the Explanatory Memorandum, which said:

“There is a high level of interest in the scheme from energy suppliers who deliver the scheme, fuel poverty groups and installers, and some interest in the scheme from the public”.


That is extremely honest of the instrument, but I am sure we would all agree that it would be good if the public, who are affected by this, were motivated to push to get the scheme going. From that evidence, there may be a real need for some sort of public information scheme. I would be interested to hear from the Minister how that will be solved.

I find some of this order a little bit difficult to follow. Clearly there is an emphasis on social housing, which I welcome. Given the budget of the ECO—it is not insubstantial but it is limited—I also welcome that it is going on areas of fuel poverty rather than just carbon savings. No one is more committed to climate change issues than me but it is right to concentrate expenditure on fuel poverty.

What do we do about the rest of the housing stock that is not covered by this? The Minister mentioned that there is still a real gap in the Clean Growth Strategy in dealing with household efficiency in the rest of the market. I notice that the strategy states that it will:

“Support around £3.6 billion of investment to upgrade around a million homes”.


The programme covers 900,000 homes with an average spend of £640 million per calendar year. That works out at only about £2 billion for the time that is left until the end of March 2022. I would be interested to see what happened to the other £1.6 billion between the strategy and this paper.

On the private sector side, how do we check that landlords are meeting their legal obligations? How do we check that the measures work? I am sure that there is already a process for this but the instrument mentions the “monitored measure” option. I do not want to go into great detail but that option gives bonuses to suppliers or accounts in additional savings or help.

From the evidence, we all know that fuel poverty families getting better insulation does not tend to reduce their energy spend. Quite understandably, it just makes sure that the family is warmer than it was before, so I do not understand how we measure the effect of this given that people will probably use more energy to keep warmer instead of being cold. Are the Government confident about how these schemes are audited?

I welcome the fact that the scheme will continue beyond this until 2028, as in the Clean Growth Strategy, and I welcome the concentration on fuel poverty. Again, following the unfortunate relative failure of the Green Deal during the coalition Government, we absolutely need a national scheme to find a way to upgrade the rest of the UK’s housing stock.

[Baroness McIntosh of Pickering (Con)]

My Lords, I bow to the superior knowledge of the noble Lord, Lord Teverson. I have a couple of questions. I want to press my noble friend, if I may.

At the outset, I declare my interest in the register as a vice-president of National Energy Action. I have long taken a close interest in the Warm Front programme. Like the noble Lord, Lord Teverson, I welcome the continuation of the scheme. Obviously, it is a matter of record and ongoing regret that around 4 million households are still in fuel poverty. Any scheme that can be seen to reduce that is very welcome. How does the scheme compliment what is already happening? What more could potentially happen through building regulations? A more joined-up approach to warm homes would be very welcome indeed.

Being half Danish, I am particularly interested that we currently export residual household waste from the city of York and north Yorkshire to Holland at a cost to the local taxpayer. However, at the end of the day, the benefit is to Dutch residents, because the waste is burned and energy from waste is recovered in the form of district heating. My aunt in Denmark gets the benefit of that—although not from our residual waste in north Yorkshire—through cheaper electricity, hot water and heating. I am very interested to know the potential number of new district housing connections that could be made through the continued scheme before us this afternoon. Does my noble friend have a projection of that? What plans do the Government have to retrofit? There is a firm in Denmark that has changed its name to Ørsted, but I prefer the old name of DONG—the Danish Oil and Natural Gas company—which is easy to remember. It claims it could retrofit properties here in London. Is that something that the department has considered?

My last question is about the figure in the order before us today for potential savings. Is the overall home-heating cost reduction target of £8.2 billion realistic? How do the Government plan to achieve that?

[Lord Grantchester (Lab)]

I thank the Minister for his introduction to the order before the Committee today. As he explained, it introduces a completely new energy efficiency programme—ECO3—focused essentially on those in fuel poverty but with elements of ECO2 and 2t. Indeed, the first ECO order, made in January 2013, was itself a successor to previous government energy efficiency schemes such as Warm Front, CERT and CESP. These previous schemes were more centrally funded, whereas ECO is an obligation on energy companies to fund and finance energy efficiency measures using their own resources and without additional government support. In that regard, austerity is still continuing.

The order extends to 2028, which, as I mentioned last week, is only four years short of 2032, the end period for the fifth carbon budget. We note that the Government are at risk of failing to meet that. The new ECO3 measure, as suggested, replaces the wider remit of former ECO schemes, which were based on a carbon-saving metric and encompassed a number of programmes relating to energy efficiency for carbon-saving purposes, where only a minority of the overall funding was directed specifically towards people in fuel poverty. The main programme therefore restricts measures to those households in band E, F and G properties. For these reasons, I cannot fully endorse the order before the Committee today. I also detected a slightly less than encouraging response from the noble Lord, Lord Teverson, and perhaps some criticism.

The order is a continuation, reducing and restricting policies that fail to address the wider issue of energy efficiency on a more comprehensive basis. Nevertheless, it does contain some good measures in response to previous Labour criticisms. The Government should be commended for reducing the obligation threshold for suppliers from 250,000 to 150,000 accounts over time, and for looking at the problems encountered by customers when switching from a company above the threshold to a smaller company operating below the accounts threshold.

Also to be welcomed is the Government’s response to extending the 25% of the suppliers’ obligation to be met by local authority flexible eligibility. It is, in effect, a nominations scheme in which local authorities can participate, whereby area-based activity can be undertaken to improve similar properties in a location. Another important aspect of this measure is the focus on innovation and the benefits it can bring—for example, Q-Bot, which undertakes the laying of insulation in inaccessible places.

18:30

The fuel poverty measures contained in the order are also welcome, especially the extensions to further participants in the scheme and the measures to maintain at least 15% of the obligation to rural households. They are important. However, concentration on the problems of fuel poverty is certainly important, but whether this should be to the exclusion and at the expense of all other aspects of energy efficiency is a matter of concern. This would fundamentally alter the carbon savings brief of the original obligations programme. When it was first introduced in 2013, ECO represented a change from the previous Government’s programmes—namely, the carbon emissions reduction target, the community energy saving programme and the Warm Front scheme.

In the context of the Clean Growth Strategy, which the noble Lord and others have mentioned and which I quote:

“We will need to ensure existing buildings waste even less energy”.

This order reduces the overall envelope of the ECO programme for 2018-22 and onwards. The rate of improvement in properties can only diminish. This order represents a continuing substantial cut in overall obligation requirements, from £1.67 billion per annum in 2013 for CERT, CESP and Warm Front, to £1.12 billion for the ECO replacement, to £0.87 billion per annum for ECO2, reducing now further to £640 million under ECO2t and the ECO3 measure. This represents a more than 60% drop in energy efficiency funding through government schemes, however funded, since 2013—and a regrettable lack of ambition. This obligation level falls well short of what is required to meet statutory fuel poverty targets. Indeed, the Committee on Fuel Poverty has indicated that even this order’s concentration on fuel poverty will not be sufficient to meet current poverty reduction targets—a reflection of the overall size of the scheme and its ambitions within the overall setting.

Labour is committed to a programme of insulating 4 million homes in a period of one Parliament, and to repeating that commitment for another two Parliaments to reach the level of domestic energy efficiency required to meet contributions to the fifth carbon budget by 2032. This commitment, including both state funding and the accompanying company obligations, will enable both carbon obligation targets and fuel poverty targets to be met, including specifically through a prioritisation of measures relating to fuel poverty within the overall programme.

Even after refocusing ECO3 to deal exclusively with households in fuel poverty, this measure falls short, even in its own terms, to meet statutory fuel poverty targets. It does not deal with the carbon reduction imperative, provides no new public sector funding and does not deal with the challenge to improve energy efficiency requirements for the UK’s housing stock. I can approve the order only on the basis that it is a starting measure while the Government consider more comprehensive measures to bring forward.

The memorandum provided with the regulation states that one of the core aims of the instrument is to contribute to carbon reduction targets. Bearing in mind the assessment of the Committee on Climate Change in achieving the fourth and fifth carbon budgets, what action will the Government be taking to meet the UK’s target?

[Lord Henley]

My Lords, I welcome the generally positive tone of the noble Lord and my noble friend Lady McIntosh, both of whom recognised that this order is a genuine reform of the ECO system. As I made clear in my opening remarks, it is designed to target it far better at those who are less well off and those who find it harder to adapt their houses to make them more energy efficient. It has achieved a great deal in the past and will continue to achieve a great deal.

I am sorry that the noble Lord, Lord Grantchester, takes a less positive approach to this and accused us of a lack of ambition, given that I talked about increasing very dramatically the number of people that we intend to try to reach, and recommended generally spending more taxpayers’ money in a rather haphazard manner. I point out to him and to the noble Lord, Lord Teverson, that technology will encourage those who can afford it to make changes that will lead to a reduction in the use of energy. One only has to look at, for example, the reduction in the cost of things such as LED lights over the past few years, which has made it far easier for people to change to those lights and therefore decrease their use of energy. Similarly, it is right that those who can afford it should pay for appropriate insulation as is necessary, as they will see the benefit in a reduction in their fuel bills and the country and society as a whole will see a benefit in the reduction in carbon use. These measures are designed to encourage those who find it less easy to afford to make those changes.

[Lord Teverson]

As the Minister knows, in the UK, particularly in commercial buildings and increasingly in private buildings, we have a problem that landlords and tenants have very different goals in this area, so unfortunately it does not always work out that way. However, I do not want to interrupt him further.

[Lord Henley]

I totally agree that landlords and tenants have different views on this. Landlords can benefit from these measures. If the noble Lord would like, I will write to him in greater detail on that point. We would also like to see landlords with old houses make the investment that is right in those houses where they can do so.

I shall deal with some of the more detailed questions that were put to me, particularly by the noble Lord, Lord Teverson, and my noble friend Lady McIntosh. I hope that in the process I will also deal with some of the queries of the noble Lord, Lord Grantchester.

My noble friend talked about energy from waste and the possible advantages that the Danes are getting from us exporting some waste. My noble friend will remember that when I served in Defra I had an interest in waste. She will also know that there are sometimes difficulties in getting planning consent for energy from waste plants. I will write to her in greater detail on that, as it goes slightly beyond my brief at the moment. I also note that she mentioned the firm DONG in Denmark—I think it has now changed its name to something else that I cannot pronounce: Ørsted. I have recently seen some of its windmills off Barrow, which is now the largest wind farm in Europe, providing, I think, a very large increase in renewables from that source.

I agree with what my noble friend said about more homes being retrofitted. The new innovation routes could allow multiple measures to be installed in homes. That approach would need to be sponsored by us to demonstrate that it could be cost-effective. That information would need to be provided to Ofgem, the scheme administrator, to ensure that it met the relevant standards. If I can give her some further detail on that and on potential figures for those new district heating connections, I will write to her in due course.

The noble Lord, Lord Teverson, was concerned about the end of the old scheme and the start of the new. I assure him that early delivery means that the measures which meet the new scheme’s rules, and which are delivered before Parliament agrees these regulations, will count towards the supplier’s obligations. We will have a seamless transformation of these matters. I also assure the noble Lord that there will be the appropriate audit he seeks. Ofgem requires measures to be installed to specific standards and 5% of the measures are checked by Ofgem under the scheme’s technical monitoring checks. I hope that 5% will be sufficient for the noble Lord to consider that it provides the appropriate audit and checks.

The noble Lord asked about the housing stock that is not covered by the ECO scheme. We are reviewing the fuel poverty strategy and will make an assessment of how best to meet the fuel poverty targets. As I made clear, the clean growth strategy has set aspirations to decarbonise all sectors of the UK economy. The buildings mission aims to at least halve the energy use of new buildings by 2030, as well as halving the cost of renovating existing buildings to a standard similar to new buildings. I repeat that new buildings are covered by current building regulations, and therefore any new buildings will be appropriately insulated. However, we want to get old buildings up to the same standard as new buildings while increasing quality and safety.

The noble Lord had other queries. He quoted from paragraph 7.20 that there was some interest from the public and said that he wished to see more. We would all like to see more interest from the public—that is true of a great many schemes throughout government, way beyond this one. I assure the noble Lord that a number of members of the public responded to the consultation. They obviously had an interest in energy issues, energy efficiency and fuel poverty. The majority of the responses were supportive of consultation, as I set out in my opening remarks. I hope that as a result of this debate—should people be taking much interest in it—and other measures, others throughout the country will take an interest in this, and that those firms involved in the scheme will do their bit to contact the public and let them know what is available, particularly for those with low-cost housing.

As I said, I welcome the generally positive tone taken by the noble Lord, Lord Teverson, and my noble friend. I hope that in due course the noble Lord, Lord Grantchester, will come round to that view and accept that this will go a long way towards meeting the problems of fuel poverty, will help to decarbonise and will help to meet the targets that we hope to—and will—meet by 2030 and beyond. I commend the regulations to the Committee.

Motion agreed.

Electricity and Gas (Powers to Make Subordinate Legislation (Amendment) (EU Exit) Regulations 2018

Tuesday 30th October 2018 Grand Committee

Considered in Grand Committee

18:44

Moved by

[Lord Henley]

That the Committee do consider the Electricity and Gas (Powers to Make Subordinate Legislation) (Amendment) (EU Exit) Regulations 2018

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Henley) (Con)]

My Lords, the regulations were laid before the House on 5 September. As we approach EU exit, my department is working to ensure that our energy legislation continues to function effectively after exit day. In recent years the EU has introduced through the third energy package a suite of legislation governing the energy systems of member states. Much of this is technical legislation, known as European network codes and guidelines which apply to energy operators and regulators.

To maximise continuity, the European Union (Withdrawal) Act 2018 will incorporate the majority of this legislation into domestic law when we leave the EU. This instrument is the first of a package of energy-focused regulations amending this retained EU law to ensure that the UK’s energy legislation and markets work effectively after exit. This instrument does so in two ways: first, by ensuring that directly applicable EU law concerning electricity and gas will be effectively incorporated into domestic law; secondly, by enabling the UK Government and the Northern Ireland Executive to amend elements of this retained EU law in a simple and proportionate way, ensuring that our energy legislation can keep up with the rapid pace of technological advances and market developments. To do so, this instrument will transfer legislative functions conferred by four EU regulations from the European Commission to the UK Government and Northern Ireland Executive under the powers of Section 8 of the withdrawal Act.

The first power being transferred by this instrument is a limited ability to create European network codes. The withdrawal Act will incorporate all direct EU legislation so far as is operative immediately before exit day. This means that provisions in force on exit day but applying from a later date will not be incorporated. This is the case for several European network codes. Without government action, this could create gaps in the energy regulatory framework, leading to uncertainty and detriment to industry, which has adapted rules and practices to comply with the network codes. It is therefore important that the UK can incorporate these missing provisions promptly through legislation. This is accomplished by Part 2 of the instrument, which will revoke the European Commission’s power to make new codes and instead substitute limited powers for the Secretary of State and the Northern Ireland Department for the Economy to make regulations bringing into domestic law provisions corresponding to the codes or parts of codes not captured by the withdrawal Act. These statutory instruments will themselves be subject to the affirmative procedure to ensure effective parliamentary scrutiny.

Secondly, this instrument will enable amendments to network codes by transferring powers currently held by the European Commission to the Secretary of State and the Northern Ireland Department for the Economy. These powers would be exercised using subsequent affirmative statutory instruments.

Thirdly, as well as powers relating to network codes, this instrument will transfer to the Secretary of State and the Northern Ireland Department for the Economy powers to amend definitions and reporting requirements under the EU regulation on wholesale energy market integrity and transparency, known as REMIT. REMIT prohibits insider trading and market manipulation in wholesale energy markets and provides energy regulators with valuable tools to fight these crimes. The power to amend definitions is limited and may be used only to ensure coherence with other relevant financial services and energy legislation, or to take into account developments in wholesale energy markets.

The fourth power under this instrument concerns the security of gas supply regulation, which creates common standards and indicators to measure threats to gas security and defines how much gas is needed to maintain security of supply. The regulation contains templates for risk assessments, preventive action plans and emergency plans to be carried out by the Government. Further, the regulation contains powers for the European Commission to amend these templates using delegated acts. This instrument transfers these to the Secretary of State. Powers to amend the security of gas supply regulation and REMIT would be exercised through subsequent negative statutory instruments. This is appropriate as these powers permit only narrow amendments to very limited provisions of these regulations.

This instrument extends to Northern Ireland. As energy is a devolved matter, this instrument transfers powers variously to the Secretary of State and to the Department for the Economy in Northern Ireland, respecting the devolution settlement. In addition, my department has consulted with the Northern Ireland Department for the Economy throughout. While this instrument permits the Secretary of State to exercise its powers in respect of Northern Ireland, this would occur only in respect of a reserved area such as international relations, or when the Department for the Economy determines that it is unable to act in the absence of Northern Ireland Ministers. Each time this occurs, it would be accompanied by a ministerial Statement explaining why it was necessary.

In conclusion, the regulations are a sensible and necessary use of the powers of the withdrawal Act that will maximise continuity in our energy regulations as we leave the EU. I commend the regulations to the House.

[Lord Teverson (LD)]

It is left to me to start this rather technical discussion. On this occasion, I will stick to a rather strategic level, if the Minister does not mind. First, it has been the Government’s intention in our EU negotiations to remain in the single energy market, which I hugely welcome. I would be interested to understand from the Minister whether there has been any progress on that; whether that might appear in the political declaration of our future relationship in the withdrawal agreement; whether the Government are still keen to do that; and, if we are successful despite our red lines and the Government’s general intention to come out of the single market, whether the instruments would be necessary if we remain in the EU internal energy market.

Moving on from that, we have interconnectors. On codes and other technical matters, once we leave, if we are not part of the internal energy market, we will no longer have access to discussions on or information around codes used by that market. I would be interested to understand what effect that will have on interconnectors between us and the European Union at that time. Certainly the Select Committee that I chair was very concerned about the inefficiencies in trading—not so much around interruption of supply but around increases in energy prices due to inefficiencies because of the relationship not being as smooth as it was before—that might come about from that.

I want to ask a fundamental question. As the Minister mentioned, the secondary legislation concerns Northern Ireland as well. As he knows, the island of Ireland has a completely integrated energy market—a so-called single energy market. What preparations have the Government made, particularly in the case of no deal, so that this energy market for electricity and gas can continue to function, with powers coming back to the UK and such disintegration—that is, no longer being completely under the purview of the internal energy market? Will that single energy market in Ireland still work despite the fact that the network codes will change? This system seems fundamental to Northern Ireland’s energy needs, let alone those of the Republic.

[Lord Grantchester (Lab)]

My Lords, I thank the Minister for his introduction to the regulations—the first of many to come concerning the UK’s exit from the EU. The Committee will consider many technical energy matters. It will not be entirely simple to identify the crucial elements and their implications. However, I will echo the remarks of the noble Lord, Lord Teverson, on the more challenging aspects of the regulations on wider-ranging topics, such as the internal energy market and the position of the island of Ireland.

On the face of it, the instrument seems simple enough. It moves powers held by the European Commission to a domestic authority, giving the Secretary of State power to alter them—in this case, referring to European network codes and guidelines—and adopt the amendments overall as “retained direct EU legislation”. Later amendments that will not come into force by 29 March 2019 will not be regarded as retained direct EU legislation. They will be resolved, perhaps even revoked, by exit day under separate secondary legislation, along with elements of retained EU law where the Secretary of State considers that the EU instruments retained in law will not be capable of operating in isolation from the rest of the EU instrument. Powers are also taken in the SI to amend the provisions of REMIT, an EU regulation concerning wholesale market integration and transparency, to apply internally to the UK and not to have to report to EU authorities.

Some amendments will be made by affirmative procedure and some negative. As your Lordships’ Secondary Legislation Scrutiny Committee concluded, all is so clear, so far. Perhaps the Minister can confirm first whether all these amending instruments will be amending only: that is, not enabling new powers through secondary legislation. That does not seem to have been commented on.

More importantly, this question brings up the whole issue of the internal energy market. Unlike Euratom and other bodies established by treaty, the IEM is merely a collection of agreements among member states on how the European energy market is to be conducted. It has been stated many times that it would be advantageous for membership of the IEM to be retained, or a close association with it. How far could any statement go when it is not really a distinct entity? This order would be regarded as a contingent action, to be effected and commenced if no suitable alternative arrangement for energy trading through interconnectors can be put into place—rather like the contingent nature of the Nuclear Safeguards Bill, now an Act, as the Minister will remember. Can the Minister clarify whether this is the Government’s intention or whether, as the memorandum seems to suggest, the order will apply regardless of any deal and be part of a signal to break with the IEM under all scenarios? Will he also clarify the Government’s general intention toward the internal energy market?

Very pertinent in this respect is the position regarding Northern Ireland. Ireland, north and south of the border, already operates under an all-Ireland grid. Given the possibility that Northern Ireland will not operate its own grid requirements at Brexit, is it intended to break up the Ireland grid? While paragraphs 7.12 and 7.13 of the Explanatory Memorandum deal with the position as now, when there is not a functioning Executive, is it intended that Northern Ireland will function on different codes from the rest of Ireland at Brexit? Can the Minister explain what is intended and how it will work on a United Kingdom basis with Northern Ireland and the Irish grid?

While an effective system must be in place upon Brexit, does this order—while enabling continuity for UK authorities—close the door on options for a better working of the energy system after Brexit through close association with the internal energy market? Can the Minister provide the Committee with any further clarity? If any of his remarks can assure the Committee on this point, I can confirm the order today.

[Lord Henley]

My Lords, I am grateful to both noble Lords for their comments. As the noble Lord, Lord Grantchester, rightly said, this is possibly the first of many statutory instruments that will come before the House, possibly as negative orders. He will remember that, if I have this right, I wrote to him and to the noble Lord, Lord Teverson—or if I did not, I copied a letter that my right honourable friend Claire Perry sent to colleagues in another place—about these orders back in August of this year. I will double check whether I did. All I know is that she wrote on 14 August; I thought that I had copied that letter but if not, I will make sure that I have.

The reason why I mentioned it is that I have given a commitment to write to noble Lords as other orders come forward. As I made clear in my introductory remarks, these orders merely give certain powers to the Secretary of State to make powers that previously existed with the EU. Obviously, those powers are to make further orders that will come forward. It is, one might say, quite a complicated landscape and—both noble Lords will have heard the discussions on earlier orders—we might have found it easier and speedier if I had written to them in advance. I thought that I had.

19:00

Further orders will come forward and I will write to noble Lords. Some of the orders will be affirmative and some will be negative. All will go to the appropriate committees, which might suggest that some that we had thought were possibly negative should be treated as affirmative. If that is the case, Her Majesty’s Government will obviously take that on board and deal with them as appropriate as they come before this House. As I said, I will make sure that I write on those.

The noble Lord, Lord Teverson, asked whether this instrument would still be needed in a deal scenario as opposed to a no-deal scenario. These regulations are a deal/no-deal instrument. The powers will be needed in all scenarios. In a deal scenario, they could be used to keep pace with EU amendments to the network code. We need them whatever happens.

Let me deal with some of the other points. First, what effect will EU exit have on the interconnectors? The Government and Ofgem are already working with the interconnectors to ensure that new access rules, which set the terms and conditions for trade, can be approved by Great Britain by 29 March 2019. We understand that the interconnectors are already engaging with EU member state regulators, who will need to approve the access rules to the same timeframe.

Will the single electricity market in the island of Ireland still function after EU exit? Negotiations have already made good progress on legal provision to underpin the single electricity market in the withdrawal agreement. The UK will work with Ireland and the EU in an effort to ensure that the SEM is maintained in any future scenario, including the unlikely event that we do not reach a deal. Given the benefits to consumers and the economy of a more efficient shared market, it is strongly in the interests of all parties to agree to a means to ensure the continuation of the SEM. We have long-standing and ongoing bilateral relations with Irish energy officials.

I accept that these regulations are pretty technical and that further SIs will come forward in due course. The noble Lord, Lord Teverson, invited me to take a more strategic approach and view the whole of the negotiations in the round, but I do not think that this would be the time or the place to do that. We will continue with our negotiations and I am sure that they will have the appropriate outcome in due course. Meanwhile, it is necessary to get these regulations on the book so that we are in a position to make the appropriate changes and to take the appropriate powers at the right time. I commend the regulations to the Committee.

Motion agreed.

[The Deputy Chairman of Committees (Baroness Newlove) (Con)]

My Lords, the Committee needs to adjourn for five minutes to make an adjustment to the furniture before the final debate.

19:04

Sitting suspended.

Child Support (Miscellaneous Amendments) Regulations 2018

Tuesday 30th October 2018 Grand Committee

Considered in Grand Committee

19:08

Moved by

[Baroness Buscombe]

That the Grand Committee do consider the Child Support (Miscellaneous Amendments) Regulations 2018.

Relevant document: 41st Report from the Secondary Legislation Scrutiny Committee

[The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Buscombe) (Con)]

My Lords, I begin by thanking noble Lords for bearing with me as I take these regulations through from a seated position. I want to say a particular thanks to the noble Baroness, Lady Sherlock, for giving me early notice of her response to the regulations, for which I am extremely grateful. The regulations were laid before both Houses on 12 September 2018. They enable the Government to make amendments to child maintenance legislation to deliver the new child maintenance compliance and arrears strategy. Let me give the Committee some context and background to the regulations.

The Government introduced a reformed child maintenance scheme in 2012. The reformed scheme provides stronger incentives for parents to work together following separation and, where possible, to make a family-based arrangement for maintenance, avoiding state intervention altogether. The Child Maintenance Service is there for families unable to make a private arrangement. It delivers a simpler scheme, avoiding the problems which beset the previous statutory child maintenance schemes. These draft regulations will strengthen the statutory scheme and introduce measures to prevent parents artificially minimising their child maintenance liability. They will also introduce new collection measures, close loopholes and broaden the sanctions that we can bring against the small number of parents who persistently fail to meet their obligations to their children.

Now that the majority of cases with ongoing maintenance have been closed on the CSA schemes, the Government want to draw a line under the regrettable legacy of the CSA and end the years of uncertainty that families who have historic CSA cases have experienced. For many years, these cases have been held in limbo. The debts outstanding are often small, and in some cases, when asked, parents have moved on with their lives and are not interested in pursuing the debt. These regulations will give parents in certain circumstances a final chance to tell the Government that they still want to consider taking action to collect their debt where it is likely to be possible at reasonable cost to the taxpayer. This will enable these cases to be closed finally in the next few years.

A small number of parents are currently able to lower their child maintenance liabilities artificially, or avoid them altogether, by drawing an undeclared income from assets. Whether this is via loans against the value of bullion or through the acquisition of virtual currency, the cultivation of a cash-poor but asset-rich lifestyle is a rare but growing method of evading child maintenance responsibilities. These regulations introduce new powers to address this problem. Where a client believes their ex-partner possesses the relevant assets, the Child Maintenance Service will investigate, escalating to its financial investigations unit if appropriate. If possession of a relevant asset is confirmed, and the value exceeds £31,250, a notional income will be calculated at 8% of the asset’s total value. This will be added to the total income used to calculate the maintenance due. It is recognised that assets can be acquired for legitimate reasons, which is why this power will be used in only a very small number of cases. The draft regulations protect assets in certain circumstances, including where the asset is used for business purposes or is the primary home of the parent or a child.

It has become evident that some parents are able to place all their funds in joint or unlimited partnership accounts, rendering them inaccessible to our current powers. These regulations extend the Government’s powers to enable the Child Maintenance Service to use regular and lump sum deduction orders in relation to joint and unlimited partnership bank accounts and to use lump sum deduction orders in relation to sole trader accounts. The introduction of this new power will mean that an additional £350,000 of maintenance per year may be collected for children.

To protect the rights of other joint account holders, a number of safeguards have been put in place to prevent deductions being taken from the other joint account holder’s funds. Joint or unlimited partnership accounts will be targeted only where there are insufficient funds in the parent’s solely held accounts. Before action is taken, the last six months’ account statements will be checked to establish the ownership of the funds. In a small number of cases where, despite investigation, it is not possible to establish how much of the funds within the account belong to the parent—for example, because no evidence is furnished as to ownership—a pro-rata approach will be adopted. This will assume that the parent’s share of the funds is equal to that of the other account holders. All account holders will be notified before a deduction order is made in respect of a joint account and given the opportunity to make representations in relation to the funds targeted. The standard representation periods will be 14 days for regular deduction orders and 28 days for lump sum deduction orders. All account holders will also have appeal rights. Further safeguards are in place to ensure businesses have sufficient cash flow to continue to trade. A deduction will not be taken if it would reduce the account balance below a reasonable amount; we suggest, for example, £2,000. There is also a requirement for the Government to review these provisions every five years.

19:15

With respect to passports, the Government plan to commence an existing power to enable the Child Maintenance Service to disqualify a parent with child maintenance arrears from holding or obtaining a UK passport. These regulations make further provisions in respect of this power. This measure will add to the existing sanctions of commitment to prison and disqualification from holding or obtaining a driving licence and will operate in a similar way. It will be used only where a parent has consistently failed to meet their financial responsibility for their children and all other enforcement powers have failed to regain compliance. Given the serious nature of this power, appropriate safeguards are in place. It will be for the court to decide whether to disqualify a parent from holding or obtaining a UK passport. The court has the power to suspend the disqualification order on such conditions as the court thinks appropriate. This power will be used in only a small volume of cases but will serve as a deterrent to encourage the payment of maintenance as early in the case as possible.

Debt on CSA schemes has built up since they launched in 1993. Over the years, successive Governments have tried various strategies to collect this debt, including using external debt collection agencies and offering parents the option of making a part payment, but none of these has been successful in getting money to children. The published Child Support Agency client fund accounts for 2015-16 make clear that £3.1 billion of CSA debt is deemed uncollectable. These regulations include changes that help to deliver certainty to parents by attempting a final collection of their debt where they want it and where such action is likely to be cost-effective for the taxpayer. For a case to be in scope for these regulations, the debt must have accumulated on the 1993 or 2003 CSA schemes. It must also be a case where only arrears of maintenance are due—that is, where no maintenance is currently due for a child—and the case has not received a payment within the past three months. Where a case started on or before 1 November 2008 and has more than £1,000 arrears, or is over £500 if the case started after 1 November 2008, or the arrears accrued under the CSA but have transferred to the Child Maintenance Service system and are more than £500, we will write to the parent the money is owed to and ask whether they would like us to make a last attempt to collect the debt. Parents will be given 60 days to tell us that they want us to attempt to collect the debt. If representations are not received within the 60-day period, the debt may be written off.

Where CSA debt falls below the thresholds prescribed in the regulations and no payment has been received in the past three months, it will be written off without seeking representation. This is because it will not be cost-effective to attempt collection of debt below these thresholds. There are different thresholds according to age of debt, as the older the debt, the harder it is to collect. Where this applies to a case, both parents will be notified that the debt has been written off. Where the debt is below £65, these regulations will enable the debt to be written off without notice to the parties. This is in line with the current threshold used for debts owed to government. Finally, if a case has debt subject to sequestration, which is Scottish insolvency, these regulations will enable it to be written off when the sequestration expires. This will apply to all child maintenance schemes, as this debt becomes legally uncollectable due to the way sequestration operates.

In conclusion, I am of the opinion that these regulations will strengthen the statutory Child Maintenance Scheme by enabling greater compliance by the small number of parents who deliberately try to reduce their child maintenance liability or to evade their parental responsibilities. It will bring certainty to families with historic CSA debt by offering a final chance of collection of that debt, where it is possible at reasonable cost to the taxpayer. I am satisfied that this instrument is compatible with the European Convention on Human Rights, and I commend these regulations to the Grand Committee.

[Lord Kirkwood of Kirkhope (LD)]

My Lords, I am very grateful to the Minister, who, in adversity, has done a splendid job in explaining these regulations. I cannot help but believe that somewhere on the premises there must be a parliamentary sedan chair, which I happily will take one end of until she is better, and I hope that that happens soon.

I am a member of the scrutiny committee, and its report is part of the discussion this evening. It was interesting scoping the report, and we got some really compelling evidence from both sides of the argument, from non-resident parents as well as parents with care. My track record on all this stuff is longer than I care to admit. I was around in 1991 when the original legislation was brought forward and produced the 1993 scheme. The economic environment within which these schemes were started is now different. In the past, I have always taken a Gingerbread approach to this. In 1991 and 2003, the thing that really exercised me was that there were people acting in bad faith as non-resident parents with considerable amounts of money, and, because of the bad blood between the parents, they were taking it out on the children. That is what set my measuring stick for working out how this happens. It is very difficult for the state to go behind the front door of any family and interfere in these circumstances, and we learned that the hard way. It is true to say that under both Governments—and I could not help either from the place I sat in in the House of Commons or in the House of Lords—the two legacy schemes have been really difficult for families. Misery is not too important a word because they exacerbated the relationship between the separated parents.

None of this is easy, and my heart goes out to the professionals who have been running these schemes. They have been dogged by IT difficulties, and the collection process has struggled. The honest truth is that the elements in these regulations, which largely I support, should have been carried out years ago. I was part of the 2008 Act that gave passport legislation authority to the department, and now in 2018 we are actually implementing some of that. In parentheses, there is an interesting question about why that is not happening in Northern Ireland. It may be that there are special provisions for Northern Ireland at the current political moment, for all I know, but I would be pleased to know why it is an exception, because I cannot think of any other reason than the fact that it is getting special treatment.

When the Secondary Legislation Scrutiny Committee looked at this statutory instrument, it looked at the fact that there is still only a 57% payment compliance rate. My colleagues on the committee, who have not been studying this legislation as long as I have, found it very hard to understand why a scheme of this duration was still getting only 57% payment compliance, and that is still an issue for me as well.

Concerns were expressed about the way in which assets are still being protected from actions in bad faith because of the difficulties of valuation. I understand that with physical assets such as works of art it is difficult to know how much they are worth, who owns them and so on, but we heard evidence in the committee’s investigation of this SI which demonstrated that yachts are being bought which, even under these regulations, cannot be attached to the liability due by the non-resident parent. That is too complacent. There must be some way of obtaining an independent valuation of an asset’s worth. I support the notional wealth which the regulations attach to assets but they do not go far enough, certainly in relation to some of the physical assets that the Secondary Legislation Scrutiny Committee heard about in evidence when considering these regulations. I will be interested in what the Minister has to say about that.

The evidence we received from non-resident parents led me to think again about the relatively different economic environment for child poverty that we are facing. Non-resident parents have that problem as well as parents with care. They do not get any credit within universal credit for making maintenance payments, which must be difficult for some non-resident parents. They made that point with some force in the course of the evidence they gave. The department made a fist of answering some of these points, but we were still left with real concerns.

People are nervous that we are closing down these schemes—no one will miss them when they go—but, when we move into the new child maintenance scheme, are we taking proper advantage of the opportunity to look at this in a slightly wider context than merely these regulations? They are welcome as far as they go. The weekly value of assets being considered is good, deduction orders, lump sums and additional write-off powers are understandable, and I have mentioned passports, but the communities which will be deprived of pursuing some of these liabilities in future deserve better legislative consideration of the impact that will be felt by them when all of these dramatic things happen.

It would help if there could be an update on how these schemes are proceeding towards closure—what the time frames are and whether there has been any slippage from the last time we discussed this in Parliament. I am still concerned about some of the issues that were raised by the National Audit Office report of March 2017. I am delighted that the Select Committee in the House of Commons is still interested in actively pursuing some of these issues. However, the NAO report did not make happy reading either.

There are a couple of issues I wish to ask questions about. The NAO made special reference to the fact that the department does not tell non-resident parents who have arrears that there is an opportunity available to them to renegotiate the debt on cause shown where hardship can be demonstrated. However, the department does not do that, I suppose for the obvious reason that it gives people an excuse to pay less, but in the situation that we facing in terms of child poverty and for the next couple of years, I think that some non-resident parents should be told about that. The claim they make for a reduction in their maintenance liabilities can be contested by the department and controlled in that way. The NAO was right to raise that. Keeping it secret is no longer defensible and I hope the department will think about that.

19:30

Does the department review the impact and outcomes of enforcement activities? That point was also made in the NAO report. If we are thinking seriously about taking major steps in closing down some of these accounts with outstanding arrears—I suspect we will have another NAO report before too long—the department must, for its own good, be able to argue that it is looking at the outcome and impact of its enforcement schemes.

I could go on for a long while but I will not. Finally, can the Minister say anything about the disappointing number of people who were invited to join the new scheme once the old scheme closed? In the last figures I looked at, which the NAO referred to as well, the department expected far more people to volunteer with a fresh application to go on to the new scheme. The results were very disappointing. The number of family-made arrangements that flowed from that was also very disappointing. The suspicion in my mind is still that a lot of families out there have given up and there are no arrangements. That is a tragedy in anticipation of increased child poverty statistics over the next couple of years for families under a lot of pressure. Is the Minister happy to write to me if she does not have the information to hand? The hour is late and I am sorry to detain the Committee but this debate is important. I would be much happier supporting the regulations if I knew that there was a wider parliamentary context that could help us to understand in more detail the full consequences of the major change that is about to happen.

[Baroness Sherlock (Lab)]

My Lords, I, too, thank the Minister for her explanation of the regulations. I also wish that she is back to full ambulatory health soon. I was glad to have the opportunity to give her advance notice of the questions I will raise because some of them are quite technical. It would be great if she could answer them but if not, she should feel free to write to me.

Before I start, I want to pick on where the noble Lord, Lord Kirkwood, stopped. Most of the people in the House of Lords who have a passionate interest in this are in this room, apart from one or two who could not be here. We have been discussing these issues for a long time. The noble Lord, Lord Kirkwood, saying that he has moved on to a different perspective makes me want to rehearse briefly the fact that having an administrative system of child maintenance is incredibly important. Before it existed, the only way for single parents to get the money they needed to raise their kids was to go to court. It was expensive to get an order, to get it updated and to get it enforced, so the creation of an administrative system of child support really matters. It matters for those kids, the families and the country. It is a statement that you may separate from your partner but you do not cease to be responsible for your children, and the state will enforce that if necessary if the parents cannot afford to do so. I want to lay that on the record.

We should also note that, although the legacy schemes have had a range of problems, billions of pounds have changed hands and gone towards raising children. We should mark that. We should not say simply assume that the problems mean that we do not want to get this right going forward. The obligation to support your children is there, so I share the view that it would be good to have an opportunity to discuss more broadly the issues around child support policy. However, since Parliament has determined the amounts that should be paid by non-resident parents to parents with care, getting that enforced really matters and the regulations address that. In the light of that, I should flag up a historic and now rather distant remunerated interest as I was a non-executive director of CMEC for a time.

In essence, these regulations do two things. They allow the Government to write off significant debts arising from historic schemes and they introduce some new compliance measures to help with collecting future child maintenance. I want to look at each of those in turn to see whether it feels like a balanced package.

First, on the debt proposals, the Explanatory Memorandum says that there are uncollected arrears of £3.7 billion, with £2.5 billion owed to parents and £1.2 billion owed to the Government. DWP thinks that it would be too expensive to try to collect all this, so it proposes to separate the debt into two parts: that which it will make one last attempt to collect and that which it will simply write off. Where there has not been a payment in the last three months and, as the Minister explained, a CSA case started on or before 1 November 2008 and the debt is more than £1,000, or the case started after that date and the debt is more than £500, it will ask clients if they want it to try to collect the debt. If no representations are received, or collection of the debt is not possible, it may be written off. Can the Minister tell us how those representations will be sought? Will each parent to whom money is owed be written to individually?

Secondly, where there has been no payment in the last three months and the case started on or before 1 November 2008 and the debt is less than £1,000, or the case started after 1 November 2008 and the debt is less than £500, or the debt is less than £65, then the debt can be written off without asking the parents at all. Can the Minister tell us, if there had been a payment of some sort in the last three months, irrespective of how much was involved or when it started, would attempts carry on being made to collect the debt, even if it did not meet these criteria? If so, is there not a risk of what is known in the trade as moral hazard? In other words, does it not risk sending out a message to parents who have not paid to support their kids that if they simply do not pay for long enough, the Government will give up and they will benefit from having the debt written off?

To justify writing off historic debt while avoiding the moral hazard charge, it is incumbent on the Government to show that current child maintenance liabilities are being effectively enforced—a point made by the noble Lord, Lord Kirkwood. So is that the case? As the noble Lord mentioned, the current rate of compliance is 57% and it has been static for the last two years. Ministers are partly arguing that these regulations would add to the range of collection and enforcement powers the department has to drive up that statistic. Let us see whether we think they would.

There are basically three measures. First, the deductions from joint and unlimited partnership accounts, which is a welcome measure designed to prevent non-resident parents from evading their financial obligations by moving all their money into joint or unlimited partnership accounts. However, I would like to raise a point made in paragraph 11 of the 39th report from the Secondary Legislation Scrutiny Committee. It reports a concern—raised in a submission to the committee, on which the noble Lord, Lord Kirkwood sits—that the proposal to notify the other account holders of the intention to make regular or lump sum deductions and give them a set period to make representations could give the non-resident parent time to move the cash somewhere else.

The committee noted that the regulations provide that the interim order must include an instruction to the deposit-taker not to do anything that would reduce the amount standing to the credit of the account below the amount specified in the order. However, the Explanatory Memorandum also goes on to say that, in the absence of evidence to the contrary—the Minister reinforced this today—it will be assumed that the NRP has a share of the funds equal to that of any other account holder. So, if the deposit-taker is required only to keep in the account an amount equivalent to that specified in the order, is there not a risk that, in some cases, only a portion of that retained balance can be attributed to the non-resident parent, and therefore, when it comes to the attempt to reclaim it, there will not be enough left to meet the debt? What are the Government doing about that? I did say this was technical.

Secondly, I want to look at the effect of this measure. The self-certified impact assessment says that DWP expects that the use of this measure will result in 350 requested deduction orders from joint personal accounts in England and Wales per year and 170 from unlimited partnership business accounts. Based on the pattern of their use for sole accounts, DWP assumed 34% will be lump sum deduction orders and 66% regular deduction orders, and it expects a 60% success rate. When you crunch these numbers down—which I did because I am very sad—it means that, adding together personal joint accounts and unlimited partnership business joint accounts, you get a total of basically not very much. My sums suggested this meant that the department expected to issue only 100 successful lump-sum DOs and 200 successful regular DOs, which would have brought in about £350,000 a year in extra child maintenance.

However, about half an hour before I came into the Committee, I saw a letter—just published—from Justin Tomlinson to Frank Field, chair of the Work and Pensions Select Committee, in which he said that DWP analysis after the consultation estimated that these new powers would actually enable an extra 400 to 500 actions per year, yielding around £840,000 in additional maintenance. The letter said that the department thought the figure might be even higher still. Can the Minister tell the Grand Committee the current estimate of the number of cases in which these powers are likely to be used, and how much extra maintenance the department expects to collect?

Another question is on the confiscation of passports. The instrument also commences a power, set out in Sections 39B to 39G of the Child Support Act 1991, enabling the Secretary of State to apply to the court for an order to disqualify a non-resident parent who is wilfully refusing to pay from holding or obtaining a UK passport. This is again welcome but I wonder how well it would be used. The 39th report of the scrutiny committee quoted the department as saying:

“This measure will be used as a last resort, where all other enforcement actions have been found to be inappropriate or ineffective”.


When I went back to the methodology document that accompanied the consultation, it said that DWP expected approximately 20 cases per year where a court sanction would be applied. But then it became clear that that would be not 20 passports a year but 20 cases where court sanctions could be applied. Those sanctions might be passport removal but might be losing a driving licence or going to prison. That could mean this new power on passports might be in single-figure usage.

Again, the letter to Frank Field from Justin Tomlinson suggested that this power could be used in around 20 cases a year. Can the Minister explain whether that is 20 cases of passport confiscation a year or whether we are still talking about 20 cases of court sanctions a year, of which some may or may not be on passports? Either way, it is a very small number. Clearly, I realise that it is intended to be a deterrent as well but that was said of driving licences, yet we are still stuck at 57% enforcement. We have to ask: how effective is this likely to be?

The third and final category is on including major assets in the calculation of child maintenance liabilities. There has been lots of pressure on DWP for a long time to reinstate the lifestyle variation available under the previous regime, by which parents could request a variation to the calculation based on a disparity between the lifestyle of a non-resident parent and the income which they reported. Charities such as Gingerbread, along with the Work and Pensions Select Committee, have pressed DWP on this but to no avail. One of the presenting problems has been parents complaining that the NRP claims to have a low income, yet possesses considerable assets and a lifestyle that should be impossible on the income that he or she is declaring.

However, DWP decided not to do that. This is one of its proposals to deal with it instead by including major assets in the calculation of child maintenance liabilities. That is welcome but the scrutiny committee remains concerned about how it is to be done—a point alluded to by the noble Lord, Lord Kirkwood, who mentioned yachts. I do not often get to talk about yachts in my brief but it is the case that a specific submission was made to the committee of a parent who said that her former spouse had bought a yacht, yet nobody could make him pay over the amount of cash he was meant to do as support for the children.

It would seem from that case that there is a real situation out there. Yet in its 41st report, the committee managed to establish from DWP that the definition of asset does not include high-value items such as a yacht or a Rolls-Royce, because it is too hard to value them. In fact, the report said:

“This would seem to confirm our concern that the Non-Resident Parent can find ways of avoiding payment by buying goods with their cash assets and reinforces our view that the new formula for calculating income may make little actual difference”.


Given that that is the whole point of this power, can the Minister explain how the Government plan to deal with this issue and, again, how often DWP anticipates using these provisions?

In conclusion, we are in a position where compliance rates are stuck at 57%. I am doubtful that the package of powers we are discussing are likely to make all that much difference given that the biggest of them will, in the original calculations, affect only 450 children and bring in £350,000 a year. Alongside that, the Government are planning to write off debts of £3.7 billion, so basically we are talking about 0.01% of the amount that has been written off. Even if it is the higher £840,000 figure, my back-of-an-envelope calculations say that we are still talking about 0.02%. There is quite an imbalance.

I remain concerned about those who are slipping through the net—the noble Lord, Lord Kirkwood, raised this. In 2012, DWP estimated that 56% of CSA clients who chose not to apply to the statutory service would make a family-based arrangement. A survey by NatCen conducted between June 2015 and September 2016 found that three months after the CSA cases had been closed, only 18% had a family-based arrangement in place. A similar number had gone to the CMS but 56% had nothing in place.

19:45

Perhaps I may ask the Minister some final questions. What is the Government’s current target for the proportion of parents who do not use CMS and who will go on to have an appropriate family- based arrangement? What target has been set for increasing compliance by non-resident parents from that 57% current base? What target has DWP set for future arrears to avoid us simply being back here again in five years, with Ministers wanting to write off arrears on the current system on the grounds that they need to have a fresh start for everyone before a new system is devised? If the Minister could reply to those questions, I would be grateful. It would also be helpful if she could tell the Committee whether she is satisfied with the level of resourcing going into this. Is it really about powers or resources? Either way, we will be interested to hear how the Government plan to make sure that having an administrative child maintenance system is worth the regulations that are written about it.

[Baroness Buscombe]

I thank noble Lords for their contributions to this debate and for the constructive approach that they have taken towards today’s proceedings. I will now respond to some of the key issues raised. I will attempt to do this in order but I doubt whether I will succeed. I will do my best and if I fail to answer any questions, please be assured that we will write to the Committee following the debate.

I wish to put into context the justification for what we are doing. This has not been a quick or easy decision; it has involved exhausting other approaches to deal with the debt. We have also had numerous long debates and discussions within the department in trying to decide the best thing to do. We are talking about huge sums of money here. I say immediately that when considering resources and budgets, the truth is that we have to be proportionate—what is reasonable in the circumstances; what is more pressing; and what is more important. In our department we are already spending 25% of the entire government budget across Whitehall, so we have to think about resources and the degree to which we want to protect and support children going forward versus the difficulty of writing off such a considerable debt. We have to balance that against the fact that if we do not write it off and keep it on our books it would cost us approximately £30 million a year, which would not be money well spent. It has been a difficult balancing act.

Moving all the debt to the CMS IT systems would incur a one-off cost of at least £250 million, without the resources to action it. We have taken various actions to collect this debt, including using debt collection agencies to chase what is owed. More than 63,000 cases were passed to debt collection agencies for them to arrange collection, but after three years we took back 55,000 cases because the DCAs had not been able to make any debt collection arrangements.

This is our approach following exhaustive discussions, debates and thinking through what is fair to the taxpayer. As the noble Baroness, Lady Sherlock, said, the most important thing is to put the children at the forefront of our minds while seeking ways to send out the critical message that no one should cease to be responsible for their children. Enforcement matters.

I say to the noble Lord, Lord Kirkwood, that I absolutely respect his considerable and lengthy involvement on this really important subject. Of course, there have all along been compelling arguments on both sides. It is interesting what he said about the economic environment being different. Maybe there is also a sense that people are becoming more artful in how they seek to avoid their responsibilities, which is depressing. I am not sure what that says but the truth is that we must have the well-being of children at the forefront of our minds. In a sense, yes, these regulations are overdue, so it is important that we look forward. It is also important to say here that they form the first of two packages. We plan to lay a further set of regulations in 2019 to secure the remaining powers to deliver the 2018 compliance and arrears strategy. These will allow us to take a consistent approach to deduction from benefits.

I should explain that the regulations are being laid in two packages because the Social Security Advisory Committee needs to consider the regulations that make changes to deductions from benefits. But we would not wish to delay the rest of the regulations so that we may lay them all together. Those regulations are not yet drafted, so there is still time—I stress this—to take into account any thoughts on these provisions from noble Lords and honourable friends in another place. We welcome any input on that.

[Lord Kirkwood of Kirkhope]

That is an opportunity perhaps, under an SSAC consideration of the second package of regulations, for affected parents with care and non-resident parents to make submissions to the SSAC scheme later this year. If I understood what the Minister was saying, the Social Security Advisory Committee will undertake a normal consultation and will be looking for people to make submissions for consideration as the committee makes its recommendations. Am I right in thinking that?

[Baroness Buscombe]

I ask the noble Lord to bear with me, because I do not want to get this wrong. The answer is: only if the committee decides to report the regulations.

I will focus on some of the questions put to me, which are welcome. I start with the question from the noble Lord, Lord Kirkwood, on case closure timescales and the fact that there has been slippage. We are still on course to have ended all existing liabilities on CSA cases by the end of this year, 2018. The noble Lord referenced the NAO report. In that context, it is really important to say that we are continuing to consider the recommendations in the report. The department, in a broader context, has really taken on board that we need to be much better at listening. We thought that we were doing enough perhaps, but there is always more that we can do—within time and resource constraints, of course—but it is very important that we listen.

The noble Baroness, Lady Sherlock, asked how the representations will be sought. Will each parent to whom money is owed be written to individually? Depending on which category a case falls into, a client will receive a different letter or series of letters explaining what is happening and why, and, where appropriate, giving them the opportunity to ask us to try to collect their debt. These letters will be sensitively worded and will acknowledge that this may not be the outcome a client is hoping for. I was asked whether, if there has been a payment in the last three months, we will continue to collect. The answer is yes. If the case is in payment, we will continue to collect any arrears still outstanding for as long as the case remains in payment.

I was also asked whether our power to confiscate passports will be used only in a few cases. We will use this power in a targeted, proportionate way. I noted what the noble Baroness, Lady Sherlock, said about our having tried driving licences and asking whether that worked. The keyword here is “deterrent”. The vast majority of parents, we must stress, willingly pay towards their liabilities; we will seek to apply sanctions only in cases where parents wilfully refuse to pay. This happens only in limited circumstances. As with other enforcement powers, such as removing driving licences, the threat of exercising it can be very persuasive. The threat of denying people a passport is certainly something that stood out, when I first read the draft regulations, as something quite exceptional. I hope noble Lords will agree that it should send out a strong message to those who, frankly, are consistently refusing to take responsibility for their children.

The noble Baroness, Lady Sherlock, and the noble Lord, Lord Kirkwood, enquired about compliance rates for cases of collect and pay, asking what we are doing to improve the figure of 57%. The latest data, published in September, for collect and pay compliance shows it is going up; it is now 62%. Of the £1.85 billion due to be paid since the Child Maintenance Service began, £1.6 billion has been arranged through direct pay or collected through collect and pay while £290 million is currently unpaid—around 12% of the total. This percentage share continues to decline from 12.4% last year and 13.1% two years ago.

The CMS is not the only option available for separated parents to arrange child maintenance; it is there for people who cannot work together to make their own arrangements. The collect and pay service is in place for those parents unable to work together, who are less likely to be compliant. This means that the caseload is smaller but naturally more challenging than the CSA caseload.

The noble Baroness, Lady Sherlock, asked how many cases will be affected by the notional income power each year. We have not made projections on this point, but we anticipate the number to be small as, historically, only a small number of parents attempt to avoid their liabilities in this way. On the question of how many passports we expect to be disqualified every year, the figure referred to indicates that we project 20 applications for all types of sanctions will be made in the year. These include commitment to prison and disqualification from driving. Sanctions must only ever be a last resort; this is not just about how many we pursue but about targeting the right people. The threat often results in payments restarting.

The noble Lord, Lord Kirkwood, asked why the passport power is not being introduced for people in Northern Ireland. I can assure the noble Lord that this is not a particular sop to those resident in Northern Ireland who do not respect their responsibilities for their children. This is not being introduced in Northern Ireland simply because Northern Ireland citizens are entitled to an Irish passport; they have options for dual nationality, which would reduce the effectiveness of the power—they would simply find an easy way around it.

The noble Baroness, Lady Sherlock, asked whether giving periods of representation to account holders would mean that NRPs can move money to other accounts. This change is intended to close down a known loophole. If we intend to deduct a lump sum from a joint or business account, the funds will be frozen during the representation period. If parents move their funds to another type of account—for example, a sole account—we will target that account. If the funds are moved to an account we are unable deduct from, we will use our other strong enforcement measures to collect the debt.

20:00

A question was asked about whether the amount frozen in a lump sum deduction would be reduced if some of the money belonged to the other account holders. Although the debt outstanding will be frozen in the case of a lump sum deduction, if we receive representations from other account holders and, following these, decide that a proportion of the money does not belong to the non-resident parent, we will deduct only the proportion that we have decided belongs to the non-resident parent. Those working on this issue in the Department for Work and Pensions have been considering many of the possibilities—as has the noble Baroness, Lady Sherlock—of how people will work hard to get around the system.

I was asked whether we have targets for family-based arrangements. We do not have targets. We want families to make an arrangement which suits them. Around 25% of families who contacted the Child Maintenance Options service chose a family-based arrangement. Other families may make these arrangements without speaking to the service. Family-based arrangements tend to have high rates of compliance.

I was asked what target has been set for increased compliance and arrears. Again, we do not set formal targets. Our ambition remains to take the new powers debated today and continue to build on our success to date. Again, it is more about listening, watching and seeing how these regulations work out, bearing in mind that, as I have already made clear and the regulations make clear, we can revisit this instrument within five years if it is found to be ineffective.

The question of the yacht came up. Again, we have discussed and debated this interesting issue in the department. How easy is it to set a value on a particular asset? Some may think that it is easy to value a yacht, but it is quite difficult. It is easier to value a house because you can look at comparisons, go to estate agents and so on, but we have to think about the proportionate cost.

There is more to it than that in considering why we have not included high-value items such as yachts as an asset under these powers. The assets chosen reflect those which are most commonly used by individuals to generate undeclared income to support themselves and are based on operational experience. We are not interested in targeting assets that cannot be used in this way. It certainly persuaded me to a considerable degree that, unfortunately, these high-value items are often purchased using credit. We attempted to take into account this kind of lifestyle inconsistency under the CSA, but it has not been adopted because it has rarely led to a change in the liability of a case.

We must remember that buying such items is simply not the reality for the vast majority of clients. The latest published statistics show that more than 90% of paying parents pay less than £100 a week. Payment amounts vary according to family circumstances. To put this in context, for a hypothetical separated family with two children—and no children from another family—a weekly payment of £100 per week might imply a gross income of approximately £625 per week, which is around £32,500 a year. Our focus is on introducing a power that will effectively target a small minority of highly-motivated individuals who take steps to avoid their responsibilities, not those funding a lifestyle through debt.

The noble Lord, Lord Kirkwood, asked whether I can say anything about the number of people moving from the old scheme to the new scheme, which, in the words of the noble Lord, was disappointing. The number of parents opting for the new statutory scheme—the noble Baroness, Lady Sherlock, also referred to this issue—was lower than was expected but we continue to monitor the arrangements parents make, including understanding why parents may not choose to make an arrangement. It is very difficult to monitor that. To what extent should we seek to pry—if I may use that word—into people’s private lives about why they do what they do? This is a very fine and difficult balance. I can appreciate that. With the depth of experience of the noble Baroness, Lady Sherlock, and the noble Lord, Lord Kirkwood, we have to be careful to try to do the right thing while being proportionate but not being naive, and putting the children first. It is very difficult.

Finally, the noble Lord, Lord Kirkwood, asked what happens if parents cannot afford to pay off their arrears because of other debts. If the paying parent is having financial difficulties, the Child Maintenance Service will discuss the parent’s income and outgoings with them to agree an affordable and sustainable payment arrangement that settles the outstanding arrears within two years. In exceptional circumstances this period can be extended, for example where the paying parent has recently stopped claiming benefit and started new employment or self-employment.

I hope that I have mostly answered, if I can put it that way, the questions that have been raised. I am very grateful to the Committee for asking for much more detail following my introductory speech. The Government are committed to building on the success of the Child Maintenance Service. These regulations will help to do this, first, by extending our enforcement powers, closing down known loopholes and sending a clear signal that those who fail to meet their obligations to their children will be pursued, and secondly, by addressing the arrears which represent the legacy of the CSA in a way that best balances the interests of parents with the public purse. I commend this instrument to the Grand Committee.

Motion agreed.

Committee adjourned at 8.06 pm.