Post Office Court of Appeal Judgment

Lord Mendelsohn Excerpts

Wednesday 28th April 2021 Lords Chamber

[Lord Callanan (Con)]

The noble Lord makes a powerful point. Of course, the judgment is relatively recent and no decisions have been taken regarding compensation, so I cannot give him any specific commitments today. However, I repeat that we are keen to see that all postmasters whose convictions are overturned are fairly compensated as quickly as possible. I know that the issue of compensation will be of great interest to the House, and I commit to update the House on this matter whenever it is appropriate.

[Lord Mendelsohn (Lab) [V]]

My Lords, as a businessman, I am embarrassed that our culture of corporate governance and a failure of corporate leadership has directly ruined the lives of the innocent. As Mr Justice Fraser’s judgment lays bare, this includes the fact that they defended an untenable case, and how they did it shows how hollow and disingenuous even the current statements by the Post Office should be seen. The positions of the chairman and CEO are difficult to justify. Can the Minister provide assurance that the serious questions this raises about the position of every member of the current board, and indeed the responsibility of all members since the board was first presented with problems in the system nearly a decade ago, can be fully examined without a statutory inquiry? Can he also assure us that the Government are now willing to provide a full statement relating to what they were told and their actions and role as shareholder? Their apparent failure to provide vigorous challenge to the board meant that this scandal has carried on for as long as it has and illustrates a likely flaw in the Government’s role as a shareholder in this and potentially other circumstances.

[Lord Callanan (Con)]

I can give the noble Lord the assurance he asked for in the first part of his question: Sir Wyn, as part of his evidence gathering, is looking at the issue of corporate governance, where it is clear that there are some serious questions that need to be answered. On his question about the role of the shareholder, as I have said before on a number of occasions in this place, the Government pressed the management at the time on issues regarding complaints brought by sub-postmasters about Horizon, and we received repeated assurances that the system was reliable. Of course, the Court of Appeal opined that the Post Office had consistently asserted that Horizon was robust and reliable at the time.

Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021

Lord Mendelsohn Excerpts

Monday 22nd March 2021 Lords Chamber

[Lord Mendelsohn (Lab) [V]]

My Lords, I thank the Minister for his introduction of these measures. We are all very grateful for the efforts undertaken by the Insolvency Service and the Minister to deal with this issue, and for our interaction. I hope that he will take my comments and those of others constructively.

We share the view that pre-packs play a useful role, but the core issue is how to deal with abuses. At its simplest, we are most grateful to the Minister for the assurance that we will now be looking at this as a mandatory procedure. This has been the critical change which now provides the opportunity to cleanse the process of pre-pack administrations. We could have achieved the same objective with the Pre Pack Pool—I am not compelled by the issues that were outside it—but that has passed and we now must deal with the realities of the arrangements that have been suggested, particularly how effective they are.

I worry about the effectiveness of these regulations. We are not in the same situation as that with the monitors. I have tried for one business to get a monitor, using the existing legislation, and it is quite a difficult process. The compulsion of making this mandatory will certainly create a different incentive, which is important. However, some of the changes made after the consultation are currently insufficient to make this work as effectively as possible or to deal with all the potential abuses. I would be grateful for the Minister’s thoughts on these issues. It is important to acknowledge that the ability of a connected person to opinion-shop has been curtailed from the original proposals, but the Minister is yet to address the issues whereby someone gets something which is not a full opinion. It is advice, it is guidance, it is other things which contribute to making a pre-pack to a connected party that may be problematic, without informally becoming a full opinion. Such things are still excluded. It would be very useful if they were carried within the ambit of this to ensure that opinion-shopping was fully transparent and that those things which were not meeting the full test of an opinion were also included.

Many have concerns about the qualification requirements for the evaluator, but the Minister clearly specified the types of professions that this will extend to, not least because of the qualification that they must get professional indemnity insurance. This is probably a sensible approach. However, the Government were wrong not to look for a wider inclusion of secure lenders within the definition of connected persons. It is important to connect not only those who have voting rights but those outside that, who can exercise control without voting just by the very conditions. It is very important to ensure that this extends as strongly as possible. My first experience of how someone gamed a system irresponsibly was seeing how they used offshore-based debt vehicles to control a connected-party sale. That could continue, even under these requirements.

I feel very strongly that the responsibility for obtaining the opinion should be with the administrator, rather than the connected person. The arguments of cost, delay and the value of the connected person’s information are all reasons why abuse is plausible and possible, and with the modern world of the digital economy, and the way business is conducted, some of the issues to get to creditors can be dealt with much more quickly. Therefore, that balance should be turned in favour of the administrator. It would help to cleanse the system very significantly.

Finally, the further definition of “substantial disposal” again does not fully cover what is necessary. The use of “significant” or “material” would be very easy, but “substantial” has a specific legal definition of size, which allows for arguments about proportionality. Again, you can parcel up a company as well. Given that this is a statutory instrument, can the Minister indicate what the review would do to ensure that this works as effectively as possible, and what further consideration might be given in the fullness of time to whether these measures can be tightened in the light of potential experience, or who will be responsible for ensuring that this has an effective regime to monitor and, if necessary, proposing some form of sanctions?

Corporate Insolvency and Governance Bill

Lord Mendelsohn Excerpts

Committee stage & Committee: 2nd sitting (Hansard) & Committee: 2nd sitting (Hansard): House of Lords
Wednesday 17th June 2020 Lords Chamber

[Lord Adonis (Lab) [V]]

My Lords, I have two specific questions for the Minister. Is it the case, as reported in the Times on 26 May, that the Pre Pack Pool’s oversight committee has written to the Minister specifically, notifying him that it will be “unsustainable” unless referrals of pre-pack sales are made mandatory? Secondly, could he confirm that Teresa Graham, the accountant who led the review referred to by the noble Lord, Lord Hodgson, is now in favour of mandatory referrals? She is quoted in the Times as saying:

“To see the demise of the Pre Pack Pool would be utter folly.”


If that is the case, I cannot see how the Government can resist the amendment in the name of the noble Lord, Lord Hodgson, unless they believe that the pool and its whole policy is wrong. If the Minister is not as forthcoming as he expects, I hope the noble Lord, Lord Hodgson, will have the courage of his convictions and bring this back to the House on Report, because this looks otherwise like a classic case of willing the means but not the ends.

[Lord Mendelsohn (Lab) [V]]

My Lords, I declare my interests as an investor in turnaround and distressed businesses and as a corporate finance professional working in a regulated business.

It is unfortunate to have to return to this issue. I recall that my first duty as a Front-Bencher was to deal with the then Small Business, Enterprise and Employment Bill, where these issues came up. I recall at Second Reading a very powerful consensus over the problems that needed to be addressed, the Graham report recommendations and the feeling that a reserved power was still insufficient to deal with it. It is rather terrifying that we are back in a position of trying to recover a power we never thought good enough in the first place, due to the Government not only never exercising the power to make it mandatory but not really reviewing its performance.

I pay tribute to the noble Lord, Lord Hodgson, who was a strong advocate then and has been a doughty campaigner since. I associate myself with his comments; he summarised the position extremely well. I support Amendment 57 completely. I do so in preference to Amendment 61, but I also praise the noble Lord, Lord Vaux of Harrowden, for his excellent speech and his intention.

There is such a weakness in the system. Pre-packs are everywhere at the moment, and I can see their footprint increasing at some pace. That is not to say that pre-packs are inherently a bad thing. They are a device to try to maintain businesses and jobs. Indeed, this week Oak Furnitureland and its team of administrators were able to use the mechanism in a way that saved the business and brought in an external investor. But far too often they punish staff and small suppliers for management mistakes, and allow poor and improper management conduct to be legalised at the expense of employees and powerless suppliers. There is no fairness or public interest in this.

Nothing better proves the shortcomings of the drafting of the legislation that we are debating, and the Government’s unwillingness to provide better assurances that would give some sense of how the new system would work, than the presence—or rather the absence—of anything about pre-packs in the current framing. As the noble Lord, Lord Hodgson, so correctly said, that is likely to undermine the capacity of monitors and other proposals in the Bill to work effectively.

In general, the pre-packs that involve current owners carrying on by being able to write off their debts, rather than a third-party buyer bringing in fresh thinking and funding, have never sat well with me. My experience is that they provide an unchecked process that allows people to make clean that which should never be considered to be so. Far too often, as the noble Lord, Lord Hodgson, said, people hide behind the claim that they are saving jobs. There is more than one way to do that, and very often there are better ways than by using the same people.

We should recognise that it is not always the wrong outcome for existing owners to keep businesses—an example is the recent pre-pack of Everest, which sold the business back to the owner and secured a good long-term future for it. In that case we should give credit to Jon Moulton’s Better Capital, which referred the matter to the Pre Pack Pool and undertook a proper process to find an alternative. That is the true value of the Pre Pack Pool.

However, there are ways to game the system that are so clearly unacceptable that we must deal with them. In recent weeks we have witnessed, with both Monsoon and Quiz, two uses of the pre-pack system permitting current owners to cherry-pick parts of their businesses to dispose of, allowing them to avoid their debts and responsibilities and to carry out real abuse of the rules. I directly ask the Minister to comment on the Quiz situation—not to justify that particular action, but to tell us how it is possible to allow the system to remain untouched in current circumstances.

May I remind the noble Lord of the facts, so that he can give a policy interpretation? Quiz raised £103 million when floating in July 2017, and the business was valued at £200 million: £93 million of the proceeds went to the owners and £10.6 million went to the business for its growth. Unsurprisingly, the group unravelled well before the pandemic, with frequent profits alerts, as it was a listed business, and at the start of the year the share price went down to less than 10% of the float. The family still control 49% of the company, and, essentially, all activities of the business.

Corporate Insolvency and Governance Bill

Lord Mendelsohn Excerpts

Committee stage & Committee: 1st sitting (Hansard) & Committee: 1st sitting (Hansard): House of Lords
Tuesday 16th June 2020 Lords Chamber

In the interests of time, I feel that that is all I need to say at this stage. I thank my noble friend the Minister for all the work that has gone into this important Bill.

[Lord Mendelsohn (Lab) [V]]

My Lords, I will speak to Amendment 3 and make some general observations.

Amendment 3 relates to the recognition of the appropriate debts of creditors. In particular, one must be concerned about smaller businesses, which may well suffer as creditors and unsecured creditors from such a transaction. While these may be smaller crumbs of comfort than the overall Bill, it is absolutely right that businesses that fall into this process properly recognise the full extent of the debts that they owe so that statutory interest is recognised as a cost and a consequence for them. It is right that these debts should be appreciated and recognised in the statements that the monitors have to put forward. I hope that the Minister will consider the Government introducing this measure, not just to make sure of the full amount that is owed to a company because of late payment and late settlement of their debts but also because it sends an important cultural message.

I support some of the measures introduced by other Members of this House. In particular, it is very important that we probe the Minister for much more detail about the role of the monitor. We must look at the qualifications, skills and independence of the people who will occupy those posts, as well as the costs.

Here I am concerned that the impact assessment itself shows that very little work has been done on the likely operating mechanisms of the Bill. The figures that it uses are from a study in 2010, and I hasten to add that in the last decade we have seen a significant increase in the rise of professional service costs, and the costs in the impact assessment do not fully recognise those.

We do not have a full appreciation of what skills are required for this, and I strongly support the notions expressed by my noble friend Lord Stevenson that there are many others who we might want to introduce into this area who have appropriate skills that are recognised by professional accountancy bodies. Many people who have been involved in the turnaround industry would do very well at this task—much better than qualified insolvency practitioners. I would be interested to hear the Minister’s comments as to how the Government will look at the appropriate skills that are required for someone to successfully be able to carry out the role of a monitor, including the measures to try to ensure the proper independence of the monitor, that they have a real view for the potential future success of the business and that they are not beholden to any particular class, but particularly those who are connected parties.

However, I strongly support the amendment, which addresses the difficult question about the time for a monitor. This process should be given an extended period, and it would be worth while in the first instance extending the first period to ensure that we do not go through a quick cycle to make sure that it is there.

On the amendment in the name of the noble Lord, Lord Leigh, while many people will consider this to be a difference without a distinction, he will be able to express the nature of his interpretation.

It is important also to probe the Minister on the fact that we have seen that many businesses, particularly at latter stages, like to structure themselves in such a way that they can move a variety of the different connected parts of the business through different processes, and will disaggregate the overall enterprise and take individual companies to be able to crush suppliers or deal with the dispensing of staff during that period. It is important that the application of a company’s business helps us ensure that companies do not act inappropriately and section off parts of their businesses, as we saw just a couple of days after Second Reading, with one of the most disgraceful pre-packs of all time. A connected part of a business was crushed in order to eliminate the full suppliers, and it isolated a particular business rather than the whole enterprise. It will be important for the Minister to give us some reassurance that the definition of a company does not allow businesses to game the system, or allow some form of recourse or interpretation that makes that possible.

[Lord Hope of Craighead (CB) [V]]

My Lords, I will speak to Amendment 4 on the Marshalled List, which is in my name.

The context for what I propose is to be found in new Section A8, which requires the monitor, as soon as reasonably practicable after the moratorium comes into force, to notify every creditor of the company of whose claim he is aware, giving notice of when the moratorium came into force and when it will come to an end. The importance of this duty is highlighted by the fact that the monitor commits an offence if he fails without a reasonable excuse to comply with it. That is as it should be, as the creditors need to know about the moratorium as soon as possible, because it has such an obvious effect on them and their interests. Their right to recover the debt is effectively frozen for the duration of the moratorium. That may have significant adverse effects, which may need to be provided for urgently to avoid the creditors’ financial embarrassment. But the monitor’s duty to notify the creditors extends only to those of whose claims he is aware. There is no suggestion anywhere in the Bill, so far as I can see, that the monitor is under a duty to make inquiries. Therefore, the provision, as it stands, is a rather weak protection for the creditors, whose interests will inevitably be disadvantaged by the moratorium, against which they are being given no right to object.

In that context, I am proposing an addition to the list of relevant documents in new Section A6. These are the documents that must accompany the directors’ application for a moratorium. The amendment seeks to add to the definition of “the relevant documents” in Section A6(1) a list by the directors of all known creditors of the company. The aim of the amendment is to ensure that the monitor has access to this information as soon as possible. That is because he really does need it, if the performance of his duty to notify is to be effective for the protection of the creditors. The directors are, of course, in a much better position to say who the creditors are than the monitor, who is a newcomer to its affairs. Adding this list to the definition will greatly strengthen the effectiveness of the duty to notify in new Section A8. It will enable the performance by the monitor of his duty to notify to be much more effectively scrutinised, and enforced, if necessary, than it would be if all that can be done is to rely on what he happens to be “aware” of.

I should explain that the need for a provision of this kind was drawn to my attention by the Law Society of England and Wales. The wording of it has its support, and I invite the Minister to look at it very carefully. I appreciate, of course, the pressure the Minister is under to get the Bill through as soon as possible, and that the time he may need to get clearance for any amendments to it is also very limited. I would therefore be content if the Minister would give an assurance that he will indeed look at this matter and at the gap in the creditors’ protection that it exposes, perhaps with a view to an amendment by regulation under the power provided by Clause 18(1)(a), as R3 suggests, once the way these measures are working out in practice has been tested in the marketplace.

--- Later in debate ---

[Lord Hendy [V]]

My Lords, my contribution dovetails with that of the noble Baroness, Lady Bowles, whose remarks I support. I speak to Amendment 56, the purpose of which is to preserve for the unsecured creditors a larger share of the assets available for distribution than the legislation currently provides. The legislation recognises that something must be preserved for them, but the question is: how much?

The first part of our amendment seeks 30% of the “prescribed part” of the company’s property. This is an arbitrary figure, intended to be reasonably fair. The problem is that the “prescribed part” is fixed by a formula and is capped. I understand it to be £800,000, or thereabouts, but I confess that I am no expert on this. Consequently, 30% may be a very small sum and spread very thin. The second part of the amendment therefore proposes that, in any event, if assets are being sold to pay debt, as is usual, at least 30% of the proceeds should be reserved for the unsecured creditors, leaving 70% for the secured and other creditors.

I add a word about unsecured creditors. Included in this, for reasons I touched on earlier, will be much of the debt owed to employees of the company, which falls outside that preserved for preferred creditors. The unsecured creditors also include all the workers for the company who are not classed in law as employees but who are nominally self-employed or engaged through a personal company. This is a significant sector of the workforce—over 5 million people in total.

As I mentioned earlier, it is right that workers should have priority because, unlike secured creditors, they cannot diversify the risk of the company becoming insolvent, and their stock of labour is ever-diminishing. There is another reason that they should be given preference: they spend their remuneration; they do not put it in hidden bank accounts in the Cayman Islands. They spend it because they and their families have to live on it. This creates demand and is good for the economy and for business.

Also included among the unsecured creditors are the many SMEs in the company’s supply chain. This may involve dozens of suppliers who have supplied materials, items or labour on credit, but cannot recover them. In turn, they may employ hundreds or thousands of workers. It is right that, in a complex and interconnected economy, unsecured creditors and their workers should be guaranteed an appropriate slice of the cake.

[Lord Mendelsohn [V]]

My Lords, I reinforce my support for Amendment 56, in my name and those of my noble friends Lord Hendy, Lord Hain and Lord Monks, and Amendment 59, in the name of my noble friend Lord Stevenson of Balmacara. I had intended to introduce amendments in these areas, but these are far better crafted than I could ever have achieved.

I would like the Minister to address the operation of these arrangements, the changes to the status of different creditors and how these will be properly balanced to operate as intended, rather than to allow abuse and preserve value in the deal, and how changing creditor status provides for a successful rescue of the company.

We have to appreciate that monitors, moratoriums and restructurings under this legislation are still likely to be in a minority of cases, especially if the comparisons for evaluations, or evaluating the condition of the business, provide both a high bar and ample scope to game the outcome. The majority of cases will still be covered under a going concern administration, whether that leads to a pre-pack liquidation sale or a scheme of arrangements to maintain the company. In many circumstances, the need for protections is even greater.

The new restructuring regime, which should be significantly more attractive, has created a lot of complications by relying on the model of creditor-in-possession financing rather than debtor-in-possession financing. The crucial difference is that this means that external financing is encouraged and given super-priority status, while unsecured creditors can be further disadvantaged by both existing debts and further trading risks. Debtor-in-possession arrangements generally encourage existing shareholders, creditors and finance holders to participate in the future rescue of the business. The amendments would ensure that in this layering of priorities, the weakest in line are not the ones that the system continues to place at a disadvantage. It is important that the Minister should indicate whether the Government are willing to provide extra protections for unsecured creditors and workers who have an unsecured credit with the business.

Have the Government considered a debtor-in-possession financing model and will they consider allowing this in the future? In the spirit of providing a floor to support unsecured creditors, what flexibility can they look for in the system and how are they expected to operate, so that they can participate in the future upside, be that an equity upside or an arranged scheme, thereafter?

Finally, I support the amendments tabled by the noble Baronesses, Lady Bowles and Lady Neville-Rolfe. Can the Minister make it clear how these decisions will be reviewed and what role the Government expect the Insolvency Service to play in order to make sure that abuses can be dealt with and that all forms of creditor can be properly balanced and ensured?

[Baroness Neville-Rolfe [V]]

My Lords, as time is short, I will focus on my Amendment 60. A court of administration normally involves pre-packs, and that is why, with the support of my noble friend Lady Altmann, I want to provide a quick and easy way of ensuring that the power we gave HMG in the Small Business, Enterprise and Employment Act 2015 can be restored. This power was the victim of a sunset clause and a delay in making the necessary regulations. There are later amendments that we may reach today on pre-packs and the encouragement of the pre-pack pool. All of them reflect the fact that a group of us across the House who spoke at Second Reading, including the noble Lords, Lord Vaux and Lord Mendelsohn, think that we need early action on pre-packs. I imagine that we are all rather disappointed—although the usual opportunity for a discussion in the Bishops’ Bar is not available—by the Minister’s response at Second Reading. His suggestion was that strengthening professional standards and existing regulation would be adequate, and if not, there could be legislation at a future date —a sort of mañana.

My amendment is very simple: it would give the Government back the power to make the necessary regulation on pre-packs but it would sunset that power after a year, both to provide the incentive for speedy resolution of this issue and to avoid any unwelcome use of the delegated power for other purposes down the line. I would obviously be delighted if the simple sunset clause I have used in Clause 62 might also help us to consider and find a path to resolving some of the important delegated powers issues we were discussing earlier; I am very hopeful that the Government will be listening in that regard.

I hope that my noble friend the Minister and his department will listen to those of us who have concerns and agree to amend the Bill to deal with the pre-pack issue, perhaps in the way that I have proposed.

--- Later in debate ---

[Lord Callanan]

My Lords, these are a number of technical amendments tabled by the Government in my name to ensure that financial collateral arrangements, charges and securities are carved out from the effects of the moratorium. This is part of the Government’s intention to exclude certain financial services contracts from the moratorium.

I am conscious that time is getting on. I have an extensive speaking note and I can go through it in great detail if noble Lords wish me to do so, but it probably best serves the interests of the Committee if I stop at this point and let noble Lords who wish to contribute on this matter come in. I can respond at the end, rather than go through a lot of technical detail that might not be of interest to those present. That might be to the benefit of the Committee, given the late hour and the fact that we are pressed for time.

[Lord Mendelsohn [V]]

My Lords, I am encouraged by the Minister’s indication during the debate that the Government are open to amendments and it is useful to hear that they have published material relating to insolvency practitioners, even though I am yet to find out where we can get hold of it. However, I am not entirely satisfied by the Government’s assurance that they appreciate how to deal with some of the complexities that they have put forward. That is not least the case in this group of amendments. I would like to understand not the entire effect but the assumption of which particular cases and how many of them these amendments are likely to affect, and whether they are just technical or do in fact change some of the current core financing arrangements for larger companies.

While I welcome the progress towards a more flexible insolvency regime and appreciate the need for temporary arrangements to help to navigate the current emergency, this legislation, as necessary as it may be, ends up asking a lot more questions than it answers. The truncated process is of course, as many noble Lords have mentioned, wholly unsatisfactory not just for scrutiny but to allow the Government to consider these matters and others as they should. It defies logic that the process was done fully in one day in the other place.

It is not just that the impact assessment is based on out-of-date data and contradictory calculations; the permanent provisions were consulted on, although in their previous form they were never going to be implemented in such a piecemeal fashion. It appears to be widely accepted that it is not just the flaws but the time required to adjust this regime that will be complicated. The permanent measures will take longer to implement, and it will take time for people to get used to how they operate. The temporary measures are a bit too limited to operate in their own guise.

However, the Government cannot have it both ways. They cannot claim that these measures are to get things working in an emergency and at the same time widen the number of options, the required skills, the number of participants and the variety of arrangements required where practitioners or courts will need to be trained or practised in. And, of course, this omits some of the most significant elements that will still need to be addressed, such as whether HMRC will have a preference or take an active role in this, as well as the role of the pre-pack regime and others. It is not just a question of all the delegated powers that noble Lords have spoken so eloquently and raised such meaningful and compelling objections and warnings about. It is also that the regulatory regime is weak and unclear, and so much of this should be in the Bill.

However, we are where we are, and the Government are going to do this whatever we say. Bluntly, this is not this House’s first rodeo, but it is our job to be realistic. This legislation will require further regulation and change, and much work is already taking place in a number of the agencies or in other places that is likely to lead to measures being added to the legislation at a later date. Therefore, we should address how this will work best in the future.

The most important element here is to receive proper reassurance from the Minister of an enhanced process to deal with the implementation, review, secondary legislation and regulation of this legislation, so any clear statements and undertakings in this regard would be important, whether given here or on Report. Will the Government create a post-legislative scrutiny process or, for example, would they be keen for this House to establish a process or a committee that could provide a meaningful role? Will the provision of information be sufficient, and what sort of information will be provided to this House? What will be measured by government, so that we can properly evaluate the operation of the legislation?

What other reviews or agencies, from the professional bodies to the Insolvency Service or the courts, are currently being consulted? What part of these discussions can we be told now, and what will be made available in the future to help resolve concerns or help us to have a debate prior to legislation or regulation being brought forward? Can clearer statements be made by Ministers about how they expect it to work, so that the courts have a clear indication on what to make rulings on and how they should do so? I suspect that the courts will be slightly busier than the Minister anticipates, not least because financial indemnity insurance will provide a very adequate target for people to exercise some degree of accountability in the courts.

Of course, the affirmative procedure for regulation is all that we have, but will the Government look at how this process can be enhanced with a greater provision of information, and possibly consultation, prior to the regulations being tabled? Any such assurances on how we will deal with where we are, and how we might deal with what might evolve into a better and more robust system, would be gratefully received.

[Lord Thomas of Cwmgiedd [V]]

In view of the course that the debate has taken and the statements by the Minister, I can be very brief. I welcome Amendments 92, 104 and 106, which ensure that unsecured bonds are caught by the exclusions of the moratorium and ipso facto provisions. However, there are many other technical issues to address, and I very much hope that this can be done by further government amendments before Report. That would certainly be preferable to making changes and correcting errors through the regulation-making powers. I welcome what the Minister has said so far and very much look forward to seeing the further amendments dealing with these technical problems.

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[Lord Mendelsohn [V]]

My Lords, I will briefly speak in support of Amendment 75, which is also in my name, on the Small Business Commissioner. Only in the UK system have we decided to have a Small Business Commissioner to deal with late payments and model it on existing arrangements in other countries. Every other country uses legislation to deal with late payments. However, they have found that the small business administration in America or in Australia, or other types of such agencies, have played a useful role in the insolvency process, building support and confidence for smaller businesses and being a useful vehicle for larger companies and professional services to do a variety of things—from the renegotiation of leases to dealing with supplier contracts, for example. Apart from the measures my noble friend Lord Stevenson described, there are of course other ways in which involving the Small Business Commissioner is a big help in making sure that this legislation works and that it properly protects the interests of smaller operators, ensuring that larger operators and the asymmetry of powers can be adequately addressed and a smoother process can be assured. Enhancing the role of the Small Business Commissioner by adopting this amendment and introducing some sort of formal role or consultative power would be a useful step toward ensuring that this process works smoothly.

[Baroness Anelay of St Johns [V]]

My Lords, I will speak to Amendment 143, which is in my name. The Bill is of course welcome and gives legal certainty to certain charities about how they can, without any penalty, “disobey” the rules in their own governing document on whether and when to hold AGMs and other meetings and file certain documents. But some charities are excluded from this sensible legal assistance—those established either by Act of Parliament or by Royal Charter. They are mostly long-established and include national museums and leading cultural organisations such as the Royal College of Music and the National Art Collection Fund, as well as some leading universities and colleges. It should also be noted that, even if a charity does not have to hold an AGM during the relevant period, it may none the less be advisable for it to take advantage of the temporary flexibility offered by the Bill to other charities and go ahead with a meeting to consider resolutions which might need to be passed in the next few months—for example, the appointment or re-appointment of board members.

My objective today is to ask the Government to explain why they have excluded certain categories of charities from the flexibilities provided by this Bill. If the Government have decided that the Bill is not the right vehicle for these charities, I would like my noble friend the Minister to explain why. It is important that the Government explain today what other guarantee of certainty they can give to the excluded charities, so that they will not face any disadvantage.

Much earlier this afternoon, in answer to the noble Baroness, Lady Falkner, my noble friend Lord Callanan stated that there had been extensive consultation over a long period about provisions in the Bill. I would be grateful if the Minister said now what discussions she or her officials have had with DCMS and the Charity Commission in deciding what assistance should or should not be provided by legislation to the excluded charities. Did those discussions take place before the pandemic began, or have they taken into account discussions since then with representatives of the excluded charities about the impact of the pandemic on them and how they might be given certainty?

My concern is that there is a group of excepted—excluded—charities which do not have the same benefits as others listed in Schedule 14. I feel that it is unfair to leave them to the vagaries of decisions by the Charity Commission as to whether they can go ahead and break the rules of their own governing document. They are respectable charities; they need to have the respect of being given the flexibility to operate in the same way during this pandemic as charities currently covered by the Bill. I look forward to the Minister’s response.

Corporate Insolvency and Governance Bill

Lord Mendelsohn Excerpts

2nd reading & 2nd reading (Hansard) & 2nd reading (Hansard): House of Lords
Tuesday 9th June 2020 Lords Chamber

[Lord Mendelsohn (Lab) [V]]

I refer to my entry in the register of interests, particularly in restructuring and distressed investments. I welcome the introduction of the Bill, which recognises the extraordinary economic stress and uncertainty by tilting the balance towards restructuring and saving companies. I thank the Minister for his openness and engagement. I am happy to support the measures, especially those that are permanent as a step towards the UK having an insolvency regime that is not just to deal with the economic consequences of the pandemic, but is part of a global process of change started off by the financial crisis.

There is much to go through in Committee on the detailed provisions, so I will outline just a few issues and constructive suggestions that I hope the Minister will address to ensure that these reforms can work to their best and quickly in practice.

The changes to the creditor-in-possession system will be a tweak in a positive direction. However, debtor-in-possession financing is the most effective form of restructuring support as it incentivises existing share- holders, creditors or sponsors to put more cash in. If financing is dependent on new players, that adds a lot of complexity. Does the Minister plan to encourage debtor-in-possession finance through registration?

Do the monitors really have to be licensed insolvency practitioners? The skill sets are not the same. Will the Government consider a suitable threshold for qualified experienced accountants from other fields, even if on a temporary basis? That would certainly help to address the issues around conflicts, cost and availability.

Revenue and Customs as a preferential creditor could adversely affect the availability of funding, especially asset-backed lending, and have a major unintended impact on credit arrangements, unless we can see some clear view of how HMRC will operate. Indeed, under the new Crown preference system HMRC could use its voice to make sure that creditors get a fair deal from post-moratorium planning. Will HMRC publish anything on how it or even the Insolvency Service might work or skill up and operate under these provisions?

Pre-packs will become a more obvious way to game the system. Their exclusion is a charter for abuse. Even prior to the more general review, will the Government consider a simple amendment to make it compulsory for pre-packs to go to the currently voluntary pre-pack panel? The opportunities to game the system are inherent in the language of the moratorium. Will the Government consider that the comparator should not be “winding up”—that is, liquidation—but should be at least as good as “going concern administration”?

The moratorium freeze on payments works well for smaller companies but does not help larger employment-heavy companies as there is no say on bank debt, high-yield bonds or complex financing arrangements. These tend to be the issues that need most restructuring. Will this be dealt with by regulation?

The regulatory framework is not addressed but it is crucial to ensure that the system operates fairly, efficiently and effectively. Can the Minister please give some assurance on what guidance will be given to the judiciary on how to use this and to practitioners on how to use the courts, and on what will be published for us to see during the passage of the Bill?

The oversight of issues around late payment, the abuse of supply contracts and other areas that deal in particular with small businesses are not adequately protected, but they could be by use of the Small Business Commissioner. Will the Government bring forward such an amendment in Committee?

Regulation is required to make sure that potential conflicts and operations of monitors have the right robust system. We cannot really rely on the old cosy world of professional bodies. Can we receive assurances about how the obvious weaknesses in regulation will be plugged and what resources will be applied to it?

Lastly, will the Government include in their regulations provisions to bring in both the Pensions Regulator and the Pension Protection Fund at an earlier stage, to be able to participate and ensure that pension schemes are properly considered?

Prompt Payment Code

Lord Mendelsohn Excerpts

Thursday 10th May 2018 Lords Chamber

[Lord Mendelsohn (Lab)]

My Lords, I thank the noble Baroness, Lady Burt, for her excellent speech and for securing this debate.

There are two questions at the heart of this issue: do the signatories to the Prompt Payment Code perform better on payment practices than non-signatories; and has the overall picture of late payments been shifted in a positive direction since the establishment of the code?

On the first question, it is hard to make an assessment. The code’s website provides no aggregate data and I can find no detailed reported data. On the website, companies are asked to supply data on how to get paid, and most do; their procurement policy, and some do; and their reported payment information, and I found none that did. Some have put in details under “payment terms comments” which are quite unbelievable. From the random—and undoubtedly totally unrepresentative—sample I looked at, 20% of the companies had written in payment terms of 90 days, which is against the code.

I welcome the new duty to report on payment practices but will the Minister give some indication of how both datasets will relate to each other? There is no evidence available to test the direct impact of the code on the companies that are signatories but public confidence is not evident. The last IoD survey from February this year showed that, as a means of addressing late payments, businesses felt that the Prompt Payment Code did not feature and that kitemarks for best practice as sector-specific codes carried the confidence of only 3% each. No doubt this relates to the performance of some individual signatories, and the example of Carillion is perhaps instructive.

Let me make a sobering point in an attempt to draw a conclusion on performance. In a survey on late payment by MarketInvoice, five of the worst offenders were shown to pay an average of 83% of their invoices late. Three of those—John Lewis, Marks & Spencer and Kingfisher—were and remain signatories of the code.

On the question of whether the bigger picture has improved, the evidence, unfortunately, suggests the opposite. The cost of late payments to SMEs is £40 billion to £50 billion and getting higher. However, I draw your Lordships’ attention to an excellent new index developed by Lloyds Bank called the working capital index. This was created to draw attention to the area of financial operational efficiency in the UK and is soon to publish its third report. It is an account of a variety of missed opportunities but reveals some important points about the problems of payment practices and late payments. It reveals that there is a £680 billion opportunity in the UK to release working capital and that, as a result of payment problems, working capital makes up 25% of net company debt.

The latest data shows that around a third of all invoices are reported as being paid later than agreed terms, and four times as many small firms reported longer payment times from customers compared to larger firms as part of the survey. Why has the code not had the intended impact? Put simply, there is no consequence for non-compliance. Transparency is low, enforcement is piecemeal, accountability is absent and trust in the system has eroded. Checks, investigations, improvements and the role and functioning of the code’s compliance board need to be addressed. Naming and shaming has not worked when you look at any company that has faced such a problem; the example of Debenhams and its terrible performance is instructive.

Companies need to take this seriously. When I first addressed the House on this matter in 2015, when the legislation establishing the Small Business Commissioner was passed, we contacted a number of companies to try to find out how they used the Prompt Payment Code. Not once were we directed to the finance department. Not once when we contacted the finance department did they know that they were members of the code. In every example of the companies we used—also probably unrepresentative—we were directed to either the PR department, the corporate affairs department or the social responsibility department. It was not tied to finance. As a voluntary code, it needs to be tied to the part of the business that pays the bills.

I want to make a few suggestions on how to improve this. First, the code needs to be enhanced operationally. Naming and shaming and expulsion from the code—as the Federation of Small Businesses suggested—should be an absolute minimum for the worst offenders, while we should always find ways to commend the good performers. Secondly, by far the most useful thing would be to link the Government’s initiatives more strategically. The Government should place the code in the office of the excellent Small Business Commissioner, Paul Uppal. He and his brilliant team are doing very well in establishing the right approach and are well placed to make best use of and help with not just the PPC but the payment reporting requirements. I recommend strongly that the Government look into this.

Finally, some strength could be given to the areas where there seems to be a consensus and the Government’s determination to pursue good practice is backed up by a determination to bear down on bad practice. I plan to introduce a Bill on these measures soon and I hope that the Minister can indicate the Government’s willingness to support: in relation to payment practices, outlawing retrospective drops and requiring companies to publicly provide details of charges made to suppliers for storage, marketing or any other deduction or contract term that helps them to change or vary the price of supplied goods; outlawing payment dates of 120 days; dealing with the increasing problem of companies avoiding being taken to account for late payments by reclassifying them as payment disputes, by ensuring that a 30-day limit for resolving payment disputes becomes a part of all relevant sector codes and public sector contracts; and, finally, outlawing the idea that suppliers should be forced to accept giving a company a discount on the agreed price for paying on time.

The current measures employed by the Government are insufficient because there is too strong an economic incentive for cultural change to work. All evidence and economic analysis indicates this. Practices have to change the culture, not the culture change the practices. At the heart of this problem are the asymmetries of power, information, scale and capacity, which work too strongly in favour of late payment, particularly against small businesses. Without a degree of enforcement or compulsion, we can never overcome the legitimate fear for a small business that challenging a larger company will have adverse consequences. If reporting remains a problem, it is unlikely that the Prompt Payment Code will ever be effective.

Small Business Commissioner

Lord Mendelsohn Excerpts

Monday 22nd January 2018 Lords Chamber

Asked by

[Lord Mendelsohn]

To ask Her Majesty’s Government what progress they have made in establishing the role of the Small Business Commissioner; and what further action they are taking to support small and medium-sized enterprises, including tackling the issue of late payments.

[Lord Mendelsohn (Lab)]

My Lords, I thank everyone who is going to participate in this debate, and thank everyone for their endurance. It is nice finally to be at the moment when we start. I thank the House of Lords Library, too, for an excellent briefing that I hope has been of help to noble Lords. From these Benches I thank the Institute of Directors, which has kept us constantly informed with a lot of very useful detail and data.

I hope that we will have a very constructive debate, and I hope to make some general observations for the Minister to consider. I hope that he will not feel that we are criticising, hectoring or boring him, and I hope that he understands that I am trying to make the point that late payments, and support for small businesses, matter, and that across this House we should be united in making an effort to try to achieve some progress.

I make two basic assumptions. The first is that the Government are to be credited not just for the small business Bill, and not just for establishing the requirement for notification of payments, but for the establishment of the Small Business Commissioner. These things are important steps, and important strategic anchors for what can be achieved in the long term.

I also say that the Government have made an excellent choice in the Small Business Commissioner, Mr Paul Uppal. He is a 20-year veteran owner of small businesses, including in the property sector, and a former Conservative MP for Wolverhampton South West who is now based in Birmingham. He is absolutely first class and an excellent appointment, and I wish him and his colleagues great success. We on these Benches have been invited to visit the Small Business Commissioner and we look forward to doing that. In him we have someone who will try to do his very best.

However, he faces a real challenge to make a difference. A survey in a trade magazine asked what faith companies had in the Small Business Commissioner to improve payments. Only 3% had “a decent amount”, 21% had “a little” and 76% had “none at all”. This reflects a much broader concern about some of the issues we have around late payment. The first is that there is not enough weight—and there are not enough levers—behind the Small Business Commissioner to make a real difference on late payments. I also think, in the context of the role of the Small Business Commissioner, that it is a huge opportunity, particularly if we learn some of the lessons and apply some of the models that others have, to achieve a huge amount for small businesses.

The purpose of this debate is to ask the Government to do three things. The first is to remain committed and to look for ways to continue to add pressure through the system to encourage a resolution of late payments. The second is for the Government to be open to review early and to consider additional actions and resources in the interim, while these institutions are gaining their feet. The third is for the Government to be sympathetic to the opportunities that the Small Business Commissioner may present as he starts going about his work, learning lessons and receiving a great deal of experience.

The problem of late payments is still quite large. Most surveys put it somewhere between £40 billion to £50 billion; a few have it as larger and only one as smaller. There are various breakdowns between small and large but, in general, taking the figure of £45 billion, we know that the extent is significant. Interestingly, a number of surveys put a bit more flesh on the bones of some of the problems and challenges we are facing. The Dun & Bradstreet survey has found that this is putting the future at risk for 58% of SMEs. Cash flow, profitability and future trading capacity are all being hit. This research revealed an average late payment amount of £63,881 for each SME, with 11% owed between £100,000 and £250,000. This withholding of payments brings about cash-flow difficulties for 35% and delayed payments for 29%. Some 51% say late payments are more of a problem than they were three years ago, and 51% of SME owners are using personal savings to cover the shortfall from late payments. Manufacturing was the sector most affected, closely followed by retail. Robert Blackburn, from Kingston University’s Small Business Research Centre, has also stressed that these late payments seem,

“to worsen during difficult economic times”,

and the uncertainties of the moment may well be adding to that.

The Sage survey released in December 2017 made the stark point that the UK’s late-payment culture is the worst in the world. Alan Laing, the managing director of Sage, made a number of strong points. In particular, UK businesses spend an average of 15 working days chasing late payments. That is a higher level of wasted time than in any other country in the world. The survey went further in naming the UK as the world capital of late payment, finding that 18% of all invoices paid to SMEs in the UK were late, a total matched only by Singapore, and that almost 10% of invoices become bad debts. This is extremely difficult. This was a significant survey of 3,000 businesses around the world.

There is another damaging trend which I cannot account for. I would be grateful for the Minister’s view—I am not blaming him for it. Research by MarketInvoice, in which 80,000 invoices were studied, found a very peculiar situation. Almost three-quarters of invoices sent by UK businesses to EU firms were paid late in 2017. This figure represents a huge increase from the 40.4% of invoices that were paid late the year before. This significant increase is not just with EU firms. United States firms have also extended their payment dates and have a higher proportion of late payments. I do not know, and cannot account for, the reason, but that is a significant shift. Overdue invoices from the US have also risen from 40.4% to 71%. This is of great concern.

Last year, the insolvency body R3 said that more than 20% of business failures had been caused by late payment or the domino effect of other business failures. With the recent collapse of Carillion we saw that it had extended payments to 120 days, even though the Government said they tried to compel it to pay on time. There is, of course, no mechanism to highlight to anybody that the period has been extended to this point. Indeed, the whole public sector—late-paying councils, trusts and government departments—are outside the scope of the Small Business Commissioner. The public sector pays small businesses late over 62% of the time, and that is a huge concern.

There are things in place to try to encourage payment, some of them long standing, such as the Late Payment of Commercial Debts (Interest) Act 1998, amended and supplemented by the Late Payment of Commercial Debts Regulations 2002. These allow one to claim interest and debt recovery costs if another business is late in paying for goods and services, if a time is not agreed and it becomes due after 30 days. The percentage is the base rate plus 8%, so the interest due on a £10,000 debt over 90 days is £205. This is, and has been, insufficient to make any material change. I would be interested to know whether the Government have ever had any data on how many late payments have been made. For example, they should know how many interest payments have been made to small suppliers in the public sector. I would also be interested in that figure. However, that in itself was insufficient to make a huge change in this area so the Government introduced the Prompt Payment Code, which has approximately 2,087 members. It is an attempt to encourage suppliers to pay promptly. Like Ronseal, the code does what it says on the tin. Unfortunately, it does not.

I would be grateful for the Minister’s observations on companies’ duty to report under the Prompt Payment Code. It appears that they are probably not paying on the due date. The Sage survey makes the most important point—namely, that the Prompt Payment Code addresses the wrong thing. This is not about people paying; it is about making sure that they are chased for the money they owe. We have a cultural problem in that in the UK it has become unacceptable to chase people for money. We have to change that culture so that it is reasonable to expect late payments to be chased.

I am getting into the swing of this. In Australia, where the concept of the small business commissioner was first invented, the purpose was to change the small business environment for the better. It was not about late payment. In fact, Australia’s experience is that soft measures are not sufficient. People in Australia are campaigning for legislation to allow electronic payments to be tracked and all the other significant measures that we have discussed. I hope the Minister considers that in the future we should be alive to the opportunities that others are creating and the initiatives that others are introducing to ensure not just that we tackle late payments more effectively but that the role of the Small Business Commissioner is to improve the business environment and the capacity of small businesses to access justice as regards information and trading. Those are the proper tasks for the commissioner. I hope that the Government are alive to those opportunities.

Green Finance

Lord Mendelsohn Excerpts

Thursday 18th January 2018 Lords Chamber

[Lord Mendelsohn (Lab)]

My Lords, I thank the noble Lord, Lord Teverson, for securing the debate. It has been useful and constructive, and I look forward to hearing the Minister respond in kind to some very useful suggestions. I pay tribute to the noble Lord, Lord Teverson, who has done an outstanding job in these areas. I thank him for the unpaid role that he plays as a trustee of the Green Purposes Company, and I thank all his colleagues for the work they do. It is a very important role and we are very grateful to them.

Like others, I noticed that the noble Lord bristles when he is described as a reliable eco-warrior. I certainly think that he is very reliable and, having worked with him on the Green Investment Bank, I think he is also exceptionally constructive, as was his tone in his remarkable tour d’horizon. He raised an important issue that I shall just pick up: the risks involved for the insurance industry in the grand challenge of climate change. No one should underestimate how significant they are. There has indeed been a fourfold increase but the velocity of that increase is changing rapidly and we have to be very conscious of that.

I was very moved by the enthusiasm of the noble Lord, Lord Barker, particularly his phrase that the Government have regained their mojo; that is an important point to make and it is certainly true. We welcome the green finance task force, the City of London green finance leadership group and many other important initiatives that are now starting to take place. Like many others, I regret what happened to the Green Investment Bank. All that did was to take £1.6 billion off the Government’s debt figure. That was an overriding requirement of the transaction but it yielded only £120 million. That was not the deal that I would have done. I declare my interest as having a corporate finance business. Nevertheless, we are where we are, we have to move on and at least there is some enthusiasm to do so.

We do this in the context not just of enthusiasm but of the fact that there has been a downturn, and there are worrying signs of a reduction in investment, as noted by the noble Lords, Lord Teverson and Lord Fox. There are some opportunities available to the UK because we have an excellent outstanding financial centre. Certainly, in the shadow of Brexit, we have to work doubly hard to maximise any opportunities that we have, and during this debate we have heard many interesting and useful suggestions. In introducing the debate, the noble Lord, Lord Teverson, made a crucial point about how we in the UK remain a global leader in green finance. The watchword for this has to be how we ensure leadership.

I want to talk about green finance in a slightly wider context. Many of the contributions have strayed into broader areas—the noble Baroness, Lady Featherstone, made an excellent and quite wide-ranging speech on a number of areas. However, this is not just about a market opportunity. There is an unprecedented availability and uptake of solutions, particularly on treatment and on renewable energy generation and storage. In many ways you could identify that as the largest business opportunity in the world at this time, but it is also a market requirement. Sustainable capitalism, long-term capitalism, inclusive capitalism—however you wish to describe it, it is now a much more important requirement for the world at large. This is about promoting an economic system within which business and capital seek to maximise long-term value creation, and about accounting for material, environmental, social and governance issues. Integral to this framework is the consideration of all costs and benefits regardless of whether they are currently attributed with an economic cost by society.

This sort of sustainable investing is an investment philosophy and approach that allocates capital to companies aligned with these principles, and uses analysis and metrics to do it. Indeed, it seeks a competitive market rate return. It does not compromise financial returns for sustainable outcomes, or the reverse. It applies to the entire investment value chain. This is the way the world is moving—for very good reasons. That reflects not just the requirements of green areas but of all society’s impacts; it also reflects confidence in the private sector itself.

There are many advantages to take, and we have many goals in policy terms. That is not just about the transition to a low-carbon economy, or about more business models leveraging technology that improves asset utilisation, thus conserving resources and other things. It is not just about the maturing field of sustainable finance, but also about a shift in behaviours and attitudes towards sustainability between generations, with more enthusiasm and commitment towards such issues from the millennial generation and the centennials. Indeed, we face the challenge behind that often-quoted phrase, that the future belongs to those who give the next generation reasons for hope—and we have to do that.

This all bleeds into issues around corporate governance, because asset owners, managers and companies need to adopt a more holistic definition of fiduciary duty—one that incorporates sustainability and shapes investment frameworks as a result. We also need to encourage wider consumer behaviours and consciousness of these issues, even to the point of considering how our pension plan might incorporate sustainability as a key consideration, and how we can become more aware of all the consequences of our purchasing decisions. Investors, businesses and consumers alike are now equipped with the economic case for action, and the information on which to take that action.

The Paris Agreement provides a key opportunity, which has led to many calculations of the overall requirements globally. The International Finance Corporation has suggested that $23 trillion of global investment will be needed between 2016 and 2030, and I think that our Government have identified $13.5 trillion in investment in energy alone. We must energise all forms of economic activity and finance.

I shall focus on one or two particular aspects, to try to illustrate some of the challenges. It is important to establish global standards. This is not something that affects the UK alone. The lack of agreed global standards for what qualifies as a green project is fraught with many problems. For example, let me illustrate one of the challenges in the nascent area of green bonds—the crucial point at which climate issues directly meet the financial markets.

Green bonds are a fixed-income instrument used to further the green agenda. This asset class has grown dramatically, and there was more than £100 billion of issuance last year, compared with a minuscule amount only a few years ago. The momentum is extraordinary—yet there is no binding definition of “green”. There is no legal perspective in the European economies as to what constitutes such a bond. There has been a vacuum, filled by some principles from NGOs and industry groups such as the International Capital Market Association, which has a list of acceptable use of proceeds. But there is a glaring lack of an acceptable legal definition. This is not the case globally—China has a legal definition—but we need much more co-operation to create our own in Europe, and a more accepted global standard.

What can the Government do to maintain leadership? We are seeing from around the world what can be done to support growth in green finance. The European Commission has this month indicated support for regulatory incentives that would encourage banks to shift their balance sheets in a green direction, by allowing them to take on more leverage against assets with a positive environmental impact. France last year became the largest sovereign issuer of green bonds, raising €7 billion to fund energy transition. There are other illustrations as well.

We must not miss this opportunity, because the appetite is clearly there. In September a €600-million bond sold by SSE became the largest bond with a green label attached so far issued by a UK company, with the funds being used to finance onshore wind farms. As has been stated before, Barclays sold the first green bond from a UK financial institution linked to assets in the UK. But there is an issue about how some of our rivals are dealing with these opportunities. This is an important challenge for the City of London, and the noble Lord who has had such a distinguished career in the City made a very useful contribution.

Earlier this month, Fromageries Bel, the French multinational cheesemaker perhaps best known for the brand Mini Babybel, extended a credit agreement with a group of banks, comprising a €520 million revolving credit facility made up of a consortium of banks, including Société Générale, BNP Paribas, Crédit Agricole, Commerce Bank, KBC Bank and a few others. It is interesting that this renewed credit agreement includes environmental and social impact criteria linked to the company’s sustainable development strategy. It is a pioneering credit facility tying a credit line to environmental and social performance. These sorts of challenges have been taken up round the world and to maintain our leadership position we have to do more.

We are starting to promote electric vehicles. The right reverend Prelate the Bishop of Durham talked about sales of petrol and diesel vehicles ending by 2040. We have a massive issue with millions of lithium-ion batteries that will need to be recycled or reused each year, as required by existing law. Indeed, we have no such facility in the UK and we have to think about what our requirements will be over time. Perhaps in this area we can show that we have moved on and adopt a more collaborative approach to the way in which the market might be encouraged or supported to meet that challenge within the context of the industrial strategy or other initiatives. The Government take the view that this issue will be for the market to determine. The consensus in the Chamber for more progress, and more co-operation to achieve it, was adequately reflected in the debate. I hope that the Minister will respond in kind.

Industrial Strategy

Lord Mendelsohn Excerpts

Monday 8th January 2018 Lords Chamber

[Lord Mendelsohn (Lab)]

My Lords, we have had a quite outstanding debate, with a very encouraging level of consensus. We have heard some very forthright comments, a litany of lessons learned, and some very thoughtful challenges and criticisms. Indeed, nowhere is the chequered history of how the industrial strategies have been described better known and understood than in this place. We have had the pleasure of hearing from some of the people who have been the architects of industrial policies and of great things in our country how they did it. It has been an extraordinary debate and one I felt hugely privileged to be part of. I am also extremely pleased I am not the Minister who has to respond to it.

One thing that I felt during the course of the debate was best expressed by that character Yogi Berra—the US baseball star who played for the New York Yankees from the 1940s to the 1960s and was well-known not just for his great play but for his impromptu pithy comments, malapropisms and seemingly unintentional witticisms—when he said, “It’s déjà vu all over again”. Here we have another debate about the industrial strategy, but the times are very different and there is a very important context in which we are doing this. It is understood, here and in other parts of the world, as a reaction to the issues that have arisen as a result of the financial crisis and the problems of growth and the squeeze in wages felt across many parts of the world.

There have been many evolving views, crystallised in the lessons of past failures of the time. I recall that the noble Lord, Lord Turner, said in 2013, based on his understanding of the financial services collapse and what it meant, that there was no clear evidence that the growth in the scale and complexity of the financial system in the developed world over the previous 20 to 30 years had driven increased growth or stability. So we have come to believe that there is no surprise that a wider acceptance of the role that the state can play in stimulating private companies to create innovations can be actively and purposefully used. We have also decided to believe in some quarters that the role that the state can play in creating demand can be a good thing. There is also a role for the state in rebalancing the economy, not just in strengthening locally based manufacturing but in preparing industries for the future. This is an important context, and the challenge is still greater with the likely economic tribulations and opportunities of Brexit.

The context of the UK’s general economic position has not been particularly benign. We have had problems of imbalances, regional problems, problems of infrastructure investment and other issues that have been pointed out by many during this debate. However, we have also had failures—for example, failures to maximise our advantages when we have had great successes but have been unable to commercialise some of our great research facilities, and failures to address matters where there has been success but we have created long tails of problems, including corporate governance.

So here we are, looking at a White Paper and wondering, “Do we have the right policy approach? Can an industrial strategy be something to everyone, a framework by which everyone can get what they want put into something?”. This White Paper certainly has its merits, and it has made a successful change from Green Paper to White Paper. At its very core, the industrial strategy should always be seen as a framework rather than a collection of specific industrial policies. I agree with the noble Lord, Lord Maude, that it is a compendium. Its evolution from 10 pillars to five foundations and four grand challenges has probably combined focus with ensuring that long-term issues can be addressed at the same time. The importance of goals or objectives—or, as they are more popularly described, “missions”—is a central shift to ensure that we have a focus in the industrial strategy. Dealing with productivity has been the greatest advance in the process from the Green Paper to the White Paper, finally focusing on a meaningful challenge. That is to be warmly welcomed. In a previous debate, the noble Lord, Lord Prior, made a point, as he did today, about the importance of productivity and the challenge that it provides over the next decade. It is utterly proper that the industrial strategy now mainly focuses on addressing that and embraces all the other opportunities that we have.

The problem is not just with inequality; it is also about the crisis of confidence that the economy will work for everyone, whether the next generation will look forward to greater prosperity, the challenge for people in gaining the employment conditions they need, and the problems of insecurity caused by some aspects of the flexible labour market at the moment. These are the types of problems regarding confidence in markets and the market system that will cause us great long-term problems if we do not address them now. They will certainly seriously undermine the values underpinning our society.

I was prepared to accept a very poor industrial strategy because I thought it more important than anything else that we had an industrial strategy at all. However, this is not a poor industrial strategy but a welcome, important and useful foundation, and the White Paper is to be congratulated on that. As I say, this paper is a significant improvement on the Green Paper. However, the White Paper is unlikely in and of itself to move the dial significantly, although it will undoubtedly do good things. There is strong agreement that this is a crucial start but what will be essential is what happens next in its delivery and development. Here there are a great series of challenges that we have to be alive to.

It is important also to agree that, as my noble friend Lord Mandelson said early in the debate, this is more than just having to tweak the policy dial. The noble Lord, Lord Griffiths, made an important point when he said that the design of this is usually 10% in government and 90% in implementation. To meet the test of not just doing business and industrial policy better but making a more profound impact to achieve meaningful growth outcomes and improve productivity, we must ensure that we have the foundations to get it absolutely right.

We must have targets. I strongly believe that you cannot manage what you cannot measure, and if you cannot measure, you cannot improve. The introduction of productivity as a main focus is important, but we need to ensure that the targets are stretching, or at least allow us to achieve our goals. The Government have made an important contribution in saying that we wish to grow research as a proportion of GDP to 2.4% by 2027, but that is still only the average today. High-performing countries are already at between 3% and 4%, but the top of our ambition is 3%.

Targets are significant. As the noble Lord, Lord Horam, said, when we established broadband targets it was important that we had a minimum statutory requirement, but when we started by requiring 10 megabytes, everyone lowered their ambitions in their business models. If we had said 30 megabytes, business models would have been different. Setting targets is extremely important, but we have to set the right targets. They should stretch, they should be aspirational, but they should be deliverable. That is crucial.

We need some sense of what it will mean when we talk about becoming the world’s most innovative economy by 2030: what definitions we are using to determine whether we have achieved good jobs and greater earning power for all, and how we will finally be able to establish through the industrial policy whether the UK has become the best place to start and grow a business. We also have a great challenge to ensure that we put in the right level of resource—the funds that we commit. It is certainly to be applauded that the national productivity and investment fund has been increased, but it is still 2.9% of GDP, whereas the OECD average is 3.5%. As a businessman, if you are to invest in something, you put a dollop of money in: you put big money behind a commitment. That tells people what you are doing; it shows that you believe it will have a significant benefit. The level of resource we are putting in is a challenge the Government need to address at some stage. I am not expecting the Minister to reply to all these points; these are long-term industrial strategy challenges, not short-term considerations.

My noble friend Lord Eatwell made the point extremely well that we need to be frank and honest about our ills, because if we are not, we will be unable to solve them. We should also be clear that the challenges we will face will not be easy. How we trade with the rest of the world will not be straightforward. We will not discover something that no one else has. As the noble Lord, Lord Prior, said, most other countries are still either in the midst of significant industrial strategy policies—they have institutions or long-term policies—or are adopting them. The same is true of trade. Everyone is in the same competitive position.

There are challenges across government. We have the Cabinet committee. We have a key role for other departments that are sponsors of industry. They must be able to take on those roles properly. There is the question of how the role and function of the Treasury is balanced with that of other departments. Those are important challenges that will require evolution. We have an important challenge inside BEIS itself in the organisation and leadership office. I was concerned. I saw the job advert for head of industrial strategy and delivery—the person responsible for delivery; for implementing the White Paper commitments; for ensuring delivery and making a difference; for setting up and delivering the governance structures of the external review body; for cross-government and cross-departmental engagement; and for strategy and policy development. This is someone deep within the business and science group of the department who is meant to be managing possibly five to 10 people. If that is the person ultimately responsible, do they have the weight and heft? How does that work in the context of the department? If this person is a senior civil servant on pay band 1, there is an imbalance. If they come from the private sector, they start on £65,000. If they are an official, they can move up to £117,000. What is the people strategy to make sure we have the right team working on this? It is a crucial challenge.

I also think we have a huge challenge with the industrial strategy board, which will require further thinking from the Government on whether the advisory council will be sufficiently independent and will have the sort of function required to make sure the industrial strategy is properly assessed. The Government might wish to reconsider: if they create a body rather more on the model of the OBR, they might have a more successful opportunity to embed the industrial strategy into the routine agendas of future Governments.

The most crucial part of this is that it is not resolved on place—on the role of regions, the role of local authorities and the role of mayors. The points made during the debate are crucial, and we can see how things have developed in local areas—the success of local government and the difference that local government can make to this. It is important to have continuity of policy, building the right plans across different political parties and adjusting policies to make sure that we have things and institutions that can endure—ones that can go beyond the occasional moments, such as those with which the noble Lord, Lord Willetts, so graphically punctuated his contribution. We also need to make sure that we build on this cross-party, political and economic consensus—indeed on things such as the productivity leadership board, mentioned by the noble Lord, Lord Flight, so that in the sectors themselves there is the creation of a national consensus and national bodies where that will work.

We also need to accept that change is not a failure but a likely outcome of getting better. As the noble Lord, Lord Prior, said, this is an hors d’oeuvre and the main course is still to come. If the Government were to set out a list of the next things to do, they would do well to read the speech of the noble Lord, Lord Eatwell, which contained a large measure of them. But now is not necessarily the time for that. The Government have to accept that getting it wrong will not make them weaker and will not make the case for an industrial strategy weaker; it will provide the platform to make it better.

As Yogi Berra also said, you can observe a lot by watching. Those noble Lords who have debated in this House today, who believe that we can do something together and more meaningfully for this country, will be watching this process very carefully. They will reflect the desire to do more together if the Government are more open about the opportunities ahead.

Better Regulation

Lord Mendelsohn Excerpts

Thursday 7th December 2017 Lords Chamber

[Lord Mendelsohn (Lab)]

My Lords, I will make a declaration of interest. I am indeed meant to be a beneficiary of successful deregulation over the last few years, when we have had successive figures about how much has been deregulated to the benefit of businesses. I calculate that on that basis, I should be some £200,000 better off. I am not, but I am meant to be a beneficiary of successful deregulation. I have experience of regulation because I am now a PEP and treated as one with every bank account I have to deal with. However, I benefit from regulation, because I am regulated in one of my businesses by the FCA. While people may whinge about it, it provides an important architecture for businesses and our business benefits from it.

I congratulate the noble Baroness, Lady Neville-Rolfe, who has been a great champion of these issues and has a tremendous track record. I agree with much of what she said, and her prescriptions are similar to the things I will say; in fact, I may have been influenced by her in the first place. However, I disagree with her on one point. She argued that productivity is being held back by a surfeit of poorly enforced regulation and other forms of regulation. I do not believe this to be the case. The noble Lord, Lord Stoneham, made the point in his excellent speech that the OECD classifies us as one of the low-regulation countries and that low regulation is frequently cited as one of the reasons why we have high levels of foreign direct investment—whatever the arguments about that are. There is no evidence that there is an impairment of productivity caused by regulation. In fact, the opposite is more readily identifiable from the evidence. More regulated countries, including the US and other parts of Europe, are able to exercise greater levels of productivity by sometimes better use of management, skill and innovation and use of capital features. So that is not an argument. Some of this is not about the economic issues, although they are important.

It is worth acknowledging that we have had some excellent contributions. We miss certain voices, which have been prominent in this debate, such as that of the noble Earl, Lord Lindsay, but some interesting points have also been made about different industries. The noble Baroness, Lady Deech, talked about legal services. I suspect that the rise in trust in the law may well be as a result of the regulator she complains about. However, it is certainly encouraging that the level of trust in such an important sector as legal services is increasing.

My noble friend Lady Donaghy made an interesting speech about the construction industry, and my noble friend Lady Henig made an important contribution about one of the most successful models of regulation in this country: the security industry. I have direct experience of a company which, when the regulations came in, did not believe that they would be taken seriously, and went to the wall as a result. That was a jolly good thing. The SIA has done a wonderful job. I regret that the Government have not been more forthcoming on points which are clear about how that industry has developed a regulatory structure of great strength as a result. I know of many cases that support that. There are stories about companies, even brand names such as Kroll, and some of its alleged conduct. Especially in this modern digital world, it should come under a proper form of regulation.

The economic case for ensuring that we get regulation right is not as strong as the other case based on safety risk and other sorts of market failures. That is not to say that it is not important, but when the Federation of Small Businesses tells us that 20% of small businesses said that regulation was one of their top issues, that means that 80% said that it was not. We understand the relative importance of this. When businesses say that tax administration rates and other sorts of issues are more important, it indicates the level of priority.

The fact that we can do something is a case for doing it, but we need to put the importance of regulation in its context. Where it is most required is to deal with issues such as defining standards, competitive dynamics, failures, risk, imbalances, and those sorts of things—many of which my noble friend Lord Whitty talked about. We have to consider that regulation has to have a clear purpose and be easy to understand; there should be much more obligation on regulators to make sure that their regulations are understood.

We have touched on some key issues. The architecture of how we make sure we get good regulation is really important. I share the deep concern of others who wonder how the Government’s interpretation of how they should respond to the Public Accounts Committee’s exhortation to improve and streamline regulation, or even their understanding of their own manifesto to get better regulation, can in any way be helped by undermining the useful architecture that is evolving in our country. The idea that the Regulatory Policy Committee should change in the way that the Government suggest, whether over the de minimis issue, giving government departments the authority to be able to define, however they wish, to establish the level of impacts or the assessments, or the controversial requirements such as the first-stage consultations, are problems, and I urge the Government to think again about how they look at the Regulatory Policy Committee. There is consensus on that. I agree with the noble Lord, Lord Curry, that it is time to strengthen, not weaken, the structures we have, and the noble Baroness, Lady Altmann, also made an excellent case. We need not just to ensure that we do not give departments absolute and unfettered ability to define this process but we should look at putting it on a more independent and possibly statutory footing. The definitive case was made unbelievably well by my noble friend Lady Andrews, and I urge the Minister to prioritise her questions when he answers. My noble friend Lord Haskel properly identified the statutory instruments, which are becoming an ever increasing problem in this House; they are being used in particular for departmental convenience and not for the public interest.

What is to be done? Of course, we have to beef up the independent structures, as endorsed by the National Audit Office, and we need to include EU tax administration, the national living wage and the national minimum wage. We have to be truthful about the impacts. It is essential that we get a handle on what is happening, particularly as we go through Brexit. It is crucial to think small first and be easily understood, along the lines of what the noble Baroness, Lady Neville-Rolfe, said. It is also utterly crucial that we enforce the regulations that we have. I declare my interest as a landlord. The number of landlords who are prosecuted as against the number of complaints that are made shows that we probably do not enforce the regulations properly. The Residential Landlords Association found in 2016-17 that only 496 landlords were prosecuted but there were 105,359 complaints. I would be interested in knowing how we can process these complaints effectively.

I turn to the subject of the national minimum wage and the categories of workers. Each year 70,000 internships are unpaid, all breaching the national minimum wage rules, yet alongside the entirety of the issues surrounding the national minimum wage, there have been only 13 prosecutions. I worry about this because Grenfell raises a number of particularly tragic issues. As a result of Grenfell, we decided to look at fire safety in relation to the short-term renting of private homes, such as those offered through Airbnb. It seems that the Government believed that the fire safety order of 2005 covered this. The problem was that none of the agencies—the Government, the local authorities, the fire brigade or the fire safety authorities—thought that they had responsibility for it, so no one was doing anything. Counsel to the Health and Safety Executive then provided us with an opinion saying that the safety order—the law that the Government think applies—does not apply. There is a regulatory break, so there is no regulation whatever. This is a major issue and I would like the Government to clarify the position. There is also the major question of who enforces the enforcers. We have a big problem with the gap there and I would like to see the Government try to address it.

Questions were raised about the European Union. We have to get some understanding of how the changes will affect us. There is a variety of EU regulations and I would be interested in knowing which UK bodies will assume the investigatory role of the European Commission. What work have the Government done on that? How many bodies do they estimate will need to transition?

Finally—I make this point now, as I do in all my contributions—I would be very grateful if the Minister could give one clear answer or proper guidance on how we should measure the Government’s achievements on better regulation. It is very important that this is not just about exhortation; anything that we can use to test what better regulation means would be very welcome.

--- Later in debate ---

[Lord Henley]

The noble Lord is correct that the new regime is in place, but that does not mean that all proposals are finalised; these matters can always be considered in the light of representations made, even by the noble Lord. He and I were in the coalition Government together; we worked together in the past. I am sure we can take account of comments made here, and I would be more than happy to listen to him.

I want to make it clear—not commenting on leaked documents—that our proposals actually increase scrutiny by bringing significant deregulation measures into scope. They focus the system on measures with large impacts. This brings me to the Public Accounts Committee, whose recommendations it is worth commenting on. The 2016 report said:

“The Better Regulation Executive’s rules for assessing and validating the expected impact of a regulation are the same, regardless of the scale of the regulation’s impact. The Better Regulation Executive … has established a complex bureaucracy across Whitehall that diverts departments’ resources away from potentially more productive efforts … Of the 95 regulations that the Regulatory Policy Committee has scrutinised during this Parliament, 64 of them have an individual expected net impact of less than £5 million”.


The committee then recommended that we should change the rules to allow a more proportionate approach whereby significantly more effort can be applied to the assessment and validation of the small number of regulations with the greatest impact. That is what we are doing with the de minimis rule.

That is why we took this action and why I wrote to the Public Accounts Committee only last month to inform it that we intended to follow its recommendations and adopt a more proportionate and efficient better regulation system by introducing that threshold. Obviously, we can always reconsider those matters, but that is why I wrote. It will allow the RPC to focus on the measures that matter most. If it had been in force in the last Parliament, 90% of the costs would still be subject to independent scrutiny.

It is only right that regulation should be kept under constant review as products and technology change. Where regulatory requirements are not clear or easily understood, it can lead to confusion and potentially an increased risk to the public. Over the last 20 years, Governments have been working on getting the delicate balance or proportionality right and the costs and benefits of regulation right. That has included the establishment of the Regulatory Policy Committee, as I mentioned earlier, which gives independent scrutiny of the evidence for regulatory changes when they are debated in Parliament.

There were previous government initiatives to review the stock of legislation. Going back to the beginning of the coalition Government, which the noble Lords, Lord Stoneham and Lord Stunnell, will remember, there were the Red Tape Challenge and the cutting red tape reviews. The noble Lord, Lord Stunnell, took credit for introducing the one-in, one-out measure, which I think he accepted served a useful purpose in encouraging the process, even if another noble Lord—I think it was the noble Lord, Lord Whitty—did not like the idea and said that it led to getting rid of something purely for the sake of it. But it encouraged the others and served a useful purpose.

Those reviews sought views from the public to help identify outdated, unnecessary or overly complex legislation and led in due course, as both noble Lords and others will remember, to the Small Business, Enterprise and Employment Act 2015. My noble friend will remember that because she took the legislation through the House. It introduced a requirement for the Government to set a business impact target, focused on the economic impact of regulatory change on business activities, and the need to report annually on its achievements against that target.

These initiatives have delivered some real improvements in how people, businesses and public bodies are regulated, and have also encouraged a cultural shift in government departments towards more appropriate and smarter regulation. The one-in, one-out or one-in, two-out proposals played a part in that. For example, my own department’s business perceptions survey last year showed a decline in the proportion of businesses that believed that the overall level of regulation in the UK was an obstacle to their success. It went down to 49% in 2016, from 62% in 2009.

As I said earlier, the Public Accounts Committee produced a number of recommendations about how we can further improve our regulation system, following the report from the National Audit Office last year. We have been reflecting on those conclusions, including ideas about how to make our approach more proportionate.

[Lord Mendelsohn]

Will the Minister clarify the changes to the RPC that are in effect? Is he suggesting that the change to the regime is more permissive, less permissive or exactly the same as what stood before? To be clear on the purpose, is he saying that the changes were directly as a result of those suggestions from other committees? Were some of the changes requested by departments to have freedom and flexibility, or were they in any way related to the pressures in the system as a result of the EU exit?

[Lord Henley]

My Lords, I do not accept that the EU exit has led to those changes. I said that the Public Accounts Committee had made some recommendations. We considered those and brought in the de minimis rule. We are not bound to keep that. We could change it if necessary, but it gives the RPC a freer hand in what it does and allows it to focus its efforts more appropriately on the job that it does very well.

I can also give an assurance, since there was some criticism of our attitude to the RPC, that we are still committed to it and its work. We are making sure that it has the appropriate number of members. It currently has eight members and it will continue to have eight members. Announcements will be made in due course as to whether some members have been reappointed, or where necessary new members will be brought in, so that it can continue to do its work.

I am beginning to run out of time and I do not want to deprive my noble friend of the chance to say a few words at the end of the debate. However, I should like to deal with one or two of the other questions that have been raised.

I think I have more or less touched on it, but the noble Lord, Lord Haskel, referred to the letter from my noble friend Lord Trefgarne, the chair of his committee, about the threshold. We acknowledge the good work of the committee and I am aware of the letter from my noble friend. I think that it was received in the department on 28 November and I intend to respond to it shortly. I can reassure the noble Lord that the department will continue to provide appropriate analysis of its policies to the committee.

Perhaps I may also give an assurance to my noble friend Lord Altmann on pensions auto-enrolment. As a former member of the Department for Work and Pensions, where I have also served, she will know that auto-enrolment has been a great success. Some 8 million people have now enrolled and the Government are conducting a review to build on this success and make sure that the programme works in the long term. The review will be led by the Department for Work and Pensions supported by an external advisory body. I am told that it will report by the end of 2017, so my noble friend does not have to wait for long because that really does mean pretty soon.

Concern was expressed by my noble friend Lady Neville-Rolfe and the noble Baroness, Lady Andrews, about the RPC’s processing not applying to tax or the national minimum wage. I can give them an assurance that HMRC has a separate body, known as the Administrative Burdens Advisory Body, to consider reducing the burden of tax administration, so there is a role for it which provides scrutiny.

Lastly, the noble Lord, Lord Stoneham, was concerned about what plans we have for EU exit. This is a concern that comes up in every Question and debate in the House. We have made it quite clear that the withdrawal Bill will be designed to ensure that EU exit will take place with certainty and that we maintain continuity and control. The Bill will help to maximise certainty for business on what regulation will apply on exit and to maintain important protections for consumers.

As always, I apologise for the fact that I have not been able to address every point that has been put before me, but again as always I promise to write to noble Lords on any issues that I have not addressed. I end by thanking my noble friend once more for introducing this debate.