Grand Committee
Arrangement of Business
The Deputy Chairman of Committees (Lord Caine) (Con)
My Lords, some Members are here in person, respecting social distancing, and others are participating remotely, but all Members will be treated equally. I must ask Members in the Room to wear a face covering except when seated at their desk, to speak sitting down and to wipe down their desk, chair and any other touch points before and after use. If the capacity of the Committee Room is exceeded or other safety requirements are breached, I will immediately adjourn the Committee. If there is a Division in the House, the Committee will adjourn for five minutes.
Representation of the People (Proxy Vote Applications) (Coronavirus) Regulations 2021
(3 years, 7 months ago)
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The Minister of State, Cabinet Office (Lord True) (Con)
My Lords, across all parties and none, we are all resolved that democracy should not be cancelled because of Covid. The Government have confirmed that the election scheduled for May will go ahead and are providing a package of measures to support the statutorily independent returning officers to deliver these elections successfully and with the right precautions in place. Those measures were set out in a delivery plan published by the Government on 5 February.
These draft regulations would temporarily change the eligibility criteria for emergency proxy applications, so that electors who are self-isolating due to coronavirus on election day have an additional option to vote remotely. The provisions in this SI would also allow those with an existing proxy to change the person acting as their proxy if their original proxy were affected by coronavirus.
The last opportunity for a routine proxy application is at 5 pm six working days before election day. After this deadline, the only other option to create a new absent voting arrangement is to apply for an emergency proxy vote. Emergency proxy applications on medical grounds are usually required to be attested by a medical professional. Not everyone will be able to seek such attestation—for example, those who become symptomatic with Covid too late to take a test. The statutory instrument would remove this requirement for those affected by Covid. Removing attestation will also avoid adding more pressure on already busy medical professionals.
Furthermore, if an elector was informed that a member of their household tested positive for coronavirus but they were unable to evidence that they also had the virus, under current regulations the elector would be ineligible to apply for an emergency proxy vote even though they ought to remain at home. This statutory instrument will remove these limitations for those affected by Covid-19 and provide a more flexible approach for those who ought to remain at home on election day.
The changes proposed would mean that, if an elector believed that their particular circumstances would lead to an increased risk of transmission of the coronavirus to themselves or others in a range of circumstances, they would be eligible to apply for an emergency proxy vote. For example, an elector who has been made aware they may have been exposed to the virus at home or work in the days leading up to the election can apply for an emergency proxy vote even if they are not yet showing symptoms.
Beyond removing attestation, the usual security measures for absent voting applications—such as the signature requirement, providing date of birth, and the requirement that electors declare that they understand that all the information provided is true and that providing false information to an ERO is illegal—remain in place.
Electors who are granted emergency proxies will be included in the absent voting lists, which are available to candidates and agents on request, for the express purpose of ensuring scrutiny and integrity.
These temporary changes are both necessary and proportionate to ensure that those affected by coronavirus can still exercise their right to vote. This SI does not affect the regulations regarding any other route for emergency proxy applications. Almost all provisions in it will expire at the end of February next year, so will not apply to any regularly scheduled elections, such as those in May 2022.
The only permanent provisions in this SI simply clarify and add certainty to the existing position that electors with long-term proxy arrangements, such as those with a disability, can replace the person acting as a proxy without having to go through the entire application process again. Going through the full application process would require an elector to prove their eligibility for a long-term proxy vote again, simply to change the person who was their proxy; that should not be necessary.
The statutory instrument has been considered by both the JCSI and the SLSC, neither of which has drawn the attention of the House to it. For the avoidance of doubt, I should state that we have consulted the Electoral Commission, which is supportive of the proposed changes. We also shared a draft of the SI with the Association of Electoral Administrators, SOLACE and officials in the Welsh Government.
There is broad support among stakeholders for the proposed changes in the instrument. Both the Welsh and Scottish Governments have put similar measures in place for the polls on 6 May for which they are responsible. It is important that we are able to offer voters consistency of approach wherever possible, and I am pleased that all three Governments are working to support voters in this way. I hope that noble Lords will welcome these proposals. I beg to move.
Lord Naseby (Con) [V]
My Lords, I am pleased that the title contains “draft”, because I have some thoughts that I hope my noble friend the Minister might take on board. I am not clear why we need an expiry date of 28 February 2022. Surely we do not know whether isolation will continue for some unknown period. There is talk of a third wave and another lockdown and so on, so I do not know why this cannot be left open-ended. Then, when it is clear that we are through the coronavirus pandemic, we can by all means determine to remove this facility altogether.
Self-isolation is only for 10 to 14 days, depending on the circumstances. That is a pretty short timeframe, really. I have fought local elections, general elections and other elections, and part of me wonders whether there is not a degree of overkill.
After paragraph (3A), there are four categories to be inserted. I have no problems with new sub-paragraphs (a) or (b), but what is said in new sub-paragraph (c) is true for almost everyone, so in a sense it depreciates the currency. I have a question mark over new sub-paragraph (d), because there is a danger of its being made too easy to get a vote. This could be open to abuse.
In elections I have taken part in, I have known there to be personation. Indeed, there was an article about it in the Times or the Telegraph after the 1966 general election, in which I was the Conservative candidate in Islington North. I fully admit that I had no hope of winning in Islington North, which is now Jeremy Corbyn’s seat, but as a keen young candidate I made sure that we had tellers on the doors, and we watched carefully what was happening. Afterwards I was in the pub talking with my key workers, and two of them said, “You know, we’re quite sure we saw that chap come at 7.30 and the same chap appeared again at 9 o’clock.” I said, “That’s funny you say that, because I felt the same.” I thought no more of it other than that, as people who know that part of London will know, there is an extensive Irish community there with large families. The long and the short of it was that some journalist from either the Times or the Telegraph was watching carefully, and along appears an editorial saying that there were clearly personations, where people had left the voting card in a house or residence where there were multiple voters, and a chap had taken a card not just for himself but for several other people in that house who were registered to vote.
On general elections, there is still some personation. I have seen it in a couple of seats and indeed—dare I mention it?—I have been on a number of overseas monitoring roles, and there is certainly less personation in general elections that I have watched in Sri Lanka than in parts of the UK. I am not at all sure what the principles are. People who are ill get a postal vote and it is done with great rigour, as my noble friend mentioned. It is done properly and carefully. Proxy votes, on the other hand, are a little more open to creative illegality. This SI talks about “long-term proxy arrangements”. Why should there ever be a long-term proxy arrangement when you can get a postal vote? There is a real danger here with a low turnout or tight majority.
My first general election majority was 179. I lost on the first count, then crept in with about two or three votes on the second count, and ended up with 179 on the third count. At my second election in October 1974, I crept in with 141. In local elections, as we all know, there are some very low turnouts and very tight majorities. Single figures are quite common; majorities of 20 to 25 are very common. If, as a result of this proposal, you have people applying for proxy votes, there is no doubt that it will dramatically improve the turnout. There will probably be people who were not going to vote in the first place, but because they know they can get a proxy vote they will turn out.
I am a bit fearful about what is proposed here. This needs to be watched carefully and, frankly, I am not in favour of it at all. Maybe I am in a minority. However, as someone who has experienced elections in some depth—I note that the Liberal spokesman has also witnessed a fair number of local elections—I wonder whether this is a step too far.
The Deputy Chairman of Committees (Lord Caine) (Con)
The noble Baroness, Lady Gardner of Parkes, has withdrawn, so I call the noble Lord, Lord Rennard.
Lord Rennard (LD)
My Lords, I thank the Minister for answering my Written Question on Monday about absent voting arrangements. I am grateful to him for confirming that
“The law does not require applicants to verify their identity or address when applying for a postal or proxy vote”.
The regulations that we are considering today require little debate. In the circumstances of the pandemic, it is right to allow people to appoint someone as a proxy voter for them as late as 5 pm on polling day. But other measures could have been taken to ensure that everyone entitled to vote was able to do so. We have seen in the most recent Dutch elections this week that polling stations were opened for three days to help more people to vote without the risk of queues and crowding. Our Government are limiting increased access to voting to this very modest measure.
My concern is that some local authorities may act against the clear intention of these regulations and existing legislation about proxy voting, and try to suppress the right of voters to participate in this way or by post. The Minister will no doubt be aware that the local council in Woking has been advising potential proxy and postal voters that they should provide proof of identity with photo ID and proof of residence. People not providing this are threatened with consequences, and only in the very small print does the documentation admit that applications will be processed even if the photo ID and proof of residence is not provided.
Does the Minister think that local authorities should be free to imply incorrectly that there are such requirements to obtain a postal or proxy vote? Does he accept that such barriers may discriminate against groups such as young people who may not yet have passports or a driving licence, and who may not have utility bills addressed to them personally? Is not this a classic attempt at voter suppression of the kind that we have become familiar with seeing from the Republicans in the United States? Will the Minister work with the Electoral Commission, the Association of Electoral Administrators, SOLACE and others to advise local authorities that they should proceed exactly as set out in these regulations and other legislation, and not seek to impose additional barriers to make it harder for people entitled to vote to participate in the elections? Does he think that the Electoral Commission may need greater powers to enforce standardisation of best practice consistent with the law for electoral administrators issuing application forms concerned with electoral registration and absent voting?
The Minister helpfully replied to me on Monday to say that electoral registration officers
“do not have the power to reject or refuse an absent vote application if the applicant does not provide additional proof of identity or residence”.
Will he therefore prevent local authorities such as Woking Borough Council effectively taking the law into their own hands in such matters and seeking to exclude some of those people on the electoral rolls from being able to participate in elections? I have heard today from the Electoral Commission, which advises that local authorities should not imply that this is the case. I hope that the Minister will work with the commission to make sure that this practice is ended in the Woking borough and not begun elsewhere.
Lord Kennedy of Southwark (Lab Co-op)
My Lords, I support the regulations. As the noble Lord, Lord Rennard, and the Minister said, they do not need a huge amount of discussion. They are very welcome, as they will enable people to have further opportunities to participate in the elections in May, and I welcome them.
The noble Lord, Lord Naseby, had a valid point when he drew attention to the fact that these regulations have a sunset clause coming up next February. We all want to ensure that the pandemic is long gone when we get to May 2022 but of course we cannot guarantee that—so why do have the sunset clause? I am assuming that, if the pandemic has not gone by next May—if we have a third or fourth wave—the Government will have to introduce something like these regulations again. We do not want that but it may have to happen, and that is a fair point.
The noble Lord, Lord Rennard, raised Woking Borough Council. I have had involvement with Woking Borough Council before and I know that this is not the first time that this authority has decided to do its own thing, as it were. It is not right for local authorities, EROs or any other official of a council to think that they can act beyond the law as agreed by Parliament. The situation is that nobody needs to provide this information and Woking Borough Council is acting beyond its powers. I hope that the Electoral Commission, and the Government, will make it very clear to the council that it cannot do this and that it has to act strictly within the regulations as approved by Parliament —no more, no less.
As I said, this is not the first time this authority has done this, and I do not think that any other authority behaves like this. I understand that the noble Lord, Lord True, has confirmed to the noble Lord, Lord Rennard, what the situation is. I hope the Government can speak to the authority and make it very clear that it should not and cannot do what it is doing. In fact, the authority knows that it cannot do this, because, as the noble Lord said, it is in the small print that people do not need to provide that information. That confirms that the council knows that it should not be doing this. For me, that is poor practice, or sharp practice, and not something that any of us in this Committee would support.
Having said that, I fully support the regulations before the Grand Committee.
Lord True (Con)
My Lords, I am grateful to all those who have spoken and acknowledge their great experience in electoral matters. I am not going to exchange election stories with my noble friend Lord Naseby, but I can assure him that the first majority I ever had was a lot smaller than his—not normally what people boast about, but that was the case.
Important points were raised and I shall try briefly to address them. My noble friend Lord Naseby said two things. The first was that he was concerned about fraud. We are all concerned about fraud. There is always a balance to be reached in these things. The noble Lord, Lord Rennard, implied that it is also important to ensure that people are enabled to vote, and that is ultimately what this statutory instrument is about. In the difficult circumstances we face now, with coronavirus, people who are affected by coronavirus at a late stage before the election must be enabled to vote. This is an exceptional circumstance and our judgment is that, whatever the risks my noble friend may fear, it is a reasonable stance that we are taking.
I repeat what I said in opening: it is an offence to provide false information. Electors granted emergency proxies will be included in the absent voting lists, which will be available on request to candidates and agents for scrutiny. We believe that the Government have reached a reasonable balance on that.
The other point my noble friend made was, in a sense, logically not quite on par. Like the noble Lord, Lord Kennedy of Southwark, he asked why this provision is just for a brief period. If I were concerned about fraud, I would not necessarily want to make it a permanent arrangement. I think there is a slight logical inconsistency in the questions, but I understand that my noble friend was coming at it from two different directions.
It is our belief and hope that conditions will have returned to normal by next year and that we should return to the broad established arrangements for elections. Obviously, if the worst happened—and we all pray that it will not—the Government would review it at the time. We believe that it is reasonable to place in the regulations a sunset clause and, indeed, we are often asked in other aspects of coronavirus debates to impose sunset clauses. I hope that answers also the point made by the noble Lord, Lord Kennedy of Southwark. I appreciate his support for the proposed SI, and that of his party, and equally the support put forward by the noble Lord, Lord Rennard.
The noble Lord, Lord Rennard, raised a point about a specific local authority. In my position responding to the Committee, I shall not highlight—or lowlight—any particular local authority. I made the position clear in response to a Question, as he was kind enough to say. Postal or proxy voters must by law supply their date of birth and signature at application, and again when they return their postal ballots at an election or referendum. The legal position is clearly set out in this statutory instrument and elsewhere in electoral law. I am sure that electoral registration officers, who are responsible for processing applications for postal or proxy votes and applying the legislative requirements, have a mind to the law. The points raised are properly for the electoral registration office of Woking Borough Council to respond to, but I take note of what he said. Good practice is good practice and the best practice in line with the law. That is as far as I will go on that matter.
I return to my gratitude to all noble Lords who have spoken, who raised germane and important points to which I have tried to respond. I, and I think they, believe that the instrument makes sensible change to support the effective administration of elections. It gives an option to those electors who must remain at home on election day to cast their vote remotely if they are affected by coronavirus, or to replace a proxy affected by coronavirus if they have already made arrangements to vote remotely.
I did not answer my noble friend Lord Naseby’s question on long-term proxy. Those with long-term proxies often have particular reasons and conditions for having them. In a free society, where a proxy vote is a perfectly legitimate way to vote, people have a choice. They can vote by proxy, in person—although such people cannot often do that—or by post. That is a choice for each elector.
I thank noble Lords most sincerely for their support for the statutory instrument and commend it to the Committee.
The Deputy Chairman of Committees (Lord Caine) (Con)
The Grand Committee stands adjourned until 3.30 pm. I remind Members to sanitise their desks and chairs before leaving the Room.
Arrangement of Business
The Deputy Chairman of Committees (Lord Caine) (Con)
My Lords, the hybrid Grand Committee will now resume. Some Members are here in person, respecting social distancing, and others are participating remotely, but all Members will be treated equally. I must ask Members in the Room to wear a face covering except when seated at their desk, to speak sitting down and to wipe down their desk, chair and any other touch points before and after use. If the capacity of the Committee Room is exceeded or other safety requirements are breached, I will immediately adjourn the Committee. If there is a Division in the House, the Committee will adjourn for five minutes.
Energy Performance of Buildings (England and Wales) (Amendment) Regulations 2021
(3 years, 7 months ago)
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Lord Greenhalgh
That the Grand Committee do consider the Energy Performance of Buildings (England and Wales) (Amendment) Regulations 2021.
The Minister of State, Home Office and Ministry of Housing, Communities and Local Government (Lord Greenhalgh) (Con)
My Lords, these regulations were laid before the House on 22 February 2021 under paragraph 12(1) of Schedule 7 to the European Union (Withdrawal) Act 2018. They were debated and moved in the Commons Delegated Legislation Committee on Monday 8 March and considered by the Secondary Legislation Scrutiny Committee on Tuesday 9 March. Mirroring legislation is being prepared for data registered against properties in Northern Ireland, which will be presented in plenary on Monday 22 March. Scotland operates its own energy performance of buildings register and is not covered by these regulations.
This is a straightforward instrument. It relates to the statutory fees that are charged when data is registered for energy performance certificates, display energy certificates and air conditioning inspection reports for properties in England and Wales. Fees are applied to two classes of data registration, covering domestic and non-domestic properties. The regulations propose to reduce fees from £1.86 to £1.64 when data is lodged for domestic properties, and from £9.84 to £1.89 for non-domestic properties. Noble Lords may recall that fees charged for data registrations in England and Wales were last adjusted three years ago, and that they have been amended by statutory instruments on six occasions between 2012 and 2018.
The Committee will recall that the United Kingdom has set a target in law to bring its greenhouse gas emissions to net zero by 2050, to help tackle climate change. Heating and powering buildings currently accounts for 40% of the UK’s total energy usage, and we must ensure that buildings are constructed to high standards of energy efficiency. The energy performance of buildings registers are a key tool in promoting energy efficiency by providing valuable information about the energy performance of buildings and encouraging home- owners and commercial building owners and occupiers to improve the energy efficiency of their buildings. An energy performance certificate is needed whenever a property is built, sold or let, and must be ordered before a property is marketed for sale or rent. At a glance, a consumer searching for a new home or commercial premises can determine how efficient a property might be, while an owner can consider recommendations on how they might improve the energy efficiency of their property.
Historically, the Energy Performance of Buildings (England and Wales) Regulations 2012 implemented the energy performance of buildings directive. We retained those regulations after we left the European Union, as they contribute to our target of achieving net zero greenhouse gas emissions by 2050. They set out the Secretary of State’s obligation to maintain registers of data so that energy performance certificates, display energy certificates and air conditioning inspection reports can be recorded in a readily accessible format and made available to everyone. Regulation 28 sets out a power to levy fees to maintain the registers. Officials in my department calculate the appropriate level of fees each year on the basis of proposed costs of service divided by the forecast number of data lodgements expected.
A reduction in fees is possible now because the Government have invested in a new cloud-based digital platform and moved away from the fixed hardware model that had been in place since 2008. This will ensure the energy performance of buildings register service is user-centred and fit for the future. The new fee rates set out in this instrument will allow the costs of operating the energy performance of buildings register service to continue to be met without profiteering, but nor do we expect lodgement fees to subsidise a loss. Costs of the service have been calculated in line with government policy and tested with Treasury colleagues and stakeholders in the property energy profession.
Domestic and non-domestic data lodgements are now made to a unified platform built on cloud-based infrastructure. There are some technical differences between lodging data for a domestic and non-domestic certificate, which give rise to additional costs for making a non-domestic data registration and hence a differentiation in fees between the two classes, although this is now greatly reduced compared to previous years.
To conclude, these regulations serve a very specific purpose: to reduce the statutory fees charged when data is registered for domestic and non-domestic energy performance certificates, display energy certificates and air conditioning inspection reports. Colleagues in Northern Ireland are proposing to introduce their own mirroring legislation to ensure coherence between different parts of the United Kingdom that make use of the same register infrastructure. This will ensure that fees charged for Northern Ireland data lodgements are in line with those for England and Wales. I hope that colleagues will join me in supporting the draft regulations. I commend them to the Grand Committee.
Lord Moynihan (Con)
My Lords, on the face of it, the regulations before the Committee are as simple as they come. However, my noble friend the Minister will recall from his previous encounter, over business rates relief for sport and charities, with me and the noble Lord, Lord Addington, who will of course be opening the bowling for the Liberal Democrats, that what appears to be the simplest of balls can lead to a Minister being nutmegged at the crease. While we hope that that will not happen today, I intend to press the Minister on a few key issues relating to these fees. I thank the Energy Saving Trust and all those who have offered advice on this issue.
I also draw on my experience as a resident in Ayrshire, Scotland. For while, as my noble friend the Minister has said, Scotland operates its own energy performance of buildings register and is not covered by the draft regulations, I believe there are important read-across policy implications which are pursued in Scotland and which the Committee may reflect on in the context of these regulations.
As the Minister has said, this is a straightforward SI relating to the statutory fees charged when data is registered for energy performance certificates—EPCs—display energy certificates and air conditioning inspection reports for England and Wales. Fees, as he confirmed, are applied to the two classes of data registration, covering domestic and non-domestic properties. There are significant benefits in having the energy performance certificate register and the service it provides, including readily available access to information and data. I strongly support any initiative that provides easy-to-access information and data on the land and built environment at cost.
However, there are likely to be considerable changes to building regulations. It is important that these changes are provided as far in advance as possible, so that contracts can also be amended as far in advance of any proposed changes. This would improve the lodgement process and minimise the requirement for the Minister to return to this Committee in future years over fees. Would it also be possible for government to consider sending registered EPCs by email rather than having to log into a labyrinthine database to retrieve them, as this can be inadequate and time-consuming? If so, this would provide value for the money spent. We need constantly to review and improve the system to which these fees apply.
Policies could be implemented in England that have made a real difference in Scotland and, indeed, Wales, such as the existence of a focused, directly funded scheme for installing energy efficiency measures and efficient heating for fuel-poor homeowners and private renters. I remain convinced, as I have previously proposed in the House, that this policy would be more efficiently delivered centrally. That said, in the context of these regulations the question as to how frequently charges will be reviewed and revised is important, which brings me to certainty. This is important because it bears on the frequency of registering for EPCs for properties in England and Wales. Governments can offer two very important things for energy efficiency measures to work: money, of course, but also certainty.
To develop the supply chain and to unlock investment from the private sector, a defined and adhered to long-term policy framework is needed. The biggest issue when talking to the supply chain is always the chopping and changing of energy efficiency schemes. While the nature and detail of schemes matter, that they should not be changed frequently is almost as important as what those actual details are. The supply chain can adapt to and thrive on most variants of energy efficiency schemes; what it cannot deal with is uncertainty and discontinuity.
Scotland and, to a lesser extent, Wales have long-term energy efficiency policies and programmes. In this vein, one of the key components of a stable policy environment is to make energy efficiency, particularly domestic energy efficiency, an infrastructure priority. The Scottish Government have done this and reaped the benefits.
Although individual energy efficiency installations are obviously relatively small in scale, the energy efficiency of buildings is a key parameter in the overall efficiency and productivity of the economy, and the aggregate costs and benefits are of major infrastructure scale. Raising domestic energy efficiency to EPC rating C would generate 150,000 jobs, have a budget of the same magnitude as HS2 and would save the energy equivalent of six Hinkley Points. It thus makes sense for energy efficiency to be an infrastructure priority, and once it is, this drives investment and policy certainty and sends key signals to the supply chain.
While I accept that a modest reduction in fees is now possible, I question whether the reduction is not exceeded by the duplication, time input, form changing and system adjustment for such a small change for domestic properties simply because the Government have invested in new cloud-based digital platforms and moved away from the fixed hardware model that has been in place, as my noble friend the Minister said, for the past 13 years.
A recent report by the Public Accounts Committee said that the Government have no plans to meet climate change targets, two years after setting them in law. That is what is stated in the report. The UK’s stock of 27 million houses includes some of the worst insulated and least energy-efficient homes in Europe. I share the views of Members of another place that I hope the Government will take the example of what is proposed in this related SI to move further with the agenda and deliver a big improvement in work to meet our climate change targets by making homes in the UK warm, dry and affordable to heat.
Should there not be some consideration of linking the fees to improvements in the future homes standards to be introduced in 2025, so that sellers can make a marketing point that there might be no charge where homes are at least 75% more carbon-efficient than when they were purchased? Correspondingly, would these charges not be an opportunity to charge more for those homeowners and businesses who fail to meet targets? They could effectively become a financial penalty and reward scheme. It would provide an opportunity for everyone concerned to have skin in the game, rather than the less efficient mechanism of being urged to take action by government. This would add further impetus to the sector.
With these suggestions now tabled, I hope my noble friend will present a defensive straight bat in response to what I appreciate may have been six difficult balls to defend. We know that he can do no more than play a defensive shot today—wild attempted sweeps to six would be a fatal error—since the last thing the noble Lord, Lord Addington, and I want to do is to take the wicket of such an impressive and erudite Minister.
Lord Lansley (Con)
My Lords, it is a genuine pleasure to follow my noble friend Lord Moynihan, who has made lots of good points. Some of them relate directly to points that I was hoping to make, so I will not repeat them, but the importance of the building sector in achieving our net zero carbon objectives should not be underestimated. The second largest source of emissions is from buildings.
It is easy for us to focus far too much on the commendable achievements in building net zero carbon homes, but by my calculation, we simply have to recognise that, by 2050, something like two-thirds of the homes we live in will already have been built, so retrofitting and securing energy efficiency in our existing housing stock is absolutely critical. There are government schemes for this purpose, such as the Whole House Retrofit plan related to social housing, and so on.
The scope of these regulations is modest, and I welcome that. I know that we are all grateful to the Minister for explaining the regulations at the outset, but I shall unashamedly take the opportunity to talk about not the price of EPCs but the uses to which they should be put. Far too infrequently are EPCs seen as the spur to energy efficiency improvements that they should be, which is what we are looking for.
On this occasion I will not be drawn into the private rented sector. I know that the Government undertook a consultation in the latter part of last year. I am probably slightly disappointed that, in the event, they were not a bit more ambitious, because the cost-benefit ratio they ended up with suggested that the benefits did not outweigh the costs, but that of course was at the carbon price assumed between now and 2050.
Again, I will not go down this rabbit hole for too long because it is too important and too deep, but we ought to ensure that our carbon pricing is set at a level that forces change. If it is set at that level, it is also one that is likely to deliver substantial benefits in relation to the energy efficiency of buildings and the costs that renters and landlords have to meet.
I come back to the use of the EPC. Two-thirds of the existing housing stock has a rating of D or worse, so we need to effect change. There are government schemes: my noble friend Lord Moynihan is quite right; it is not that there are not schemes. The Government have put money and resources behind grant schemes, but the supply chain and the people influenced by it need these things to be sustained over a considerable period and we need the response to be substantial and positive. I am afraid it is not.
At the moment, even in the last few weeks, we are sitting here saying, “Why are people not taking up the green homes grant?” I think it would be far too easy to blame it on Covid and say, “They do not want people in their homes, understandably, so they are not taking up the grant.” However, it was true beforehand. We have had this with other insulation schemes. It is sometimes as brutally simple as people living in a house not wanting to empty their loft to let somebody up there to put the right insulation in place. They do not want the disruption.
I will put just one point to my noble friend in the hope he will convey it into the right ears across government. Like we do in the private rented sector, focusing on when there is a new tenancy, in the owner-occupied sector we must focus on the moment of sale—when the EPC is given to a potential new owner and they have a period ahead of them when they might reap the benefits of investment in energy efficiency. At that moment, they also are likely to empty the house. They may empty the loft and sometimes they can engineer a short window of opportunity for energy efficiency improvements to take place.
I suggest that, at that moment, rather than a grant scheme which comes and goes and depends on the vagaries of spending reviews, there could be a permanent allowance against stamp duty for energy efficiency improvements up to, say, the value of £5,000 that they undertake—if recommended as a result of an energy performance certificate. Such a scheme could be confined to houses with an EPC of D or worse or, to start off with, those rated F and G, to see how it goes.
I prefer tax incentives to government grant schemes. I prefer tax relief to expenditure. I prefer incentives people can permanently rely on and where they feel they are getting some of their own money back or not having to give their money to the Government. As the tax is targeted on that moment, the incentive can be deployed in that moment as well. I commend that thought to my noble friend.
I know government departments not only hesitate, but will not enter the territory of tax, because it is all the Treasury’s business. But if they have an objective—and there is an objective here—and they think it can best be achieved by working with the Treasury through a tax incentive, I ask that they go down that path.
The Deputy Chairman of Committees (Lord Caine) (Con)
The noble Baroness, Lady McIntosh of Pickering, has withdrawn, so I call the noble Lord, Lord Addington.
Lord Addington (LD)
My Lords, follow that. The noble Lord, Lord Moynihan, started with what we might call a tricky spin and then we had straight bowling at the wicket from the noble Lord, Lord Lansley.
Anybody who has been around this issue will have heard variations of these points before; they are the obvious points. If you have a scheme that people are not accessing, you might as well not have it.
One of the points I wanted to make was this. With varying savings of 22p and £7.95, it might seem churlish to complain, but are those savings at the cost of guiding people through the benefits? I am thinking of somebody wanting to pick up the phone to be told how to do it properly, especially if this is something that they do not do very often and they are not that confident.
This is a useful tool in the battle against climate change, because it gives people information about how to go on from here. But are we going to make sure that the housing stock changes? To my knowledge, there has been agreement for over 30 years that we have very badly insulated housing in this country. This is no surprise to anybody who has been around this issue; even if you had wanted to avoid knowing it, it would have been very difficult not to have found it out. How are we going to get through that?
A small reduction is lovely—everybody likes that—but are we even going to notice a 22p change and a seven quid change on the fees? What is the cost here? Have we made sure that there will be somebody at the end of a phone line, to chat through the process and make sure people know what they are getting, how it is being used and the benefit? What if you get something wrong online and there is nobody to help you? On such occasions my use of expletives goes through the roof. If you are not used to using the system online or have limited access, things may not happen as they should. How are we going to talk people through it?
I totally endorse the points made about the fact there should be a long-term, reliable strategy to address the long-term problem—that has been here long before any of us were—of badly insulated housing, and that people are wasting money and we are messing up the environment. I thank the Government for what they have been doing and the greater incentive they have brought forward. But there is a long way to go and this is an old problem. I look forward to the answers that the noble Lord gives.
Baroness Wilcox of Newport (Lab) [V]
My Lords, I reassure the Minister that I will be speaking for a considerably shorter time in this debate than I did in an earlier debate this afternoon on the levelling-up fund. I am also afraid to say that I have a complete absence of cricketing metaphors in my vocabulary, but I am looking forward to Wales winning the grand slam on Saturday.
The instrument before the Committee simply reduces statutory fees in relation to energy data. It has the support of this side of the Committee, but I would appreciate clarification from the Minister in a few areas.
First, considering the application of these regulations to both England and Wales, can the Minister confirm the role of the Welsh Government in the drafting process? Secondly, can the Minister detail how the Government decided on a fee of £1.64 when data is lodged for domestic properties and £1.89 for non-domestic properties? Finally, can the Minister confirm whether his department has estimated the impact of these regulations on compliance with energy performance certificates?
I also briefly raise the Government’s broader green homes agenda, of which this is a part. Earlier this month, the Public Accounts Committee said that the Government have no plans to meet climate change targets. Can the Minister confirm whether this is true? If not, how will the Government urgently support homeowners as part of a green transition to tackle the climate crisis?
Lord Greenhalgh (Con)
My Lords, I thank everybody for this short debate in Grand Committee considering the draft regulations and for the many cricketing metaphors, as well as the reference to the important rugby match taking place at the weekend. I am sure we can all agree that this is one of the shorter and easier instruments that we have been asked to debate.
The proposed statutory instrument will reduce the fees that are chargeable when statutory data is lodged to the energy performance of buildings register. The reduction is possible because the Government have invested in modernising the register by using new information technology and the latest software development techniques. The register service is now hosted on a cloud-based digital platform that is managed in-house, with lower running costs, the benefit of which can be passed on to fee-payers.
The noble Baroness, Lady Wilcox, asked how the fees were calculated. Noble Lords will be reassured that we aim for a cost-neutral service over time. As I said in my opening speech, there is no desire to profit from this. The fee modelling indicates that the data lodgement fees can be reduced, and the cost of the service has been calculated in line with government policy as set out in Managing Public Money from Her Majesty’s Treasury. The registered service costs from April 2021 to March 2022 have been modelled at £2.25 million, and our forecast fee income over the same period will deliver approximately the same amount from a projection of approximately 1.36 million data lodgements.
In response to the noble Lord, Lord Addington, I say that there are very clear benefits from these EPCs. They provide policy-makers and markets with information about the energy efficiency of the building stock as well as supporting and encouraging individuals to make informed choices about how to improve the energy efficiency of their building. Increasingly, government policies such as minimum energy efficiency standards in the private rented sector, the renewable heat incentive, which supports installation of renewable energy production, and the Green Deal, which supported installation of energy efficiency measures, have relied on buildings having a current EPC and being linked to achieving a specific EPC rating. The most recent green homes grant, which helps with installing energy-efficient and low-carbon heating improvements to homes, also makes use of the recommendations set out in the EPC where one is available for the property concerned. I assure the noble Lord, Lord Addington, that the Government are delivering an action plan to explore better ways to identify non-compliance and review penalties, provide better consumer information and improve the quality assurance of EPCs, including better oversight, accountability and formal error reporting.
I am surprised that both my noble friends in energy efficiency—the noble Lord, Lord Addington, and my noble friend Lord Moynihan—talked about the difficulty of accessing the data. My understanding is that there is open public access to the register and on the website you can access records by address search or EPC reference numbers, so it should not be too difficult to access the information.
I thank my noble friend Lord Lansley for his policy ideas. One can see that he has tremendous experience of heading up policy thinking, and indeed implementing it as a very distinguished Cabinet Minister. Retrofit is important, but that policy area is very much led on by BEIS, and it would certainly require some thinking about how to operate that. Of course, as he pointed out, any changes to the way we collect the stamp duty land tax would require support from the Treasury. It is an important point that we consider ways in which we can drive the agenda of getting homes to be more energy efficient, and obviously, as he outlines, the existing stock requires retrofitting. However, I will take forward his policy ideas with some enthusiasm. I completely agree with the broad point that very often tax incentives are a better way of achieving policy objectives than direct grant funding.
In response to my noble friend Lord Moynihan, I take the opportunity to highlight that the Government have a plan around this. We set the future homes standard, which is very clear about the need to produce at least 75% lower CO2 emissions than current standards. That is for our homes but, equally, the future building standards consultation, which was launched in January 2021 and which will close on 13 April, will set a future buildings standard. By having these standards and then having a suite of measures, including the energy performance certificate, I am sure that we will be in a position where we can deliver on the Government’s promise of a zero-carbon economy.
I have certainly done my measured best to deal with the variety of questions that have been thrown at me from my colleagues. If I have not done so, I am happy to follow up with them in writing if necessary. I hope that noble Lords have found the debate informative and will join me in supporting these regulations.
The Deputy Chairman of Committees (Lord Caine) (Con)
My Lords, despite my having a wealth of cricketing metaphors, the umpire will put the Question. The Question is that this Motion be agreed to.
The Deputy Chairman of Committees (Lord Caine) (Con)
The Grand Committee stands adjourned until 4.30 pm. I remind Members to sanitise their desks and chairs before leaving the Room.
Arrangement of Business
The Deputy Chairman of Committees (Baroness Garden of Frognal) (LD)
My Lords, the hybrid Grand Committee will now resume. Some Members are here in person, respecting social distancing, and others are participating remotely, but all Members will be treated equally. I must ask Members in the Room to wear a face covering except when seated at their desk, to speak sitting down, and to wipe down their desk, chair and any other touch points before and after use. If the capacity of the Committee Room is exceeded, or other safety requirements are breached, I will immediately adjourn the Committee. If there is a Division in the House, the Committee will adjourn for five minutes.
Corporate Insolvency and Governance Act 2020 (Coronavirus) (Change of Expiry Date) Regulations 2021
(3 years, 7 months ago)
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Lord Callanan
That the Grand Committee do consider the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Change of Expiry Date) Regulations 2021
Relevant document: 46th Report from the Secondary Legislation Scrutiny Committee
The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)
My Lords, these regulations were laid before the House on 11 February. We have shared a long and difficult journey since restrictions were first needed in March 2020. As individuals, we have had to endure the very necessary but nonetheless difficult requirement to socially distance, with limits on where we can go, what we can do and who we can see. That, of course, has had an impact on businesses, with many having to close temporarily, and many more being able to trade only under very tight restrictions.
I am sure noble Lords all shared my sense of optimism when, on 22 February, the Prime Minister was able to set out the road map for the staged lifting of restrictions in England, with plans for Scotland and Wales being published by the devolved Administrations soon after. We can at last look forward to a return to normality in the months ahead. This would not have been possible without our wonderful NHS workers, both in their caring for sufferers from the virus and in their astonishing efficiency in the successful rollout of our unprecedented vaccination programme. Over the next few weeks, businesses that have been closed for many months will be able to reopen and trade, initially subject to certain limitations but, if all goes well, free of restrictions in parts of Great Britain from late June.
Noble Lords will recall that the Corporate Insolvency and Governance Act 2020 provided urgent support for businesses severely impacted by the effects of the pandemic. Temporary measures such as suspension of the use of statutory demands and restrictions on winding-up petitions, and the suspension of personal liability for wrongful trading, were put in place to allow viable businesses the best possible opportunity to survive.
New insolvency and business rescue procedures were also introduced, which will allow companies breathing space to decide on the best course of action in the face of financial distress, or to use a new formal restructuring process. As a contingency, and to enable the Government to rise to meet unexpected challenges and strains on the corporate insolvency regime as a result of the pandemic, the Act provided the Secretary of State with a general power to make temporary amendments or modifications to the effect of specified insolvency and governance legislation through regulations.
This power was needed because at that time we just did not know what the future would bring. We had hoped, of course, that the pandemic would have run its course by autumn last year, but, sadly, as we all know, that turned out not to be the case. The general power meant that the Government could act quickly to make the urgent changes needed to prevent unnecessary insolvencies, to allow the regulatory and administrative frameworks to deal with any impact of the pandemic on case numbers, and to mitigate the impact of the legislation on the duties of those with corporate responsibility.
As this was such a wide power, its use was restricted. It can be used only for the purposes I have just mentioned, and only where the temporary change was in response to the impact of the pandemic. The general power can be used only where the need is urgent, the provision being made is a proportionate response to the challenge being met, and exercising that power is the only way to achieve the desired outcome. In addition, the Secretary of State has a duty not only to assess the impact of using the power on those affected by any changes but to keep any regulations made using the power under review and to revoke them if they are no longer needed.
The legislation creating this general power also specified that it would sunset on 30 April 2021, although that date could be extended by further regulation. The original expiry date for the general power was set when we all hoped that the pandemic would be over and life would return to normal by the autumn. It would allow the power to be used while businesses were recovering and adapting to life after the virus.
While we were of course hoping to be free of restrictions in June, businesses have suffered the impacts of the virus for a year now, and we may need to be able to use the general power while the economy recovers. The unprecedented package of Government support which has been put in place has so far allowed as many otherwise viable businesses as possible to survive, saving jobs and livelihoods in the process. But there is of course no question of it being business as usual as soon as lockdown restrictions are fully lifted. Indeed, the Office for Budget Responsibility is not expecting the economy to have fully recovered until the middle of next year.
These regulations use a power in Section 24(3) of the Corporate Insolvency and Governance Act 2020 to extend the sunset date of the general power, and will mean that the Secretary of State will be able to use it for a further year. Extending the period during which we can use the general power will mean that we can continue to be able to act quickly should the need arise, to give the best opportunities to allow viable businesses to survive the pandemic, and, in the process, save jobs and livelihoods.
The general power could, in addition, be essential to any strategy that we need to deal with any extraordinary pressures on the administrative and regulatory regimes. I can reassure noble Lords that the Government’s ability to extend the life of the general power is not open-ended. In particular, any further extension of the power is limited by Section 24(4), which prohibits the power being exercised after 24 June 2022—that is to say, for two years, starting with the day after the Act conferring the general power was passed.
It is important to note that these regulations do not introduce a new power but rather extend an existing one which we think is still needed. The general power has been used once since its creation to revive the suspension of personal liability for wrongful trading when national restrictions were reintroduced late last year. That suspension has not been extended, due to the apparent improvement in trading conditions at the time of its expiry at the end of September.
There are no specific plans to use the power again at present, but this could of course quickly change, and it remains an essential part of our toolkit in dealing with the impact of the pandemic on business. I commend these draft regulations to the House.
Baroness Neville-Rolfe (Con) [V]
My Lords, I thank my noble friend for his explanation of these regulations, which extend the powers to regulate that we agreed last year during our lengthy debates on the Corporate Insolvency and Governance Act for a further year, until April 2022.
We know from the report by our hard-working Secondary Legislation Scrutiny Committee that the power has been used only to suspend temporarily the personal liability incurred by company directors through wrongful trading. As my noble friend said, that has not been renewed, so I cannot see why a wide-ranging power of this kind needs to be extended—and extended for a whole year. If necessary, I would have favoured a more focused provision and a six-month extension.
It is dangerous to take too much power in regulations. I do not favour the method apparently adopted by the ancient Greek state of Locris, where proposers of law change stood with a noose round their neck, ready to be hung should the proposal be rejected. However, every burden placed on business and society makes someone poorer, and we need to outgrow the juvenile temptation to meddle, using strong, grown-up powers. Perhaps my noble friend can reassure me by outlining the circumstances in which he thinks he might need to use these powers.
From the Back Benches it has seemed that BEIS, the Minister’s department, has dealt with Covid relatively well. Instructed to bring in extensive controls on business, it tried its best to consult and find ways around problems like insolvency and access to business, retail, hospitality and other premises. Several sectors of the economy have kept working better than in the first lockdown. BEIS has also been a critical player in the success of vaccines, which, like all victories, has many fathers, to pick up an observation of President John F Kennedy.
However, the voice of business and economics has not been heard loudly enough. This is part of the reason that the programme of lockdown is far too lengthy. Each day of lockdown takes the country closer to a potential financial crisis, especially as bond yields start to move up. In what amounts to a reverse takeover, the objective of BEIS has become:
“Building a stronger, greener future by fighting coronavirus, tackling climate change, unleashing innovation and making Britain a great place to work and do business.”
There seems to be very little emphasis on the success of British businesses, large or small, which create the wealth and pay the taxes that finance hospitals, schools, transport and social care, let alone unfashionable causes like the police and defence.
In the wider health sphere, our approach to Covid has failed. Our handling of the epidemic, which is not the Minister’s fault, has undone years of progress in the NHS and threatens a decade of excess deaths. According to a left-wing think tank, IPPR, disruption to healthcare will be felt for 10 years. There will be 4,500 needless cancer deaths this year alone and doctors’ appointments are down by 31 million.
In terms of mass suffering, we need to add the impact of the pandemic on mental illness and social care. That does not allow for the agony of people, especially the elderly, being unable to see family and friends. Nor does it count the cost to the young unemployed or to those who have built up businesses only to see them go bankrupt—just visit the centre of a relatively prosperous town like Salisbury, my local town. This contrasts with the United States, which has been more confident, less fearful, kept its economy going well and is on course to match our record in vaccination in a few weeks’ time. Sadly, one has to conclude that it is a better friend to business, innovation and enterprise than we sometimes are.
In closing, I thank my noble friend for his letter of today and ask when we will be able to debate the changes to company law announced by the Business Secretary. As a non-executive company director who takes my responsibilities seriously and as an ex-company secretary, I am alarmed by these proposals. They seem bound to have the perverse effect of discouraging skilled people from taking positions on the boards of companies that need their help. Blaming business, as some seem to be, is not the way to rebuild confidence.
Indeed, unlike parts of government, business has done superbly during the pandemic—think of the food supply chain and the supermarkets, AstraZeneca, construction; think of the adaptability of and investment by pubs and restaurants still unable to open.
I am sure that the Minister will not wish to reply now, but I urge him to prepare a full impact assessment, not only of the benefits of these proposals but of all the risks and the costs including, perversely, the extra accountancy charges that businesses will have to pay. We need to think very carefully about these changes and consider what could be achieved by better enforcement of existing rules.
More broadly, we need an end to the fantasy that we can make things work perfectly by passing new laws. I know that my noble friend was a Brexiteer, and that a driver of Brexit thinking was getting rid of EU rules and ending Brussels bureaucracy—a cause I support. It would be unwise now that Brexit is finally secured to abandon this path.
Lord Sikka (Lab) [V]
My Lords, I am very grateful to the Minister for the explanation of the regulations. It is also a great pleasure to follow the noble Baroness, Lady Neville-Rolfe, and to add to some of the comments that she has made. I am sure that many businesses welcome the extension of what were supposed to be temporary measures, especially as they struggle to re-establish themselves. At the same time, some may well resent it, because they may argue that it constrains their ability to recover money from some businesses.
Overall, I am inclined to support what the Minister has announced. Nevertheless some industries, such as aviation, hospitality and event management, will need support beyond the period from 2022, and it would be helpful for the Government to consider the specific circumstances of various industries and businesses in considering what happens over the next three to four years. The Government need a transitional plan, as it would give businesses some certainty about what is coming their way in the next two to three years. Many businesses will still face a cliff edge in that, when these measures come to an end, floodgates to insolvency will open. Those unable to pay landlords or suppliers will definitely face an uncertain future so transitional help, focusing on their particular problems, would be helpful.
The Government could and should have done more; they could have increased the survival chances of businesses by reforming insolvency practices and ensuring that unsecured creditors receive a fair share of the debts owed to them, but they have refused to act on that front. The high street is already reeling from bankruptcies. Bonmarché, Cath Kidston, Comet, Flybe, Maplin, Monarch Airlines, HMV, House of Fraser, Payless shoes and Toys“R”Us are just some of the victims of asset-stripping by private equity. Their ranks are now swelled by Debenhams. Private equity invests little in equity and usually installs itself as a secured creditor, which means that it needs to be paid before unsecured creditors can recover anything from the proceeds of the sale of a bankrupt business’s assets. These insolvency arrangements have no economic or moral logic from a national perspective and are based on medieval practices that prioritise the interests of lenders over all other creditors. The Government could and should have investigated the predatory practices of private equity to create breathing space for supply-chain creditors, but they have not done so.
The survival of suppliers is also affected by the collapse of the Arcadia empire, and darker shadows loom on Liberty Steel and others. Most supply-chain creditors will be lucky to get a few pennies in the pound of the debts owed to them, and this will hit their survival chances, just when they need all the resources that they can muster. There is no logic in such insolvency arrangements, whereby the risks of insolvency are not fairly shared. The current arrangements throw a few crumbs to unsecured creditors and strangle many SMEs, which often rely on relatively few customers and stand to recover next to nothing.
The Government should have used the last year to reconstruct insolvency practices, but they did not. Last year, as the Minister knows, Labour put forward proposals for equitable sharing of insolvency risks, which would have ensured that unsecured creditors recovered substantial sums from their bankrupt customers and thus improved their chances of survival. I hope that the Government can still revisit those proposals, because they are worthy of consideration. The suppliers’ chances of survival are further hampered by the Government’s failure to effectively regulate the insolvency industry. Higher insolvency fees and longer time taken by insolvency practitioners to finalise the bankruptcy inevitably harms unsecured creditors.
By January 2021, PricewaterhouseCoopers, acting as special managers assisting the official receiver in the Carillion liquidation, had already collected nearly £60 million in fees. The London Capital & Finance administrators have collected nearly £8 million in fees. I have personally seen invoices from big accounting firms where their partners act as insolvency practitioners; they are charging themselves out at a rate of some £1,500 an hour. There is absolutely no justification whatever for this. Such huge fees directly deplete the amount available to unsecured creditors, but the Government have done nothing to curb such predatory practices. I am not aware of a single insolvency regulator who has even asked any questions about such high fees.
I am sure that the Minister will put up a spirited defence of the Government’s action on the insolvency front. However, they are not even curious about the welfare of unsecured creditors. On 14 January 2021, I asked the Government:
“how much unsecured creditors have been unable to recover from the bankruptcy of their corporate customers”.
On 28 January, the reply was:
“This information is not collated and held centrally.”
The Government have no idea of the size of losses faced by supply chain creditors, far less have they been helping them.
There is no control on insolvency processes, and practitioners can continue to milk distressed businesses for years. On 27 October 2020, the Minister informed me that 7,962 corporate liquidations were still open within five to nine years of commencement; that 3,642 incomplete liquidations dated between 10 and 14 years; and that 14,328 were incomplete even after 15 years. Do the Government know that these prolonged insolvencies destroy supply chains, since the cost of these huge fees is directly borne by unsecured creditors? Secured creditors do not bear a single penny of the cost of the insolvency practitioner. I urge the Government to help unsecured creditors by reforming insolvency practices and clamping down on rapacious practices, thus giving hard-pressed businesses, especially small businesses, a good chance of survival.
The Deputy Chairman of Committees (Baroness Garden of Frognal) (LD)
The noble Baroness, Lady McIntosh of Pickering has withdrawn, so I now call the noble Lord, Lord Lennie.
Lord Lennie (Lab) [V]
My Lords, I thank my noble friend Lord Sikka and the noble Baroness, Lady Neville-Rolfe, for their contributions to this debate, and I thank the Minister for introducing the new regulations. I do not imagine he thought they would be quite as controversial as they appear to be.
However, the regulations extend the Secretary of State’s powers to modify, temporarily, corporate insolvency or governance legislation in response to coronavirus until 29 April 2022. We repeatedly said during the passage of the Corporate Insolvency and Governance Act 2020 that we supported the changes the Government were making. We called many times for the end date of provisions to be delayed in order to support business through this difficult period. Businesses are still in distress, and the lockdown and business disruption will continue beyond the original date in the provisions—the end of April this year.
The system of business support that was set up for three months has not proven adequate for the length of time that the crisis is continuing. In truth, we do not yet know whether all the restrictions will be lifted after 21 June, when social restrictions are due to be ended. BEIS has said that the one-year extension reflects that, while there is a vaccination programme, with national lockdowns and other restrictions on normal trading continuing, the future impact of the pandemic on business and the insolvency regime remains at least uncertain. The Minister mentioned this in his introduction, but can he clarify whether the other measures in the Act will be extended, such as on wrongful trading?
It is only sensible to maintain the option of further extending the measures in the Act in this way: we have the worst economic recession of any country in the G7. Although the Covid support measures that the Government put in place have given business a stay of execution, we are concerned that we may still see a wave of insolvencies as support is withdrawn and the safety net dissolves.
Lord Callanan (Con)
I thank all noble Lords for their interesting and valuable contributions to this debate. The Government’s road map for the staged lifting of restrictions is cause for great optimism, and we can look forward to many businesses, including shops, pubs, and restaurants, being able to reopen successfully in April. But we have to recognise that these businesses and many others have suffered from the impact of the pandemic for a year now, and in many cases could take time to return to full pre-Covid financial health. The Government are determined to do whatever they can to continue to support businesses throughout this period of economic recovery. For example, many business owners and employees will have welcomed the Chancellor’s statement in the Budget that the furlough scheme will be extended to September this year.
All the same, traders and company directors will be having to assess whether full recovery of their businesses in a post-Covid economy is possible, and government financial support, along with the temporary easements in the Corporate Insolvency and Governance Act, must at some point be brought to an end. Having a power to use regulations to make temporary amendments to corporate insolvency and governance legislation, or modifications to its effect, will mean that we can continue to act quickly to meet the challenges which arise as a result of these uncertain times.
This was illustrated when the power was used to revive the suspension of personal liability for wrongful trading. This was a Corporate Insolvency and Governance Act 2020 provision which had expired at the end of September last year when trading conditions for many businesses had improved. Other temporary easements in the Act had been extended, but given the importance of wrongful trading as a protection for creditors and a deterrent to trading when insolvency proceedings are inevitable, the suspension was allowed to expire.
Sadly, as noble Lords will recall, there was a surge in infection levels in late October leading to national restrictions being reintroduced across Great Britain and businesses once again being required to close their doors. As a result, many company directors were once more faced with great uncertainty about their companies’ futures. Using the power to revive the suspension of wrongful trading meant that directors of companies which would have been viable but for the impact of the pandemic were able to make decisions as to whether they should continue to trade based solely on their knowledge and experience, rather than under the threat of becoming liable to contribute to the company’s debts themselves should insolvency proceedings then follow. This meant that unnecessary insolvencies could be avoided and is an example of how the power could be used going forward to save jobs and livelihoods.
My noble friend Lady Neville-Rolfe asked why we need the power for a further year. Although we now have a road map for the lifting of restrictions, the impact on businesses will continue after return to what we would call normality. The OBR predicts that the economy is unlikely to return to pre-Covid levels before the middle of next year, so we need to keep the power on the statute book until then. My noble friend also asked how we might intend to use the power. I am afraid I must say to her that, at the moment, we just do not know. There are no plans to use the power at present, but it is a contingency and we need to be in a position where we can meet urgent challenges quickly. If the worst happens, as the noble Lord, Lord Sikka, indicated, we may need the power as part of our strategy to deal with any increases in insolvency case numbers.
We also need to keep the power because, although the Prime Minister has now announced a road map for a gradual reopening, the impact of restrictions on businesses is likely to be felt beyond the point that we would consider to be full normality. As I have said, the OBR is expecting the economy to return to pre-Covid levels by the middle of next year, but we do not know for certain what will happen in the meantime. However, we do know that many businesses are struggling and may need protection. If we were to extend for less than a year and, as likely, a further extension was needed, we would be back here debating the same question in just a few months because of the requirement for debate before the extension can occur.
My noble friend Lady Neville-Rolfe referred to the audit reform proposals. The White Paper published this morning is not, of course, the subject of today’s debate, but I can certainly tell her that we have carefully thought through the director accountability proposals that she referred to. They would cover only the biggest companies, with turnovers into the hundreds of millions, and employing hundreds, or even thousands, of people. I think most people would think it appropriate that we ask directors of such companies to take a little more responsibility for the accounts and financial information produced by their companies. As I said, this will not apply to small business, to SMEs or to entrepreneurs, so I think I can put my noble friend’s mind at rest.
The noble Lord, Lord Sikka, asked what was being done to prepare for the approaching cliff edge of potential insolvency cases when government support measures and temporary easements end. Official statistics published by the Insolvency Service show that case numbers are still low in comparison with the same period last year, and it seems inevitable that there will be an impact on insolvency case numbers. This is being closely considered, and extending the power for a further year will allow any temporary changes needed to be made quickly. I thank the noble Lord for reminding the Government of the importance of closely monitoring the operation of the insolvency practitioner regulation regime.
The noble Lord, Lord Lennie, asked whether the other measures introduced by the Corporate Insolvency and Governance Act would be extended. We are considering that question at the moment, and I hope that we will be in a position to make an announcement shortly. I thank the noble Lord for asking about the other temporary measures in the Act, and I can assure him that they too are under close consideration; any announcement will be made shortly.
I think I have addressed all the points raised in the debate, and I thank all noble Lords who have contributed. I commend these draft regulations to the Committee.
The Deputy Chairman of Committees (Baroness Garden of Frognal) (LD)
My Lords, the hybrid Grand Committee stands adjourned until 5.30 pm. I remind Members to sanitise their desks and chairs before leaving the room.
Arrangement of Business
The Deputy Chairman of Committees (Lord Faulkner of Worcester) (Lab)
My Lords, the hybrid Grand Committee will now resume. If there is a Division in the House, the Committee will adjourn for five minutes.
Financial Reporting Council (Miscellaneous Provisions) Order 2021
(3 years, 7 months ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Callanan
That the Grand Committee do consider the Financial Reporting Council (Miscellaneous Provisions) Order 2021.
The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)
My Lords, I beg to move that the Financial Reporting Council (Miscellaneous Provisions) Order 2021, which was laid before the House on 8 February 2021, be approved.
The Financial Reporting Council, or the FRC, as I shall refer to it, is an independent regulator. It is responsible for regulating auditors, accountants and actuaries, and setting the UK’s corporate governance and stewardship codes. Following corporate failures such as BHS and Carillion, the Government have been working to understand and address shortcomings within the UK audit environment, including the role that the FRC as the regulator plays. As a result, the Government commissioned Sir John Kingman to conduct an independent review of the FRC. This review was commissioned in April 2018 and reported on 18 December 2018.
The FRC review made over 80 recommendations; its central recommendation was for a new, stronger regulator. The review indicated that the new regulator needed to be more transparent than the FRC had historically been and should be held to the same standards as other public sector bodies—including full compliance with the Managing public money handbook. The review also recommended that the FRC be subject to the Freedom of Information Act and the Regulators’ Code. These findings were supported by the Government and welcomed by the Business, Energy and Industrial Strategy Committee in another place.
Since the FRC review reported, the regulator has undertaken significant steps to strengthen its capabilities. Under new leadership, it has also begun to build the additional capacity needed to deliver on the ambitious mandate set out by the review. The FRC has also worked to streamline its governance structures and expand its stakeholder engagement. This order builds on the FRC’s progress in taking the non-legislative steps needed to implement the review’s recommendations on its internal workings.
Today represents another important milestone for audit and corporate governance reform. I am pleased that today we have published the Government’s White Paper Restoring trust in audit and corporate governance. It sets out a comprehensive and ambitious vision for reform of the corporate landscape and outlines the Government’s detailed proposals for further reform of the regulator. The instrument’s legislative measures are a further step forward on the path to transforming the FRC into a new, strengthened regulator. They apply the Freedom of Information Act, the Regulators’ Code and the public sector equality duty to the FRC.
I turn first to the application of the Freedom of Information Act to the FRC. As identified by the FRC review, currently only some of the FRC’s statutory functions are subject to the Freedom of Information Act. Since December 2019, however, the FRC has voluntarily complied with the provisions of the Act across the range of its work. This measure designates the FRC as a public authority for the purposes of the Freedom of Information Act so that all of its public functions are covered by the Act.
The Freedom of Information Act provides a general right of access to the public for information held by public authorities, subject to the exemptions set out in the Act. Public authorities are also obliged under the Act to produce and maintain a publication scheme approved by the Information Commissioner. The FRC was consulted on the application of the Freedom of Information Act and it supported the application of the Act to its public functions. Since the FRC is a public body, it is reasonable and proportionate that this measure is taken to apply the Freedom of Information Act to its public functions. In doing so, it will help to underpin trust and confidence in the regulator.
I turn now to the Regulators’ Code measure. The FRC is already subject to the code in respect of some of its regulatory functions. This order will apply the Regulators’ Code to all of the FRC’s regulatory functions, except for those that it has delegated to the relevant professional bodies. The code aims to encourage proportionate and consistent regulatory activity; it also promotes trust, open dialogue and accountability between the regulator and those that it regulates. Application of the code by legislation will enable the FRC to be more accountable and bring it into line with other regulators who are subject to the code in this way. It will encourage greater transparency for regulatory delivery, allowing the FRC to target its resources better. This in turn will support the FRC’s delivery of high standards of audit, reporting and governance in the UK. The Government have worked closely with the FRC and the relevant professional bodies and have consulted them regarding this measure. All the parties consulted support the application of the Regulators’ Code to the FRC through secondary legislation.
I turn to the public sector equality duty measure, which will add the FRC to the list of public bodies that are formally subject to this duty. At present, the FRC is subject to the public sector equality duty only in respect to the exercise of its public functions. The measure expands this so that the FRC itself will be subject to the public sector equality duty in respect of all of its functions. Sir John Kingman’s review of the FRC recommended that the regulator should fully consider and assess equalities impacts in its work. This measure will support that recommendation.
Those subject to the equality duty must: eliminate unlawful discrimination, harassment and victimisation and other conduct prohibited by or under the Equality Act 2010; advance equality of opportunity between people who share a protected characteristic and those who do not; and foster good relations between people who share a protected characteristic and those who do not. The term “protected characteristic” refers to those characteristics covered by the equality duty and includes age, disability, pregnancy and maternity, race, religion or belief, sex and sexual orientation and gender reassignment. This order means that the FRC will need to consider the objectives of the public sector equality duty in its oversight of those it regulates. Additionally, as the FRC is the regulator that sets the UK Corporate Governance Code, it promotes diversity reporting to the UK’s largest companies. It would only be right that the FRC itself was subject to the public sector equality duty in full. This measure will ensure that equality is considered as an important aspect of the regulator’s day-to-day activities.
In March 2019, in their initial response to the FRC review, the Government committed to replace the FRC with a new independent statutory regulator with stronger powers. The new regulator, the audit, reporting and governance authority, will be a stronger regulator underpinned by legislation. It will have stronger enforcement powers and will be funded by a mandatory levy on the industry that it regulates. The White Paper published today sets out the Government’s proposals in more detail. The Government intend to bring forward the necessary primary legislation to create the new regulator when parliamentary time allows. But we want to press forward with measures such as those in this draft instrument. They do not need to and they should not wait. These measures will ensure that the FRC is more transparent and accountable to the public as well as to the businesses and professions it regulates. It will also bring the FRC into line with the requirements of similar public bodies. These measures are therefore a further step down the road to creating the new regulator.
I conclude by emphasising that I see the measures contained in this order as important since they will help to bring about greater transparency on the part of the FRC. I hope that noble Lords will support them and commend the draft order to the House.
Lord Davies of Brixton (Lab) [V]
My Lords, I declare my interest as a fellow of the Institute and Faculty of Actuaries, which in some areas is subject to regulation by the FRC. I thank the Minister for his detailed introduction. To a certain extent he has shot my fox. I was intrigued as to the conjunction of these two events—the publication of the White Paper and the statutory instrument today—and he has made it absolutely plain that it was not a coincidence. It was a coincidence to me but, clearly, it was part of a deeper plan, and I feel that it might have been better if those who like myself were coming from outside to the issue had understood that beforehand. My contribution might have been a bit more effective. But still, it is right and proper that the Government should do what they can to implement proposals in this area, and I support the regulations.
Could the Minister say a little more about the timing of the process? It is happening now, but it is happening to an organisation that is on its way out. We are to have the new audit, reporting and governance authority which the Government say will have these clearly defined roles, one of which is to protect and promote the interests of investors, other users of corporate reporting and the wider public interest. How do those things tie together? Could we have a few brief remarks about that?
There are three substantive parts to the order. First, there is the public sector equality duty, which obviously is something that we agree with. The issue of why it was not done before comes to mind, but we shall pass over that. The second leg of the instrument is the extension of the freedom of information requirements. Obviously, that is to be welcomed as well. However, the Minister seemed to imply that all the relevant statutory functions of the FRC and its successor will be subject to the requirements, but all we have is a list—and when we are given a list I always wonder what is not on it. Is there any way for the Minister to explain what has not been included and, if it has not been included, why it has not been? If it is all there, that is fine, but an assurance that that is the case would be welcome.
I just want to say a bit more about the third leg, which is the obligation to follow the principles in Section 21 of the Legislative and Regulatory Reform Act 2006 and under Section 22 to follow a code of practice. I want to highlight the key part. In fact, Section 21 is very brief and pretty vague; it says that the principles are that
“regulatory activities should be carried out in a way which is transparent, accountable, proportionate and consistent”.
Well, yes, of course they should. It then says that
“regulatory activities should be targeted only at cases in which action is needed”.
But if you put the converse to those principles, you are left a bit in the air. Are there really people out there keen to apply regulatory activities to cases where action is not needed? It is a statement of the obvious.
We have to turn to the Regulators’ Code for a bit more substance. This puts a bit more meat on the bones of the principles. It is interesting to see that the regulators’ purpose is supposed to be:
“to regulate for the protection of the vulnerable, the environment, social or other objective.”
That is just one of the principles in the code, and those are fairly lofty objectives.
The code also says:
“When designing and reviewing policies, operational procedures and practice, regulators should consider how they might support or enable economic growth for compliant businesses and other regulated entities, for example, by considering how they can best … understand and minimise negative economic impacts of their regulatory activities”.
It also says that there should be
“simple and straightforward ways to engage with those they regulate”.
That is all fine and dandy, but this is what the Regulators’ Code says at the end, on the final page, about monitoring the effectiveness of the code:
“The Government will monitor published policies and standards of regulators subject to the Regulators’ Code, and will challenge regulators where there is evidence that policies and standards are not in line with the Code or not followed.”
I suppose that, to an extent, the White Paper is a reflection of the Government’s intention, but I think that the word “monitor” implies something more regular and consistent. So the one big question I am raising today is this: do the Government actually have a system for monitoring all the work of all the regulators subject to the code? There are a lot of them—I understand that—but what is the Government’s approach to monitoring their activities? How can we avoid the situation that we have with the FRC, whereby things got to a pretty pass before action was taken? Maybe a more consistent, measured and regular approach to enforcing the code would be appropriate.
Baroness Wheatcroft (CB) [V]
My Lords, I thank the Minister for the way in which he introduced this statutory instrument, and I am delighted to follow the noble Lord, Lord Davies. His final point was very interesting, and I would be interested to hear how the Minister will address the issue of how one monitors the regulators. As the noble Lord said, there are so many of them. What they do is important, and they need to be held to account.
On one level this is a perfectly straightforward SI, imposing three new and perfectly reasonable duties on the FRC. But the anomaly is the FRC itself. In December 2018, in his review of the organisation, Sir John Kingman described it as the equivalent of
“a rather ramshackle house, cobbled together with all sorts of extensions over time.”
In other words, it was not fit for purpose—a verdict that the Government themselves accepted the following March, in welcoming the review.
They were equally supportive of the findings of the Competition and Markets Authority, which called for significant changes to the way in which the audit profession operates in the UK. Indeed, the Queen’s Speech in December 2019 stated as one of its priorities the reform of auditing.
What we have here is just another extension to that rather ramshackle house, which is becoming increasingly unstable. I know that the Minister acknowledged the need for root and branch reform, and for the new regulatory authority that will eventually come to us, but here we are, in March 2021, debating a minor SI relating to the still-extant FRC.
The letter that we received this afternoon—what a wonderful coincidence of timing—tells us that the White Paper is coming out and that there will be reform. It all sounds very promising, but my first question to the Minister has to be: when does he think, realistically, that we might see legislation on this, and the emergence of the new accounting regulation and governance authority?
In the meantime, we remain dependent on the FRC to conduct this crucial work and its governance is in flux. In October 2019, Simon Dingemans took over as interim chairman. This turned out to be even more of a temporary post than most had expected; in May the following year, he was lured away by private equity. He was replaced, although not until the following October, by Keith Skeoch but this was declared to be for a term of no more than six months. My second question to the Minister is: does he have a successor lined up for 12 April? It seems that the FRC will be with us for a while to come and, at the moment, I am unaware of who is going to be leading it.
It is important that the equality duty in this SI should certainly be imposed, as the Kingman review found that very few roles at the FRC actually went through an appropriate recruitment process. That might have done more to improve the gender pay gap there, which is still quite pronounced. Reform of the organisation is clearly needed urgently, as is reform of the audit profession. It continues to disappoint. In 2018, the fines levied by the FRC against the big four accountancy firms trebled. Last year, a record fine of £15 million was levied against Deloitte. But it does no good for the credibility of the audit profession if all of the big four firms are regularly seen to be guilty of misleading accounts, and misleading the investing public—and the public more generally.
The proposal we have seen in the White Paper is that there should be compulsory joint audits. But the original suggestion was that the smaller audit firm taking part in these joint audits should be jointly liable, with the larger firm, for anything that went wrong and resulted in action and fines. As far as I can see, that is absolutely unworkable. As my third and final question, can the Minister say whether he believes that there will be equal liability on these smaller firms—the challenger firms—that will be brought into joint audits, or that a more reasonable system of liability will be brought into play?
Lord Sikka (Lab) [V]
My Lords, I will make my comments in two parts. I will comment first on the legislative order and, secondly, taking my suit from the Minister, say a few words about the White Paper as well. On the legislative order, the Financial Reporting Council has really led a shadowy existence for far too long. Since 2004, the FRC has had the status of a public body and should therefore have been subjected to the full application of the freedom of information legislation, but it was not.
On 29 June 2018, the Department for Business, Energy and Industrial Strategy told the House of Commons, in a Written Answer:
“All our regulatory bodies are subject to the Freedom of Information Act 2000 with the exception of the Financial Reporting Council which is subject to the Act for some but not all of its functions.”
Over the years, I have put in many freedom of information requests to the FRC, some relating to the secondment of staff from the big four accounting firms, its complaints procedures and the quality of investigations. Every one of them was rejected so it is good, to some extent, to see a modicum of openness. I assure the Minister that I shall soon test this new-found openness and see how far it goes. Nevertheless, I have a number of concerns about the legislative order and, more importantly, its omissions.
First, despite the government claim, which I just cited, that all our regulatory bodies are subject to the Freedom of Information Act 2000, why are the four accountancy trade associations acting as recognised supervisory bodies not within the scope of freedom of information legislation? The four trade associations are the Association of Chartered Certified Accountants, the Chartered Accountants Ireland, the Institute of Chartered Accountants in England and Wales and the Institute of Chartered Accountants of Scotland. They carry out public functions and are named as regulators in the Companies Act 2006. They licence, monitor and discipline auditors. Their role is similar that of the FRC. So why are they totally exempt from freedom of information requirements?
Secondly, Article 4(1)(c) of the order refers to “accounting standards” but no mention is made of “auditing standards”, which are also issued by the FRC. I hope the Minister can shed some light on that omission.
Thirdly, Article 4(1)(m) of the order refers to:
“providing independent oversight of the regulation of the accountancy profession”.
No further details are anywhere to be seen. Is it reasonable to assume that in the Government’s view the FRC is now responsible for ensuring good governance of all accountancy trade associations?
Fourthly, despite claims of openness, or advances in openness, the FRC, which, as was mentioned, will soon morph into ARGA, has in fact regressed in some areas. Let me provide two examples. The first is its press release dated 2 April 2020 with the headline
“Sanctions against KPMG and a partner”
and the second is dated 6 November 2020 and headed
“Sanctions against Deloitte and a partner”.
In both cases, the firm delivering the failed audit has been named, but unlike the past practice, the identity of the company receiving the poor audit has been concealed. Why is that? Do the stakeholders of those companies not deserve to know that dud audits have been delivered? Armed with that information they can question auditors and directors, and make informed decisions about auditor appointment, fees, investment, credit, reliance on the audited information and much more. The FRC’s regression is not compatible with the Government’s claim of new openness at the FRC.
Fifthly, the so-called openness at the FRC is not accompanied by open board meetings. I am sure the Minister would acknowledge that the FRC does not discuss troop movements or the position of spy satellites, so this obsession with secrecy and keeping the people out is hard to understand. In the US, the Financial Accounting Standards Board holds all its meetings in the open and makes full minutes and background papers available to any interested party. The same is also true of the Swedish Accounting Standards Board. As we know, openness always promotes public confidence and accountability, so why are the Government afraid of writing in open board meetings in the current legislative draft or in some other ways? Why is the UK to be a laggard in such matters?
Sixthly, the FRC publishes its board minutes, but they are sanitised and have virtually no information content—I have seen them. Paradoxically, individuals sitting on its board and various committees come from corporations and big law and accounting firms and have full access to all inside information. It must inevitably inform their worldviews and policy options discussed within their organisations. Yet the other stakeholders affected by the FRC’s decisions and policy choices do not have access to the same information and must therefore be disadvantaged in any negotiations, lobbying and framing of accounting and auditing rules. Why are the Government content with this kind of information apartheid? It is almost legalised.
Seventh, the legislative order before us is full of words such as “independent” and I struggle to know what the Government mean. The FRC is not independent of corporations and big accounting firms as their personnel have colonised the FRC board, committees, working parties and its world views. Corporate thinking informs the FRC’s operation and, inevitably, there is cognitive capture. Neither is the FRC independent of the International Accounting Standards Board, which issues international accounting standards that in many cases are simply rubber stamped by the FRC. I am sure the Minster is aware that the IASB is an offshoot of the IFRS Foundation, which is registered in the US state of Delaware for the sole reason of avoiding taxes on all the income and charitable donations it receives. Is that a good way to be setting accounting standards, with somebody holed up in Delaware and keen to avoid taxes? That is not really appropriate.
It would be helpful to know what exactly the FRC is independent of. What are the tests the Government will specify we should apply to test whether the FRC passes those marks? It would also be helpful for the Minister to tell us whether any part of the FRC’s operations are not subject to the Freedom of Information Act and why they are excluded.
I will say a few words about the White Paper. For the last 20 years, the auditing industry has led a charmed life. Most of the urgently needed reforms have been postponed. The White Paper does not really tackle any of the fundamental issues. I am sure the Minister is aware that the FRC has said that up to 80% of the audits in its samples are deficient. Can you imagine if any producer of cars, aeroplanes, medicines or food had an output that was 80% deficient? That industry would be put out of business and taken into special care, not allowed to play its selfish games.
In my view, the White Paper misses the fundamental points and it does not address those things. In the White Paper there is a memorable line about share- holders being company owners. Can the Minister refer me to any economic theory, legal theory, or anything in the Companies Act which says that shareholders are owners of companies? Shareholders may have controlling rights, but they have absolutely no ownership; that is something entirely different. For the last 100 years we have been relying on shareholders. Where exactly has that got us?
I was an adviser to the Work and Pensions Committee for the investigation of BHS. Shareholders appointed the auditors and everybody else, and we all know what the outcome was. In many ways the Government are reciting the past failures and repeating the past mistakes—
Baroness Sanderson of Welton (Con)
Can I remind the noble Lord of the 10-minute speaking limit?
Lord Lennie (Lab) [V]
My Lords, I thank the Minister for introducing this and my noble friends Lord Davies and Lord Sikka for their comments, particularly the comment made by my noble friend Lord Davies about the monetary not the monitors, and the comments of my noble friend Lord Sikka about freedom, secrecy and independence. I thank the noble Baroness, Lady Wheatcroft, for her examination of the FRC being unfit for purpose and its gender gap issues.
The regulations impose new duties and regulatory requirements on the Financial Reporting Council, which is currently the independent regulator responsible for regulating auditors, accountants and actuaries and setting the UK’s corporate governance and stewardship code. These regulations impose specific duties on the FRC relating to freedom of information, the Regulators’ Code and the public sector equality duty. However, as Sir John Kingman’s review in December 2018 made clear, it was an institution with “leaks and creaks” and required fundamental reform.
We were first promised a new audit, reporting and governance authority in 2019, but the Government have since dithered on that promise. The Minister in the other place today published a White Paper to try to put an end to corporate scandals. We will examine it closely in due course and respond in detail, but it appears at the outset that the Government are rowing back from the proposals to tighten corporate reporting requirements. When exactly do the Government intend to legislate? The SI does not give much hope that it will be any time soon, and the White Paper consultation is set to run until July 2021.
I have some initial questions about the new proposals. The new regulator will be established as a company limited by guarantee. How was this decided? The Government note that the largest audit firms are already working with the Financial Reporting Council to implement the CMA recommendations on a voluntary basis by 2024. How is that work progressing? The Government disagree that the regulator intervening to take over the running of an audit firm, albeit on a temporary basis, would be proportionate or effective. How did the Government reach that conclusion, and what advice did they receive on that issue?
In 2017, the Department for Business, Energy and Industrial Strategy concluded that the FRC’s work should comply with all relevant public body guidelines. In 2018, the Government commissioned an independent review that recommended that the regulator be subject to the Freedom of Information Act. A couple of years ago, the FRC voluntarily adopted compliance with the codes, so the SI will not fundamentally change the FRC’s approach, but it is welcome that the compliance is to be put on a statutory footing.
However, with the disbanding of the FRC and its replacement with ARGA, are we not passing this SI somewhat too late? Labour supports the changes but wonders why they are being made now, on the very same day as consultation proposals to give birth to the new audit, reporting and governance authority are published.
Lord Callanan (Con)
I thank noble Lords who have contributed to this debate. The points that we have been discussing highlight the need for the measures contained in this order and emphasise the beneficial impacts they will have on the Financial Reporting Council and those that it regulates.
Reliable audit and corporate reporting are critical to well-functioning markets, business investment and growth. A transparent and effective regulator has a vital role in assisting the UK economy to realise these benefits. These measures will help the regulator meet the goal of ensuring that the UK maintains and advances its status as a place of the highest standards in audit and corporate reporting. They are a crucial part of the Government’s commitment to acting on the findings of Sir John Kingman’s independent review.
The noble Lord, Lord Davies of Brixton, asked about the timing of the SI given that the FRC is on the way out, and wanted to understand what we might not be applying to the regulator. He also asked how the Government enforce the Regulators’ Code. Establishing the new regulator, ARGA, requires primary legislation, and the Government intend to introduce that when parliamentary time allows. We think it is right to ask the FRC to start now, as we mean the new regulator, ARGA, to go on in this vein.
The Deputy Chairman of Committees (Lord Faulkner of Worcester) (Lab)
My Lords, there is a Division in the Chamber. The Committee will adjourn for five minutes.
Lord Callanan (Con)
To resume, the FRC did not start out as a public body. Since its creation in the 1980s, it has slowly accumulated public functions to the point that it has more recently been classified as a public body. Certain statutory functions of the FRC are already subject to the FoI Act. As the FRC is now a regulator acting in the public interest, we think it is right to extend the FoI Act to cover all the FRC’s public functions.
The noble Lord, Lord Davies, and the noble Baroness, Lady Wheatcroft, asked whether the Government have a system for monitoring the work of all regulators. In monitoring these regulators, the FRC is required to report annually to the Secretary of State on its activities relating to the oversight of statutory auditors, and that report must in turn be laid before Parliament. We have proposed yet stronger arrangements in relation to ARGA.
I answered the question the noble Baroness, Lady Wheatcroft, asked about when we might realistically see legislation. The answer to that is, I am afraid, the standard one: when parliamentary time allows. Now that we have published the White Paper setting out our intentions for the new regulator, the Government will recruit a permanent chair of the FRC. We are making these changes as laying the foundation for the new regulator, not extending the FRC’s house.
The noble Baroness, Lady Wheatcroft, and the noble Lord, Lord Lennie, also asked why we are still waiting for these changes. We are intending to legislate as soon as parliamentary time allow us, and ARGA will of course come into being thereafter. However, I cannot give any guarantees as to when it is likely that will be.
The noble Lord, Lord Sikka, raised a number of comments about the order. The FoI Act obliges public authorities to publish certain information about their activities, and entitles members of the public to request information from public authorities. As RSBs are independent professional bodies rather than regulators, we do not believe it would be proportionate to subject them to the Freedom of Information Act.
On the point about referring to accounting standards rather than auditing standards, the new UK endorsement board, not the FRC, will be the body to endorse and adopt international financial reporting standards in the UK. The FRC has exercised some oversight of the RSBs, hence this function should be subject to freedom of information. The Regulators’ Code will promote openness at the FRC. Access to the FRC’s board meetings is, of course, a matter for the FRC itself. Although the FRC has staff from companies and the industry, its chair is appointed by the Secretary of State.
In response to the noble Lord, Lord Lennie, who asked why we disagreed with the regulator taking over the running of a failing auditor, we think this would be a fairly major step and we are not totally convinced of its likely effectiveness.
The noble Lord, Lord Lennie, also raised the point that ARGA will be a company limited by guarantee. The creation of ARGA will be achieved by renaming and reconstituting the FRC, which is a company limited by guarantee at the moment, at the same time as making substantial changes to its functions. The Government will legislate to rename the existing body and make provision for its internal governance, as will be set out in its articles of association. We are clear that ARGA will be a regulator with teeth, backed by legislation. It will be funded by a mandatory levy on industry and given much stronger enforcement powers. The Government consider that this approach has the advantage of minimising the transitional costs which would be involved in setting up a new, statutory corporation.
The important measures in the order ensure that the FRC will be designated as a public authority in respect of its public functions for the purposes of the Freedom of Information Act; that all the FRC’s regulatory functions will be subject to the Regulators’ Code; and that the FRC is added to the list of public bodies which are explicitly subject to the public sector equality duty. As a result, its responsibility for adherence will be clear. Compliance on a statutory level with the Freedom of Information Act, the Regulators’ Code and the public sector equality duty will ensure that the FRC is made more transparent and accountable to those that it regulates. It will support the FRC’s effective operation and bring the regulatory requirement in line with similar public bodies. It will also further strengthen its regulated status as a public body.
Establishing the new regulator will, of course, require primary legislation. As I said, the Government will introduce this when parliamentary time allows. In the meantime, the FRC has made some progress on the recommendations from Sir John Kingman’s review and those proposals can be implemented without legislation, in parallel with this order. The FRC recognises the significant role that it has to play in paving the way for the new regulator. Building trust in the UK’s audit, accounting and corporate reporting regulator is an essential part of the Government’s programme of work to reform audit and corporate reporting. Our proposals, published today, set out how we will achieve this.
Meanwhile, applying the measures in the order now to the FRC builds on other progress, and it does so through statute. It shows that the Government are committed to putting in place the right degree of transparency and oversight for the work of an important regulator. I recommend this draft order to the Committee.
The Deputy Chairman of Committees (Lord Faulkner of Worcester) (Lab)
That completes the business before the Grand Committee today. I remind Members to sanitise their desks and chairs before leaving the Room.