Grand Committee
Arrangement of Business
The Deputy Chairman of Committees (Baroness Garden of Frognal) (LD)
My Lords, if there is a Division in the House, the Committee will adjourn for 10 minutes.
National Minimum Wage (Amendment) (No. 2) Regulations 2020
The Earl of Courtown
That the Grand Committee do consider the National Minimum Wage (Amendment) (No. 2) Regulations 2020.
Relevant document: 7th Report from the Secondary Legislation Scrutiny Committee
The Earl of Courtown (Con)
My Lords, on behalf of my noble friend Lord Callanan, I beg to move these draft regulations. The Government are committed to making the UK the best place in the world to work and grow a business. At the turn of the decade, we confirmed that 2 million low-paid workers will receive the biggest ever cash increase to the national living wage. We have pledged to take the national living wage further, with a target of two-thirds of median earnings by 2024, making the UK the first major economy to set such an ambition.
We are also committed to ensuring that all those who are entitled to the national living wage or national minimum wage receive it. The Government take tough action against the minority of employers who underpay their workers, and we have doubled the budget for minimum wage compliance and enforcement since 2015; it is now at a record high of £27.4 million. However, we are acutely aware of the burden that the regulations, including the minimum wage, can place upon business. As the level of the national living wage enters new territory, we want to make sure that the rules are as straightforward as possible.
As long as workers are getting the wages that they are entitled to, we want to make it easier for businesses to comply with the law. That is why we are bringing forward these regulations. Their purpose is to amend the national minimum wage rules relating to salaried hours work and pay reductions. We have worked closely with stakeholders to identify the areas of the national minimum wage rules that add complexity for employers without providing clear protections or benefits for workers. Employers, particularly in the retail sector, told us that some aspects of the rules can be unnecessarily difficult to comply with. We have listened to these views. Following a review of evidence from the consultation on salaried workers and salary sacrifice schemes, these changes to the regulations will support businesses which employ salaried hours workers.
The rules on salaried hours work provide a method of calculating minimum wage pay for workers who are paid a salary in equal instalments, including where the hours worked each week or month may vary. For example, this method can be used for some teachers who receive equal pay packets throughout the year, including through the holidays, or for chefs who may receive consistent pay packets throughout the year despite large variations in their working hours before and after the busy Christmas period.
Currently, low-paid salaried workers cannot be paid in fortnightly or four-weekly cycles without the risk of their employer breaching the regulations. Evidence tells us that this is a preferred method of payment for some workers and employers. Similarly, if companies were to pay such salaried staff extra for working a bank holiday shift, there is a risk of breaching the regulations as they stand. Evidence from the consultation and stakeholder engagement found that employers are removing premium payments for workers to reduce the risk of minimum wage non-compliance. These regulations widen the range of pay arrangements that are compatible with workers being treated as salaried hours workers, helping to preserve certain pay arrangements that are valued by many workers. As a result, any fixed payment cycle that is between one week and one month will meet the conditions for salaried hours work. Workers will also be able to be paid a premium in respect of their basic hours while meeting the same conditions.
To help employers monitor their own practices and make sure they are paying above the minimum wage, the regulations will also allow them to take steps to change the “calculation year” for salaried hours workers. The calculation year is the reference point to identify when in a year a salaried worker’s basic hours, for which they are paid their salary, are exceeded. Employers may wish, for instance, to create a uniform calculation year for all their salaried hours workers to align with other annual business cycles.
The regulations also make a small change to the rules on workers making purchases from their employer, such as where a clothing retail worker buys a uniform from their employer. The change ensures that employers get credit for reimbursing the worker, as they currently do when the purchase is from a third party. The new rules will come into force on 6 April 2020.
These regulations provide greater flexibility to employers and show the Government’s commitment to supporting compliance with the minimum wage rules while maintaining our world-leading employment rights. I commend them to the Committee.
Baroness Burt of Solihull (LD)
My Lords, I thank the Minister for his explanations. He has gone some way to answering some of my questions. The amendments seem reasonably straightforward. They are very welcome in so far as they incorporate changing work patterns into the minimum wage regulations. Thinking about the current coronavirus situation that besets us, more and more of us will be working irregular work patterns, including, of course, working from home.
As long as the worker performs to the requirement of the contract, I am not sure why you would not measure the amount of work in total hours, or even, more radically, in outcomes achieved. However, outcomes might be a stretch too far away from what we are talking about today, except for those for whom performance bonuses comprise part of their remuneration. My understanding is that performance bonuses would be excluded from the basic minimum wage calculation. Can the Minister confirm that?
The instrument’s main thrust is to accommodate the changing work payment cycles that people have today—for example, fortnightly or four-weekly—and ensure that their pay is fair and falls within the minimum wage regulations. Basic hours might indeed vary, as the Minister said, but the employer must ensure that when these are divided up by the number of pay periods, the average payment paid each month equals at least the minimum wage. For workers who work on, for example, bank holidays and receive premium payments, the rules currently do not allow for premium payment arrangements in respect of a worker’s basic hours. As I understand it, the regulations rectify this.
Finally, could the Minister elaborate on the relevance of the calculation year? I fully understand the change from the worker’s initial start date as a reference point for calculation to a point where the employer can specify when the year will be calculated from, but does that mean that a worker will need to wait nearly a year to determine whether they have worked any overtime? I am sure this cannot be the case. I would be very grateful if the Minister explained that a little further.
Lord McNicol of West Kilbride (Lab)
My Lords, the Minister talked about being the best in the world. We on this side of the Committee obviously support that aim. Six countries pay a higher or better national minimum wage than the UK—Australia, Luxembourg, France, Germany, New Zealand and Belgium, according to the House of Commons briefing. We will happily work with Her Majesty’s Government to leapfrog those countries. Could the Minister outline when he believes the UK will surpass those countries?
I gave a number of my questions to the Minister earlier so that we could try to get some answers on to the record. In fact, the noble Baroness has asked many of the technical questions, so I will not repeat them.
Since the introduction of the national minimum wage in 1999, the Government have ordered employers to repay more than £118 million to 835,000 workers. The Government have issued more than £40 million in financial penalties and completed more than 78,000 investigations. A large number of companies and businesses out there are obviously still not paying the national minimum wage. The SI touches on a number of specifics; the intention behind it is that the Government will be able to reduce non-compliance rates since companies will be able to monitor the hours worked by salaried workers and identify potential underpayments of wages. If that can be done, we obviously support it, but how will the Government enforce or monitor this compliance? Does HMRC require any additional resources to cope with these rule changes?
Before the SI was brought forward, a consultation by BEIS took place and of its 60 respondents, 43 agreed that the rules regarding the salaried hours worked—as touched on earlier by the noble Baroness, Lady Burt— caused difficulties when making premium payments. Of these 60 respondents, 23 suggested that salaried hours rules make the national minimum wage calculations complex and increase the risk of non-compliance. If these rules can help to reduce that complication, without penalising the workers, we would obviously be happy to support them. Will the Government be monitoring this to ensure that there are no detriments to the workers?
The SI widens the range of pay arrangements that are compatible with the rules on the national minimum wage. Again, I will not repeat the questions we have heard on the payment cycles, so I look forward to the Minister’s answer. The SI also proposes to enable employers to specify the calculation year for their salaried workers. Currently, the calculation year depends on the individual’s starting date. Again, does the Minister see the possibility of any detriment? How will the Government protect against any detriment to individual workers if the calculation year could change?
In April 2019, the Low Pay Commission estimated that 424,000 people were paid the national minimum wage, the national living wage or less. Do the Government have any separate departmental figures, or are the figures we are working from the LPC’s? Those 424,000 people are about 1.5% of those aged 16 and older in the UK job market—an awful lot of people. What activity is going to be involved with the expenditure of funds that the department will use to monitor any abuses in the enforcement of the national minimum wage?
On businesses themselves, the Government have stated that HMRC will visit selected new, small businesses to educate them on the national minimum wage and support them in getting the process right. How many businesses have been selected and how many will HMRC visit before April?
I finish by noting that the Government have stated that a new single enforcement body to crack down on employment law breaches will be part of a new employment Bill. Can the Minister say when that Bill will be laid before Parliament?
The Earl of Courtown
My Lords, I thank noble Lords for their valuable contributions and for supporting our ambitions in respect of the national minimum wage. I shall respond to the queries in the order in which they were posed. I shall try to answer them as best I can, but if further information becomes available, I will of course write to both the noble Baroness and the noble Lord.
The noble Baroness, Lady Burt, asked whether a worker needs to wait a year to work out whether they have been paid overtime. The answer is no. The flexibility to change the calculation year is technical only. We do not anticipate any detriment to the worker in that area. The noble Baroness also asked whether performance bonuses are excluded from the calculation of minimum wage pay. No, they are included.
I thank the noble Lord, Lord McNicol, for giving me prior notice of some of the questions he was going to pose—it certainly makes my life a little easier. He asked when the UK would surpass other countries’ minimum wage. As he pointed out, we are already in the leading pack internationally on the minimum wage, but the United Kingdom’s ambition to reach 66% of median earnings is unique. The noble Lord will be glad to hear that the increased rates in the living wage will affect more than 2 million workers.
The noble Lord asked whether HMRC would need extra resources to enforce the regulations. As I said earlier, we are committed to cracking down on employers who pay below the national minimum wage or national living wage. The doubling of funding to £27.4 million for 2019-20 for the Government’s minimum wage enforcement compliance centres allows us to do just that, while helping employers to ensure compliance without the need for enforcement. Not only does HMRC follow up on every worker complaint that it receives but it undertakes targeted enforcement for businesses and sectors with a high risk of non-compliance. Such targeting is really important. Additional funding allows HMRC also to undertake activities to educate employers into compliance—from proactively visiting new small businesses to delivering webinars on issues where employers commonly trip up. In 2018-19, HMRC used additional funding to recruit an extra 124 staff deployed on minimum wage enforcement. In the same year, it identified a record £24.4 million in arrears owed to more than 220,000 workers who were underpaid in respect of the national minimum wage or the national living wage and issued £17 million in penalties.
The noble Lord, Lord McNicol, also asked how Her Majesty’s Government are communicating the rule changes to small and medium-sized businesses across the UK, which is important and affects a great many workers. Alongside our annual campaign to raise awareness among employers and workers of the new minimum wage rates, we will continue to engage widely with small and medium-sized businesses. We are offering proactive support to new small businesses through HMRC, which will visit selected employers to educate them on the national minimum wage and help them get their practices right from the start. To improve understanding of the rules still further, we shall soon publish an improved guidance offer through GOV.UK. We have convened a guidance readership panel of employer groups, unions and relevant experts to make sure that we get these products right.
The noble Lord, Lord McNicol, also asked about enforcement. The Government have created a new single enforcement body. Cracking down on employment law breaches will be part of the new employment Bill. The noble Lord asked when this will be brought to Parliament. As announced in the Queen’s Speech, we will bring forward an employment Bill to deliver the greatest reform of workers’ rights in over 20 years. The legislation will make workplaces fairer by providing better support for working families and new protections for those in low-paid work and the gig economy, and by encouraging flexible working. We are making good progress and will lay this measure when parliamentary time allows.
The noble Lord also asked whether the Government will monitor to ensure that workers do not suffer detriments from these rules. The legislative changes have been specifically designed to address business concerns without causing detriment to workers; that is of prime importance. Employers seeking to make changes will have to inform their workers in writing before changing the calculation year. Workers must consent to this change.
We know that in the vast majority of cases, businesses want to do the right thing by their workers, including by paying them all at least a national living wage or national minimum wage. The Government’s consultation on salaried-hours work found evidence that in some areas, regulations have not kept up with modern-day practices. These regulations bring minimum wage rules up to date, reducing the burden on employers trying to adhere to the law. These regulations and additional non-legislative measures announced last month show that we are committed to helping employers get the rules right at the first time of asking, while not reducing worker protections.
We are not changing the regulations relating to salary sacrifice schemes. However, we recognise that in some instances, employers are penalised by offering benefits to workers through these arrangements and by misunderstanding the rules. That is why we have established a helpline for employers who operate pay deduction on salary sacrifice schemes to access support and information directly from HMRC. We are also offering proactive support to new small businesses. HMRC will proactively visit selected employers, as I mentioned before. To further improve understanding of the rules, we will soon publish improved guidance through GOV.UK.
These regulations are just one of the ways in which we are making the UK the best place in the world to work and grow a business.
Baroness Burt of Solihull
In response to one of my questions, the Minister said the performance bonus is included in the minimum wage calculation. If a worker does not earn a bonus, does this mean they could earn less than the minimum wage? Surely the point of a bonus is that it is in addition to the minimum wage.
The Earl of Courtown
No, they could not earn less than the minimum wage.
I commend these regulations to the Committee.
Electrical Safety Standards in the Private Rented Sector (England) Regulations 2020
The Earl of Courtown
That the Grand Committee do consider the Electrical Safety Standards in the Private Rented Sector (England) Regulations 2020.
Relevant document: 4th Report from the Secondary Legislation Scrutiny Committee
The Earl of Courtown (Con)
My Lords, this Government are committed to ensuring that all tenants live in safe, secure and high-quality properties. These important regulations help deliver that commitment for private tenants. Private landlords make an extremely valuable contribution to the housing market. The majority of landlords in England provide well-maintained and safe accommodation for their tenants, allowing them to put down roots, work and thrive in their communities. However, some landlords wilfully flout their responsibilities and put their tenants at a significant risk of harm as a result. This is not acceptable. These regulations will target those irresponsible and unscrupulous landlords and will help to level the playing field for the majority of good landlords who already meet this requirement. As a result, the regulations will help to drive up safety and standards across the private rented sector and reduce deaths and injuries caused by electrical faults.
The numbers are telling. In 2016-17, 16 people died and 871 were injured in England as a result of electrical fires in the home. In a five-year period, the London Fire Brigade dealt with 748 fires caused by electrics. In the same period, only 97 fires it dealt with in London were caused by gas. Only 60% of homes in the private rented sector have all the recommended electrical safety features installed, compared with 75% of homes in the social rented sector. This amounts to a compelling case for change.
These regulations will require all landlords to have the electrical installations in their properties inspected and tested by a qualified and competent person at least every five years. Good landlords already keep the electrics in their properties safe, but there are those who avoid doing this and undercut the good ones. They will now have to comply and better protect the safety of their tenants. If they do not like it, they can leave the business. The regulations will also require landlords to provide a copy of the electrical safety report to their tenants, and to their local authority if requested, to give tenants the information they need for their peace of mind and to support local authority enforcement.
But what about those landlords who decide to continue to flout the law and put their tenants at risk of electrocution and perhaps even fire? These regulations will provide local authorities with strong enforcement powers to tackle this minority of landlords. Local authorities will be able legally to require landlords to carry out vital remedial works. If landlords still do not comply, the council will be able to arrange the works and recover the cost from the landlord.
Local authorities will also be able to request proof from landlords that the electrical installations in their property are in fact safe. If a landlord has to carry out essential remedial work, they must let their local authority know. There will be a serious penalty for landlords who do not comply with the requirements—requirements that they should already be meeting. Local authorities will have the power to issue financial penalties of up to £30,000; it will be for them to decide the level of penalty. They can see the severity of the issue and will know best how to tackle irresponsible landlords in their areas.
Our local authorities are working hard to enforce standards in privately rented properties, so we are mindful of the risks of putting new burdens on them. That is why we have legislated that they may retain the proceeds of these financial penalties for enforcement purposes, allowing councils to keep up the good work and drive up standards further. This will contribute to the long-term financial stability of housing enforcement teams. These regulations form part of the Government’s comprehensive programme of work to improve safety in all buildings and conditions in the private rented sector in particular, where overall standards are significantly worse than in other tenures.
We took decisive action to address the risks identified following the Grenfell Tower tragedy and accepted in principle all recommendations in the Grenfell Tower inquiry phase one report. My right honourable friend the Home Secretary will introduce a fire safety Bill which will clarify that, under the Regulatory Reform (Fire Safety) Order 2005, building owners and managers of multioccupied residential buildings must ensure they assess fire risks linked to external walls, including cladding, and the entrance doors to individual flats. We also accepted the recommendations from Dame Judith Hackitt’s independent review of building safety and will publish a building safety Bill as soon as possible.
This is all in addition to the renters’ reform Bill, which will deliver a better deal for renters. I look forward to sharing the details of this Bill with Members of the House over the coming months. However, I can tell noble Lords now that it will improve security and affordability for tenants and professionalise the sector. It will include measures to drive criminal landlords out of the sector while strengthening the rights of landlords who have a valid reason for regaining possession of their property.
I appreciate the opportunity to set out all this exciting new work and thank noble Lords for their interest in this important matter. These regulations will help drive up standards and reduce injuries and deaths due to electric shocks and fires caused by electrical faults in residential premises within the private rented sector. As I said at the start, the majority of landlords are proactive in ensuring the safety of their tenants, so these requirements will not put an additional burden on those landlords who make a welcome contribution to the housing market.
It is reasonable to expect all landlords to make sure their tenants are safe from the risk of electrocution or fire. Ultimately, these regulations will help ensure that tenants are kept safe. I beg to move.
Lord Tope (LD)
My Lords, I thank the Minister for his thorough introduction to these long-overdue regulations, which I welcome. Before I go any further, I declare an interest as a patron of the charity Electrical Safety First. It has been campaigning for many years—longer than I have been involved with it—for these regulations, which they too very much welcome.
Baroness Grender (LD)
My Lords, my party gives its full support to these regulations. Indeed, my noble friend Lord Tope and our former colleague, the noble Baroness, Lady Tonge, have been assiduous campaigners for this change over a long period. Their dogged persistence, alongside that of other opposition parties, has finally borne fruit. I also congratulate Electrical Safety First on its constant and unwavering focus on getting this done. These regulations will start to keep many people safe from electrical accidents and fires.
Every year, around 350,000 people are injured and 70 people are killed in the UK by electrical accidents. Compare that with, altogether, 300 injuries and 18 deaths per year due to fires, explosions, carbon monoxide poisoning and gas leaks. That leads to my first question: why has this taken so long? I looked back at some previous debates to find that, in April 2018, I raised the issue of the achingly slow pace with the then Minister, who promised something soon. The electrical safety working group completed its work in autumn 2016. Even then, regulations were promised by spring 2019. The people who have been injured in the interim period, and the families of those who have been killed, expect an answer now. I appreciate that it is not easy to answer that right here, right now, but I would like an undertaking to write to explain why these regulations have taken so long to come through.
As with the ban on tenant fees, the wheels of government appear to move slowly when it comes to people in the private rented sector, who, I believe, continue to be treated as second-class citizens. This extends to the current coronavirus pandemic. Much effort is being made to ensure that there are holidays for mortgage payments. Every time the Government make such a move, I ask them to ask themselves the following question: how do we mirror this now in the private rented sector, given that, even by the Government’s own figures, which I believe to be a significant underestimate of 4.8 million households, over one-quarter of the population is excluded from something like a mortgage holiday? What is the equivalent in the private rented sector? Will the Minister urgently look at rental holidays, too, to help those who are often the poorest through this crisis?
Will the Minister also use this opportunity to revisit the issue of a central register for landlords to enable tenants and local authorities to ensure tenants’ rights are enhanced and upheld? The Government originally said no to banning tenant fees, but rightly changed their mind. Again, they said no early on to mandatory checks, but again, they rightly changed their mind. Will the Government now change their mind about a central register of private rented sector landlords? This would help local authorities in particular. As the Minister will know, local authorities have had their funding reduced by 60p out of every pound, as my noble friend Lord Tope explained. The £30,000 financial penalty for a breach of regulations is very welcome, but will the Minister outline what additional support will go to local authorities in advance?
We always have a chicken-and-egg debate at this point. I urge the Minister to consider what funds are made available to the local authority to raise its first £30,000 penalty in breach, so that it can then pay to reinforce. It is exactly like the recent legislation on the prevention of homelessness. What is the up-front payment that goes to a local authority so that it can then start to enforce, as I believe it should? Paragraph 12.8 of the Explanatory Memorandum seems very similar to what exists for rogue landlords. What is the up-front payment to help ensure that it is upheld? Under paragraph 11, “Guidance”, I notice that there is further information about how the guidance will come through and be explained to people. What resource will be placed behind explaining to people their new rights, and how they can assert them as tenants?
We are very grateful to the Minister for giving us a brief and most welcome update on progress towards a Bill on the private rented sector. If he would like to take a fast-track approach to dealing with no-fault evictions, I recommend my Private Member’s Bill, which is currently in the Lords, as a way to ensure that we address this issue at a slightly faster pace than the Government are currently dealing with private rented sector issues.
I will touch briefly on the issue of property guardians, which I have also raised with the Government. Towards the end of Theresa May’s premiership we were getting closer, as I understood it, to introducing greater rights for property guardians. I had a very useful meeting with Minister Wheeler and the noble Lord, Lord Bourne, about this. I felt that we were getting quite close to a solution; then there was a change at No. 10, since when it has gone very quiet. The property guardians issue is an increasing problem that we need to be ahead of, so I refer the Minister to a recent investigation by Vicky Spratt of the i newspaper of a former residential care home. Not untypically with property guardian issues, there were 31 residents, who are often older renters. Nothing has been tested. They have all had to sign NDAs, which are unenforceable—but how do they know that?—and the HMO licence is not an HMO licence. I point out to the Minister that recently, Colchester Council took Camelot Guardian Management Company Ltd to court on this very issue.
The property guardians issue is a growing problem that the Government could be well ahead of in legislation. It would be good, at the very least, to offer to sit down with interested parties and follow up the discussion held a year ago, when it felt as if we were getting close to something useful and helpful, because they are not included under any kind of assured shorthold tenancy rights. We now have teachers, NHS staff and low-income workers being housed in former care homes that are, frankly, dilapidated buildings. It is on the increase and being advertised in a lot of local authority areas.
Finally, will the Minister update us, as my noble friend Lord Tope asked, on any plans to include mandatory electrical checks in the social rented sector, and on what the Government are going to do to ensure home safety visits for vulnerable and older people, who are sometimes owner-occupiers? Again, this would be very useful. All those questions having been asked—for which, many apologies—I welcome this legislation. But it was achingly slow, and people deserve an answer on that.
Lord Kennedy of Southwark (Lab Co-op)
My Lords, I first declare my interest as a vice-president of the Local Government Association and pay tribute to the work of Electrical Safety First. As we have heard, it has been assiduous in its campaigning over many years to get these regulations before us today, as have noble Lords on all Benches, including the noble Baroness, Lady Grender, the noble Lord, Lord Tope, and my noble friend Lady Hayter. I thank the Government for bringing them forward and offer them many congratulations. It is appreciated.
I am generally pleased that the regulations are here but, as has been outlined, this has taken years. It could not have been any slower; it has gone at a snail’s pace. I remember the debates during the dreaded Housing and Planning Act, in which the noble Lord, Lord Tope, and I moved amendments yet could not get any action from the Government. Then, they finally moved forward. I have tried to write down how many people I have dealt with since then: when we first raised this issue in that Bill, the noble Baroness, Lady Williams of Trafford, was the Minister and the noble Baroness, Lady Evans of Bowes Park, was the Whip; we then had the noble Lord, Lord Bourne; then the noble Viscount, Lord Younger; then the noble Baroness, Lady Bloomfield; now we have the noble Earl, Lord Courtown. I am sure there were many other Whips, but that is five Ministers.
Frankly, the length of time this has taken is outrageous. The Minister listed the number of fires, injuries and fatalities. It is shocking that we have waited so long for this. It is unacceptable. As the noble Baroness, Lady Grender, said, people need answers. We discussed this five years ago and are finally getting some regulations; now we are worrying, in the present crisis, whether they will happen. We need an answer.
As the noble Baroness, Lady Grender, was mentioning other things that have not happened, she reminded me of discussions about the rogue landlords database. Again, we could not get the Government to agree to make it public. They were not having it and we lost votes. I remember meeting with Greg Clark from the other place; very nice man though he is, we could not make any progress whatever. Two years on, the Government decided that they wanted to make it public. The noble Lord, Lord Bourne, told me, “I want to do it, Roy, but I just can’t find any parliamentary time to do it in.” I thought, “Hang on, two years ago you had the vote and voted against it.” I know he was sincere about it and wanted it made public, but it is very frustrating when you sit here, make the points, win the votes and the arguments, yet they will not budge—then, literally a year or so later, there is a complete about-turn by the Government. They told us, “We want to do it, but we can’t get any time because of the pressure of legislation.” Up until last December, we had not actually been very busy in this House; there were no huge swathes of legislation coming forward, so time could have been found if we had wanted to.
A number of questions have been raised that I was going to ask, so I look forward to getting answers to them. On the issue of communication, how will we get this out to tenants so that they know what their new rights are? Equally, how will we get this out to landlords so that they know their new responsibilities? Will we use charities such as Electrical Safety First to get this information out, which will be very important? As the noble Baroness, Lady Grender, and the noble Lord, Lord Tope, said, what about electrical safety standards in the social rented sector? These questions need looking at, as does that of vulnerable people in the owner-occupied sector, who may not have the cash resources to get work done. We need to know about that.
I genuinely thank the Government for introducing these regulations—it is just regrettable that it has taken so long. I hope they have learned that they need to move at at least at a snail’s pace—we have not even got that far—in future to get these things on board.
The Earl of Courtown
My Lords, as always, I thank all noble Lords who have taken part for their valuable contributions. I am really pleased to note the general support for the intention of these regulations and our work to improve the private rented sector. I also understand the Committee’s concerns over the delay. I will come to that point later. If I do not cover everything in great detail or miss various points, I will ensure that I write to noble Lords on some of these issues.
The noble Baroness, Lady Grender, and the noble Lords, Lord Tope and Lord Kennedy, asked how we will ensure that landlords, tenants and local authorities understand these new requirements. We will ensure they understand them; officials have been working closely with landlords, letting agents and trade organisations, as well as the electrical safety industry, which is already disseminating information to its members. We are also publicising the regulations across social media. In addition, ahead of the regulations coming into force we will publish guidance for landlords, local authorities and tenants. The introduction of the regulations before Parliament has already attracted broadly positive and welcoming media attention, including from the national press. We will continue to publicise them, to ensure maximum possible coverage. We will also work closely with local authorities to ensure they have what they need. We are fully committed to bringing these provisions forward as soon as we can but, as the noble Lord commented, these are exceptional times.
The noble Lord, Lord Tope, also asked whether local authorities will be overburdened with these regulations and raised additional financial support. These regulations will not mean additional work for local authorities, because local authority environmental health departments are already responsible for enforcing electrical safety standards in the private rented sector. The new regulations will in fact make it simpler for local authorities to do this, because landlords will now have to provide them with proof that their electrics are safe. As I said before, local authorities will also be able to keep any money raised from financial penalties to fund their enforcement activities, helping to raise standards in the long run, and these penalties can be up to £30,000 for the most serious offenders.
The noble Lord, Lord Tope, also looked at compliance with, for example, the wiring regulations, even if the wiring was installed before the edition was in force. The regulations state that a landlord must
“ensure that the electrical safety standards are met”
and that
“investigative or remedial work is carried out”
if a report requires it. The electrical installation should be safe for continued use. In practice, if the report does not require investigative or remedial work, the landlord will not be required to carry out any further work.
The noble Lords, Lord Tope and Lord Kennedy, and the noble Baroness, Lady Grender, mentioned social housing. As I said in my opening speech, these regulations apply to the private rented sector. This is because that is where the standards were lower—in the private sector, as opposed to the social rented sector. These regulations target this sector. However, the Government are also separately considering safety measures for social rented properties.
The noble Baroness, Lady Grender, mentioned rent holidays taking account of a person’s situation. The Government have always been clear that our priority here is to put people first, which is why support is in place to help affected people and minimise any social and economic disruption. We have announced a range of measures to support people and communities, including a £500 million fund for households experiencing financial hardship, while ensuring that statutory sick pay is available from the first day that people take off work. If I can add anything more in relation to the noble Baroness’s speech, I will write to her on that.
I went over this in a slightly different area earlier, but the noble Lord, Lord Tope, asked about the 18th edition of the wiring regulations. In statutory instruments there are strict rules about making ambulatory references. In this case, when referring to an external publication such as a British Standard, a date or version number must be given. The national standard is set out in the current edition of the wiring regs—the 18th edition, published as a British Standard. If the wiring regulations are updated, we will have to consider carefully whether it is necessary and appropriate to update the electrical safety regulations. This depends on the level of update in the regulations.
The noble Lords, Lord Tope and Lord Kennedy, mentioned homes in multiple occupation. All existing houses in multiple occupation, both licensable and non-licensable, will need to comply until 1 June 2020 with the requirement in the 2006 HMO management regulations to have electrics tested. Any new tenancies created from this date will need to comply with the new electrical safety regulations from 1 July 2020.
In respect to existing tenancies in HMOs, all such properties should already have a certificate stating they have been inspected and tested in compliance with the 2006 regulations; this certification lasts for five years. In some HMOs, an electrical installation condition report may run out between the coming into force of the regulations on 1 June 2020 and 1 April 2021. However, during the familiarisation period, local authorities can rely on their enforcement powers under Part 1 of the Housing Act 2004, which requires that electrical safety hazards are remedied, and tenant safety is protected. Local authorities use their housing health and safety rating system to assess electrical safety hazards, and they have a duty to take full enforcement action if they identify a hazard at category 1 level.
The noble Lord, Lord Kennedy and the noble Baroness, Lady Grender, also asked why this has taken so long. The Government announced in July 2018 that we would introduce a mandatory requirement on landlords in the private rented sector to ensure electrical installations in their properties are inspected every five years. Following that announcement, we worked closely with experts in the sector, considering this complex issue carefully to make sure the changes were proportionate and delivered real benefit to tenants without undue burden on landlords, inspectors and testers. I should emphasise that I note the comments made by the noble Lords, and I am sure the department will as well.
The noble Baroness, Lady Grender, also mentioned guidance. We will be publishing guidance for tenants, as well as for landlords and local authorities, before the regulations come into force in June 2020. This will ensure tenants are aware of their rights and will know to approach their local authority if they have concerns. We continue to have regular contact with local authorities and their enforcement officers, who will have regular interactions with tenants. When the regulations are made, subject to parliamentary approval, we will publish an update to the suite of “how to” guides, including How to Rent, which must be provided to all tenants by their landlords.
The noble Lord, Lord Kennedy, also asked why there is no landlord register. We want to strike the right balance between supporting good landlords and tackling criminals. We introduced the database of rogue landlords to target the worst offenders and better protect tenants. Our consultations on how to open up and extend information on the database to tenants closed on 12 October 2019. We are currently reviewing responses and will update the House soon.
The noble Baroness, Lady Grender, brought up the subject of property guardians. I was interested to hear what she said on this issue. The Government are committed to ensuring that all renters live in safe conditions. Many property guardians live in HMOs, to which these regulations will apply. More broadly, the Government will soon publish updated guidance to help guardians understand their rights. We are also undertaking research to understand the size of the sector and the severity of problems. This will inform future policy decisions, addressing the concerns raised by her.
This is a major step towards levelling up the private rented sector and making sure it will offer high-quality, safe and secure housing. Along with our social and owner-occupier sectors, this is housing that this country deserves. I commend the instrument to the Committee.
Client Money Protection for Property Agents (Approval and Designation of Schemes) (Amendment) Regulations 2020
The Earl of Courtown
That the Grand Committee do consider the Client Money Protection for Property Agents (Approval and Designation of Schemes) (Amendment) Regulations 2020.
Relevant document: 6th Report from the Secondary Legislation Scrutiny Committee
The Earl of Courtown (Con)
My Lords, client money protection gives landlords and tenants confidence that their money is safe when it is being handled by an agent. The Government made it a mandatory requirement for all property agents in England holding private rented sector-related client money to obtain membership from an approved client money protection scheme on 1 April 2019. The client money held by agents primarily includes rent paid directly to the agent and funds provided by landlords to the agent for the purpose of making property repairs. The Government have approved six client money protection schemes protecting £3.4 billion of client money across schemes. Nearly 10,000 letting agents are now members of a scheme. Increasing the financial protections for landlords and tenants through mandatory client money protection is a positive step towards driving up standards in the private rented sector.
Before I go on to set out the detail of the regulations before the Committee, I want to establish the legislative context. The Housing and Planning Act 2016 provides powers for the introduction of mandatory client money protection. Following the passage of the Act, the Government invited the noble Baroness, Lady Hayter, and the noble Lord, Lord Palmer of Childs Hill, to chair a client money protection working group. The group reported in March 2017 and its recommendation to make client money protection mandatory was accepted by the Government
In late 2018 we reviewed the regulations, considering new concerns that had come to our attention. These included the difficulties that agents in Scotland were facing in obtaining a pooled client account following the introduction of client money protection there in January 2018. In addressing the issues highlighted in Scotland, we permitted client money protection schemes to accept as members agents who are making all reasonable efforts to obtain a client account but are unable to do so for reasons beyond their control. We applied this grace period for 12 months to 31 March this year. The amendments to the approval regulations were made and commenced on 14 February 2019, which allowed schemes and letting agents to comply with our regulations ahead of 1 April 2019, when the requirement for every agent to be a member of a client money protection scheme came into force.
The Client Money Protection for Property Agents (Approval and Designation of Schemes) (Amendment) Regulations 2020 simply extend the initial grace period for letting agents struggling to obtain a pooled client account for a further 12 months to 1 April 2021. I should point out that an error was made in the Explanatory Notes to this statutory instrument when it was laid in Parliament on 3 February. They referred to a full impact assessment but as this measure falls within the de minimis exemption, we have not produced one. With the agreement of the statutory instrument registrar, we issued a correction slip to the Explanatory Notes, pointing out that the regulations have “no, or no significant impact”.
Now that mandatory client money protection has been in place for several months, there is some evidence of UK banks being reluctant to offer pooled client accounts to agents. This issue requires attention because one of the requirements of the client money protection regulations is that letting agents must hold their client money in a client account. For the majority of letting agents, the only workable model is to hold this money in a pooled client account, thus avoiding the need for thousands of individual client accounts. However, this presents money laundering risks because funds from multiple different sources can be co-mingled and move rapidly through the account, presenting challenges in identifying the true owners of the funds in the account. To address these risks, anti-money laundering regulations place specific requirements on non-regulated firms, which includes the large majority of letting agents. These requirements include that banks should conduct due diligence on the customer holding the pooled account, the lettings agent and the customer’s clients.
This enhanced consumer due diligence has made it difficult for some letting agents to obtain a pooled client account. We are aware that certain banks are reluctant to offer them, driven by a concern to ensure compliance with money laundering regulations as well as commercial factors. We continue to monitor on a quarterly basis the number of agents on whom this has an impact. I am happy to report that the number of agents reporting such difficulties to the client money protection schemes remains low. In the last quarter for which we have data, October to December 2019, 251 letting agents reported difficulties in obtaining a client account. This amounts to around 2.5% of agents who belong to a client money protection scheme.
Forthcoming guidance for banks from the Joint Money Laundering Steering Group on their obligations under the money laundering regulations will help address the need for proportionality when assessing the risk associated with non-regulated firms such as letting agents. We had expected final guidance to be published before the end of the grace period, but, due to its unexpected complexity, a draft of the consultation is not now expected till spring this year.
We have considered the case for ending or extending the grace period in consultation with the client money protection schemes. We have concluded that there is a strong case for offering a further 12-month extension. This will guard against the risk that some agents will be unable to comply with the regulations through no fault of their own, with attendant sanctions of up to £30,000 for non-compliance. This further extension allows the time needed for Joint Money Laundering Steering Group guidance to be published and to inform commercial decisions made by banks. We will also encourage the client money protection schemes to encourage those agents who report that they are struggling to secure a client money account to make exhaustive efforts to do so. The fact remains that most agents hold such accounts with banks. Agents must not assume that the grace period will be extended again beyond April 2021.
Mandatory client money protection is an important part of the Government’s suite of existing and proposed policies to drive up standards in the private rented sector and give landlords and tenants the confidence they need when using an agent. I beg to move.
Lord Palmer of Childs Hill (LD)
My Lords, I thank the Minister for the great detail in which he set out this statutory instrument, which is almost a one-line measure which moves a date. Behind that one line, however, is a bigger story.
I should declare my interest as set out in the register as the chairman of the advisory board of the Property Redress Scheme, one of the three ombudsman schemes. As the Minister noted, I also have a proprietary interest in this matter, having been the co-chair of the review group set up by the noble Lord, Lord Bourne, which worked incredibly well. We welcome the legislation.
The problem is: where are we now? As the Minister said, letting agents were told in the other place that this would be their last chance to comply with the CMP regulations, which have been a legal requirement for a year. Compliance was delayed to give letting agents more time to set up pooled client accounts for their landlord and vendor customers and to keep these separate from the turnover of their business.
The problem hidden by this short measure, which the Minister acknowledged in his introduction, is how the banks are helping or not helping the legislation. They take different views depending on the interpretation of the latest money laundering directive. Some do not even accept registration with HMRC as being satisfactory. I understand that government guidance will be published in the not-too-distant future which gives some banks more comfort that they can allow agents to have pooled client accounts. I hope that the Minister will confirm that such guidance is being given, although it seems that some banks have taken a commercial stance not to do so. Just to complete the picture, some forward-looking banks have offered accounts, but, naturally, the agent would have to move to those newer banks on the market.
Some banks claim that they need an individual client’s account for each landlord, which the Minister did not mention. Others have refused to open a client’s account without client money protection in place. However, to obtain client money protection, the agent needs a dedicated, ring-fenced client’s account. Is the Minister aware—given what he said in his introduction, I rather think that he is—of the chicken-and-egg situation of banks requiring CMP to set up an account when a company is not able to obtain CMP without the right bank account being set up?
We pass the law here, but the banks are thwarting that law in how they are allowing these accounts to be set up. I have the figure of 251 agents saying that they are struggling to set up pooled clients’ accounts. In a sense, it is a great achievement that only 251 or 253, whichever the figure is, are doing this—it is a great improvement in providing security for people’s money that is left with letting agents—but it means that 250-odd people want to do this but cannot seem to because of the banks’ attitude.
As a chartered accountant, I used to audit solicitors’ accounts. They always had to have clients’ accounts. They had a pooled clients’ account and, within their ledgers, you separated out that account. There is no need for a separate client’s account for each landlord or letting agent. It is possible to do that within the ledgers. I remember one solicitor who, sadly, I had to report to the Law Society and who was struck off, because he did not operate the system properly, but it exists—you can tie it down in solicitors’ accounts. If they can do it, I do not see why banks are not being more helpful in this instance.
We need from the Minster not only this extra year, which I regret has had to happen—we have the extra year for the reasons explained, which is to be fair to people who would otherwise lose their livings—but some effort to make the banks understand what is necessary. The banks have to be assured that their worries about money laundering can be covered. The Government need to speak to the banks about why they are not co-operating in something that is a great benefit to the housing industry.
Lord Hodgson of Astley Abbotts (Con)
My Lords, I thank the Minister for his explanation. I just want to intervene briefly. I should make it clear that although I am the Chairman of the Secondary Legislation Scrutiny Committee, which has considered this instrument, I am speaking here for myself.
I draw attention to the fact that this is what happens when an irresistible force meets an immovable object. As a result of the Government’s policy, for a year people’s deposits that otherwise would be covered will not be covered. It seems a shame that we have not been able to find a way to move forward. The noble Lord, Lord Palmer, has told the Committee in great detail about the problems of money laundering. Those of us who take an interest in the financial proceedings in the Chamber know of old that money laundering is the ace of trumps. You just have to say, “I’m doing this because of money laundering”, and the argument is shut down. If someone says, “Hang on, let’s just get some perspective on this”, they are immediately told that they are the money launderers’ friend.
The noble Lord, Lord Palmer, went through the background and what is known in the trade as the KYC—know your customer—regulations. We have all seen it: when we have tried to open a small account of £25 or £50 for a child or godchild, we are into the whole business of utility bills and identification. I raise this issue because I want once again to draw the Government’s attention to the extent to which this thing has got completely out of control.
I have here a copy of the UK Financial Intelligence Unit’s “Suspicious Activity Reports”. The SARs, as they are known in the trade, are the meat and drink of the money laundering business.
If you believe that something suspicious is going on, you have to make an SAR. You are not allowed to tell the person you are making a report about that you are going to report them, because that would be an offence under the Act. In the year to March 2019, 478,437 SARs were reported. That is, on a 250-day working year, about 2,000 a day. It is vanishingly improbable that one in 10 of those is looked at. They just create a huge mountain of paper along the lines of the problems raised by the noble Lord, Lord Palmer, and about which nothing is done.
Lord Kennedy of Southwark (Lab Co-op)
My Lords, I thank the noble Earl, Lord Courtown, for presenting these regulations to the Committee and explaining their purpose to us. I understand why the Government have had to table the regulations. In that sense, I fully support them. As the noble Lord, Lord Palmer of Childs Hill, set out, the problem here is that some banks do not offer client accounts, making it difficult for people who want to comply with the legislation and do the right thing to get the account to do what they need to do. That is very frustrating. I understand the point about needing the extra year and I fully support it.
The noble Lord, Lord Hodgson of Astley Abbotts, was absolutely right that some bigger organisations seem to be able to channel hundreds of billions of pounds through UK banks with no problem at all. That is fine, but when a small person trying to run a small business in the local area sets up a client account, they get caught by money laundering rules. I like the idea of maybe having de minimis rules. We need to find something to get over this. It seems ridiculous. Transparency International will talk to you about the amount of money going through some of these major UK banks; the money is from all sorts of jurisdictions around the world that certainly have less regulation—it may be more dubious where these funds are coming from. They can buy property all over London and elsewhere with no problem at all. They can do what they want.
However, for a small trader trying to run a business and do the right thing who comes up against the money laundering regulations, things are not done for you and you cannot run your business and serve your clients properly. That cannot be right. I hope the Government at least talk to these banks. It is unacceptable. You have to allow these businesses to do their job properly. They are required by law to have these accounts and protection; they need a way to actually have them or, if not, to be able to find some way forward—maybe the way suggested by the noble Lord, Lord Hodgson of Astley Abbotts—that they can enact themselves.
The Earl of Courtown
My Lords, all noble Lords commented on how important this issue is. Mandatory client money protection is an important part of the Government’s suite of existing and proposed policies to drive up standards in the private rented sector and gives landlords and tenants the confidence they need when using an agent.
I thank my noble friend Lord Hodgson, and the noble Lords, Lord Kennedy and Lord Palmer, for their contributions. I will deal with the questions put. Should any more detail be required, I will of course write to noble Lords after I read Hansard.
The noble Lord, Lord Palmer, started off with an issue that all noble Lords referred to: how the banks are helping, or not, in this situation, and what they are doing to address these issues. These are the issues that we expect the guidance to pick up on and address. We must remember that this is a low-risk sector, hence the low level of problems in getting pooled accounts—I think some 2.5%. I repeat what I said in my opening speech: forthcoming guidance for banks from the Joint Money Laundering Steering Group on their obligations under money laundering regulations will help to address the need for proportionality—which is what I think all noble Lords were referring to—when assessing the risk of non-regulated firms, such as letting agents.
The noble Lord, Lord Palmer, referred to his days as an accountant and looking at solicitors’ clients’ accounts. I was an agricultural property manager, collecting rents for agricultural land and the let sector. I wholeheartedly agree with him on the importance of making sure that clients’ accounts are tip-top and up to shape; it is so important for the client and the individuals involved.
My noble friend Lord Hodgson talked about the money laundering regulations. He was basically saying that they have got out of control. I will draw the attention of the responsible department to his views on that matter, which will of course write to him in due course. He went on to ask about client money and tenancy deposit protections. The client money protection and tenancy deposit protection are two separate matters. Agents can join a tenancy deposit protection scheme without being a member of a client money protection scheme. I hope that is clear to my noble friend. Finally, I thank all noble Lords for their contributions and commend the regulations to the Committee.
Lord Kennedy of Southwark
Could the noble Earl say a little more about where we are with what the banks are doing? It is unacceptable that hundreds of millions of pounds of illegal money goes through our banking institutions every year with no problem whatever, but they claim that they have strict money laundering procedures in place. We know that property is bought elsewhere using money gained from criminal activities, but nothing appears to be done about it. However, as the noble Lord, Lord Hodgson of Astley Abbott, has said, if you are the little person running a small firm and you want to open a client account, you cannot open one. That is ridiculous.
The Earl of Courtown
My Lords, I thank the noble Lord, Lord Kennedy, for asking that question. The banks have to comply with HMRC policy. There may be more that I can add in due course, so I will write to him and distribute the answer to all noble Lords attending the Committee.
Armed Forces Act (Continuation) Order 2020
(4 years, 8 months ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Baroness Goldie
That the Grand Committee do consider the Armed Forces Act (Continuation) Order 2020.
The Minister of State, Ministry of Defence (Baroness Goldie) (Con)
My Lords, we have before us a small, though crucial, piece of parliamentary business to conduct: our annual consideration of the legislation governing the Armed Forces—the Armed Forces Act 2006. Before I turn directly to the matter of the annual continuation of the Armed Forces Act, let us not forget that our Armed Forces are without doubt one of this country’s foremost and most precious institutions, being held in the highest regard throughout the world as a benchmark of military excellence that other nations aspire to. Let us never forget, either, the men and women of the Armed Forces who serve and have served us so well, whether at home or further afield.
This nation owes much to our Armed Forces and the admirable qualities they espouse: bravery, discipline, professionalism, unflinching and steadfast loyalty to duty, and a strong moral compass to do all that we ask of them. These noble qualities and adherence to duty are all too frequently tested in the most challenging and varied of environments and circumstances. Therefore, our service men and women deserve our respect for the manner in which they continue to maintain such high standards and professionalism. We owe a huge debt of gratitude to our Armed Forces, who perform exceptional feats to protect this country in incredibly difficult circumstances. To support them, we shall shortly bring forward legislation to deal with vexatious claims. We will also further strengthen the basis of the Armed Forces covenant, because we are absolutely committed to supporting all in our Armed Forces community, but today we busy ourselves with the continuation of the Armed Forces themselves.
Therefore, the draft order we are considering is to continue in force the Armed Forces Act 2006 for a further year, until the end of 11 May 2021. As I shall explain, this reflects the constitutional requirement under the Bill of Rights of 1688 that a standing army, and by extension now the Royal Navy and the Royal Air Force, may not be maintained without the consent of Parliament. Let us not forget that the Armed Forces cannot exist without the annual consent of Parliament. Our consent is an opportunity for us in this Committee to record our thanks by permitting the Armed Forces to continue for another year. As I have indicated, yearly renewal is rooted in the 1688 Bill of Rights. This historical context forms the basis for why the legislation that provides for the Armed Forces to exist as disciplined bodies is renewed by Parliament every year.
Lord Craig of Radley (CB)
My Lords, I support this renewal of the Armed Forces Act. In previous debates on renewing the Act, I have taken the opportunity to raise the thorny issue of combat immunity and the failure of successive Administrations to provide clear statutory authority and legal guidance on how difficulties that arise are resolved and on how to avoid difficulties in future conflicts.
I and others have long forecast that such difficulties would arise from the incompatibility between the laws of armed conflict and human rights legislation. The ongoing ways in which human rights issues affecting the Armed Forces have been adjudicated have only added to the problem. It took a considerable time, but the difficulties have been acknowledged by Governments. A variety of promises and even some tentative solutions have been aired, but there seem to be insoluble stumbling blocks. Progress has stalled, although I was interested to hear what the Minister has just said.
There is talk of providing for possible combat immunity if appropriate when conflict starts, but surely that is like a sticking plaster. It might cover the wound, but it will not stop the injury or a festering sore. Surely, we have seen enough examples of the problems that have arisen, whether in the course and aftermath of armed combat and military offensives or in the field of counterterrorism, as in Northern Ireland and Operation Banner there. We must demand resolution. Interestingly, a temporary fix to the Northern Ireland issue involving the Attorney-General was mooted in a weekend newspaper. What do the Government have in mind or was that just flying a kite?
The wider resolution should be to have pre-prepared statutory arrangements considered, thought out and enacted in peacetime so as to be ready to be applied immediately as necessary in conflict. Successive Defence Secretaries have expressed concern, along with their determination to put this right, so I am delighted to hear that a new Bill addressing the issue is on the stocks. Maybe the Minister will be able to give an update, or if not now, by a letter in the Library.
As I have pressed for before, whatever statutory solution is found, would it not best be incorporated into the Armed Forces Act to ensure that the incompatibilities between peacetime humanitarian law and those of armed conflict and the Geneva conventions are resolved, and future incompatibilities thus avoided? A target to do so might be by the next enactment of the Armed Forces Act.
Baroness Smith of Newnham (LD)
My Lords, I welcome this statutory instrument which, as the Minister has pointed out, is a short but crucial piece of legislation. She has rightly highlighted the importance of our Armed Forces and the crucial role they play both in the United Kingdom and abroad, highlighted by their response to flooding, piracy, terrorism and challenges to fisheries. I realise that I might be going slightly beyond the remit of the legislation, but if we did not have any Armed Forces, they would not be able to do what I am about to ask. Might she be able to say a little about what the Armed Forces might be expected to do in the coming months and years?
We are now being asked to ensure that the Armed Forces can continue for a year. That is clearly important, but this is a year when we may, for example, see Parliament being prorogued. My one question is: given that the Minister said that the Armed Forces would essentially cease to exist if Parliament did not authorise their continuation, what would happen in the event that Parliament were prorogued at a time when such a statutory instrument was needed? Clearly, at the moment we are sitting and able to give our views, but this is an important issue for the longer term. I would be really interested to know to what extent the Government are assuming that the Armed Forces may be deployed domestically in the coming weeks and months. What provisions are in place for that?
Further, what do the Government have in mind for the integrated security and defence review? We were told that it was to take place ahead of the comprehensive spending review but that was all on the assumption that it was business as usual. However, the current situation is far from business as usual.
The Prime Minister has just announced that we should be suspending social contact, and, as far as possible, working from home. It is difficult to see how the Grand Committee could work from home. It is even more difficult to see how most of the Armed Forces could work from home. Obviously, civil servants and Ministers could work virtually when they are thinking about the integrated security review. Is that the plan or is there a possibility that the longer-term thinking about security and defence could be deferred so that Ministers and civil servants can give sufficient thought to what we might require? That is because what we might have expected to be the security challenges if we had been heading towards a review on 30 November 2019 will look quite different on 31 March this year. Are the Government thinking about any alternatives? However, we are obviously very supportive of this statutory instrument to make sure that the Armed Forces can continue at least for the next year.
Lord Tunnicliffe (Lab)
My Lords, I too thank the Minister for introducing this continuation order. I think it is about the sixth or eighth time I have dealt with something like this order from these Benches. We tend to reflect on the Bill of Rights, and so on and so forth, and take a general view of the Armed Forces and how they are faring. But the order allows for the continuation of the Armed Forces Act 2006 and the service justice system, which I want to comment on in particular.
However, first I will say a few words about how the Armed Forces are working now. I lay no criticism at the feet of the men and women of the Armed Forces, and I join the Minister in praising them for what they do. My criticisms are, of course, about what the Government have done.
The Armed Forces represent some of this country’s best of the best. Across the world, they work hard to liberate and keep civilians safe from terrorist organisations, serve on peacekeeping missions, and step in to provide humanitarian relief in the wake of hurricanes and other disasters. Therefore, Labour supports the Armed Forces Act (Continuation) Order. But we do not support the way the Government have been treating personnel and the recruitment process or providing housing to Armed Forces families over the last 10 years.
There has been an alarming downward trend in the number of personnel in the Armed Forces. In 2010, there were 102,000 regulars in the Army, 40,000 in the RAF and 35,500 in the Royal Navy. They are all substantially smaller now. The Army and the RAF have been cut by 25%, and the Navy is down nearly 20%. The trajectory is quite worrying: every single service has fallen over the last 10 years. It is no surprise that the Government have removed the 82,000 Regular Army personnel commitment from their manifesto. Will the integrated review set personnel targets like the 2015 SDSR?
The steady decline in satisfaction with service life is also a significant worry. The proportion of all personnel reporting satisfaction with service life in general was 60% in 2010. In 2019, it had fallen to 46%. Will the Minister set out what plans they have to improve morale and retention?
Labour remains concerned about the future accommodation model and the possibility that it may be used to push more personnel and their families into the private rented sector, with all the associated uncertainty and added cost. Research from the Army Families Federation has found a number of flaws in the information provided on the future accommodation model. Some 48% of respondents said they had received no information about it at all, with only 2% saying that they had received a great deal. We have not been updated on progress with the defence estate for more than a year. It is particularly urgent, given that troops will return from Afghanistan within 14 months, following the recent deal. Our troops and local communities need to be kept updated. Will the Minister update us on progress with the defence estate?
Baroness Goldie
My Lords, I thank all noble Lords for their contributions, which have been very helpful. To some this might seem to be a routine and almost ritual debate, but underneath it are very important issues, as all contributors have indicated.
The points raised by the noble and gallant Lord, Lord Craig of Radley, were interestingly echoed by the noble Lord, Lord Tunnicliffe, in his final point. These are very important issues. Your Lordships will be aware that the Government have been concerned about the position in which members of our Armed Forces find themselves placed when in a situation of conflict. They take action that they deem to be proportionate and necessary, yet they have not been sure that they can return home without recriminations following, which might be either criminal law prosecution or civil law action for damages. The Government take that backdrop very seriously because when we ask men and women to undertake service in the name of the country, and frankly to expose themselves to situations and do things that many of us are not required to do, we are asking a very great deal of them. The least we can do is try to reassure our service men and women that when they act in the interest and under the orders of our national direction, we value what they are doing and we wish to try to protect them.
Your Lordships will be aware that last year we carried out an extensive consultation on overseas operations focused on three proposed measures that the Government want to take: a statutory presumption against prosecution; a proposal to consider the creation of a new partial defence to murder; and a proposal to restrict the court’s discretion to extend the normal time limit for bringing civil claims for personal injury and/or death in relation to historical events outside the United Kingdom. I am pleased to inform your Lordships that the Government will very shortly introduce a legislative package to ensure that our service personnel and veterans have access to the legal protections that they deserve. That legislation will build on the consultation held last summer on proposed legal protections and measures for our Armed Forces personnel and veterans who have served in operations outside the United Kingdom.
The noble and gallant Lord, Lord Craig of Radley, specifically raised the issue of Northern Ireland. That will be dealt with in a separate Bill—a Stormont Bill—which will seek to replicate the same types of protections that we are trying to achieve. I hope that reassures your Lordships that something is likely to come before Parliament imminently.
Lord Craig of Radley
Just to be absolutely clear in my own mind, are we talking about legislation? The noble Baroness has talked about giving the Armed Forces assurances, but I think she just said that there will be legislation. I want to make sure that we will legislate and that this is not just about assurance.
Baroness Goldie
I can reassure the noble and gallant Lord that, yes, I said that we will introduce a legislative package and that is what we will do. The legislation has been drafted and will imminently come before Parliament. As I say, I hope that that offers reassurance.
The noble Baroness, Lady Smith of Newnham, raised a number of very interesting points. She specifically asked what will happen if Parliament is prorogued when, for example, an SI might be needed to renew the operation of our Armed Forces. We are dealing with extraordinary circumstances, the extent and impact of which are probably not yet quantifiable. There is an assumption that Parliament will sit. There is a recognition that the parliamentary process, particularly in a time of crisis, is extremely important. I want to reassure her that every effort will be made to ensure that the parliamentary process can continue in one form or another. She is absolutely right to say that there are consequences to Parliament being prorogued which could be very grave, and therefore every effort will be made to ensure that, whatever legislation is required for essential purposes, some mechanism will be found to make sure that that is addressed.
The noble Baroness also asked about the current pressures on the MoD, particularly in relation to the Covid-19 pandemic. I assure her that arrangements are in place for Defence to provide support to civil authorities if requested. We are working hard to identify where we can best provide support. At this time, there are no immediate plans for any large-scale deployments of the military to assist with public services, but we do stand ready to assist if requested to by other government departments. It goes without saying that we will continue to maintain the delivery of our key operations and outputs, such as the continuous at-sea deterrent and overseas operations.
Lord Tunnicliffe
Can I address that point? These are not my conclusions. A High Court judge and a chief constable, working for the Government, have produced a report basically saying that it is not appropriate for these crimes to be tried by court martial because they are so serious. Surely if one is accused of murder, going in front of a civil court where the “beyond reasonable doubt” concept is reinforced by either a unanimous or significant majority jury decision is different from a military court where at the moment a guilty verdict in such a case could come about through a simple majority where one number is one greater than the other.
Baroness Goldie
I was coming to the point that is of concern to the noble Lord on the issue of which system of prosecution is used. As we say in our response to the review, we will adopt the alternative approach identified in the review of assessing the prosecutors protocol and relevant supporting documents to ensure that they support the principle that the service justice system should deal only with those cases where there are good reasons for doing so. In other words, cases will ordinarily be tried in the civilian system unless there are good reasons why they should be tried in the service justice system. The main principle in deciding who has primacy is whether the offence has any civilian context, especially a civilian victim.
The other aspect of the review which the noble Lord raised was recommendation 4. He had a number of questions about that, such as the five-to-one qualified majority. He asked why the MoD has had this report for over a year and yet still has not come to a decision on these recommendations. Again, I reassure him that we have been working with our stakeholders on all aspects of the review. Some of the changes will require primary legislation, so we must wait for an appropriate opportunity to deal with them. We are considering these matters for the next Armed Forces Bill, which must be passed by Parliament before the end of next year. I hope that has gone some way towards reassuring the noble Lord that matters are under consideration.
The noble Lord also raised the issue of recruitment. My understanding is that the recent Army recruitment figures contain some rather encouraging information which suggests that there has been a marked increase in uptake on investigating the Army as a career. However, the noble Lord is right that getting the application figures up is only part of it; retention is another major issue which the Government are well aware of. Everything is being done to ensure that if applicants are successful and subsequently recruited, they will be given a career prospect which is conducive to their wanting to remain in the Army.
The noble Lord is absolutely correct about the very important matter of accommodation, which is connected to this. An attractive and affordable accommodation offer helps to deliver military capability and contributes to attracting and retaining service personnel. He may be aware that the MoD has developed the future accommodation model to improve choice about where, with whom and how service personnel choose to live, reflecting modern family life with entitlement based on need, not rank. We very much hope that this model, which is being piloted at HM Naval Base Clyde, Aldershot Garrison and RAF Wittering—the latter from 31 May—will provide productive examples of what works and what does not. I can reassure him that efforts are being made to look at providing accommodation suitable to modern living; he is quite right that we should give reasons to people who join the Armed Forces why they should stay.
Lord Tunnicliffe
Before the Minister continues, perhaps I may record my concern about her answers. The MoD commissioned a report using the best people available. As far as I can see, the recommendations of that report will not come before Parliament unless a particular recommendation suits the Government and they bring it forward for primary legislation. The failure to act on the recommendations, as far as I can see, will not come into the public domain unless I find some way of raising it in Parliament in the future.
Baroness Goldie
I am sorry if I have failed to reassure the noble Lord. I have tried to cover the points he raised. I will certainly look at Hansard to see whether there is any more detailed information which I can provide for him. Any government review is always the subject of scrutiny by such vigilant observers as the noble Lord. It is always available to parliamentarians to look at what a review says and, where subsequent legislative proposals may not seem to reflect that, it is the right of parliamentarians to raise that with Government. I have tried to reassure him that the Armed Forces Bill will cover certain aspects of the matters he has raised, but I will look at Hansard and, if there are any areas where I can provide further information, I shall undertake to do so.
I am very grateful for the debate we have had. I have already moved the order and hope the Committee will agree that it should be passed.
Civil Liability (Information Requirements) and Risk Transformation (Amendment) Regulations 2020
Lord Parkinson of Whitley Bay
That the Grand Committee do consider the Civil Liability (Information Requirements) and Risk Transformation (Amendment) Regulations 2020
Relevant document: 6th Report from the Secondary Legislation Scrutiny Committee
Lord Parkinson of Whitley Bay (Con)
My Lords, the regulations before the Committee serve two important functions. First, they set out information reporting requirements for motor insurers, which will allow Her Majesty’s Treasury to evaluate the benefits to consumers from the reforms set out in the Civil Liability Act 2018. Secondly, they make a technical fix to the Risk Transformation Regulations 2017 to clarify an ambiguity concerning the nature of qualified investors in transactions in insurance-linked securities.
I begin by outlining the information reporting requirements under the Civil Liability Act, which constitute Part 2 of the instrument. The Civil Liability Act 2018 established a new compensation and claims system for whiplash injuries and introduced a new process for calculating the personal injury discount rate. These changes were expected to result in savings for insurers and lead to lower motor insurance premiums for consumers.
Indeed, when the Act was introduced, the Association of British Insurers published a letter from its members, comprising 86% of the ABI’s motor and liability insurance businesses, in which it publicly committed to passing any savings from the reforms on to consumers. During the passage of the Civil Liability Act, noble Lords tabled an amendment intended to hold insurers to account for this commitment. This instrument flows from that. It obliges insurers to provide data that will allow the Treasury to report back to Parliament on whether motor insurers have passed on any cost benefits arising from the Act.
Insurers that issue 100,000 or more private motor insurance policies annually—these make up over 95% of the UK market—will be required to provide a one-off data submission to the Financial Conduct Authority showing their costs and premiums for the three years from April 2020. They will also be required to calculate counterfactual figures, demonstrating what their costs and premiums would have been had the Act not been implemented. The data must be accompanied by a statement from a qualified auditor verifying that it meets the standards set out in the regulations. Insurers may also provide relevant supplementary information to explain any figures provided. The Financial Conduct Authority will review and aggregate the data before passing it on to the Treasury. A report assessing the extent of any savings and whether these were passed on to consumers will be laid before Parliament after 1 April 2024.
The reporting requirements themselves have been designed to allow the Treasury to make a reasoned assessment of the Civil Liability Act’s impact on motor insurance premiums, while not imposing a disproportionate regulatory burden on insurers. As such, they have been developed in close consultation with the Financial Conduct Authority and industry representatives.
I draw your Lordships’ attention to the fact that the Secondary Legislation Scrutiny Committee described this instrument as an “instrument of interest” in its report of 26 February. I see that my noble friend Lord Hodgson of Astley Abbotts is in his place. The report notes that the date by which the Treasury must submit its final report before Parliament will be up to seven years from when the Civil Liability Act received Royal Assent, and that a tighter reporting timescale would have been preferable. I must beg to differ on that.
First, it is important to note that the Act’s reforms were not put into effect immediately upon Royal Assent. Indeed, they will be fully implemented only later this year, with the whiplash reforms set to come into force in August. Secondly, the Government believe that the three-year reporting period and subsequent time for data processing are proportionate, allow for a thorough assessment of changes to costs and premiums over time, and avoid placing unnecessary burden on the industry and the regulator. The reporting requirements themselves have been designed to provide the Treasury with sufficiently robust data to make an accurate evaluation of the impact of the Civil Liability Act on motor insurance premiums while minimising the regulatory burden placed on insurers.
Part 3 of the instrument amends the UK’s regulatory framework for insurance-linked securities. The Risk Transformation Regulations 2017 set in law a tax and regulatory regime designed to enable the UK to become an attractive jurisdiction in which to domicile insurance-linked securities special purpose vehicles. Insurance-linked securities allow insurers to transfer risk to capital markets with their value being linked to an insured loss event.
Lord Hodgson of Astley Abbotts (Con)
My Lords, I congratulate my noble friend on his clear exposition on quite a technical matter. I think that this is the first time I have participated in a debate where he is on the Front Bench—in the pound seat, so to speak—and we look forward to hearing his summary after we have raised our questions.
As I did earlier, I declare an interest as the chairman of the SLSC, whose report is included in the papers my noble friend referred to, but I am now speaking in my own capacity, not as the chairman or indeed for any member of that committee. I am speaking because I took a considerable interest in the proceedings on the Civil Liability Bill as it then was, now the Civil Liability Act. On several occasions, the noble Baroness, Lady Kramer, and I, along with many others, laboured long into the night to get what I thought was a pretty good cross-party consensus as to the right way forward.
I was glad to do that because I was very supportive of the policy behind the Act; it sought to bring fairness to a very complex area that is also highly emotionally charged. When people suffer life-changing injuries, they and their families are inevitably extremely upset, as anyone would be because one’s life has been completely wrecked. It is important to keep their position in mind, but we also had to remember that not all our fellow citizens are saints and there are people who might be inclined to push the envelope rather, so we had to make sure that their position was balanced.
There are essentially three interested parties in these cases: on the one hand is the injured party—or at least the allegedly injured person—while on the other are the other insured persons in the class covered. That is because this is not a risk-free, cost-free change. If insurance companies pay out on policies on which proper damages should not be paid, the costs fall in part on the other people in the insured class. For those Members of your Lordships’ House who are of a greater age than my noble friend on the Front Bench, it is of course insured drivers aged over 60 who pay a particularly heavy premium on these things. Finally, there are the insurance companies, which have to satisfy their shareholders of a reasonable degree of profitability. As was hinted at in my noble friend’s exposition, they are the least popular of the three parties.
I have two specific areas of concern about this to record with my noble friend. First is the way the discount rate applicable to sums awarded for personal injuries is calculated and set forward. This is a technical matter. If you are awarded a lump sum to look after your terrible injuries, it is not dead money; it will earn a return. The difficult issue is therefore to decide what rate should be applied to the sum to make sure it is fair to all parties. The Ogden rate, as it is called, is set by the Lord Chancellor, now the Secretary of State for Justice.
Consequential changes from changes in the rate are huge, and politicians are therefore understandably fearful. From 2001 to 2015, the Ogden rate was unchanged at 2.5%. In 2001 it was perfectly fair, but by 2015 it was patently unfair. The level of interest rates meant that you were quite unable to earn the return of 2.5% on the lump sum awarded to you. That was terribly unfair and wrong to people looking to it to look after their injuries incurred at work, on the road or wherever. In that latter year, the then Secretary of State for Justice suddenly, with a jerk on the tiller, moved the discount rate from 2.5% to minus 0.75%. That meant that the NHS had to find another £9 billion to compensate for the injuries expected actuarially out of its doing business; £9 billion was suddenly hoovered up and had to be put aside.
Such swings are clearly very unhelpful and the whole area needs more frequent reviews. It was not a matter of cross-party dispute; we all agreed that it needed a proper procedure. It needed a proper procedure also to provide the Ministers having to take this difficult decision—the Secretary of State for Justice, the Lord Chancellor—with some air cover. We needed a procedure so that every so often we had to go through the whole routine and ramifications of it and come up with an answer. That would then provide the Secretary of State for Justice, the Lord Chancellor, with a rationale for making a decision, instead of having to do it out of the blue on their own.
As a result of the final shape of the Act, the procedure was put in place and went to work. The Ministry of Justice guided the market as it would be, between 0% and 1% when the first review took place—but it never happened. It went to the Treasury, and when it came back another 1% had been taken off it, so all the work we had done—the way we had achieved cross-party consensus, not only in this building politically but externally with industry and all the interested parties—was set at naught. That seems a terrible waste and a terrible mistake, because once politicians of any party have to get involved in this, the numbers are so great that they are terrified and will not make a change, and we get into the position in which we found ourselves in the past.
If not this afternoon, perhaps my noble friend could illuminate people at the Committee today, such as my noble friend Lady Kramer—I think I can call her “my noble friend” on this matter—on some of the ways the Government reached the sudden decision not to accept the number recommended by the Committee. That is the first question.
The second question relates to the Civil Liability Act and the soft-tissue whiplash injuries. As my noble friend will be aware, this is not a medical condition that lends itself to easy diagnosis. People with malice aforethought can therefore ride the system. I discovered that at Runcorn railway station. I chair a company at Runcorn. I arrived there and took a taxi—a 10-minute ride—to the place where the company meets. The driver and I talked about whiplash. He said, “Oh, yes, it’s called cash for crash.” I said, “How does it work?” He said, “It’s quite simple. Four or five people—maybe half a dozen—buy a banger for 150 quid and they arrange to crash it into a taxi.” I asked, “Why do they crash into a taxi?” He replied, “Oh, because they know it will be insured, otherwise the local authority would not give them a licence. They also know that if we make too much of a fuss and complain, we may not get our licence renewed by the local authority, because we are seen not to be helpful to people who have been injured.” This is the other side of a situation where some people have terrible injuries: there are people who have been gaming the system in a terrible way.
It was clear that if the proposals under the Act were brought into effect there would be substantial savings. The question was where those savings would fall. As my noble friend Lord Parkinson pointed out, appropriately, there was a concern that too much would end up with the shareholders of insurance companies. My committee made the point about the time, and my noble friend has rebutted that by saying, “Of course, we haven’t been able to begin collecting the data till August 2020.” The Act took effect on 1 January 2019, so we will have had a year and a half. It is important from the point of view of how insurance companies present themselves that they should be able to show that they are clean-handed. By March 2025, when the report comes out, we will be eight years on from when this was a big issue. It is only fair that where people have done their stuff in the industry, they should be able to say so and show it in slightly less than seven years.
Perhaps I may raise one last technical question about the way in which these savings are going to be shown. It is about periodical payment orders. One does not have to be awarded all the money in a lump sum. One can be awarded it on a PPO, as it is called, where one gets an amount of money every month, every quarter or every year depending on one’s circumstances. I have always felt that to be a sensible way to proceed. If you have a terrible crash at 25, the doctor will examine you and say, “I think you’re probably going to die when you’re 45”. Therefore, the sum awarded to you by the court is for 20 years. You may be unlucky and die at 45, but you may be lucky and live on. That means that if you live to 50 or 55, the end of your life will be lived in much reduced financial circumstances because your award will have run out.
PPOs are an important way forward, but they are not liked by insurance companies because they cannot put a pink ribbon around the file and say, “We have paid out our £1 million, £2 million”—or whatever the number is—“and it is done.” They are left with this tail of having to pay out so much every week, month, quarter or whatever and will therefore have to allow for that, and account for it, in how they set up their financial statements. There is therefore a bit of a temptation to push people towards a nice lump sum. The awful reality is that, if you say, “Here’s 5 million quid, or here is what seems a smaller sum on a monthly basis”, people will say, “Oh, I’ll take the big number because it looks good”. When we look at the way in which the calculations are done, to show how insurance companies have made the savings—and shared them—I hope that there will be no implicit bias in how they are drawn up to make it less likely that people can get periodical payment orders.
Before I close, could I go completely off-piste? We know about insurance companies being unpopular, so I want to ask my noble friend a Covid-19 question. I quite understand he probably will not be able to reply, but it would be helpful if I could put it on the record now. He might then be able to reply to me and the other members of the Committee shortly.
Baroness Kramer (LD)
My Lords, it is a delight to follow the noble Lord, Lord Hodgson of Astley Abbotts, because I could probably just say, “I agree with Lord Hodgson”, and sit down. I want to welcome the noble Lord, Lord Parkinson, to his new role, as this is my first opportunity to do so. He is getting to meet the geeks; he has several of them here in the Room today. I am afraid we are going to be part of his future.
I know that the last point the noble Lord, Lord Hodgson, made on coronavirus does not apply to this SI, but it underscores the significance of looking at the resilience of our insurance industry. Thanks to our success in being a hub for international insurance, an awful lot of liabilities are carried in the UK as a consequence of business done well outside the UK. The resilience of this sector will be absolutely critical to overall financial stability. I wish the Minister well in trying to work his way through what will be a very sensitive and difficult process. As the noble Lord, Lord Hodgson, has reminded us, it will impact not just at the macro scale; it will come down to sectors, businesses and small and large employers, which will be impacted.
In the many hours—all late at night, for reasons I can never quite remember—when we put together the Civil Liability Act, much of my focus was on trying to determine a way to deliver a personal injury discount rate that made some sort of sense. On the rate in play prior to the Act, I think someone had probably decided in 2001 what a sensible number to use was, and then looked around for a reference rate that would provide it. It was related to the yield in gilts at that point, as I remember.
Lord Hodgson of Astley Abbotts
It was the Wells v Wells case, in which the noble and learned Lord, Lord Hope of Craighead, was involved—the noble Baroness may recall that he interrupted us several times on it. That is how it was set; it was linked to the index-linked gilt rate.
Baroness Kramer
Of course, as the years went by it became evident that it no longer made sense. If I remember right—if I am wrong, the noble Lord, Lord Hodgson, will correct me—the way in which the lump sum is calculated is that award is made on an estimate of the length of time the individual will live, and the degree of injury and cost that will be consequent over that time. Therefore, the discount rate is the mechanism for bringing it back to a number which creates the lump sum. Even a very minor variation in that number creates a very different lump sum.
As we and the Treasury hunted around, it became impossible to find a reference rate that would work for all purposes: hence the move to say that the Lord Chancellor should make that decision, but with the advice of an expert panel. The expert panel was seen as an important part of it because there were so many changing and subjective elements that, in a constantly changing set of economies, would undoubtedly have play. All we were certain of was that 2.5%, the old rate, was not right and that minus 0.75%, which as I remember was the result of the Treasury finally going back and looking at its reference rate using the same methodology as in 2001, was obviously complete nonsense. It assumed that if you had a lump sum and were going to invest it, you would, first, do so on a risk-free basis and, secondly, look at such a narrow range of instruments into which to invest it that you would get only negative yield. None of us could think that even the most incompetent financial adviser would suggest investing money in that way, when there were plenty of secure ways. Even putting it into a bank savings account with a guarantee on it would have yielded far more, so it was clearly all wrong.
What has distressed all of us—I join the noble Lord, Lord Hodgson, in this—is that the advice of that expert panel was not taken. It was overridden, and instead of a number somewhere between 0% and 1%, which gave a lot of discretion to the Lord Chancellor, we ended up with minus 0.25%. That was not as bad as the minus 0.75%, which is obviously devastating as a discount rate, giving you a huge lump sum as a consequence. But it was still a number that most people felt could be justified only by someone looking at an ultra-conservative, unrealistically constrained investment strategy of that lump sum which would have to, as it were, deliver over the remaining life of the individual who had been injured.
We were all very concerned not to disadvantage someone who was being given a proper award for injuries they had sustained. That was never the purpose. Nor was it the purpose to be unfair in the way we treated insurance companies—less because we all love insurance companies and very much more because we know the cost is passed on. We heard a great deal from those who spoke up for young drivers, who often carry the highest premiums and, as a consequence of the original assessment of minus 0.75%, were going to see huge increases to their annual premiums, perhaps as high as £75 a year added on to the premium. We all knew that was completely inappropriate.
I ask the Minister as part of this—even though it is not within the language of the statutory instrument itself—to go back and try to understand why the recommendations of the expert panel were set aside. It seems we have never heard a sufficient explanation as to why it happened. If the expert panel is not going to be the answer, it seems we have to go back and look at some other system that everybody can rely on and have faith in.
As for the SI itself, I join the noble Lord, Lord Hodgson, in thinking, “Come on, guys—2025?” We are all slightly cynical and would like assurance a lot earlier that the revenue accrued, as a consequence of the change, is being passed through to the customer. That was an assurance given to us by the industry. I know that many of us who spoke up in favour of finding a new way to provide a personal injury discount rate did so only because we had that absolute assurance from the industry: that the money would be a pass-through and not a further distribution to shareholders.
I have no problem with the more technical aspects of this SI. It is just a good lesson that statutory instruments drafted in haste nearly always need to be changed sometime within the following 18 months. This is an introduction to that for this Minister. I am sure we will meet again around the table, changing statutory instruments—I seem to spend a large part of my life doing that. I thank again the noble Lord, Lord Hodgson, who covered all the issues. I support anything he said.
Lord Tunnicliffe (Lab)
My Lords, I take it from conversation that this is the Minister’s first appearance; I congratulate him on that. As he can now appreciate, Treasury SIs are somewhat intimate affairs. I thank the noble Lord, Lord Hodgson, and the noble Baroness, Lady Kramer, for their interesting speeches. Having done most bits of Treasury legislation over the last 10 years, I managed—uniquely—to dodge the bullet on this one and therefore was not part of these late-night parties, so my comments will be rather narrower.
We support this measure. Indeed, Part 2 deals with some of the concerns raised during the passage of the 2018 Act. I am generally not one for being overtly political, but I say to Ministers that exercises such as this should influence the Government’s approach to primary legislation. There may now be a large majority in the Commons. However, members of the Opposition and outside organisations will continue to offer sensible suggestions as legislation goes through Parliament. Rather than resisting amendments and having to introduce changes later on, Ministers would be better advised to engage on key issues and ultimately pass better legislation.
Following the passage of the 2018 Act, this instrument seeks to ensure that insurers pass on to consumers any savings generated from the changing calculation of the personal discount rate. This is achieved by requiring insurance firms to provide figures on their premiums, as well as the total value of claims, to the FCA.
In the Commons, the honourable member for Oxford East, Anneliese Dodds, asked the Minister what would happen to firms if they chose not to comply with the directive. That was an eventuality she deemed realistic, given that the Government have decided to legislate rather than pursue this informally. In his response, the Economic Secretary to the Treasury asserted that both the FCA and the Competition and Markets Authority already have the relevant powers in this scenario. I hope the Minister can confirm where such powers reside, so consumer groups can be reassured.
Lord Parkinson of Whitley Bay
I am grateful to noble Lords for their words of welcome. It is a privilege to be intimate among the geeks, as the noble Baroness, Lady Kramer, said. This debate has illustrated the rigorous approach that your Lordships’ House brings to legislation, including where it can be improved post facto. It was also helpful that in all their speeches, noble Lords referred to striking the important balance between providing help to people who have suffered an unpleasant accident and fairness to those who must bear the cost, which is what this boils down to fundamentally.
My noble friend Lord Hodgson and the noble Baroness, Lady Kramer, asked about the discount rate and how it is calculated. The current rate is, as was touched on, minus 0.25% as of August 2019, using calculations set out in the Civil Liability Act. That was set by the Lord Chancellor at the time, David Gauke, who had the benefit of expert advice and reached his decision on the rate, having taken this analysis and the requirements of the Act into account. He was assured that this was the fairest outcome for the claimants. That included expert advice from the Government Actuary’s Department. Moving forward, an expert panel will be convened to review the rate. As the noble Baroness, Lady Kramer, said, panels such as that can form an important part of the process as we move forward.
Baroness Kramer
It might help the Minister to know that 0% to 1% was the recommendation of the Government Actuary’s Department.
Lord Parkinson of Whitley Bay
I am grateful. Not having had the benefit of being here during the passage of the 2018 Act, I am not as au fait with it as other noble Lords.
My noble friend Lord Hodgson and the noble Lord, Lord Tunnicliffe, both touched on the gap between the Act receiving Royal Assent and the Treasury reporting back. There are some good reasons which contribute to the time period. The Treasury believes that the reporting period of three financial years is an appropriate time period to make a thorough assessment of insurers’ costs and premiums, following reforms instigated by the 2018 Act, and to observe any trends which emerge over time. After the reporting period, firms will have six months to complete their actuarial and audit processes and to submit their data to the FCA. The FCA will then have six months to review and aggregate the data before passing it on to the Treasury to complete its evaluation.
We are confident that each stage of the reporting process has been allocated a fair and proportionate amount of time given the level of data processing and analysis required, but of course the report represents just one way in which the Treasury continues to ensure that the insurance market is working well for insurers and consumers alike. I can assure noble Lords that our objective of ensuring good consumer outcomes will be as relevant in 2025 as it was when the Act was passed.
My noble friend Lord Hodgson raised periodical payment orders, or PPOs. These are and will continue to be used in those cases where they are an appropriate remedy, but they are not suitable in all cases and the discount rate addresses this fact.
My noble friend also asked about coronavirus. I will certainly take away the points he has raised and discuss them in more detail, as he suggested would be useful. I can say to him and other noble Lords that the Government understand people’s concerns about insurance cover in respect of coronavirus and are in close daily dialogue with the insurance sector, which I hope covers firms such as that which he mentioned, as well as with the Financial Conduct Authority and the Prudential Regulation Authority. In these difficult times, we encourage insurance companies to do everything they can to support other businesses and ensure open conversations with their clients. Government will continue that dialogue. Of course, the potential implications of Covid-19 for the wider UK economy and the economic response were addressed by my right honourable friend the Chancellor in his Budget Statement. We stand ready with a series of measures to support the public health response and the economy. These include financial support for small businesses in difficulty, which may be of some consolation to my noble friend’s company.
The noble Lord, Lord Tunnicliffe, followed up an issue raised in the other place by his honourable friend: how we can make sure that insurers comply with the requirement and the penalties for non-compliance. The penalties are included in the Financial Services and Markets Act 2000. Section 11 of the Civil Liability Act makes the necessary changes to that Act, empowering the FCA to use its full suite of supervisory and enforcement powers to bring about compliance with the requirements of these regulations. I shall consult Hansard afterwards. If there are any other issues which I have missed, I shall certainly undertake to follow them up with the small but select group of noble Lords who are here.
The regulations will allow the Treasury and in turn Parliament to assess whether the cost benefits of the Civil Liability Act reforms have been passed on to motor insurance customers, and they will make a technical fix—which I am grateful to noble Lords for recognising —to the Risk Transformation Regulations 2017 to make it clear that insurance-linked securities can be offered to qualified investors. I therefore commend the regulations.