House of Commons (30) - Commons Chamber (14) / Public Bill Committees (6) / Written Statements (5) / Westminster Hall (4) / General Committees (1)
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(3 years, 2 months ago)
Public Bill CommitteesWe are now sitting in public and the proceedings are being broadcast. Before we begin, I have a few preliminary announcements to make. Members will understand the need to respect social distancing guidance and, in line with the Commission’s decision, face coverings should be worn in Committee unless Members are speaking or are medically exempt. Hansard colleagues will be grateful if Members could email their speaking notes to hansardnotes@parliament.uk. Please switch electronic devices to silent. Tea and coffee are not allowed during sittings. Following a request from a Member, gentlemen will be permitted to remove their jackets. Date Time Witness Tuesday 15 June Until no later than 10.15 am Financial Services Compensation Scheme; Financial Conduct Authority Tuesday 15 June Until no later than 10.45 am Pension Protection Fund Tuesday 15 June Until no later than 11.25 am The Rt. Hon. Dame Elizabeth Gloster DBE, PC; Dechert LLP; Transparency Taskforce; B&CE
Today, we will first consider the programme motion on the amendment paper. We will then consider a motion to enable the reporting of written evidence for publication and a motion to allow us to deliberate in private about our questions before the oral evidence session. In view of the timetable available, I hope we can take these matters formally without debate. I now call the Minister to move the programme motion in his name and that was discussed yesterday by the Programming Sub-Committee.
Ordered,
That—
(1) the Committee shall (in addition to its first meeting at 9.25 am on Tuesday 15 June) meet—
(a) at 2.00 pm on Tuesday 15 June;
(b) at 11.30 am on Thursday 17 June.
(2) the Committee shall hear oral evidence in accordance with the following Table:
(3) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 1.00 pm on Thursday 17 June. —(John Glen.)
Resolved,
That, subject to the discretion of the Chair, any written evidence received by the Committee shall be reported to the House for publication.—(John Glen.)
Resolved,
That at this and any subsequent meeting at which oral evidence is to be heard, the Committee shall sit in private until the witnesses are admitted.—(John Glen.)
Before we hear from the witnesses, do any Members wish to make declarations of interest in connection with the Bill? I take that as a no.
I remind all Members that questions should be limited to matters within the scope of the Bill and that we must stick to the timing in the programme motion. The Committee has agreed that we have only until 10.15 am for this session. Will the witnesses please introduce themselves for the record?
Sheree Howard: Good morning. My name is Sheree Howard and I am the executive director of risk and compliance oversight at the Financial Conduct Authority.
Robin Jones: Good morning. I am Robin Jones and I am a director within the risk and compliance oversight function of the FCA.
Simon Wilson: Good morning. I am Simon Wilson, the interim head of resolution at the Financial Services Compensation Scheme.
Casey McGrath: Good morning. I am Casey McGrath, head of legal at the FSCS.
James Darbyshire: Good morning. I am James Darbyshire, chief counsel and a member of the executive team at the FSCS.
Q
Simon Wilson: Thank you for the question. If it is okay, I will pass it over to my colleague, James Darbyshire.
James Darbyshire: It is difficult to put a figure on the extent of pension mis-selling going on at the moment. We are certainly seeing an increase, and certainly an increase through the covid crisis. It is important to make it clear that there is a clear distinction between the two compensation schemes. Here at the FSCS it is triggered in relation to authorised firms that go bust and regulated activities, whereas the fraud compensation scheme is triggered by dishonesty in occupational pension schemes. There will be differences, but the mis-selling we see is through authorised financial advisers as well as unregulated firms.
Q
James Darbyshire: The typical cases of mis-selling that we see at the FSCS involve scenarios in which somebody has been misadvised to transfer from a vanilla pension into a self-invested personal pension and, within that, invest in illiquid, esoteric and high-risk investments. Sometimes there is a fraud element as well, but they are certainly very high risk and often lead to that person losing all their pension savings. That is our most typical scenario.
Q
James Darbyshire: We are triggered because a regulated firm is involved, so there is an adviser who has mis-sold. But we have also seen an increase in pure scams, if we can call them that, that relate to investments that have been advertised through search engines. They are scams and not genuine investments. As part of the FSCS’s strategic role for prevention and our strategies for the 2020s, we are identifying those kinds of scams and ensuring that we pass the information, data and insights that we see on to the relevant enforcement agencies so that they can take action. We work very closely with the FCA and last year, for example, we signed a memorandum of understanding with the Serious Fraud Office to ensure that we share information in the right way.
Q
Sheree Howard: Thank you for the question. Obviously you are correct that Dame Elizabeth Gloster undertook a very thorough and detailed investigation and produced a detailed report. It has identified a range of issues and mistakes that the FCA made, for which we are profoundly sorry. We know that it has had a devastating impact on many people.
We embarked on a range of initiatives and interventions as a result. We have done a significant amount of work on mini-bonds, in particular, and on other high-risk investments in the investment space and financial promotions arena. Actions are under way in all of them: some are closed, some are ongoing and some will take some time to be sustainable and to embed.
Financial firms do fail due to a variety of circumstances. We are investing heavily in an ongoing transformations programme, but can I give you an absolute assurance that something will not happen again? Sitting here today, I cannot give that absolute assurance, no.
Q
Sheree Howard: A significant range of action has already been undertaken and is still under way to ensure that we make the embedded change that makes the FCA fit for the digitised future. A huge amount has been done. If you are asking whether we have changed, for example, our approach to financial promotions, we now escalate much earlier—we have a much clearer escalation process with a clear route through it. We have changed policies—for example, our contact centre policy—around areas highlighted in Dame Elizabeth’s report.
Q
Sheree Howard: Dame Elizabeth Gloster’s report outlined the circumstances and nature of the changes that occurred at the time that consumer credit was transferred from the OFT to the FCA in 2014. The report is clear about the state of supervision within the FCA at that point and the changes that were implemented by the then executive members of supervision and others in the light of issues that they identified when they came into the organisation. It was a very substantial change of responsibilities, and it came from a regime where there was not a supervisory regime.
Q
Sheree Howard: I was not in the FCA at the time, but it was a very large assumption of remit. We have changed systems. We have implemented various programmes highlighted in Dame Elizabeth’s report on delivering effective supervision and effective authorisation programmes.
As I have already outlined, the financial services market is not sitting still; the FCA cannot sit still—hence the changes that are under way and will be a fact of life going forward. We are undertaking a significant programme to ensure that we invest in digital and data and have much greater access to the information, given the quantum of firms that we oversee.
Q
James Darbyshire: I don’t think it would cause administrative difficulties; it would just mean an additional area of coverage for the FSCS. The cost to levy payers—to the financial services industry—would potentially go up, depending on whether there were any failures involving mini-bonds.
Q
Simon Wilson: Unfortunately, I cannot give an accurate figure, but I would be happy to look it up and come back to the Committee.
Q
Simon Wilson: We certainly get calls and contact from our customers regarding investments that they made that we are unable to protect—that is correct.
Q
Sheree Howard: I will look to my colleague Robin in a moment, but Dame Elizabeth Gloster’s report highlighted the halo effect that occurred in LCF. It was unique as it was an authorised firm issuing mini-bonds, which are not regulated although the firm was authorised for other activity but was not undertaking regulated activity.
On whether unsophisticated customers understand that, we are seeking ways of working with our partners to enhance that understanding. There is certain information on that in the financial services register, but people who invest little may not understand that, so it is an area of focus for us, including thinking about how we might most effectively act against that halo effect. That includes strengthening our gateway—our authorisations process—implementing a nursery, where we look at firms shortly after to ensure that they operate in line with our norms and standards. We are looking to do that as part of our transformation programme, as well as considering legislative routes that might help—for example, not having the logo and the FCA name.
May I ask witnesses to keep their responses as short as possible so that we can get in more questions from Members? Mr Grant, will you make this your final question, please?
Q
Ms Howard, another major problem has been not the unregulated activities carried out by regulated organisations, but unregulated companies that hide behind the fact that some company associated with it is regulated—for example, if a regulated company gives section 21 authorisation for its marketing materials. I will ask the same question again: do the people being encouraged to make these investments understand that the fact that marketing material is issued by a company registered with the FCA does not mean that its activity is regulated?
Sheree Howard: In evidence as part of LCF there was substantial discussion of the financial promotions regime—of the section 21 approval regime in particular. The Government are currently considering changes to that regime to help to improve understanding by making it a specific gateway so that we can test firms that wish to give such approvals to ensure that they do so appropriately. That should help to ensure that consumers understand better.
Q
May we ensure that questions are in scope of what is before us? You have only three to four minutes.
I will move through them rapidly.
To what extent do the witnesses believe that pensions scams are a tangible risk to the future of people’s retirement in the UK?
James Darbyshire: The FSCS is seeing an increase in pensions scams in our work. The area certainly needs further attention, given the distress and the potential for losing life savings. Where we see evidence of scams, particularly use of the FSCS logo, we are working closely to reassure pensioners in relation to scam investments and are sharing data with regulatory colleagues to ensure that they can take action as appropriate.
Q
James Darbyshire: Focusing specifically on scams, we think that online scams and the ability to scam investors and pensioners should be considered for inclusion as part of the online safety Bill. That is certainly our position, and I believe it is also the FCA’s.
Q
Sheree Howard: Picking up on James’s final comment on the online harms Bill, we definitely would support that. Good changes have been made recently, but further changes would be helpful in mitigating the risk of scams and fraud in pensions and investments. We have our ScamSmart campaign and have done targeted campaigns around it. We work with partners, as James said. Could more be done? Yes, more could be done, such as the online harms Bill, education and so on. We are working with partners, but more could be done.
Thank you. I call Richard Fuller, who has five minutes. I remind hon. Members please to keep their questions within the scope of the Bill.
Q
James Darbyshire: That really is a question of judgment for the Government and Parliament in relation to the impact on the Bill. The FSCS’s role is simply to administer the Government’s redress scheme as efficiently and effectively as possible. We are committed to paying compensation to eligible investors within six months of the scheme going live.
Q
James Darbyshire: The balance between consumer protection and consumer responsibility is a delicate one. Ultimately, that is a policy question that has to come from the Government and through the FCA. In our role, we are focused on ensuring that consumers can make decisions in a way that they are as informed as possible about whether there is FSCS protection for particular products. That is critical to the way they make decisions. For example, at the moment we have a comms campaign about pensions and investments, to make sure that consumers are checking whether they are covered when they make those decisions.
Q
Sheree Howard: I will pass that on to Robin, if I may.
Robin Jones: Of course. The first thing to say is no, the Government stepping in in this particular scenario most certainly does not affect the FCA’s commitment to effective regulation, and to making the changes that Sheree set out. As the Government have already noted and the Economic Secretary to the Treasury has highlighted, this is only the third time that such a scheme has been set up in the recent past. It is exceptional and unique. We are not expecting it to be happening on a regular basis.
At the FCA we have accepted all the recommendations of Dame Elizabeth’s report, and Raj Parker’s report into Connaught. We are now taking a number of steps to respond to that. We have steps that we are taking this year. As we have highlighted, our new chief executive, Nikhil Rathi, has a significant transformation programme in place and has brought in a range of external executive directors to lead that change and to bring an operational excellence focus to the changes that are needed in the organisation. I do not see this scheme and the Government stepping in, in unique and exceptional circumstances, as creating any risk of diverting our focus.
Q
Sheree Howard: Could I ask for clarification? Are you asking about during the time that LCF was in operation, or subsequently?
First, during the time that LCF was in operation.
Sheree Howard: I am not aware of any, but I would need to go and check that.
Q
Sheree Howard: I think there has been, but I would need to go and check the details on that and get back to the Committee separately, if that is okay.
Q
Sheree Howard: As part of our transformation programme, we are considering our approach to consumer engagement and what that looks like, recognising some of what we have seen here and making sure that we are serving the UK public in the best way we can, both through information provision and by ensuring that their voices are heard.
Q
Sheree Howard: Our focus initially would be to gather that intelligence and use it as quickly and urgently as possible to act against whatever has been raised. That would be our primary focus—making sure that we gather as much evidence or intelligence from them as we can.
Q
Sheree Howard: I am sure we would consider it. From my perspective, of course we want to listen to them, and we would offer to meet them, if they wish to.
Q
Sheree Howard: For the businesses that we regulate, authorise and supervise, yes, we would. As I said, we would take it into consideration and—potentially do what we do with whistleblowers, for example,
Q
Sheree Howard: I think I ought to clarify. Obviously, meeting with lots of individual consumers would take a very significant amount of resource. We do meet groups of consumers on occasion to hear concerns. We meet lobby groups, consumer networks and things like that, to hear those consumer voices. We obviously also have a consumer panel, so we meet ranges of consumer representatives in a number of circumstances. If you are asking me whether we would meet every consumer who phones up or who asks to phone up, that would be slightly more difficult. We do on occasion—for example, under the complaints scheme—meet a consumer who has a complaint, if that is the best way for them to get their concerns across. It is very individual and depends on the circumstances.
Q
Sheree Howard: In any initiative we are very focused on its operationalisation. When a paper comes through, we are very focused on what would happen once that policy goes live—our ability to supervise through it and how it would be implemented in the organisation to make sure it is as effective as it can be.
Q
Sheree Howard: I am aware that the FCA has met you about this area. I am very conscious that there will be future discussion between the EST and our CEO Nikhil Rathi on that matter. We have clear guidance about how we handle part VIIs and the role of the independent expert in those, which LV would go through if it went through a demutualisation process.
Q
Sheree Howard: I will find what we have and send it to you.
Ms Howard, you responded to Mr Thomas’s first question by saying that you would write to us. May I point out to you that you must write your response to both questions today? Minister Opperman, do you have any questions?
You are very kind, Chair, but I do not.
No, I do not, thank you.
That brings us to the end of this session. I thank all the witnesses for giving evidence.
Examination of Witness
David Taylor gave evidence.
We will now move on to oral evidence from David Taylor, general counsel at the Pension Protection Fund. We have until 10.45 am for this session. Could the witness please introduce himself for the record?
David Taylor: I am David Taylor, executive director and general counsel at the Pension Protection Fund, which also runs the Fraud Compensation Fund.
Q
David Taylor: Absolutely. We have the power to set the levy up to limits set out in legislation. Since we got clarity on the eligibility of scam schemes for compensation in the last year, we have raised the levy to the maximum we can at the moment. That is 75p per member for schemes in general, and 30p per member for master trusts. Any change to those maximum levels is a legislative matter that the Government plan to consult on in the autumn.
Q
David Taylor: Our role in relation to this is, as you say, as the backstop to pay compensation in the particular circumstances where there is a pension scheme that has been defrauded, or where money has been lost from the scheme due to dishonesty. The sorts of cases that we are talking about here, and for which the loan will be required, are actually predominantly historical in nature. As you will no doubt hear from other witnesses, there have been a number of measures since then that have tightened up in various respects and mean that cases like the ones we are talking about here are less likely to happen in the future.
Q
David Taylor: The Fraud Compensation Fund has been in existence since the main Pension Protection Fund was set up in 2004-05, but it has actually had relatively few claims on it prior to this raft of pensions liberation cases. I believe you will be hearing later from the transparency taskforce, which very helpfully flagged to us that information on the Fraud Compensation Fund was not perhaps as successful as it could be. We have taken various steps to increase visibility. We are in the process of creating a separate website for the Fraud Compensation Fund, where it is very straightforward for members to find information about how the fund works. For the sorts of members we are talking about, their first port of call is also the scheme trustees or professional trustees who have been put in place by the Pensions Regulator and who will be able to keep them posted as to where their applications have got to.
Q
David Taylor: From the point at which an application is made to us, through to our making a payment into the scheme, we would estimate that it takes somewhere between six and 18 months to process that application and establish whether the various necessary tests have been satisfied, particularly a loss to the scheme due to dishonesty, and whether all other avenues for redress have been exhausted, because we are the fund of last resort. Once the application comes to us, it is relatively quick. However, in relation to the schemes that we are talking about here, people have been waiting for some time as a result of the uncertainty about the eligibility of those schemes for FCF compensation.
Q
David Taylor: The way that these cases typically work is that when they become known, the Pensions Regulator appoints a professional trustee to manage the case and to seek to bring in any assets that they can, any claims against the wrongdoers and so forth. The information that we have on the amount of claims is based on information that we have gleaned to date from the professional trustees and/or the Pensions Regulator. We have been liaising with them for some years in relation to these cases.
Inevitably, it is not until they make their formal application to us and provide us with all the documentation that we can really get into the numbers, so we have greater certainty about the numbers that have already applied, perhaps slightly less certainty about the longer-term pipeline.
I think it is fair to say that, based on everything that we have done to date, we are reasonably confident about the order of magnitude of the claims that we know about. There is no legal reason why we could not get more claims in future, so I cannot say, no, that number is not going to go up. For the reasons I mentioned earlier, about these claims not being so relevant anymore, we would perhaps be slightly surprised if it went up a great deal.
Q
David Taylor: Our role relates to paying the compensation at the end of the process. The cases we are talking about here almost entirely predate pension freedoms. The reasons for the liberation cases have gone away to an extent, as a result of pension freedoms. There is not a great deal that would be appropriate for me in my role to talk about pension freedoms.
Q
David Taylor: We have almost no discretion in how the Fraud Compensation Fund levy is set. Members will probably be familiar with the Pension Protection Fund levy, the much larger levy on defined benefit schemes, where we have a lot of discretion and we do a lot of work on structuring that levy. As far as the Fraud Compensation Fund levy is concerned, it is simply a flat-rate levy. Our only choice is whether to charge the maximum amount or less. In the light of the size of the claims we are now dealing with, we will charge the maximum for the foreseeable future.
Q
David Taylor: Again, that is slightly outside our remit but we are, of course, well aware of the debate around the fact that it is a per-member levy, and the representations made by master trusts, in particular, on the impact that has where they manage numerous small pots.
Q
David Taylor: Like a number of other systems, the Fraud Compensation Fund was set up to be an industry-funded system. Our role in this is simply to administer that system and it has become apparent that, in order to deal with the cases that are eligible, more money will be needed. As I understand it, the plan is to maintain the system of industry funding and the Government will be consulting in the autumn on any changes to the levy rates.
Q
David Taylor: Yes, that is true.
Q
“The FCF is funded by a levy on eligible pension schemes and at the time of the judgment had assets of £26.2m. Even with future levy income, the expectation is that there will be unfunded liabilities in the region of £200m to £250m.”
Is it your expectation that the Government’s consultation later in the year will be about resolving that funding shortfall or that, with current resources, over an acceptable horizon, that funding shortfall can be reduced?
David Taylor: I will pick up on a couple of points there. To go back to the question of how big the shortfall is, as I said earlier, those numbers are based on our best current estimate of the claims that will come in. As for how that shortfall is then funded, the loan that we are talking about and that the legislation enables will effectively resolve the cash-flow issue while we make the payments. As I understand it, the plan is that it will be reimbursed through the fraud compensation levy. In terms of what the levy is, there is a balance to be struck between the level at which the levy is set and the period over which we are required to pay the money back to Government.
I apologise, Ms Ghani. I mis-spoke earlier; it is probably a lack of practice. My questions actually relate to the third group rather than this one.
Q
David Taylor: That is right. The types of cases that we were dealing with in the early years of the Fraud Compensation Fund were different. They did not involve schemes that had been set up specifically for the purpose of pensions liberation. They were more to do with, for example, employers who had failed to pay over into a scheme the moneys that they had deducted from their employers or conceptually straightforward fraud by which money was taken out of existing defined contribution or DB pension schemes.
Q
David Taylor: That is correct.
Q
David Taylor: That is right. There have been a couple of changes over the years.
Q
David Taylor: That is right, yes.
Q
David Taylor: Yes, we do. We are just about to publish our report for the year finishing 31 March 2021. It is quite comprehensive and is audited by the National Audit Office.
Q
David Taylor: It does, and I anticipate that there will be far more activity on the Fraud Compensation Fund in the year to come than there has been in previous years.
If there are no further questions from Members, I shall thank the witness for his evidence. We now move on to the next panel.
We seem to be struggling to get all the witnesses on Zoom, so I will suspend the sitting until 10.45 am.
We will now hear oral evidence from the right hon. Dame Elizabeth Gloster, Dorothy Cory-Wright and John Bedford of Dechert LLP, Andy Agathangelou—forgive me if I have mispronounced your name—and Mark Bishop of Transparency Task Force, and Philip Brown of B&CE. For this panel we have until 11.25 am. Could the witnesses please introduce themselves for the record? Let’s begin with Andy Agathangelou.
Andy Agathangelou: Thank you. I am the founder of the Transparency Task Force, which is a certified social enterprise. I should also mention that I am the chair to the secretariat to two all-party parliamentary groups: the all-party parliamentary group on pension scams and the all-party parliamentary group on personal banking and fairer financial services.
Mark Bishop: I am Mark Bishop, a strategy adviser working with Transparency Task Force, particularly in the areas of organisational strategy, public affairs and helping the victims of financial services misconduct and regulatory failure.
Philip Brown: Good morning, I am Philip Brown, director of policy and external affairs and B&CE, providers of the People’s Pension. We are one of the UK’s largest pension schemes, serving the automatic enrolment market. We have 5 million members, nearly £15 billion of assets and serve nearly 100,000 employers.
Dame Elizabeth Gloster: Hello, I am Liz Gloster, I was appointed by the FCA at the direction of the Treasury to investigate the FCA’s regulation of London Capital & Finance. Assisted by my team at Dechert and barristers, we produced our report last November. I currently sit as an arbitrator in international commercial arbitration.
Dorothy Cory-Wright: I am head of disputes and contentious regulatory in the law firm of Dechert. As you just heard, we supported Dame Elizabeth in her investigation, and I led the team from Dechert.
John Bedford: I am John Bedford, I am a partner at Dechert LLP in London, and I was part of the team supporting Dame Elizabeth with her report.
I thank all the witnesses for giving evidence today. I urge them to keep their answers short so we can get through all the Members who wish to contribute. I call the shadow Minister, Pat McFadden.
Q
Dame Elizabeth Gloster: It is probably set out in the executive summary of my report, in chapter 2. I think the biggest lesson that should be taken away is that there has to be a cultural change at the Financial Conduct Authority in order to ensure that the FCA is able to regulate in accordance with its obligations in a digitalised world.
Q
Dame Elizabeth Gloster: Let me make it clear, as I think I did in my letter to the Committee, that I only looked—and was only instructed to look—at the regulation of LCF. I did not look at the regulation of other firms that may or may not have been similar. Having said that, some of the criticisms my report made could potentially apply to other firms. First, for example, the restricted approach to the regulatory perimeter when dealing with authorised firms; secondly, the failure to consider LCF’s business holistically in the application, variation and the regulation supervision processes; and thirdly, the absence of training that we pointed to of those employees at the FCA who had to review financial material. Those are all three failings that potentially could apply to other businesses.
Q
Dame Elizabeth Gloster: The gap we identified—I would be grateful if John or Dorothy could direct me to the particular chapter in my report—was that neither the FCA, nor HMRC, at any time checked on or seemed to conduct any analysis of, either as part of a regulatory or a taxation process, whether or not the product being flogged to the investors was ISA compliant. John, do you have the chapter?
John Bedford: Yes, Dame Elizabeth. It is chapter 14, page 303 of your report.
Dame Elizabeth Gloster: Thank you. The fact that LCF bonds could be acquired in an ISA wrapper was absolutely critical to attracting investment because bondholders believed that the ISA status indicated that LCF’s products were subject to an additional level of regulatory security and assurance. Once LCF got its approval, and marketed its bonds as ISA-eligible, the sales significantly increased. That was our concern—this gap with neither the FCA nor HMRC actually looking at the question—and was something that should be addressed.
Q
“LCF is the only mini-bond firm that was authorised by the FCA and sold bonds in order to on-lend to other companies.”—[Official Report, 8 June 2021; Vol. 696, c. 905.]
My question is whether the case of LCF is unique and, if not, why not?
Mark Bishop: Shall I take this one? If you look at what the Minister said, then no doubt it is unique. I am not aware of any other situation where there is a regulated product being sold by an authorised firm who is conducting literally no regulated business, and is also allowed into an ISA. Those are exceptional circumstances.
However, if you look at the many other financial services scandals that have occurred where regulatory failure is either proven, as in the Connaught case, or is alleged with very good reason, they all have exclusive and specific circumstances. I think the question for this Committee is whether you want to use the opportunity of this Bill to create a right for consumers—with a high bar—to have their claims for compensation considered, where they are able to demonstrate significant regulatory failure and that that failure has led to loss.
Q
Dame Elizabeth, may I come to you first? You will be aware that there are amendments that the Committee will consider later that ask for the Secretary of State to be required to report various things to Parliament. In particular, one amendment asks for a report within six months on progress towards the implementation of the recommendations in your report. Clearly, not all of the recommendations will be implemented within six months, but in your view what would be a reasonable time scale for Parliament to ask the Secretary of State to come back and give us an update as to what had been achieved by that point?
Dame Elizabeth Gloster: Thank you for the question; I don’t think I am really qualified, in terms of parliamentary process, to answer it. What I can say is that it was a matter for the FCA to determine how it responds to my recommendation, and my report specifically said that any such response should involve an assurance exercise to confirm that any of the steps, whether recommended by me or otherwise, to cure the defects in the regulation process have indeed achieved the desired objective.
I believe that implementation of my recommendations should be closely monitored, but I don’t really have a view as to whether that means the Secretary of State should be required to lay a report before Parliament, or, if they are, within what timescale. There may be other ways of monitoring progress in relation to the implementation of my recommendations, such as via the Treasury Committee or otherwise.
I think that is the best answer that I can give you.
Q
Dame Elizabeth Gloster: I would hope so, but I am not saying that in an informed way. Nevertheless, since the FCA has had my recommendations, as indeed has the Treasury, for some months how, I would hope that they are cracking ahead with implementing the recommendations right now. I suspect that the answer to your question is probably “Yes, it would be reasonable”.
Q
Dame Elizabeth Gloster: Well, I am a lawyer, so I can define anything, I suspect—[Laughter.] At the time, mini-bonds were not defined and nobody really knew what was being referred to. But, yes, of course you can define a bond that has particular attributes and define it as a mini-bond. It is a slightly open-ended question, but I would have thought that the answer is yes, you can define a bond with particular attributes that might or might not attract protection.
I do not know whether either of my colleagues want to come in on that answer.
I can see on the screens that they are shaking their heads, so we will take that as a “no”. For the record, I do not know whether the camera showed this, but one of the lawyers on the Committee was jumping for joy and waving his arms about when you announced, Dame Elizabeth, that a lawyer can define anything when asked to do so. You have one friend on the Committee.
Dame Elizabeth Gloster: I am not expecting people to agree with that comment; it was only a frivolous comment.
Q
Andy Agathangelou: I certainly do agree. The reason I agree is because there is a mountain of evidence suggesting that there are many similar cases to LCF—Connaught, Lendy, FundingSecure, Blackmore Bond, Exmount, Bentley Global, Store First, Park First, Premier FX, Woodford.
We have to ask ourselves one fundamental question: do we want the public to have good reason to have trust and confidence in our financial ecosystem? If the answer is yes, it follows that we must also want the public to have confidence and trust in the financial regulatory framework that oversees it. Unless we get to that point, we cannot have what we want, which is a system that we can all rely on.
I would argue very strongly indeed that we must look at, for example, Blackmore Bond. The evidence is crystal clear that there has been catastrophic regulatory failure. We need to do what is uncomfortable and open up the can of worms that is there, and the can of worms that is within Premier FX. We need to have the courage to recognise that things have gone wrong. We do not need to make it in any way personal—this is a systemic issue. We will only start addressing these problems if we move away from short-term, tactical, reactive responses to long-term, strategic, proactive responses. I and the many members of our organisation would be very pleased if Parliament were to decide to properly investigate the many other catastrophic regulatory failures that have taken place.
I ask witnesses to make sure that you are on mute if you are not speaking, and to keep answers short. Mr Grant, is this your final question?
Q
Mark Bishop: Yes. I strongly endorse what my colleague Andy Agathangelou said and I would like to add a little more information.
As far as I am concerned, the debate is about what happens when the regulator fails in its statutory duty to protect consumers. There are a number of options. The consumers can bear the costs, and that is tough; the consumers can be compensated by the Treasury; or they can be compensated by the FCA.
At the moment, there is no effective route to be compensated by the FCA, because in the Financial Services Act 2012, Parliament—rightly or wrongly—gave the FCA broad exemption from civil liability. It is almost impossible to sue. There is a very narrow carve-out on breach of human rights and acting in bad faith. At some point, someone is going to try the human rights angle, but I do not think anyone has successfully done so yet, because the costs are high and the FCA effectively has unlimited resources.
Knowing that it gave that exemption, Parliament also created a complaints scheme. Unfortunately, it then allowed the FCA to specify the complaints scheme. As a result, the FCA has determined that it cannot give out material levels of redress and it cannot give out any redress where there is an allegation that the regulator has failed in its statutory duty—it has been negligent or it has just not done the job properly. In effect, there is no route for consumers to receive redress. There is a need to create one.
There are big ways of doing that, such as having a royal commission, as happened in Australia. There are also simple, pragmatic, quick ways of doing it. Modifying the Bill so that it could deal with other legacy cases of regulatory failure would be a very sensible way to do it.
Q
Philip Brown: Yes, of course. Fraud is a serious issue and people should have a route to redress, as has been said by other witnesses. The challenge is how you pay for that redress.
The current levy system was created a long time ago, before master trusts existed. The People’s Pension is a master trust and a not-for-profit organisation. If a levy is put upon us, it comes from our members’ savings—from the savers we are trying to help create pensions.
The challenge we have with the current system is that it works on a member basis. Between ourselves and NEST, as the two very large master trust schemes, we paid approximately 37% of the Fraud Compensation Fund levy the last time it was taken, in 2019. That is a significant amount of money. At the time, the levy raised £6.9 million.
If we are going to raise a levy using the same mechanism, the current estimate is £350 million. The proportion of that that falls on the two schemes that I referred to is very significant, and it needs to be put in the context that, between those two schemes, we have roughly 1% of the assets in the sector, so there is a very disproportionate effect of how the current levy system works. A fundamental review is necessary for how levies are calculated.
Q
Philip Brown: Yes, absolutely. Between ourselves, the People’s Pension and NEST, we are serving the small and medium-enterprise end of the market. Those savers are all relatively new to pensions, so they have modest funds, and it is a very disproportionate effect if you are taking roughly 37% of the fees from those organisations.
Q
I wonder whether I might ask Dame Elizabeth a short question as well. In your view, Dame Elizabeth, should there be a wider explanation of the rights of consumers in relation to the regulatory failure that we have heard about today?
Dame Elizabeth Gloster: I am not sure I understand the question. What do you mean by “a wider explanation”?
Exploration, sorry. Should there be a wider exploration of this issue?
Dame Elizabeth Gloster: I am not sure what you are suggesting. Do you mean the regulatory failures in connection with LCF or more widely?
Q
Dame Elizabeth Gloster: I do not think that is something that I am qualified to comment on. I did my report. The problem about wider reviews is that they need to focus, as my report did, on a specific case and specific facts. The idea of a judicial commission looking at all the financially regulated firms that have gone bust in the last two years—I am not sure what it would achieve beyond the failings that I have identified in my report. It might identify other failings, or it might not, but I do not know that my answer is a very informed answer to that.
Q
Finally, I want to turn to Mr Agathangelou—I apologise if I have mispronounced your name. You talked about catastrophic failure across the system. I am particularly interested in the issue of pensions, and obviously we are talking about the wider financial services system. I wonder whether you might comment on the scale of the problems in the pensions sector on its own.
Andy Agathangelou: As it happens, most of my career has been connected to the pensions sector. To know that the issue is very widespread, you only have to look at the report produced by the Work and Pensions Committee as a consequence of the excellent investigation that it had into the pension schemes problem. There is a long list of recommendations in that report. Most, if not all of them, are very warmly supported by the Transparency Task Force.
Unfortunately, the trajectory is worsening. The problem we have is widespread regulatory failure leading to catastrophic losses for people—sometimes literally life-changing losses—and sometimes extreme emotional harm as well as financial considerations. The problem is getting worse. I genuinely believe that the only way we are going to have a chance to deal with these issues systemically is if there is a high-level, widespread investigation into what is going wrong. I believe that could be carried out it a very constructive way. It is not about apportioning blame; it is about having very honest conversations about what is actually broken here and the most pragmatic ways to solve it.
I now call Mr Gareth Thomas. You will be pleased to know the witnesses are with us until 11.25 am, Mr Thomas.
Q
Dame Elizabeth Gloster: I do not think I am in a position to do that for this reason: I produced my report and recommendations. I presented to the new chief executive officer at the FCA, to some of his senior staff and to the non-executive directors. As you know, the FCA at all levels has accepted the recommendations in my report. It has said that it is addressing the problems but my team and I have not been tasked—I say that thankfully, I think—to go in and conduct a subsequent audit of whether our recommendations have, indeed, been implemented, so that what we identified as systemic failures have been addressed. As I already said in a previous answer and I said in my report, I believe that the implementation of the recommendations should be closely monitored and should be audited to ensure that things have changed. However, I am not in a position to know that.
Dorothy Cory-Wright: May I add one point on that? I want to point out that Dame Elizabeth’s work concluded in the time period January 2019 and we were also told subsequently by the FCA, which we have not verified independently, that work had been going on during the period prior to our recommendations being made. It may be that that has been the subject of internal audit, but we just do not know about that.
Q
Dame Elizabeth Gloster: We certainly had a meeting, as I said a moment ago, with the new CEO. As I said in my report, the FCA’s response should involve an assurance exercise to confirm that any steps taken have achieved the desired objective. Indeed, it is important and was a significant feature of my report that there should be some sort of audit process that would be made publicly available.
Q
Andy Agathangelou: I do not think we need to talk hypothetically about whether there is a chance that a case like LCF could happen again. We believe cases—plural—like LCF are happening right now and we have evidence to support that claim. I will pass over to Mark for any further comments that he would like to make, but I will commit to providing all the Committee members with evidence relating to a range of issues that I believe will lead to the conclusion that this is a very serious problem that has not yet gone away. It is happening now.
Mark Bishop: I agree with that. I would just like to give you a few examples of what I mean. I would like to pick up on something that Dame Elizabeth said, because I strongly agree with it, which is that the single biggest problem that the FCA has is cultural. The problem with cultural change is, first, it takes a while to fix, even if you are trying to fix it. Secondly, the closer you are to it, the harder it is to spot the problems, let alone know how to fix them.
One of the first things that Nikhil Rathi did in response to the two independent reviews published in December was to announce the appointment of an executive director for transformation. This is a new role that has never existed before. He did not advertise the job externally. He gave it to Megan Butler, and Megan Butler is a name that is mentioned in Dame Elizabeth’s report as one of the people who held a position of responsibility in relation to LCF. She does not apportion blame specifically, but she does apportion responsibility. I believe that had Raj Parker not succumbed to FCA lobbying to also redact the names of executives, her name would have appeared in that document as well. She may be a highly intelligent individual and acting in good faith, but she was literally a founder employee of the Financial Services Authority in 2000, and I would question whether a fresh pair of eyes and a fresh mind might be better suited to the job of transforming the organisation.
To use the hypothetical example of whether something similar might happen again, Dame Elizabeth helpfully pointed out in her report that, prior to the summer of 2016, LCF did not have authorised status from the FCA, and therefore it had to get its promotions approved by a third party that was on the register. This was a firm called Sentient Capital London Ltd. The first complaint or notification into the FCA that there were concerns about whether those promotions were accurate happened in January 2016, five and a half years ago. I looked on the FCA register just last Friday when I knew I was coming to this session to see whether there was any investigation under way against that firm or its directors, or whether it had a limitation attached to its registration that meant that it could not approve promotions for third parties, and I found that none of those things has happened.
So not only could another LCF happen, but it could happen using one of the same firms today, five and a half years on, and that seems to me an example of the complacency of the FCA that is, in the view of most campaigners, culturally where the problem is. Also, Gareth Thomas talked very early on in this evidence session about the voice of the consumer and to what degree are consumers’ voices being heard in the FCA. I think a genuine transformation of the FCA would have consumer voices, including campaigners, very much at the heart of it, and I do not think that that is happening.
Q
Dame Elizabeth Gloster: Between the FCA and bondholders and LCF? You mean after the company became insolvent or—
And before, because there was a pattern of customers trying to get in touch with the FCA to complain about LCF’s products. I am interested to know whether there was ever any attempt to meet that group of customers by relatively senior people within the FCA.
Dame Elizabeth Gloster: Let me answer that in this way. First, it is clear, as my report sets out, that a lot of complaints were made or questions raised by consumers and bondholders, or prospective bondholders, and they were not dealt with adequately. There is a full chapter dealing with that. One of the criticisms that I made was that the communication or the recording of complaints was not adequate. I will ask John Bedford to come in here, but I do not think that there was, before the company went into administration—or was shut down, effectively, by the FCA—any meeting with groups of bondholders. John, can you help me on that?
John Bedford: Of course, Dame Elizabeth. As far as we are aware in relation to the intervention in 2019, there were no meetings between bondholders, or groups of bondholders, and the FCA.
Sure. The biggest issue for the FCA in terms of particular cases at the moment and consumers is, as I understand it, the potential demutualisation of Liverpool Victoria. I wonder whether any of the witnesses find it extraordinary that no policy paper has been published by the FCA on the handling of demutualisations.
Mr Thomas, I am afraid your current question is not within the scope of the Bill, so unless you have another question to ask, I will move to another Member.
Okay, that brings us to the end of this session. If there are no further questions from Members, I thank the witnesses for their evidence. Because we have closed a little sooner than expected, I will invite the Government Whip to propose the Adjournment. Please will Committee members leave the room promptly by the door marked “Exit”, while observing social distancing? The Committee will meet again today at 2 pm in Committee Room 10 to begin line-by-line consideration of the Bill.
Ordered, That further consideration be now adjourned. —(Alan Mak.)
(3 years, 2 months ago)
Public Bill CommitteesThe Committee consisted of the following Members:
Chairs: † Ms Nusrat Ghani, Peter Dowd
† Bell, Aaron (Newcastle-under-Lyme) (Con)
† Benton, Scott (Blackpool South) (Con)
† Cates, Miriam (Penistone and Stocksbridge) (Con)
† Davies, Gareth (Grantham and Stamford) (Con)
† Fuller, Richard (North East Bedfordshire) (Con)
† Glen, John (Economic Secretary to the Treasury)
† Grant, Peter (Glenrothes) (SNP)
† Hunt, Jane (Loughborough) (Con)
† McFadden, Mr Pat (Wolverhampton South East) (Lab)
† Mak, Alan (Lord Commissioner of Her Majesty's Treasury)
† Opperman, Guy (Parliamentary Under-Secretary of State for Work and Pensions)
† Owen, Sarah (Luton North) (Lab)
† Rodda, Matt (Reading East) (Lab)
† Thomas, Gareth (Harrow West) (Lab/Co-op)
† Twist, Liz (Blaydon) (Lab)
† Williams, Craig (Montgomeryshire) (Con)
Seb Newman, Committee Clerk
† attended the Committee
Public Bill Committee
Tuesday 15 June 2021
(Afternoon)
[Ms Nusrat Ghani in the Chair]
Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill
We are now sitting in public and the proceedings are being broadcast. Before we begin, I have a few preliminary announcements. Members will understand the need to respect social distancing guidance. In line with the Commission’s decision, face coverings should be worn in Committee unless Members are speaking or are medically exempt. Hansard colleagues would be grateful if Members could email their speaking notes to hansardnotes@parliament.uk. Please switch electronic devices to silent. Tea and coffee are not allowed during the sittings.
We now begin line-by-line consideration of the Bill. The selection list for today’s sitting is available in the room and shows how the selected amendments have been grouped together for debate. Amendments grouped together are generally on the same or a similar issue. Please note that decisions on amendments do not take place in the order that they are debated but in the order that they appear on the amendment paper. The selection and grouping list shows the order of debates. Decisions on each amendment are taken when we come to the clause to which the amendment relates. A Member who has put their name to the leading amendment in a group is called first. Other Members are then free to catch my eye in order to speak to all or any of the amendments within that group. A Member may speak more than once in a single debate. At the end of a debate on a group of amendments, I shall call the Member who moved the leading amendment again. Before they sit down, they will need to indicate whether they wish to withdraw the amendment or seek a decision. If any Member wishes to press to a vote any other amendment in a group, they need to let me know.
Clause 1
Compensation payments to customers of London Capital & Finance plc
I beg to move amendment 1, in clause 1, page 1, line 5, at end insert—
“(1A) Within six months of this Act receiving Royal Assent, the Secretary of State shall lay before Parliament a report that considers the circumstances and impact of the payment of compensation to the customers of London Capital & Finance plc and that, in the light of that consideration, sets out the following—
(a) the circumstances in which taxpayer-funded compensation should be paid following the collapse of investment companies in future;
(b) the extent of regulatory failure necessary to trigger compensation funded by the taxpayer in future; and
(c) the limits to taxpayer exposure to investment failings.”
This amendment would require the Secretary of State to lay before Parliament a report exploring the impact of the payment of compensation to the customers of London Capital & Finance plc and giving criteria for when the taxpayer should compensate investors for investment failures.
With this it will be convenient to discuss amendment 7, in clause 1, page 1, line 18, at end insert—
“(5) Within six months of this Act coming into force, the Secretary of State must lay before Parliament a report that assesses the impact of the payment of compensation to the customers of London Capital & Finance plc under this section, and in the light of that assessment, sets out the following—
(a) an assessment of the regulatory failures that gave rise to the need to compensate the customers of London Capital & Finance plc;
(b) measures the Government is taking to prevent such regulatory failures in the future;
(c) the reasons why the Government is providing compensation to the customers of London Capital & Finance plc but not the customers of other failed investment firms;
(d) criteria for when the Government should be expected to provide compensation following the collapse of investment firms; and
(e) the reasons for the capping of compensation payments under this section at 80% of what customers of London Capital & Finance would have been entitled to under the Financial Services Compensation Scheme.”
This amendment would require the Secretary of State to lay a report before Parliament that assesses the impact of the Government compensating the customers of London Capital & Finance plc, as well as broader issues relevant to the mis-selling scandal.
Thank you for your guidance, Ms Ghani. Later, I will move amendment 2 and, with your help, my hon. Friend the Member for Reading East will move amendments 3, 5 and 6, which stand in the Opposition’s name.
Amendment 1 relates to the first clause of the Bill, which deals with the compensation scheme relating to the collapse of London Capital & Finance and which is based on the report published by Dame Elizabeth Gloster, on which we took oral evidence this morning.
Clause 1 enables a very significant Government decision to step in and compensate people for the collapse of an investment firm. The estimated cost given by the Treasury for that decision is about £120 million. As the Minister pointed out on Second Reading, it is rare that the Government do that. He told us that there have been only two other cases in recent decades—Barlow Clowes and Equitable Life—and even those decisions did not always bring matters to a close. With Equitable Life, some investors around the country remain dissatisfied with the levels of compensation that have been paid out. There is an all-party parliamentary group in this House, and we have my indefatigable hon. Friend the Member for Harrow West, who has led at least one debate, if not more, on these issues, on the Committee. Such decisions do not always bring the matter to a close.
The focus of the amendment is to try to bring some clarity to Parliament and the public about when the taxpayer should be on the hook for an investment collapse, and when not. This issue was raised in oral evidence this morning by the hon. Member for North East Bedfordshire. He used the well-known phrase “caveat emptor”, or “buyer beware”, which applies those who may buy investment products. The trouble at the heart of this case is that the investors did not think they were making a particularly risky decision. LCF sold mini-bonds on the basis of a guaranteed investment return. When those who suspected something might be wrong phoned the FCA, time after time they were reassured that nothing was wrong. To quote one of the FCA’s call handlers, “This is not a scam”. While the hon. Gentleman was right to raise the principle of caveat emptor, how can we blame the investors if the very regulator looking after the thing was reassuring them that there was nothing to be concerned about?
The Government have judged the level of regulatory failure to be so exceptional and egregious that they have decided that the taxpayer has a responsibility to compensate, or as it is sometimes put, to socialise the losses. The level of compensation set by the Government is 80% of the maximum level allowed by the Financial Services Compensation Fund. That maximum is £85,000, so 80% leaves investors with a maximum pay-out of about £68,000.
There is debate about that 80%. Members of the Committee will have been sent written evidence from various LCF investors who think that level is too low. They do not understand why they have been asked to forfeit 20% of their investment because of what the Government acknowledge to be a particularly egregious regulatory failure. The Government will have to debate that. Their justification for any compensation at all is that LCF is a unique case. Both Ministers spelled that out on Second Reading last week. In his opening speech, the Pensions Minister said:
“While other mini-bond firms have failed, LCF is the only mini-bond firm that was authorised by the FCA and sold bonds in order to on-lend to other companies.”
He went on to say:
“It is…important to emphasise that the circumstances surrounding LCF are unique and exceptional, and the Government cannot and should not be expected to stand behind every failed investment firm.”—[Official Report, 8 June 2021; Vol. 696, c. 905.]
We agree, and that is precisely what the amendment is about: to try to get some clarity on the Government’s thinking when the degree of regulatory failure is so exceptional that it warrants the taxpayer picking up the bill. When that is not the case, whatever losses there may be should be regarded as normal investment market failings.
My right hon. Friend rightly sets out the scale of regulatory failure. Does he think that one of the other potentially unique circumstances of this case is the apparent legislative lacuna about who had the responsibility for regulating mini-bonds? Dame Elizabeth Gloster set out that, on the one hand, the FCA said it should be Her Majesty’s Revenue and Customs; HMRC was equally clear that it thought it should be the FCA. We do not know whether that legislative lacuna has yet been sorted. Does my right hon. Friend think that was also a factor in the Government’s decision to compensate to the scale they have?
My hon. Friend is right; the lacuna referred to in the report relates particularly to the allocation of ISA status. We asked Dame Elizabeth about that during the oral evidence session this morning. This is important because if there are two things that gave the mini-bonds the stamp of respectability, it would be that prominent in LCF’s advertising was the statement that it was regulated by the FCA, which at firm level was true but was not true of the mini-bonds being sold, and that they could be placed inside an ISA wrapper. Although it is, of course, true that people who invest in ISAs can lose money, for understandable reasons, the ISA wrapper has a certain cachet and a note of respectability.
Dame Elizabeth confirmed during oral evidence this morning that once the ISA wrapper status was allocated in 2017, the degree of investment in those mini-bonds rose markedly, because people would have thought they were investing in something safe. The adverts spoke, in fact, of a 100% record in paying out, when what we were really dealing with was a pyramid scheme where any pay-outs that did come came from other investors and not normal market returns. People thought they were investing in a safe bond. They did not think they were playing investment roulette.
The Economic Secretary also emphasised the uniqueness of the LCF case in his closing speech on Second Reading. He said:
“LCF is unique in that regard; indeed, it is the only mini-bond issuer that was authorised by the FCA and that sold bonds to on-lend to other companies.”—[Official Report, 8 June 2021; Vol. 696, c. 918.]
That is an exact replica, with both Ministers saying the same thing, and I suspect that that phrase has been very carefully honed inside the Treasury. A case had to be made for the uniqueness of this that could not be applied to other investment failures, so I think that form of words is very carefully chosen. However, the Minister may be able to tell us more when he responds.
The amendment is designed to tease out the following point, which I want to clarify with the Minister. Is it the case that even though a number of mini-bond issuers have collapsed in recent years, LCF is the only one that was authorised and regulated by the FCA? The Minister can intervene now or I am happy to wait. As I said to the Ministers on Second Reading, there must have been a discussion in the Treasury about developing a compensation scheme such as the one set out in clause 1. The question would have been asked: if we did this for LCF, what about investors in the Connaught fund or Blackmore Bond or any of the other investment schemes that were raised either on Second Reading or during the oral evidence session this morning? What was the nature of those discussions at the Treasury and what is it about LCF that makes the Government convinced that compensation is due in this case but not in the others? That is why our amendment calls for a report. Having taken the decision to compensate, we believe it would be in the public interest for the Treasury to set out the circumstances under which the taxpayer might be expected to pay when investors lose money. Is it about a firm being authorised by the FCA? Is it about commissioning a report by an eminent and independent figure such as Dame Elizabeth Gloster?
I am very happy to respond at length in my remarks at the end. The distinction we make is that LCF is the only FCA-authorised firm that was on-lending. That is the distinction; not so much the mini-bond issuance but the on-lending nature of it.
I am grateful to the Minister. I am just going through this series of things to try to clarify exactly what might place the taxpayer on the hook. Does it require the kind of report carried out by Dame Elizabeth Gloster and commissioned by the FCA into the collapse of LCF? Is there a clear threshold of regulatory failure to be passed? There was obviously regulatory failure in this case, but, as we saw from the witnesses this morning, people will argue that other regulatory failures have applied to other firms.
In this case, the regulatory failures were multiple. I do not want to go through them in detail because we will come on to other amendments in which they can be discussed, but I will mention a few of them briefly: misleading promotions by LCF using the halo effect have been regulated by the FCA yet not adequately dealt with by the financial promotions team at the FCA; a failure by the same financial promotions team to join the dots and alert other parts of the FCA, such as the supervisory team, on the implications of those misleading promotions; and multiple attempts to alert the FCA—more than 600 phone calls, according to annex 6 of Dame Elizabeth’s report. Yet, in the vast majority of cases nothing was passed up the line of pursuit, in large part because the mini-bonds were not regulated by the FCA, so the call-handlers’ instincts were, “You’re phoning us about something that we do not regulate, so we don’t have to pass it up the line”—even though the firm as a whole was regulated by the FCA.
That brings us to the failure to take what Dame Elizabeth calls a “holistic approach” to viewing LCF from within the FCA. One could pose the question of what “regulated by the FCA” means if the regulator then ignores the vast majority of what the company does because it does not fall within the regulatory parameter. In the Treasury’s eyes, those regulatory failures, together with the others set out in the report, were enough to trigger the Bill, in both senses of the word. So, what is the principle at stake? When is regulatory failure so obvious and complete that the taxpayer should compensate investors for their losses? That is what the amendment seeks to clarify. We believe that such clarity would be of great benefit to the FCA in the conduct of its duties and in its task of learning the lessons from Dame Elizabeth’s report. It would also be in the public interest. Indeed, without such clarity, the question will continue to be asked: “Why compensate in this case and not others”?
The final point covered by the amendment is the question of any limitations on taxpayer exposure.
My right hon. Friend is understandably concerned to protect the taxpayer’s interest. Is there not also another dimension as to why the report he seeks is worthwhile? If there is regulatory failure by the FCA in other ways, and not just in the handling of investors’ resources, and if there is no chance of the Government stepping in and offering compensation for that failure, then, for example, if a big financial services company that was not properly regulated by the FCA were to be demutualised, would there not be a reason to offer compensation? Or, if not, would that let the FCA off the hook?
My hon. Friend raises a very important point. There are many reasons why clarity about the limitations of Government responsibility and taxpayer responsibility, to put it another way, would be extremely helpful. The very fact of producing the Bill will mean that the Government have asked those questions anyway. As I said earlier, the cost in this case is expected to be about £120 million. The costs of clause 2, which we will come to later, are expected to be over £300 million. Over both clauses the cost will therefore be more than £400 million. That is a large sum of public money that will, in the case of clause 2, be recouped over a period of years from pension scheme members.
Of course, it is possible to have investment failings on an even greater scale. Is there any upper limit that the Treasury would see to such taxpayer exposure, or is it always to be on a case-by-case basis? In theory, investment failings could cost billions rather than hundreds of millions. Our amendment seeks to clarify the Government’s thinking on that, which would be beneficial to Parliament and the public.
Those are the reasons why we have tabled this amendment. We think that the compensation scheme and the whole story of the collapse of LCF demands such clarity and that reports such as the one we have called for would be beneficial.
It is a pleasure to serve under your chairship, Ms Ghani.
I shall speak to amendment 7, in my name, and in support of the official Opposition’s amendment 1.
Both amendments call for the Secretary of State to report back to Parliament on issues that collectively raise many still unanswered questions about the Bill, about the compensation scheme, and about why the scandal of London Capital & Finance was allowed to happen.
By far the biggest criticism of the Bill, which we again heard from witnesses today, is that it has been deliberately framed so narrowly that those questions are in danger of being ignored. I know that the Government will argue that framing it narrowly increases its chances of getting on to the statute book—I accept that argument—but there is a downside to doing that.
The biggest question that is still unanswered is: why do we expect compensation for the victims of one investment mis-selling scandal when so many people have lost so much—possibly a total of more than £1 billion —in other company collapses that share most, and sometimes all, of the key features of London Capital & Finance?
I should make it clear that I am not asking for the setting up of other schemes. We are not asking for approval at this stage, or for other failures to be included in the LCF scheme. All we are asking for is some clear indication that the Government are taking action to look at the wider issues.
The Government’s answer is that London Capital & Finance was regulated by the Financial Conduct Authority and that companies such as Blackmore Bond were not. That smacks of looking for an explanation to justify a decision that has been taken for a completely different reason.
Companies such as Blackmore Bond set out to make prospective investors believe that the FCA had a role in protecting their money. Investors in LCF were misled into believing that its own registration with the FCA would cover their investments. The only difference with other company failures is that investors in those companies were misled into believing that someone else’s registration would cover them—a fine point lost on investors themselves.
The Government’s explanation appear to assume that the only problem, or even the biggest problem, with London Capital & Finance was that it was a regulated company selling unregulated investments. That was certainly part of the problem, but, as the written submissions from a number of investors and as evidence this morning made clear, there were other failings and possibly deliberate malpractice within the company and some of its advisers. Other failings of regulation went well beyond those laid at the feet of the Financial Conduct Authority in relation purely to LCF. If the Government constantly remind us that the sale of mini-bonds was not regulated by the Financial Conduct Authority, surely the elephant in the room is: why on earth not?
The Government will, I know, refer to the principle of caveat emptor. It is correct that anyone making an investment has a responsibility to ensure that the investment meets their needs, but there are hundreds—possibly thousands—of examples in UK regulation where we regulate the market but it is not realistic or fair to expect the emptor to caveat.
We do not expect people to do their own personal survey of a house to make sure it is safe before they buy it. We do not expect people to check the brakes on the bus before buying a ticket. We have regulation to protect public safety, on food standards, on product safety and on a number of financial transactions. It is perfectly possible for the Government to start to look at regulating these investments in future and compensating ordinary men, women and sometimes children who have lost sums that, individually, are not significant to the FCA but are massively significant to their plans for retirement, for paying to support their children at university or for ever.
We must make it clear that we are not asking the Government to approve compensation for every company failure. We are not asking them even to consider the implications of doing that. We are asking them to look specifically at cases where there is clear evidence of the mis-selling of investments, usually to people who the seller knew perfectly well were not suited to that investment. That has been a characteristic of all the cases we have looked at today.
I am particularly drawn to proposed subsection 5(b) of amendment 7. I wonder whether the hon. Gentleman shares my view that one measure the Government need to require of the FCA in the future, to prevent further such regulatory failures, is for it to take a more hands-on approach when customers get in contact to raise concerns about particular businesses; and to make it a point of principle that, when a significant number of customers raise concerns about the activities of a firm, the FCA might actually try to meet some of those customers, rather than, as appears to be the case at the moment, only bothering to meet representatives of the board and management of said firm.
The hon. Gentleman makes a valid point. A lot of the issues he raises are covered in Dame Elizabeth Gloster’s report and recommendations. She even pointed out today that possibly the single biggest failing—certainly one of the biggest failings—was that the Financial Conduct Authority had too restrictive a view of its purpose in regulating the market.
I have to say that it is not only the Financial Conduct Authority that has failed to regulate. What was the registrar of companies at Companies House doing when they got a copy of the audited accounts of Blackmore Bond—the only copy that was ever submitted by that entire group—in which it said, in so many words, that in order to pay the guaranteed interest on money it had already received from investors, it had to keep on getting more and more new investors? It was effectively a Ponzi scheme in all but name. The auditors made similar comments on the accounts but did not seem to be under any obligation or duty to do anything else. Nobody at Companies House, or the registrar of companies, appears to have been under any responsibility to look at the documents submitted to spot the danger signs; nobody anywhere seems to have been responsible for that. Although the Financial Conduct Authority has been rightly and severely criticised for its failure to regulate London Capital & Finance, we are talking about a much wider failure of the regulatory regime. Maybe one of the biggest difficulties is that there are so many people who might be involved and they are quite happy to point fingers at one another, saying that they should be responsible.
I realise I am in danger of wandering off the narrow scope of the Bill. We cannot amend the Bill to set up a more comprehensive compensation scheme just now because of the way it is framed; we cannot even amend it to set up a framework so that the Secretary of State, through statutory instrument, could extend it in the future. However, we can ask the Secretary of State to explain to Parliament not only what the Government are doing to help the victims of this one scandal but what lessons they have learned and what they are doing to make sure these scandals cannot be repeated. I hope the words of the witnesses from the Transparency Task Force this morning are ringing in all our ears. They believe they have evidence that there are other scandals like LCF happening right now and that it is just a matter of time before they collapse and leave yet more investors out of pocket.
Finally, why is it that the Government need to be called to account and asked to explain to Parliament why it is that, while they are supporting the victims of LCF, they are doing nothing to help the thousands of other victims of other scandals that have already come home to roost? For those victims, improvement in regulation alone is far too late.
I do not intend to detain the Committee long, because my right hon. Friend the Member for Wolverhampton South East made an excellent speech on this issue; I merely want to underline the point that I made in when intervening on him. There seems to be a degree of risk in the Government’s approach. Again, it would be good to hear from the Minister to better understand why the level of regulatory failure in this particular case should merit Government compensation, whereas if there were to be regulatory failure in, say, the case of the FCA’s handling of the demutualisation of Liverpool Victoria, that would not merit compensation for the 1 million-plus customers and owners of that financial services business.
I also underline the point that I made when intervening on the hon. Member for Glenrothes, who speaks for the Scottish National party, on the need of the FCA to perhaps rethink its approach to consumers more generally. At least one of the regulators in the financial services business case that I have particularly been following—that of Liverpool Victoria—has met representatives of that organisation some 35-plus times but has not met consumers at all. That seems to be an example of the FCA continuing not to have properly thought through where it might need to change its practices going forward. I know the Minister will be looking at this issue, and I gently encourage him to focus particularly on that aspect of the regulatory failure.
My right hon. Friend the Member for Wolverhampton South East underlined the point in Dame Elizabeth Gloster’s report that there have been 600 phone calls from customers about LCF’s poor performance, yet that still did not seem to spur on the FCA to take action quickly. There are almost 10 times as many consumers who are members of Liverpool Victoria as those who invested in LCF, which surely further underlines the need to get right how the FCA handles the consumer interests going forward. I look forward to the Minister’s answers.
It is a pleasure to serve under your chairmanship, Ms Ghani, and I thank all Committee members for their consideration of this important legislation.
As I set out on Second Reading, the Bill is a vital step in compensating LCF bondholders, and I will now turn directly to the consideration of amendments 1 and 7. As the right hon. Member for Wolverhampton South East set out, amendment 1 seeks to add a requirement for the Secretary of State to lay before Parliament a set of criteria for when the taxpayer should compensate investors for investment failures. In essence, it brings some clarity about when the mechanism that we are adopting, and hopefully funding, through the passage of the Bill would be used. Amendment 7 seeks to require the Secretary of State to lay before Parliament a report that assesses the impact of the Government’s compensating the customers of London Capital & Finance plc, as well as broader issues relevant to the mis-selling scandal.
I have listened very carefully to the speeches made during the passage of the Bill, on Second Reading and today, and to the evidence that we received this morning. I am particularly drawn to the remarks of my hon. Friend the Member for North East Bedfordshire, who acknowledged that a degree of risk is involved with any investment. With the right set of regulations and requirements, however, investors can be equipped with the right information to understand their risks and to make informed choices. The Government’s scheme appropriately balances the interests of both bondholders and the taxpayer, and it will ensure that all LCF bondholders receive a fair level of compensation for the financial loss they have suffered.
I turn now to compensation. I must reiterate that LCF’s failure was unique and exceptional. It is the only failed mini-bond issuer that was FCA-authorised and was selling bonds in order to on-lend to other companies. In conjunction with the FCA, the Treasury has looked at eight mini-bond firms that have failed in recent years, and LCF is unique in that respect. It is important to emphasise that the Government cannot and should not stand behind every investment loss. As I have probably said previously, LCF’s business model was highly unusual in both its scale and structure, and the extraordinary circumstances surrounding its collapse are unique.
Has the Economic Secretary or any of his advisers actually read the promotional material that companies such as Blackmore Bond were giving out, to assess the number of times that words such as “guarantee” and “secure” were included in those documents? Does he not accept that something needs to be looked at there—maybe not for compensation this time, but certainly for tighter regulation in the future?
I am grateful to the hon. Gentleman for his intervention because it takes me to the question of what the Government are doing to improve the efficacy of the financial promotions regime that he mentioned in respect of a different failure. We continue to keep the legislative framework underpinning the regulation of financial promotions under review, including whether it is suitable for the digital age. Many of the promotions are obviously online. We will publish a response in the early summer to the consultation on a regulatory gateway for authorised firms approving the promotion of unauthorised firms. It is not an issue that we take lightly. Change, once in place, is designed to strengthen the regime by ensuring that firms able to approve financial promotions are limited to those with the relevant expertise to do so. The FCA will be better able to identify when a financial promotion has breached the restrictions and take action accordingly, but that does not mean that the LCF failure is not unique and of a different scale and quality from some of the other failures.
I want to ask the Minister about the point he made about on-lending. What is the relationship between on-lending and the degree of regulatory failure? He is probably right that this was the only firm doing on-lending, but Dame Elizabeth’s report focuses on an egregious regulatory failure and she sets out all the different things that we will discuss. I suspect that the Government have found something about this case that is unique in order to insulate themselves from claims from other investment failures. I do not see the relationship between that uniqueness and the regulatory failures outlined in Dame Elizabeth’s report.
As the right hon. Gentleman set out, Dame Elizabeth’s report showed enormous failure in the way that the FCA discharged its responsibility for a regulated firm carrying out unauthorised activities. The point that he is making specifically is about the distinctiveness of the on-lending. There is a distinction between a firm, such as BrewDog or Hotel Chocolat, that raises funds for its own business activities and a firm that, although authorised, has not carried out regulated activities. Through the failure of the FCA’s oversight to look at the broader activities of the firm, it is impossible to verify whether those activities on lending bore any relationship to the raising of funds for that business. That is the distinctive difference. It is that failure of the FCA to execute its broader responsibility for an authorised firm carrying out an unauthorised activity in this distinct area that gives us licence to intervene.
On the specific issue of non-transferable debt securities, which are commonly known as mini-bonds, the Government are consulting on proposals to bring their issuance into FCA regulation. After listening to the evidence this morning, I would just make the point that Dame Elizabeth Gloster made 13 recommendations in her report. In the written ministerial statement of 17 December 2020 that was issued in my name all those recommendations were accepted—nine pertaining to the FCA and four to the Treasury. There has also been a subsequent undertaking by the FCA to report on progress against those actions and recommendations. The FCA is conducting a detailed piece of work to look at the issue of high-risk investments holistically, and that includes a discussion paper to get views on changes that can strengthen the FCA’s financial promotion rules for high-risk investments. This work follows the FCA’s ban on the mass marketing of speculative illiquid securities.
As the right hon. Gentleman rightly said, only three Government compensation schemes have been established in the past three decades: Barlow Clowes, Equitable Life and LCF. I acknowledge that, for some, they have not been complete and satisfactory. Despite many investment firms failing over that period, the fact that there have only been those three interventions on the scale that we are seeking to secure today demonstrates that this type of intervention is the exception and not the rule. Moreover, the particular circumstances of these three cases are quite different. For example, compensation was provided to Equitable Life investors, in most cases not because they had lost their original capital but because the firm had not met the expected returns on which many investors had based their future retirement plans. That contrasts starkly with LCF, where investors stood to lose their principal sum.
The common feature in each case is a degree of maladministration or misregulation—a major factor that the Government considered in deciding to launch the LCF compensation scheme—but the circumstances are idiosyncratic. It therefore would not be possible in any meaningful sense to set out the precise framework for Government to consider when establishing such schemes in future or to stipulate the threshold of misregulation ex ante.
That does not mean to say that as a Minister, and in my frequent engagement with the FCA, I do not look closely at all these matters. Indeed, I have done so throughout the process in getting to this point today. I believe that such a framework could create an unrealistic expectation among investors about the possibility of future Government compensation schemes and the misconception that Government will stand behind bad investments. That would create a moral hazard for investors and potentially lead individuals to choose unsuitable investments, thinking that the Government will provide compensation if things go wrong.
I want to address some of the points that the right hon. Gentleman made. He mentioned ISAs. As we announced in response to Dame Elizabeth’s report, HMRC and the FCA have now established an ISA intelligence working group to strengthen communication and information sharing between the two organisations. The group has met and agreed the structure and objectives, which is already resulting in information sharing between the two organisations.
In parallel, from this autumn, once recruitment of personnel is complete, HMRC will reinforce its ISA compliance regime with a programme of ISA manager audits. This will not focus on consumer protection, which does not fall within HMRC’s remit, but could detect technical breaches of the ISA regulations.
We are exploring steps to increase consumer understanding of the ISA wrapper. As the right hon. Gentleman rightly said, this has a large degree of consumer confidence vested in it. We need to tackle the misplaced perception that ISAs benefit from greater Government or regulatory assistance.
I have deep engagement with the FCA. I will speak later this week to the chief executive as part of my routine, regular engagement and I will relay the detailed comments of, in particular, the hon. Member for Harrow West on the degree of engagement of consumer groups versus the regulated firm’s representatives, and especially the case he is on at the moment.
We heard evidence this morning about the retention of one named individual. The chief executive has brought in five new people from outside the organisation in taking a balanced view on how to deliver a successful transformation programme. I urge him to continue successfully to implement the programme.
There are considerable principled and practical drawbacks to the amendment, which is why I ask that it be withdrawn.
I am grateful for the Minister’s response.
I am not entirely convinced about the relationship between on-lending and the decision to compensate. I am sure that the Minister is correct in the literal sense that this was the only regulated firm that was selling unregulated mini-bonds. I am not saying that the Minister is wrong, but from reading the report I believe that Dame Elizabeth would have made the same findings. The mini-bonds were not doing what it said on the tin: they were not on-lending but pyramid selling.
The degree of failure, the degree of investment loss and the degree of regulatory failure are not directly related to the point about on-lending: it is more substantial than that. I am not convinced that all the elements of the Government’s case add up. It looks to me as though they have had to find a unique element to insulate themselves from court action or other claims.
As an indication of the Government having come to a decision and then looking for an explanation for it, I do not know whether the right hon. Gentleman picked up in the Minister’s comments how for the first time, in my knowledge, the concept of the scale of the failure—if I wrote down what the Minister said exactly right at the time—was that London Capital & Finance was unique and of a scale and nature that made it different from the rest. Does the right hon. Gentleman believe that the fact that the scale of the failure has now been quoted as a factor, when it was not before, is an indication that the Government have come to a decision and are now looking for reasons to justify it?
We are trying to put ourselves into discussions that we have not been party to so, to some extent, I am speculating on the way that the Government have built their argument.
I have made the point and I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
I beg to move amendment 2, in clause 1, page 1, line 15, at end insert—
“(3A) Within six months of this Act receiving Royal Assent, the Secretary of State shall lay before Parliament a report setting out progress on the implementation of the recommendations in pages 47 to 49 of the Gloster Report.”
This amendment would require the Secretary of State to lay before Parliament a report setting out progress on the implementations of the thirteen recommendations in the Gloster Report.
Amendment 2 concerns the recommendations made in Dame Elizabeth’s report. It is a long report, but I am specifically referring to the series of conclusions and recommendations made on pages 47 to 49. As the Minister said a few moments ago, some of those recommendations are for the FCA and others are for the Government. We heard Dame Elizabeth say this morning that if she reached one overall conclusion that she wanted us to understand, it would be about the degree of culture change necessary for the FCA to fulfil its statutory duties. The fact that she judged that the culture that existed was so inappropriate that it stopped the FCA from doing its statutory job effectively is a serious charge. It is, after all, the body that we depend on to uphold the consumer interest and charged with ensuring proper conduct in the sale and provision of financial services. I do not need to tell anybody on the Committee how important those are, either to everyday life or to the UK economy.
One of the most telling parts of Dame Elizabeth’s report is when she discusses the loss of a letter sent to the FCA by a financial adviser called Neil Liversidge in November 2015, fully three years before the collapse of LCF. The letter warned in fairly graphic language, some of which I read out on Second Reading, what was going on at LCF and the financial adviser’s concern. Dame Elizabeth’s damning conclusion is that even if the letter had not been lost in the FCA, which appears to be what happened, so dysfunctional was the FCA that it would not have done anything about it anyway. She says on page 78 of the report:
“it is unlikely that it would have resulted in any”
action by the FCA. She found that degree of dysfunctionality to be deep and in need of urgent attention, as set out in the recommendations.
Every time there is a public failing, we hear some familiar things being said. In fact, we could almost play word bingo with them. People talk about lessons learned and new systems being put in place, and sometimes there is change of leadership or a change of the management team—all those things. In the report, there was a very well publicised disagreement about the nature of accountability and responsibility involving Dame Elizabeth and the now Governor of the Bank of England, who led the FCA at the time. That was all played out in front of the Treasury Committee over several hearings early this year. I want to focus on the 13 specific recommendations on pages 47 to 49. I am not going to go through them in huge detail, but I will mention a few.
The first recommendation is the desire to treat the regulation of companies holistically; that is, to deal with the halo effect of regulated companies selling unregulated products. That was at the very heart of the regulatory failures over LCF. It was a big part of why the many phone calls to the FCA alerting staff to investor fears about what was going on went unheeded. Indeed, Dame Elizabeth’s report records many instances where calls were not acted on because the mini-bonds concerned were not regulated. There is a whole annex containing the transcripts and I will not delay the Committee with them at the moment, but they are all set out in the report.
The failure to act exposed a major weakness in the FCA’s approach. Even if staff could tick a box that said that a phone call was about something that it did not regulate, the FCA was still on the hook at the end of the day if the firm failed, as the Bill now shows. The recommendation therefore requires a major change in how the FCA thinks about unregulated products.
The next two recommendations are about how the FCA deals with information passed on to it and how it is shared. Again, they highlight a failing in how the LCF information was handled. As we have said, the financial promotions team intervened several times to warn the company about the misleading nature of its promotions as it kept saying that it was regulated by the FCA. However, the financial promotions team did not escalate this information to other parts of the organisation that could have taken action.
The fifth recommendation deals with the financial promotion rules and what to do about breaches when red flags should be raised. Page 49 highlights recommendations more for the Treasury than the FCA. As we discussed a moment ago, the first of those deals with what Dame Elizabeth calls a lacuna in the allocation of the ISA-related responsibilities between the FCA and HMRC. The Minister referred to a working group—I think that is the phrase that he used—and I hope it reaches a conclusion quickly. Such a response is common in the catastrophe word bingo that we often hear. A working group is okay, but it has to deal with the lacuna that has been identified.
Just saying that something is regulated by the FCA gives it an aura of safety and respectability and so does saying that about investments in an ISA wrapper. As the report says, once ISA status was granted to these mini-bonds, investment in them grew markedly. Putting money into an ISA is thought to be a responsible thing to do. People believe that those operating ISAs are respectable companies and not those engaged in what are, in effect, pyramid selling schemes like the one that LCF was operating. That is why this issue is particularly important.
Recommendation 12 is about the optimal remit of the FCA. That matters because the failure of LCF sits so squarely on the boundary of regulated companies selling unregulated products. The FCA’s remit is known in the parlance as the perimeter. The Minister gave evidence to the Treasury Committee a few months ago and he said it was not an issue about the perimeter, but about the failure to use the enforcement and supervision powers that the FCA already had. I understand what he means by that. He is saying that if the FCA had acted on the reports that it had received, a great deal less damage would have been done and the taxpayer would not be faced with the compensation bill set out in the Bill. Even though I understand the point he made, the perimeter is still relevant because it informed attitudes inside the FCA on how alarmed it should be about calls reporting concerns about LCF and whether it should act. That behaviour was influenced by the fact that the calls were about products that were not regulated.
How should the Government and the FCA respond to the issue of regulated companies and unregulated products? In theory, one response could be to say that regulated companies can only sell regulated products, but that would involve a major extension of regulation. That is not to say that that is necessarily wrong, but it would be a big step. For example, foreign exchange trading is not regulated but it is carried out by every high street bank in the country and they are, of course, regulated entities.
If the answer is not a major extension of regulatory responsibilities, what is it? Is it the Government’s position that there is no need to look at this because this was such a one-off event that cannot be repeated? How can we be sure of that? We asked the FCA this morning whether this could happen again and, understandably, the witness from the FCA said that he could not tell us for sure that it could not.
My right hon. Friend is rightly dwelling on the issue of the perimeter. May I give him another scenario that suggests that there might still be reasons to be concerned about whether the FCA has got the perimeter point in Dame Elizabeth Gloster’s report? Let us imagine that the FCA had investigated a financial services business that was recommending one thing to its customers but only 12 months later was doing the complete reverse. The FCA, having looked at it initially, says, “We’ve looked at it already. We’re putting a perimeter around that. We’re not going to consider what happened 12 months before in the context of this decision.” Were that to be a live situation, would it not suggest that the FCA had not grasped the perimeter point that Dame Elizabeth Gloster was making?
My hon. Friend makes a very strong point. The question of the perimeter is inescapable. One of Dame Elizabeth’s recommendations is that the Government consider the FCA’s remit, and the Government have said that they accept all her recommendations. The Minister said in his evidence to the Select Committee that this cannot be pinned on the perimeter, as it were, but as a conclusion of what has happened the perimeter must be considered. The Government have accepted that.
One way to deal with this is to say that regulated firms and regulated products must be brought together—I shall be grateful for the Minister’s response on that—but if that is not deemed to be the right response how will the question of the remit and the perimeter be responded to? At the heart of this failure is the halo effect of a regulated firm selling unregulated products.
Recommendation 13 is about ensuring that the legislative framework keeps pace with the sale of products through technology platforms. This field of activity is growing daily. It is driven by technological innovation—the movement of more and more activity online—and perhaps by the increased time people have had during the lockdowns to invest online. I do not want to try your patience, Ms Ghani, by delving too deeply into that today, but I think that this issue will occupy the House and this Minister in particular over the next couple of years. We will have to return to it again and again in the House, but recommendation 13 is precisely about legislation on selling things through technological platforms, and the Government and the FCA will have to adapt to it or they will fall behind the reality of the market and of financial crime.
Most of these issues have been put in the hands of the new chief executive, Nikhil Rathi, and the trans-formation programme to which the Minister referred on Second Reading. How are we to know that the 13 recommendations have been implemented? It is easy when a report is published to say, “We accept the findings.” The key is: are they followed through and properly implemented?
Dame Elizabeth’s report should be more than a series of individual recommendations. As she said this morning, it should result in a culture change. Much more communication needs to take place between different parts of the FCA while, crucially, not dropping the ball on regulated firms and unregulated products.
It is unfair of any of us, in government or in opposition, to load more responsibilities on to the FCA if it does not have the resources to fulfil them. We are clear in our amendment that the resources of the FCA have to be covered. Does the FCA have the resources to meet the ever-expanding list of responsibilities, including those on-shored as a result of our departure from the EU? It is funded through a levy on the sectors for which it is responsible. Is the levy giving it enough resources?
The failure of LCF exposed such a degree of dysfunctionality that it prompted the question: can the FCA really do its job? If not, the Government have to act because the public need the protection of a powerful regulator. The imbalance of information between the sellers of financial services products and the buyers absolutely demands that. This amendment is aimed at our receiving a report on the 13 recommendations and on their implementation by both the FCA and the Treasury. Its acceptance would provide Parliament and the public with a mechanism to ensure that statements saying that the recommendations had been accepted had actually been followed through and action taken.
I am pleased to speak in support of the amendment. There are two questions if the Government wish to reject it. Assuming that no one has any objection to the idea that somebody should keep an eye on what the Government are doing in response to the Gloster report—that would be a good idea—the questions are who should they report back to and when should they report back. Their response to those questions might provide the only grounds on which they could object to the amendment.
There can be no doubt that the Government must report back to the House of Commons and to Parliament. I know I might not look it—perhaps I do—but I am old enough to remember cases like Polly Peck, one of the great corporate scandals of earlier generations. In response to that, we had the Cadbury report that, in effect, invented the concept of corporate governance. It seems obvious now, but one of the key principles that came out of the report is that once the directors who are supposed to be in charge of a company have taken a decision for something to happen, they cannot just walk away. They have to put a process in place by which they, as the directors, individually and personally, can be satisfied that what they say should happen does happen.
The House of Commons in the UK Parliament is not a board of directors as such, but we still have to take responsibility—all 650 of us, individually and collectively—for making sure that, having had assurances from the Government that they will act either directly or indirectly through agencies such as the FCA, they will do things to sort out a £1 billion scandal. We are the ones who ultimately have to hold them to account for that.
I am not saying that a report or a statement to Parliament is the best possible way of holding the Government to account. Frankly, it is a joke of a holding to account, but it is the best that we are allowed in this place. That is why it is included in many of our amendments. Any argument from the Government that any way of reporting back on such vital recommendations that is anything less than regular statements to the full House of Commons and making themselves available to take questions from, if we are lucky, just 5% of all elected MPs, is just not acceptable.
Secondly, when should the Government report back? That is why I made a point of asking Dame Elizabeth whether six months from now—12 months from the original recommendations—is a reasonable time in which to expect significant progress. Dame Elizabeth made it clear that she cannot tell us about parliamentary procedure and all the rest of it, and I accept that. However, her view was clear that, in six months from now, it would be reasonable to expect there to be significant progress on a significant number of the recommendations. At that point, the House of Commons should get a report back from the Minister to explain what has happened and if it has not happened yet, when it will happen. Most importantly, he will explain why what has not happened has not happened. We have had far too many examples of Ministers giving assurances in good faith but of things not happening or, if they did happen, of their taking far longer than they should have done.
Time matters. None of us knows whether there is another London Capital & Finance already happening, and we heard from witnesses who are convinced that it is. There could be another Blackmore Bond, Basset & Gold or you name the corporate investment mis-selling scandal. It could be happening again right now. We do not know how many of them are on the go just now already swallowing up people’s pensions and savings. If the Minister is not prepared to commit to giving an update within six months, will he tell us what timescale he thinks is reasonable for us to expect real change? “In due course” is just not good enough for people who might be losing their investments now even while we dither and dally about what to do next.
I rise to support amendment 2, in the name of my right hon. Friend the Member for Wolverhampton South East. I share some of the frustration that the hon. Member for Glenrothes aired: this is the only route available to the Opposition to signal to the Government and the FCA the need to provide a continuing update on their progress in implementing the lessons that have been learned from the LCF scandal. My right hon. Friend the Member for Wolverhampton South East went through some of the many issues and recommendations that Dame Elizabeth Gloster’s report highlighted, but let me pick out five in particular.
First, the FCA failed to consider LCF holistically. Indeed, as my right hon. Friend pointed out, we got Dame Elizabeth to emphasise again in the evidence session today that the most significant issue was a very restricted approach to the regulatory perimeter. I will come back to that point.
Secondly, the FCA’s policy documents were unclear on the handling of key questions. Thirdly, its staff had not been trained sufficiently in various key and crucial matters. Fourthly, there was a series of gaps in the law that needed fixing in order to enable proper regulation. Fifthly, the issue that my right hon. Friend touched on last was the FCA’s scope and capacity to intervene effectively on consumers’ behalf—did it have sufficient powers?
Let me turn to the first of those concerns—the restricted approach to the regulatory perimeter and whether the FCA has learned to consider issues to do with consumers holistically. The example that I gave when I intervened on my right hon. Friend was that of a financial service business that has recommended to its customers something that the FCA has approved, only for it to come down the line, 12 months later, and suggest the reverse approach. That is effectively what is happening in the case of Liverpool Victoria. I do not want to test your patience too much, Ms Ghani, but let me clarify that example very briefly.
Liverpool Victoria converted to a company limited by guarantee from a friendly society two years ago. The FCA looked at it—
I am curious as to how the hon. Gentleman will keep this in scope, but I am listening attentively.
I am grateful for your patience, Ms Ghani, and I will not test it much more.
The FCA looked at that two years ago and approved it. Crucially, at the time, the chair and the leadership of LV said, “This has got nothing to do with demutualisation.” Where the regulatory perimeter issue comes in is that the FCA will not look at what happened two years ago in the context of what Liverpool Victoria is now trying to do. It is surely legitimate to be concerned about Dame Elizabeth Gloster’s crucial finding that the FCA had not worked out a way to handle decisions being taken by businesses holistically. That has not been properly grasped, and I gently suggest that Liverpool Victoria is the key evidence in that respect.
On the question of the FCA’s policy documents, the way they were used by staff, and whether they were appropriate to LCF’s challenges, they clearly were not up to the job, but at least there was a policy document. In the case of Liverpool Victoria, there does not appear to be any policy document on the FCA’s handling of the demutualisation. That raises a bunch of serious questions, albeit not within the scope of our conversations today.
Clearly, there is a question as to whether staff have been trained appropriately to handle the 600-plus phone calls that customers of LCF made to the FCA, raising their concerns about the products that were on offer, and that they had invested in and were buying. Again, one would have thought that the FCA would have grasped that concern and made sure that staff were trained properly on the big issues of the day affecting the FCA.
Again, I am surprised. I use the example of Liverpool Victoria again. There has been no looking back at previous demutualisations and at how the consumers’ interest was protected in that respect. So even if the FCA has highly capable staff, as I am sure it has, given that they have not looked back, one wonders how they can possibly be trained to think through properly all the key questions.
One of the issues that I raised in an intervention on the hon. Member for Glenrothes was about the extent to which the FCA has learned from the LCF scandal that perhaps it needs not to be quite so close to the boards and management of financial services businesses. Perhaps it needs to move just a little bit more towards having a little more scepticism on behalf of the consumer.
So imagine my concern when I discovered that one of the regulators involved in handling the consumer interest in the Liverpool Victoria case has met the management of LV 35 times and not once with any consumers of the company. That would seem to suggest that they have not learned the lessons.
Lastly, I just want to suggest that there is a series of gaps in the law that need fixing. My right hon. Friend the Member for Wolverhampton South East rightly drew attention to the concern in the LCF case about who regulates mini-bonds. It is gratifying to hear that there is a working group looking at the relationship between HMRC and the FCA in this regard. However, the Minister will not be surprised to learn that I think there is a series of legislative gaps regarding how consumers are handled during the demutualisation of a major financial services business, but I would tempt your patience, Ms Ghani, were I to go down that route. Fortunately, as the all-party parliamentary group for mutuals is meeting the Minister, it will have an opportunity to go through those issues and I very much look forward to that occasion.
I will obviously now move to consideration of amendment 2. I am grateful to the right hon. Member for Wolverhampton South East, who is an experienced and distinguished former Minister himself. He referred to the catastrophe word bingo. I do not want to address that particularly, but I will address the amendment, which seeks to add a requirement for the Secretary of State to publish a report setting out progress on the implementation of the 13 recommendations in the report by Dame Elizabeth Gloster.
I will also tell the right hon. Gentleman precisely what we have done, what I think the FCA has done, and where I think that takes us, and I will address his concerns, raised throughout this debate, on the perimeter, on the halo effect and some of the points that Dame Elizabeth Gloster made.
The Treasury accepted Dame Elizabeth’s four recommendations regarding the Treasury and we welcome the FCA’s commitment to implement all nine of her recommendations that apply to it. We are committed as a Government to act on Dame Elizabeth’s recommendations, to ensure that the regulatory system maintains the trust of consumers. I submit that progress has already been made in implementing the recommendations and I set that out during my evidence session for the Treasury Committee’s inquiry into the FCA’s regulation of London Capital & Finance on 21 April.
Regarding Dame Elizabeth’s recommendations for the FCA, I obviously welcome the FCA’s acceptance of them, and I am sure that the Committee will have noted its commitment to report publicly on its progress in implementing these recommendations and indeed on its wider transformation programme. I am sensitive to the criticism that this is an empty exercise where there is nothing specific that Parliament and Members can address. I would therefore draw attention to the fact that Charles Randell, the current chair of the FCA, provided a detailed update in his letter to me on 16 April.
The letter has been published on the FCA’s website and sets out the comprehensive improvements that have already been delivered. The right hon. Member for Wolverhampton South East rightly referred to a number of those, and the hon. Member for Harrow West mentioned training and the empowerment of staff to make decisions and respond to those calls and representations from consumers. A further update will be provided in the FCA’s annual report, which will be published in July, and the FCA is committed to providing updates every six months until the programme is delivered. I would also note that the Treasury Committee intends to publish its report on the FCA’s regulation of LCF before the end of June, which the Government and the FAC will no doubt respond to as appropriate.
The right hon. Member for Wolverhampton South East raised Dame Elizabeth Gloster’s recommendations concerning the perimeter and remit. In essence, what she said was that the FCA had a responsibility to deal with a firm that it regulated, but was conducting unauthorised activities. As the right hon. Gentleman will know, I believe that in financial services legislation that we took through Parliament together, we gave the FCA responsibility to remove the names of firms that do not conduct any activities but are regulated under the FCA, and so remove the halo effect. I watch and monitor the transformation programme very closely, but I think that the amendment would create an additional and unnecessary administrative burden given the commitments that I have set out, and would distract from the work to deliver the recommendations themselves.
I wanted to correct one thing I said in my earlier speech. I referred to eight firms rather than eight years; we looked across mini-bonds over eight years, and there are probably more than eight failed firms. I wanted to put that on record.
There is no complacency on my part regarding how important it is that these 13 recommendations are implemented fully. We will then see how things look thereafter. On the perimeter specifically, I met the chief executive of the FCA on 20 January and the minutes of that discussion were published on 25 February, and I remain open to those conversations going forward.
Given those reassurances, I hope that hon. Members will not seek to press the amendment.
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
London Capital & Finance was an FCA-authorised firm that primarily offered an unregulated investment product, commonly known as mini-bonds, to retail consumers. It entered administration in January 2019, impacting 11,625 people who invested around £237 million. The Serious Fraud Office and FCA enforcement have launched an investigation into individuals associated with LCF. The Financial Reporting Council has also launched investigations into the audits of LCF. As the Committee will know, Dame Elizabeth Gloster led that independent investigation, which also revealed shortcomings in the FCA’s supervision of LCF. A complex range of interconnected factors contributed to the scale of losses for LCF bondholders, creating a situation that is unique and exceptional. While other mini-bond firms have failed, LCF is the only one that was authorised by the FCA and sold bonds in order to “on-lend” to other companies. As I have said before, LCF’s business model was highly unusual both in its scale and structure. In particular, it was authorised by the FCA despite generating no income from regulated activities. Bondholders were badly let down by LCF and the regulatory system designed to protect them, and I announced that the Treasury had set up a compensation scheme for bondholders who suffered losses after investing in LCF. The scheme will be available to all LCF bondholders who have not already received compensation from the FSCS and will provide 80% of the compensation that they would have received had they been eligible for FSCS protection up to the maximum cap of £68,000. The LCF scheme is expected to pay out £120 million in compensation to around 8,800 bondholders in total. Where bondholders have received interest payments from LCF or distributions from the administrators, Smith & Williamson, these will be deducted from the amount of compensation paid.
There are two main aspects of clause 1, which I shall explain in turn. First, legislation is required to establish the financial authority to enable the Treasury to incur expenditure in relation to the scheme. That will ensure that the Treasury complies with the 1932 Baldwin concordat and the principles of managing public money. Clause 1 provides the Treasury with the spending authority that will enable payments to be made to eligible bondholders. We are working on the details of that scheme but I hope that it will be possible to reimburse them within six months of Royal Assent.
Secondly, the Treasury intends to use the process set out in part 15A of the Financial Services and Markets Act 2000 to require the Financial Services Compensation Scheme to administer the scheme on behalf of the Treasury. Clause 1 disapplies the FCA’s rule-making requirement so that existing rules relating to the FSCS can be applied to the scheme without the need to undertake a lengthy consultation. That reflects the fact that existing rules have already been consulted on and avoids any further unnecessary delays to compensation payments. In addition, as the Treasury will pay for the scheme, there is not the same obligation to consult FSCS levy payers as there would be for rules that sought to make use of FSCS funds raised by the levy.
I submit that clause 1 is an essential step in the introduction of the LCF compensation scheme without which compensation payments cannot be made. I therefore recommend that the clause stand part of the Bill.
I understand that the right hon. Member for Wolverhampton South East wishes to make a short contribution.
It is really just a question. The Committee has received a number of representations from LCF investors about this 80% level. What is the Minister’s response to those representations? If LCF investors were here and were allowed to speak, they would say, “Why is it that those who invested after getting financial advice get 100% of the FSCS level because financial advice is a regulated product and therefore covered by the FSCS in full but we are getting 80% of that level?” What is his response on this differential treatment of the two types of investors?
Before you respond Minister, I call the hon. Member for Glenrothes to make a short contribution.
The Minister referred to the fact that there are ongoing investigations in relation to LCF. Does he recognise that some of the individuals and intermediary businesses that are now under criminal investigation for their part in LCF also played a major part in other mini-bond scandals that I have written to him about separately? Although he made the point about the uniqueness of LCF, the aftershock of LCF is very definitely being felt in other mini-bond scandals that have happened since then.
Out of courtesy, I am very happy to respond to my colleagues. The right hon. Member for Wolverhampton South East asked why the 80% figure was not 100%. As I have tried to explain through the submissions that I have made, the Government have been trying throughout to balance the interests of bondholders and the taxpayer to ensure that we have a fair level of compensation in respect of the financial losses incurred. The scheme is based on the FSCS level of compensation but, as he knows, it is 80% up to that cap of £68,000 to reflect the unregulated nature of the LCF product.
I emphasise that it is imperative to avoid creating the misconception that Government will stand behind bad investments in future, even where the FSCS does not apply. That would create a moral hazard for investors and potentially lead individuals to choose unsuitable investments thinking that the Government will provide compensation when things go wrong. To avoid creating that misconception, and to take into account the wide range of factors that contributed to the losses that the Government would not ordinarily compensate for, the Government will establish the scheme at the level of 80% of LCF bondholders’ initial investment up to the maximum of £68,000. With any investment, there is clearly a risk that sometimes investors will lose money, and the Government and taxpayer cannot and should not be expected to step in and compensate for every failure and every loss. It would not be right or fair for investors in non-regulated products to receive fuller compensation than those who have invested in regulated products, for which the maximum amount is capped at £85,000 under the FSCS.
On the remarks of the hon. Member for Glenrothes about the individuals involved in an ongoing serious fraud inquiry, I am not familiar with the detail, but obviously I am happy to receive any representations. I hope that brings satisfaction to the Committee.
Question put and agreed to.
Clause 1 accordingly ordered to stand part of the Bill.
Clause 2
Loans to the Board of the Pension Protection Fund
I beg to move amendment 3, in clause 2, page 2, line 7, at end insert—
“(3) No loan shall be made under this section until the Secretary of State has laid before Parliament an impact assessment of the means of repaying the loan, including specifically the impact on pension schemes from the Fraud Compensation Fund levy.”
This amendment would prevent the Secretary of State from making a loan to the Board of the Pension Protection Fund for the purpose of compensating eligible pension schemes until he or she has laid before Parliament an impact assessment of the Fraud Compensation Fund levy on different pension sectors.
With this it will be convenient to discuss the following:
Amendment 5, in clause 2, page 2, line 7, at end insert—
“(3) Before making a loan under this section, the Secretary of State must lay before Parliament an assessment of the levels of fraud in the pensions system.”
This amendment would require the Secretary of State to publish a report on the levels of fraud in the pensions system before making any loan under new section 115A of the Pensions Act 2004.
Amendment 6, in clause 2, page 2, line 18, at end insert—
“(5) Within twelve months of this Act receiving Royal Assent, the Secretary of State must publish a report on the operation of the Fraud Compensation Fund in connection with any loan made under section 115A.”
This amendment would require the Secretary of State to publish a report, within twelve months of this Act being passed, on the operation of the Fraud Compensation Fund in connection with any loan made to the Board of the PPF under new section 115A of the Pensions Act 2004.
We have tabled a number of amendments seeking to improve the Bill. Amendment 3 seeks to ensure that we have clarity and certainty before taking the step of asking key pension schemes to fund the majority of the bill for the Fraud Compensation Fund. It is perhaps worth reflecting on the evidence we heard this morning, which was so illustrative on this issue. One socially important pension scheme—the People’s Pension fund, which we heard about today—was asked to put forward a large amount of money to help support the compensation fund. The fund is known to take a large number of people—many of them women, on low incomes or self-employed—who have started to save for a pension through auto-enrolment. I am sure the whole Committee will agree that it is a worthwhile objective of Government policy to encourage pension savings by a wide range of people, not just the wealthier sector of the community.
Specifically, amendment 3 would prevent the Secretary of State from making a loan to the board of the Pension Protection Fund for the purpose of compensating eligible pension schemes until he or she has laid before Parliament an assessment of the impact of the Fraud Compensation Fund levy on different pension sectors, thereby allowing Parliament to consider the issues affecting them. That is essential because, as we have heard, the burden of compensating victims of fraud is falling disproportionately on certain groups. As we heard this morning, just two schemes—the People’s Pension and the National Employment Savings Trust, which are both not-for-profit operators—have historically ended up paying the lion’s share of the fraud compensation levy, despite their size and the fact that there is no tangible connection between those funds and the fraud that we are trying to address.
It is perhaps helpful to mention the figures again, for the sake of clarification. To recap, the PPF’s 2019 annual report and accounts reported that the FCF levy raised £6.9 million. What is truly surprising to casual onlookers, however, is that 37% of that was paid by the two pension schemes that I mentioned—NEST and the People’s Pension—even though they managed only £20 billion of the roughly £2 trillion of assets held in UK workplace pensions. They were managing just 1% of the total, which is a tiny amount, as I am sure everyone will agree. There is clearly a mismatch, and I am sure that the Minister, who has obviously followed this in great detail, will want to respond because something strange seems to be going on. With the figure now enlarged significantly to hundreds of millions of pounds, and with the potential repayment of the loan via an increased levy, it is understandable that the schemes are anxious about where the burden of repayment will fall. That is a fair point, and one that I am sure we would all want to consider thoroughly.
We have been promised a review of the levy later this year, and I appreciate that the Government are willing do that. However, it does not seem right that, given the significant sums involved for the loan, the legislation should proceed without pausing—all we are asking for is a pause—to consider its impact. Both of the pension schemes I have mentioned play a hugely important part in expanding pensions coverage, and I am sure that members of the Committee are aware of the national policy challenge of encouraging more people to save for their pensions. We all want a much larger proportion of the community—ideally, everybody—to have access to a pension scheme that they can save into as well as the state pension. The two organisations I have mentioned have many low-income savers who I am sure we want to support. It is crucial that we consider the long-term viability of those schemes as we consider the structure of the levy, and that the long-term viability of the two pension schemes is not jeopardised.
A fundamental change is under way and it needs to be addressed. I hope that the Minister will reflect on that. First, the scope of who is compensated for fraud has been drastically expanded by the High Court judgment. Secondly, the industry structure has radically altered since the levy was first designed. Both of those points are important, and combined they will, potentially, have a huge impact on the rest of the sector. Careful consideration neds to be given to that. An impact assessment is necessary to give parliamentarians, sector experts and decision makers in the round a broader understanding of this complicated situation.
The Government have a duty to make sure that not-for-profit operators and other legitimate, law-abiding companies and mutuals, as my hon. Friend the Member for Harrow West has said, are not unfairly affected or carrying the burden of responding to the need to pay out compensation for scams. The savers and pensioners who have invested in that way should not be forced to pay higher charges as a result. I appreciate the pressure on time and hope that the Government will consider the amendment in great detail.
The official Opposition’s spokesperson gave very clear reasons why there is benefit in our agreeing to the amendment. I would like to anticipate the reasons that the Government will give for rejecting it and explain briefly why those reasons are not valid—I nearly said mince, but I do not know if that would be understood.
I hope that the amendment will be regarded, not only today but in the future, in the same spirit as that with which it has been tabled. I can almost see someone at the Dispatch Box, thumping the table in response to a question, saying, “Of course, Mr Speaker, we all know that the official Opposition attempted to delay implementation of the scheme.” Amendment 3 could be misrepresented in that way, but that is clearly not what it seeks to do. It asks the Government to publish the results of something that any responsible Government would do before they created the terms of a loan. All it asks is that, having done an assessment—which surely they will—they tell us the results.
The impact on particular kinds of pension schemes is important, because it could be argued that the reason the clause is needed is that a previous Government did not properly assess the impact of the changes they made in 2015 on certain types of pension holders. That is where pension liberation and pension liberation scams came from. I hope that the Government have learned their lesson. If they do not assess in more detail the impact of major changes on particular types of investors and pension holders, they may be saving up problems for the future.
I will briefly mention the other two amendments. The Government should do what is proposed by amendment 5. Do they have any idea of the level of pension fraud in the United Kingdom right now? They should.
The Minister indicated this morning that the measure proposed by amendment 6 might already have been done by someone else. If that is the case, there is nothing to stop him taking that document and putting a written statement before the House, saying, “I have received the report of xyz this morning and I endorse its contents.” A report is given significantly more weight if it is put on the record in that way. Presenting an annual report also gives Ministers an opportunity to say, “I am unable to endorse its contents, for the following reasons,” but endorsing it gives it a gravity that it might not otherwise have had. The Minister may have noticed that I am no great fan of this Government or this place, but if a Minister of the Crown lays before Parliament a statement taking responsibility for and endorsing the report of a body that reports to their Department, that carries more weight than the report simply appearing somewhere in the pages of the media a day or two later.
In case any Member did not quite understand what I said at the top, all of the proposed amendments to the clause are being debated now, including amendments 5 and 6. Mr Rodda, to confirm, are you aware of that, and do you wish to speak to amendments 5 and 6 now?
I am very grateful, Ms Ghani. I would like to speak to amendments 5 and 6. Amendment 5 obviously covers a very different area. I sponsored it because I think that the central principle of this country’s pensions system—I am sure the Committee agrees—is that people who work hard all their lives and who contribute and save diligently are able to receive a decent pension in their retirement. I hope there is cross-party agreement on that. I am sure there is; historically, that has been the case.
In recent years, however, it has become clear that an increasing number of pensioners—and, indeed, people approaching retirement, who are also an important group and are in some ways quite vulnerable—have been set back significantly as a result of what are commonly called pension scams. As the Bill Committee, we have a duty to protect people and to help them prepare for their retirement. Amendment 5 therefore seeks to require the Secretary of State to publish a report on the levels of fraud in the pensions system before making any loan under new section 115A of the Pensions Act 2004. We believe that that is a crucial first step in tackling pension scams. Obviously, there are a whole series of ways to tackle them, and we appreciate that the Government are taking other steps. This is important because the consequences of the scams can be utterly devastating for those directly affected. They are also potentially expensive and damage trust in the pensions system as a whole and the operation of many businesses in the sector. It is critical that we have a system that is robust and protected against scams. The Bill highlights the consequences for everyone, including other scheme members, when fraud is allowed to spiral unchecked.
The pandemic has, sadly, given rise to an increase in fraud, as many criminals have taken advantage of the confusion and, in some cases, the isolation of vulnerable people to prey on those who, sadly, can fall victim to these dreadful crimes. However, pension scams were already on the rise. It is worth noting that, since George Osborne’s pension freedoms were introduced in 2015, fraudsters have taken advantage of confusion around what the rules precisely allow. We warned at the time that those reforms would significantly increase that risk. The Government must acknowledge, as I am sure they will, the failings of pension freedoms and their associated tax problems, as in the case of the NHS.
One of the most egregious abuses of pension freedoms has been a scam by sophisticated criminals who trick people into accessing their pensions before the legal age of 55, relying on confusion about the rules, and then abscond with the funds, leaving people in a desperate situation. In some cases, the victims suffer a double injustice: not only do they lose their entire pension pot in some cases; they are also aggressively pursued by HMRC for tax penalties, having broken the rules on money they no longer have. There are some truly heartbreaking cases of innocent people being misled and sadly losing their life savings, as well as being left with tax debts of tens of thousands of pounds.
We would like reassurance that the Department for Work and Pensions and the Treasury will look into tackling this problem in the wake of the Dalriada judgment last year. The Government could provide that reassurance by supporting amendment 5 as a crucial first step. They should also find a way for HMRC to work with the authorities to make sure that these crimes are properly investigated, targeting the promoters, not the victims, and recognising the dreadful circumstances in which those victims find themselves through little fault of their own.
The High Court judgment that is at the centre of the loan we are discussing today is linked to exactly that type of fraud. In its recent report on pension freedoms fraud, the Select Committee on Work and Pensions recommended that particular aspects of pension freedoms and the Pension Protection Fund be reviewed in further detail in that light.
We agree with the Select Committee. Our amendment, which calls for an assessment, could form an important part of tackling the issue. It is important that the Government publish the report the amendment seeks, in order to show the public that they are not simply looking at the symptoms of fraud, but tackling the causes. I am sure the Minister will want to consider that point. The Government should set out an action plan to protect pension savers and an assessment of the level of fraud in the system as part of that work.
I know the Minister campaigned to tackle cold-calling last year in the Pension Schemes Act 2021. The Bill quite rightly tackled telephone cold-calling, but people can be approached in a cold manner online. I ask the Government to consider that avenue for scams. There has been some mixed messaging, but I hope the Minister, who I know is in touch with the sector, will take the point on board. I have written to the Secretary of State for Digital, Culture, Media and Sport to ask that the Government act on this point and include it in the online harms Bill, which is an appropriate place to tackle these serious scams, alongside many others.
Pension savers are particularly vulnerable in the few years just before retirement, when savings have accumulated but before they have actually retired. Pension transfers, especially for those in defined-benefit pension schemes, can be targeted by criminals, alongside pensions liberation fraud, which we are talking about today. This is where the Money and Pensions Service should play a bigger part. As Members will know, the service is a Government-funded body that offers free pensions advice to people aged over 50, through its Pensions Wise service.
Is it possible for Pensions Wise to play a bigger role? I hope the Minister will consider that point. It could be helpful and supportive to individuals, as well as helping the operation of the sector—the businesses that are operating legitimately, as the vast majority are.
It was disappointing that the Government rejected a proposal in proceedings on the Pension Schemes Act that would have booked a default Pensions Wise appointment for everyone in the five years prior to their retirement. The amendment was put forward by the Chair of the Work and Pensions Committee, my right hon. Friend the Member for East Ham (Stephen Timms), and was supported by the Opposition. It would have meant that everybody would automatically get some basic knowledge about where they stood, better protecting them against scams.
Finally, I would like to share some research from the People’s Pension and the Police Foundation that demonstrates the scale of the problem and why we need to act urgently. The true level of pensions fraud in the UK, though large, is unknown, but could it be as high as £14.6 billion, based on the average pot size of £63,700.
I hope the points I have set out are helpful and that the Minister will consider them. We would like to see this area addressed by the Government. I urge the Minister to respond to my points.
Ms Ghani, should I speak to the other amendment now?
The amendments are grouped, so they are all to be debated together. Do you have a contribution on amendment 6?
Yes. I will move straight on. I appreciate your tolerance.
Amendment 6 seeks to perform another important role—ensuring that the PPF and the Fraud Compensation Fund work effectively and efficiently for all parties, which I am sure everyone here would support. The amendment would require the Secretary of State to publish a report, within 12 months of the Act being passed, on the operation of the Fraud Compensation Fund in connection with any loan made to the board of the PPF under proposed new section 115A of the Pensions Act 2004.
In the debate on amendment 3, I set out why we needed a fuller understanding of the way the levy works and its impact—I mentioned the two not-for-profit organisations that are doing such valuable work—in order to improve the situation for savers and pensioners. I will not go into the detail of those arguments again, but they are applicable and equally important for this amendment.
It is crucial to highlight the context in which we put forward the amendment. A very limited number of schemes are currently propping up the fraud compensation levy by paying disproportionate contributions, even though they do not have a meaningful connection to fraud at this time.
These are crucial funds that support large numbers of savers—indeed, increasingly so in this country, as we enjoy the success of auto-enrolment, which is a great step forward for pension savers, and indeed future pensions across the country, providing greater access to pensions. Millions of workers across the country, at different stages of their lives, pay into these schemes and rightly expect their pension pots to be given the best possible chance to grow. Yet because the levy is passed on to savers through charges, it is current Government policy to ask savers to do the right thing in order to pay for the damage caused by criminals. As we heard earlier, this is not happening on a small scale but on quite a large scale.
Again, the PPF reported in its 2019 annual report and accounts that the FCF levy raised £6.9 million, 37% of which is paid by NEST and People’s Pension, as I said earlier, despite their having a very small share of the overall assets—around 1%. This issue disproportionately affects these very worthy organisations, which are helping so many people.
Another factor that makes a review after 12 months so important is that the High Court only recently ruled to drastically expand the scope of those who may qualify for compensation for pensions fraud. As a result, the full scale of the situation might not be immediately obvious, which is yet another reason why the Government might want to consider amendment 6, as I hope they will.
The Secretary of State has a responsibility to ensure constant monitoring and assessment. Our amendment would help her and her team of Ministers to perform their roles in that way. Without a proper assessment, the Government could be taking us down a path towards an unsustainable pensions sector, in terms of fraud compensation, and severe problems that will have to be rectified at greater cost in the future, which obviously none of us wants.
Finally, another court judgment could change things again, if it were to rule differently and the lawyers then pointed to a number of additional issues related to the ruling that had not yet been clarified. As a result, the pensions sector is still having to work under a degree of uncertainty, and obviously it is a central principle of any wise policy to try to reduce uncertainty. I hope that a report could to some extent alleviate that uncertainty. I appreciate that it would not completely resolve it, but it might be of assistance to businesses in the sector that are providing the services that we value so much, so I hope that the Minister will consider our amendment.
On a point of order, Ms Ghani. You were very good at the end of the evidence session with the FCA to point out that the director, who was present, agreed to provide two pieces of written correspondence to me and to the whole Committee. As I understand it, that has not yet arrived. I have some sympathy for the FCA, given the timetable on which we were asking it to provide that information, but I wonder whether the Clerk might gently press the FCA for that information at some point this week.
Thank you, Mr Thomas; your point of order is duly noted. I believe that the Clerk will indeed be pressing for that data as soon as possible.
I gather that we have a possible vote in the House, so I will attempt my entire response in 10 minutes. Before I do so, it is right that, on behalf of the entire Committee, I thank you for chairing the Committee, Ms Ghani. As the former ports and shipping Minister, and in a month when we celebrate the first female Royal Navy captain, some might argue that you are a well-qualified captain to keep what is—let us be honest—a motley crew in order. If you run for Speaker, Ms Ghani, I will definitely be supporting you.
Let me discuss what clause 2 does and does not do. It creates a power to make a loan to the board of the Pension Protection Fund, following the decision of 6 November 2020 in the case of the PPF v. Dalriada. It achieves that by inserting a new section into the Pensions Act 2004 to provide the Secretary of State with a power to loan money to the board of the PPF.
I think it is fair to point out to the Committee that the clause deals with matters that are predominantly––almost entirely––to do with 2010 to 2014. Many would wish to make this a case about pension freedoms, when in fact pension freedoms post-dated these matters. It is clearly a serious and important matter, and, following a court decision, the Government have accepted the entirety of that decision.
The practical reality is that the Fraud Compensation Fund has assets of £26.2 million, and the potential liability arising from the court judgment is £350 million. I accept that points have been made in respect of how the loan is to be repaid in the longer term and I will address that, but I shall now turn briefly to the amendments.
Amendment 3 seeks an impact assessment. With great respect to the Members who tabled that request, it is utterly unnecessary. It is, in fact, precluded by the decision of the House on section 22 of the Small Business, Enterprise and Employment Act 2015, of which I am sure Members are acutely aware. It states that impact assessments are not required in respect of levies or other such charges in these particular circumstances.
Secondly, the clause is implementing a court judgment.
Will the Minister clarify his last comment? Did he say that impact assessments are not required or that they are not permitted? Surely, if they are not required, we can still ask for one if we think it would be useful.
That is a very fair question that I shall attempt to answer while I am on my feet, but I believe that it is not required. Section 22 of the 2015 Act excludes impact from the definition of regulatory provision, so I believe that it is an exclusion rather than a requirement. If I am wrong in any way, I shall write to the hon. Gentleman and correct myself. I may be corrected while I am on my feet, although in the brave new world of covid, that is quite difficult, as I am sure that he understands.
Clearly, if we were to do an impact assessment at this time, it would fundamentally delay the implementation of payment to members, and the blunt truth is that the PPF will run out of money by October if we do not progress this legislation. The levy increase will be consulted on post the passing of this Bill. It will need consultation, regulations and debate in the usual way.
Amendment 5 would also delay the progress of this matter. The Government will respond to the Work and Pensions Committee, to which I gave detailed evidence, before the end of the summer term. The full response of the Government in respect of all matters relating to such scams will be made before the end of term. We are already progressing Project Bloom and there is the work of the Money and Pensions Service that was introduced by my hon. Friend the Economic Secretary to the Treasury in the previous Act that we worked on. We have produced section 125 of the Pension Schemes Act 2021, which Her Majesty signed on the dotted line in early February, and the consequential transfer regulations that we have consulted on over the past month to ensure that pension scams are prevented on an ongoing basis.
I have been asked to address other matters. It is clear that Ministers are engaging with various organisations, including Google and Facebook. The two of us have made our views very clear to those organisations about how they should regulate themselves. I agree that Pension Wise should be used more but, with great respect, I disagree with the Chair of the Select Committee’s proposal for the many good reasons that I outlined in the debates on Report and Third Reading of the 2021 Act. Clearly the work that we are doing jointly with the Treasury and other organisations, including the FCA, on stronger nudges towards using Pension Wise and other things will make a massive difference.
On amendment 6, there is already an annual report. In true Chamberlain style, I have it here in my hand: the annual report of the Pension Protection Fund, which is published every July. I know, Ms Ghani, that you will have read the most recent version, and will be looking forward with bated breath to the July 2021 report, which will specifically address the issues whose importance today’s witness made very clear.
In those circumstances, I invite hon. Members not to press their amendments.
Let us try to ensure that we get through this portion of business before the Division. The Opposition spokesperson may of course respond, but let us keep it brief.
I am grateful to the Minister for his response. I feel that he is being somewhat generous in his description of the Government’s assessment of this problem and the level of response. I urge him to redouble his efforts and to focus on some of these points in further detail.
I think that the hon. Member for Glenrothes is right to draw attention to the subtle legal difference on the issue of the impact assessment. Surely, given the scale of what is going on, it would be wise to carry out an impact assessment. I appreciate the pressure of time, but perhaps with the considerable resources of DWP, which has the largest staff quota of any Department and a very able group of civil servants, it would be possible to carry out an impact assessment on a rapid turnaround, given the scale of what we are talking about and, indeed, the problems of the sector as a whole.
On the ongoing consultation and the possibility of reviews in this area, will the Minister agree to meet me and the not-for-profit providers to explore the particular issues affecting them?
I will, of course, agree to meet them. I already meet NEST and the People’s Pension regularly, and they have made a very good pitch for a reduced levy. It is already a reduced levy, as I am sure the hon. Gentleman is aware, and there is already a 0.75% cap, but of course I am looking forward to meeting them as part of the ongoing consultation.
I am very grateful to the Minister and put on the record my thanks to him for offering that meeting. I look forward to seeing him and discussing the matter.
On amendment 5, the Minister mentioned the regulations in the Pension Schemes Act 2021, but will he write to me to discuss some of the ways in which the specific parts of the regulations relate to this issue? He has been reported in the media as suggesting that it might be wise to consider pension scams in the online harms Bill. Perhaps he will comment on that now or write to me separately, because we would like to work constructively with the Government on this matter. I appreciate that online harms are a huge and wide-ranging issue, and I have a constituency interest in violent crime in respect of a tragic incident in Reading.
I would be happy to write to the hon. Gentleman. He can read in detail what I said in The Times on both occasions, and that is pretty much all I can say on that matter.
I thank the Minister for his candour and for offering me a cutting from The Times, which is a fine newspaper.
Finally, on the PPF annual report, the issue is that while these documents are very worthy, and we should all read them, there is a delay. I urge the Minister to consider the need to reassure organisations in the sector, pension savers and pensioners themselves in the near term, rather than our having to wait well into 2022 before the 2021 annual report is available.
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 2 ordered to stand part of the Bill.
Clause 3 ordered to stand part of the Bill.
Bill to be reported, without amendment.
Committee rose.
Written evidence reported to the House
COMPB 01 Nigel Simmonds
COMPB 02 Paul and Susan Warren
COMPB 03 Mary Young
COMPB 04 Transparency Task Force (supplementary)
COMPB 05 Financial Services Compensation Scheme (supplementary)
(3 years, 2 months ago)
Public Bill CommitteesBefore we begin, I have a few preliminary reminders for the Committee. Please switch electronic devices to silent mode. No food or drink except the water provided is permitted during sittings of the Committee. I remind hon. Members to observe physical distancing. They should sit only in places that are clearly marked. It is important that Members find their seats and leave the room promptly in order to avoid delays for other Members and staff—that is not actually an issue for us because we have the room for the day. Members should wear face coverings in Committee unless they are speaking or medically exempt. Hansard colleagues would be grateful if Members emailed their speaking notes to hansardnotes@parliament.uk.
We now resume line-by-line consideration of the Bill. The selection list for today’s sittings is available in the room. I remind Members wishing to press to a Division grouped amendments or new clauses that they should indicate their intention when speaking to their amendment. I think that, before we start, there is a point of order from the shadow Minister.
On a point of order, Sir Charles. Good morning to you. I made a small but significant and totally unintentional mistake in one of my speeches last week. In the debate relating to clause 100, I referenced the Sentencing Council and said that it had expressed concern about the reasoning behind the proposed provision. The council had not; the comments made should have been attributed to the Sentencing Academy. I apologise to both organisations for the error, and I am pleased to set the record straight.
That was a very generous and lovely apology.
Clause 106
Increase in requisite custodial period for certain violent or sexual offenders
Question proposed, That the clause stand part of the Bill.
Good morning, Sir Charles. It is, as always, a pleasure to serve under your chairmanship. Clause 106 is an extremely important clause of the Bill, because it forms a critical part of the Government’s commitment to ensuring that the most serious offenders spend more time in prison, properly reflecting the gravity of their offences, protecting the public and building confidence in our sentencing regime. It does that by abolishing the automatic halfway release point for certain serious violent or sexual offenders and instead requiring them to serve two thirds of their sentence in prison.
This builds on changes made throughout 2020. First, in February of last year, we changed the release provisions for terrorists and terrorist-connected offenders receiving a standard determinate sentence in order to ensure that they serve at least two thirds of their sentence in custody and thereafter are released only when the Parole Board is satisfied that it is safe to release them. Colleagues will recall the Bill that became the Terrorist Offenders (Restriction of Early Release) Act 2020, which we passed in a day in February of last year to prevent repeats of the Fishmongers’ Hall and Streatham attacks. In fact, the first terrorist who might otherwise have been released early was kept in prison just a few weeks after we passed that Bill. The measure was tested in the High Court last summer and found to be lawful when measured against the European convention on human rights. I thought that the Committee might appreciate an update on that.
Then, in April of last year, we laid before the House a statutory instrument—the Release of Prisoners (Alteration of Relevant Proportion of Sentence) Order 2020. I will explain what that did. For the most serious sexual or violent offenders with a standard determinate sentence of more than seven years, the automatic release point was moved from half to two thirds, ensuring that those serious offenders spend longer in prison. This clause puts the provisions of that order—a statutory instrument—into primary legislation. Critically, however, it goes further and says that serious sexual offenders and certain violent offenders receiving a standard determinate sentence not just of more than seven years but of between four and seven years will also automatically spend two thirds of their sentence in custody, rather than being automatically released at the halfway point; the release at the two-thirds point will still be automatic. It applies to any sexual offence carrying a maximum life sentence, including rape. I know that rape and related sexual offences are rightly of concern to the Committee, so it is worth stressing that this clause will ensure that rapists spend longer in prison.
What assessment has the Minister made of the effect on the prison population, particularly in Wales, which already has the highest rate of imprisonment in western Europe with 154 prisoners per 100,000 of the population of Wales, compared with 141 per 100,000 in England? Given the possible effects of inflation on the length of sentences, what provision will he make specifically for Welsh prisons to cope with that?
We have indeed made such an assessment. We have done it for the whole jurisdiction, and the steady-state impact on the prison population is 255 prisoners. I do not have a breakdown for Wales, but I estimate—this is simply my off-the-cuff estimate—that the portion of that 255 that applies to Wales might be in the range of 10 to 20 prisoners in Wales. That is just my off-the-cuff estimate, not an official figure, so it carries quite an important health warning.
On the prison population impact and prison capacity more generally, the hon. Gentleman will be aware that the Government are committed to building an extra 10,000 prison places to make sure we can cater to increased demands in the Prison Service as we make sure dangerous criminals spend longer incarcerated.
Building an extra 10,000 prison cells is very costly. Does the Minister agree that investing more in rehabilitation and preventive programmes might be a better use of the money?
Of course, we do believe in rehabilitation and prevention, and a lot of work is going on in that area, but we are talking about people who have been convicted of offences such as rape and murder. On Second Reading, Members made the point about making sure that particularly sexual offenders, including rapists, spend longer in prison. There were different views on how that could be achieved, but there seemed to be broad unanimity across the House that such offenders should spend longer in prison, and the clause does exactly that. However, it in no way detracts from the importance of prevention and rehabilitation that the hon. Lady mentioned a second ago.
I should say that caught in this clause are not just sexual offenders who commit offences, including rape, with a life sentence, but also the most serious violent offenders, which includes those who commit manslaughter, attempted murder, soliciting murder, and wounding with intent to cause grievous bodily harm, so I think our constituents up and down the country will welcome the fact that these serious offenders will spend two thirds of their sentence in prison and not just a half.
Provision is also made in this clause for the two-thirds release requirement to apply to those under the age of 18 who were given a youth standard determinate sentence of seven years or more for a sexual offence with a maximum penalty of life, and for the other very serious violent offences just referred to. The changes are made by inserting new section 244ZA into the Criminal Justice Act 2003 to make the necessary provisions. The measures will ensure that the proportion of the sentence reflects the gravity of the offence committed, and are intended to address long-held concerns, both in Parliament and among the public, about the automatic halfway release for serious offenders.
The two-thirds point also aligns with the release point for offenders found to be dangerous and therefore serving an extended determinate sentence, whose eligibility for release by the Parole Board commences from the two-thirds point, so it introduces consistency and coherence into the sentencing regime as well. On that basis, I commend this very important clause to the Committee.
Clause 106, as we have heard, follows the Release of Prisoners (Alteration of Relevant Proportion of Sentence) Order 2020, which altered the automatic release point for offenders who have committed a specific sexual or violent offence. As the Minister said, the effect of the release of prisoners order was to move the automatic release point from halfway to two thirds of an eligible prisoner’s sentence, and would apply to those found guilty of specific sexual or violent offences for which the penalty is life, and who were sentenced to seven years or more in prison.
Clause 106 implements the proposal in the “A Smarter Approach to Sentencing” White Paper to extend these changes to include sentences of between four and seven years for any of the sexual offences already specified, but only to some of the specified violent offences. That raises a point of concern for the Opposition. Why does the clause apply to all the sexual offences covered by the release of prisoners order, but only some of the violent offences?
Clause 106 will apply only to manslaughter, soliciting murder, attempted murder, and wounding causing grievous bodily harm with intent. This is precisely the point that the Opposition are trying to make. First, the release of prisoners order fundamentally changed the sentencing and release regime. Now the Government propose to extend the regime, but only to some of the original offences, with the other offences remaining the same. How on earth can that do anything but confuse an already notoriously confused system? I have asked before, what is the point of the remarkable work of the Law Commission on producing a much simplified sentencing code if the Government continue to tinker with sentencing and release provisions?
It is not only the Opposition who are concerned by the direction of travel the Government are taking on sentencing complexity. After considering clause 106, the Sentencing Academy agreed that its inclusion,
“unquestionably makes sentencing more complex and less intelligible to the public. Anecdotal evidence suggests that the judiciary are already struggling in discharging their statutory duty to explain the effect of the sentence as a result of the SI 2020/158 change. This proposal will make this task more difficult and result in a greater number of errors.”
The academy goes on to express its concerns in full:
“We expressed concerns about the reforms last year and this provision exacerbates our concern. Proportionate sentencing is not well-served by a system in which identical sentence lengths have a significantly diverging impact in practice: two nine year sentences should carry the same penal weight; it should not mean six years in custody for one offence and four-and-a-half years in custody for another. The decision to exclude some violent offences from this proposal makes the system yet more perplexing: how can a seven year sentence for kidnapping justify four years and eight months in prison when a six year sentence for the same offence merits three years?”
I wonder if the Minister could explain that point to the Committee.
Let me be clear: Labour supports moves to ensure that the most serious and violent criminals receive longer sentences when there is evidence that their sentences do not match the severity of their crimes. That is why the Opposition supported the Government’s moves to introduce clause 101 to extend whole-life orders for the premeditated murder of a child; clause 102 to extend whole-life orders to those who are 18 to 20 and have committed particularly heinous crimes; and clause 103 to increase the starting points for murder committed as a child. However, we cannot support a series of yet more changes to sentencing and release, which will only further confuse the system and make the task of members of the judiciary even more difficult, resulting in a greater number of sentencing errors.
The Prison Reform Trust makes a good point on the Government’s proposed changes to sentencing and release when it says,
“that only serves to demonstrate the complexity of sentencing law in this area, and the extent to which the government adds to that complexity every time it responds to an individual crime by promising a change in sentencing law.”
If the Government want to ensure that serious violent and sex offenders spend longer in prison, they can easily do so simply by increasing the maximum sentence length for the relevant offences. Taking that route rather than what the Sentencing Academy describes as,
“sentence inflation via the back door”
would not lead to judges being confused and making sentencing errors. Moreover, it would not lead to the public being confused and losing faith in our sentencing system. Taking that route would also mean that prisoners spend longer in jail without having to lose out on the rehabilitative properties of spending half their sentence in the community.
That brings me to another fundamental concern that the Opposition have with clause 106. By requiring an offender to spend additional time in prison, the amount of time that they would spend in the community under supervision would decrease significantly. As the Howard League notes, we know that reducing
“the amount of time which people who have committed serious offences spend under the supervision of probation services in the community…is likely to undermine public safety rather than helping to keep victims and the public safe. Though there is no single model of probation supervision, a rapid evidence review across jurisdictions and models suggests that community supervision in itself reduces reoffending—unlike time in prison, which increases reoffending rates.”
To sum up, the Opposition agree with the Government that where evidence exists that sentences do not properly reflect the severity of the crimes committed, sentencing reform should absolutely be an option. None the less, sentencing reform should be properly considered and guided by the principles set out by the Lord Chancellor in his foreword to the White Paper. Sentences should make sense to victims, members of the judiciary and legal practitioners. More importantly, sentences should make sense to the general public. Only when the general public and victims of crime understand our sentencing regime will they have full faith in it. We believe clause 106 goes against those principles, and for that reason we cannot support it.
Are there any colleagues who would like to participate before I call the Minister? If not, I call the Minister.
I feel bound to reply to some of the points that the shadow Minister has just made. First, he said that the provisions make sentencing more complicated and that it will be harder for the judiciary to understand. I will pass over the implied slight on the judiciary’s ability to absorb complicated sentencing, but the measures relate exclusively to release provisions; they make no changes to the way that sentencing works. As such, this does not change anything a judge will do in passing sentence. The release decisions, and the administration of that, are obviously done by the Prison Service and the National Probation Service down the track. The release provisions have nothing at all to do with sentencing, so let me assure the shadow Minister on that point.
Secondly, the shadow Minister said that if we want people to spend longer in prison, we should increase the maximum sentence. By definition, the way that the provisions are constructed mean that they relate only to offences where the maximum sentence is life. It is not possible to increase a sentence beyond life—life already is the maximum. The only way to increase the sentencing is for the Sentencing Council to change its guidelines, and as the shadow Minister knows, the Sentencing Council is independent of Government and is chaired by Lord Justice Holroyde. However, I note in passing that average sentence lengths passed down by judges for serious offences have been increasing. Since 2010—a date that I choose arbitrarily—the average sentence for rape has gone up by about two and a half years, so judges have chosen to increase sentence lengths in the past 10 years.
The shadow Minister asked why the selection of violent offences with sentences between four and seven years is narrower than those above seven years. To be completely clear, the list of sexual offences is the same: between four and seven years, and seven-plus. I think the shadow Minister did say that, but I repeat it for clarity. The reason is that we are trying to calibrate the provisions in order to target the most serious offences, which include all serious violent and sexual offences where the sentence is more than seven years, and all serious sexual offences where the sentence is between four and seven years, but just that smaller selection of violent offences, such as manslaughter and so on, which we talked about earlier. We are attempting to calibrate this to the most serious offences.
Finally, the shadow Minister asked about public perception. Over the past 10 or 20 years, the public have been both confused and angered that a court hands down a sentence to a very serious offender—we are talking about sentences that carry a maximum of life, such as manslaughter and rape—and the offender then walks out halfway through a sentence, or less than halfway when time on remand in taken into account. The public are angered by that. In fact, as a Minister in the Ministry of Justice, I get quite a lot of correspondence from members of the public who are angry about serious offenders getting released inappropriately early, as they see it. I agree, which is why we will ensure that the most serious offenders spend longer in prison. If the Opposition vote against this measure, as it would appear they are about to do, they are voting to say that they do not think those serious offenders should spend longer in prison. They are voting for people who have committed manslaughter or rape to be released from prison earlier than would be the case if the clause were passed. I think the public expect us to do something different, and I ask the Opposition to think again—particularly given that, on Second Reading, both sides of the House seemed to be arguing that people who commit very serious offences, including rape, should spend longer in prison. The clause does exactly that. On that basis, I commend it to the Committee.
Clause 107 makes some changes to SOPC—sentences for offenders of particular concern—essentially to tidy up an anomaly that arose from the changes made last year. As Members will recall, under the changes we made last year to terrorism sentencing, when a terrorist offender had a SOPC sentence the release point was moved to two thirds, at which point they became eligible for consideration for release by the Parole Board. However, two child sexual offences also carry a mandatory SOPC sentence where there are different release provisions.
In this clause, we are simply making a change to make the release provisions for those two child sex offences in relation to the SOPC sentence the same as those for the terrorist sentence—that is to say, they will serve two thirds, following which they will be eligible for consideration for release by the Parole Board. That makes the sentence the same as for the other terrorism SOPC offences and the same as the extended determinate sentences. In his last speech, the shadow Minister spoke in a spirit of simplification and consistency, and this change is consistent with that principle. I commend the clause to the Committee.
The Minister likes to have his little digs; I think he quite enjoys them. I assure the Committee and everybody else that I have full confidence in the judiciary. If the Minister had as much confidence as I do, perhaps he would not be mucking about so much with the system and would leave the judiciary to sentence within the regime that exists.
As we have heard, as with clause 106 the purpose of clause 107 is to increase the proportion of the time certain offenders spend their sentence in jail. In this case, we are talking about offenders of particular concern, meaning those who have been convicted of one or two child sexual offences or certain terrorist offences. As set out by the Minister, as things currently stand different release arrangements apply to offenders of particular concern convicted of terror offences and those convicted of child sexual offences.
Clause 107 would change that by ensuring that all offenders of particular concern would serve two thirds rather than one half of their sentence in prison, before applying to the Parole Board to be released. Given that I have spoken extensively on the same matter, or very similar matters, in clauses 105 and 106, this speech will be very short. For the reasons I set out in relation to those clauses, we cannot support clause 107. Although the Opposition agree that those who have committed the most serious violent and sexual offences should spend longer in prison, we do not believe that the method set out in clauses 105 to 107 is the best vehicle to meet this policy objective.
The Opposition cannot support more changes to the sentencing and release regimes. Contrary to what the Minister says, that will further complicate our sentencing system and risk victims of crime and members of the public losing faith in it. If the Government want to ensure that offenders spend longer in prison, where the evidence base suggests they should, we believe there are better ways of achieving that goal.
I have nothing to add, except one point that I should have made in my earlier speech. If someone with a SOPC serves their entire sentence in custody, they get a year on licence after release. That is an important point to add to my previous remarks, but I have nothing further to add to my speech on clause 106: the same points apply.
-Question put, That the clause stand part of the Bill.
Sorry, Sir Charles; I was momentarily moved to speechlessness by the fact that the Opposition have just voted to let child rapists out of jail earlier than the clause proposes.
Let us move on to clause 108, which relates to a new power for the Secretary of State to prevent the automatic release of offenders serving a standard determinate sentence, where release is ordinarily automatic, and instead refer them to the Parole Board in certain, very limited circumstances.
With a standard determinate sentence at the moment, there is automatic release at either the halfway point or, for more serious offences, at the two-thirds point, as per clauses 105 and 106. Clause 108 creates a new power to allow the Secretary of State to refer a prisoner who is in custody and assessed as dangerous to the Parole Board, to decide whether or not they are safe to release. Prisoners who are serving a standard determinate sentence, for any offence, who have become dangerous or who are identified as being dangerous while they are in prison get this referral.
To be clear, we are not creating a new kind of indeterminate sentence like the old imprisonment for public protection sentences, created in 2003, in which the sentence could carry on forever if someone were considered to be dangerous. The maximum sentence originally passed by the court on conviction and sentencing still applies.
We are not overriding the sentence of the court, but we are saying that if an offender is identified as dangerous they may continue to serve their determinate sentence until its end, unless and until the Parole Board, after the release point, decides that they are safe to release. It means that if someone becomes dangerous, they do not automatically get released early.
The Minister will see from an upcoming amendment that I am interested in this clause. Can he give some clarification? Will he define “dangerous”? I assume that is within the prison context, as opposed to the crime being served for.
Will the Minister give some details on when and why the Secretary of State might intervene? At the moment, depending on the Parole Board’s decision, the Secretary of State already has 21 days to intervene. Will he explain what the clause will bring to the table?
I am happy to answer all those questions, which are good questions. The 21-days provision that allows the Parole Board to think again has nothing to do with this; it is completely separate. It is a live issue in the terrible Pitchfork case, which Members will be aware of.
The provision in which the Parole Board takes a decision to release and the Secretary of State may ask it to think again, within 21 days, applies to any Parole Board release and is a matter currently being considered. That is wholly separate from this provision. It relates to any Parole Board release decision and was prompted by the awful Worboys case two or three years ago.
Here we are talking about where a prisoner is serving a standard determinate sentence and would ordinarily be released automatically without any Parole Board involvement at all, and the Secretary of State says, “Well, I think actually they are now dangerous”—I will come on to what that means in a minute—“and instead of automatic release, can the Parole Board look at the case and decide whether they are suitable for release, once their release point is passed?” That is different from the 21-days reconsideration.
The hon. Member for Rotherham asked for the definition of becoming dangerous and whether it means dangerous in a prison context. The answer is no. It does not mean dangerous in a prison context; it means dangerous to the public. One might ask what “dangerous to the public” means. The definition of “dangerous” in this context has a high threshold—we anticipate this provision will be used extremely rarely; it is not going to be a commonly used provision. It is that an offender is at “significant risk” of causing “serious harm” to the public by committing murder or one of the serious offences listed in schedule 18 of the Sentencing Act 2020, such as manslaughter, rape or terrorist offences, and that the risk cannot be sufficiently managed through the use of licence conditions.
If a referral is made, the Parole Board will consider it. It may say, “We will release them anyway” or, “We think there is a danger; we are going to keep them inside.” It can only keep them inside prison until the end of the original sentence that the court handed down.
I will give an example not caught by our new provisions. To take the example the shadow Minister used, let us say there is a six-year sentence for kidnapping. Currently, there would ordinarily be automatic release after three years. If for some reason there is evidence that the person who has been committed for kidnap might commit a terrorist offence or might kill someone, the Secretary of State can refer and the Parole Board will then consider, “Are they dangerous? Can we release them?” If it decides to keep them in prison, they can be kept in prison up to the six years of the original sentence, but no later. During the final three-year period in my example, the Parole Board will look at the case periodically.
If, after reference to the Parole Board, the prisoner thinks there has been an unreasonable delay—“I should have been released after three years, but it is now three years and six months and no one has looked at it; this is unreasonable”—they can refer the matter to the High Court to get it sorted out. There is a safety mechanism so that there cannot be an unreasonable delay.
Will the Minister confirm something? In the event of a dangerous person—a radicalised person—being required to serve their full sentence, will they be released into the community without any supervision or licence conditions when they get to the end of the sentence?
That already happens, of course, with extended determinate sentences, where it is possible that the person will spend all their sentence in prison. If the Parole Board does that, there is no subsequent period on licence—unlike the SOPC that we just talked about, where there is a minimum of one year on licence afterwards.
Of course, when the Parole Board makes decisions about whether to release in the final half or third of a sentence, it will be aware of the point that the shadow Minister made. If it thinks that public safety is best served by releasing a little bit before the end of the sentence to allow that one year, or whatever it may be, on licence at the end, it is within its power to consider and do that—so instead of the individual serving all the sentence inside, there would be a bit of release on licence at the end. The Parole Board can think about that at the end if it chooses to.
But surely the point remains that this person, who is said to be a danger to the public although there may not be sufficient evidence to convict him of another charge, will be released into the community at the end of their sentence—after six years, 10 years or whatever—and will still be the same dangerous person he was thought to be by the Lord Chancellor, through the Parole Board, when he was in prison.
Under ECHR and common-law provisions, we cannot extend a sentence beyond what was handed down by the court. Of course, that was the big problem with the old IPP sentences, where people could stay in prison forever; indeed, there are still people in prison under IPP sentences.
We have to work within the envelope—within the maximum sentence handed down by the court originally for the offence originally committed. The judgment is essentially to be exercised by the Parole Board on how best to protect the public, by striking a balance. Do we leave people in prison for the whole time or do we release them a bit early with a period on licence? That is a judgment that the Parole Board has to make to best protect the public. In some cases, if it thinks that the risk is very high, it may consider that the whole term in prison is the best way.
Take the example of the six years. The Parole Board may say, “Well, six years in prison is better than five years in prison followed by one year on licence”. It is a judgment that the Parole Board must make. We cannot reasonably go beyond that six years, because that would be potentially unjust: we would be punishing someone and imposing a sentence that was longer than that originally handed down by the court for the offence of which they were convicted. That would be contrary to natural justice, common law and ECHR provisions.
That is why the measure is designed as it is, and I hope that makes sense.
The old IPP sentences had their problems; they were much too widely used and were not originally intended to be that widely used. There was an issue about them, certainly. However, would not that kind of sentence—one that was indeterminate but able to be cut short when the individual concerned could demonstrate that they were no longer dangerous—be the answer in some of the kinds of tangents that the Minister is talking about?
The Minister seems to be tying himself in knots, to say, “Well, it’s going to be either three years or six years, but we all know that the person is coming out at the end”. Originally, IPP sentences were legislated for to deal with this very issue, but of course they ended up being too widely used. Is there not a better way of reintroducing some kind of IPP sentences that would enable greater safety but be much more narrowly used?
Can I clarify whether the hon. Member is talking about potentially indeterminate sentences?
She is. Okay.
We debated this issue internally, when we were designing the clause. Clearly, one of the options considered was reintroducing some form of IPP sentence, which is, as the hon. Lady said, indeterminate, meaning that it could go on forever. That was not done because there is potentially an inherent injustice. We have been using the example of kidnap, so let us keep using it. If someone commits that offence and the judge decides that six years is the right sentence, to then say that that person, having been given a fixed sentence, could spend the rest of their life in prison because of a risk that they might offend later—they had not committed a more serious offence; it is just that they might—struck us as being inherently unjust.
Do hon. Members remember the film “Minority Report”, where people were incarcerated because it was judged that they might commit an offence in the future? If we get into the territory of imposing a penalty, which could be imprisonment forever, because someone might commit an offence rather than because they actually have committed an offence, we are straying into potentially slightly dangerous territory.
I was not suggesting that; I was not suggesting that people who have been given determinate sentences should then arbitrarily suddenly find themselves with an indeterminate sentence. What I was suggesting was that perhaps there are a small number of cases for which it would be appropriate to reintroduce the possibility for judges to give indeterminate sentences again. The problem with the IPP was that it was much too widely used; I think the wording was too broad and it was much too widely used by sentencers. But the purpose of it was to deal with just these cases that the Minister is talking about.
I am not suggesting that somebody who has been given a determinate sentence should then arbitrarily be given an indeterminate sentence. However, if an indeterminate sentence for public protection was available in very narrow circumstances to judges, would that not fill this gap in a more coherent way than the way in which the Minister is trying to do it?
Clearly, if the original offence for which the offender is sentenced is one of the more serious ones that we have been talking about—for example, even offences that we consider to be moderately serious, such as committing grievous bodily harm with intent, have life sentences—the judge can, if he or she chooses, impose a life sentence and set a tariff for consideration for release, so there is flexibility. We are talking about cases where the original offence is not one of those very serious ones that has a life sentence, but one that has a fixed determinate sentence. I think the hon. Member is asking if we can give the judge the power to say that, even though the original offence has a fixed maximum sentence of, for example, only five years, they will override that and say, “Actually, for some reason that is not to do with the original offence, but is just to do with some other assessment of public risk, I will give you an indeterminate sentence.” I think that is the question.
Not quite. I was suggesting that perhaps the Minister should legislate for indeterminate sentences in particular circumstances and give the judge that discretion, but in a much narrower band of offences than those that ended up getting indeterminate sentences in the past. Indeterminate sentences have all been abolished now—they cannot be used. If I might say so, it seems that the Minister is trying to deal with the very issue that they were introduced to deal with in a very convoluted manner.
No, we are trying to do deal with the issue of prisoners who become dangerous, or who clearly pose a danger to the public, while they are in prison, but without doing what IPPs did. IPPs were abolished for a reason in 2012: people who committed a particular offence with a fixed sentence of, say, five years could end up in prison forever. As I have said, for more serious offenders the judge has the option of a life sentence, but we do not think it is right that someone could commit an offence with a fixed sentence, such as five years, and end up in prison for life, not for an offence they have committed, but for one that they might commit in the future.
This is the best way of balancing that public protection consideration against natural justice—that the punishment should fit the crime—and avoid a “Minority report”-type situation where someone is incarcerated for a crime that they may commit in the future, but have not yet committed. This strikes the right balance. We stay within the envelope of the sentence handed down by the judge. The judge has the option in serious cases to hand down a life sentence already, but we have just changed the release provisions.
We have debated the clause relatively extensively, Sir Charles. It strikes the right balance between natural justice and protecting the public. On that basis, I commend it to the Committee.
As we have heard, clause 108 would create a new power to allow the Lord Chancellor to refer a prisoner to the Parole Board who would otherwise be eligible for automatic release, if he believes that they have become a significant danger to the public while in prison. Rather than being freed at the halfway or two-thirds point of a sentence, they would be released only if the Parole Board thought it was safe. If the Parole Board did not believe it was safe, they would continue to serve the rest of their sentence in prison, unless the Parole Board consequently changed its mind. As the Minister has confirmed, if they served the whole of their sentence in prison, they would then be released into the community without any licence conditions or supervision.
It is safe to say that the Opposition have several serious concerns with clause 108, and largely agree with the Prison Reform Trust in believing that
“this clause creates a constitutional and legal mess”.
Let us start with the basics. As is set out in the explanatory notes to the Bill, this is a brand new power, the beneficiary of whom is the Lord Chancellor.
I say with great respect to the shadow Minister that the beneficiary of this clause is not the Lord Chancellor, but the general public, who might be protected from dangerous offenders who would otherwise be released.
The Lord Chancellor is the beneficiary, because he is given a new power to change things and refer.
The effect of the clause is that, for the first time for these types of prisoners, the Lord Chancellor will have the power effectively to refer a prisoner to have their sentence conditions varied, should the Parole Board agree. We all understand that. For example, if a prisoner is sentenced to five years for shoplifting, under current legislation they would become eligible to be automatically released on licence at the halfway point of their sentence. Under the new provision, if the Lord Chancellor believes that the shoplifter had become radicalised in prison, he could refer the prisoner to the Parole Board, which could prevent his automatic release. That would, of course, be without the prisoner ever having been charged or found guilty of any further offence while in prison.
That raises two fundamental questions. First, is it right or proper for the Lord Chancellor to be involved in the management of individual prisoners? How will he make the decision to refer somebody to the Parole Board? What criteria will be used for the Lord Chancellor to make such a referral decision? Secondly, is this not a case of punishment without due process, and therefore unlawful?
On the first point, I note the remarks of the Sentencing Academy on clause 108:
“giving the Secretary of State for Justice the power to intervene in the management of an individual offender’s sentence gives rise to concern about undue political interference in the sentences of individual offenders.”
I accept that the final decision rests with the Parole Board. That raises the all-important question of whether the Secretary of State for Justice, who is after all a member of the Government, is really the right person to decide who should be referred to the Parole Board in a prison that could be hundreds of miles away.
That is by no means the only question provoked by clause 108, as currently drafted. The questions go on and on. Perhaps the Minister will be good enough to provide clarity on at least the following points today. What evidential tests will have to be satisfied for the Secretary of State to make a referral to the Parole Board, and who will be responsible for collecting that evidence? What standard of proof will the Secretary of State use when deciding to make a referral or not? Will he have to be satisfied that someone has become a significant danger on the balance of probabilities, or beyond reasonable doubt? If the Secretary of State is so concerned that someone has become radicalised or poses a serious threat, why not simply take that person to court and allow a judge to consider the evidence? Are the Government simply trying to avoid the inconvenience of having to provide evidence and have it tested in open court? Is it not a dangerous precedent for the Secretary of State to become involved in determinations made about individual cases?
That brings me to my next concern. What happens to a prisoner who, after being referred by the Secretary of State to the Parole Board, is refused their automatic release? As I understand it, if the offender is denied automatic release, he or she could spend the rest of their custodial sentence in prison, rather than some of it on licence in the community. Those prisoners will be released before the end of their sentence only if and when the Parole Board authorises it.
That raises two further concerns. First, it would create what Jonathan Hall, the independent reviewer of terrorism legislation, has described as a “cliff-edge effect”, which is where an offender who has specifically been identified as being a significant danger to the public while in prison spends their entire sentence in custody and is released into the community without any licence or monitoring conditions. Let us think about a possible scenario. A prisoner has been convicted for non-terrorist or non-violent crime and is sentenced in court to, say, five years. They are specifically told by the court that they can expect to be automatically released from prison at the halfway point of their sentence—in that case, two and a half years. Instead, they receive the news that the Secretary of State has reason to believe that they have become a danger to society while in prison. The Parole Board agrees, and their sentence is retrospectively changed so that they can spend the whole sentence in prison.
I am sure the Minister will agree that that offender would have some right to be angry with the criminal justice system and society at large. They would then be released, harbouring that anger, without any licence conditions or supervision. Does the Minister not see what the consequences of that could be? Would it not be better simply to collect any evidence and allow a court to come to a determination? Surely, if the evidence of what is effectively an offence exists, the person should be charged and sentenced for that offence.
During the evidence session on 18 May, the Minister tried to convince the Committee that clause 108 would not create that cliff-edge effect by indicating that if the authorities were particularly concerned about an individual offender, the Home Secretary could impose a terrorism prevention and investigation measure on them. However, that excuse simply does not stack up. As Jonathan Hall, QC, pointed out, TPIMs are extremely resource-intensive and very rarely used, especially in these circumstances. As the Minister will be aware, for each of the three-month periods between 1 December 2018 and 30 November 2019, only three to five TPIMs were in place nationally.
It was not my intention to make a speech on this clause, but more questions are being raised than answered, and I hope that the Minister will be able to answer a few of them.
I share the concerns raised by my hon. Friend the Member for Stockton North, and there are many questions, but I have always had a problem with the idea of someone being given a sentence and serving only a third or two thirds of it. I would much rather that it were clear that a sentence was for this amount of time in prison and that amount of time under licence in the community, because I think that would give clarity. My concern about the clause is that it almost creates a hierarchy of sentencing, which I find confusing.
I know well only the behaviour of sexual offenders, and I am yet to find any form of rehabilitation or punishment that effectively changes their behaviour, so I could argue persuasively here that they will always be a danger and that there is always a potential risk. I also believe, however, that we need a justice system that is fair and transparent so that we can follow it, and I am not sure that the clause would allow us to do that. I am concerned that if someone is released at the end of their sentence after serving a full term, the probation, rehabilitation and limits that a licence would put around them might not be there, meaning that their transition into the community is abrupt and does not have the level of support that is needed to curb some people’s behaviour.
I am concerned that the Minister did not once mention whether victims would be consulted. My amendment 145 deals with that. Who could be better than victims and survivors to say whether a person is a danger and to influence the decision of the Lord Chancellor? I am also concerned that there may be subjectivity in decisions made by this Lord Chancellor and future Lord Chancellors—that cannot be allowed to happen. I really hope that the Minister will give some reassurances on the points that I have raised, because at the moment the clause would not be a successful one.
I want to raise one particular point. Is the Minister aware of the Welsh Government’s recently published race equality action plan, which states its commitment to developing a race equality delivery plan that will address the over-representation of black, Asian and minority ethnic people in the criminal justice system? Indeed, in Wales, more black and minority ethnic people are in prison than elsewhere in the United Kingdom. Does he share my concern that this and other clauses might militate against the policy of the Senedd in Cardiff, a legislative public body that has been democratically elected?
I will try briefly to respond to some of the points raised by Opposition Members in relation to clause 108.
First, on whether the clause somehow infringes natural justice or the ECHR, or imposes a penalty without due process, as the shadow Minister put it, I can categorically say that it does not, because under no circumstances can anyone spend a longer period in prison than the original sentence handed down by the judge. The clause relates to the administration of the release provisions. It is a long-established legal principle that the administration of a sentence—whether it is spent inside or outside prison, for example—is a matter that can be varied in the course of the sentence being served.
This matter was tested in the courts relatively recently when we passed the Terrorist Offenders (Restriction of Early Release) Act 2020. The very first person who was effectively kept in prison longer than they ordinarily would have been, because their release point was basically moved by that Act, went to the High Court and tried to make the case that that was an infringement of their rights because they thought they were going to get released automatically at two thirds, but were instead referred to the Parole Board, which did not let them out. Because of TORA, that has been tested in the High Court and found to be lawful—that is to say, the administration of the sentence can be varied.
The reason we have gone no further than that and have said that someone cannot be kept in prison for longer than the original sentence—the hon. Member for Garston and Halewood was probing on this in her interventions—was that we think that would infringe the principle of natural justice. The shadow Minister questions whether we have gone too far and the hon. Member for Garston and Halewood thinks we have not gone far enough, which might suggest that we have landed in around the right place.
There was then the question from the shadow Minister on the cliff edge issue: if someone serves all of their sentence in prison, they then spend no time on licence, by definition. That does, of course, apply to any of the existing extended determinate sentences if the Parole Board decide to keep the prisoner inside prison for the whole of their sentence. The potential for the cliff edge does exist, but when deciding whether to release early the Parole Board can, of course, take into account whether the public are better served by the whole sentence being spent in prison, or most of it in prison and a bit of licence at the end. In no sense are the public any less safe if the prisoner spends all of the sentence in prison, given that the sentence is a maximum. The prisoner is in prison, clearly, and cannot commit an offence during that period.
On rehabilitation, it can of course take place, it does take place, and it should take place in prison as much as in the community. Significant resources are being invested in that rehabilitation process in prison, led by the Under-Secretary of State for Justice, my hon. Friend the Member for Cheltenham (Alex Chalk).
On the matter of the propriety of the Lord Chancellor making the referral, as raised by the shadow Minister and by the hon. Member for Rotherham, the power is the power of referral. The Secretary of State for Justice, the Lord Chancellor, is not making any final decision himself or herself about release, and is simply referring a prisoner to the Parole Board to make that determination and that decision. That does not constitute undue political interference in the process.
I am anxious to make progress, but I will take an intervention.
I am grateful to the Minister for giving way. For me, the issue is the basis on which the Lord Chancellor makes the decision to refer. What evidence test is used and who gathers that particular evidence?
Most likely, as a matter of practice, that would be the prison governor or prison authorities who see behaviour of concern, and might draw the matter to the attention of the Ministry of Justice and the Secretary of State.
The shadow minister asked what test was applied. The test is whether there is a significant risk of serious harm to the public by the offender potentially committing a serious offence, such as murder, in the future, as listed in section 18 of the Sentencing Act 2020, and that the risk cannot be sufficiently managed through the use of licence conditions. That is the test that will be applied by those making decisions, but ultimately the decision is for the Parole Board.
The concept of the Parole Board making a discretionary decision about whether to release already exists, and has done for years. Currently it exists in the contest of extended determinate sentences, and in the past it existed—in theory at least—for every single sentence passed. It already happens for thousands and thousands of extended determinate sentences, so what is proposed here is not a radical departure from current practice for extended determinate sentences, nor indeed for people on a life sentence with a tariff. The referral process can add to the criteria taken into account for those offenders. We would expect that to involve small numbers.
In answer to the issue relating to Wales raised by the hon. Member for Arfon, we are expecting the numbers to be extremely low. It will not have a significant impact on overall numbers. It is, mercifully, pretty rare for that sort of evidence to come to light. If the evidence is at the level that it merits prosecution—planning, preparing or inciting an offence, which was asked about—obviously prosecution is the first option. Prosecution for the offence will always be the first option, but if we cannot establish that an offence has been committed to the required criminal standard, a Parole Board referral is the next best thing up to the maximum sentence, but no further. I hope that address the questions—
I asked the Minister to address the issue of the number of TPIMs likely to be applied in the event of somebody considered to be dangerous when leaving prison.
I cannot speculate on what may happen in the future. The shadow Minister pointed out that the number of TPIMs in use is pretty small and that is most certainly true. Equally, the number of people likely to be referred in that way will be small, albeit likely to be larger than the number of TPIMs. As I said, there is the option for the Parole Board not to have the person serve the full sentence but to have a little bit at the end served on licence. There is that option, as well as the TPIM, plus the option for the police and security services to keep people under observation more generally, if they are concerned. I hope that answers the point.
The Minister has given a full response to some of the issues I raised but not a sufficient one. I am worried about the evidential test in relation to this matter. The Minister said if there is sufficient evidence for a prosecution while the person remains in prison, there will be a prosecution, but if that evidence does not meet a criminal test, there can be no prosecution and this legislation will be relied on to retain the person in prison following a referral to the Parole Board. We remain very concerned about that and about the standard of proof, which we also talked about.
Ultimately, this issue is about how prisoners are managed in the longer term and their rehabilitation. The fact remains that someone who is considered dangerous, though not dangerous enough to be prosecuted, can be released into the community at the end of their sentence without any supervision or conditions. I accept that the Minister says the security services or police might keep an eye on them. That is insufficient if somebody is considered to be so dangerous. On that basis, we still oppose the clause.
Question put, That the clause stand part of the Bill.
Before we move on, I remind the Committee that it was notified to the Chair that the Whips wish to get to clause 138 by close of play today. We are moving at glacial pace. I know these are important matters but, if we continue to move at that pace, the Whips may want to recalibrate their lofty ambitions over lunch.
Clause 109
Power to make provision for reconsideration and setting aside of Parole Board decisions
I beg to move amendment 145, in clause 109, page 98, line 41, at beginning insert—
‘(1) In subsection (3) of section 239 of the Criminal Justice Act 2003 (the Parole Board), after 3(b) insert—
“(c) the views of the victim or victims of the crime to which the case relates””
This amendment would amend the Criminal Justice Act 2003 to ensure victims/survivors are consulted in parole decisions which will affect them.
I have tabled the amendment because two survivors have raised this as an issue with me this year. I have briefly spoken to the Minister because I am not sure that the amendment will achieve the job I hope it will. By raising it, I hope the Minister will work with me to come up with a solution, because we have a real problem here.
The amendment aims to amend the Criminal Justice Act 2003, to ensure that victims and survivors are consulted on parole decisions that affect them. Currently, victims of crime, such as child abuse, can submit a victim impact statement before it is decided whether the abuser will receive parole. Victims should be informed when their abuser is released from prison or is on parole. However, too often that process is not carried out and victims are unaware that their abuser has been released from prison, or has been moved to a different category of prison.
The all-party parliamentary group for adult survivors of childhood sexual abuse found in its survey that as many as 75% of victims are not informed about their perpetrator being released on parole. One survivor who contributed to the report said:
“I found out my abuser was living nearby. In a town I visited regularly with my children for their sports club. And nobody bothered to inform me. I found this completely unacceptable.”
The shock and fear of finding out unexpectedly can be incredibly distressing for victims. Another survivor said:
“I was petrified because they gave him my name and all he’s got to do is look on the electoral roll and he could find me.”
Including victims and survivors in the parole decision-making process would let them understand how and why decisions are made. In discussion of the previous clause, the Minister presented an argument around the word “dangerous” and what makes an offender dangerous. Who better to feed in that information to the Parole Board’s decisions or the Lord Chancellor’s decisions than the victims and survivors themselves? Furthermore, allowing survivors to contribute to the process would ensure their voice is heard and the terror they have experienced in the past will not be relived—if they are listened to.
My amendment would ensure the Parole Board must consult with the victim during any decisions that would give recommendations resulting in parole for the offender. It would amend the Criminal Justice Act 2003, so the Parole Board must take account of the views of the person to whom the case is related. If it becomes a legal necessity for the Parole Board to consult with the victim, the potential for them to not be informed would not be an issue.
In 2019, the Government pledged to allow victims into parole hearings and, in 2020, they also consulted on making some parole hearings open to victims. Both of those followed the Worboys case, which exposed the failures of the parole process. At the time, the Government said they wanted to increase survivors’ ability to challenge release decisions if they felt the decision was flawed. That would save time and resources by consulting with the victim before the decision is made. The current system is not working for victims. We need a justice system that puts victims at the heart of its decisions.
This is not me just making a speech. As I said earlier, this is because I have two cases at the moment where the parole process has completely failed. Both relate to Rotherham survivors of past historic child sexual exploitation, and the first case is a survivor who I will call Elizabeth. The perpetrator was sentenced to nine years for two counts of rape of a girl under 16 in 2018. They were transferred after two and a half years to a category D prison, which we would view as an open prison. They were also told they could have day release but for covid-19.
The victim had signed up to the victim contact scheme, which should have ensured she was notified and provided with information about key stages in the offender’s sentence, including for those cases where release falls to the Parole Board. She should have been consulted on the timing of the Parole Board’s review and whether the offender was released or moved to open conditions. All of that should have been relayed to her. The victim should have been notified that the transfer to open conditions was being considered, and then she should have been told of the outcome. At the moment, victims have only a right of notification, and notification took place, in this case, after the decision was made.
I raised the issue with the Minister, who responded, explaining the legal position that, in accordance with legislation at the time, the offender is required to serve half of the sentence in custody, with the remaining period served in the community on licence and subject to supervision by the National Probation Service. During the custodial period, offenders must be held in the lowest security conditions necessary to manage the safety of their identified risk of escape or absconding, the risk of harm to the public and the risk of any serious disorder. Those are the considerations, not the impact on the victims.
The errors in the case, as identified by the Minister, were that the prison is responsible for managing a case. The prison offender manager should have contacted the victim liaison officer directly to let them know that the move to open conditions was under consideration, but they failed to do so. The senior manager has spoken to the staff at the prison, and a reminder has been sent to all of the staff reminding them to follow the correct procedure. The requirement has been raised with the National Probation Service regional implementation managers to take forward and ensure other prisons follow the correct process.
I will quote from the letter from the Solicitor General dated 21 October 2020.
“The reason for informing victims before the decision is taken, is to ensure that victims are kept updated with developments, so that a move to open conditions does not come as a total shock, and also to ensure the prison is aware of any exclusion zones which the victim has requested. This can help to inform which open prison an offender is moved to. I should like to underline that the Government shares the concerns about offenders who commit very serious crimes, and yet are released automatically at the halfway point in their sentence. We have taken action to address this through legislation we introduced earlier this year. We are committed to ensure that serious offenders spend the time in prison that reflects the gravity of their crimes and intend to bring forward proposals to further strengthen the law in this area”—
the Bill that we are all serving on.
So we got an apology, commitments and managers and staff spoken to. It was never going to happen again, and then, lo and behold, two months later, I got a near identical case—case B. The perpetrator was sentenced to nine years on three counts of sexual activity with a child in 2018. The offender was transferred to a category D prison in February 2021—again, two and a half years after the sentence—but the victim was not notified until April, three months after the offender was moved to a category D prison. Again, the victim was signed up to the victim contact scheme, but was not notified until after the transfer had taken place.
Again, I contacted the Minister, and in January 2021 the prison offender manager told the victim liaison officer that the offender had been assessed as suitable for open conditions in October and that an open prison had confirmed they would accept the offender, but the date of transfer had not been finalised. The POM should then have informed the victim liaison officer when the open conditions were considered, not just about the decision. Once the victim liaison officer was notified, the victim should have been notified, but that did not happen. The victim liaison officer asked to be notified when the transfer had taken place, but the prison, whose responsibility this was, failed to inform her. The victim liaison officer became aware themselves only in April when the community offender manager made inquiries about the conditions that the victim would wish to request for temporary release of the prisoner who raped her three times when she was a child.
Something is going horribly wrong. We have a system in which, twice in six months, victims of the most serious crime have been let down by the state. The system that the Minister currently has in place is not working, so how can we make sure that this does not keep on happening again and again? I am one MP and I have had two cases in the past six months, so it concerns me that this is happening all over the country, but survivors would not think to go to their MP to get it raised. The transfer of offenders guilty of serious offences to open conditions after just a quarter of their sentence is deeply wrong. The thought of an offender being back in the community is deeply traumatising for victims who have already been through both the crime and also the ordeal of a trial only comparatively recently. Notification is vital, as should be consultation. However, consultation is not offered and the system for notification is clearly dysfunctional.
As I said to the Minister, I am not sure that my amendment is the correct amendment, but I really need some reassurances to make sure that victims are both notified and consulted. To refer back to the previous clause, how are we meant to know whether an offender is dangerous and a risk unless we actually hear from the people who have been subjected to the horror that that person can wreak?
I congratulate my hon. Friend the Member for Rotherham on tabling amendment 145, which has been crafted with her characteristic care and has won support from colleagues across the House. Contrary to what she might think, I think it is the right amendment. The Opposition fully support the principle behind amendment 145 that victims and survivors deserve to be at the heart of criminal justice and, in this case, to be consulted on decisions made by the Parole Board that affect them. The amendment is a simple one, and I will not detain the Committee by repeating the words of my hon. Friend the Member for Rotherham on the technical aspects of how it would work
I thank the hon. Member for Rotherham for moving her amendment and for her remarks, the spirit of which I certainly completely agree with. Amendment 145 covers only moves to open prisons rather than Parole Board release decisions more generally. I think it is worth making it clear to the Committee that the victim’s rights to participate in the parole process are clearly enshrined already in the victims’ code, published again recently. Under the Parole Board’s existing rules, there is a requirement for the Secretary of State to provide the board with a current victim personal statement if one has been prepared, and that must be taken into account by the panel considering the case. The statement sets out the impact that the offence has had on the victim and their family and any concerns that the victim and their family may have about the potential release. Victims are, as part of that, entitled to request that specific licence conditions, including exclusion zones and non-contact requirements, be imposed on the offender. The victims’ code enshrines a number of entitlements relating to parole, including the right to present a victim personal statement in the way that has just been described. A root-and-branch review of the parole system is going on to try to improve these different things further.
As I said, this amendment relates only and specifically to open prison transfers. But I think that the general point that the hon. Member for Rotherham has raised is important. It is important that we do more to ensure that the victim’s voice is heard in these Parole Board decisions, for all the reasons that the hon. Member eloquently laid out. I will suggest that the Under-Secretary of State for Justice, my hon. Friend the Member for Cheltenham, who has the responsibility for this area, meet with the hon. Member for Rotherham to discuss these important issues. The matter is obviously in the rules already: it is in the victims’ code; it is in the Parole Board rules. But clearly, what is written down needs then to translate into action, and the hon. Member has raised a couple of cases in which that did not seem to happen in the way it ought to have done. She has clearly had correspondence with the previous Minister with responsibility for prisons and probation. My hon. Friend the Member for Cheltenham took over that portfolio only three or four months ago. I know he will want to meet her to discuss these important issues and make sure that it is happening in practice as it should do, so I make that commitment on his behalf.
Government amendment 132 to clause 109 makes some simple provisions and creates a mechanism for the Parole Board to change a decision where there has manifestly been an error. This follows a recent court case.
You have been very generous, so do not regard that as an admonishment. Just temper your keenness to canter on.
I will take that as a check on the reins. I have nothing further to say on amendment 145, Sir Charles.
I am grateful for the Minister’s comments. I have worked extensively with the Government’s victims team and it is fantastic. The victims code is great, but only if it is implemented. The problem we find is that people are not notified when the offender is coming up for parole consideration, so their rights are not activated because they do not know that that situation is occurring.
I accept his generous offer of meeting the hon. Member for Cheltenham, which I will take up. With that reassurance, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
I beg to move amendment 132, in clause 109, page 99, line 11, leave out
“resulted from a clear mistake”
and insert
“it would not have given or made but for an error”.
This amendment ensures that the language used in the new provision about when the Parole Board can set aside decisions aligns with a recent High Court judgment which ruled on the circumstances when a Parole Board decision can be revisited and makes a drafting clarification.
I am sorry to have spoiled the anticipation by jumping early. May I speak to clause 109 as well?
Very briefly, clause 109 makes provision for manifest errors in Parole Board release decisions to be corrected. Government amendment 132 implements a recent court judgment where the language was changed and says that reconsideration will happen where there has been
“a clear mistake of law or fact”.
It makes that change following the High Court judgment in the case of Dickins, with which I am sure the Committee is familiar.
I have nothing to add.
Amendment 132 agreed to.
Clause 109, as amended, ordered to stand part of the Bill.
Clause 110
Responsibility for setting licence conditions for fixed-term prisoners
Question proposed, That the clause stand part of the Bill.
I have relatively little to say on these clauses, which are technical in nature. Clause 110 covers responsibility for setting licence conditions for fixed-term prisoners. Clause 111 repeals some uncommenced provisions dating back many years that have never been used, and simply removes them from the statute book because they have never been commenced. Clause 112 covers the release at the direction of the Parole Board after recall for fixed-term prisoners. Clause 113 is about changing the release test for the release of fixed-term prisoners following recall. Clause 114 covers release at the direction of the Parole Board in relation to timing.
They are technical changes, and I do not propose to add anything beyond these brief remarks, Sir Charles.
Question put and agreed to.
Clause 110 accordingly ordered to stand part of the Bill.
Clauses 111 to 114 ordered to stand part of the Bill.
Clause 115
Extension of driving disqualification where custodial sentence imposed: England and Wales
I beg to move amendment 68, in clause 115, page 104, line 21, at end insert—
“(2A) The amendments made by subsection (2)(a)(i) do not have effect in relation to an offender who—
(a) is sentenced before the coming into force of section 107 (increase in requisite custodial period for certain offenders of particular concern), and
(b) on being sentenced, will be a prisoner to whom section 244A of the Criminal Justice Act 2003 (release on licence of prisoners serving sentence under 278 of the Sentencing Code etc) applies.”.
This amendment ensures that the amendments made by clause 115(2)(a)(i) do not apply to a person who is sentenced between the passing of the Bill (when clause 115 comes into force) and the coming into force of clause 107 two months later and who will be a person to whom section 244A of the Criminal Justice Act 2003 applies.
Amendment 68 is a technical amendment that introduces a transitional provision that has been identified as necessary to address a short two-month gap before different, but inter-connected, provisions in the Bill come into force. Sir Charles, will I briefly speak to clauses 115 to 118?
Okay. I will not refer to them again, so I will do so.
Clause 115 relates to England and Wales and makes some changes to the driving disqualification provisions where we have changed the automatic release points. Colleagues will recall that we have moved the release point from a half to two thirds for certain offences, including in changes made last year. We want to make sure that, where a driving disqualification is imposed, it takes account of the change in release point. The clause makes simple consequential amendments to those release points.
Clauses 116 and 117 do similar things to make sure that driving disqualifications properly intermesh with the changes to release provisions. Clause 118 does similar things in relation to Scotland.
The House briefing paper on the Bill explains that when a driver receives a driving disqualification alongside a custodial sentence, the court must also impose an extension period to ensure that the disqualification period is not entirely spent during the time the offender is in prison. The explanatory notes explain that clause 115 would change the law so that the length of the extension period reflects a succession of other changes made by the Government to the release points for certain offenders.
The notes refer to changes made by the Terrorist Offenders (Restriction of Early Release) Act 2020, the Release of Prisoners (Alteration of Relevant Proportion of Sentence) Order 2020, changes in the Counter-Terrorism and Sentencing Act 2021 and further changes proposed by this Bill. These pieces of legislation all change the point at which an offender is automatically released or becomes eligible to be released if the Parole Board agrees they are no longer a danger to the public. Rather than being at the halfway point of the sentence, that release point will now move to the two-thirds point.
As I explained at some length in the debate on clause 106, the Opposition cannot wholeheartedly support changes to the release point of certain offenders. Not only do the changes make a notoriously complicated sentencing regime even more complicated but they also substantially limit the amount of time an offender spends on licence in the community, significantly increasing their chances of reoffending.
The Opposition do not support the Government’s logic in adapting other pieces of legislation, in this case driving offences, to reflect those changes. For that reason, we are opposed to clauses 115 to 118 and urge the Government to use caution before committing to any further changes that would further complicate an already overcomplicated sentencing system. That said, I do not intend to press the clauses to a vote, but let the record show that we are opposed to the provisions.
No.
Amendment agreed to.
Clause 115, as amended, agreed to.
Clauses 116 to 118 ordered to stand part of the Bill.
Clause 119
Calculation of period before release or parole board referral where multiple sentences being served
Question proposed, That the clause stand part of the Bill.
I will speak extremely briefly to clauses 119 to 123. They simply set out minor amendments to existing legislation that part 7, chapter 1 of the Bill makes. In brief, clause 119 provides clarification on when a prisoner must be automatically released and when referral to the Parole Board is required in cases where concurrent or consecutive sentences are being served, so it provides clarification around how those sentences interact with one another.
Clause 120 addresses the application of release provisions to repatriated prisoners, reflecting some recent alterations that have been made domestically, which we have talked about already—making sure that works with repatriated prisoners.
With this it will be convenient to debate the following:
Clauses 125 to 127 stand part.
That schedule 12 be the Twelfth schedule to the Bill.
Clause 128 stand part.
That schedule 13 be the Thirteenth schedule to the Bill.
Clause 129 stand part.
That schedule 14 be the Fourteenth schedule to the Bill.
Let me start with clause 124, which would give responsible officers the power to compel offenders to attend an appointment at any point in a community order or during the supervision period of a suspended sentence, in exceptional circumstances.
The responsible officer is the statutory term for the probation practitioner who is overseeing the order. Section 198 of the Criminal Justice Act 2003 requires the responsible officer to make any arrangements that are necessary in connection with the requirements imposed by the order, and to promote the offender’s compliance with those requirements.
In some cases, the responsible officer might be delivering those requirements directly. In other cases, they might be working with the offender to develop a sentence plan and monitor their progress against it, but referring them to colleagues or to other organisations to deliver particular requirements, for example, educational or treatment requirements.
The current legislation lacks clarity on the extent of a responsible officer’s power to compel an offender, who is subject to a community or suspended sentence order, to attend supervision appointments—meetings, essentially. Offenders serving community sentences have a duty to keep in touch with their responsible officer, and responsible officers also have the power to make any arrangements that are necessary in connection with the requirements imposed by the Order. But it is not currently clear what powers probation officers have if they are concerned about a new or escalated risk that an offender presents, which is not necessarily related to the delivery of what the court has ordered. Hence this measure, which enables the responsible officer to require the offender to participate in a meeting. It simply clarifies that that can happen. I think we all agree that contact between the responsible officer, for example, the probation officer, and the offender is a good thing to make sure that that relationship is being properly managed.
Clause 125 is one of a number of measures in the Bill that seek to strengthen community sentences. In the Sentencing White Paper last September, we set out a new vision for community supervision combining robust punishment and management of risk with a new focus on addressing rehabilitation needs to break the cycle of reoffending. Clause 125 therefore increases the maximum length of time a curfew can be imposed to make it potentially more effective and increases the maximum number of hours that a curfew could be imposed in any given 24-hour period. At the moment, a curfew can be imposed for a maximum of 12 months and we will increase this to up to two years, to give the court a little more flexibility and, we hope, encourage the use of community sentences more often.
The clause will also increase the potential of a curfew to support rehabilitation by providing a longer period during which some of the positive effects of the curfew can be established. It can, for example, reduce interaction with criminal associates. Again, that will hopefully enable the courts to use those sentences more as an alternative to short custodial sentences, which we are all keen to avoid where possible.
At the moment, a community order or suspended sentence order may specify a maximum of 16 hours of curfew per day, which provides in practice a weekly maximum of 112 hours. The clause will increase the daily maximum to 20 hours, but we will not move the seven-day maximum of 112. The number of curfew hours per day can be moved around if, for example, somebody gets a job, or something like that, and that needs to be taken into account, but the weekly maximum does not change. It is important to make the point that we are not altering that.
Clause 126 will give greater powers to the responsible officer to vary electronically monitored curfews on community sentences. Again, we think that will be helpful. To be clear, the responsible officer will not be able to change the number of curfew hours. That is an important point to emphasise.
Clause 127 removes senior attendance centres from the menu of options available. They are not very widely used, and in fact in some parts of the country they are not used at all. These days, there are various other means that are used to provide rehabilitation and so on, rather than senior attendance centres. Schedule 12 contains further amendments relating to the removal of the attendance centre requirements, as I have just described.
Clause 128 simply introduces schedule 13, which makes provision for courts to have powers to review community and suspended sentence orders and commit an offender to custody for breach. Without this clause, schedule 13 would not form part of the Bill. Part 1 of schedule 13 contains provisions relating to the review, which is a crucial element of the problem-solving court approach. As Members know, we are keen to run pilots of problem-solving courts. We think they have an important role to play where offenders have a drug, alcohol or mental health problem, and where the judge can have repeated interaction with the person concerned. We think that could hopefully contribute to the addiction or mental health problem being dealt with. They were piloted in the past—I think they were piloted in Liverpool a few years ago—and they were perhaps not as effective as we had hoped. This pilot is therefore important to try to get the model right. If we can get the model right, we will obviously look to roll it out.
Clause 129 introduces schedule 14. Schedule 14 itself provides the legislative changes required for the problem-solving court pilot that I have just described. We think that problem-solving courts are really important, so the pilots will be important as we have to get the model right. There are lots of different ways of running problem-solving courts. The Americans and the Australians do them differently. We want to get this right. As I say, if we can find a way of tackling the root cause of offending behaviour, whether it is drug addiction, alcohol addiction or mental health, that will help everybody—the community, society and the offender—so I am really pleased that these schedules are in this Bill, laying the groundwork for the things that I have described. I commend these clauses and schedules to the Committee.
As the Minister set out, clause 124 provides legal clarity about what a probation officer or responsible officer can instruct an offender who has been released from custody to do. Specifically, it will give probation officers the legal power to compel offenders serving a community or suspended sentence order to attend supervision appointments. Those appointments can be either for the purpose of ensuring the offender complies with rehabilitative requirements or where there are public protection concerns. If an offender refuses to comply with directions made under clause 124, they can be found to be in breach of their licence conditions and punished accordingly.
On the whole, this is a clause that the Opposition can support. If there is legislative uncertainty about what a probation officer can and cannot do, it is important, for the benefit of probation officers and offenders themselves, that it is ironed out. We accept that. The Opposition also accept the importance of offenders attending the appointments they need to rehabilitate and reform in the community. I have spoken at length about how Labour fully appreciates the importance of time spent in the community when it comes to reforming an offender and reducing the risk of reoffending. We are also keen to support amendments that will make the life of probation officers easier by providing legislative clarity.
However, although we are supportive of clause 124, we have some concerns, which I hope the Minister can respond to today. First, given that failing to attend appointments under the clause could result in an offender being found to be in breach of their licence and possibly recalled to prison, can the Minister set out the procedure that offenders can use to challenge orders made under clause 124?
Secondly, we must also consider the impact that the powers in clause 124 could have on offenders who have learning disabilities or are neurodivergent. As the Prison Reform Trust explains:
“People with learning disabilities can find it particularly difficult to comply with measures such as additional appointments or reporting requirements, and so special attention will need to be given to ensuring they are not unfairly disadvantaged by these provisions.”
In addition to addressing the system for offenders to challenge orders under the clause, will Minister set out what safeguards will exist to ensure that no offender is unfairly disadvantaged by clause 124 due to circumstances beyond their control?
I now turn to clause 125, the effect of which is similar to 124. Clause 124 gives probation officers greater powers to compel offenders to attend appointments in the community, and clause 125 gives probation officers greater powers with regard to curfews. Under current legislation, offenders subject to a community order or suspended sentence order can be subject to a curfew for up to 16 hours a day for a maximum of 12 months. Clause 125 would increase the daily curfew to 20 hours and increase the total period over which curfews can be imposed from one year to two years.
The Government set out in the explanatory notes that this change will increase the punitive weight of a curfew requirement, but also has the potential to support rehabilitation by providing a longer period during which some of the positive effects of curfew could be established. As with clause 124, the Opposition are keen to give our hard-working probation officers the tools, powers and legal clarity they need to do their job properly. We are satisfied that clause 125 is a proportionate means of achieving that goal, particularly as the Government have chosen to retain the maximum number of curfew hours that can be imposed per week.
None the less, as with clause 124, we seek some assurances from the Minister about how these extended powers will be used in practice. As with clause 124, our main concern is about the potential of clause 125 to increase the number of offenders found to be in breach of their licence due to circumstances they cannot control, or because of technical breaches. I will discuss one aspect of this in more detail when we come to amendment 122, but we know that offenders are wrongly accused of breaching their licence conditions, including those relating to curfews, due to electronic tags malfunctioning. What assurances can the Minister give that extending the powers of probation officers in this area will not lead to more offenders accused of being in breach due to malfunctioning tags?
I also repeat my concern in relation to clause 124 about how this power could impact offenders who suffer from learning difficulties or are neurodivergent. What steps will the Minister take to ensure that these offenders are not unfairly disadvantaged by clause 125? Will probation officers be given additional discretionary powers to ensure that these offenders are not punished for a breach that they did not intend to make?
Finally, how does the Minister respond to concerns expressed by the Howard League that allowing probation officers to place strict restrictions on leisure days could prevent people on licence from building the positive social relationships that would help them to desist from crime?
Let us move to clause 126, which, like clause 125, extends the power of probation officers in relation to curfews. As the Government explanatory notes point out, currently, changes to a curfew cannot take place unless they have been authorised by a court. Clause 126 would amend the sentencing code by enabling probation officers to vary a curfew requirement made on a community order or suspended sentence order. Specifically, the clause would allow the probation officer or responsible person to change the curfew requirement in one of two ways: changing the time a curfew starts or ends over the course of 24 hours, or changing the residence of the offender as set out in the order.
The explanatory notes suggest that these additional changes will be beneficial not only for probation officers but for Her Majesty’s Courts and Tribunals Service and offenders:
“This legislative change seeks to reduce the burden on the courts, freeing up time for other matters and saving probation resource by reducing the volumes of papers prepared for court and court visits. There will also be advantages for offenders, allowing for variations where typically there are alterations to work hours or location that make compliance impossible, or where an offender’s curfew residence address needs to be changed in a timely way.”
While the Opposition stand firmly behind any proposal to reduce the horrendous burden currently on our courts, I am somewhat perplexed that the Government’s first thought in this area is to give probation officers the power to vary curfew requirements.
As the Minister will no doubt be aware, the backlog in the Crown court is at record levels, sitting at almost 40,000 cases before the pandemic even began. As we said before, victims of rape and other serious offences face a wait of up to four years for their day in court. While it is true that the backlog has been exacerbated by the pandemic, it was created by the Conservatives closing half of all courts in England and Wales between 2010 and 2019, and allowing 27,000 fewer sitting days than in 2016. If the Government were serious about reducing the burden on our courts, they would have adopted Labour’s package of emergency measures during the pandemic, including mass testing in courts, the extension of Nightingale courts and reduced juries until restrictions are lifted, but they did not, and the result is the catastrophe we see today.
Of course, there was also the North Liverpool community justice centre, which I think the Minister may have referred to, which extended the problem-solving court technique to all kinds of offences, not only specifically drug or alcohol offences, domestic violence or mental health issues, and it was very successful.
Indeed, that was the case. We have so much to learn from the best practice around the country, but also from what happened before this Government varied those types of courts when they came to power in 2010.
In total, the Government have committed to piloting five problem-solving courts, targeted at repeat offenders who would otherwise have been sent to custody. The Bill builds on those proposals by laying the legislative framework for the pilots to take place—specifically, clause 128 introduces schedule 13, which will give problem-solving courts the power to periodically review community and suspended sentence orders, and to commit an offender to custody for a breach. The pilot of problem-solving courts is welcome.
The evidence is clear that problem-solving courts have proven hugely effective—for example, in restoring confidence in the criminal justice system among marginal communities. As the Government’s own response to the Lammy review set out:
“Trusted figures in the CJS were described as those who had taken the time to get to know an individual, their background and specific needs and vulnerabilities.”
Moreover, if rolled out nationally, the pilot of problem-solving courts would also play an important role in reducing the huge burden on our courts system, while ensuring short custodial sentences are used only if completely necessary.
Although the Opposition support the powers in clause 128, we have some concerns, and I would be grateful if the Minister responded to them this afternoon—sorry, this morning. It is still morning!
First, as Women in Prison points out in its helpful briefing:
“In order to be considered for a problem-solving court approach, a person must first enter an admission of guilt for the alleged offence.”
The briefing goes on to note that the review conducted by my right hon. Friend the Member for Tottenham (Mr Lammy) found:
“Black, Asian and minority ethnic people are more likely to plead not guilty to alleged offences. We know that experience of racism and lack of trust in the criminal justice system prevents people from feeling that they will be treated fairly if they plead guilty.”
I know that we have already raised this issue in debate, but therein lies a difficulty that the Government will have to contend with as they pursue their pilot of problem-solving courts. As the Prison Reform Trust explains, while, on one hand, problem-solving courts have been useful at restoring confidence in the criminal justice system for those in marginalised communities, for them to be wholly successful,
“pilots must work with people who enter not guilty pleas, and on added measures that are likely to increase confidence in the process.”
I know the Minister said that the Government would do what they could to overcome that problem, but what that is, or could be, is still far from clear. Can he be more specific by explaining what steps the Government are taking on the issue of not guilty pleas and to avoid exacerbating the disproportionality that already exists for black, Asian and minority ethnic people in the criminal justice system?
Secondly, if problem-solving courts have already shown themselves to be effective in providing rehabilitative alternatives to custody, why have the Government chosen to pursue such a limited pilot rather than a larger national roll-out? Thirdly, what will the Government do to resource properly the probation and other services that work with offenders who are dealt with through problem-solving courts? The Minister knows, as I do, that resources are thin. If they are not there, the system will fail. Finally, will he report back to Parliament on the success rate of the pilots, and if so, what would the Government look for before they could commit to a national roll-out?
I will be very brief on clause 129. While clause 128 and schedule 13 provide the legislative foundation for the pilot of problem-solving courts, clause 129 and schedule 14 would enable the courts involved in the pilot to impose drug-testing requirements as part of a community sentence or a suspended sentence order. As the House briefing sets out, a court would be able to impose drug-testing requirements only where the two following conditions are met: substance misuse has contributed to the offence to which the relevant order related, or is likely to contribute towards further offending behaviour; and the Secretary of State has notified the court that arrangements to implement drug-testing requirements are available in the offender’s local area. Taken hand in hand with clause 128, the Opposition are happy to support clause 129.
It being 11.24 am, it is not fair to get the Minister to respond, so I will ask the Government Whip to move the motion to adjourn.
Ordered, That the debate be now adjourned.—(Tom Pursglove.)
(3 years, 2 months ago)
Public Bill CommitteesThe Committee consisted of the following Members:
Chair: Sir Charles Walker
† Anderson, Lee (Ashfield) (Con)
† Atkins, Victoria (Parliamentary Under-Secretary of State for the Home Department)
† Baillie, Siobhan (Stroud) (Con)
† Champion, Sarah (Rotherham) (Lab)
† Charalambous, Bambos (Enfield, Southgate) (Lab)
† Clarkson, Chris (Heywood and Middleton) (Con)
† Cunningham, Alex (Stockton North) (Lab)
Dorans, Allan (Ayr, Carrick and Cumnock) (SNP)
Eagle, Maria (Garston and Halewood) (Lab)
† Goodwill, Mr Robert (Scarborough and Whitby) (Con)
Higginbotham, Antony (Burnley) (Con)
† Jones, Sarah (Croydon Central) (Lab)
† Levy, Ian (Blyth Valley) (Con)
† Philp, Chris (Parliamentary Under-Secretary of State for the Home Department)
† Pursglove, Tom (Corby) (Con)
Wheeler, Mrs Heather (South Derbyshire) (Con)
† Williams, Hywel (Arfon) (PC)
Huw Yardley, Sarah Thatcher, Committee Clerks
† attended the Committee
Public Bill Committee
Tuesday 15 June 2021
(Afternoon)
[Sir Charles Walker in the Chair]
Police, Crime, Sentencing and Courts Bill
Clause 124
Supervision by responsible officer
Question (this day) again proposed, That the clause stand part of the Bill.
I remind the Committee that with this it will be convenient to discuss the following:
Clauses 125 to 127 stand part.
That schedule 12 be the Twelfth schedule to the Bill.
Clause 128 stand part.
That schedule 13 be the Thirteenth schedule to the Bill.
Clause 129 stand part.
That schedule 14 be the Fourteenth schedule to the Bill.
Before we adjourned, the Opposition spokesman, the hon. Member for Stockton North, gave a lengthy speech, which we were all grateful to hear. We paused to allow the Minister to prepare himself. I believe he is now prepared, so I call the Minister.
Thank you, Sir Charles. I trust everyone has had a refreshing and congenial break for lunch. Prior to the break, the shadow Minister raised a number of questions relating to clauses 124 to 128 and to schedules 12 to 14. I will endeavour to answer as many of those questions as I can. He asked what procedure offenders could use to challenge orders made under clauses 124 and 125, particularly to ensure that they were not unduly penalised if they then breached the conditions that had been imposed. If a breach does occur and some serious consequence follows, it is always open to the offender to make a representation when attending their hearing at court to either make the case that the breach was technical or minor in nature, or that the condition itself was not varied in a reasonable way. A significant penalty can never be imposed without the intervention of the court.
Questions were asked about circumstances beyond the control of the offender. We heard about the possibility of a device malfunctioning and about particular circumstances relating to disability that might disadvantage certain people. We envisage the power laid out in section 124 being used only in rare circumstances, certainly not routinely.
I confirm that it is the intention to provide clear advice to probation staff, setting out the rare circumstances in which additional supervision may be warranted, to ensure, for example, that disabled offenders are not unfairly or unduly disadvantaged, and to avoid the purpose of these supervision appointments going beyond the very specific purposes that the order has been imposed by the sentencing court.
The same applies to people with learning difficulties. Courts sentence on a case-by-case basis and, where electronic monitoring has been imposed as one element of that sentence, the officer supervising the offender is already able to review notifications of apparent violations and take a reasonable view, on a case-by-case basis. If someone has been genuinely unable to understand how to operate the equipment or had a genuine technical problem, we would expect probation officers to exercise reasonable discretion.
As I said at the very beginning, if a breach did follow and the court was invited to impose some penalty, it would be open to the offender to make a representation at that point to explain the mitigating circumstances. My expectation is that it would never get that far, because I would expect the supervising officer to be reasonable in the meantime.
I recognise what the Minister is saying. I raised the point that people should be able to make representations after their hearings, but some of the people we are talking about have particular challenges in life and special needs. How will the Minister ensure that their problem—their malfunctioning equipment or otherwise—is properly communicated to a court to ensure that they are not penalised?
Clearly, in the first instance we would expect the responsible officer to exercise these powers in a reasonable way and to exercise discretion. Hopefully, as I said a few minutes ago, these cases would not get as far as court because the probation officer would act in a reasonable and proportionate way in the first place. The guidance will reflect that. If someone does get to court, there is the possibility of their being represented in proceedings. However, I also would expect the judge to ask a reasonable question of the person appearing before the court, such as whether there were any mitigating circumstances or technical problems or whether they had failed to understand how to operate the equipment. If there is a vulnerability, the pre-sentence report written prior to the original sentencing would be expected to pick up those issues.
The shadow Minister asked whether the powers in clause 126 were too wide and gave the responsible officer excessive latitude and leeway to vary curfew requirements that a court had previously imposed—to dispense summary justice without proper reference to the courts. To be clear, clause 126 is very limited in the powers that it provides probation officers, and they will be able to amend the requirement in only two limited ways, and only if those changes do not undermine the weight or purpose of the requirement imposed by the court. The power in clause 126 is restricted to two areas: a shift in the start and/or end times of the curfew periods—but no change to the total number of hours imposed—and a change to the offender’s curfew address, where the address was not part of the order in the first place. So they are very limited powers to vary, which I hope provides the reassurance asked for.
The hon. Member for Garston and Halewood, who unfortunately is not in her place, referred to the problem-solving courts in Liverpool. I understand that the results from that have been a little mixed, but we are committed on both sides of the House to the principle of problem-solving courts, and I noted the shadow Minister’s recitation of the history of these going back as far as 1999. Both sides recognise the important role that problem-solving courts can play. Other jurisdictions have used them, with the United States being an obvious example. We are starting on a pilot basis rather than a big-bang roll-out because the details of how the model operates is important. The details make a big difference, and the design of the way it works—when the reviews takes place, what they are reviewing and what actions are taken—make a difference to whether the thing is successful or not.
While across the House we are committed to the principle of problem-solving courts to tackle the underlying causes of offending, we have to make sure that they work in practice and the details are right before rolling them out. To answer another of the shadow Minister’s questions, I am sure we will be coming back to Parliament and reporting on the progress of these problem-solving courts. My hope is that we find a way quickly to make these work in practice and can then roll them out. I am committed to community sentence treatment requirements, which are a form of disposal that provides for mental health, alcohol and drug addiction treatment. Quite a lot of money has gone into that recently—£80 million for drug addiction earlier this year. Problem-solving courts are a critical way of supporting the delivery of treatment under community sentence treatment requirements. It is something I want to push, and I am glad that there is agreement across the House on that.
The final question that the shadow Minister asked was whether a guilty plea was needed to qualify for an appearance before a problem-solving court. Problem-solving courts do not require a guilty plea, and this Bill does not stipulate that as a prerequisite, but a willingness to engage with the court and comply with the community interventions will be an important factor. The problem-solving courts working group in 2016 considered making a guilty plea a key factor in creating the engagement necessary, but it recognised the number of complexities across the cohorts targeted, and did not think it was necessarily required. People who plead not guilty, and are then convicted, would be eligible for the problem-solving court, and I hope they can be helped as much as anyone else. On that basis, I commend these provisions to the Committee.
Question put and agreed to.
Clause 124 accordingly ordered to stand part of the Bill.
Clauses 125 to 127 ordered to stand part of the Bill.
Schedule 12 agreed to.
Clause 128 ordered to stand part of the Bill.
Schedule 13 agreed to.
Clause 129 ordered to stand part of the Bill.
Schedule 14 agreed to.
Clause 130
Duty to consult on unpaid work requirements
Question proposed, That the clause stand part of the Bill.
I will follow your direction, Sir Charles, by saying just a few words on this clause, which is relatively straightforward and, I think, pretty inoffensive.
Clause 130 simply creates a requirement for probation officials to consult key local and regional stakeholders on the delivery of unpaid work. Unpaid work—or community payback, as it is sometimes known—combines the sentencing purposes of punishment with reparation to communities. We believe that, where possible, unpaid work requirements should benefit the local communities in which they are carried out. Nominated local projects are already popular with sentencers and the public, but there is currently no requirement for probation officials to consult stakeholders on the design or delivery of unpaid work, so members of communities and organisations within particular local areas that are best placed to understand the impact of crime and what might be useful in the local area do not necessarily have their say.
Clause 130 simply seeks to address the gap by ensuring that key local stakeholders are consulted, so that they can suggest to the probation service what kind of unpaid work might be useful in their local area. We hope that local community groups and stakeholders come up with some good ideas that the probation service can then respond to. That seems to be a pretty sensible idea. The probation service in some areas may do it already. This clause simply creates a proper duty, or a requirement, for the probation service to do it. Of course, if we understand the needs of local communities and their thoughts, we can improve the way unpaid work placements operate to support rehabilitation and also help the local community. If the local community can visibly see offenders doing unpaid work in their local area, whether it is cleaning off graffiti, cleaning the place up or whatever else it may be, that will, we hope, demonstrate that the programme is giving back to and improving the local community, but delivering a punitive element as well.
I was about to conclude, but of course I will take the intervention.
When I used to run a children’s hospice, we had offenders under probation supervision come in. They were meant to be doing gardening at the children’s hospice, but instead they sat around smoking cigarettes. We kept on raising that with the probation worker, because we had invited the offenders there to give them a second chance, to help with their rehabilitation, to enable them to contribute to the community and so on. But the probation officer said, “What do you want me to do? I can’t beat them; I can’t make them work, but they have to come on these schemes.” Could the Minister give some examples of how the probation service will have the resources and the influence to ensure that people who are out in their local community are actually—
Order. This is meant to be an intervention, not a speech. The hon. Lady is entitled to make a speech and could have made a speech, but can we treat this as an intervention?
The hon. Lady makes a very good point. First, I am extremely disappointed and somewhat shocked to hear that people who were supposed to be doing work at a hospice in Rotherham in fact sat around smoking cigarettes. That is obviously shocking and not what the orders are supposed to be about. The hon. Lady says that the probation officer shrugged their shoulders and said, “Well, what can I do about it?” Of course, if the person, the offender, was not doing the work that they were supposed to be doing, that would amount to a breach of the unpaid work requirement, and they could be taken back to court to account for their breach, so I am extremely disappointed by the attitude of the probation officer that the hon. Lady just described.
The hon. Lady asked about resources. Extra resources are going into the probation service for it to supervise exactly these kinds of activities, and I would expect them to be supervised and policed properly. I will certainly pass on her concern to the relevant Minister. I have already made contact about fixing a meeting for the hon. Lady and the Prisons Minister that we talked about in this morning’s session, in relation to victims being consulted about probable decisions. The same Minister, my hon. Friend the Under-Secretary of State for Justice, is responsible for the probation service as well—I am just adding to his workload. I will raise it with him, but I would certainly urge the hon. Member for Rotherham to raise this issue in the same meeting, because I know that the account she just gave will concern my hon. Friend as much as it concerns me.
I echo the points made by the hon. Member for Rotherham in that there is a variation in the enthusiasm that some of those who conduct this work display, on both sides. I was told, for example, that a lad who came from a farming family had thrown his back into it very strongly and was encouraging others to join him. I would add that we do consult with the local community, and many of the jobs that are done in my constituency are at the behest of either a local authority or other local groups.
Wonderful. We would like to see the kind of consultation that already takes place in Scarborough and Whitby take place across the country as a whole, and that is precisely the intention behind clause 130. Where Scarborough has led, the rest of the nation, thanks to this clause, will follow.
Question put and agreed to.
Clause 130 accordingly ordered to stand part of the Bill.
Clause 131
Youth Remand
I beg to move amendment 128, in clause 131, page 122, line 12, at end insert—
“(ba) after subsection (5) insert—
(5A) For the purposes of subsections (5) and (6) “recent” is defined as having occurred in the previous six weeks.””
With this it will be convenient to discuss the following:
Amendment 129, in clause 131, page 122, line 16, at end insert—
“(ca) in subsection (7)(b) insert “serious” before “imprisonable offences”;”
Amendment 130, in clause 131, page 123, line 3, at end insert—
“(aa) after subsection (4)(b) insert—
“(c) state in open court the age, gender and ethnicity of the child.””
I am pleased to speak to amendments 128, 129 and 130 in the name of my hon. Friend the Member for Rotherham and myself. However, before I do that, if the Minister could give me a list of where he has influence, perhaps he could fix a few meetings with Ministers for me as well.
I thank the Minister very much for that—it will, of course, be on the record, which I am very pleased to note. Before I get into my speech, I would like to thank Transform Justice and the Alliance for Youth Justice for the extremely helpful work they have done on this part of the Bill. I also thank my hon. Friend the Member for Hove (Peter Kyle), the former shadow Justice Minister, who worked extremely hard on these particular issues. I am grateful to him.
Clause 131 amends the legislative threshold for remanding a child to custody. It will mean that remand to youth detention accommodation can be imposed only in the most serious cases, where a custodial sentence is the only option and the risk posed by the child cannot be safely managed within the community. It will introduce a statutory duty which states that courts must consider the interests and welfare of the child before deciding whether to remand them to youth detention. It also imposes a statutory requirement for the courts to record the reasons for the decision.
First, let me say that we are pleased with the direction of travel that this clause indicates, and we are keen for the Government’s work in this area to succeed. We are in complete agreement with the Government that custodial remand should be used only as a last resort for children. However, we do think that there is scope for these proposals to go further in tightening the threshold for remanding a child into custody. I will speak more on that when we discuss our amendments.
The current youth remand provisions were introduced in the Legal Aid, Sentencing and Punishment of Offenders Act 2012 and I well remember the Public Bill Committee, where I had the privilege of serving as Parliamentary Private Secretary to Sadiq Khan, now our excellent Mayor of London, and also my good friend. By 2019, the independent inquiry into child sexual abuse noted a significant increase in the use of custodial remand for children. The Opposition warmly welcomes measures which aim to reduce the number of children remanded into custody, especially in light of the fact that in 2018/19 only a third of children remanded to custody or local authority accommodation later received a custodial sentence.
Our concerns about the use of custodial remands for children are compounded by the extreme racial disproportionality on remand, and the record proportion of children in custody who have not yet been tried in court.
Against the backdrop of the record court backlog and the waiting times for trial, there could not be a more opportune moment to address these issues. We particularly welcome the introduction of the statutory duty to consider the welfare and best interests of the child. We believe that, while these proposals can go further—I know that the Minister will listen carefully to our proposals shortly—these changes will help to reduce the number of children who are unnecessarily remanded to custody, so we are pleased to support them.
However, there are a couple of points on which I would welcome the Minister’s thoughts. Has he any further information to share with the Committee on his Department’s considerations of the impact that police remand has on custodial remand? Are there any plans to address that? Research by Transform Justice shows that police remand, where the child is detained by the police until court either in a police cell or in a local authority PACE bed—under the Police and Criminal Evidence Act 1984—is a driver of custodial remand. Transform Justice explains that point:
“This is because any child remanded by the police has to be presented in court within 24 hours, meaning Youth Offending Team staff often don’t have enough time to develop a bail package that will satisfy the court. Children who appear from police custody also usually appear in the secure dock, which can bias courts to view the child as more ‘dangerous’ and therefore more suitable for custodial remand.”
The criteria for police remand are spelled out in section 38 of the Police and Criminal Evidence Act and are very different from those used by the court for remand. In fact, the criteria for police remand of children are almost identical to those for adults, unlike the child-first approach taken in so many other areas of the justice system.
We know that the police remand more children than the courts. Of the 4,500 children who appeared in court from police custody in 2019, only 12% went on to be remanded by the court. Some 31% of those remanded by the police went on to be discharged, dismissed or have their case withdrawn, while 37% went on to get a fine or community sentence. The figures illustrate that police use of remand is seriously out of synch with the courts already. This clause may further widen that gap.
Is the Minister not concerned that the police may continue to overuse post-charge detention, undermining the positive efforts of the clause to reduce unnecessary custodial remand for children? Will the Government consider updating the police remand criteria, so they are in line with the new court remand criteria, to ensure consistent decision making across the whole criminal justice system?
I am greatly supportive of the provision in the clause that requires courts to record their reasons for remanding a child, not least because it will provide valuable data on the use of remand, which will enable us to continue to make improvements in this area. For that to be most effective in informing future policy decisions, we would need to have some sort of centralised monitoring system. Will we have such a system? It would mean that the need to record reasons would not only focus the mind of the court in a specific case; it would also benefit the system as a whole, as each case can inform our ongoing learning process about the use of remand and its effectiveness. Has the Minister considered the possibility of such a centralised monitoring system?
It has been suggested that the obligation on the court to record reasons would be most effective if courts had to specify why non-custodial alternatives were deemed unsuitable and how each of the custodial remand conditions has been met. Is that the kind of detail that the Minister envisages the obligation should entail? I am sure we all agree that it would be helpful for that level of information to be provided, so I am interested to hear the Minister’s thoughts.
Turning to the amendments, as I said earlier, the reforms to the threshold for remanding a child in custody are welcome, but there are a couple of areas where we believe they should go further. The Opposition amendments, if adopted, would get us closer to the goal of custodial remand being used only as a truly last resort.
Amendment 128 seeks to tighten the history test by defining a recent history of breaching bail or offending while on bail as having been committed within the last six weeks. The clause currently makes provision to amend the history condition so that the previous instances of breach or offending while on bail must be “significant”, “relevant” and “recent”. In order to reduce the number of children held unnecessarily on remand, it would be helpful to amend the clause so that there is a clear definition of “recent”.
In defining recent, we have to be mindful of what that means to a child. As the Alliance for Youth Justice notes:
“If we are to take a child-centred approach, we must consider how children experience time, and recognise the well-established principle that children change and develop in a shorter time than adults.”
The Youth Justice Board for England and Wales has recommended that “recent” be no longer than within a six-week period. I hope that the Minister will agree that clarity on that point would be of great assistance to the courts. I would be interested to hear from him what discussions his Ministry of Justice colleagues have had regarding defining a time limit for this condition.
Amendment 129 is a straightforward amendment to the necessity condition that would again help achieve the aim of using custodial remand for children only as a last resort. Although we welcome the strengthened wording of the necessity condition included in the Bill, which would require remand to be used only when the risk posed by a child cannot be safely managed in the community, we share the concerns of the sector that the benefits arising from this change may be undermined by its drafting. The amendment would therefore tighten and strengthen the wording. Transform Justice says that these benefits of the current proposed change to the necessity condition
“will be undermined by the loose wording of one of the other necessity conditions: that remand to YDA is necessary to prevent further imprisonable offences. This condition is highly subjective and casts a wide net, which may be widened further by youth sentencing provisions elsewhere in the bill.”
We share the concern expressed by the Alliance for Youth Justice that
“the latter part of the condition (to prevent the commission of an imprisonable offence) sets such a low threshold for meeting the Condition as to render the first threshold (to protect the public from death or serious personal injury) somewhat redundant.”
The amendment would tighten the latter part of the condition by ensuring that it applies only to serious imprisonable offences, which we think better reflects the intention of the clause.
Finally, amendment 130 would compel the court to record the age, gender and ethnicity of a child remanded in custody in order to provide better data on remand, particularly on disproportionality. We believe that this could be a helpful tool in addressing the deeply concerning and increasing levels of disproportionality at this point in our justice system. The numbers beggar belief. Nine out of 10 London children who are remanded are from black, Asian and minority ethnic communities. A deeply comprehensive report that was published by the Youth Justice Board in January shows that race alone is a factor in remand outcomes for children. The researchers gathered data on thousands of English and Welsh cases, and information provided in practitioner assessments. Even when other related factors were controlled for mixed ethnicity black children, they were, as the Youth Justice Board notes,
“still more likely to be remanded in custody and, if not remanded, more likely to be subject to restrictions on bail.”
This is a serious injustice in our system that needs to be urgently addressed. More needs to be done than this amendment makes provision for, but it would be a helpful tool in breaking down the disproportionate outcomes that we are seeing. The amendment would at the very least provide accurate data to help understand this disparity, in line with the “explain or reform” principle outlined in the Lammy review, which I think is an eminently sensible step in the right direction. I hope that the Minister agrees and look forward to hearing his thoughts. I would also be grateful if he could share with the Committee any other initiatives his Department is working on to address this flagrant disproportionality in youth remand.
I fully support the arguments made by my hon. Friend the Member for Stockton North on the amendments. I have a fundamental concern about remanding children. It impacts on them disproportionately in terms of their future outlook, opportunities and potential. We see within the remand youth justice system some of the highest levels of disproportionality in the criminal justice system. Although Labour Members welcome the measures in the Bill to tighten the tests that the courts must satisfy to decide whether to remand a child in custody, we still have concerns about this section of the Bill.
We agree with the policy to encourage the courts to impose a custodial remand only when absolutely necessary while ensuring the public remain safe, but as my hon. Friend stated, there are real concerns about the overrepresentation of black, Asian and minority ethnic people, who make up only 12% of the UK population but half the youth prison population. I would be much more comfortable if we were using the Bill to look at the reasons for that disproportionate make-up, rather than at further punitive measures. We have to take steps to ensure that all people, particularly all children, can reach their potential. I am very mindful of the fact that the literacy rate of the prison population is so much lower than that of the rest of the population. Why are we not investing more to address those underlying issues?
I am frustrated that the Government agreed to my amendment to a previous Bill to introduce relationship and sex education that should have become mandatory in September 2020 but it has not yet been enacted, while we see ever younger children engaged in completely inappropriate actions of a sexual nature. There are preventive measures that we could put in place but we must also consider, and address accordingly, what it is that some children that I am thinking about, such as children in gangs, are being subjected to that makes them feel that they need to go along with the norm of the gang rather than the norm of society. I am not talking about giving any group special treatment; I am talking about taking steps to fix the justice system so that it operates in a fair and proportionate way for everybody.
We have to be aware that, under successive Tory Governments, youth services budgets have been cut by 73%, which is nearly a £1 billion since 2010, and we have to consider the impact that is having, particularly in my area of Rotherham, where the early interventions that could put children on the right path to a successful future are just not there any more. Now, rather than preventing the crime, we are looking at heavy-handed ways to punish it. I urge the Minister to speak to us and consider what his Government are doing to address those early intervention gaps to make sure that the measures in this legislation apply only in exceptional circumstances.
As the shadow Minister said, clause 131 aims to ensure that children are remanded into youth detention accommodation only where absolutely necessary and as a last resort. As the hon. Member for Rotherham and the shadow Minister said, that is something that we can all agree on. We do not want to remand children into custody prior to conviction unless it is absolutely necessary.
The hon. Member for Rotherham said that prevention was important, and of course we agree, although it is outside the scope of these clauses. Money is being invested, significantly, in serious violence reduction units that aim to prevent, but also to divert young people who might otherwise get into serious crime on to a better path.
We are mindful that over a third of children in custody are on remand and that, of those, only around a third go on to receive a custodial sentence. While custodial remand is perfectly justified in some cases, the threshold for confining an unconvicted child to a secure environment must, rightly, be set very high indeed. It sounds like we broadly agree on these principles, and that is why we are amending the provisions of the Legal Aid, Sentencing and Punishment of Offenders Act 2012, which sets out the test that the courts must satisfy when deciding whether to remand a child into custody. I think everyone agrees with the aim of the clause, which is to make sure that remand custody for a child is an absolute last resort. The shadow Minister welcomed this direction of travel and the steps that are being taken.
The clause introduces a statutory duty for the court to consider the welfare and best interests of the child when making remand decisions and a statutory requirement for the court to record its reasons for imposing custodial remand to ensure that the welfare of the child is at the forefront of the court’s mind and promote a child-first approach to decision making. We are also strengthening the sentencing condition to ensure that the mere possibility of a custodial sentence would not on its own necessarily warrant custodial remand. Similarly, a relatively minor or fairly recent breach should not, on its own, justify remand. We are reinforcing the history condition so that only a recent, significant and relevant history of breaching while on bail should be taken into account to justify custodial remand. The current tests already require the court to satisfy itself that a child can be remanded to custody only where it is necessary to protect the public from death or serious harm. We are reinforcing that necessity condition by making it clear that it means when the risk posed by the child cannot be managed safely in the community. These measures, taken together, significantly elevate and strengthen the test for child remand to custody.
Will the Minister confirm whether there is likely to be some form of time limit relating to the recent history of the child?
The shadow Minister leads me to his amendment 128, to which I was going to speak in a moment, but I shall address it now as he has raised it. There will not be a hard or specific time limit in the way that his amendment specifies six weeks. We think that a hard-edged limit of six weeks specified so precisely would unduly fetter judicial discretion. The judge should be able to make a judgment in the round, taking into account all the considerations. A hard cut-off of six weeks is too binary. It is made clear that the judge needs only to look at circumstances where there is a history of breach or offending while on bail that is recent, significant and relevant. That is quite a high test, but we do not propose to go as far as amendment 128 does in specifying six weeks. We do not support the amendment for that reason, although, in spirit, our clause as drafted is pushing in a very similar direction. We just think that six weeks is too precise and that the judge should have some residual discretion.
Before moving to amendments 129 and 130, I would like to touch on a question that the shadow Minister raised about whether police remand almost inevitably and inappropriately leads to custodial remand. He said that could be because there is not enough time to consider bail arrangements and that it could create a sense of bias because, if the judge sees the person in the dock, it may lead them to believe that they are a more serious offender. I do not accept either argument. The statistics that he himself gave a minute or two later support that. He said that only 12% of children going into police remand end up in custodial remand. That demonstrates that 88% of children on police remand do not go into custodial remand, which suggests that there is not a strong linkage in the way that he feared there might be.
We need some clarity around the 12% and the 88%. My point is that the police are remanding into custody a very high proportion of children who do not then go on to receive a custodial sentence. That is the problem, not the other way round.
I think that the shadow Minister also pointed out to the Committee that there is a 24-hour time limit on police remand for children, so it is an extremely short period of time. For that very short window before the court appearance, it ensures that the police do not lose control of the person in their care. Clearly, if that was going on for days or weeks, it would be a matter of concern, but it is a very short time window, as he said.
The shadow Minister’s amendment 129, on the necessity condition, proposes the insertion of the single word “serious”. I contend that any imprisonable offence is in itself serious but, more broadly, we are again relying on judicial discretion. We do not want to unduly fetter the judge’s discretion. The provisions in clause 131 as drafted will send a fairly clear signal to the judiciary that this is something that should be taken very seriously in making these decisions and that Parliament does not want children remanded to custody lightly or inappropriately. The clause as drafted makes that pretty clear. It also makes it clear that not only do the conditions that we have talked about have to be met but, in the opinion of the court, the risk posed cannot be managed safely in the community. Clause 131 as drafted sends a very clear message that custodial remand should indeed be a last resort.
Amendment 130, proposed by the shadow Minister, would require the court to state in open court the age, sex and ethnicity of a child remanded to custody. In all honesty, we believe that the amendment is unnecessary because the data is already collected and published, so the information is there already. The important point about the new record being created is that the reasons for custodial remand have to be spelt out expressly to ensure that the court is properly considering those things. We can then be absolutely assured that the court has to consider those matters and record them so that they are there to look at subsequently and be reviewed, not forgotten in the rush of a court appearance. The substance is captured already by the requirements in clause 131. It seems that both sides of the Committee broadly agree on this, so I do not think that amendments 128 to 130 are particularly necessary, although I do understand the spirit in which they are moved.
I am grateful to the Minister for his response. I am prepared to withdraw amendment 128, given his explanation, but I ask that he look seriously at time limits, whether in some form of guidance from the Department or otherwise.
On police remand, I am still very concerned that the police are far, far more likely to remand a child in custody than a court is. I ask that the Minister think again and review the advice given to police officers to try to reduce the number of children who are automatically remanded to custody. I am content with the Minister’s explanation on amendment 129 and I will not press it.
When it comes to data, as the Minister will know because I assume that he signs them all off, I get lots of answers to written parliamentary questions saying that the information cannot be provided because it is not available or it can be provided only at disproportionate cost. If we do not gather the data, I will get more of those answers from the Minister, so I intend to press amendment 130. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendment proposed: 130, in clause 131, page 123, line 3, at end insert—
“(aa) after subsection (4)(b) insert—
“(c) state in open court the age, gender and ethnicity of the child.””––[Alex Cunningham.]
Question put, That the amendment be made.
I have a suspicion, but I could be wrong, that we had quite a broad canter round the principles of clause 131. Does anybody want to debate it again, or are we happy to dispose of it? Excellent.
Clause 131 ordered to stand part of the Bill.
Clause 132
Discretion as to Length of Term
Question proposed, That the clause stand part of the Bill.
With this it will be convenient to discuss the following:
Clause 133 stand part.
Clause 134 stand part.
That schedule 15 be the Fifteenth schedule to the Bill.
We want a youth justice system that recognises the unique needs of children, tackles the underlying reasons why children offend and intervenes early to provide support and divert them where possible. There is a distinct and separate sentencing framework for children aged 10 to 17, which recognises that children have their own specific needs that require a different and tailored approach.
The clauses and schedule amend existing legislation to enable us to make the necessary changes to the most common youth custodial sentence, the detention and training order, or DTO. The changes are to make the DTO more flexible, fairer and more in line with other youth custodial sentences.
In that spirit, clause 132 amends the sentencing code to remove the fixed lengths of the DTO, meaning that any length of DTO between four months and 12 months can be given. The court can pass the right sentence instead of being constrained to give only sentences of DTOs of four, six, eight, 10, 12, 18 or 24 months. Removing those very fixed lengths does not change the maximum or minimum sentence but just means that any length of sentence can be given between the limits of four and 24 months. Removing the fixed lengths also means that the reductions made for time spent on remand that we have just been talking about, or bail, which is subject to a qualifying curfew condition and an electronic monitoring condition, and for a guilty plea, will be more accurate. At the moment, there is not always a DTO length that directly fits once remand, bail or guilty pleas have been considered, and the court must instead refer the sentence to one of the fixed lengths of four, six, eight, 10, 12, 18 or 24 months. With the proposed changes, the court may go between those sentence lengths, if it needs to, to fit in with the reductions for time spent on remand and so on. It is a fairly straightforward change, which makes a great deal of sense.
Clause 133 amends the sentencing code and the Criminal Justice Act 2003 to fix a current inconsistency in relation to early release. That inconsistency means that different lengths of early release are available for offenders sentenced consecutively to a DTO and another sentence, depending on the order in which they receive those sentences. The change means that where an offender is serving a DTO and another sentence consecutively, the offender may benefit from the same amount of early release, regardless of the order in which sentences are given. I think that is a fairly innocuous and sensible technical change to the 2003 Act.
Clause 134 introduces schedule 15, and that schedule amends the 2003 Act and the sentencing code, so that time spent on remand and bail, where that bail is subject to a qualifying curfew condition and an electronic monitoring condition—a tag—is counted as time served and credited accurately against the custodial part of the DTO. That is a change to the current approach, where time on remand or bail is taken into account when determining the length of the DTO, rather than being credited as time served. The schedule also makes further amendments where an offender is given two or more sentences, of which one is a DTO. Those sentences are treated as being a single term for the purposes of crediting the days spent on remand or bail. The schedule also makes changes to the Armed Forces Act 2006 to make sure that there is consistency.
Those are relatively technical and, I hope, relatively straightforward changes.
We all recognise that DTOs are the most common custodial sentence for children. Between 2010 and 2019, 20,000 offenders under the age of 18 were sentenced to a DTO. It is important that we get this right. We are tentatively supportive of the proposals in the clauses, and I look forward to the Minister’s response, which will I hope will be able to allay some of our concerns.
As the Minister has outlined, DTOs currently have to be of a fixed length. I have some sympathy with the Government’s view that having such fixed periods restricts the courts in deciding the most appropriate length of sentences. Clause 132 will address that by removing the fixed length and providing that a DTO must be for at least four months and no longer than 24 months. We agree with the Government that is important that the minimum period for a DTO is retained to ensure that extremely short, unhelpful and, indeed, counterproductive custodial terms are not given out.
I do wonder, however, whether four months is still too short, and I question the real benefits of such a short sentence. Clause 133 provides that where an offender is given two or more sentences, one of which is a DTO, those sentences are to be treated as a single term for the purposes of crediting days spent in custody, or in qualifying for bail. The explanatory notes state that this clause is intended to
“fix an existing discrepancy in relation to early release which meant that different lengths of early release were available for offenders sentenced to a DTO and another sentence consecutively, depending on the order in which they received those sentences.”
The clause aims to ensure that
“where an offender is serving a DTO and another sentence consecutively, the offender is able to benefit from the same amount of early release regardless of the order in which the sentences are given.”
Clause 134 and schedule 15 provide that time spent on remand or bail subject to a qualifying curfew condition and an electronic monitoring condition is counted as time served and credited against the custodial part of the DTO.
Taken together, the clauses increase the flexibility in the system for sentencers and should mean that the sentence length can accurately account for remand episodes already served, electronically monitored bail or a guilty plea, rather than nearest permissible length based on the fixed tariffs that currently exist.
I note that the Youth Justice Board for England and Wales broadly welcomes these proposals as well. It notes that the changes may help to solve the issue whereby the fixed lengths of the DTO sentences held the potential to create a barrier to resettlement—for example, where a fixed sentence length would mean that a child would be released just after September and therefore miss out on the intake of a new school or college year. In this instance, the fixed terms would push children out of education for longer than necessary. The more flexible approach proposed here by the Government can help to address such issues.
On the face of it, these reforms seem sensible, and like something we would support. However, the impact assessment contains some concerning projections, on which I would welcome the Minister’s thoughts. The impact assessment notes an unfortunate adverse impact of removing the fixed-term nature of DTOs, in that individuals who receive early guilty plea discounts under the current system may receive longer sentences than they currently do. While there will be no additional children sentenced to DTOs under this option, the Youth Justice Board has said that it anticipates that the increase in average sentence length may lead to a steady-state increase in the youth custody population of around 30 to 50 places, costing around £5.3 million to £8.5 million per year. It has said that there would also be an equivalent uplift in the number of children supervised in the community at any one time at a cost of around £0.4 million to £0.6 million a year.
The Government’s impact assessment predicts that the proposals will increase the steady-state number of children in custody by up to 50 children by 2023-24, costing the youth custody service between £38.6 million and £61.4 million. That is of very serious concern to the Opposition. We share the Government’s stated vision of reducing the number of children in custody, and there has been great progress in that area over the past decade. The number of children in custody has decreased by about 75%, for which the Government ought to be applauded. It would be a terrible shame if we were to roll back any of the progress that has been made in this area, especially as I know how proud the Justice Secretary is of the work that has been done.
I would be grateful for the Minister’s thoughts on how these proposals can be introduced without increasing the number of children in custody. Let us remember that it is the Youth Justice Board that is saying this will happen. Does the Department intend to introduce any safeguards in this area? The Opposition would like safeguards to be put in place to help to avoid the possibility of children spending longer than necessary in custody, which could also mean an increase in the number of children in a secure establishment at any one time.
I would also welcome a reassurance from the Minister on a further point raised by the Youth Justice Board in its briefing. It notes that the impact assessment states:
“Time spent on remand will be taken away from time to serve in custody as opposed to from the overall sentence length. There will be some individuals that spend longer on supervision in the community under this option, which would incur additional YOT costs. It has not proved possible to quantify these additional costs.”
We recognise that it might be beneficial for children to spend longer with the support of the youth offending team as opposed to being in custody, but there is of course an attendant impact on youth offending team budgets, which are already stretched. The Youth Justice Board says:
“Some children may spend longer on the community part of the order which gives youth offending teams more time to work with them but there is no evidence to support this as a benefit.”
The Youth Justice Board also notes that a cost-benefit analysis of these proposals, in terms of the additional spend for youth offending teams, would be helpful. Will the Minister provide such a cost-benefit analysis? Will he also confirm whether youth offending teams will be provided with appropriate further resource to handle any increased workload as a result of these proposals?
I am glad that the shadow Minister welcomes the broad thrust of these changes. That is very welcome indeed. In response to his questions about the impact assessment, it is important to say that it makes it clear on the second page that
“there will be no additional children sentenced to DTOs”.
The question therefore arises: why, then, will there be this very slight increase in the population, of between 30 and 50 places? The reason, as far as I can see, is that where the DTO sentence length falls between the two fixed points, at the moment it gets rounded down to the lower of the two, whereas under these proposals it can be calculated precisely. No additional people will be subject to a DTO; however, we will no longer have this rounding-down effect. In a sense, when we account for the time served and so on, and particularly the early plea discount, at the moment there is an inappropriate rounding down, because of the fixed points, which will now be eliminated. The time served will therefore better reflect the law and the court’s intention, and that will lead to a very slight increase in the number of people subject to these orders at any given point. However, the total number receiving the order will not change.
I accept that the total number receiving the orders will not change, but does the Minister not accept, and regret, that these proposals will lead to some children—it might only be a handful—being subjected to more time in custody than they would be under the current system? If he does accept that, what will he do to try to change it?
It is more that, owing to an anomaly in the current system that is a consequence of the fixed points, people are being let out slightly early. This change really means, among other things, that the law as written can be fully implemented, rather than this little rounding anomaly occurring. However, I stress that the effect is very slight.
By the way, I should take this opportunity to thank the shadow Minister for his earlier commendation of the Government’s record on reducing unnecessary child imprisonment.
In answer to the shadow Minister’s last question, which was about youth offending teams and longer time potentially being spent under their care, clearly it is our hope and expectation that youth offending teams will be effective—indeed, they are effective—in helping to divert young people on to a better path in life. We are generally increasing resources in this area, and I hope that that will have precisely that effect.
Question put and agreed to.
Clause 132 accordingly ordered to stand part of the Bill.
Clauses 133 and 134 ordered to stand part of the Bill.
Schedule 15 agreed to.
Clause 135
Youth rehabilitation orders
Question proposed, That the clause stand part of the Bill.
With this it will be convenient to discuss the following:
Amendment 122, in schedule 16, page 255, line 26, at end insert—
“(2A)After sub-paragraph 4(1) (Duty to give warning or lay information relating to breach of order), insert—
“4 (1A) For the purposes of this paragraph, a reasonable excuse for breach of an electronic compliance monitoring requirement shall include design faults in any necessary electronic apparatus, including (but not limited to) poor battery life; but shall not include intentional failure by the offender to charge necessary electronic apparatus.””
This amendment would introduce a safeguard to prevent children from being criminalised due to design faults, including poor battery life, on electronic monitoring devices.
Amendment 120, in schedule 16, page 258, line 34, at end insert—
“24(1) Paragraph 35 of Schedule 1 (Further provisions about youth rehabilitation orders) of the Criminal Justice and Immigration Act 2008 is amended as follows.
(2) In sub-paragraph (1), for “The Secretary of State may by order” substitute “The Secretary of State must by order”.
(3) In sub-sub-paragraph (1)(a), omit “enable or”.”
This amendment would make panel reviews of youth rehabilitation orders routine by amending Paragraph 35, Schedule 1 of the Criminal Justice and Immigration Act 2008.
Amendment 121, in schedule 16, page 258, line 34, at end insert—
“24(1) Paragraph 3 of Schedule 1 (Further provisions about youth rehabilitation orders) of the Criminal Justice and Immigration Act 2008 is amended as follows.
(2) At end insert—
“(6) The Secretary of State shall take steps to ensure that there are sufficient resources in place to allow for a court to make a youth rehabilitation order with intensive supervision and surveillance in all appropriate cases.””
This amendment would require the Secretary of State to ensure that intensive supervision and surveillance is available in all youth offending areas.
That schedule 16 be the Sixteenth schedule to the Bill.
I call the Minister.
There are amendments, so if you wish to start, Mr Cunningham, by all means fire away.
I am sure you will be sending out for ice creams within the next half hour.
I rise to speak to amendments 120, 121 and 122, standing in my name. Youth rehabilitation orders currently permit courts to impose a choice of 18 requirements from which a sentence can be designed. This also provides for two high-intensity requirements, intensive supervision and surveillance, or ISS, or intensive fostering, as alternatives to custody. The proposals in the Bill would make several changes to youth rehabilitation orders which I will consider in turn.
Currently, a curfew of up to 16 hours each day can be included as a requirement in any YRO and can last for up to 12 months. The Bill proposes increasing the maximum daily curfew to 20 hours while retaining a weekly maximum of 112 hours. As with the changes to detention and training orders, we are supportive of the principle behind the change, which is increased flexibility of approach. While we support more flexibility in the use of curfews, I worry that imposing curfews of 20 hours a day is overly punitive.
The Government’s rationale is that increasing the maximum number of hours per day that a curfew can impose with a youth rehabilitation order will increase the flexibility of the curfew system because it will allow for longer curfews on certain days, such as weekends, when individuals may be more prone to breaches. I understand that the Youth Justice Board has made its concerns about the proposal known to the Government, citing the risk that this will pose regarding potential increased exposure to interfamilial––a difficult word to say––violence. It says:
“We can draw parallels between this proposal to the increased instances of domestic interfamilial violence seen during the COVID-19 lockdown, during which time children were required to spend more time within the family home. This concern has been echoed by other across the sector. We believe that the 16 hours maximum curfew is more than enough, especially if used creatively. We would propose that the maximum daily curfew time should remain at 16 hours per day.”
Can the Minister confirm that increased exposure to interfamilial violence has been considered in forming this proposal? There are risks both inside and outside the home, and getting the curfew time correct is a delicate balancing act. It would help alleviate our concerns if we knew that the Government had planned for such situations.
The Bill would introduce location monitoring as a stand-alone requirement that can be imposed in YROs. That is to be piloted. Currently, GPS tagging is used to monitor compliance with other YRO conditions. Stand-alone location monitoring is already available for adults and children as part of the supervision period of a detention and training order. According to the sentencing White Paper, the rationale for the proposal is that it would reduce the likelihood of breach, provide information to support services and provide an additional protective factor.
I note that the Youth Justice Board’s briefing indicates that there is evidence to support this rationale and that demonstrates that electronic monitoring can often have a positive impact on the safety of the child. However, it goes on to point out that electronic monitoring is quite an intrusive measure and can be seen to be at odds with the child-first approach if applied punitively. Have the Government assessed the number of cases in which they anticipate that the measure would be used, both within the pilot and beyond? I ask because the benefit of a stand-alone monitoring requirement is that the sector tells us that, generally, in cases where children’s behaviour may be seen to warrant such restriction, the child is also likely to need support through supervision. Without adequate support, there may be an increased risk of electronic monitoring violations through children failing to charge their tag. We have talked about some of these issues before. We would not want children to be further punished for something as simple as failing to charge their tag on time or correctly. I would be grateful if the Minister said more about the safeguards that his Department has considered.
We are supportive of the change that makes youth offending teams or probation staff the responsible officers in cases where electronic monitoring requirements are imposed. Currently, the electronic monitoring provider are the responsible officers in cases where electronic monitoring is imposed. We are therefore pleased to see the Government make this sensible change, which will provide wider discretion to youth offending teams, which have a fuller understanding of the child and so are better placed to encourage the child to engage with the curfew.
The next proposal is to increase to 12 months the maximum length of the extended activity requirement of a YRO with intensive supervision and surveillance, and to add a location monitoring requirement as a mandatory element of the ISS. I understand that these measures will also be piloted. The proposal will enable children to benefit from increased contact time and support from the youth offending team. We think the change has the potential to be a positive one, especially as we know that short interventions tend to be much less effective. Although this is, in a sense, a toughening up of a community sentence, we would be supportive of it if it encouraged courts to use ISS in place of longer custodial sentences and thus divert more children from custody.
However, the sector has raised the concern that children are less likely to be able to engage with such stringent requirements if they are subject to them for longer periods of time, and there may be a consequential increased likelihood of non-compliance and resulting breach action. That would mean that lengthier sentences of this kind simply delayed a child’s entry into custody, rather than diverting them from it. I would like to hear the Minister’s thoughts on that, and whether the proposal will be assessed in the pilot with a view to amending it if it inadvertently means that more children end up in custody.
I am also aware of concerns from the sector about the resource implications of the proposal, because delivery of high-quality ISS provision is expensive. I have already mentioned how overstretched youth offending teams are, and I would be grateful for reassurances from the Minister that appropriate funding will be made available so that the introduction of costly measures such as this one does not come at the expense of other important interventions by youth offending teams.
Finally on this clause, I want to discuss the proposal to raise the age limit of the education requirement to match the age of compulsory participation in education and training, rather than compulsory school age. We agree with the Youth Justice Board that it makes sense to bring the YRO education requirements into line with those in the Education and Skills Act 2008.
It is important to note, however, that education requirements are rarely used as part of a YRO. In the most recent year for which information is available, only 1% of YROs included an education requirement. We therefore wonder whether there is a risk that this proposal, which will increase the number of children to whom an education requirement can be applied, will also increase the number of children we end up criminalising for breaching their education requirement, when there are other routes available for ensuring education attendance. Again, it would be helpful to hear from the Minister how the Department intends to monitor that to ensure that these positive proposals do not inadvertently end up criminalising the children we are trying to help.
We are concerned that the reforms to community sentences—expanding electronic monitoring, and extending intensive supervision and surveillance provisions—focus on increasing surveillance and restrictions, rather than on better responding to children’s needs and addressing the root causes of offending behaviour. However, as I said earlier, if we can keep more children out of custody by toughening up community sentences, we are very supportive of that.
I would like to make one final point about the expansion of electronic monitoring before I move on to discussing our amendments. The Alliance for Youth Justice says that its members have reported a number of concerns about electronic monitoring, including: children’s difficulties with managing their tag; the fact that for children involved in organised crime, the fear of their exploiter exceeds their fear of breaching tag requirements; and the danger that tags may effectively trap children in unsafe areas—for example, where their exploiter is. As set out by AYJ member the Association of Youth Offending Team Managers, the assertion in the White Paper
“that electronic monitoring of any sort may reduce the impact of child exploitation on a child is misguided and is not reflected in our experiences of child exploitation.”
The AYJ states:
“The presence of a tag does not deter an exploiter as only the child is impacted by a breach.”
It goes on to say:
“Discretion in responding to breaches is key to ensuring the increased use of Electronic Monitoring does not increasingly criminalise children who may struggle for multiple reasons to keep their tag in working order and fulfil requirements, and awareness of the full circumstances of a child is crucial before imposing unrealistic and potentially dangerous requirements on them.”
That was a very long quote, but one that was necessary. The AYJ believes that statutory guidance should be introduced to that effect, and I think that that could be helpful in addressing some of the issues with electronic monitoring and child exploitation. Does the Minister agree?
I now turn specifically to our amendments. Amendment 120 would make panel reviews of youth rehabilitation orders routine by amending paragraph 35 to schedule 1 of the Criminal Justice and Immigration Act 2008. Currently the law allows for the Secretary of State to establish panels to review youth rehabilitation orders, but this is the exception rather than the rule. The amendment would allow magistrates to establish their own review panels, unless there is good reason not to, thus reversing the current system and hopefully making it the rule rather than the exception. That was recommended by the 2014 Carlile report and has the backing of the Magistrates Association after successful trials in Northampton.
In 2015, a preliminary evaluation of Northamptonshire’s model for reviews by Dr Jenni Ward of Middlesex University concluded that the youth order review panels are
“a positive intervention that could be more widely implemented across youth justice services”.
Northamptonshire Youth Offending Service said:
“Our experience in Northamptonshire suggests significant benefits in terms of securing children’s continued engagement with interventions well beyond the initial period of dynamic work that we know follows sentencing. We have also seen children’s attitudes towards criminal justice institutions changed by their encounters with magistrates who, often to the children’s surprise, demonstrate empathy, interest and concern in their lives and progress. Magistrates also benefit from gaining a deeper understanding of the developmental, social and practical issues faced by the children they sentence.”
We believe that this could be a very positive addition to the youth offending system that ensures that the child-first approach is maintained throughout the time for which the youth rehabilitation order is in effect. Can the Minister share whether his Department has considered the benefits of these reviews and whether it has any plans in motion to expand them? I am sure that he will recognise the benefit in them, and I hope he can support our amendment.
Amendment 121 would require the Secretary of State to ensure that intensive supervision and surveillance is available in all youth offending areas. A lack of funding from central Government means that, in some areas, youth offending teams request courts not to award YROs with ISSs due to lack of availability. That reduces the amount of non-custodial options open to the court, meaning that some children get custodial sentences when they should not. I understand that this is a particular issue in places where there are fewer children to whom the order would apply, such as Sunderland. As I have said many times in our discussions on this part of the Bill, we are singing from the same hymn sheet as the Government with regard to reducing the number of children in custody. So I am sure that the Government agree with us that whether a child gets a custodial sentence should not be a matter for a postcode lottery. This simple change would place a duty on the Ministry of Justice to ensure ISS schemes are available across all youth offending areas, and so bring in a consistency of provision across the country.
Amendment 122 relates to electronic monitoring tags and would provide a safeguard to prevent children from being criminalised due to design faults, including poor battery life on electronic monitoring devices. This will simply protect children against being wrongly criminalised due to faults in the technology. We know that happened in 2017 when the then Justice Minister admitted that people may have been wrongly sent to prison due to faulty electronic tags being used to monitor offenders. I am sure everyone in this room will want to ensure that that does not happen—I was going to say particularly in cases involving child offenders, but it should apply to all offenders. We know that even a short time in custody can have extremely adverse consequences for a child and the likelihood of reoffending. I hope that the Government can commit to providing this simple safeguard.
I look forward to the Minister’s response.
As we have said previously, and as I think the Opposition would agree, we believe that, wherever possible, children who offend should be managed in the community, as it is better for their rehabilitation and therefore wider society, as it is less likely that they will reoffend. In that spirit, clause 135 introduces and refers to schedule 16, which makes amendments to YRO provisions set out in the Criminal Justice and Immigration Act 2008 and in the sentencing code, which we believe will give the courts and the public confidence in YROs as an alternative to custody. The amendments are listed in schedule 16 and include the introduction of a new electronic whereabouts monitoring requirement and changes to the YRO with intensive supervision and surveillance, ISS, a high-intensity alternative to custody, with mandatory extended activities, supervision and curfew requirements.
The clause sets out the functionality for piloting the new electronic whereabouts monitoring requirement and the changes to YROs with ISS to ensure that they are robust and effective before being rolled out nationally. The clause also enables us to restrict the use of the requirements, for example, by age or offender profile, in the light of evidence uncovered in the trial and in practice.
Schedule 16 sets out the amendments that have been made to YROs by clause 35, which will provide the courts with the tools that they need to deliver stronger community sentences, for example, by increasing the flexibility of the curfew requirement by raising the daily maximum hours from 16 to 20, if in some cases it may be appropriate, but retaining the weekly maximum of 112 hours.
As the shadow Minister said already, a stand-alone location monitoring requirement will be added to the list of available requirements to help provide an additional protective factor for the child and improve confidence in robust community sentences. Youth offending teams will be made the responsible officers for YROs with electronic monitoring requirements, as they are aware of the child’s individual circumstances and can make informed decisions in the case of a breach. I think that is a welcome improvement.
The upper age limit of the education requirement will be raised, as the shadow Minister said, so that children who are past the compulsory school age but still in compulsory education or training will still be eligible for education requirements. Schedule 16 also makes changes to the YRO with ISS, doubling the maximum length of the extended daily requirement from six to 12 months, and adding a mandatory location monitoring requirement, which we believe will give courts extra confidence that children can be supervised in the community and use ISS in place of short custodial sentences. I know that we all agree with that objective.
The changes will be piloted to make sure that they are robust and effective before being rolled out nationally. I hope that that explains the intent behind clause 135 and its associated schedule, schedule 16.
As the shadow Minister has said, the Criminal Justice and Immigration Act 2008 confers a power on the Secretary of State for Justice by order to enable or require a court to review and amend an YRO. Amendment 120 would require that the Secretary of State must make such an order. It would also remove the Secretary of State’s discretion on whether to enable or require a court to make such a review, limiting them to use the order to require a review. Effectively, it would compel the Secretary of State, and through the Secretary of State compel courts always to undertake those reviews. We understand the rationale behind widening the use of reviews and YROs, essentially for reasons to do with promoting problem-solving court approaches that we discussed earlier. We generally support such approaches, which is why we are introducing the problem-solving court trials that we discussed earlier. Of course, we are also aware of innovative local approaches, where magistrates and others are voluntarily using progress reviews for some children in relation to their YROs. We are aware of the example of Northamptonshire, which the shadow Minister mentioned. Of course, those local examples do not necessarily provide evidence of wider impact, but there are indications that such arrangements can be effective. We are interested in further exploring how we can learn those lessons and expand them. We have already discussed how we intend to pilot problem-solving courts, and we think that a process of piloting and trialling as laid out is the right way to go, rather than a blanket compulsion, which the amendment proposes. We should also be mindful, I think, of the capacity of Her Majesty’s Courts and Tribunals Service, which is obviously in the middle of recovering from covid. If we were to require and compel in every circumstance, as the amendment would do, it may have an impact on the capacity of HMCTS to discharge its duties more widely. We think that the right approach is for the Secretary of State to retain the power so to act, but without compelling the Secretary of State. I would like to assure the shadow Minister, however, that the direction of travel is in that of using those review processes more, and as he knows from the measures we have debated already, we intend to pilot problem-solving courts more widely, because we believe that the international evidence and other evidence suggests that they can be effective.
In relation to amendment 121, we acknowledge the value of work done by multi-agency services in supporting children who reoffend and by the youth offending teams that deliver YROs with ISSs. In terms of resourcing, we are already providing funding to YOTs to meet these obligations. In this financial year, an extra £7 million is being provided, so YOTs are now getting a total of £82 million this year, a 9% increase on last year, well above inflation.
Of course, YOTs operate at a local level. Having allocated the money, we do not tell them exactly how to spend it. We leave it to them to decide themselves. Hypothecating and compelling YOTs to spend money in a certain way would fetter their discretion, so we would like to leave it with the YOTs to decide how they spend that money. We have given them more resources and it is our expectation that ISSs will be made available in order to avoid short custodial sentences in general but for young people in particular.
On amendment 122, there is already a robust system in place to consider violations of the tagging regime to ensure that no child or adult is unnecessarily penalised for a fault in their equipment. Each case is dealt with on a case-by-case basis, as we have discussed in considering previous clauses, allowing the key professional to make an informed decision. If there is a breach and it ends up before a court, ultimately a judge will decide on any consequences that flow from it. The equipment is subject to all the proper testing and the children are informed about the charging requirements. Where the tags are low on battery, the children concerned will be contacted with a reminder to charge them up. But as I say, individual discretion is exercisable. Ultimately, the court can exercise discretion in terms of the consequences flowing from a breach. The current regime is not unduly punitive or inflexible and does not end up disadvantaging people through no fault of their own. I commend clause 135 and schedule 16 and suggest that while the amendments are reasonable in spirit, for the reasons laid out, they are not strictly necessary.
I understand the Minister’s explanation on amendment 120 but feel that there should be an opportunity for far more reviews in this space. I hope that the system out there will look at that far more closely.
In relation to the intensive supervision and surveillance provisions, it is nonsense that a child in London may be subject to a completely different set of penalties from those facing a child in Sunderland. There should be consistency in the availability of orders. For me, that means that the Government should be directing the development of these orders across the country.
While the £7 million increase is very welcome, I am sure that it will have to do many, many things in the system. We keep getting referred to the same sums of money but more tasks have to be covered within that particular budget. I intend to test the Committee on amendments 121 and 122 because the Government have a long way to go to sort out faulty monitoring systems. We want to be on the side of the child. We do not want them criminalised through no fault of their own.
Question put and agreed to.
Clause 135 accordingly ordered to stand part of the Bill.
Amendment proposed: 122, page 255, line 26, in schedule 16, at end insert—
“(2A) After sub-paragraph 4(1) (Duty to give warning or lay information relating to breach of order), insert—
‘4 (1A) For the purposes of this paragraph, a reasonable excuse for breach of an electronic compliance monitoring requirement shall include design faults in any necessary electronic apparatus, including (but not limited to) poor battery life; but shall not include intentional failure by the offender to charge necessary electronic apparatus.’”—(Alex Cunningham.)
This amendment would introduce a safeguard to prevent children from being criminalised due to design faults, including poor battery life, on electronic monitoring devices.
Question put, That the amendment be made.
Amendment proposed: 121, page 258, line 34, in schedule 16, at end insert—
“24 (1) Paragraph 3 of Schedule 1 (Further provisions about youth rehabilitation orders) of the Criminal Justice and Immigration Act 2008 is amended as follows.
(2) At end insert—
‘(6) The Secretary of State shall take steps to ensure that there are sufficient resources in place to allow for a court to make a youth rehabilitation order with intensive supervision and surveillance in all appropriate cases.’” —(Alex Cunningham.)
This amendment would require the Secretary of State to ensure that intensive supervision and surveillance is available in all youth offending areas.
Question put, That the amendment be made.
Schedule 16 agreed to.
Before we move on, it has come to my attention, courtesy of the Whips, that there will be a vote in the House at 4.30 pm. I am sure that none of you want to come back afterwards. It is up to you if you do, but I thought I would bring the Whips’ discussion to a wider audience, so we know what their ambition is for the Committee.
Clause 136
Abolition of reparation orders
Question proposed, That the clause stand part of the Bill.
Given your suggestion, Sir Charles, I will place a premium on brevity. Clause 136 is straightforward. We believe that restorative justice is an important part of the justice system. However, the reparation order itself has been made redundant, having been overtaken by the evolution of the wider youth justice sentencing framework. Instead, referral orders and youth rehabilitation orders now provide a wider range of interventions, including elements of restorative justice, and are more flexible than a reparation order. They have essentially replaced reparation orders.
Also, reparation orders cannot be given in conjunction with a referral order or a youth rehabilitation order, which significantly reduces the circumstances in which they can be used. As a consequence, reparation orders have dropped out of usage—they dropped by 98% over the last decade because the other disposals have taken up the slack. Only 51 have been handed down in the year to March 2020. It is by far the least-used non-custodial disposal. Therefore, in the interests of clarity and simplicity, the clause abolishes the reparation order to enable those other forms of disposal to be used, as they are used anyway.
As the Minister explained, the clause would abolish reparation orders, which require the child to make practical amends to the victim or other affected party. The Government White Paper noted that the orders are little used, probably as they have been replaced by some of the more widely used sentencing options, and so have become redundant.
Reparation orders are the least used orders in the children’s sentencing regime, too. Between 2010 and 2019, around 5,000 offenders under the age of 18 were sentenced to reparation orders. The number of reparation orders handed down fell in each year during that period. In 2019, 66 of those sentences were passed, compared with 2,400 in 2010. In the year ending March 2020, there were just under 16,900 occasions where children were sentenced at court; only 51 of these were reparation orders.
While it is not clear why the use of the order has fallen so sharply, it has been suggested that it is as a result of changes in the Legal Aid, Sentencing and Punishment of Offenders Act 2012, which removed restrictions on the use of cautions and conditional cautions, which means that children who may have proceeded to court are possibly now receiving out-of-court disposals, which is a good thing. Do the Government plan to do any research to confirm this suggestion? I think it could be helpful if they did so, since this is quite a significant change in sentencing patterns, and it would be helpful to better understand how restorative justice processes are now manifesting themselves, given that usage is low and that reparation can also be included in other sentences, such as the referral order and youth rehabilitation order.
We support the removal of reparation orders and support the clause.
Question put and agreed to.
Clause 136 ordered to stand part of the Bill.
Clause 137
Temporary release from secure children’s homes
Question proposed, That the clause stand part of the Bill.
With this it will be convenient to consider:
Amendment 123, in clause 138, page 126, line 40, at end insert—
‘(8) A secure 16 to 19 Academy will be subject to annual inspection by Her Majesty’s Chief Inspector of Prisons.”
This amendment would make secure 16 to 19 academies subject to annual inspection by Her Majesty‘s Chief Inspector of Prisons.
Amendment 133, in page 126, line 40, at end insert—
‘(8) A secure 16 to 19 Academy will be subject to annual inspection by Ofsted.”
This amendment would make secure 16 to 19 academies subject to annual inspection by Ofsted.
Amendment 146, in page 126, line 40, at end insert—
‘(8) A local authority may establish and maintain a secure 16 to 19 Academy.
(9) A body corporate (including any of its subsidiaries) that is carried on for profit may not be a party to an arrangement to establish and maintain a secure 16 to 19 Academy.”
This amendment would enable local authorities to run Secure 16 to 19 Academies, either alone or in consortia, and to prevent these establishments being run for profit.
Clause 138 stand part.
Secure children’s homes accommodate boys and girls aged 10 to 17 assessed as particularly vulnerable. As well as children held on justice grounds, secure children’s homes accommodate children detained on welfare grounds for their protection or the protection of others. The explanatory notes state that they
“currently rely on inherent powers to make arrangements for the ‘mobility’ of children detained in such accommodation to help address their offending behaviour and to support the integration of children back into the community at the end of their sentence. Clause 137 would provide a statutory power for the temporary release of children detained in SCHs. The Secretary of State or the registered manager of the home would be able to temporarily release a child to whom the clause applies. Temporary release under this clause could be granted under conditions. The Secretary of State and registered managers would have concurrent powers to recall children temporarily released…If the period for which the child is temporarily released expires or if the child has been recalled, the child would be deemed to be unlawfully at large.”
Overall, we are supportive of the Government’s proposals in this area and recognise that a good balance has to be struck between allowing temporary release of children from secure children’s homes to support their reintegration into society, and close monitoring of children on temporary release for risk management purposes.
The Opposition understand that temporary release is an important part of the rehabilitation process for children sentenced to custody, and that some child sentence plan objectives will require them to attend meetings or participate in activities outside the secure establishment. As the Youth Justice Board notes in its briefing,
“Allowing children to be released temporarily supports their constructive resettlement into their community both in maintaining family ties and allowing children to start or maintain education placements.”
While the clause is effectively just putting into statute practice that is already in place, we are pleased to see the Government conferring authority for these decisions and processes to the secure school provider, as they will be best placed to support the child in question.
Research published by the Department for Education comparing children on justice placements and those on welfare placements in secure children’s homes concluded that children on justice and welfare placements are fundamentally the same children. The research found that the level of risk posed by individual children was not related to whether they were on a justice or welfare pathway. The report examined whether there was a need to separate children on justice and welfare placements, but concluded that, rather than separating them, if anything the children would benefit from greater integration. While secure children’s homes managers already have powers under section 25 of the Children Act 1989 to consider and approve temporary release for children on welfare placements, we are pleased that the new provisions will put those managers in the same position for sentenced children on justice placements.
We note the concerns of the Howard League, however, that the clause applies only to children who have been sentenced and therefore excludes children who are held in secure children’s homes on remand from being able to access temporary release. The Howard League points out that this change will therefore create a disparity between children who are in secure children’s homes and children who are in secure training centres. Rule 5 of the Secure Training Centre Rules allows children who are on remand to be temporarily released. It explains that unless temporary release also applies to children on remand in secure children’s homes and schools,
“there is a risk that this will undermine the ‘seamless service’ between custody and the community which the Government envisions for secure schools”
We agree with the Howard League that all children remanded to custody should have access to temporary release where appropriate, as they do in secure training centres.
The Bill’s fact sheet on this provision says temporary release is “not a relevant factor” for children on remand. I find this surprising given that we know that, as a result of court delays, children are sometimes subject to quite lengthy custodial remands. The Alliance for Youth Justice further points out:
“introducing new legislation which restricts temporary release in Secure Children’s Homes to sentenced children would be detrimental, particularly to the development of Secure Schools, which we know have ambitious plans for transitions into the community.”
I would be interested to hear the Minister’s thoughts on this and wonder why this distinction has been maintained. Will he consider including children on remand in these provisions? It would be helpful to be reassured on that point, but on the whole we are pleased with the proposal and will offer it our support.
As we have heard, clause 138 would amend the Academies Act 2010 so that 16-to-19 academies can provide secure accommodation for the purpose of restricting liberty but only if approved to do so by the Secretary of State. On the whole, the Opposition support the principle of secure academies and we do not strongly object to these academies being run by charitable entities. But, as ever, there are some areas in which I seek the Minister’s reassurances, especially with this clause, as comprehensive information is not available from the Government.
The Alliance for Youth Justice briefing on this clause says:
“We are aware of concerns that have been prompted by this section of the Bill around the lack of clarity on the status of Secure Schools, in particular what legislation, regulation and guidance will govern and oversee their activities. It has been confirmed to the AYJ by the Youth Custody Service and Oasis Charitable Trust, that Oasis Restore, the first Secure School pilot, will be registered as a Secure Children’s Home and regulated by Ofsted. It has also been confirmed that 12-to-18-year-olds may be placed in Oasis Restore.”
There is clear discomfort in the sector about the limited information available on the plans for Oasis Restore and how the model will operate in practice. Can the Minister confirm that his Department will publish more information on this? Can he provide a timeframe for publication?
Another issue raised by the sector is that it is unclear how the introduction of secure schools fits into the long-term strategy for the youth secure estate. I understand that it is the Government’s stated intention for secure schools to replace young offender institutions and secure training centres, but we have not yet seen any proposed timeline for such changes. Can the Minister provide more information on his Department’s intended timeline for the changeover to secure schools for the Committee today?
The first secure school is being established in Medway, but I understand that children from across the UK can be sent there. Hazel Williamson put it very well in our evidence session when she said:
“As an association of YOT managers, we believe that children in custody…should be placed in small, secure units close to their homes. We do not advocate large custodial establishments where children are placed far away from their home; we would advocate small custodial units.”––[Official Report, Police, Crime, Sentencing and Courts Public Bill Committee, 20 May 2021; c. 133, Q212.]
Can the Minister confirm that the Government’s timetable for delivering secure schools will not entail children being detained hundreds of miles from their homes while still only a small number of these establishments are available?
The Youth Justice Board has shared its concerns about the links to children entering the youth justice system from practices such as off-rolling children. Indeed, there is a high prevalence of expelled children in the children’s secure estate. For instance, in 2018 in HMYOI Feltham, 89% of children had been excluded from school.
Can the Minister confirm that any academy trusts selected through the tendering process to open or run a secure school have got, as the Youth Justice Board put it
“the necessary skills, expertise, structures and ethos to support children in a secure setting”?
I know that the Howard League wrote to the Secretary of State on this issue last year, and its briefing says:
“This clause provides a legal basis for the ‘secure school’ model of youth custody: it allows academies to provide secure accommodation for their pupils if they have been approved to do so and establishes that running a secure academy is to be treated as fulfilling the charitable purpose of ‘advancement of education’ under s3(1) of the Charities Act 2011. In April 2020, the Charity Commission noted that ‘the proposed purposes of secure schools, as we understand them, do not wholly fall within the descriptions of purpose in s3(1) of the Charities Act 2011’ and that ‘we do not think the operation of a secure school can be exclusively charitable’. In November 2020, the Howard League wrote to the Secretary of State outlining the concerns that locking children up does not fall within charitable objectives. The proposal compounds this issue.”
It would be helpful if the Minister could share with the Committee his discussions with the Charity Commission, so that we all better understand the position that has been reached on this knotty issue.
Amendments 123 and 133 both relate to the inspection regime for secure 16-to-19 academies. Amendment 123 would make secure 16-to-19 academies subject to annual inspection by Her Majesty’s chief inspector of prisons, and amendment 133 would make them subject to annual inspection by Ofsted. I understand that the current inspection framework will come from Ofsted. However, I am sure the Government would agree that a secure school is a very different entity from a standard school. We therefore believe that such schools would benefit from a different inspection regime, to ensure that no aspects of their running are overlooked. Although it is true that it is not a prison, a secure school is still part of the secure estate, so there is expertise that Her Majesty’s Inspectorate of Prisons can provide. Indeed, when Ofsted does inspections on the secure estate, HMIP is part of the broader inspection team. We think the inclusion of HMIP is important and should be put on a statutory footing. I hope the Government agree that it would add value to the monitoring and running of the secure school system as it is rolled out, so I hope they will be able to support our amendment 123.
As I outlined in my earlier speech, there is still much that is unknown and has yet to be decided in relation to secure schools. For that reason, we think it would be important for there to be regular inspections, especially in the early years of operation. That is why our amendment 133 provides for annual inspection by Ofsted, to ensure that nothing slips through the cracks. Furthermore, we are entrusting such schools with the care of some of our most vulnerable children at a point in their lives when positive and engaged care can have the most impact, so it is only right that the schools are subject to the most rigorous monitoring while they do so. I hope that the Government agree and can support amendment 133.
Amendment 146, which was tabled by my hon. Friend the Member for Rotherham, allows for local authorities to establish and maintain a secure 16-to-19 academy, and to exclude profit-making bodies from doing likewise. I am sure she will address her amendment in detail, but she has our support.
My amendment 146 is designed to ensure that local authorities are able to run secure 16-to-19 academies, either alone or in consortia, and to prevent such establishments from being run for profit. I will go into the detail of why, but, fundamentally, I do not think profit should be made from keeping our children safe. We are seeing some pretty gross examples of that at the moment.
In December 2016, the Government committed to phase out child prisons—by that, I mean juvenile young offenders institutions and secure training centres—and to replace them with a network of secure schools and children’s homes. I hope that this is not just the Government playing semantics and that they really are going to get rid of these institutions, because it is very clear, and the Youth Justice Board concedes, that secure training centres are not fit for purpose.
The Government must speed up the phasing out of secure training centres. When introducing secure schools and academies, they must ensure that they will meet high standards of care. We must ensure that secure children’s homes take an approach that fulfils all of a child’s needs and that they are not seen as cash cows for the private firms who run them to make huge profits.
The amendment seeks to achieve two changes to the Bill, both of which have the potential to improve significantly the capacity of our child welfare system to meet the needs of the most vulnerable children and to keep them safe. First, it seeks to reverse the exclusion of local authorities from running secure schools, which are defined in clause 138(4) of the Bill as secure children’s homes.
There is considerable experience in the local authority sector in caring for children with very high levels of need in a locked environment. It makes no sense to exclude this knowledge and learning from the provisions in the Bill. The failure of the last experiment in child detention—secure training centres—should be reason enough for the Government to avoid contracting with organisations that have little or no experience of managing children’s residential care needs.
The Government’s 2016 commitment to phase out secure training centres came in response to a review of the youth justice system undertaken by Charlie Taylor before he became chair of the Youth Justice Board. The February 2016 report proposed that a network of secure schools should replace child prisons. He described secure schools in the report as
“a larger number of small, education-led establishments”
that would be
“set up in a similar way to alternative provision free schools in England”.
Charlie Taylor commended the “dedication, determination and courage” of those working in children’s prisons, but concluded that many staff did not have the skills and experience to properly look after, protect and educate children in custody.
Charlie Taylor’s final report described in more detail the safeguarding challenges in children’s prisons and the imperative for change. He said:
“While I believe that many staff working in the current youth custodial estate are not equipped to carry out their difficult roles, I also believe that the staffing model adopted in these establishments exacerbates the problems of engaging and safeguarding children…I believe that having a distinct group of staff performing this role actually raises the risk of violence, and they can fall back on coercion or physical restraint when confronted by a resistant child…specialist residential schools do not have such a group of staff because everyone working there has…expertise in working with children, preventing and managing conflict, and ensuring compliance with the rules through support and persistence.”
The review was launched a few months ahead of the damning undercover “Panorama” exposé of serious child abuse in the Medway Secure Training Centre, which was then managed by G4S.
G4S and Serco were contracted to run the four centres, holding children between the ages of 12 and 17. Twenty years later, the very strong warnings from the children’s and penal reform sectors about STCs prove that these places were not the centres of excellence of care and education that we were promised. In the BBC “Panorama” documentary, staff were filmed verbally and physically assaulting children. One manager boasted of stabbing a child’s leg and arm with a fork. Another recounted deliberately winding up a child so that he could physically assault him. A third was caught on camera forcing a crying child to repeatedly denounce his favourite football team.
In January 2012, the High Court found systematic unlawful restraint had been used from when the centres opened. Two boys, Gareth Myatt and Adam Rickwood, died following restraint in a secure training centre in 2004. Only two secure training centres remain: Rainsbrook, run by MTCnovo and Oakhill, run by G4S. Both continue to attract strong criticism on child safeguarding. It is vital we introduce the amendment now, to prevent damaging effects that may occur months or years after this Bill has passed, if the private sector is allowed to run these homes.
Secondly, the amendment seeks to confirm in primary legislation that secure schools will not be run for profit. We must ensure that public funds directed at supporting our children and families stay where they can help people in need, and do not line the pockets of shareholders and private equity firms.
As a society, when we get to the stage of sending a child to custody it nearly always exposes a catalogue of chronic failures as the child was growing up. Those failures can include lack of physical or emotional support for families, the unavailability of mental health services for the child and/or the parents, marginalisation in and exclusion from the education system or a care system that has not adequately cared for or protected them. More than half of the children in custody today have been in care at some time.
Our aim must be to keep children out of custody. That obligation is enshrined in the Children Act 1989 and article 37(b) of the United Nations convention on the rights of the child. We have also seen the damaging effects of the private sector running accommodation in children’s social care. Reports from the former Children’s Commissioner for England, Anne Longfield, show that children were treated horrendously in poor-quality accommodation while the providers of it made huge profits. Last year, the Children’s Commissioner reported that there had been a 69% increase in the use of unregulated accommodation for children in care since 2012-13. Anne Longfield’s team found that one in every eight children in care in England in 2018-19 had experienced living in unregulated accommodation. That is more than 12,000 children.
The report highlighted a 21% increase in teenagers entering care in the past five years, noting that that cohort of children was 12 times more likely than younger children to be involved in trafficking, six times more likely to have suffered child sexual exploitation, seven times more likely to go missing from home and five times more likely to be involved in gangs. The report stated that
“all of these children need specialist help and care which is therapeutic and rehabilitative”,
yet currently there is not sufficient provision for them.
Unaccompanied asylum-seeking children are significantly over-represented in unregulated accommodation. In recent years, family court judges have taken the unusual step of writing to Ministers to urge them to act after those judges have been forced to make orders placing children in inappropriate, sometimes wholly inappropriate settings.
An article in The Guardian just last week explained that in the children’s residential care home market in England, 75% of homes are run by private firms. And that is my concern; rather than just private care homes, the Bill facilitates that shift to private in our justice system as well. Prices in those homes have risen by 40% since 2013, with the average placement costing £4,000 a week, or about £200,000 a year. How much will a place be in one of the secure schools?
Meanwhile local authorities are facing huge cuts to their budgets. The Local Government Association has reported that councils have been forced to spend an extra £832 million on children’s services over what they were allocated in 2019-20. The devastating impact of austerity on early intervention and family support means that far too many children have gone without timely help in their earlier lives. That is not in the best interests of any child, either children in social care who have had their liberties removed or in custody. Those children are in our care, and we can and must do better. No one should be making profits from a vulnerable child’s living situation. It must be said that the involvement of the private sector in the children’s secure estate has done little to improve provision for vulnerable children. I ask the Minister to please adopt the amendment and put the safety of children before profits. The amendment is supported by Article 39 and the National Association for Youth Justice.
Charlie Taylor’s case for change is compelling and urgent, but that was made four years ago. In February 2012, the Justice Committee called on the Government to publish a timetable for meeting their 2016 commitment. While we wait for that, today we can ensure that our legislation allows people who have the experience of running this specialist type of provision to play an important and positive role in our children’s lives. We can also ensure that no profits are made from children’s lives being so out of control and so difficult that they have to spend time in a secure setting.
The vote might come at quarter past 4, although the Whips will be better informed of that than me, and the Whip cannot move the adjournment while someone is speaking, I just remind him of that.
With that thought in mind, I will try to deal with the important points raised as quickly as I can.
We recognise that young people in detained accommodation or in custodial settings need a lot of support. Secure schools are being developed to do precisely this.
To support this, we think it is important that secure schools are provided by people who have a certain level of autonomy. Many charities have the necessary skills to do this. That is why, starting with clause 138, we are ensuring that providing a secure 16-to-19 academy can be counted as a charitable activity, enabling charitable secure school providers to improve outcomes in youth custody.
We always take changes to charities law seriously. We have to ensure that charities are properly regulated. The Ministry of Justice has worked closely with the Charity Commission and the Department for Digital, Culture, Media and Sport to make sure that is done in a way that preserves the integrity of charity law.
Clause 137 ensures that there is a clear statutory power to enable providers to allow for temporary release where someone is sentenced to custody, which applies to secure schools as well. It is important that these children can be released into the community as part of the rehabilitation that we want to do with them. This clause puts that release provision on a statutory footing. We think that temporary release provisions are an essential tool in the rehabilitation journey, and this makes sure that can happen.
The Youth Custody Service and secure children’s homes that make temporary release decisions always do so subject to proper risk assessments. The YCS will develop formal guidance for SCH managers, outlining the necessary steps to be taken when making a balanced temporary release decision. Both these measures are helpful in ensuring that charities are able to come into this space to provide these services and that temporary release can be facilitated as part of the rehabilitation package, all of which is important.
Amendments 123 and 133 speak to the inspection regime. Like other academies and children’s homes, secure schools will be jointly inspected by Ofsted and the Care Quality Commission. They will also be inspected monthly, not annually, by independent visitors. As co-commissioners for secure schools, the Youth Custody Service and NHS England will be responsible for ensuring high standards of performance. The minimum frequency of inspection is also set out in the regulations.
As secure 16-to-19 academies will fall under the definition of a children’s home in the Care Standards Act 2000, they will be inspected on an annual basis in any case. The definition of children’s home in the Children’s Home (England) Regulations 2015 makes it clear that they will fall under the frequency of inspections regulations, so they will be annually inspected in any case, making amendment 123 unnecessary.
We have consulted HMCIP on the question of inviting it into the inspection regime, and it agrees with the Government’s position. Although secure schools are a secure environment, they are essentially schools and children’s homes, and so should be inspected by Ofsted and the CQC. Involving the prisons inspectorate in these institutions would run counter to the ethos we are trying to develop.
In speaking to amendment 146, the hon. Member for Rotherham made a compelling contribution on some of the failings that have occurred in the past, which we all agree we want to avoid. We are clearly talking about the new secure 16-to-19 academies. I want to speak to the concern about the profit motive, which amendment 146 addresses. As part of the existing academies legislation, an academy trust is, by definition, a not-for-profit charitable company, so I can confirm to the hon. Member and other members of the Committee that because academy trusts have to be not-for-profit by their nature, this new provision does not open up the possibility of introducing the profit motive into the provision of these secure schools.
I hope that my remarks achieve the twin objectives of giving commitment and assurance on these clauses, as well as avoiding a clashing with a vote that may be imminent.
The hon. Member for Rotherham looks happy. I will ask her if she is happy in relation to her amendment, but I will first go to the shadow Minister.
I think we have to be very clear that we are talking about the incarceration of some of the most vulnerable young people in our society. I believe that we owe them a duty of care. When I was a local councillor and a lead member for children, I was a corporate parent for looked-after children, and I was responsible for them. We as MPs should be responsible for children in our society, particularly when we are dealing with such issues. I cannot understand for one minute why the Government would not want the most rigorous inspection regime possible.
What the Government are proposing is actually a testbed on how we look after those vulnerable children in future. It is a testbed; it has not been sorted, nothing has happened, and there here have been no pilots—nothing. Yet the Government are quite content to rely on independent visitors and inspections by different organisations. The most robust possible inspection of those establishments would certainly by conducted by HMIs and Ofsted.
History shows us—my hon. Friend the Member for Rotherham gave some examples—that if we do not get this right, in future, the responsibility for that child who dies, or that child who gets abused, will lie at our door and with nobody else, because we may not have made sure that they had the most rigorous inspection regime possible. For that reason, even though Her Majesty’s inspectors do not wish to get involved in this, I think their expertise should be put to good use, and I intend to press both amendments to a vote.
I do not wish to divide the Committee. I am content with what the Minister said about profit, but I would be grateful if he could write to me about why local authorities cannot apply.
Excellent.
Question put and agreed to.
Clause 137 accordingly ordered to stand part of the Bill.
Amendment proposed: 123, in clause 138, page 126, line 40, at end insert—
“(8) A secure 16 to 19 Academy will be subject to annual inspection by Her Majesty’s Chief Inspector of Prisons.”—(Alex Cunningham.)
This amendment would make secure 16 to 19 academies subject to annual inspection by Her Majesty’s Chief Inspector of Prisons.
Question put, That the amendment be made.
Amendment proposed: 133, in clause 138, page 126, line 40, at end insert—
“(8) A secure 16 to 19 Academy will be subject to annual inspection by Ofsted.”—(Alex Cunningham.)
This amendment would make secure 16 to 19 academies subject to annual inspection by Ofsted.
Question put, That the amendment be made.
Clause 138 ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned. —(Tom Pursglove.)
Adjourned till Thursday 17 June at half-past Eleven o’clock.
Written evidence reported to the House
PCSCB37 Ellie Cumbo, Head of Public Law, The Law Society (supplementary submission)
PCSCB38 The Bar Council
(3 years, 2 months ago)
Public Bill CommitteesI remind the Committee that with this it will be convenient to discuss the following:
Clauses 125 to 127 stand part.
That schedule 12 be the Twelfth schedule to the Bill.
Clause 128 stand part.
That schedule 13 be the Thirteenth schedule to the Bill.
Clause 129 stand part.
That schedule 14 be the Fourteenth schedule to the Bill.
Before we adjourned, the Opposition spokesman, the hon. Member for Stockton North, gave a lengthy speech, which we were all grateful to hear. We paused to allow the Minister to prepare himself. I believe he is now prepared, so I call the Minister.
Thank you, Sir Charles. I trust everyone has had a refreshing and congenial break for lunch. Prior to the break, the shadow Minister raised a number of questions relating to clauses 124 to 128 and to schedules 12 to 14. I will endeavour to answer as many of those questions as I can. He asked what procedure offenders could use to challenge orders made under clauses 124 and 125, particularly to ensure that they were not unduly penalised if they then breached the conditions that had been imposed. If a breach does occur and some serious consequence follows, it is always open to the offender to make a representation when attending their hearing at court to either make the case that the breach was technical or minor in nature, or that the condition itself was not varied in a reasonable way. A significant penalty can never be imposed without the intervention of the court.
Questions were asked about circumstances beyond the control of the offender. We heard about the possibility of a device malfunctioning and about particular circumstances relating to disability that might disadvantage certain people. We envisage the power laid out in section 124 being used only in rare circumstances, certainly not routinely.
I confirm that it is the intention to provide clear advice to probation staff, setting out the rare circumstances in which additional supervision may be warranted, to ensure, for example, that disabled offenders are not unfairly or unduly disadvantaged, and to avoid the purpose of these supervision appointments going beyond the very specific purposes that the order has been imposed by the sentencing court.
The same applies to people with learning difficulties. Courts sentence on a case-by-case basis and, where electronic monitoring has been imposed as one element of that sentence, the officer supervising the offender is already able to review notifications of apparent violations and take a reasonable view, on a case-by-case basis. If someone has been genuinely unable to understand how to operate the equipment or had a genuine technical problem, we would expect probation officers to exercise reasonable discretion.
As I said at the very beginning, if a breach did follow and the court was invited to impose some penalty, it would be open to the offender to make a representation at that point to explain the mitigating circumstances. My expectation is that it would never get that far, because I would expect the supervising officer to be reasonable in the meantime.
I recognise what the Minister is saying. I raised the point that people should be able to make representations after their hearings, but some of the people we are talking about have particular challenges in life and special needs. How will the Minister ensure that their problem—their malfunctioning equipment or otherwise—is properly communicated to a court to ensure that they are not penalised?
Clearly, in the first instance we would expect the responsible officer to exercise these powers in a reasonable way and to exercise discretion. Hopefully, as I said a few minutes ago, these cases would not get as far as court because the probation officer would act in a reasonable and proportionate way in the first place. The guidance will reflect that. If someone does get to court, there is the possibility of their being represented in proceedings. However, I also would expect the judge to ask a reasonable question of the person appearing before the court, such as whether there were any mitigating circumstances or technical problems or whether they had failed to understand how to operate the equipment. If there is a vulnerability, the pre-sentence report written prior to the original sentencing would be expected to pick up those issues.
The shadow Minister asked whether the powers in clause 126 were too wide and gave the responsible officer excessive latitude and leeway to vary curfew requirements that a court had previously imposed—to dispense summary justice without proper reference to the courts. To be clear, clause 126 is very limited in the powers that it provides probation officers, and they will be able to amend the requirement in only two limited ways, and only if those changes do not undermine the weight or purpose of the requirement imposed by the court. The power in clause 126 is restricted to two areas: a shift in the start and/or end times of the curfew periods—but no change to the total number of hours imposed—and a change to the offender’s curfew address, where the address was not part of the order in the first place. So they are very limited powers to vary, which I hope provides the reassurance asked for.
The hon. Member for Garston and Halewood, who unfortunately is not in her place, referred to the problem-solving courts in Liverpool. I understand that the results from that have been a little mixed, but we are committed on both sides of the House to the principle of problem-solving courts, and I noted the shadow Minister’s recitation of the history of these going back as far as 1999. Both sides recognise the important role that problem-solving courts can play. Other jurisdictions have used them, with the United States being an obvious example. We are starting on a pilot basis rather than a big-bang roll-out because the details of how the model operates is important. The details make a big difference, and the design of the way it works—when the reviews takes place, what they are reviewing and what actions are taken—make a difference to whether the thing is successful or not.
While across the House we are committed to the principle of problem-solving courts to tackle the underlying causes of offending, we have to make sure that they work in practice and the details are right before rolling them out. To answer another of the shadow Minister’s questions, I am sure we will be coming back to Parliament and reporting on the progress of these problem-solving courts. My hope is that we find a way quickly to make these work in practice and can then roll them out. I am committed to community sentence treatment requirements, which are a form of disposal that provides for mental health, alcohol and drug addiction treatment. Quite a lot of money has gone into that recently—£80 million for drug addiction earlier this year. Problem-solving courts are a critical way of supporting the delivery of treatment under community sentence treatment requirements. It is something I want to push, and I am glad that there is agreement across the House on that.
The final question that the shadow Minister asked was whether a guilty plea was needed to qualify for an appearance before a problem-solving court. Problem-solving courts do not require a guilty plea, and this Bill does not stipulate that as a prerequisite, but a willingness to engage with the court and comply with the community interventions will be an important factor. The problem-solving courts working group in 2016 considered making a guilty plea a key factor in creating the engagement necessary, but we recognised the number of complexities across the cohorts targeted, and did not think it was necessarily required. People who plead not guilty, and are then convicted, would be eligible for the problem-solving court, and I hope they can be helped as much as anyone else. On that basis, I commend these provisions to the Committee.
Question put and agreed to.
Clause 124 accordingly ordered to stand part of the Bill.
Clauses 125 to 127 ordered to stand part of the Bill.
Schedule 12 agreed to.
Clause 128 ordered to stand part of the Bill.
Schedule 13 agreed to.
Clause 129 ordered to stand part of the Bill.
Schedule 14 agreed to.
Clause 130
Duty to consult on unpaid work requirements
Question proposed, That the clause stand part of the Bill.
I will follow your direction, Sir Charles, by saying just a few words on this clause, which is relatively straightforward and, I think, pretty inoffensive.
Clause 130 simply creates a requirement for probation officials to consult key local and regional stakeholders on the delivery of unpaid work. Unpaid work—or community payback, as it is sometimes known—combines the sentencing purposes of punishment with reparation to communities. We believe that, where possible, unpaid work requirements should benefit the local communities in which they are carried out. Nominated local projects are already popular with sentencers and the public, but there is currently no requirement for probation officials to consult stakeholders on the design or delivery of unpaid work, so members of communities and organisations within particular local areas that are best placed to understand the impact of crime and what might be useful in the local area do not necessarily have their say.
Clause 130 simply seeks to address the gap by ensuring that key local stakeholders are consulted, so that they can suggest to the probation service what kind of unpaid work might be useful in their local area. We hope that local community groups and stakeholders come up with some good ideas that the probation service can then respond to. That seems to be a pretty sensible idea. The probation service in some areas may do it already. This clause simply creates a proper duty, or a requirement, for the probation service to do it. Of course, if we understand the needs of local communities and their thoughts, we can improve the way unpaid work placements operate to support rehabilitation and also help the local community. If the local community can visibly see offenders doing unpaid work in their local area, whether it is cleaning off graffiti, cleaning the place up or whatever else it may be, that will, we hope, demonstrate that the programme is giving back to and improving the local community, but delivering a punitive element as well.
I was about to conclude, but of course I will take the intervention.
When I used to run a children’s hospice, we had offenders under probation supervision come in. They were meant to be doing gardening at the children’s hospice, but instead they sat around smoking cigarettes. We kept on raising that with the probation worker, because we had invited the offenders there to give them a second chance, to help with their rehabilitation, to enable them to contribute to the community and so on. But the probation officer said, “What do you want me to do? I can’t beat them; I can’t make them work, but they have to come on these schemes.” Could the Minister give some examples of how the probation service will have the resources and the influence to ensure that people who are out in their local community are actually—
Order. This is meant to be an intervention, not a speech. The hon. Lady is entitled to make a speech and could have made a speech, but can we treat this as an intervention?
The hon. Lady makes a very good point. First, I am extremely disappointed and somewhat shocked to hear that people who were supposed to be doing work at a hospice in Rotherham in fact sat around smoking cigarettes. That is obviously shocking and not what the orders are supposed to be about. The hon. Lady says that the probation officer shrugged their shoulders and said, “Well, what can I do about it?” Of course, if the person, the offender, was not doing the work that they were supposed to be doing, that would amount to a breach of the unpaid work requirement, and they could be taken back to court to account for their breach, so I am extremely disappointed by the attitude of the probation officer that the hon. Lady just described.
The hon. Lady asked about resources. Extra resources are going into the probation service for it to supervise exactly these kinds of activities, and I would expect them to be supervised and policed properly. I will certainly pass on her concern to the relevant Minister. I have already made contact about fixing a meeting for the hon. Lady and the Prisons Minister that we talked about in this morning’s session, in relation to victims being consulted about probable decisions. The same Minister, my hon. Friend the Under-Secretary of State for Justice, is responsible for the probation service as well—I am just adding to his workload. I will raise it with him, but I would certainly urge the hon. Member for Rotherham to raise this issue in the same meeting, because I know that the account she just gave will concern my hon. Friend as much as it concerns me.
I echo the points made by the hon. Member for Rotherham in that there is a variation in the enthusiasm that some of those who conduct this work display, on both sides. I was told, for example, that a lad who came from a farming family had thrown his back into it very strongly and was encouraging others to join him. I would add that we do consult with the local community, and many of the jobs that are done in my constituency are at the behest of either a local authority or other local groups.
Wonderful. We would like to see the kind of consultation that already takes place in Scarborough and Whitby take place across the country as a whole, and that is precisely the intention behind clause 130. Where Scarborough has led, the rest of the nation, thanks to this clause, will follow.
Question put and agreed to.
Clause 130 accordingly ordered to stand part of the Bill.
Clause 131
Youth Remand
I beg to move amendment 128, in clause 131, page 122, line 12, at end insert—
“(ba) after subsection (5) insert—
(5A) For the purposes of subsections (5) and (6) “recent” is defined as having occurred in the previous six weeks.””
With this it will be convenient to discuss the following:
Amendment 129, in clause 131, page 122, line 16, at end insert—
“(ca) in subsection (7)(b) insert “serious” before “imprisonable offences”;”
Amendment 130, in clause 131, page 123, line 3, at end insert—
“(aa) after subsection (4)(b) insert—
“(c) state in open court the age, gender and ethnicity of the child.””
I am pleased to speak to amendments 128, 129 and 130 in the name of my hon. Friend the Member for Rotherham and myself. However, before I do that, if the Minister could give me a list of where he has influence, perhaps he could fix a few meetings with Ministers for me as well.
I thank the Minister very much for that—it will, of course, be on the record, which I am very pleased to note. Before I get into my speech, I would like to thank Transform Justice and the Alliance for Youth Justice for the extremely helpful work they have done on this part of the Bill. I also thank my hon. Friend the Member for Hove (Peter Kyle), the former shadow Justice Minister, who worked extremely hard on these particular issues. I am grateful to him.
Clause 131 amends the legislative threshold for remanding a child to custody. It will mean that remand to youth detention accommodation can be imposed only in the most serious cases, where a custodial sentence is the only option and the risk posed by the child cannot be safely managed within the community. It will introduce a statutory duty which states that courts must consider the interests and welfare of the child before deciding whether to remand them to youth detention. It also imposes a statutory requirement for the courts to record the reasons for the decision.
First, let me say that we are pleased with the direction of travel that this clause indicates, and we are keen for the Government’s work in this area to succeed. We are in complete agreement with the Government that custodial remand should be used only as a last resort for children. However, we do think that there is scope for these proposals to go further in tightening the threshold for remanding a child into custody. I will speak more on that when we discuss our amendments.
The current youth remand provisions were introduced in the Legal Aid, Sentencing and Punishment of Offenders Act 2012 and I well remember the Public Bill Committee, where I had the privilege of serving as Parliamentary Private Secretary to Sadiq Khan, now our excellent Mayor of London, and also my good friend. By 2019, the independent inquiry into child sexual abuse noted a significant increase in the use of custodial remand for children. The Opposition warmly welcomes measures which aim to reduce the number of children remanded into custody, especially in light of the fact that in 2018/19 only a third of children remanded to custody or local authority accommodation later received a custodial sentence.
Our concerns about the use of custodial remands for children are compounded by the extreme racial disproportionality on remand, and the record proportion of children in custody who have not yet been tried in court.
Against the backdrop of the record court backlog and the waiting times for trial, there could not be a more opportune moment to address these issues. We particularly welcome the introduction of the statutory duty to consider the welfare and best interests of the child. We believe that, while these proposals can go further—I know that the Minister will listen carefully to our proposals shortly—these changes will help to reduce the number of children who are unnecessarily remanded to custody, so we are pleased to support them.
However, there are a couple of points on which I would welcome the Minister’s thoughts. Has he any further information to share with the Committee on his Department’s considerations of the impact that police remand has on custodial remand? Are there any plans to address that? Research by Transform Justice shows that police remand, where the child is detained by the police until court either in a police cell or in a local authority PACE bed—under the Police and Criminal Evidence Act 1984—is a driver of custodial remand. Transform Justice explains that point:
“This is because any child remanded by the police has to be presented in court within 24 hours, meaning Youth Offending Team staff often don’t have enough time to develop a bail package that will satisfy the court. Children who appear from police custody also usually appear in the secure dock, which can bias courts to view the child as more ‘dangerous’ and therefore more suitable for custodial remand.”
The criteria for police remand are spelled out in section 38 of the Police and Criminal Evidence Act and are very different from those used by the court for remand. In fact, the criteria for police remand of children are almost identical to those for adults, unlike the child-first approach taken in so many other areas of the justice system.
We know that the police remand more children than the courts. Of the 4,500 children who appeared in court from police custody in 2019, only 12% went on to be remanded by the court. Some 31% of those remanded by the police went on to be discharged, dismissed or have their case withdrawn, while 37% went on to get a fine or community sentence. The figures illustrate that police use of remand is seriously out of synch with the courts already. This clause may further widen that gap.
Is the Minister not concerned that the police may continue to overuse post-charge detention, undermining the positive efforts of the clause to reduce unnecessary custodial remand for children? Will the Government consider updating the police remand criteria, so they are in line with the new court remand criteria, to ensure consistent decision making across the whole criminal justice system?
I am greatly supportive of the provision in the clause that requires courts to record their reasons for remanding a child, not least because it will provide valuable data on the use of remand, which will enable us to continue to make improvements in this area. For that to be most effective in informing future policy decisions, we would need to have some sort of centralised monitoring system. Will we have such a system? It would mean that the need to record reasons would not only focus the mind of the court in a specific case; it would also benefit the system as a whole, as each case can inform our ongoing learning process about the use of remand and its effectiveness. Has the Minister considered the possibility of such a centralised monitoring system?
It has been suggested that the obligation on the court to record reasons would be most effective if courts had to specify why non-custodial alternatives were deemed unsuitable and how each of the custodial remand conditions has been met. Is that the kind of detail that the Minister envisages the obligation should entail? I am sure we all agree that it would be helpful for that level of information to be provided, so I am interested to hear the Minister’s thoughts.
Turning to the amendments, as I said earlier, the reforms to the threshold for remanding a child in custody are welcome, but there are a couple of areas where we believe they should go further. The Opposition amendments, if adopted, would get us closer to the goal of custodial remand being used only as a truly last resort.
Amendment 128 seeks to tighten the history test by defining a recent history of breaching bail or offending while on bail as having been committed within the last six weeks. The clause currently makes provision to amend the history condition so that the previous instances of breach or offending while on bail must be “significant”, “relevant” and “recent”. In order to reduce the number of children held unnecessarily on remand, it would be helpful to amend the clause so that there is a clear definition of “recent”.
In defining recent, we have to be mindful of what that means to a child. As the Alliance for Youth Justice notes:
“If we are to take a child-centred approach, we must consider how children experience time, and recognise the well-established principle that children change and develop in a shorter time than adults.”
The Youth Justice Board for England and Wales has recommended that “recent” be no longer than within a six-week period. I hope that the Minister will agree that clarity on that point would be of great assistance to the courts. I would be interested to hear from him what discussions his Ministry of Justice colleagues have had regarding defining a time limit for this condition.
Amendment 129 is a straightforward amendment to the necessity condition that would again help achieve the aim of using custodial remand for children only as a last resort. Although we welcome the strengthened wording of the necessity condition included in the Bill, which would require remand to be used only when the risk posed by a child cannot be safely managed in the community, we share the concerns of the sector that the benefits arising from this change may be undermined by its drafting. The amendment would therefore tighten and strengthen the wording. Transform Justice says that these benefits of the current proposed change to the necessity condition
“will be undermined by the loose wording of one of the other necessity conditions: that remand to YDA is necessary to prevent further imprisonable offences. This condition is highly subjective and casts a wide net, which may be widened further by youth sentencing provisions elsewhere in the bill.”
We share the concern expressed by the Alliance for Youth Justice that
“the latter part of the condition (to prevent the commission of an imprisonable offence) sets such a low threshold for meeting the Condition as to render the first threshold (to protect the public from death or serious personal injury) somewhat redundant.”
The amendment would tighten the latter part of the condition by ensuring that it applies only to serious imprisonable offences, which we think better reflects the intention of the clause.
Finally, amendment 130 would compel the court to record the age, gender and ethnicity of a child remanded in custody in order to provide better data on remand, particularly on disproportionality. We believe that this could be a helpful tool in addressing the deeply concerning and increasing levels of disproportionality at this point in our justice system. The numbers beggar belief. Nine out of 10 London children who are remanded are from black, Asian and minority ethnic communities. A deeply comprehensive report that was published by the Youth Justice Board in January shows that race alone is a factor in remand outcomes for children. The researchers gathered data on thousands of English and Welsh cases, and information provided in practitioner assessments. Even when other related factors were controlled for mixed ethnicity black children, they were, as the Youth Justice Board notes,
“still more likely to be remanded in custody and, if not remanded, more likely to be subject to restrictions on bail.”
This is a serious injustice in our system that needs to be urgently addressed. More needs to be done than this amendment makes provision for, but it would be a helpful tool in breaking down the disproportionate outcomes that we are seeing. The amendment would at the very least provide accurate data to help understand this disparity, in line with the “explain or reform” principle outlined in the Lammy review, which I think is an eminently sensible step in the right direction. I hope that the Minister agrees and look forward to hearing his thoughts. I would also be grateful if he could share with the Committee any other initiatives his Department is working on to address this flagrant disproportionality in youth remand.
I fully support the arguments made by my hon. Friend the Member for Stockton North on the amendments. I have a fundamental concern about remanding children. It impacts on them disproportionately in terms of their future outlook, opportunities and potential. We see within the remand youth justice system some of the highest levels of disproportionality in the criminal justice system. Although Labour Members welcome the measures in the Bill to tighten the tests that the courts must satisfy to decide whether to remand a child in custody, we still have concerns about this section of the Bill.
We agree with the policy to encourage the courts to impose a custodial remand only when absolutely necessary while ensuring the public remain safe, but as my hon. Friend stated, there are real concerns about the overrepresentation of black, Asian and minority ethnic people, who make up only 12% of the UK population but half the youth prison population. I would be much more comfortable if we were using the Bill to look at the reasons for that disproportionate make-up, rather than at further punitive measures. We have to take steps to ensure that all people, particularly all children, can reach their potential. I am very mindful of the fact that the literacy rate of the prison population is so much lower than that of the rest of the population. Why are we not investing more to address those underlying issues?
As the shadow Minister said, clause 131 aims to ensure that children are remanded into youth detention accommodation only where absolutely necessary and as a last resort. As the hon. Member for Rotherham and the shadow Minister said, that is something that we can all agree on. We do not want to remand children into custody prior to conviction unless it is absolutely necessary.
The hon. Member for Rotherham said that prevention was important, and of course we agree, although it is outside the scope of these clauses. Money is being invested, significantly, in serious violence reduction units that aim to prevent, but also to divert young people who might otherwise get into serious crime on to a better path.
We are mindful that over a third of children in custody are on remand and that, of those, only around a third go on to receive a custodial sentence. While custodial remand is perfectly justified in some cases, the threshold for confining an unconvicted child to a secure environment must, rightly, be set very high indeed. It sounds like we broadly agree on these principles, and that is why we are amending the provisions of the Legal Aid, Sentencing and Punishment of Offenders Act 2012, which sets out the test that the courts must satisfy when deciding whether to remand a child into custody. I think everyone agrees with the aim of the clause, which is to make sure that remand custody for a child is an absolute last resort. The shadow Minister welcomed this direction of travel and the steps that are being taken.
The clause introduces a statutory duty for the court to consider the welfare and best interests of the child when making remand decisions and a statutory requirement for the court to record its reasons for imposing custodial remand to ensure that the welfare of the child is at the forefront of the court’s mind and promote a child-first approach to decision making. We are also strengthening the sentencing condition to ensure that the mere possibility of a custodial sentence would not on its own necessarily warrant custodial remand. Similarly, a relatively minor or fairly recent breach should not, on its own, justify remand. We are reinforcing the history condition so that only a recent, significant and relevant history of breaching while on bail should be taken into account to justify custodial remand. The current tests already require the court to satisfy itself that a child can be remanded to custody only where it is necessary to protect the public from death or serious harm. We are reinforcing that necessity condition by making it clear that it means when the risk posed by the child cannot be managed safely in the community. These measures, taken together, significantly elevate and strengthen the test for child remand to custody.
Will the Minister confirm whether there is likely to be some form of time limit relating to the recent history of the child?
The shadow Minister leads me to his amendment 128, to which I was going to speak in a moment, but I shall address it now as he has raised it. There will not be a hard or specific time limit in the way that his amendment specifies six weeks. We think that a hard-edged limit of six weeks specified so precisely would unduly fetter judicial discretion. The judge should be able to make a judgment in the round, taking into account all the considerations. A hard cut-off of six weeks is too binary. It is made clear that the judge needs only to look at circumstances where there is a history of breach or offending while on bail that is recent, significant and relevant. That is quite a high test, but we do not propose to go as far as amendment 128 does in specifying six weeks. We do not support the amendment for that reason, although, in spirit, our clause as drafted is pushing in a very similar direction. We just think that six weeks is too precise and that the judge should have some residual discretion.
Before moving to amendments 129 and 130, I would like to touch on a question that the shadow Minister raised about whether police remand almost inevitably and inappropriately leads to custodial remand. He said that could be because there is not enough time to consider bail arrangements and that it could create a sense of bias because, if the judge sees the person in the dock, it may lead them to believe that they are a more serious offender. I do not accept either argument. The statistics that he himself gave a minute or two later support that. He said that only 12% of children going into police remand end up in custodial remand. That demonstrates that 88% of children on police remand do not go into custodial remand, which suggests that there is not a strong linkage in the way that he feared there might be.
We need some clarity around the 12% and the 88%. My point is that the police are remanding into custody a very high proportion of children who do not then go on to receive a custodial sentence. That is the problem, not the other way round.
I think that the shadow Minister also pointed out to the Committee that there is a 24-hour time limit on police remand for children, so it is an extremely short period of time. For that very short window before the court appearance, it ensures that the police do not lose control of the person in their care. Clearly, if that was going on for days or weeks, it would be a matter of concern, but it is a very short time window, as he said.
The shadow Minister’s amendment 129, on the necessity condition, proposes the insertion of the single word “serious”. I contend that any imprisonable offence is in itself serious but, more broadly, we are again relying on judicial discretion. We do not want to unduly fetter the judge’s discretion. The provisions in clause 131 as drafted will send a fairly clear signal to the judiciary that this is something that should be taken very seriously in making these decisions and that Parliament does not want children remanded to custody lightly or inappropriately. The clause as drafted makes that pretty clear. It also makes it clear that not only do the conditions that we have talked about have to be met but, in the opinion of the court, the risk posed cannot be managed safely in the community. Clause 131 as drafted sends a very clear message that custodial remand should indeed be a last resort.
Amendment 130, proposed by the shadow Minister, would require the court to state in open court the age, sex and ethnicity of a child remanded to custody. In all honesty, we believe that the amendment is unnecessary because the data is already collected and published, so the information is there already. The important point about the new record being created is that the reasons for custodial remand have to be spelt out expressly to ensure that the court is properly considering those things. We can then be absolutely assured that the court has to consider those matters and record them so that they are there to look at subsequently and be reviewed, not forgotten in the rush of a court appearance. The substance is captured already by the requirements in clause 131. It seems that both sides of the Committee broadly agree on this, so I do not think that amendments 128 to 130 are particularly necessary, although I do understand the spirit in which they are moved.
I am grateful to the Minister for his response. I am prepared to withdraw amendment 128, given his explanation, but I ask that he look seriously at time limits, whether in some form of guidance from the Department or otherwise.
On police remand, I am still very concerned that the police are far, far more likely to remand a child in custody than a court is. I ask that the Minister think again and review the advice given to police officers to try to reduce the number of children who are automatically remanded to custody. I am content with the Minister’s explanation on amendment 129 and I will not press it.
When it comes to data, as the Minister will know because I assume that he signs them all off, I get lots of answers to written parliamentary questions saying that the information cannot be provided because it is not available or it can be provided only at disproportionate cost. If we do not gather the data, I will get more of those answers from the Minister, so I intend to press amendment 130. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendment proposed: 130, in clause 131, page 123, line 3, at end insert—
“(aa) after subsection (4)(b) insert—
“(c) state in open court the age, gender and ethnicity of the child.””––[Alex Cunningham.]
Question put, That the amendment be made.
I have a suspicion, but I could be wrong, that we had quite a broad canter round the principles of clause 131. Does anybody want to debate it again, or are we happy to dispose of it? Excellent.
Clause 131 ordered to stand part of the Bill.
Clause 132
Discretion as to Length of Term
Question proposed, That the clause stand part of the Bill.
With this it will be convenient to discuss the following:
Clause 133 stand part.
Clause 134 stand part.
That schedule 15 be the Fifteenth schedule to the Bill.
We want a youth justice system that recognises the unique needs of children, tackles the underlying reasons why children offend and intervenes early to provide support and divert them where possible. There is a distinct and separate sentencing framework for children aged 10 to 17, which recognises that children have their own specific needs that require a different and tailored approach.
The clauses and schedule amend existing legislation to enable us to make the necessary changes to the most common youth custodial sentence, the detention and training order, or DTO. The changes are to make the DTO more flexible, fairer and more in line with other youth custodial sentences.
In that spirit, clause 132 amends the sentencing code to remove the fixed lengths of the DTO, meaning that any length of DTO between four months and 12 months can be given. The court can pass the right sentence instead of being constrained to give only sentences of DTOs of four, six, eight, 10, 12, 18 or 24 months. Removing those very fixed lengths does not change the maximum or minimum sentence but just means that any length of sentence can be given between the limits of four and 24 months. Removing the fixed lengths also means that the reductions made for time spent on remand that we have just been talking about, or bail, which is subject to a qualifying curfew condition and an electronic monitoring condition, and for a guilty plea, will be more accurate. At the moment, there is not always a DTO length that directly fits once remand, bail or guilty pleas have been considered, and the court must instead refer the sentence to one of the fixed lengths of four, six, eight, 10, 12, 18 or 24 months. With the proposed changes, the court may go between those sentence lengths, if it needs to, to fit in with the reductions for time spent on remand and so on. It is a fairly straightforward change, which makes a great deal of sense.
Clause 133 amends the sentencing code and the Criminal Justice Act 2003 to fix a current inconsistency in relation to early release. That inconsistency means that different lengths of early release are available for offenders sentenced consecutively to a DTO and another sentence, depending on the order in which they receive those sentences. The change means that where an offender is serving a DTO and another sentence consecutively, the offender may benefit from the same amount of early release, regardless of the order in which sentences are given. I think that is a fairly innocuous and sensible technical change to the 2003 Act.
Clause 134 introduces schedule 15, and that schedule amends the 2003 Act and the sentencing code, so that time spent on remand and bail, where that bail is subject to a qualifying curfew condition and an electronic monitoring condition—a tag—is counted as time served and credited accurately against the custodial part of the DTO. That is a change to the current approach, where time on remand or bail is taken into account when determining the length of the DTO, rather than being credited as time served. The schedule also makes further amendments where an offender is given two or more sentences, of which one is a DTO. Those sentences are treated as being a single term for the purposes of crediting the days spent on remand or bail. The schedule also makes changes to the Armed Forces Act 2006 to make sure that there is consistency.
Those are relatively technical and, I hope, relatively straightforward changes.
We all recognise that DTOs are the most common custodial sentence for children. Between 2010 and 2019, 20,000 offenders under the age of 18 were sentenced to a DTO. It is important that we get this right. We are tentatively supportive of the proposals in the clauses, and I look forward to the Minister’s response, which will I hope will be able to allay some of our concerns.
As the Minister has outlined, DTOs currently have to be of a fixed length. I have some sympathy with the Government’s view that having such fixed periods restricts the courts in deciding the most appropriate length of sentences. Clause 132 will address that by removing the fixed length and providing that a DTO must be for at least four months and no longer than 24 months. We agree with the Government that is important that the minimum period for a DTO is retained to ensure that extremely short, unhelpful and, indeed, counterproductive custodial terms are not given out.
I do wonder, however, whether four months is still too short, and I question the real benefits of such a short sentence. Clause 133 provides that where an offender is given two or more sentences, one of which is a DTO, those sentences are to be treated as a single term for the purposes of crediting days spent in custody, or in qualifying for bail. The explanatory notes state that this clause is intended to
“fix an existing discrepancy in relation to early release which meant that different lengths of early release were available for offenders sentenced to a DTO and another sentence consecutively, depending on the order in which they received those sentences.”
The clause aims to ensure that
“where an offender is serving a DTO and another sentence consecutively, the offender is able to benefit from the same amount of early release regardless of the order in which the sentences are given.”
Clause 134 and schedule 15 provide that time spent on remand or bail subject to a qualifying curfew condition and an electronic monitoring condition is counted as time served and credited against the custodial part of the DTO.
Taken together, the clauses increase the flexibility in the system for sentencers and should mean that the sentence length can accurately account for remand episodes already served, electronically monitored bail or a guilty plea, rather than nearest permissible length based on the fixed tariffs that currently exist.
I note that the Youth Justice Board for England and Wales broadly welcomes these proposals as well. It notes that the changes may help to solve the issue whereby the fixed lengths of the DTO sentences held the potential to create a barrier to resettlement—for example, where a fixed sentence length would mean that a child would be released just after September and therefore miss out on the intake of a new school or college year. In this instance, the fixed terms would push children out of education for longer than necessary. The more flexible approach proposed here by the Government can help to address such issues.
On the face of it, these reforms seem sensible, and like something we would support. However, the impact assessment contains some concerning projections, on which I would welcome the Minister’s thoughts. The impact assessment notes an unfortunate adverse impact of removing the fixed-term nature of DTOs, in that individuals who receive early guilty plea discounts under the current system may receive longer sentences than they currently do. While there will be no additional children sentenced to DTOs under this option, the Youth Justice Board has said that it anticipates that the increase in average sentence length may lead to a steady-state increase in the youth custody population of around 30 to 50 places, costing around £5.3 million to £8.5 million per year. It has said that there would also be an equivalent uplift in the number of children supervised in the community at any one time at a cost of around £0.4 million to £0.6 million a year.
The Government’s impact assessment predicts that the proposals will increase the steady-state number of children in custody by up to 50 children by 2023-24, costing the youth custody service between £38.6 million and £61.4 million. That is of very serious concern to the Opposition. We share the Government’s stated vision of reducing the number of children in custody, and there has been great progress in that area over the past decade. The number of children in custody has decreased by about 75%, for which the Government ought to be applauded. It would be a terrible shame if we were to roll back any of the progress that has been made in this area, especially as I know how proud the Justice Secretary is of the work that has been done.
I would be grateful for the Minister’s thoughts on how these proposals can be introduced without increasing the number of children in custody. Let us remember that it is the Youth Justice Board that is saying this will happen. Does the Department intend to introduce any safeguards in this area? The Opposition would like safeguards to be put in place to help to avoid the possibility of children spending longer than necessary in custody, which could also mean an increase in the number of children in a secure establishment at any one time.
I would also welcome a reassurance from the Minister on a further point raised by the Youth Justice Board in its briefing. It notes that the impact assessment states:
“Time spent on remand will be taken away from time to serve in custody as opposed to from the overall sentence length. There will be some individuals that spend longer on supervision in the community under this option, which would incur additional YOT costs. It has not proved possible to quantify these additional costs.”
We recognise that it might be beneficial for children to spend longer with the support of the youth offending team as opposed to being in custody, but there is of course an attendant impact on youth offending team budgets, which are already stretched. The Youth Justice Board says:
“Some children may spend longer on the community part of the order which gives youth offending teams more time to work with them but there is no evidence to support this as a benefit.”
The Youth Justice Board also notes that a cost-benefit analysis of these proposals, in terms of the additional spend for youth offending teams, would be helpful. Will the Minister provide such a cost-benefit analysis? Will he also confirm whether youth offending teams will be provided with appropriate further resource to handle any increased workload as a result of these proposals?
I am glad that the shadow Minister welcomes the broad thrust of these changes. That is very welcome indeed. In response to his questions about the impact assessment, it is important to say that it makes it clear on the second page that
“there will be no additional children sentenced to DTOs”.
The question therefore arises: why, then, will there be this very slight increase in the population, of between 30 and 50 places? The reason, as far as I can see, is that where the DTO sentence length falls between the two fixed points, at the moment it gets rounded down to the lower of the two, whereas under these proposals it can be calculated precisely. No additional people will be subject to a DTO; however, we will no longer have this rounding-down effect. In a sense, when we account for the time served and so on, and particularly the early plea discount, at the moment there is an inappropriate rounding down, because of the fixed points, which will now be eliminated. The time served will therefore better reflect the law and the court’s intention, and that will lead to a very slight increase in the number of people subject to these orders at any given point. However, the total number receiving the order will not change.
I accept that the total number receiving the orders will not change, but does the Minister not accept, and regret, that these proposals will lead to some children—it might only be a handful—being subjected to more time in custody than they would be under the current system? If he does accept that, what will he do to try to change it?
It is more that, owing to an anomaly in the current system that is a consequence of the fixed points, people are being let out slightly early. This change really means, among other things, that the law as written can be fully implemented, rather than this little rounding anomaly occurring. However, I stress that the effect is very slight.
By the way, I should take this opportunity to thank the shadow Minister for his earlier commendation of the Government’s record on reducing unnecessary child imprisonment.
In answer to the shadow Minister’s last question, which was about youth offending teams and longer time potentially being spent under their care, clearly it is our hope and expectation that youth offending teams will be effective—indeed, they are effective—in helping to divert young people on to a better path in life. We are generally increasing resources in this area, and I hope that that will have precisely that effect.
Question put and agreed to.
Clause 132 accordingly ordered to stand part of the Bill.
Clauses 133 and 134 ordered to stand part of the Bill.
Schedule 15 agreed to.
Clause 135
Youth rehabilitation orders
Question proposed, That the clause stand part of the Bill.
With this it will be convenient to discuss the following:
Amendment 122, in schedule 16, page 255, line 26, at end insert—
“(2A)After sub-paragraph 4(1) (Duty to give warning or lay information relating to breach of order), insert—
“4 (1A) For the purposes of this paragraph, a reasonable excuse for breach of an electronic compliance monitoring requirement shall include design faults in any necessary electronic apparatus, including (but not limited to) poor battery life; but shall not include intentional failure by the offender to charge necessary electronic apparatus.””
This amendment would introduce a safeguard to prevent children from being criminalised due to design faults, including poor battery life, on electronic monitoring devices.
Amendment 120, in schedule 16, page 258, line 34, at end insert—
“24(1) Paragraph 35 of Schedule 1 (Further provisions about youth rehabilitation orders) of the Criminal Justice and Immigration Act 2008 is amended as follows.
(2) In sub-paragraph (1), for “The Secretary of State may by order” substitute “The Secretary of State must by order”.
(3) In sub-sub-paragraph (1)(a), omit “enable or”.”
This amendment would make panel reviews of youth rehabilitation orders routine by amending Paragraph 35, Schedule 1 of the Criminal Justice and Immigration Act 2008.
Amendment 121, in schedule 16, page 258, line 34, at end insert—
“24(1) Paragraph 3 of Schedule 1 (Further provisions about youth rehabilitation orders) of the Criminal Justice and Immigration Act 2008 is amended as follows.
(2) At end insert—
“(6) The Secretary of State shall take steps to ensure that there are sufficient resources in place to allow for a court to make a youth rehabilitation order with intensive supervision and surveillance in all appropriate cases.””
This amendment would require the Secretary of State to ensure that intensive supervision and surveillance is available in all youth offending areas.
That schedule 16 be the Sixteenth schedule to the Bill.
I call the Minister.
There are amendments, so if you wish to start, Mr Cunningham, by all means fire away.
I am sure you will be sending out for ice creams within the next half hour.
I rise to speak to amendments 120, 121 and 122, standing in my name. Youth rehabilitation orders currently permit courts to impose a choice of 18 requirements from which a sentence can be designed. This also provides for two high-intensity requirements, intensive supervision and surveillance, or ISS, or intensive fostering, as alternatives to custody. The proposals in the Bill would make several changes to youth rehabilitation orders which I will consider in turn.
As we have said previously, and as I think the Opposition would agree, we believe that, wherever possible, children who offend should be managed in the community, as it is better for their rehabilitation and therefore wider society, as it is less likely that they will reoffend. In that spirit, clause 135 introduces and refers to schedule 16, which makes amendments to YRO provisions set out in the Criminal Justice and Immigration Act 2008 and in the sentencing code, which we believe will give the courts and the public confidence in YROs as an alternative to custody. The amendments are listed in schedule 16 and include the introduction of a new electronic whereabouts monitoring requirement and changes to the YRO with intensive supervision and surveillance, ISS, a high-intensity alternative to custody, with mandatory extended activities, supervision and curfew requirements.
I understand the Minister’s explanation on amendment 120 but feel that there should be an opportunity for far more reviews in this space. I hope that the system out there will look at that far more closely.
In relation to the intensive supervision and surveillance provisions, it is nonsense that a child in London may be subject to a completely different set of penalties from those facing a child in Sunderland. There should be consistency in the availability of orders. For me, that means that the Government should be directing the development of these orders across the country.
While the £7 million increase is very welcome, I am sure that it will have to do many, many things in the system. We keep getting referred to the same sums of money but more tasks have to be covered within that particular budget. I intend to test the Committee on amendments 121 and 122 because the Government have a long way to go to sort out faulty monitoring systems. We want to be on the side of the child. We do not want them criminalised through no fault of their own.
Question put and agreed to.
Clause 135 accordingly ordered to stand part of the Bill.
Amendment proposed: 122, page 255, line 26, in schedule 16, at end insert—
“(2A) After sub-paragraph 4(1) (Duty to give warning or lay information relating to breach of order), insert—
‘4 (1A) For the purposes of this paragraph, a reasonable excuse for breach of an electronic compliance monitoring requirement shall include design faults in any necessary electronic apparatus, including (but not limited to) poor battery life; but shall not include intentional failure by the offender to charge necessary electronic apparatus.’”—(Alex Cunningham.)
This amendment would introduce a safeguard to prevent children from being criminalised due to design faults, including poor battery life, on electronic monitoring devices.
Question put, That the amendment be made.
Before we move on, it has come to my attention, courtesy of the Whips, that there will be a vote in the House at 4.30 pm. I am sure that none of you want to come back afterwards. It is up to you if you do, but I thought I would bring the Whips’ discussion to a wider audience, so we know what their ambition is for the Committee.
Clause 136
Abolition of reparation orders
Question proposed, That the clause stand part of the Bill.
Given your suggestion, Sir Charles, I will place a premium on brevity. Clause 136 is straightforward. We believe that restorative justice is an important part of the justice system. However, the reparation order itself has been made redundant, having been overtaken by the evolution of the wider youth justice sentencing framework. Instead, referral orders and youth rehabilitation orders now provide a wider range of interventions, including elements of restorative justice, and are more flexible than a reparation order. They have essentially replaced reparation orders.
Also, reparation orders cannot be given in conjunction with a referral order or a youth rehabilitation order, which significantly reduces the circumstances in which they can be used. As a consequence, reparation orders have dropped out of usage—they dropped by 98% over the last decade because the other disposals have taken up the slack. Only 51 have been handed down in the year to March 2020. It is by far the least-used non-custodial disposal. Therefore, in the interests of clarity and simplicity, the clause abolishes the reparation order to enable those other forms of disposal to be used, as they are used anyway.
As the Minister explained, the clause would abolish reparation orders, which require the child to make practical amends to the victim or other affected party. The Government White Paper noted that the orders are little used, probably as they have been replaced by some of the more widely used sentencing options, and so have become redundant.
Reparation orders are the least used orders in the children’s sentencing regime, too. Between 2010 and 2019, around 5,000 offenders under the age of 18 were sentenced to reparation orders. The number of reparation orders handed down fell in each year during that period. In 2019, 66 of those sentences were passed, compared with 2,400 in 2010. In the year ending March 2020, there were just under 16,900 occasions where children were sentenced at court; only 51 of these were reparation orders.
While it is not clear why the use of the order has fallen so sharply, it has been suggested that it is as a result of changes in the Legal Aid, Sentencing and Punishment of Offenders Act 2012, which removed restrictions on the use of cautions and conditional cautions, which means that children who may have proceeded to court are possibly now receiving out-of-court disposals, which is a good thing. Do the Government plan to do any research to confirm this suggestion? I think it could be helpful if they did so, since this is quite a significant change in sentencing patterns, and it would be helpful to better understand how restorative justice processes are now manifesting themselves, given that usage is low and that reparation can also be included in other sentences, such as the referral order and youth rehabilitation order.
We support the removal of reparation orders and support the clause.
Question put and agreed to.
Clause 136 ordered to stand part of the Bill.
Clause 137
Temporary release from secure children’s homes
Question proposed, That the clause stand part of the Bill.
With this it will be convenient to consider:
Amendment 123, in clause 138, page 126, line 40, at end insert—
‘(8) A secure 16 to 19 Academy will be subject to annual inspection by Her Majesty’s Chief Inspector of Prisons.”
This amendment would make secure 16 to 19 academies subject to annual inspection by Her Majesty‘s Chief Inspector of Prisons.
Amendment 133, in page 126, line 40, at end insert—
‘(8) A secure 16 to 19 Academy will be subject to annual inspection by Ofsted.”
This amendment would make secure 16 to 19 academies subject to annual inspection by Ofsted.
Amendment 146, in page 126, line 40, at end insert—
‘(8) A local authority may establish and maintain a secure 16 to 19 Academy.
(9) A body corporate (including any of its subsidiaries) that is carried on for profit may not be a party to an arrangement to establish and maintain a secure 16 to 19 Academy.”
This amendment would enable local authorities to run Secure 16 to 19 Academies, either alone or in consortia, and to prevent these establishments being run for profit.
Clause 138 stand part.
Secure children’s homes accommodate boys and girls aged 10 to 17 assessed as particularly vulnerable. As well as children held on justice grounds, secure children’s homes accommodate children detained on welfare grounds for their protection or the protection of others. The explanatory notes state that they
“currently rely on inherent powers to make arrangements for the ‘mobility’ of children detained in such accommodation to help address their offending behaviour and to support the integration of children back into the community at the end of their sentence. Clause 137 would provide a statutory power for the temporary release of children detained in SCHs. The Secretary of State or the registered manager of the home would be able to temporarily release a child to whom the clause applies. Temporary release under this clause could be granted under conditions. The Secretary of State and registered managers would have concurrent powers to recall children temporarily released…If the period for which the child is temporarily released expires or if the child has been recalled, the child would be deemed to be unlawfully at large.”
Overall, we are supportive of the Government’s proposals in this area and recognise that a good balance has to be struck between allowing temporary release of children from secure children’s homes to support their reintegration into society, and close monitoring of children on temporary release for risk management purposes.
The Opposition understand that temporary release is an important part of the rehabilitation process for children sentenced to custody, and that some child sentence plan objectives will require them to attend meetings or participate in activities outside the secure establishment. As the Youth Justice Board notes in its briefing,
“Allowing children to be released temporarily supports their constructive resettlement into their community both in maintaining family ties and allowing children to start or maintain education placements.”
While the clause is effectively just putting into statute practice that is already in place, we are pleased to see the Government conferring authority for these decisions and processes to the secure school provider, as they will be best placed to support the child in question.
Research published by the Department for Education comparing children on justice placements and those on welfare placements in secure children’s homes concluded that children on justice and welfare placements are fundamentally the same children. The research found that the level of risk posed by individual children was not related to whether they were on a justice or welfare pathway. The report examined whether there was a need to separate children on justice and welfare placements, but concluded that, rather than separating them, if anything the children would benefit from greater integration. While secure children’s homes managers already have powers under section 25 of the Children Act 1989 to consider and approve temporary release for children on welfare placements, we are pleased that the new provisions will put those managers in the same position for sentenced children on justice placements.
We note the concerns of the Howard League, however, that the clause applies only to children who have been sentenced and therefore excludes children who are held in secure children’s homes on remand from being able to access temporary release. The Howard League points out that this change will therefore create a disparity between children who are in secure children’s homes and children who are in secure training centres. Rule 5 of the Secure Training Centre Rules allows children who are on remand to be temporarily released. It explains that unless temporary release also applies to children on remand in secure children’s homes and schools,
“there is a risk that this will undermine the ‘seamless service’ between custody and the community which the Government envisions for secure schools”
We agree with the Howard League that all children remanded to custody should have access to temporary release where appropriate, as they do in secure training centres.
The Bill’s fact sheet on this provision says temporary release is “not a relevant factor” for children on remand. I find this surprising given that we know that, as a result of court delays, children are sometimes subject to quite lengthy custodial remands. The Alliance for Youth Justice further points out:
“introducing new legislation which restricts temporary release in Secure Children’s Homes to sentenced children would be detrimental, particularly to the development of Secure Schools, which we know have ambitious plans for transitions into the community.”
I would be interested to hear the Minister’s thoughts on this and wonder why this distinction has been maintained. Will he consider including children on remand in these provisions? It would be helpful to be reassured on that point, but on the whole we are pleased with the proposal and will offer it our support.
As we have heard, clause 138 would amend the Academies Act 2010 so that 16-to-19 academies can provide secure accommodation for the purpose of restricting liberty but only if approved to do so by the Secretary of State. On the whole, the Opposition support the principle of secure academies and we do not strongly object to these academies being run by charitable entities. But, as ever, there are some areas in which I seek the Minister’s reassurances, especially with this clause, as comprehensive information is not available from the Government.
The Alliance for Youth Justice briefing on this clause says:
“We are aware of concerns that have been prompted by this section of the Bill around the lack of clarity on the status of Secure Schools, in particular what legislation, regulation and guidance will govern and oversee their activities. It has been confirmed to the AYJ by the Youth Custody Service and Oasis Charitable Trust, that Oasis Restore, the first Secure School pilot, will be registered as a Secure Children’s Home and regulated by Ofsted. It has also been confirmed that 12-to-18-year-olds may be placed in Oasis Restore.”
There is clear discomfort in the sector about the limited information available on the plans for Oasis Restore and how the model will operate in practice. Can the Minister confirm that his Department will publish more information on this? Can he provide a timeframe for publication?
Another issue raised by the sector is that it is unclear how the introduction of secure schools fits into the long-term strategy for the youth secure estate. I understand that it is the Government’s stated intention for secure schools to replace young offender institutions and secure training centres, but we have not yet seen any proposed timeline for such changes. Can the Minister provide more information on his Department’s intended timeline for the changeover to secure schools for the Committee today?
The first secure school is being established in Medway, but I understand that children from across the UK can be sent there. Hazel Williamson put it very well in our evidence session when she said:
“As an association of YOT managers, we believe that children in custody…should be placed in small, secure units close to their homes. We do not advocate large custodial establishments where children are placed far away from their home; we would advocate small custodial units.”––[Official Report, Police, Crime, Sentencing and Courts Public Bill Committee, 20 May 2021; c. 133, Q212.]
Can the Minister confirm that the Government’s timetable for delivering secure schools will not entail children being detained hundreds of miles from their homes while still only a small number of these establishments are available?
The Youth Justice Board has shared its concerns about the links to children entering the youth justice system from practices such as off-rolling children. Indeed, there is a high prevalence of expelled children in the children’s secure estate. For instance, in 2018 in HMYOI Feltham, 89% of children had been excluded from school.
Can the Minister confirm that any academy trusts selected through the tendering process to open or run a secure school have got, as the Youth Justice Board put it
“the necessary skills, expertise, structures and ethos to support children in a secure setting”?
I know that the Howard League wrote to the Secretary of State on this issue last year, and its briefing says:
“This clause provides a legal basis for the ‘secure school’ model of youth custody: it allows academies to provide secure accommodation for their pupils if they have been approved to do so and establishes that running a secure academy is to be treated as fulfilling the charitable purpose of ‘advancement of education’ under s3(1) of the Charities Act 2011. In April 2020, the Charity Commission noted that ‘the proposed purposes of secure schools, as we understand them, do not wholly fall within the descriptions of purpose in s3(1) of the Charities Act 2011’ and that ‘we do not think the operation of a secure school can be exclusively charitable’. In November 2020, the Howard League wrote to the Secretary of State outlining the concerns that locking children up does not fall within charitable objectives. The proposal compounds this issue.”
It would be helpful if the Minister could share with the Committee his discussions with the Charity Commission, so that we all better understand the position that has been reached on this knotty issue.
Amendments 123 and 133 both relate to the inspection regime for secure 16-to-19 academies. Amendment 123 would make secure 16-to-19 academies subject to annual inspection by Her Majesty’s chief inspector of prisons, and amendment 133 would make them subject to annual inspection by Ofsted. I understand that the current inspection framework will come from Ofsted. However, I am sure the Government would agree that a secure school is a very different entity from a standard school. We therefore believe that such schools would benefit from a different inspection regime, to ensure that no aspects of their running are overlooked. Although it is true that it is not a prison, a secure school is still part of the secure estate, so there is expertise that Her Majesty’s Inspectorate of Prisons can provide. Indeed, when Ofsted does inspections on the secure estate, HMIP is part of the broader inspection team. We think the inclusion of HMIP is important and should be put on a statutory footing. I hope the Government agree that it would add value to the monitoring and running of the secure school system as it is rolled out, so I hope they will be able to support our amendment 123.
As I outlined in my earlier speech, there is still much that is unknown and has yet to be decided in relation to secure schools. For that reason, we think it would be important for there to be regular inspections, especially in the early years of operation. That is why our amendment 133 provides for annual inspection by Ofsted, to ensure that nothing slips through the cracks. Furthermore, we are entrusting such schools with the care of some of our most vulnerable children at a point in their lives when positive and engaged care can have the most impact, so it is only right that the schools are subject to the most rigorous monitoring while they do so. I hope that the Government agree and can support amendment 133.
Amendment 146, which was tabled by my hon. Friend the Member for Rotherham, allows for local authorities to establish and maintain a secure 16-to-19 academy, and to exclude profit-making bodies from doing likewise. I am sure she will address her amendment in detail, but she has our support.
My amendment 146 is designed to ensure that local authorities are able to run secure 16-to-19 academies, either alone or in consortia, and to prevent such establishments from being run for profit. I will go into the detail of why, but, fundamentally, I do not think profit should be made from keeping our children safe. We are seeing some pretty gross examples of that at the moment.
In December 2016, the Government committed to phase out child prisons—by that, I mean juvenile young offenders institutions and secure training centres—and to replace them with a network of secure schools and children’s homes. I hope that this is not just the Government playing semantics and that they really are going to get rid of these institutions, because it is very clear, and the Youth Justice Board concedes, that secure training centres are not fit for purpose.
The Government must speed up the phasing out of secure training centres. When introducing secure schools and academies, they must ensure that they will meet high standards of care. We must ensure that secure children’s homes take an approach that fulfils all of a child’s needs and that they are not seen as cash cows for the private firms who run them to make huge profits.
The vote might come at quarter past 4, although the Whips will be better informed of that than me, and the Whip cannot move the adjournment while someone is speaking, I just remind him of that.
With that thought in mind, I will try to deal with the important points raised as quickly as I can.
We recognise that young people in detained accommodation or in custodial settings need a lot of support. Secure schools are being developed to do precisely this.
To support this, we think it is important that secure schools are provided by people who have a certain level of autonomy. Many charities have the necessary skills to do this. That is why, starting with clause 138, we are ensuring that providing a secure 16-to-19 academy can be counted as a charitable activity, enabling charitable secure school providers to improve outcomes in youth custody.
We always take changes to charities law seriously. We have to ensure that charities are properly regulated. The Ministry of Justice has worked closely with the Charity Commission and the Department for Digital, Culture, Media and Sport to make sure that is done in a way that preserves the integrity of charity law.
Clause 137 ensures that there is a clear statutory power to enable providers to allow for temporary release where someone is sentenced to custody, which applies to secure schools as well. It is important that these children can be released into the community as part of the rehabilitation that we want to do with them. This clause puts that release provision on a statutory footing. We think that temporary release provisions are an essential tool in the rehabilitation journey, and this makes sure that can happen.
The Youth Custody Service and secure children’s homes that make temporary release decisions always do so subject to proper risk assessments. The YCS will develop formal guidance for SCH managers, outlining the necessary steps to be taken when making a balanced temporary release decision. Both these measures are helpful in ensuring that charities are able to come into this space to provide these services and that temporary release can be facilitated as part of the rehabilitation package, all of which is important.
Amendments 123 and 133 speak to the inspection regime. Like other academies and children’s homes, secure schools will be jointly inspected by Ofsted and the Care Quality Commission. They will also be inspected monthly, not annually, by independent visitors. As co-commissioners for secure schools, the Youth Custody Service and NHS England will be responsible for ensuring high standards of performance. The minimum frequency of inspection is also set out in the regulations.
As secure 16-to-19 academies will fall under the definition of a children’s home in the Care Standards Act 2000, they will be inspected on an annual basis in any case. The definition of children’s home in the Children’s Home (England) Regulations 2015 makes it clear that they will fall under the frequency of inspections regulations, so they will be annually inspected in any case, making amendment 123 unnecessary.
We have consulted HMCIP on the question of inviting it into the inspection regime, and it agrees with the Government’s position. Although secure schools are a secure environment, they are essentially schools and children’s homes, and so should be inspected by Ofsted and the CQC. Involving the prisons inspectorate in these institutions would run counter to the ethos we are trying to develop.
In speaking to amendment 146, the hon. Member for Rotherham made a compelling contribution on some of the failings that have occurred in the past, which we all agree we want to avoid. We are clearly talking about the new secure 16-to-19 academies. I want to speak to the concern about the profit motive, which amendment 146 addresses. As part of the existing academies legislation, an academy trust is, by definition, a not-for-profit charitable company, so I can confirm to the hon. Member and other members of the Committee that because academy trusts have to be not-for-profit by their nature, this new provision does not open up the possibility of introducing the profit motive into the provision of these secure schools.
I hope that my remarks achieve the twin objectives of giving commitment and assurance on these clauses, as well as avoiding a clashing with a vote that may be imminent.
The hon. Member for Rotherham looks happy. I will ask her if she is happy in relation to her amendment, but I will first go to the shadow Minister.
I think we have to be very clear that we are talking about the incarceration of some of the most vulnerable young people in our society. I believe that we owe them a duty of care. When I was a local councillor and a lead member for children, I was a corporate parent for looked-after children, and I was responsible for them. We as MPs should be responsible for children in our society, particularly when we are dealing with such issues. I cannot understand for one minute why the Government would not want the most rigorous inspection regime possible.
What the Government are proposing is actually a testbed on how we look after those vulnerable children in future. It is a testbed; it has not been sorted, nothing has happened, and there here have been no pilots—nothing. Yet the Government are quite content to rely on independent visitors and inspections by different organisations. The most robust possible inspection of those establishments would certainly by conducted by HMIs and Ofsted.
History shows us—my hon. Friend the Member for Rotherham gave some examples—that if we do not get this right, in future, the responsibility for that child who dies, or that child who gets abused, will lie at our door and with nobody else, because we may not have made sure that they had the most rigorous inspection regime possible. For that reason, even though Her Majesty’s inspectors do not wish to get involved in this, I think their expertise should be put to good use, and I intend to press both amendments to a vote.
I do not wish to divide the Committee. I am content with what the Minister said about profit, but I would be grateful if he could write to me about why local authorities cannot apply.
Excellent.
Question put and agreed to.
Clause 137 accordingly ordered to stand part of the Bill.
Amendment proposed: 123, in clause 138, page 126, line 40, at end insert—
“(8) A secure 16 to 19 Academy will be subject to annual inspection by Her Majesty’s Chief Inspector of Prisons.”—(Alex Cunningham.)
This amendment would make secure 16 to 19 academies subject to annual inspection by Her Majesty’s Chief Inspector of Prisons.
Question put, That the amendment be made.
(3 years, 2 months ago)
Public Bill CommitteesWe are now sitting in public and the proceedings are being broadcast. Before we begin, I have a few preliminary announcements. Members will understand the need to respect social distancing guidance. In line with the Commission’s decision, face coverings should be worn in Committee unless Members are speaking or are medically exempt. Hansard colleagues would be grateful if Members could email their speaking notes to hansardnotes@parliament.uk. Please switch electronic devices to silent. Tea and coffee are not allowed during the sittings.
We now begin line-by-line consideration of the Bill. The selection list for today’s sitting is available in the room and shows how the selected amendments have been grouped together for debate. Amendments grouped together are generally on the same or a similar issue. Please note that decisions on amendments do not take place in the order that they are debated but in the order that they appear on the amendment paper. The selection and grouping list shows the order of debates. Decisions on each amendment are taken when we come to the clause to which the amendment relates. A Member who has put their name to the leading amendment in a group is called first. Other Members are then free to catch my eye in order to speak to all or any of the amendments within that group. A Member may speak more than once in a single debate. At the end of a debate on a group of amendments, I shall call the Member who moved the leading amendment again. Before they sit down, they will need to indicate whether they wish to withdraw the amendment or seek a decision. If any Member wishes to press to a vote any other amendment in a group, they need to let me know.
Clause 1
Compensation payments to customers of London Capital & Finance plc
I beg to move amendment 1, in clause 1, page 1, line 5, at end insert—
“(1A) Within six months of this Act receiving Royal Assent, the Secretary of State shall lay before Parliament a report that considers the circumstances and impact of the payment of compensation to the customers of London Capital & Finance plc and that, in the light of that consideration, sets out the following—
(a) the circumstances in which taxpayer-funded compensation should be paid following the collapse of investment companies in future;
(b) the extent of regulatory failure necessary to trigger compensation funded by the taxpayer in future; and
(c) the limits to taxpayer exposure to investment failings.”
This amendment would require the Secretary of State to lay before Parliament a report exploring the impact of the payment of compensation to the customers of London Capital & Finance plc and giving criteria for when the taxpayer should compensate investors for investment failures.
With this it will be convenient to discuss amendment 7, in clause 1, page 1, line 18, at end insert—
“(5) Within six months of this Act coming into force, the Secretary of State must lay before Parliament a report that assesses the impact of the payment of compensation to the customers of London Capital & Finance plc under this section, and in the light of that assessment, sets out the following—
(a) an assessment of the regulatory failures that gave rise to the need to compensate the customers of London Capital & Finance plc;
(b) measures the Government is taking to prevent such regulatory failures in the future;
(c) the reasons why the Government is providing compensation to the customers of London Capital & Finance plc but not the customers of other failed investment firms;
(d) criteria for when the Government should be expected to provide compensation following the collapse of investment firms; and
(e) the reasons for the capping of compensation payments under this section at 80% of what customers of London Capital & Finance would have been entitled to under the Financial Services Compensation Scheme.”
This amendment would require the Secretary of State to lay a report before Parliament that assesses the impact of the Government compensating the customers of London Capital & Finance plc, as well as broader issues relevant to the mis-selling scandal.
Thank you for your guidance, Ms Ghani. Later, I will move amendment 2 and, with your help, my hon. Friend the Member for Reading East will move amendments 3, 5 and 6, which stand in the Opposition’s name.
Amendment 1 relates to the first clause of the Bill, which deals with the compensation scheme relating to the collapse of London Capital & Finance and which is based on the report published by Dame Elizabeth Gloster, on which we took oral evidence this morning.
Clause 1 enables a very significant Government decision to step in and compensate people for the collapse of an investment firm. The estimated cost given by the Treasury for that decision is about £120 million. As the Minister pointed out on Second Reading, it is rare that the Government do that. He told us that there have been only two other cases in recent decades—Barlow Clowes and Equitable Life—and even those decisions did not always bring matters to a close. With Equitable Life, some investors around the country remain dissatisfied with the levels of compensation that have been paid out. There is an all-party parliamentary group in this House, and we have my indefatigable hon. Friend the Member for Harrow West, who has led at least one debate, if not more, on these issues, on the Committee. Such decisions do not always bring the matter to a close.
The focus of the amendment is to try to bring some clarity to Parliament and the public about when the taxpayer should be on the hook for an investment collapse, and when not. This issue was raised in oral evidence this morning by the hon. Member for North East Bedfordshire. He used the well-known phrase “caveat emptor”, or “buyer beware”, which applies those who may buy investment products. The trouble at the heart of this case is that the investors did not think they were making a particularly risky decision. LCF sold mini-bonds on the basis of a guaranteed investment return. When those who suspected something might be wrong phoned the FCA, time after time they were reassured that nothing was wrong. To quote one of the FCA’s call handlers, “This is not a scam”. While the hon. Gentleman was right to raise the principle of caveat emptor, how can we blame the investors if the very regulator looking after the thing was reassuring them that there was nothing to be concerned about?
The Government have judged the level of regulatory failure to be so exceptional and egregious that they have decided that the taxpayer has a responsibility to compensate, or as it is sometimes put, to socialise the losses. The level of compensation set by the Government is 80% of the maximum level allowed by the Financial Services Compensation Fund. That maximum is £85,000, so 80% leaves investors with a maximum pay-out of about £68,000.
There is debate about that 80%. Members of the Committee will have been sent written evidence from various LCF investors who think that level is too low. They do not understand why they have been asked to forfeit 20% of their investment because of what the Government acknowledge to be a particularly egregious regulatory failure. The Government will have to debate that. Their justification for any compensation at all is that LCF is a unique case. Both Ministers spelled that out on Second Reading last week. In his opening speech, the Pensions Minister said:
“While other mini-bond firms have failed, LCF is the only mini-bond firm that was authorised by the FCA and sold bonds in order to on-lend to other companies.”
He went on to say:
“It is…important to emphasise that the circumstances surrounding LCF are unique and exceptional, and the Government cannot and should not be expected to stand behind every failed investment firm.”—[Official Report, 8 June 2021; Vol. 696, c. 905.]
We agree, and that is precisely what the amendment is about: to try to get some clarity on the Government’s thinking when the degree of regulatory failure is so exceptional that it warrants the taxpayer picking up the bill. When that is not the case, whatever losses there may be should be regarded as normal investment market failings.
My right hon. Friend rightly sets out the scale of regulatory failure. Does he think that one of the other potentially unique circumstances of this case is the apparent legislative lacuna about who had the responsibility for regulating mini-bonds? Dame Elizabeth Gloster set out that, on the one hand, the FCA said it should be Her Majesty’s Revenue and Customs; HMRC was equally clear that it thought it should be the FCA. We do not know whether that legislative lacuna has yet been sorted. Does my right hon. Friend think that was also a factor in the Government’s decision to compensate to the scale they have?
My hon. Friend is right; the lacuna referred to in the report relates particularly to the allocation of ISA status. We asked Dame Elizabeth about that during the oral evidence session this morning. This is important because if there are two things that gave the mini-bonds the stamp of respectability, it would be that prominent in LCF’s advertising was the statement that it was regulated by the FCA, which at firm level was true but was not true of the mini-bonds being sold, and that they could be placed inside an ISA wrapper. Although it is, of course, true that people who invest in ISAs can lose money, for understandable reasons, the ISA wrapper has a certain cachet and a note of respectability.
Dame Elizabeth confirmed during oral evidence this morning that once the ISA wrapper status was allocated in 2017, the degree of investment in those mini-bonds rose markedly, because people would have thought they were investing in something safe. The adverts spoke, in fact, of a 100% record in paying out, when what we were really dealing with was a pyramid scheme where any pay-outs that did come came from other investors and not normal market returns. People thought they were investing in a safe bond. They did not think they were playing investment roulette.
The Economic Secretary also emphasised the uniqueness of the LCF case in his closing speech on Second Reading. He said:
“LCF is unique in that regard; indeed, it is the only mini-bond issuer that was authorised by the FCA and that sold bonds to on-lend to other companies.”—[Official Report, 8 June 2021; Vol. 696, c. 918.]
That is an exact replica, with both Ministers saying the same thing, and I suspect that that phrase has been very carefully honed inside the Treasury. A case had to be made for the uniqueness of this that could not be applied to other investment failures, so I think that form of words is very carefully chosen. However, the Minister may be able to tell us more when he responds.
The amendment is designed to tease out the following point, which I want to clarify with the Minister. Is it the case that even though a number of mini-bond issuers have collapsed in recent years, LCF is the only one that was authorised and regulated by the FCA? The Minister can intervene now or I am happy to wait. As I said to the Ministers on Second Reading, there must have been a discussion in the Treasury about developing a compensation scheme such as the one set out in clause 1. The question would have been asked: if we did this for LCF, what about investors in the Connaught fund or Blackmore Bond or any of the other investment schemes that were raised either on Second Reading or during the oral evidence session this morning? What was the nature of those discussions at the Treasury and what is it about LCF that makes the Government convinced that compensation is due in this case but not in the others? That is why our amendment calls for a report. Having taken the decision to compensate, we believe it would be in the public interest for the Treasury to set out the circumstances under which the taxpayer might be expected to pay when investors lose money. Is it about a firm being authorised by the FCA? Is it about commissioning a report by an eminent and independent figure such as Dame Elizabeth Gloster?
I am very happy to respond at length in my remarks at the end. The distinction we make is that LCF is the only FCA-authorised firm that was on-lending. That is the distinction; not so much the mini-bond issuance but the on-lending nature of it.
I am grateful to the Minister. I am just going through this series of things to try to clarify exactly what might place the taxpayer on the hook. Does it require the kind of report carried out by Dame Elizabeth Gloster and commissioned by the FCA into the collapse of LCF? Is there a clear threshold of regulatory failure to be passed? There was obviously regulatory failure in this case, but, as we saw from the witnesses this morning, people will argue that other regulatory failures have applied to other firms.
In this case, the regulatory failures were multiple. I do not want to go through them in detail because we will come on to other amendments in which they can be discussed, but I will mention a few of them briefly: misleading promotions by LCF using the halo effect have been regulated by the FCA yet not adequately dealt with by the financial promotions team at the FCA; a failure by the same financial promotions team to join the dots and alert other parts of the FCA, such as the supervisory team, on the implications of those misleading promotions; and multiple attempts to alert the FCA—more than 600 phone calls, according to annex 6 of Dame Elizabeth’s report. Yet, in the vast majority of cases nothing was passed up the line of pursuit, in large part because the mini-bonds were not regulated by the FCA, so the call-handlers’ instincts were, “You’re phoning us about something that we do not regulate, so we don’t have to pass it up the line”—even though the firm as a whole was regulated by the FCA.
My right hon. Friend is understandably concerned to protect the taxpayer’s interest. Is there not also another dimension as to why the report he seeks is worthwhile? If there is regulatory failure by the FCA in other ways, and not just in the handling of investors’ resources, and if there is no chance of the Government stepping in and offering compensation for that failure, then, for example, if a big financial services company that was not properly regulated by the FCA were to be demutualised, would there not be a reason to offer compensation? Or, if not, would that let the FCA off the hook?
My hon. Friend raises a very important point. There are many reasons why clarity about the limitations of Government responsibility and taxpayer responsibility, to put it another way, would be extremely helpful. The very fact of producing the Bill will mean that the Government have asked those questions anyway. As I said earlier, the cost in this case is expected to be about £120 million. The costs of clause 2, which we will come to later, are expected to be over £300 million. Over both clauses the cost will therefore be more than £400 million. That is a large sum of public money that will, in the case of clause 2, be recouped over a period of years from pension scheme members.
Of course, it is possible to have investment failings on an even greater scale. Is there any upper limit that the Treasury would see to such taxpayer exposure, or is it always to be on a case-by-case basis? In theory, investment failings could cost billions rather than hundreds of millions. Our amendment seeks to clarify the Government’s thinking on that, which would be beneficial to Parliament and the public.
Those are the reasons why we have tabled this amendment. We think that the compensation scheme and the whole story of the collapse of LCF demands such clarity and that reports such as the one we have called for would be beneficial.
It is a pleasure to serve under your chairship, Ms Ghani.
I shall speak to amendment 7, in my name, and in support of the official Opposition’s amendment 1.
Both amendments call for the Secretary of State to report back to Parliament on issues that collectively raise many still unanswered questions about the Bill, about the compensation scheme, and about why the scandal of London Capital & Finance was allowed to happen.
By far the biggest criticism of the Bill, which we again heard from witnesses today, is that it has been deliberately framed so narrowly that those questions are in danger of being ignored. I know that the Government will argue that framing it narrowly increases its chances of getting on to the statute book—I accept that argument—but there is a downside to doing that.
The biggest question that is still unanswered is: why do we expect compensation for the victims of one investment mis-selling scandal when so many people have lost so much—possibly a total of more than £1 billion —in other company collapses that share most, and sometimes all, of the key features of London Capital & Finance?
I should make it clear that I am not asking for the setting up of other schemes. We are not asking for approval at this stage, or for other failures to be included in the LCF scheme. All we are asking for is some clear indication that the Government are taking action to look at the wider issues.
The Government’s answer is that London Capital & Finance was regulated by the Financial Conduct Authority and that companies such as Blackmore Bond were not. That smacks of looking for an explanation to justify a decision that has been taken for a completely different reason.
Companies such as Blackmore Bond set out to make prospective investors believe that the FCA had a role in protecting their money. Investors in LCF were misled into believing that its own registration with the FCA would cover their investments. The only difference with other company failures is that investors in those companies were misled into believing that someone else’s registration would cover them—a fine point lost on investors themselves.
The Government’s explanation appear to assume that the only problem, or even the biggest problem, with London Capital & Finance was that it was a regulated company selling unregulated investments. That was certainly part of the problem, but, as the written submissions from a number of investors and as evidence this morning made clear, there were other failings and possibly deliberate malpractice within the company and some of its advisers. Other failings of regulation went well beyond those laid at the feet of the Financial Conduct Authority in relation purely to LCF. If the Government constantly remind us that the sale of mini-bonds was not regulated by the Financial Conduct Authority, surely the elephant in the room is: why on earth not?
The Government will, I know, refer to the principle of caveat emptor. It is correct that anyone making an investment has a responsibility to ensure that the investment meets their needs, but there are hundreds—possibly thousands—of examples in UK regulation where we regulate the market but it is not realistic or fair to expect the emptor to caveat.
We do not expect people to do their own personal survey of a house to make sure it is safe before they buy it. We do not expect people to check the brakes on the bus before buying a ticket. We have regulation to protect public safety, on food standards, on product safety and on a number of financial transactions. It is perfectly possible for the Government to start to look at regulating these investments in future and compensating ordinary men, women and sometimes children who have lost sums that, individually, are not significant to the FCA but are massively significant to their plans for retirement, for paying to support their children at university or for ever.
We must make it clear that we are not asking the Government to approve compensation for every company failure. We are not asking them even to consider the implications of doing that. We are asking them to look specifically at cases where there is clear evidence of the mis-selling of investments, usually to people who the seller knew perfectly well were not suited to that investment. That has been a characteristic of all the cases we have looked at today.
I am particularly drawn to proposed subsection 5(b) of amendment 7. I wonder whether the hon. Gentleman shares my view that one measure the Government need to require of the FCA in the future, to prevent further such regulatory failures, is for it to take a more hands-on approach when customers get in contact to raise concerns about particular businesses; and to make it a point of principle that, when a significant number of customers raise concerns about the activities of a firm, the FCA might actually try to meet some of those customers, rather than, as appears to be the case at the moment, only bothering to meet representatives of the board and management of said firm.
The hon. Gentleman makes a valid point. A lot of the issues he raises are covered in Dame Elizabeth Gloster’s report and recommendations. She even pointed out today that possibly the single biggest failing—certainly one of the biggest failings—was that the Financial Conduct Authority had too restrictive a view of its purpose in regulating the market.
I have to say that it is not only the Financial Conduct Authority that has failed to regulate. What was the registrar of companies at Companies House doing when they got a copy of the audited accounts of Blackmore Bond—the only copy that was ever submitted by that entire group—in which it said, in so many words, that in order to pay the guaranteed interest on money it had already received from investors, it had to keep on getting more and more new investors? It was effectively a Ponzi scheme in all but name. The auditors made similar comments on the accounts but did not seem to be under any obligation or duty to do anything else. Nobody at Companies House, or the registrar of companies, appears to have been under any responsibility to look at the documents submitted to spot the danger signs; nobody anywhere seems to have been responsible for that. Although the Financial Conduct Authority has been rightly and severely criticised for its failure to regulate London Capital & Finance, we are talking about a much wider failure of the regulatory regime. Maybe one of the biggest difficulties is that there are so many people who might be involved and they are quite happy to point fingers at one another, saying that they should be responsible.
I realise I am in danger of wandering off the narrow scope of the Bill. We cannot amend the Bill to set up a more comprehensive compensation scheme just now because of the way it is framed; we cannot even amend it to set up a framework so that the Secretary of State, through statutory instrument, could extend it in the future. However, we can ask the Secretary of State to explain to Parliament not only what the Government are doing to help the victims of this one scandal but what lessons they have learned and what they are doing to make sure these scandals cannot be repeated. I hope the words of the witnesses from the Transparency Task Force this morning are ringing in all our ears. They believe they have evidence that there are other scandals like LCF happening right now and that it is just a matter of time before they collapse and leave yet more investors out of pocket.
Finally, why is it that the Government need to be called to account and asked to explain to Parliament why it is that, while they are supporting the victims of LCF, they are doing nothing to help the thousands of other victims of other scandals that have already come home to roost? For those victims, improvement in regulation alone is far too late.
I do not intend to detain the Committee long, because my right hon. Friend the Member for Wolverhampton South East made an excellent speech on this issue; I merely want to underline the point that I made in when intervening on him. There seems to be a degree of risk in the Government’s approach. Again, it would be good to hear from the Minister to better understand why the level of regulatory failure in this particular case should merit Government compensation, whereas if there were to be regulatory failure in, say, the case of the FCA’s handling of the demutualisation of Liverpool Victoria, that would not merit compensation for the 1 million-plus customers and owners of that financial services business.
I also underline the point that I made when intervening on the hon. Member for Glenrothes, who speaks for the Scottish National party, on the need of the FCA to perhaps rethink its approach to consumers more generally. At least one of the regulators in the financial services business case that I have particularly been following—that of Liverpool Victoria—has met representatives of that organisation some 35-plus times but has not met consumers at all. That seems to be an example of the FCA continuing not to have properly thought through where it might need to change its practices going forward. I know the Minister will be looking at this issue, and I gently encourage him to focus particularly on that aspect of the regulatory failure.
My right hon. Friend the Member for Wolverhampton South East underlined the point in Dame Elizabeth Gloster’s report that there have been 600 phone calls from customers about LCF’s poor performance, yet that still did not seem to spur on the FCA to take action quickly. There are almost 10 times as many consumers who are members of Liverpool Victoria as those who invested in LCF, which surely further underlines the need to get right how the FCA handles the consumer interests going forward. I look forward to the Minister’s answers.
It is a pleasure to serve under your chairmanship, Ms Ghani, and I thank all Committee members for their consideration of this important legislation.
As I set out on Second Reading, the Bill is a vital step in compensating LCF bondholders, and I will now turn directly to the consideration of amendments 1 and 7. As the right hon. Member for Wolverhampton South East set out, amendment 1 seeks to add a requirement for the Secretary of State to lay before Parliament a set of criteria for when the taxpayer should compensate investors for investment failures. In essence, it brings some clarity about when the mechanism that we are adopting, and hopefully funding, through the passage of the Bill would be used. Amendment 7 seeks to require the Secretary of State to lay before Parliament a report that assesses the impact of the Government’s compensating the customers of London Capital & Finance plc, as well as broader issues relevant to the mis-selling scandal.
I have listened very carefully to the speeches made during the passage of the Bill, on Second Reading and today, and to the evidence that we received this morning. I am particularly drawn to the remarks of my hon. Friend the Member for North East Bedfordshire, who acknowledged that a degree of risk is involved with any investment. With the right set of regulations and requirements, however, investors can be equipped with the right information to understand their risks and to make informed choices. The Government’s scheme appropriately balances the interests of both bondholders and the taxpayer, and it will ensure that all LCF bondholders receive a fair level of compensation for the financial loss they have suffered.
I turn now to compensation. I must reiterate that LCF’s failure was unique and exceptional. It is the only failed mini-bond issuer that was FCA-authorised and was selling bonds in order to on-lend to other companies. In conjunction with the FCA, the Treasury has looked at eight mini-bond firms that have failed in recent years, and LCF is unique in that respect. It is important to emphasise that the Government cannot and should not stand behind every investment loss. As I have probably said previously, LCF’s business model was highly unusual in both its scale and structure, and the extraordinary circumstances surrounding its collapse are unique.
Has the Economic Secretary or any of his advisers actually read the promotional material that companies such as Blackmore Bond were giving out, to assess the number of times that words such as “guarantee” and “secure” were included in those documents? Does he not accept that something needs to be looked at there—maybe not for compensation this time, but certainly for tighter regulation in the future?
I am grateful to the hon. Gentleman for his intervention because it takes me to the question of what the Government are doing to improve the efficacy of the financial promotions regime that he mentioned in respect of a different failure. We continue to keep the legislative framework underpinning the regulation of financial promotions under review, including whether it is suitable for the digital age. Many of the promotions are obviously online. We will publish a response in the early summer to the consultation on a regulatory gateway for authorised firms approving the promotion of unauthorised firms. It is not an issue that we take lightly. Change, once in place, is designed to strengthen the regime by ensuring that firms able to approve financial promotions are limited to those with the relevant expertise to do so. The FCA will be better able to identify when a financial promotion has breached the restrictions and take action accordingly, but that does not mean that the LCF failure is not unique and of a different scale and quality from some of the other failures.
I want to ask the Minister about the point he made about on-lending. What is the relationship between on-lending and the degree of regulatory failure? He is probably right that this was the only firm doing on-lending, but Dame Elizabeth’s report focuses on an egregious regulatory failure and she sets out all the different things that we will discuss. I suspect that the Government have found something about this case that is unique in order to insulate themselves from claims from other investment failures. I do not see the relationship between that uniqueness and the regulatory failures outlined in Dame Elizabeth’s report.
As the right hon. Gentleman set out, Dame Elizabeth’s report showed enormous failure in the way that the FCA discharged its responsibility for a regulated firm carrying out unauthorised activities. The point that he is making specifically is about the distinctiveness of the on-lending. There is a distinction between a firm, such as BrewDog or Hotel Chocolat, that raises funds for its own business activities and a firm that, although authorised, has not carried out regulated activities. Through the failure of the FCA’s oversight to look at the broader activities of the firm, it is impossible to verify whether those activities on lending bore any relationship to the raising of funds for that business. That is the distinctive difference. It is that failure of the FCA to execute its broader responsibility for an authorised firm carrying out an unauthorised activity in this distinct area that gives us licence to intervene.
On the specific issue of non-transferable debt securities, which are commonly known as mini-bonds, the Government are consulting on proposals to bring their issuance into FCA regulation. After listening to the evidence this morning, I would just make the point that Dame Elizabeth Gloster made 13 recommendations in her report. In the written ministerial statement of 17 December 2020 that was issued in my name all those recommendations were accepted—nine pertaining to the FCA and four to the Treasury. There has also been a subsequent undertaking by the FCA to report on progress against those actions and recommendations. The FCA is conducting a detailed piece of work to look at the issue of high-risk investments holistically, and that includes a discussion paper to get views on changes that can strengthen the FCA’s financial promotion rules for high-risk investments. This work follows the FCA’s ban on the mass marketing of speculative illiquid securities.
As the right hon. Gentleman rightly said, only three Government compensation schemes have been established in the past three decades: Barlow Clowes, Equitable Life and LCF. I acknowledge that, for some, they have not been complete and satisfactory. Despite many investment firms failing over that period, the fact that there have only been those three interventions on the scale that we are seeking to secure today demonstrates that this type of intervention is the exception and not the rule. Moreover, the particular circumstances of these three cases are quite different. For example, compensation was provided to Equitable Life investors, in most cases not because they had lost their original capital but because the firm had not met the expected returns on which many investors had based their future retirement plans. That contrasts starkly with LCF, where investors stood to lose their principal sum.
The common feature in each case is a degree of maladministration or misregulation—a major factor that the Government considered in deciding to launch the LCF compensation scheme—but the circumstances are idiosyncratic. It therefore would not be possible in any meaningful sense to set out the precise framework for Government to consider when establishing such schemes in future or to stipulate the threshold of misregulation ex ante.
That does not mean to say that as a Minister, and in my frequent engagement with the FCA, I do not look closely at all these matters. Indeed, I have done so throughout the process in getting to this point today. I believe that such a framework could create an unrealistic expectation among investors about the possibility of future Government compensation schemes and the misconception that Government will stand behind bad investments. That would create a moral hazard for investors and potentially lead individuals to choose unsuitable investments, thinking that the Government will provide compensation if things go wrong.
I want to address some of the points that the right hon. Gentleman made. He mentioned ISAs. As we announced in response to Dame Elizabeth’s report, HMRC and the FCA have now established an ISA intelligence working group to strengthen communication and information sharing between the two organisations. The group has met and agreed the structure and objectives, which is already resulting in information sharing between the two organisations.
In parallel, from this autumn, once recruitment of personnel is complete, HMRC will reinforce its ISA compliance regime with a programme of ISA manager audits. This will not focus on consumer protection, which does not fall within HMRC’s remit, but could detect technical breaches of the ISA regulations.
We are exploring steps to increase consumer understanding of the ISA wrapper. As the right hon. Gentleman rightly said, this has a large degree of consumer confidence vested in it. We need to tackle the misplaced perception that ISAs benefit from greater Government or regulatory assistance.
I have deep engagement with the FCA. I will speak later this week to the chief executive as part of my routine, regular engagement and I will relay the detailed comments of, in particular, the hon. Member for Harrow West on the degree of engagement of consumer groups versus the regulated firm’s representatives, and especially the case he is on at the moment.
We heard evidence this morning about the retention of one named individual. The chief executive has brought in five new people from outside the organisation in taking a balanced view on how to deliver a successful transformation programme. I urge him to continue successfully to implement the programme.
There are considerable principled and practical drawbacks to the amendment, which is why I ask that it be withdrawn.
I am grateful for the Minister’s response.
I am not entirely convinced about the relationship between on-lending and the decision to compensate. I am sure that the Minister is correct in the literal sense that this was the only regulated firm that was selling unregulated mini-bonds. I am not saying that the Minister is wrong, but from reading the report I believe that Dame Elizabeth would have made the same findings. The mini-bonds were not doing what it said on the tin: they were not on-lending but pyramid selling.
The degree of failure, the degree of investment loss and the degree of regulatory failure are not directly related to the point about on-lending: it is more substantial than that. I am not convinced that all the elements of the Government’s case add up. It looks to me as though they have had to find a unique element to insulate themselves from court action or other claims.
As an indication of the Government having come to a decision and then looking for an explanation for it, I do not know whether the right hon. Gentleman picked up in the Minister’s comments how for the first time, in my knowledge, the concept of the scale of the failure—if I wrote down what the Minister said exactly right at the time—was that London Capital & Finance was unique and of a scale and nature that made it different from the rest. Does the right hon. Gentleman believe that the fact that the scale of the failure has now been quoted as a factor, when it was not before, is an indication that the Government have come to a decision and are now looking for reasons to justify it?
We are trying to put ourselves into discussions that we have not been party to so, to some extent, I am speculating on the way that the Government have built their argument.
I have made the point and I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
I beg to move amendment 2, in clause 1, page 1, line 15, at end insert—
“(3A) Within six months of this Act receiving Royal Assent, the Secretary of State shall lay before Parliament a report setting out progress on the implementation of the recommendations in pages 47 to 49 of the Gloster Report.”
This amendment would require the Secretary of State to lay before Parliament a report setting out progress on the implementations of the thirteen recommendations in the Gloster Report.
Amendment 2 concerns the recommendations made in Dame Elizabeth’s report. It is a long report, but I am specifically referring to the series of conclusions and recommendations made on pages 47 to 49. As the Minister said a few moments ago, some of those recommendations are for the FCA and others are for the Government. We heard Dame Elizabeth say this morning that if she reached one overall conclusion that she wanted us to understand, it would be about the degree of culture change necessary for the FCA to fulfil its statutory duties. The fact that she judged that the culture that existed was so inappropriate that it stopped the FCA from doing its statutory job effectively is a serious charge. It is, after all, the body that we depend on to uphold the consumer interest and charged with ensuring proper conduct in the sale and provision of financial services. I do not need to tell anybody on the Committee how important those are, either to everyday life or to the UK economy.
One of the most telling parts of Dame Elizabeth’s report is when she discusses the loss of a letter sent to the FCA by a financial adviser called Neil Liversidge in November 2015, fully three years before the collapse of LCF. The letter warned in fairly graphic language, some of which I read out on Second Reading, what was going on at LCF and the financial adviser’s concern. Dame Elizabeth’s damning conclusion is that even if the letter had not been lost in the FCA, which appears to be what happened, so dysfunctional was the FCA that it would not have done anything about it anyway. She says on page 78 of the report:
“it is unlikely that it would have resulted in any”
action by the FCA. She found that degree of dysfunctionality to be deep and in need of urgent attention, as set out in the recommendations.
Every time there is a public failing, we hear some familiar things being said. In fact, we could almost play word bingo with them. People talk about lessons learned and new systems being put in place, and sometimes there is change of leadership or a change of the management team—all those things. In the report, there was a very well publicised disagreement about the nature of accountability and responsibility involving Dame Elizabeth and the now Governor of the Bank of England, who led the FCA at the time. That was all played out in front of the Treasury Committee over several hearings early this year. I want to focus on the 13 specific recommendations on pages 47 to 49. I am not going to go through them in huge detail, but I will mention a few.
The first recommendation is the desire to treat the regulation of companies holistically; that is, to deal with the halo effect of regulated companies selling unregulated products. That was at the very heart of the regulatory failures over LCF. It was a big part of why the many phone calls to the FCA alerting staff to investor fears about what was going on went unheeded. Indeed, Dame Elizabeth’s report records many instances where calls were not acted on because the mini-bonds concerned were not regulated. There is a whole annex containing the transcripts and I will not delay the Committee with them at the moment, but they are all set out in the report.
The failure to act exposed a major weakness in the FCA’s approach. Even if staff could tick a box that said that a phone call was about something that it did not regulate, the FCA was still on the hook at the end of the day if the firm failed, as the Bill now shows. The recommendation therefore requires a major change in how the FCA thinks about unregulated products.
The next two recommendations are about how the FCA deals with information passed on to it and how it is shared. Again, they highlight a failing in how the LCF information was handled. As we have said, the financial promotions team intervened several times to warn the company about the misleading nature of its promotions as it kept saying that it was regulated by the FCA. However, the financial promotions team did not escalate this information to other parts of the organisation that could have taken action.
The fifth recommendation deals with the financial promotion rules and what to do about breaches when red flags should be raised. Page 49 highlights recommendations more for the Treasury than the FCA. As we discussed a moment ago, the first of those deals with what Dame Elizabeth calls a lacuna in the allocation of the ISA-related responsibilities between the FCA and HMRC. The Minister referred to a working group—I think that is the phrase that he used—and I hope it reaches a conclusion quickly. Such a response is common in the catastrophe word bingo that we often hear. A working group is okay, but it has to deal with the lacuna that has been identified.
Just saying that something is regulated by the FCA gives it an aura of safety and respectability and so does saying that about investments in an ISA wrapper. As the report says, once ISA status was granted to these mini-bonds, investment in them grew markedly. Putting money into an ISA is thought to be a responsible thing to do. People believe that those operating ISAs are respectable companies and not those engaged in what are, in effect, pyramid selling schemes like the one that LCF was operating. That is why this issue is particularly important.
Recommendation 12 is about the optimal remit of the FCA. That matters because the failure of LCF sits so squarely on the boundary of regulated companies selling unregulated products. The FCA’s remit is known in the parlance as the perimeter. The Minister gave evidence to the Treasury Committee a few months ago and he said it was not an issue about the perimeter, but about the failure to use the enforcement and supervision powers that the FCA already had. I understand what he means by that. He is saying that if the FCA had acted on the reports that it had received, a great deal less damage would have been done and the taxpayer would not be faced with the compensation bill set out in the Bill. Even though I understand the point he made, the perimeter is still relevant because it informed attitudes inside the FCA on how alarmed it should be about calls reporting concerns about LCF and whether it should act. That behaviour was influenced by the fact that the calls were about products that were not regulated.
How should the Government and the FCA respond to the issue of regulated companies and unregulated products? In theory, one response could be to say that regulated companies can only sell regulated products, but that would involve a major extension of regulation. That is not to say that that is necessarily wrong, but it would be a big step. For example, foreign exchange trading is not regulated but it is carried out by every high street bank in the country and they are, of course, regulated entities.
If the answer is not a major extension of regulatory responsibilities, what is it? Is it the Government’s position that there is no need to look at this because this was such a one-off event that cannot be repeated? How can we be sure of that? We asked the FCA this morning whether this could happen again and, understandably, the witness from the FCA said that he could not tell us for sure that it could not.
My right hon. Friend is rightly dwelling on the issue of the perimeter. May I give him another scenario that suggests that there might still be reasons to be concerned about whether the FCA has got the perimeter point in Dame Elizabeth Gloster’s report? Let us imagine that the FCA had investigated a financial services business that was recommending one thing to its customers but only 12 months later was doing the complete reverse. The FCA, having looked at it initially, says, “We’ve looked at it already. We’re putting a perimeter around that. We’re not going to consider what happened 12 months before in the context of this decision.” Were that to be a live situation, would it not suggest that the FCA had not grasped the perimeter point that Dame Elizabeth Gloster was making?
My hon. Friend makes a very strong point. The question of the perimeter is inescapable. One of Dame Elizabeth’s recommendations is that the Government consider the FCA’s remit, and the Government have said that they accept all her recommendations. The Minister said in his evidence to the Select Committee that this cannot be pinned on the perimeter, as it were, but as a conclusion of what has happened the perimeter must be considered. The Government have accepted that.
One way to deal with this is to say that regulated firms and regulated products must be brought together—I shall be grateful for the Minister’s response on that—but if that is not deemed to be the right response how will the question of the remit and the perimeter be responded to? At the heart of this failure is the halo effect of a regulated firm selling unregulated products.
Recommendation 13 is about ensuring that the legislative framework keeps pace with the sale of products through technology platforms. This field of activity is growing daily. It is driven by technological innovation—the movement of more and more activity online—and perhaps by the increased time people have had during the lockdowns to invest online. I do not want to try your patience, Ms Ghani, by delving too deeply into that today, but I think that this issue will occupy the House and this Minister in particular over the next couple of years. We will have to return to it again and again in the House, but recommendation 13 is precisely about legislation on selling things through technological platforms, and the Government and the FCA will have to adapt to it or they will fall behind the reality of the market and of financial crime.
Most of these issues have been put in the hands of the new chief executive, Nikhil Rathi, and the trans-formation programme to which the Minister referred on Second Reading. How are we to know that the 13 recommendations have been implemented? It is easy when a report is published to say, “We accept the findings.” The key is: are they followed through and properly implemented?
Dame Elizabeth’s report should be more than a series of individual recommendations. As she said this morning, it should result in a culture change. Much more communication needs to take place between different parts of the FCA while, crucially, not dropping the ball on regulated firms and unregulated products.
It is unfair of any of us, in government or in opposition, to load more responsibilities on to the FCA if it does not have the resources to fulfil them. We are clear in our amendment that the resources of the FCA have to be covered. Does the FCA have the resources to meet the ever-expanding list of responsibilities, including those on-shored as a result of our departure from the EU? It is funded through a levy on the sectors for which it is responsible. Is the levy giving it enough resources?
The failure of LCF exposed such a degree of dysfunctionality that it prompted the question: can the FCA really do its job? If not, the Government have to act because the public need the protection of a powerful regulator. The imbalance of information between the sellers of financial services products and the buyers absolutely demands that. This amendment is aimed at our receiving a report on the 13 recommendations and on their implementation by both the FCA and the Treasury. Its acceptance would provide Parliament and the public with a mechanism to ensure that statements saying that the recommendations had been accepted had actually been followed through and action taken.
I am pleased to speak in support of the amendment. There are two questions if the Government wish to reject it. Assuming that no one has any objection to the idea that somebody should keep an eye on what the Government are doing in response to the Gloster report—that would be a good idea—the questions are who should they report back to and when should they report back. Their response to those questions might provide the only grounds on which they could object to the amendment.
There can be no doubt that the Government must report back to the House of Commons and to Parliament. I know I might not look it—perhaps I do—but I am old enough to remember cases like Polly Peck, one of the great corporate scandals of earlier generations. In response to that, we had the Cadbury report that, in effect, invented the concept of corporate governance. It seems obvious now, but one of the key principles that came out of the report is that once the directors who are supposed to be in charge of a company have taken a decision for something to happen, they cannot just walk away. They have to put a process in place by which they, as the directors, individually and personally, can be satisfied that what they say should happen does happen.
The House of Commons in the UK Parliament is not a board of directors as such, but we still have to take responsibility—all 650 of us, individually and collectively—for making sure that, having had assurances from the Government that they will act either directly or indirectly through agencies such as the FCA, they will do things to sort out a £1 billion scandal. We are the ones who ultimately have to hold them to account for that.
I am not saying that a report or a statement to Parliament is the best possible way of holding the Government to account. Frankly, it is a joke of a holding to account, but it is the best that we are allowed in this place. That is why it is included in many of our amendments. Any argument from the Government that any way of reporting back on such vital recommendations that is anything less than regular statements to the full House of Commons and making themselves available to take questions from, if we are lucky, just 5% of all elected MPs, is just not acceptable.
Secondly, when should the Government report back? That is why I made a point of asking Dame Elizabeth whether six months from now—12 months from the original recommendations—is a reasonable time in which to expect significant progress. Dame Elizabeth made it clear that she cannot tell us about parliamentary procedure and all the rest of it, and I accept that. However, her view was clear that, in six months from now, it would be reasonable to expect there to be significant progress on a significant number of the recommendations. At that point, the House of Commons should get a report back from the Minister to explain what has happened and if it has not happened yet, when it will happen. Most importantly, he will explain why what has not happened has not happened. We have had far too many examples of Ministers giving assurances in good faith but of things not happening or, if they did happen, of their taking far longer than they should have done.
Time matters. None of us knows whether there is another London Capital & Finance already happening, and we heard from witnesses who are convinced that it is. There could be another Blackmore Bond, Basset & Gold or you name the corporate investment mis-selling scandal. It could be happening again right now. We do not know how many of them are on the go just now already swallowing up people’s pensions and savings. If the Minister is not prepared to commit to giving an update within six months, will he tell us what timescale he thinks is reasonable for us to expect real change? “In due course” is just not good enough for people who might be losing their investments now even while we dither and dally about what to do next.
I rise to support amendment 2, in the name of my right hon. Friend the Member for Wolverhampton South East. I share some of the frustration that the hon. Member for Glenrothes aired: this is the only route available to the Opposition to signal to the Government and the FCA the need to provide a continuing update on their progress in implementing the lessons that have been learned from the LCF scandal. My right hon. Friend the Member for Wolverhampton South East went through some of the many issues and recommendations that Dame Elizabeth Gloster’s report highlighted, but let me pick out five in particular.
First, the FCA failed to consider LCF holistically. Indeed, as my right hon. Friend pointed out, we got Dame Elizabeth to emphasise again in the evidence session today that the most significant issue was a very restricted approach to the regulatory perimeter. I will come back to that point.
Secondly, the FCA’s policy documents were unclear on the handling of key questions. Thirdly, its staff had not been trained sufficiently in various key and crucial matters. Fourthly, there was a series of gaps in the law that needed fixing in order to enable proper regulation. Fifthly, the issue that my right hon. Friend touched on last was the FCA’s scope and capacity to intervene effectively on consumers’ behalf—did it have sufficient powers?
Let me turn to the first of those concerns—the restricted approach to the regulatory perimeter and whether the FCA has learned to consider issues to do with consumers holistically. The example that I gave when I intervened on my right hon. Friend was that of a financial service business that has recommended to its customers something that the FCA has approved, only for it to come down the line, 12 months later, and suggest the reverse approach. That is effectively what is happening in the case of Liverpool Victoria. I do not want to test your patience too much, Ms Ghani, but let me clarify that example very briefly.
Liverpool Victoria converted to a company limited by guarantee from a friendly society two years ago. The FCA looked at it—
I am curious as to how the hon. Gentleman will keep this in scope, but I am listening attentively.
I am grateful for your patience, Ms Ghani, and I will not test it much more.
The FCA looked at that two years ago and approved it. Crucially, at the time, the chair and the leadership of LV said, “This has got nothing to do with demutualisation.” Where the regulatory perimeter issue comes in is that the FCA will not look at what happened two years ago in the context of what Liverpool Victoria is now trying to do. It is surely legitimate to be concerned about Dame Elizabeth Gloster’s crucial finding that the FCA had not worked out a way to handle decisions being taken by businesses holistically. That has not been properly grasped, and I gently suggest that Liverpool Victoria is the key evidence in that respect.
On the question of the FCA’s policy documents, the way they were used by staff, and whether they were appropriate to LCF’s challenges, they clearly were not up to the job, but at least there was a policy document. In the case of Liverpool Victoria, there does not appear to be any policy document on the FCA’s handling of the demutualisation. That raises a bunch of serious questions, albeit not within the scope of our conversations today.
Clearly, there is a question as to whether staff have been trained appropriately to handle the 600-plus phone calls that customers of LCF made to the FCA, raising their concerns about the products that were on offer, and that they had invested in and were buying. Again, one would have thought that the FCA would have grasped that concern and made sure that staff were trained properly on the big issues of the day affecting the FCA.
Again, I am surprised. I use the example of Liverpool Victoria again. There has been no looking back at previous demutualisations and at how the consumers’ interest was protected in that respect. So even if the FCA has highly capable staff, as I am sure it has, given that they have not looked back, one wonders how they can possibly be trained to think through properly all the key questions.
One of the issues that I raised in an intervention on the hon. Member for Glenrothes was about the extent to which the FCA has learned from the LCF scandal that perhaps it needs not to be quite so close to the boards and management of financial services businesses. Perhaps it needs to move just a little bit more towards having a little more scepticism on behalf of the consumer.
So imagine my concern when I discovered that one of the regulators involved in handling the consumer interest in the Liverpool Victoria case has met the management of LV 35 times and not once with any consumers of the company. That would seem to suggest that they have not learned the lessons.
Lastly, I just want to suggest that there is a series of gaps in the law that need fixing. My right hon. Friend the Member for Wolverhampton South East rightly drew attention to the concern in the LCF case about who regulates mini-bonds. It is gratifying to hear that there is a working group looking at the relationship between HMRC and the FCA in this regard. However, the Minister will not be surprised to learn that I think there is a series of legislative gaps regarding how consumers are handled during the demutualisation of a major financial services business, but I would tempt your patience, Ms Ghani, were I to go down that route. Fortunately, as the all-party parliamentary group for mutuals is meeting the Minister, it will have an opportunity to go through those issues and I very much look forward to that occasion.
I will obviously now move to consideration of amendment 2. I am grateful to the right hon. Member for Wolverhampton South East, who is an experienced and distinguished former Minister himself. He referred to the catastrophe word bingo. I do not want to address that particularly, but I will address the amendment, which seeks to add a requirement for the Secretary of State to publish a report setting out progress on the implementation of the 13 recommendations in the report by Dame Elizabeth Gloster.
I will also tell the right hon. Gentleman precisely what we have done, what I think the FCA has done, and where I think that takes us, and I will address his concerns, raised throughout this debate, on the perimeter, on the halo effect and some of the points that Dame Elizabeth Gloster made.
The Treasury accepted Dame Elizabeth’s four recommendations regarding the Treasury and we welcome the FCA’s commitment to implement all nine of her recommendations that apply to it. We are committed as a Government to act on Dame Elizabeth’s recommendations, to ensure that the regulatory system maintains the trust of consumers. I submit that progress has already been made in implementing the recommendations and I set that out during my evidence session for the Treasury Committee’s inquiry into the FCA’s regulation of London Capital & Finance on 21 April.
Regarding Dame Elizabeth’s recommendations for the FCA, I obviously welcome the FCA’s acceptance of them, and I am sure that the Committee will have noted its commitment to report publicly on its progress in implementing these recommendations and indeed on its wider transformation programme. I am sensitive to the criticism that this is an empty exercise where there is nothing specific that Parliament and Members can address. I would therefore draw attention to the fact that Charles Randell, the current chair of the FCA, provided a detailed update in his letter to me on 16 April.
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
London Capital & Finance was an FCA-authorised firm that primarily offered an unregulated investment product, commonly known as mini-bonds, to retail consumers. It entered administration in January 2019, impacting 11,625 people who invested around £237 million. The Serious Fraud Office and FCA enforcement have launched an investigation into individuals associated with LCF. The Financial Reporting Council has also launched investigations into the audits of LCF. As the Committee will know, Dame Elizabeth Gloster led that independent investigation, which also revealed shortcomings in the FCA’s supervision of LCF. A complex range of interconnected factors contributed to the scale of losses for LCF bondholders, creating a situation that is unique and exceptional. While other mini-bond firms have failed, LCF is the only one that was authorised by the FCA and sold bonds in order to “on-lend” to other companies. As I have said before, LCF’s business model was highly unusual both in its scale and structure. In particular, it was authorised by the FCA despite generating no income from regulated activities. Bondholders were badly let down by LCF and the regulatory system designed to protect them, and I announced that the Treasury had set up a compensation scheme for bondholders who suffered losses after investing in LCF. The scheme will be available to all LCF bondholders who have not already received compensation from the FSCS and will provide 80% of the compensation that they would have received had they been eligible for FSCS protection up to the maximum cap of £68,000. The LCF scheme is expected to pay out £120 million in compensation to around 8,800 bondholders in total. Where bondholders have received interest payments from LCF or distributions from the administrators, Smith & Williamson, these will be deducted from the amount of compensation paid.
There are two main aspects of clause 1, which I shall explain in turn. First, legislation is required to establish the financial authority to enable the Treasury to incur expenditure in relation to the scheme. That will ensure that the Treasury complies with the 1932 Baldwin concordat and the principles of managing public money. Clause 1 provides the Treasury with the spending authority that will enable payments to be made to eligible bondholders. We are working on the details of that scheme but I hope that it will be possible to reimburse them within six months of Royal Assent.
Secondly, the Treasury intends to use the process set out in part 15A of the Financial Services and Markets Act 2000 to require the Financial Services Compensation Scheme to administer the scheme on behalf of the Treasury. Clause 1 disapplies the FCA’s rule-making requirement so that existing rules relating to the FSCS can be applied to the scheme without the need to undertake a lengthy consultation. That reflects the fact that existing rules have already been consulted on and avoids any further unnecessary delays to compensation payments. In addition, as the Treasury will pay for the scheme, there is not the same obligation to consult FSCS levy payers as there would be for rules that sought to make use of FSCS funds raised by the levy.
I submit that clause 1 is an essential step in the introduction of the LCF compensation scheme without which compensation payments cannot be made. I therefore recommend that the clause stand part of the Bill.
I understand that the right hon. Member for Wolverhampton South East wishes to make a short contribution.
It is really just a question. The Committee has received a number of representations from LCF investors about this 80% level. What is the Minister’s response to those representations? If LCF investors were here and were allowed to speak, they would say, “Why is it that those who invested after getting financial advice get 100% of the FSCS level because financial advice is a regulated product and therefore covered by the FSCS in full but we are getting 80% of that level?” What is his response on this differential treatment of the two types of investors?
Before you respond Minister, I call the hon. Member for Glenrothes to make a short contribution.
The Minister referred to the fact that there are ongoing investigations in relation to LCF. Does he recognise that some of the individuals and intermediary businesses that are now under criminal investigation for their part in LCF also played a major part in other mini-bond scandals that I have written to him about separately? Although he made the point about the uniqueness of LCF, the aftershock of LCF is very definitely being felt in other mini-bond scandals that have happened since then.
Out of courtesy, I am very happy to respond to my colleagues. The right hon. Member for Wolverhampton South East asked why the 80% figure was not 100%. As I have tried to explain through the submissions that I have made, the Government have been trying throughout to balance the interests of bondholders and the taxpayer to ensure that we have a fair level of compensation in respect of the financial losses incurred. The scheme is based on the FSCS level of compensation but, as he knows, it is 80% up to that cap of £68,000 to reflect the unregulated nature of the LCF product.
I emphasise that it is imperative to avoid creating the misconception that Government will stand behind bad investments in future, even where the FSCS does not apply. That would create a moral hazard for investors and potentially lead individuals to choose unsuitable investments thinking that the Government will provide compensation when things go wrong. To avoid creating that misconception, and to take into account the wide range of factors that contributed to the losses that the Government would not ordinarily compensate for, the Government will establish the scheme at the level of 80% of LCF bondholders’ initial investment up to the maximum of £68,000. With any investment, there is clearly a risk that sometimes investors will lose money, and the Government and taxpayer cannot and should not be expected to step in and compensate for every failure and every loss. It would not be right or fair for investors in non-regulated products to receive fuller compensation than those who have invested in regulated products, for which the maximum amount is capped at £85,000 under the FSCS.
On the remarks of the hon. Member for Glenrothes about the individuals involved in an ongoing serious fraud inquiry, I am not familiar with the detail, but obviously I am happy to receive any representations. I hope that brings satisfaction to the Committee.
Question put and agreed to.
Clause 1 accordingly ordered to stand part of the Bill.
Clause 2
Loans to the Board of the Pension Protection Fund
I beg to move amendment 3, in clause 2, page 2, line 7, at end insert—
“(3) No loan shall be made under this section until the Secretary of State has laid before Parliament an impact assessment of the means of repaying the loan, including specifically the impact on pension schemes from the Fraud Compensation Fund levy.”
This amendment would prevent the Secretary of State from making a loan to the Board of the Pension Protection Fund for the purpose of compensating eligible pension schemes until he or she has laid before Parliament an impact assessment of the Fraud Compensation Fund levy on different pension sectors.
With this it will be convenient to discuss the following:
Amendment 5, in clause 2, page 2, line 7, at end insert—
“(3) Before making a loan under this section, the Secretary of State must lay before Parliament an assessment of the levels of fraud in the pensions system.”
This amendment would require the Secretary of State to publish a report on the levels of fraud in the pensions system before making any loan under new section 115A of the Pensions Act 2004.
Amendment 6, in clause 2, page 2, line 18, at end insert—
“(5) Within twelve months of this Act receiving Royal Assent, the Secretary of State must publish a report on the operation of the Fraud Compensation Fund in connection with any loan made under section 115A.”
This amendment would require the Secretary of State to publish a report, within twelve months of this Act being passed, on the operation of the Fraud Compensation Fund in connection with any loan made to the Board of the PPF under new section 115A of the Pensions Act 2004.
We have tabled a number of amendments seeking to improve the Bill. Amendment 3 seeks to ensure that we have clarity and certainty before taking the step of asking key pension schemes to fund the majority of the bill for the Fraud Compensation Fund. It is perhaps worth reflecting on the evidence we heard this morning, which was so illustrative on this issue. One socially important pension scheme—the People’s Pension fund, which we heard about today—was asked to put forward a large amount of money to help support the compensation fund. The fund is known to take a large number of people—many of them women, on low incomes or self-employed—who have started to save for a pension through auto-enrolment. I am sure the whole Committee will agree that it is a worthwhile objective of Government policy to encourage pension savings by a wide range of people, not just the wealthier sector of the community.
Specifically, amendment 3 would prevent the Secretary of State from making a loan to the board of the Pension Protection Fund for the purpose of compensating eligible pension schemes until he or she has laid before Parliament an assessment of the impact of the Fraud Compensation Fund levy on different pension sectors, thereby allowing Parliament to consider the issues affecting them. That is essential because, as we have heard, the burden of compensating victims of fraud is falling disproportionately on certain groups. As we heard this morning, just two schemes—the People’s Pension and the National Employment Savings Trust, which are both not-for-profit operators—have historically ended up paying the lion’s share of the fraud compensation levy, despite their size and the fact that there is no tangible connection between those funds and the fraud that we are trying to address.
It is perhaps helpful to mention the figures again, for the sake of clarification. To recap, the PPF’s 2019 annual report and accounts reported that the FCF levy raised £6.9 million. What is truly surprising to casual onlookers, however, is that 37% of that was paid by the two pension schemes that I mentioned—NEST and the People’s Pension—even though they managed only £20 billion of the roughly £2 trillion of assets held in UK workplace pensions. They were managing just 1% of the total, which is a tiny amount, as I am sure everyone will agree. There is clearly a mismatch, and I am sure that the Minister, who has obviously followed this in great detail, will want to respond because something strange seems to be going on. With the figure now enlarged significantly to hundreds of millions of pounds, and with the potential repayment of the loan via an increased levy, it is understandable that the schemes are anxious about where the burden of repayment will fall. That is a fair point, and one that I am sure we would all want to consider thoroughly.
We have been promised a review of the levy later this year, and I appreciate that the Government are willing do that. However, it does not seem right that, given the significant sums involved for the loan, the legislation should proceed without pausing—all we are asking for is a pause—to consider its impact. Both of the pension schemes I have mentioned play a hugely important part in expanding pensions coverage, and I am sure that members of the Committee are aware of the national policy challenge of encouraging more people to save for their pensions. We all want a much larger proportion of the community—ideally, everybody—to have access to a pension scheme that they can save into as well as the state pension. The two organisations I have mentioned have many low-income savers who I am sure we want to support. It is crucial that we consider the long-term viability of those schemes as we consider the structure of the levy, and that the long-term viability of the two pension schemes is not jeopardised.
The official Opposition’s spokesperson gave very clear reasons why there is benefit in our agreeing to the amendment. I would like to anticipate the reasons that the Government will give for rejecting it and explain briefly why those reasons are not valid—I nearly said mince, but I do not know if that would be understood.
I hope that the amendment will be regarded, not only today but in the future, in the same spirit as that with which it has been tabled. I can almost see someone at the Dispatch Box, thumping the table in response to a question, saying, “Of course, Mr Speaker, we all know that the official Opposition attempted to delay implementation of the scheme.” Amendment 3 could be misrepresented in that way, but that is clearly not what it seeks to do. It asks the Government to publish the results of something that any responsible Government would do before they created the terms of a loan. All it asks is that, having done an assessment—which surely they will—they tell us the results.
The impact on particular kinds of pension schemes is important, because it could be argued that the reason the clause is needed is that a previous Government did not properly assess the impact of the changes they made in 2015 on certain types of pension holders. That is where pension liberation and pension liberation scams came from. I hope that the Government have learned their lesson. If they do not assess in more detail the impact of major changes on particular types of investors and pension holders, they may be saving up problems for the future.
I will briefly mention the other two amendments. The Government should do what is proposed by amendment 5. Do they have any idea of the level of pension fraud in the United Kingdom right now? They should.
The Minister indicated this morning that the measure proposed by amendment 6 might already have been done by someone else. If that is the case, there is nothing to stop him taking that document and putting a written statement before the House, saying, “I have received the report of xyz this morning and I endorse its contents.” A report is given significantly more weight if it is put on the record in that way. Presenting an annual report also gives Ministers an opportunity to say, “I am unable to endorse its contents, for the following reasons,” but endorsing it gives it a gravity that it might not otherwise have had. The Minister may have noticed that I am no great fan of this Government or this place, but if a Minister of the Crown lays before Parliament a statement taking responsibility for and endorsing the report of a body that reports to their Department, that carries more weight than the report simply appearing somewhere in the pages of the media a day or two later.
In case any Member did not quite understand what I said at the top, all of the proposed amendments to the clause are being debated now, including amendments 5 and 6. Mr Rodda, to confirm, are you aware of that, and do you wish to speak to amendments 5 and 6 now?
I am very grateful, Ms Ghani. I would like to speak to amendments 5 and 6. Amendment 5 obviously covers a very different area. I sponsored it because I think that the central principle of this country’s pensions system—I am sure the Committee agrees—is that people who work hard all their lives and who contribute and save diligently are able to receive a decent pension in their retirement. I hope there is cross-party agreement on that. I am sure there is; historically, that has been the case.
In recent years, however, it has become clear that an increasing number of pensioners—and, indeed, people approaching retirement, who are also an important group and are in some ways quite vulnerable—have been set back significantly as a result of what are commonly called pension scams. As the Bill Committee, we have a duty to protect people and to help them prepare for their retirement. Amendment 5 therefore seeks to require the Secretary of State to publish a report on the levels of fraud in the pensions system before making any loan under new section 115A of the Pensions Act 2004. We believe that that is a crucial first step in tackling pension scams. Obviously, there are a whole series of ways to tackle them, and we appreciate that the Government are taking other steps. This is important because the consequences of the scams can be utterly devastating for those directly affected. They are also potentially expensive and damage trust in the pensions system as a whole and the operation of many businesses in the sector. It is critical that we have a system that is robust and protected against scams. The Bill highlights the consequences for everyone, including other scheme members, when fraud is allowed to spiral unchecked.
The pandemic has, sadly, given rise to an increase in fraud, as many criminals have taken advantage of the confusion and, in some cases, the isolation of vulnerable people to prey on those who, sadly, can fall victim to these dreadful crimes. However, pension scams were already on the rise. It is worth noting that, since George Osborne’s pension freedoms were introduced in 2015, fraudsters have taken advantage of confusion around what the rules precisely allow. We warned at the time that those reforms would significantly increase that risk. The Government must acknowledge, as I am sure they will, the failings of pension freedoms and their associated tax problems, as in the case of the NHS.
One of the most egregious abuses of pension freedoms has been a scam by sophisticated criminals who trick people into accessing their pensions before the legal age of 55, relying on confusion about the rules, and then abscond with the funds, leaving people in a desperate situation. In some cases, the victims suffer a double injustice: not only do they lose their entire pension pot in some cases; they are also aggressively pursued by HMRC for tax penalties, having broken the rules on money they no longer have. There are some truly heartbreaking cases of innocent people being misled and sadly losing their life savings, as well as being left with tax debts of tens of thousands of pounds.
We would like reassurance that the Department for Work and Pensions and the Treasury will look into tackling this problem in the wake of the Dalriada judgment last year. The Government could provide that reassurance by supporting amendment 5 as a crucial first step. They should also find a way for HMRC to work with the authorities to make sure that these crimes are properly investigated, targeting the promoters, not the victims, and recognising the dreadful circumstances in which those victims find themselves through little fault of their own.
The High Court judgment that is at the centre of the loan we are discussing today is linked to exactly that type of fraud. In its recent report on pension freedoms fraud, the Select Committee on Work and Pensions recommended that particular aspects of pension freedoms and the Pension Protection Fund be reviewed in further detail in that light.
We agree with the Select Committee. Our amendment, which calls for an assessment, could form an important part of tackling the issue. It is important that the Government publish the report the amendment seeks, in order to show the public that they are not simply looking at the symptoms of fraud, but tackling the causes. I am sure the Minister will want to consider that point. The Government should set out an action plan to protect pension savers and an assessment of the level of fraud in the system as part of that work.
I know the Minister campaigned to tackle cold-calling last year in the Pension Schemes Act 2021. The Bill quite rightly tackled telephone cold-calling, but people can be approached in a cold manner online. I ask the Government to consider that avenue for scams. There has been some mixed messaging, but I hope the Minister, who I know is in touch with the sector, will take the point on board. I have written to the Secretary of State for Digital, Culture, Media and Sport to ask that the Government act on this point and include it in the online harms Bill, which is an appropriate place to tackle these serious scams, alongside many others.
Pension savers are particularly vulnerable in the few years just before retirement, when savings have accumulated but before they have actually retired. Pension transfers, especially for those in defined-benefit pension schemes, can be targeted by criminals, alongside pensions liberation fraud, which we are talking about today. This is where the Money and Pensions Service should play a bigger part. As Members will know, the service is a Government-funded body that offers free pensions advice to people aged over 50, through its Pensions Wise service.
Is it possible for Pensions Wise to play a bigger role? I hope the Minister will consider that point. It could be helpful and supportive to individuals, as well as helping the operation of the sector—the businesses that are operating legitimately, as the vast majority are.
It was disappointing that the Government rejected a proposal in proceedings on the Pension Schemes Act that would have booked a default Pensions Wise appointment for everyone in the five years prior to their retirement. The amendment was put forward by the Chair of the Work and Pensions Committee, my right hon. Friend the Member for East Ham (Stephen Timms), and was supported by the Opposition. It would have meant that everybody would automatically get some basic knowledge about where they stood, better protecting them against scams.
Finally, I would like to share some research from the People’s Pension and the Police Foundation that demonstrates the scale of the problem and why we need to act urgently. The true level of pensions fraud in the UK, though large, is unknown, but could it be as high as £14.6 billion, based on the average pot size of £63,700.
I hope the points I have set out are helpful and that the Minister will consider them. We would like to see this area addressed by the Government. I urge the Minister to respond to my points.
Ms Ghani, should I speak to the other amendment now?
The amendments are grouped, so they are all to be debated together. Do you have a contribution on amendment 6?
Yes. I will move straight on. I appreciate your tolerance.
Amendment 6 seeks to perform another important role—ensuring that the PPF and the Fraud Compensation Fund work effectively and efficiently for all parties, which I am sure everyone here would support. The amendment would require the Secretary of State to publish a report, within 12 months of the Act being passed, on the operation of the Fraud Compensation Fund in connection with any loan made to the board of the PPF under proposed new section 115A of the Pensions Act 2004.
In the debate on amendment 3, I set out why we needed a fuller understanding of the way the levy works and its impact—I mentioned the two not-for-profit organisations that are doing such valuable work—in order to improve the situation for savers and pensioners. I will not go into the detail of those arguments again, but they are applicable and equally important for this amendment.
It is crucial to highlight the context in which we put forward the amendment. A very limited number of schemes are currently propping up the fraud compensation levy by paying disproportionate contributions, even though they do not have a meaningful connection to fraud at this time.
On a point of order, Ms Ghani. You were very good at the end of the evidence session with the FCA to point out that the director, who was present, agreed to provide two pieces of written correspondence to me and to the whole Committee. As I understand it, that has not yet arrived. I have some sympathy for the FCA, given the timetable on which we were asking it to provide that information, but I wonder whether the Clerk might gently press the FCA for that information at some point this week.
Thank you, Mr Thomas; your point of order is duly noted. I believe that the Clerk will indeed be pressing for that data as soon as possible.
I gather that we have a possible vote in the House, so I will attempt my entire response in 10 minutes. Before I do so, it is right that, on behalf of the entire Committee, I thank you for chairing the Committee, Ms Ghani. As the former ports and shipping Minister, and in a month when we celebrate the first female Royal Navy captain, some might argue that you are a well-qualified captain to keep what is—let us be honest—a motley crew in order. If you run for Speaker, Ms Ghani, I will definitely be supporting you.
Let me discuss what clause 2 does and does not do. It creates a power to make a loan to the board of the Pension Protection Fund, following the decision of 6 November 2020 in the case of the PPF v. Dalriada. It achieves that by inserting a new section into the Pensions Act 2004 to provide the Secretary of State with a power to loan money to the board of the PPF.
I think it is fair to point out to the Committee that the clause deals with matters that are predominantly––almost entirely––to do with 2010 to 2014. Many would wish to make this a case about pension freedoms, when in fact pension freedoms post-dated these matters. It is clearly a serious and important matter, and, following a court decision, the Government have accepted the entirety of that decision.
The practical reality is that the Fraud Compensation Fund has assets of £26.2 million, and the potential liability arising from the court judgment is £350 million. I accept that points have been made in respect of how the loan is to be repaid in the longer term and I will address that, but I shall now turn briefly to the amendments.
Amendment 3 seeks an impact assessment. With great respect to the Members who tabled that request, it is utterly unnecessary. It is, in fact, precluded by the decision of the House on section 22 of the Small Business, Enterprise and Employment Act 2015, of which I am sure Members are acutely aware. It states that impact assessments are not required in respect of levies or other such charges in these particular circumstances.
Secondly, the clause is implementing a court judgment.
Will the Minister clarify his last comment? Did he say that impact assessments are not required or that they are not permitted? Surely, if they are not required, we can still ask for one if we think it would be useful.
That is a very fair question that I shall attempt to answer while I am on my feet, but I believe that it is not required. Section 22 of the 2015 Act excludes impact from the definition of regulatory provision, so I believe that it is an exclusion rather than a requirement. If I am wrong in any way, I shall write to the hon. Gentleman and correct myself. I may be corrected while I am on my feet, although in the brave new world of covid, that is quite difficult, as I am sure that he understands.
Clearly, if we were to do an impact assessment at this time, it would fundamentally delay the implementation of payment to members, and the blunt truth is that the PPF will run out of money by October if we do not progress this legislation. The levy increase will be consulted on post the passing of this Bill. It will need consultation, regulations and debate in the usual way.
Amendment 5 would also delay the progress of this matter. The Government will respond to the Work and Pensions Committee, to which I gave detailed evidence, before the end of the summer term. The full response of the Government in respect of all matters relating to such scams will be made before the end of term. We are already progressing Project Bloom and there is the work of the Money and Pensions Service that was introduced by my hon. Friend the Economic Secretary to the Treasury in the previous Act that we worked on. We have produced section 125 of the Pension Schemes Act 2021, which Her Majesty signed on the dotted line in early February, and the consequential transfer regulations that we have consulted on over the past month to ensure that pension scams are prevented on an ongoing basis.
I have been asked to address other matters. It is clear that Ministers are engaging with various organisations, including Google and Facebook. The two of us have made our views very clear to those organisations about how they should regulate themselves. I agree that Pension Wise should be used more but, with great respect, I disagree with the Chair of the Select Committee’s proposal for the many good reasons that I outlined in the debates on Report and Third Reading of the 2021 Act. Clearly the work that we are doing jointly with the Treasury and other organisations, including the FCA, on stronger nudges towards using Pension Wise and other things will make a massive difference.
On amendment 6, there is already an annual report. In true Chamberlain style, I have it here in my hand: the annual report of the Pension Protection Fund, which is published every July. I know, Ms Ghani, that you will have read the most recent version, and will be looking forward with bated breath to the July 2021 report, which will specifically address the issues whose importance today’s witness made very clear.
In those circumstances, I invite hon. Members not to press their amendments.
Let us try to ensure that we get through this portion of business before the Division. The Opposition spokesperson may of course respond, but let us keep it brief.
I am grateful to the Minister for his response. I feel that he is being somewhat generous in his description of the Government’s assessment of this problem and the level of response. I urge him to redouble his efforts and to focus on some of these points in further detail.
I think that the hon. Member for Glenrothes is right to draw attention to the subtle legal difference on the issue of the impact assessment. Surely, given the scale of what is going on, it would be wise to carry out an impact assessment. I appreciate the pressure of time, but perhaps with the considerable resources of DWP, which has the largest staff quota of any Department and a very able group of civil servants, it would be possible to carry out an impact assessment on a rapid turnaround, given the scale of what we are talking about and, indeed, the problems of the sector as a whole.
On the ongoing consultation and the possibility of reviews in this area, will the Minister agree to meet me and the not-for-profit providers to explore the particular issues affecting them?
I will, of course, agree to meet them. I already meet NEST and the People’s Pension regularly, and they have made a very good pitch for a reduced levy. It is already a reduced levy, as I am sure the hon. Gentleman is aware, and there is already a 0.75% cap, but of course I am looking forward to meeting them as part of the ongoing consultation.[Official Report, Vol. 697. 17 June 2021, c. 3MC.]
I am very grateful to the Minister and put on the record my thanks to him for offering that meeting. I look forward to seeing him and discussing the matter.
On amendment 5, the Minister mentioned the regulations in the Pension Schemes Act 2021, but will he write to me to discuss some of the ways in which the specific parts of the regulations relate to this issue? He has been reported in the media as suggesting that it might be wise to consider pension scams in the online harms Bill. Perhaps he will comment on that now or write to me separately, because we would like to work constructively with the Government on this matter. I appreciate that online harms are a huge and wide-ranging issue, and I have a constituency interest in violent crime in respect of a tragic incident in Reading.
I would be happy to write to the hon. Gentleman. He can read in detail what I said in The Times on both occasions, and that is pretty much all I can say on that matter.
I thank the Minister for his candour and for offering me a cutting from The Times, which is a fine newspaper.
Finally, on the PPF annual report, the issue is that while these documents are very worthy, and we should all read them, there is a delay. I urge the Minister to consider the need to reassure organisations in the sector, pension savers and pensioners themselves in the near term, rather than our having to wait well into 2022 before the 2021 annual report is available.
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 2 ordered to stand part of the Bill.
Clause 3 ordered to stand part of the Bill.
Bill to be reported, without amendment.