Baroness Neville-Rolfe
Main Page: Baroness Neville-Rolfe (Conservative - Life peer)Small Business, Enterprise and Employment Bill
Baroness Neville-Rolfe Excerpts
The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Baroness Neville-Rolfe) (Con)
My Lords, we come to several sets of amendments on pubs, a subject that has been much debated in this House and in the other place. We need to set the scene for today’s debate, which I think falls more naturally under the heading of the next grouping of amendments on market rent only. I suggest we proceed on that basis if noble Lords are content and treat this group of government amendments as the relatively technical group that it is.
For the first time, tied tenants will have a statutory code they can rely on, with an independent adjudicator to enforce it, with real sanctions at its disposal. There seems to be agreement in both Houses that a statutory Pubs Code and an adjudicator should be established. In setting up the Pubs Code Adjudicator, we have generally followed the Groceries Code Adjudicator model. This included specifying in this Bill:
“The Adjudicator may make arrangements with the Secretary of State or any other public authority for staff to be seconded to the Adjudicator”.
However, the GCA has experienced significant difficulties in securing staff on secondment from within the public sector. There is no single reason for this, but both the niche nature of the GCA and the ongoing pressures on departmental staffing levels are factors. We are keen to avoid the Pubs Code Adjudicator encountering similar problems. Amendments 33A and 33B to Schedule 1 therefore enable the adjudicator also to take secondees from the private sector. This will provide much needed flexibility for the adjudicator to find suitable staff from a wider pool—for example RICS-qualified surveyors to advise on rent assessments. We considered whether the adjudicator should have the ability to employ staff directly. However, we concluded that allowing secondments from the private sector would provide the flexibility needed without imposing employer responsibilities on the adjudicator.
Amendment 33C ensures that the adjudicator’s secondment policies are approved by the Secretary of State. This will enable the Secretary of State to specify that remuneration and the terms and conditions of persons on secondment to the adjudicator are in line with the department’s secondments policy. The amendment also provides that a person seconded to the adjudicator remains an employee of the employer he or she was seconded from.
Finally, Amendments 33E and 33F ensure that the staff of the adjudicator are subject to the House of Commons Disqualification Act 1975, in common with staff of government departments. I beg to move.
Lord Mendelsohn (Lab)
My Lords, we are happy to support these government amendments and are grateful to the Minister for the way in which she has dealt with this matter. We believe that our debate on the more substantive issues in the next group of amendments will cut to the heart of many of the important issues.
We support these technical amendments and are encouraged that the Government have learnt lessons from the introduction of the Groceries Code Adjudicator, which will be applied to ensure that the Pubs Code Adjudicator works effectively from the beginning. The only point we would make is that secondees should be drawn not just from the private sector but from a range of different areas so that they will provide the necessary experience to make the adjudicator’s work as effective as possible. Indeed, even within the context of the private sector they should be drawn from a range of disciplines. Apart from that point, on which we would be grateful for clarification from the Minister, we are happy to support these amendments.
Baroness Neville-Rolfe
My Lords, I am happy to clarify that we will take secondees from the best place possible, which could include—the noble Lord is probably referring to this—another Government, a non-profit organisation or some other source. This is to give us the flexibility to find the right people.
Baroness Neville-Rolfe
My Lords, in the light of the concerns raised about our government amendments in Committee, I committed to further engagement with noble Lords and wider stakeholders, with a view to returning with further amendments on Report. My ministerial colleagues, officials and I have since had extensive discussions with noble Lords, honourable Members in the other place, and pub company and tenant stakeholders. I am grateful for the constructive engagement of noble Lords opposite, including the noble Lords, Lord Stevenson, Lord Mendelsohn, Lord Whitty, Lord Snape and Lord Berkeley, as well as my noble friends, including my noble friends Lord Hodgson, Lord Borwick, Lord Younger, Lord Stoneham and Lord Ridley, who joined us last week.
I should say before I turn to my amendments that the problems we are trying to address in the pubs industry have a long history. The difficulties that arise from the imbalance in bargaining power between tied tenants and their pub-owning companies have been well documented. The measures in the Bill are designed to ensure fairness for tied tenants of large pub-owning businesses and to respond. They are a proportionate and targeted response, and represent a significant step for the sector.
Incorporating the “market rent only” option into the Bill in the limited time available to us, while also ensuring that it will work in practice, has not been easy. But we have made good progress, which has enabled us to bring forward these amendments. We believe they will make for a better Bill and more closely reflect the wishes of the other place. The principle of market rent only is that at certain trigger points a tied tenant should have the right to move to a free-of-tie agreement and pay a market rent for the property. A market rent will generally be higher than a tied rent, because a free-of-tie tenant is free to purchase all drinks and other products and services from wherever he or she wishes, rather than from the pub-owning company. The only exception to this is insurance, where it is common practice in any commercial lease for this to be arranged by the landlord and charged to the tenant.
I was clear at Second Reading that the Government accept the will of the other place that there should be a market rent only option. Our work since has been to ensure that it delivers the protections for those tied tenants without potential unintended consequences. The questions that have arisen and the discussions that have taken place are over exactly how the market rent only option should work in practice. I am pleased to say that we have now reached a position where the Fair Pint campaign and CAMRA are content with our amendments. I also met my honourable friend Greg Mulholland last week and he is supportive of the approach we are proposing. I should like to say we discussed it over a pint, but actually I had a scotch, supporting another of our important industries. I pay tribute to his dedication to this cause, his relentless campaigning for the rights of tied tenants and his willingness to move forward.
I am also pleased to say that, although some differences remain, at a recent meeting that Jo Swinson and I hosted with stakeholders from all sides, pub companies, too, seemed to recognise that much progress had been made. Two of the issues most keenly debated in our discussions since Committee have been how to ensure that investment in tied pubs continues, which is important for the industry, and whether the pub franchise agreements should be covered by the code.
We have made good progress here, too. I can announce that Government will be using existing powers in Clause 42 to set out in secondary legislation how tenants and pub companies can agree the waiver of two MRO triggers in exchange for significant investment in a pub. We will also use powers in Clause 71 to exempt genuine franchise agreements from the market rent only clauses of the Bill. I am conscious that noble Lords have tabled amendments relating to these issues. If noble Lords are content, I will turn to the detail of the Government’s proposals in these areas when we debate those amendments.
I now turn to Amendments 33AC to 33AF, which deal with the process of agreeing a rent after the MRO trigger is engaged. Those amendments provide that the Pubs Code must specify a reasonable period in the market rent only process for both stages of that process. The first stage is where a tenant and their pub company try to agree a rent; this was over a 21-day period in the original MRO clause laid in the other place. The second stage involves the settling of a market rent by the independent assessor. The other amendments in this group, Amendments 33AA, 33AB, 33AD and 33AE, clarify that the term “market rent” applies only to a rent set in the second stage by an independent assessor.
The market rent only clause introduced in the other place established the principle that, when MRO is triggered on a brewer’s pub, the brewery should retain their route to market as long as tenants can buy the brewer’s beer from any source. This route-to-market principle was accepted by all sides. Amendment 33AS clarifies the requirements that may be placed on pubs in terms of stocking requirements after MRO has been triggered. The Bill as drafted already allows brewers to place conditions around the stocking of their own brands of beer and of cider in terms of volume and range. The amendment confirms that brewers may also protect their route to market by allowing some restrictions on the sales of competitors’ products. Brewers will not be able to require that their market rent only pubs sell only their products; they will need to satisfy themselves that they are compliant with competition law.
Turning to Amendment 33AV, there was concern in Committee about removing the sale of title and administration triggers for market rent only, which were in the original Commons amendment. Noble Lords were worried that this would leave tenants at risk if their pub was sold or if their pub company went into administration. What has become clear through our various discussions is that it is not a pub sale or administration itself that is of concern; rather, it is the potential for a pub sale—whether as part of an administration or the normal course of business—to result in adverse consequences for the tenant. The sale of a pub to another of the large pub companies is not a problem as the code will still apply. The concern is therefore the potential loss of protection for tenants if their pub is sold to a company that is outside the scope of the Pubs Code—for example, if Fuller’s or Young’s buy a pub from Punch Taverns.
The Government are addressing this concern through Amendment 33AV, which extends the protections of the code—apart from the market rent only option—to tenants whose pub is sold by a “code company” to a company outside the statutory code. The protection will last until the next rent assessment and will mean that the tenants concerned will be able to refer any code breaches during that period to the adjudicator.
As soon as the purchasing pub company presents the tenant with new terms, the deal it offers will have to be fair and comply with the code. The tenant will have the right to refer these terms, including the rent, to the adjudicator if he thinks that the code has been breached. If a breach is found, the adjudicator has wide powers of redress. The tenant will also have the option to request a parallel rent assessment—a provision we have brought back since Committee, as I will explain—if agreement is not reached.
If the purchasing company does not change the tenant’s terms when the sale is made, the protection of the code remains until there is a new rent assessment or when the lease agreements expire, whichever comes first. In that period, if there is an event outside the tenant’s control that affects his ability to trade, or a significant price increase, this would trigger a rent assessment, which must comply with the code. The tenant could also request a parallel rent assessment in these circumstances. These provisions preserve tenants’ rights to a fair tied rent after sale.
Noble Lords will remember that, in the other place, there was concern about overburdening family brewers through our provisions. We agree and therefore we do not propose to include market rent only in the continuation of protections when a pub is sold. Nor would the adjudicator have investigatory powers relating to those companies. This is because the investigation function is designed to uncover systemic breaches of the code. It would not be right to include in that power companies that are obliged to follow the code only because some of the pubs they own used to belong to a “code company” and which are covered by the code only in respect of those pubs.
Baroness Neville-Rolfe
My Lords, I thank noble Lords for their contribution to this important debate within this Chamber and outside it. I especially thank my noble friend Lord Hodgson for his broader comments about the industry and his warnings about investment in the industry, which of course warms all our hearts, and my noble friend Lord Ridley for similar comments. Clearly, we are seeking to create certainty on the basis of the new system that Parliament will, I hope, pass in a very few days’ time. One would hope that that would lead to more investment in the industry and fewer closures. The planned consultation on the subordinate legislation will give us an important opportunity to look again at these important issues.
Before I answer the various points, I should also thank the noble Lords, Lord Whitty and Lord Stoneham, and all noble Lords for their acknowledgement and empathy and the thanks that they have accorded to my excellent team, who have worked long and hard on all this. I also thank the noble Lords, Lord Berkeley and Lord Snape, in particular for the pivotal role that they played in our discussions in Committee.
On Amendment 33L, I emphasise to my noble friend that the parallel rent assessment and the market rent only are different tools. PRA is a comparative illustration of the likely tenant profit in a tied and free-of-tie scenario for their pub; it has at its heart a projected profit and loss account for both scenarios. MRO, on the other hand, is about the market rent for the pub: in other words, what it would fetch as a pub on the open market. That starts from a different premise from a PRA. In addition, apart from being technically different, we have decided to reinstate PRA for existing tenants for a specific reason: because some tenants who do not wish to be free of tie would prefer the PRA, as they consider it a less confrontational way to secure a fair tied deal.
None the less, my noble friend will know that I am always keen to minimise bureaucracy, and as I said earlier it is our intention to streamline and integrate the two processes as far as possible, but we need to do the detailed work and process mapping to understand where and how the processes dovetail. This will benefit from further formal consultation, which will inform how we set this out in secondary legislation. I look forward to input from other noble Lords, including my noble friend, on our consultation.
My noble friend Lord Hodgson also felt that PRA was complicated and expensive. Pub companies are generally experts on the costs of running their own pubs under different models and their trading history. Therefore the extra complication and expense will be limited. As I have said, my officials will work with stakeholders on all sides when finalising the code to ensure the optimum streamlining.
My noble friend also asked about the rent assessment trigger for MRO. As I said in my opening remarks, we are aware that we need to ensure that the MRO triggers for rent assessments and renewals do not cover, for example, a predetermined rent increase, or a rent reduction to help a tenant through a difficult time. We will look at whether the drafting of the Bill needs to be improved to avoid such consequences.
Amendments 33AW, 33AX and 33AY from the noble Lord, Lord Whitty, would amend the Government’s own Amendment 33AV, which relates to the extension of code protections. I thank him again for his constructive contributions to our debate. As I said earlier, the Government will provide the continuation of protections when and where it matters. After a sale from a code to a non-code company, when the purchasing company offers new terms those must be prepared in line with the statutory code. This includes the transparency and rent negotiation provisions, and these changes will ensure that we have preserved the tenant’s right to a fair tied rent.
If the terms do not change, the tenant will not be in a worse situation but will have the right to a rent review under the code if local economic circumstances change and impact on their trade or if there is a significant price increase. If the purchasing company breaches the code, the tenant can refer the dispute to the adjudicator, who has ample powers of redress under the Arbitration Act, including the power to set a fair rent. It is appropriate and proportionate to ensure that the code protections apply until the first occasion when the tenant negotiates a new deal with the purchasing company, because this is when any disadvantage from the sale first presents itself and can be remedied through negotiation between parties.
In setting the threshold of 500 tied pubs for the code, the Government respected the wishes of the other place not to overburden smaller regional and family brewers. Therefore if we are to require that they are to be subject to the code in certain circumstances, this must be in a targeted and proportionate manner.
The noble Lord, Lord Whitty, would like to provide code protections for a longer, 10-year period. While I can accept that in one sense it is attractive to protect the tenant for a longer and fixed period, we need to have evidence for the period we would choose. Bearing in mind the concern of the other place not to overburden family brewers, the Government consider that it is proportionate to continue with the code protections until the first rent assessment and that after that the tenant is on the same footing as existing tenants of the purchasing company. Independent Family Brewers of Britain has committed to continuing the industry’s self-regulation system for its members, with access to a dispute resolution system.
Finally, I also do not consider that the noble Lord’s Amendment 33AY meets the test of proportionality. It would mean that despite not being subject to the code, a family brewer buying a code pub would be required to provide the market rent only option for that pub. This would potentially deny the family brewer the right to exercise their chosen model and discourage it from buying pubs from code companies for continued use as pubs. In addition, after taking advice from government lawyers and from external counsel—a highly respected competition, public law and European specialist—it is the Government’s view that it would be a disproportionate infringement of the property rights of pub-owning companies for the market rent only protection to continue in the case of a sale. Frankly, I do not agree with the noble Lord, Lord Mendelsohn, having seen the advice, and it is not normal practice to publish such advice because of loss of legal privilege.
The uncertainty created by the possibility of MRO would negatively impact on the property’s sale value. We have therefore sought a more proportionate way of protecting the tenant’s interests, which I have already set out. Achieving a proportionate balance between the interests of tenants and pub-owning companies is important to successfully defend any legal challenge.
The noble Lord, Lord Mendelsohn, referred to the Landlord and Tenant Act 1987, whose purpose was to protect the co-tenants of a block of flats in the event of a sale by the landlord. The Act allows tenants to be collectively offered the purchase of the residential property before the landlord can offer it for sale on the open market. Business tenants, and so pub tenants, are excluded from such protections, as the purpose of Parliament was to protect residential tenants of a multioccupier property. This is not analogous with the case of pub tenants. Furthermore, we do not think that this protection is appropriate in relation to pub premises, as pub tenants are not constrained from making an offer for the property should the pub company wish to sell it.
The noble Lord’s amendment would also mean that the investigatory powers of the adjudicator, and its related enforcement powers, would be included in the code extension. These powers have a specific function, which is to investigate systemic breaches of the code. It would not, therefore, be reasonable to apply them to family brewers that are covered by the code only by virtue of pubs they have purchased from code companies.
The noble Lord, Lord Snape, expressed a fear that the adjudicator would be emasculated—I think that was his word—in cases of the code being extended to tenants when their pub is sold. I assure him that the adjudicator is not being emasculated. He will be able to arbitrate on any alleged code breaches, including setting a fair tied rent, if necessary. The only powers that the adjudicator will not have after a pub is sold are the power to investigate a purchasing company and to impose such sanctions afterwards. That seems to me to give the right balance.
I share the noble Lord’s wish to extend protections to give a fair deal for the tenant where his pub is sold to a new company. This we have done in the amendments that we have proposed today, and this includes the ability to turn to the adjudicator for arbitration if they have a problem in doing so. That will be an important guarantee of tenants’ rights. The noble Lord has been very persistent and very constructive, and I hope in the circumstances that he will not press his amendments and that my noble friend Lord Stoneham will also feel content with my explanation.
The noble Lord, Lord Mendelsohn, asked how the stocking requirement would work. Under Clause 43(5), the Secretary of State may set out in the code terms that are required to be in a lease for it to be MRO compliant, including any terms that would be considered unreasonable. For example, if the requirement has the effect of reintroducing a product tie-in, the lease will not be MRO compliant. We will consider this in detail when we come to implement these provisions in the code. Of course, Clause 62(3) gives the adjudicator the power to set out guidance in relation to any matters regarding the Pubs Code, including the application of its provisions as well as steps that pub-owning businesses must take to comply with the code.
Lord Mendelsohn
Will the Minister confirm that we may return to matters contained in Amendments 33AS, 33AW, 33AX and 33AY at Third Reading?
Baroness Neville-Rolfe
My Lords, I was about to make the point that there are concerns on both sides. If the noble Lord wishes to press these amendments, we should test the opinion of the House.
Lord Mendelsohn
My Lords, I rise briefly in support of the amendments tabled by the noble Lord, Lord Stoneham, who has been an assiduous follower of the Bill. These are important tidying-up amendments that help correct and clarify some key measures in the Bill. In particular, Amendment 33AR is an essential requirement to make sure that there is consistency in the Bill. I hope that either the amendment will be accepted or the Government will agree to bring it back at Third Reading.
Baroness Neville-Rolfe
My Lords, I am afraid that I cannot agree to this amendment. I explained why we could agree to “must” elsewhere in the Bill but we are unable to agree to this amendment for reasons that I have also explained.
Lord Stoneham of Droxford
In that case, is my noble friend going to talk about Amendment 33AR? I will probably have to accept what she says about the other amendments, but I should like a definitive response on Amendment 33AR.
Baroness Neville-Rolfe
My Lords, I apologise for the confusion. There are a lot of different amendments here and perhaps I may have noble Lords’ patience. Perhaps the noble Lord could clarify to which amendments in which groups he seeks a response, because there are two or three different ones that relate to “must” and “may”. I explained where I was happy to accept “must”. If he is asking me to accept it in other places, there are reasons that I can go through.
My apologies to the House; we have moved on more rapidly than I could possibly have believed. I thank the noble Lord, Lord Stoneham, for his amendments. Amendments 33H and 33K would change two references to “may” in Clause 42. This would turn the powers in the Pubs Code to require pub companies to provide parallel rent assessments and give the adjudicator functions in relation to PRAs into duties. We have made a commitment to this House to introduce PRA. This commitment, together with the duty on the Secretary of State to produce the Pubs Code in Clause 42(1), means that the Government must deliver on these provisions in the secondary legislation one year after these provisions come into force, as I explained a minute ago. There can be no doubt that we will introduce these provisions.
We had similar debates on a number of topics in Committee. As I set out then, it is standard legislative drafting to refer to provisions that “may” be set out in secondary legislation to preserve some flexibility. If we were to change these “mays” into “musts”, we would need to be aware of the possibility of overly restricting and restraining the use of these powers. For example, we have said that the adjudicator “may”, in the interests of fairness and administrative effectiveness, choose not to charge fees to smaller pub companies that have bought only one pub formerly owned by a pub company. These amendments would remove such flexibility and I hope my noble friend will recognise the undesirability of that. I can assure him that the Government will include all the provisions set out in the Bill in the statutory code, which will be made by secondary legislation and subject to parliamentary scrutiny by the affirmative procedure.
With noble Lords’ permission, I shall comment on Amendments 33AJ, 33AL and 33AP. Where the Bill provides that the Secretary of State “may” by regulations give the adjudicator functions in relation to dispute resolution and determining rent for market rent only, it is clear that the Government must set out these functions for the adjudicator in secondary legislation. Clause 42(1) sets out a clear duty on the Government to introduce the statutory code within 12 months of the Bill coming into force—14 months from Royal Assent, as I have said—and to establish an adjudicator to enforce the code. The code must include the market rent only option and the adjudicator must therefore be able to enforce the market rent only option.
I turn now to Amendment 33AR. The definition of a tied pub set out in Clause 68 determines the scope of the regime and deliberately focuses on the alcohol tie, rather than other product and service ties. This is because it is in the abuse of the combination of the alcohol tie and property rent that we have evidence of problems in the relationship between tenants and pub-owning companies. This has been documented in the evidence we received to the Government’s consultation, in the continued correspondence the department receives from tied tenants, and in the multiple reports into the sector carried out by the BIS Select Committee. These reports and the evidence we have received point to problems with the alcohol tie.
The requirements for a market rent only-compliant agreement set out in the Bill specify that an agreement made once the tenant has opted for MRO must not include any alcohol, product or service ties. This is to ensure, when a tenant opts for MRO, that he or she is offered a genuinely free-of-tie agreement. However, it does not follow that all pubs with any kind of tie should be brought into the scope of the code at the outset. Amending the definition of a tied pub in the way proposed is a different prospect, as this changes the scope and application of the measures as a whole. For example, this would mean that a pub with no alcohol tie but with a service tie of some description would be covered by the legislation. This would bring into scope a pub that is contracted to a pub-owning company for something like cleaning services, but is in all other respects free of tie and able to purchase beer and other products from any source. This is not the sort of pub where we have evidence of a problem, and I believe we must avoid inadvertently capturing free-of-tie pubs and creating greater uncertainty in the regime. Focusing these measures on those pubs that are tied for their beer and alcohol will ensure that we target that part of the market where we have evidence of a problem.
I hope that my noble friend Lord Stoneham has found my explanation reassuring. I know it is all very complex, but on the basis of my full explanation, which I think has explained why the Bill says “may” and “must” on different occasions, I hope that he will feel reassured and able to withdraw his amendment.
Lord Berkeley
My Lords, could the noble Baroness clarify—I, too, feel that it is a bit complicated—that the first five amendments in this group from the noble Lord, Lord Stoneham, which replace “may” with “must”, will in fact be done in secondary legislation? Even if she does not accept these amendments, will their spirit and meaning be in the secondary legislation?
Baroness Neville-Rolfe
I am sorry; I think he is a friend on this occasion. The noble Lord, Lord Berkeley—I will have to go back to Lords school shortly. As I explained in my long reply, it is standard legislative drafting to refer to provisions that “may” be set out in secondary legislation. In practice, we will do all the things that I have described. Therefore, I feel that these “musts” are not needed.
Lord Stoneham of Droxford
I thank my noble friend for the reassurance that we will do these things. On my last amendment, Amendment 33AR, which I will be happy not to move, all I ask, in the final phases of looking through, is that the clauses I mentioned, Clause 68(5) and Clause 43(4)(a)(ii), coincide with each other.
Baroness Wheatcroft
I thank my noble friend Lord Hodgson and I support him in his amendment because it finds the balance between being overly prescriptive and legislating to give some comfort to pub owners, thus persuading them that it is safe for them to invest. I cannot support the noble Lord, Lord Mendelsohn, in his amendment. It seems to be far too prescriptive for the Bill, as others have said, and somewhat contradictory. The Bill already states that a trigger event for an MRO will be something that was unforeseen. An investment agreement, by its very nature, will have to be something that is negotiated.
Surely there are pub owners and pub landlords who are capable of negotiating an investment agreement that suits both sides. I do not subscribe to the view that all pub owners are out to do the dirty on their tenants or that all tenants are weaklings. Indeed, the Pub Landlord, that character who is so well known to television viewers, is standing up to Nigel Farage in South Thanet, although it has to be said that that particular pub landlord has not been seen there very often.
We need to offer landlords some protection so that, if owners invest in their pubs, they will not immediately be forced into an MRO. The trigger, as cited in the amendment tabled by the noble Lord, Lord Mendelsohn, would have that option. What sensible landlord is going to put money into his pub if the recipient could instantly trigger an MRO? There needs to be some scope for negotiation. My noble friend the Minister has shown that she is open to negotiation and consultation, and the amendment tabled by my noble friend Lord Hodgson would be the best way forward. However, perhaps the Minister could reassure us that she sees the need for investment to be encouraged and that she will find a way of giving pub owners and landlords the protection they need in order to invest in their estate.
Baroness Neville-Rolfe
My Lords, I am grateful to the noble Lord, Lord Mendelsohn, and my noble friend Lord Hodgson for their amendments and for providing us with an opportunity to debate further the very important question of continued investment by pub-owning companies in tied pubs. That is especially the case because, as my noble friend Lord Hodgson has just said, pubs are having to reinvent themselves in the 21st century. As we have heard, these two amendments approach the issue in rather different ways, and I understand the motivations behind both. I can reassure the noble Lord and my noble friend that the Government absolutely want to see investment in tied pubs. That is key to the success of the industry, both for pub companies and for tenants. We want to see pubs thriving and the new arrangements to work.
I think we all accept that the possibility of pubs exercising the market rent only option will create some uncertainty for pub companies, and it is possible that there might be more uncertainty than they can live with if they are thinking of making a substantial investment in a pub. It is equally clear that there is some nervousness around asking tenants to defer some of their MRO rights in return for investment and that serious consideration needs to be given to how this would work in practice and the safeguards that need to be in place. As I said earlier in our debate, we have been considering how best to address this and strike the right balance. I can reassure my noble friend Lord Hodgson that the Bill as drafted does not prevent pub companies issuing the tenant with a new lease alongside an offer of investment, and no amendment to the Bill is necessary to enable companies to do so.
As my noble friend pointed out, a new agreement may attract costs for tenants, including legal costs and stamp duty.
The situation means that the MRO triggers on rent review or renewal would not be available to the tenant for a period of five years, as that is the maximum interval that the code will currently allow between rent assessments. It would, however, provide the pub company with some certainty. We recognise that there will be occasions where a larger investment—
Lord Hodgson of Astley Abbotts
I am not quite clear whether my noble friend said that there was or was not a problem with stamp duty. My understanding is that there are repeat stamp duty obligations; in other words, you write off the stamp duty of the lease that is running and have to start again every time you have a new agreement, and for five years that is another £5,000, plus whatever you have written off before, plus the legal costs. I am not clear whether she said that was a problem. If this is too difficult and technical, I am happy for her to write to me.
Baroness Neville-Rolfe
My noble friend is right: a new agreement would appear to attract costs for tenants, which would include legal costs and stamp duty.
As I was saying, we recognise that there will be occasions where a larger investment requires a longer return-on-investment period. After careful consideration and discussion with stakeholders, the Government have decided to address this issue, but to do so via secondary legislation, using the powers in Clause 42. I can reassure the noble Lord and my noble friend that the Government are committed to using these powers to set out in the code different rent assessment periods for different amounts of substantial capital investment offered. We will consult on what constitutes substantial capital investment and what the waiver period should be for different amounts. But we are clear that this could extend the rent assessment interval beyond the usual five years where it is appropriate to do so. This would mean that MRO cannot be exercised during the waiver period unless one of the triggers of a change of circumstances beyond the tenant’s control, or a significant price increase, is met.
In our discussions with stakeholders, we have heard varying calls for the length of waiver period that would be required to enable a pub company to see a return on its investment. These calls have varied between the five years suggested by the amendment moved by the noble Lord, Lord Mendelsohn, and 10 years. Clearly, individual circumstances will differ and we need to understand the details through consultation before we set this out in secondary legislation. The code will set out the safeguards that must be met to ensure that the tenant is protected from attempts to abuse a waiver. Again, it is vital that we consult on these to get them right.
I was glad that the noble Lord, Lord Mendelsohn, welcomed the idea of providing for investment. He set out a number of understandable concerns and potential safeguards where I think there is a lot of agreement but where we will need to work out the detail; for example, ensuring that the investment is substantial, that the tenant must take independent advice before agreeing to the deal, and that it is a genuine investment and not running repairs. He also mentioned that the pub company should not be able to require that a waiver agreement involves opting out of the Landlord and Tenant Act. I can reassure him that, using existing powers, we could restrict a pub company from requiring an opt-out of the Landlord and Tenant Act protections as a condition of investment.
My noble friend Lord Hodgson set out two areas of protection in his amendment: “significant investment” and “specified period”. Again, I think we all agree that these are important, and the secondary legislation I am proposing will set them out in detail. To meet the concerns of my noble friend Lord Younger, it will indeed be by affirmative resolution, which will enable us to have a debate.
There are other potential safeguards which will really benefit from consultation. The noble Lord, Lord Mendelsohn, asked whether the tenant can buy out of their agreement at a later date or source the finance from elsewhere. We will want to consider safeguards around ensuring that a pub company delivers the investment it promises, including when the deferral period should start. The adjudicator will have the power to intervene and arbitrate disputes where the landlord has breached the relevant provisions of the code. Remedies under the Arbitration Act are wide-ranging and the adjudicator can order redress which includes the payment of money in appropriate circumstances. I agree with the noble Lord, Lord Mendelsohn, that we need to take account of the fact that different sums of investment are significant for different types of pub—I think that he talked about urban and rural pubs, but it is probably even more complex than that. This is again a matter for secondary legislation and consultation.
(a) that the tenancy or licence concerned is entered into —(i) on the date on which the determination of the estimated rent is made;(ii) in an arm’s length transaction ;(iii) after proper marketing; and(iv) between parties each of whom has acted knowledgeably, prudently and willingly; and(b) ”
Baroness Neville-Rolfe
My Lords, I thank my noble friend Lord Hodgson for championing the industry. I agree about the importance of investment. There has been some investment in the industry, and I hope there will be more if we get these important reforms right. I also agree about the importance of franchising as a new potential avenue of prosperity for the sector. I thank the noble Lord, Lord Mendelsohn, for his amendment, which I will come to.
Amendment 33Y seeks to provide that the market rent-only option does not apply to franchise agreements. My noble friend defines them as,
“agreements whereby no rent is paid by the”,
tenant,
“and their share of the profit is unaffected by the price paid for tied products”.
The Government recognise that there are turnover-based pub agreements on the market where the tenant’s interests are arguably more aligned with the pub company because both rely on a fixed proportion of turnover. The tenant does not face the combination of wet and dry rent, as with traditional agreements. The benefits of a franchise are that you are buying a proven business concept that has been tested by the franchiser. That should mean that your risk as a franchisee is reduced. Alongside the turnover share element, this would seem an important part of what constitutes a genuine franchise.
However, pub franchises also retain some characteristics of a traditional tied agreement that mean the tenant is still at risk. For example, the tenant is locked into the agreement for at least five years with no means to change the terms. The pub company remains in a stronger negotiating position, as we understand that the relative turnover share figure is fixed and generally non-negotiable, and a franchisee is unable to shop around for a better deal on some or all of his products and services.
However, after much consideration, I am pleased to confirm to my noble friend that the Government have listened to concerns expressed and agree that genuine franchises should be exempted from the MRO provisions. Given the differences between traditional tied pubs and genuine franchise agreements, we consider this a reasonable exemption, but we are clear that the remaining code protections should still apply.
We will exempt only genuine franchise agreements, and I shall make a few comments about our thoughts here. My noble friend put forward in his amendment two sensible criteria that are fundamental to defining a genuine franchise, but there are likely to be others. Therefore, it would be wise to consult further before we specify exactly what we mean by a pub franchise, and to take this forward in secondary legislation. It is our intention to provide for the exemption using the existing Clause 71.
In relation to Harry Ramsden’s, the code will regulate the alcohol tie in pubs. Harry Ramsden’s fish and chip shop clearly is not a pub, and Clause 71 enables the Government to exempt Harry Ramsden’s from the regime. Similar examples will be considered on a case-by-case basis. We will look at the points made today about Harry Ramsden’s and Starbucks in developing the code.
My noble friend Lord Hodgson was concerned about potential unintended consequences and asked for more to be done in the Bill. This is a difficult one. The best way to reduce the risks of unintended consequences is to allow for flexibility through secondary legislation because it is then possible to tweak arrangements should unintended consequences arise. If we fix these matters in primary legislation, any unintended consequences would be much harder to remedy.
On Amendment 33AZ from the noble Lord, Lord Mendelsohn, I am pleased to reassure him that the regulations we will make under Clause 71 will be subject to affirmative procedure, so we will be able to have a proper debate. However, we believe that subordinate legislation is the right way ahead. I am making it clear in Hansard that that is the Government’s intention, and my Bill team will be working away on franchise and other aspects of the subordinate legislation as soon as the Bill receives Royal Assent.
I hope that my noble friend will feel reassured by my response and will agree to withdraw the amendment.
Lord Hodgson of Astley Abbotts
My Lords, I thought for one wonderful moment that my noble friend was going to agree to put something in the Bill, but it will be secondary legislation again, with all the disadvantages and uncertainties that that implies.
Of course the noble Lord, Lord Mendelsohn, has a family familiarity with franchising, in the sense that his uncle was the moving spirit of the British Franchise Association, which of course would help set the standards that would decide what a pub franchise looks like, because it has a lot of experience in that area—so this will come back to haunt him yet.
My concern about the Minister’s reply is that we find ourselves unable to move the structure of the pub trade forward. We need to find new and better models. There will always be concerns that any new corporate structure we invent carries the risk of it being used for a loophole. That is not the case, because the amendment brings every single aspect of the franchise within the Pubs Code and the Pubs Code Adjudicator’s power except the single issue that you cannot ask for a market rent option because you are not paying any rent.
I accept my noble friend’s assurances that the Government intend to make sure that this is properly dealt with in consultation, but they are making a mistake because there is a danger of slip ’twixt cup and lip. My concern is that the trade finds itself locked into a structure with which neither side is entirely satisfied, and that we may therefore perpetuate enmity, suspicion and difficulty. I had hoped to find a way out of that by getting something in the Bill. I am sorry that the Government will not do that, but I see no point in taking it any further on this occasion. I therefore beg leave to withdraw the amendment.
Lord Hodgson of Astley Abbotts
My Lords, it will not surprise the noble Lord, Lord Whitty, that I urge the Government not to accept the amendment. The issue of the change in the MRO and its introduction is about tenants: that is to say, self-employed business men and women and the imbalance of bargaining power between the individual tenant and the brewery, in particular because of the issue of the rent charged and the charge for products and services supplied. That is the heart of the problem.
Managed pubs—the other big category—are run by people who are employed by the brewery, who run it like a branch office. The noble Lord, Lord Snape, referred earlier to how Wetherspoon runs its pubs. It has managers in every pub who are employees. They are paid a salary and a bonus, with all the other aspects that go with corporate existence. To include those in a Pubs Code would be wrong, first because there is no rent to pay and no question of any aspect of the Pubs Code applying to pubs like that. These are completely different vehicles and corporate structures, and the application of the Pubs Code can have focus and effect only where you are dealing with independent businessmen, whether they are tied, franchised, or whatever.
Baroness Neville-Rolfe
My Lords, I thank the noble Lord, Lord Whitty, for his amendment, and for his engagement on these provisions in advance of Report. As the noble Lord explained, these amendments would change the definition of a pub-owning business for the purposes of the Pubs Code to one with 500 or more pubs of any kind rather than 500 or more tied pubs.
The noble Lord asked about franchises. They will indeed be included for the purposes of the 500, as I think my noble friend Lord Hodgson helpfully explained when we were discussing it earlier. The definition focuses on the alcohol tie, because that is where we have evidence of problems, as colourfully explained in four Business Select Committee reports, all of which focused on the tie.
I understand the noble Lord’s view that companies with more than 500 pubs of any kind are companies of sufficient size that they can cope with complying with the code. However, the amendments would lead to some striking anomalies. A pub-owning company with 499 pubs, all of which are tied, would not be covered by the code, but a pub-owning company with 500 managed or free-of-tie pubs and just one tied pub would be covered for that one tied pub.
“(2A) A person not falling within subsection (1) and who is the landlord of a tied pub occupied by a tied pub tenant who has extended protection in relation to that tied pub is also a pub-owning business for the purposes of this Part in relation to that occupation.
(2B) A tied pub tenant has “extended protection in relation to a tied pub” if—
(a) the tenant occupies the tied pub under a tenancy or licence at a time when the landlord is a person who is a pub-owning business by virtue of subsection (1), and(b) before the end of that tenancy or licence the landlord is no longer such a person (whether because of a transfer of title or because the landlord ceases to fall within subsection (1)).(2C) But a tied pub tenant ceases to have “extended protection in relation to a tied pub” on the earlier of—
(a) the end of the tenancy or licence concerned, and(b) the conclusion of the first rent assessment or assessment of money payable in lieu of rent to be provided after the landlord is no longer a person who is a pub-owning business by virtue of subsection (1).(2D) The Secretary of State may for the purposes of subsections (2B) and (2C) by regulations specify—
(a) when a tenancy or licence ends;(b) when a rent assessment or assessment of money payable in lieu of rent is concluded.(2E) Nothing in sections 43 to 45 and sections 53 to 59 has effect in relation to a person who is a pub-owning business by virtue of subsection (2A).”
Baroness Neville-Rolfe
My Lords, I thank the noble Lord for tabling the amendment and am grateful to him for providing the background to it. I think he suggested that it was a probing amendment but it may be helpful if I explain some of the concerns it may raise in its current form. We must also consider the potential costs and wider implications of such a measure and the actions that we are already taking in this space, so I will endeavour to do that.
If we attempted to register the beneficial owners of all properties, that would impact on the 24 million titles on the Land Register. I am glad that this amendment would add the Land Registry to the long list of government departments involved in helping with this Bill. Last year, the Land Registry processed more than 32 million applications, which underpinned property sales worth hundreds of billions of pounds. Depending on how it is defined, a register of this kind could impact on millions of home owners, the vast majority of whom will be entirely law-abiding, as I sure the noble Lord agrees. It could also potentially deter perfectly lawful inward investment in all our major towns and cities.
If we consider the problem of companies—particularly overseas companies—being used to obscure the identity of the true owners of high-value properties, the scale of the problem is comparatively small. Approximately 0.4% of all titles in England and Wales are registered to overseas companies. Implementing the proposed reform would require us either to create a brand new register or substantially to alter either the existing Land Register, the company register or both. We need to consider carefully the links and interactions between these registers. We would also need to consider new mechanisms for requiring individuals to provide beneficial ownership information in relation to property.
In short, the cost and wider implications of such a measure would be huge for both government and property owners. This seems perverse in a Bill that is designed to help small business. Furthermore, a property register is not required by any international standards or EU directive. It is not a commitment the UK or our G7 or G20 partners have made. On that basis, I urge noble Lords to consider this problem in the context of the regimes we already have in place and the reforms we are committed to make in this important Bill. For example, the Land Registry already records the legal owner of a property, both residential and commercial, whether that is an individual or a company, and regardless of whether that company has been registered in the UK. Where the registered owner is a company, the Land Registry will also record the Companies House registration number for UK companies, or the territory of incorporation for overseas companies. This is information that can be accessed by the public. Where allegations of corruption or fraud are raised, the Land Registry works across a variety of government agencies to assist their investigations.
Let me be clear: the UK does not turn a blind eye to corruption and money laundering. Noble Lords will no doubt be familiar with the case of James Ibori, a former Nigerian politician who is reported to have owned a number of UK properties. In 2012, he was sentenced by a UK court to 13 years’ imprisonment for money laundering.
In this Bill we are taking forward world-leading reforms to ensure transparency of UK company ownership and control. We will talk about the register of people with significant control in more detail shortly. However, that reform means that, subject to the will of Parliament, from 2016 all UK companies will have to register their beneficial owners at Companies House. So where a property is owned by a UK company, information on that company’s beneficial ownership will be immediately accessible, online and for free once submitted. However, the misuse of companies is a global problem, and we need a global solution. That is why the UK is working hard to encourage other jurisdictions to take equally ambitious steps. We are seeing progress. G7 and G20 countries have made firm commitments on company beneficial ownership. EU member states will be required to implement central registers accessible to those with a “legitimate interest” when the fourth money laundering directive is adopted shortly.
These commitments will all help ensure that UK authorities can quickly and easily access beneficial ownership information on non-UK companies. These reforms to company transparency form part of our commitment to protecting the integrity of our financial system and ensuring that the UK maintains a strong reputation as a clean and safe place to invest, and a hostile environment for corrupt funds.
We will of course continue to look at what more can be done to tackle company misuse and illicit financial flows. However, that action must be proportionate and targeted. For all the reasons that I have set out, I do not believe that a register of property beneficial ownership represents a sensible or proportionate step. I hope noble Lords have been reassured by my explanation and some of the information that I have given, and that the amendment will be withdrawn.
Lord Mendelsohn
My Lords, there is certain irony in a Government who used the company wrapper on the purchase of property as a means of enhancing taxation perhaps not having been alive to the considerable opportunities that the amendment may present in the long run to deal with a variety of other things.
Aside from that, I thank the Minister for her reply. Uppermost in our considerations, in this and other amendments that we will come to, is ensuring there is the right level of transparency to ensure the integrity of how this country’s financial system operates. That is a goal we share. Both parties feel that, over time, they have dealt with the issue, only to find that problems come up again. It will constantly be work in progress and there is no step that one can take that will be sufficient to give everyone confidence that these matters will be dealt with. It would be useful for the Government to examine this area further. It is not a question of size or numbers. The reason that this problem is manageable is that a smaller number is involved, as opposed to the large mass of homes, and there will be little impact on the larger, law-abiding mass of people.
I am encouraged by what the noble Baroness has said. It is encouraging that we are looking to amendments that produce further enhancements to make sure that the ambitions that she has set out are fulfilled. I hope that she is sympathetic to them. I beg leave to withdraw the amendment.
(i) if, in relation to that company, restrictions on using or disclosing any of the individual’s PSC particulars are in force under regulations under section 790ZF, that fact.”
Baroness Neville-Rolfe
My Lords, this group of amendments responds to recommendations of the Delegated Powers and Regulatory Reform Committee and to a number of issues raised in Committee. I thank the DPRRC for its diligent scrutiny of the Bill and am happy to accept all its recommendations relating to Parts 7 to 9 of the Bill.
Amendments 54 and 57 mean that regulations to provide for exceptions to the ban on corporate directors, and orders modifying Schedule 1 to the Company Directors Disqualification Act 1986, will be subject to the affirmative resolution procedure. Amendments 47 to 50 provide that the statutory guidance on the meaning of “significant influence and control” for the register of people with significant control will be subject to the negative resolution procedure, instead of merely being laid before Parliament.
I have also reflected on certain amendments tabled in Committee by the noble Lords, Lord Mitchell, Lord Watson of Invergowrie, Lord Phillips of Sudbury and Lord Stevenson of Balmacara, who is sitting opposite. The noble Lords called for information in the central register to be kept up to date. The Bill contains a power for the Secretary of State to increase the frequency with which PSC information is filed at Companies House. I can now confirm the Government’s intention to use that power to do this.
Having discussed the issue with Companies House, we intend to allow the central register to operate for around 12 months before using the power—in other words, in 2017. This will allow the system to bed in, thereby helping companies’ transition to the new requirements. In 2017, we will in any case need to increase the frequency with which PSC information is filed at Companies House. This is because proposals in the EU’s soon-to-be-adopted fourth money laundering directive will require all EU member states to have company beneficial ownership information in central registers that is “current”. This means that we could not rely on an annual update to the central register.
Some noble Lords were concerned that the requirement for a person accessing PSC information from the company’s own register to tell the company whether they would disclose information to any other person would be unduly restrictive. On reflection, I agree that requiring those wishing to inspect the register to say whether they would disclose that information to someone else and, if so, to whom, was unnecessarily burdensome. Amendment 42 therefore removes proposed Section 790O(4)(d) of new Part 21A of the Companies Act. However, I can reassure noble Lords that safeguards are still in place around inspection of the company’s own PSC register. The person wanting access must provide his name and address, and the purpose for which the information will be used. If the company suspects the information is not sought for a proper purpose, it may apply to the court to refuse access.
Individuals at serious risk of harm will be able to apply to the registrar to have their information protected from public disclosure. If granted, their information will not be disclosed on the register at Companies House or the company’s own PSC register. To ensure appropriate levels of transparency, noble Lords argued that the fact of a person’s information being protected from public disclosure should be stated on the company and central PSC register. I agree that this is important. It will ensure that users of PSC information know whether a company has PSCs, thereby preventing the company being unfairly accused of having failed to identify its PSCs because there is no information in its register. It will also act as a safeguard against erroneous disclosure of information by a company or Companies House. Amendments 35 and 45 provide for this.
Amendments 44 and 46 are technical. They make clear that a company must not make available for public inspection PSC residential address information, or information protected from public disclosure because the individual is at serious risk of harm.
I turn finally to Amendments 51 and 52. These enable investors in certain non-UK arrangements to be treated in the same way as limited partners in English limited partnerships—an issue raised by my noble friends Lord Flight and Lord Leigh of Hurley in Committee. I agree that we must ensure that investors in foreign limited partnerships that operate in broadly the same way as English limited partnerships are treated in the same way. At the same time, we must ensure that this does not open up a convenient loophole for criminals to exploit. I am satisfied that setting out the characteristics of such arrangements in secondary legislation is the best way to avoid this risk.
It may be helpful if I explain to noble Lords why we have not made equivalent provision for other UK and non-UK structures used for investment purposes. In cases where an individual holds, in the words of the Bill, a “majority stake”—that is, more than 50%—in a fund, and where that fund owns more than 25% of a UK company, we would expect that individual to be disclosed on the register. However, we do not expect companies to look through every investor in a fund to check whether there is a PSC. Nor do we expect investors continually to monitor their holdings in UK companies. I intend to ensure that this point is made clear in guidance and hope that my noble friends are reassured by this explanation. I beg to move.
Lord Watson of Invergowrie (Lab)
My Lords, I offer my support to the Government on Amendments 35 and 42; I very much welcome both. I accept that individuals may have their details protected from being published in the PSC register in exceptional circumstances, and I have been reassured by Ministers’ comments in your Lordships’ House and another place stating that exemptions will be given only in such circumstances. I am sure that that will remain the case. In this respect, the Government have strengthened the Bill during its passage through both Houses. In another place, the Government accepted an amendment from the Member of Parliament for Hartlepool, whereby proposals for classes of companies to be exempted from the register should be subject to the affirmative procedure, which will allow greater scrutiny and debate.
I am also pleased that the Government have introduced Amendment 35 today, which will highlight in the register where a protection exists. This is a real step forward for transparency and accountability.
I have argued at previous stages of the Bill that the public interest test must always be available to challenge an exemption when new evidence comes to light. I ask the Minister whether she will undertake to keep this matter under consideration and to do likewise with regard to publishing a list of broad categories under which exemptions can be given.
Turning to Amendment 42, the requirements associated with proposed new Section 790O(4)(d) to the Companies Act really were quite prohibitive and ran counter to the spirit of the introduction of a register. Removing that proposed new section will have a significant effect. It will allow organisations and members of the public to view businesses’ registers and publish the information where they deem it necessary.
I tabled a similar amendment to this in Committee, and I appreciate the Minister listening and acting on it. I also want to record my thanks to noble Lords from across the House who spoke in favour of that amendment in Committee.
Lord Stevenson of Balmacara (Lab)
My Lords, I simply want to add a little to the comments of my noble friend Lord Watson. In his typically modest way, he did not take enough credit for himself for raising some of the issues. I think he touched on them at the end of his remarks, but without his probing in Committee we perhaps would not have got as far as we have. With the additional help of the DPRRC’s recommendations, which were very firm in a number of areas relating in particular to the change to the affirmative procedure but also to matters related to foreign limited partnerships and directors’ responsibilities, we have now got to a much better place. We are very grateful to the Minister for listening so well and for bringing forward these amendments.
Baroness Neville-Rolfe
I thank noble Lords. I am especially grateful to the noble Lord, Lord Watson, for his support today and for the work that he put into what has become the government amendments. If I may, I will write to him on the public interest test.
Lord Forsyth of Drumlean
My response to that is that it is a fair cop. He is absolutely right that I should have made this speech three months ago. I had no idea, along with, I suspect, 99.99% of the country, that this measure was included in this Bill. I had not read about a desire to set up a register, adding £1 billion to the cost, in any newspaper or seen any great debate about it. Perhaps I have been a little remiss. It is perfectly true that the occasion of this amendment has given me an opportunity to draw attention to the considerable cost involved, which I appreciate was argued at an earlier stage of the Bill.
However, in his speech, the noble Lord argued that the Minister had argued at an earlier stage of the proceedings that she could not accept his amendment because it would add to the costs on small business. I support my noble friend in arguing that we should not add to the costs on small businesses. Therefore, I think I am in order in arguing against this amendment because, as the noble Lord said, it was an issue at an earlier stage.
I apologise to the House that I was not involved at an earlier stage but when one of my noble friends pointed out to me what was in the Bill, I could not believe it. I looked up the Government’s assessment of compliance costs. Certainly, when I was in government, as the noble Lord will remember, impact assessments invariably turned out to be less than what they were. Even at this late stage, I hope that, in rejecting these amendments, my noble friend will think very carefully about introducing this measure at this time of great stress.
I could understand it if all the other G8 countries had their legislation in place; then I could see how it could work. The noble Lord is not addressing my main point; namely, that if we are concerned about people setting up shell companies to hide where their interests lie, passing this legislation will not deal with that problem because people will operate outside other countries. I made a speech the other day which upset Amazon and I received a letter from its public affairs person. I said that Amazon did not pay business rates and corporation tax in the same way as ordinary retail outlets. She pointed out that Amazon pays business rates on its distribution centres. I wrote back and said, “But you haven’t dealt with the point about corporation tax”. We understand that one of the reasons that Luxembourg will meet the quota on overseas aid is because it is based on gross national income, which includes revenues that really should have been in other countries. Therefore, although the amount that it is spending on overseas aid is tiny, it appears to meet the target because of the number of companies that use Luxembourg in that way. If the Government wish to recover the tax that my noble friend is concerned about, the answer is to pass the necessary legislation in the Finance Bill. It is not to ask hard-working people up and down this country to burn the midnight oil filling in registers of the kind proposed, nor to complicate the statute book.
I cannot believe this Bill, which is dealing with small business. It is pages and pages of stuff. The Explanatory Notes would take a whole evening to read. It seems to me that this amendment and the provisions in the Bill relating to the register drive a coach and horses through the Government’s declared policy of reducing the burdens on business and allowing it to concentrate on wealth creation.
Baroness Neville-Rolfe
I am grateful to the noble Lord, Lord Watson, and my noble friend Lord Phillips for these amendments. I thank my noble friends Lord Forsyth and Lord Naseby for reminding us of the needs of small business, many of which will of course be caught by the Bill at a substantial cost, but it will be over 10 years. It has been properly costed in an impact assessment, which has been available for some months. Of course, businesses would have to deal with any additional requirements, as my noble friend has made clear, if we were to impose them. I should equally say that the benefits of the register have the potential to be substantial, whether as a result of improved efficacy of investigations and outcomes where companies are being used to facilitate serious criminal activity, or to businesses as a result of their operation in a more open and trusted environment. As my noble friend Lord Phillips said, this is a cause in favour of transparency and against corruption that the Prime Minister has led.
However, the group of amendments raises important questions about the information in the register of people with significant control and the integrity and accuracy of those data. I turn first to Amendments 36, 37 and 38, which would require details of every company in the ownership chain to be entered in the PSC register. The PSC register is a ground-breaking change and the UK is leading by example. The register will contain information on the individuals who ultimately control UK companies, including how that control is held. I do not think my noble friend was in the House earlier when I ran through some of the international efforts that have been going on and reported on the progress of the money laundering directive. However, I did not deal with the overseas territories and Crown dependencies, which were raised by my noble friend Lord Phillips. We are working closely with the overseas territories and Crown dependencies and are keeping them informed as the UK policy on corporate transparency develops. This will help to feed into their thinking. We believe that they have made significant progress on tax transparency and they have publicly committed to transparency of company ownership. Arguably, more has been achieved in the past year than over the past 10 years.
Some noble Lords and business groups feel that we have gone too far, in particular by making the register publicly available when this is not currently a global requirement. They fear that reform will impose unnecessary costs on business and have an adverse impact on UK competitiveness. These amendments seek to go further. They would require information not only on those individuals but on every legal entity in the ownership chain. The question we have to ask is whether this goes too far. Such an approach is not required by international standards, by the likely EU requirements shortly to be adopted in the fourth money laundering directive or by our G7 or G20 commitments. Nor is it something—this is significant—that the law enforcement community, including HMRC, has called for.
The amendments would add to the already substantial compliance costs. Companies must update their own registers as changes occur. Companies keeping their own registers would have even more information to obtain and keep up to date, plus the compliance cost of notifying every change in every layer of a chain. Companies owning other companies would have to work out if and when they need to report information. These amendments could also adversely impact the utility of the register. More data do not necessarily lead to more transparency. If the amendment were adopted, the very information we want to reveal may be buried under a mass of less relevant data. What matters is who ultimately exercises control, which, subject to the will of Parliament, from next year will be on the public record and not just available to law enforcement agencies. However, I recognise that this is an issue that some noble Lords feel strongly about.
Clause 82 already requires us to undertake a statutory review of the PSC within three years of the requirements coming into force. That review will provide an opportunity to look at the range of issues raised by noble Lords on all sides of the House. I am prepared expressly to consider looking at the question of the ownership chain in the context of that review.
I now turn to Amendment 53. Let me start by making clear that I am absolutely committed to ensuring the integrity and accuracy of information on the public register. I am satisfied that our current approach achieves this. It is based on a combination of pre- and post-registration checks, criminal penalties and public scrutiny. We are looking at what more we can do and have started with the creation of a new register integrity team at Companies House. The team undertakes compliance activities to help companies, ensuring that they are fulfilling their filing responsibilities, and data analysis to identify where specific activities can improve the integrity of the register. The Government already have powers of investigation that allow them, for example, to require the production of documents. Moreover, as the register will be public, transparency will be a driver of accuracy.
Amendment 53 calls for the Secretary of State to lay an annual report before Parliament on measures taken to ensure that PSC data are verified and accurate. A clear requirement on the register to verify every piece of PSC information would not be proportionate. However, I know that this is not what my noble friends have in mind. They want assurance that our proactive approach to ensuring data accuracy will continue. The Government fully support that objective. I do not, however, think that an additional bespoke report is the way to achieve that. The Bill requires the Secretary of State to review whether the register’s objectives have been achieved within three years of its implementation. The accuracy of the information will be a key part of the review as well as all other relevant issues, such as whether additional information on the ownership chain should be recorded.
I can also commit today to ensuring that, in future, Companies House will make explicit reference to activities undertaken to ensure the integrity and accuracy of information on the register in its annual report, which is, of course, presented to Parliament every year.
Lord Forsyth of Drumlean
Given the size and scope of the register, can my noble friend say how exactly Companies House will do that, how many people they will need to employ to achieve that objective and what the likely cost will be?
Baroness Neville-Rolfe
My Lords, the point I was making about reporting is that we would extend the annual report, in any event, so that it covered this new function, which is sensible, and in that context we would obviously look at data and other relevant issues.
The noble Lord asked about the scale of staffing required. I may be able to give him a response if I can make a bit of progress. My normal port of call would be the compliance cost assessment. The answer is that we are going to do this within the existing budget but in co-operation with other enforcement agencies. I have been to see Companies House during the course of swotting up for the Bill and I am impressed by it. It is bringing a more modern approach to the way in which it does things. It has been aware for some time that it is going to be given this new burden and it is ready and willing to pursue it.
Lord Naseby
As I understand my noble friend’s argument, she is saying that her department and other departments are in a similar mode. Their staff will cope with these changes and this huge register at nil cost other than what is already budgeted for the implementation of this Bill. Is that correct?
Baroness Neville-Rolfe
My Lords, agencies such as Companies House have long-term plans to look at the duties coming down the line which they will have to fulfil. They have been aware for some time that this duty will fall on them. Obviously it follows the Prime Minister’s initiative at Lough Erne in 2013 and the money-laundering directive discussions that have been going on in Brussels for a long time. We will be bringing in this register. I will pass on the points that have been made to Companies House but it is ready to tackle this task. Of course, the reason the compliance costs are large is because it is a small amount of work by a large number of companies. It is because the multiplier is so big that you get the compliance costs that you do. That might be of some comfort to my noble friend.
The issue of timing was raised by the noble Lord, Lord Phillips. We intend to require companies to maintain their own PSC registers from January 2016 and to file information at Companies House from April 2016. We publicly set out these intentions in January this year.
On complexity, it will be straightforward for the majority of companies to identify their PSCs. We are thinking carefully about the guidance and communications to companies so that we can get the message across about how they might do it simply and what is required. We have a working group set up to develop guidance which contains representatives from all interested parties including, everyone will be pleased to hear, small business. Our enforcement user group is co-chaired with the National Crime Agency and will look specifically at how to make best use of the PSC data so that, in making this big change, we are using it to good effect and that the benefits I have described come through.
I have set out these points at some length. I hope noble Lords have been reassured by what I have said about the forward plans for the register and its review and will be willing not to press their amendments.
Lord Watson of Invergowrie
Yes, but defining what is a proper purpose is simply not achievable. People will ask for information. If they use that information in a way that is against the law, they leave themselves open to action. That is a protection.
The noble Lord, Lord Borwick, said that he did not understand why the Liberal Democrats or the Labour Party were supporting this legislation. I have to remind him that it is a government Bill, and it is a government Bill with different aspects to it. It did not emanate from his coalition partners or from the Opposition. However, this is one aspect of the Bill which all parts of the House should get behind, because it seeks to achieve transparency. In terms of the way in which British business operates, surely that has to be a positive development.
Baroness Neville-Rolfe
My Lords, I am grateful to the noble Lords, Lord Flight and Lord Borwick, for their amendments. I thank them and the noble Lord, Lord Naseby, for the many points that they have made at a series of meetings and in correspondence, and express the hope that they will encourage business representatives with an eye for simplicity to help with the implementation process so that it is as business- friendly as possible.
We are reasonably confident about our 2016 timeline. We have clear plans in place at Companies House which are already being implemented. All being well, we are on track to meet our 2016 deadline. I know that there can be problems with software, but that is the plan.
Amendments 39 and 40 would allow a company’s own PSC register to be held solely at Companies House. I agree that flexibility is important. That is why the Bill gives private companies the option of holding their company registers solely at Companies House. However, it is important that companies can continue to hold their own register at their registered office, service provider’s office or other suitable location should they wish to do so.
Amendments 41 and 43 would restrict access to a company’s own PSC register to law enforcement and tax authorities. Amendments 55 and 56 would do likewise in respect of PSC information held centrally at Companies House. As I explained during our Committee debates, reducing the level of access to PSC information runs entirely counter to our public commitments on this reform.
Company transparency matters, and it is not just about tackling criminals. The Prime Minister set out the rationale for this back in October 2013. He said that transparency of company control allows businesses better to identify who really owns the companies they are trading with, that it gives developing countries easy access to data without having to submit endless requests for information, and that a public register allows public scrutiny and therefore supports data accuracy.
I know that there are concerns about the impact on privacy of this reform. We are satisfied with the balance that we have struck. We will not, for example, place residential addresses in the public domain, and we will put in place a protection regime that allows individuals at serious risk of harm to apply for their information not to be disclosed.
Of most practical importance, in the coming months the EU will adopt the fourth anti-money laundering directive, which will require member states to implement semi-public central registers of company beneficial ownership. This will ensure that all with a “legitimate interest” can access the register. My noble friend Lord Flight asked what “legitimate” meant. We believe that a legitimate interest would include civil society organisations and journalists in the context of their money-laundering investigations. He also asked what “proper purpose” means. The term is intended to have a wide interpretation and application. We are satisfied that there is no need to define it in the Bill. This is in line with the approach taken for the inspection regime for the register of members. I was reassured to know that if a company suspected that a person wanted access to a company’s PSC register for the purpose only of carrying out identity theft or fraud or using junk mail, that would not be a proper purpose.
Lord Forsyth of Drumlean
I apologise for being somewhat behind the curve, but I was trying to think of an example of what a legitimate purpose is. If, for example, a person wanted to get this information in order to compile the Sunday Times rich list, that would be legitimate if it was made clear that that was why they were seeking the information, but if they asked for the information for another reason and then used it or passed it on to a journalist, they could be sent to prison for two years. Is that what the Minister was saying?
Baroness Neville-Rolfe
My Lords, on the face of it, the first part of the noble Lord’s presumption is correct, but I think that I will take the time to reflect on it further and write to him, because I certainly would not want to mislead the House on such an important point. There are safeguards, but it is also a public register.
I should perhaps answer the question asked by my noble friend Lord Borwick, about the number of threats that individuals receive in the context of the review. I hope that it will reassure him when I say that I intend to look widely at those issues, as I have already said. As he probably knows, threat levels are not directly within my department’s remit, but I certainly intend that the review should consider the impact and efficacy of the protection regime as a whole.
I hope that, in view of the various reassurances that I have given, my noble friend Lord Flight will feel able to withdraw his amendment.
Lord Naseby
My Lords, before my noble friend sits down, will she clarify the point about the impending EU law? What happens if it goes through in, say, nine months, six months or 12 months? It is presumably the intention of Her Majesty’s Government to sign the law and then, if necessary, amend the Bill. Or will they wait another two years, or two and one-quarter years, and then amend it? If we are to sign up in Brussels to a law, it ought to be the law that applies in the United Kingdom, not one that is half Europe and half something else.
Baroness Neville-Rolfe
My Lords, we hope that the directive will be agreed in Brussels in the next few months. It is a directive, so there will be a two-year commencement, as normal. In the mean time we will bring in—and, I hope, road test and make a great success of—the register that we plan. If the detail of the directive requires some change either to the Bill—or, more likely, I suspect, from my experience of European directives, to regulations made under Section 122—that will be laid before the House in the usual way. I take comfort from the fact that that important bit of transparency legislation is going through in Brussels, and one would hope to see it on the statute book as soon as possible. That is the situation.
Lord Flight
My Lords, I suggest that what will happen is that the EU directive will come forth and we will be heavily gold-plated on its requirement. It is pretty clear that its requirement is for a register, but one available only for legitimate purposes.
I know that I have no chance of persuading the Government at this stage to fall in line with the EU and honour the privacy of private companies. What right is there for a snooping journalist to go around finding out what wealth someone has through the introduction of the register and looking up information about their private affairs? I find it quite unacceptable that that should be done, just like that, when it adds absolutely nothing to the task of unearthing fiscal and terrorist crime.
I have tried throughout to persuade the Government that it would be more sensible to limit access essentially to those tasked with finding crime, so there is little point in pushing the amendment further. I beg leave to withdraw the amendment.
“790SA Protected information
(1) Section 790N and subsections (1) and (2) of section 790O are subject to—
(a) section 790ZE (protection of information as to usual residential address), and(b) any provision of regulations made under section 790ZF (protection of material).(2) Subsection (1) is not to be taken to affect the generality of the power conferred by virtue of section 790ZF(3)(ea).”
Baroness Neville-Rolfe
My Lords, I thank the noble Lord. As I outlined in Committee, the Government have overseen a number of changes to the takeover code that have made the takeover regime stronger and more robust. Amendment 56A deals with the disclosure of compliance with directors’ duties. As I set out during that debate, Section 172 of the Companies Act 2006 makes it clear that directors have a general duty to promote the success of the company. Directors must comply with their duties at all times. That includes actively considering how they comply with their duties during takeovers, mergers and any other transactions that affect the ownership or control of the company of which they are a director. The question before us is how best to ensure that they do so.
The takeover code already requires offeree companies to provide the board’s opinion on the offer’s effect on,
“all the company’s interests, including, specifically, employment”.
If a company is listed on the London Stock Exchange, the listing rules will also require the company to make an announcement or send an appropriate circular to shareholders and obtain their prior approval for the most significant class 1 transactions.
As I know from personal experience, that covers a considerable amount of the ground suggested by the amendment. As I am sure the noble Lord will agree, significant policy changes need to be underpinned by clear evidence and supporting analysis. Requiring all companies to make disclosures in the broad way proposed would place a heavy burden on business and stifle innovation and entrepreneurship. This is partly because we believe that this amendment could be read as covering not only transactions for publicly traded companies, such as those regulated by the takeover code, but all purchases and sales of private companies. There are 3.3 million private companies in the UK, so the potential for business burden is substantial.
“(9) An order under this section may not be made unless a draft of the instrument containing it has been laid before, and approved by a resolution of, each”