Enterprise Bill [HL]

Earl of Kinnoull Excerpts

Wednesday 28th October 2015 Grand Committee

[Lord Cope of Berkeley (Con)]

My Lords, I too am sympathetic to the idea of a review of this subject. I do not go along entirely with the precise wording of the amendment. The noble Lord has just identified the final subsection of the proposed new clause with its requirement for the Secretary of State to implement in regulations whatever is suggested in the review. I do not really think that that would work, nor would it be satisfactory from Parliament’s point of view, as we discovered on Monday. Nevertheless, the idea of a review is important. Quite a lot has already been said about the problems in this area. I think of it in terms of, for example, bricklayers. Many bricklaying companies are quite small concerns doing a lot of specialist work. If one of them is involved in a large project, which may be part of a major commercial project or an estate of houses, its work is done at quite an early stage.

In some cases, the work is organised by not very substantial firms—the developers do not necessarily have huge reserves in comparison with the size of the projects. Also, not all housing estates that are built sell readily, which can cause great problems for the developers. However, they should not be able to take that out on the bricklayers who did their work several years before, or for that matter on the fellows who laid the drains, as that work has to be done at the start and it has to be examined at the start. It is no good complaining that the drains were not properly laid when everything else has been done; that is the wrong time to find out. The clerk of works and the building inspectors should discover that at a much earlier stage.

The suggested purpose of retention—to make sure that the work has been properly done—therefore has less force than might be supposed in a case of that kind. If the bricklayers are not being paid for maybe five years after they have done their work, that is an extremely difficult situation to be in. The subcontracting nature of the construction industry, which adds great value in flexibility for the industry—that is why the system has grown up as it has—is an important factor in considering how retention works. I am in favour of this proposal being examined to see what can be done to improve the situation. As has been said, some contractors manage without it, but the public sector on the whole does not. Perhaps this requires not law but instructions from the Government concerning the public sector’s attitude towards contracts of this kind.

[The Earl of Kinnoull (CB)]

My Lords, I too support the amendment in the name of the noble Lord, Lord Aberdare. I should declare my interests, and not only those on the register of the House—until earlier this year, I had been for 10 years or so a director of the construction bond insurance companies in the Hiscox group, as well as having been responsible for the bit of Hiscox which dealt with United Kingdom household insurances and which was therefore rebuilding the houses of our clients.

I congratulate the noble Lord on the thinking behind the amendment. This is an interestingly complex area. We have heard about the problem of bad behaviour, but the other problem is the failure of the various parties concerned to understand the credit risks involved in construction contracts. In the JCT standard construction contracts, there are provisions for payments of the retention moneys into trust accounts, which I suspect are never really honoured. That is a big area which should be looked at.

A lot of the business that the construction bond area of Hiscox dealt in was Irish. Ireland had a particularly severe construction dip following the financial crisis and there was quite a bit of evidence of what I would call the domino effect. A head contractor would get into financial difficulties and would drag down a lot of smaller contractors and, because trust accounts were not in place, the smaller contractors lost out. Given the Government’s theme of trying to give every help to the small and the brave, I believe that this could be dealt with. It would not be expensive and could easily benefit small businesses quite a bit.

[Lord Hodgson of Astley Abbotts]

I have a lot of sympathy with the amendment but, unlike my noble friend Lord Cope or the noble Lord, Lord O’Neill, I am interested in what happens at the end of the contract, when retention moneys and liquidated damages wash one into another. The concept of liquidated damages is perfectly fair. It is designed to make the main manufacturer finish on time; if he fails to do so, a penalty is attached. Of course, the main contractor then passes the penalty on in his subcontract. This can mean that the penalty in relation to the value of the work of the subcontractor can be very small indeed, and that the retentions become commensurately large.

For example, take a company bypassing a piece of road with liquidating damages of maybe several thousand pounds a week for delays beyond the contract date, and a subcontractor whose job it is to put up the signage at the end. The chap who does the foundations is a bit late; it is a very wet, cold and rainy winter so the earth-moving is behind; and the spring is late in coming so the tarmac cannot be laid. By the time the small firm that was subcontracted to do the signage comes to do its job, it is very close up against the end of the contract date. Of course that firm is carrying in its contract the liquidating damages sum for the contract as a whole, which has been passed on to it. In these circumstances, retentions can very often be withheld against the completion of the contract as a whole, in case it is argued that the subcontractor played some role or part in the overall delay. The fact that he may have had an incredibly small amount of time to do his work because the people before him were delayed is of course something to be argued about by lawyers, and it is hard for small subcontractors to have sufficient equality of arms.

As we begin to develop this idea, I hope that the issues of liquidating damages and how they impact in contractual terms on small subcontractors can form part of the retention-moneys and withholding-of-sums-due concerns.

--- Later in debate ---

There is room for debate around some of the claims made by the previous Government, which suggested that some £10.6 billion of savings were made during that Parliament because of reductions in red tape and regulation. A close read of the independent Regulatory Policy Committee suggests that that is a great overstatement and that more costs were incurred than were saved. If we are going to get this right, it falls back to a definition, and I ask the noble Baroness to take that thought away. It may not be something that we can do within the Bill, but there is a big job of work to be done. We must think again about how we make regulations, how the impact assessments are done to support them and how we discuss them. I beg to move.

[The Earl of Kinnoull]

My Lords, I rise to speak to Amendment 49CA. I declare my interests as set out in the register, especially in insurance. The amendment is about old gold plate, which I talked about at Second Reading. I will first pick up on something that the noble Lord, Lord Stevenson, said in his thought-provoking introduction, which was that businesses do not care where things come from. I am not sure that I agree with that. One thing they certainly do care about is the level playing field. If a business has a European Union regulation and it is over-implemented in its home nation and not in its competitor nations, it is at a disadvantage and cares a lot.

The old gold plate—it should be called lead plate because it is a great drain on business resource—problem can be briefly summarised by saying that there have been three eras of transposition of EU regulations. In reverse order, there is the era from coalition times—2011—until today, where there are very good transposition arrangements: a good solid anti-gold plate look at any legislation and sunset and review clauses to ensure that things are self-righting if they are not quite right.

Then there is the period from 2006 and the Davidson review—of which more in a second—when the issue had been recognised and there were good anti-gold plate arrangements, but the use of sunset and review clauses was limited. Then there is the period prior to that, which I call old gold plate, where there was no self-righting mechanism for the shedding of the gold plate and the bringing into line of the UK with the other competitor nations of our regulatory environment.

I had a quick look at Lord Davidson’s review in preparation for this debate. I noticed that chapter 2 is called “Cases of Gold Plating”. The first three words of chapter 2 are “insurance mediation directive”. I was reminded last night by senior insurance industry colleagues that the 12 pages of that directive were turned by the FSA into more than 1,000 pages of stuff, which has been a source of great pain for my beloved home industry.

The reason behind the amendment is to try to provide a mechanism for getting the old gold plate reviewed. It is a mechanism which is compliant with the coalition, in that it is a one-shot mechanism—an individual, as a regulator, is in charge of reviewing themselves once and writing a report. That is all they have to do. It is a sort of reverse name and shame mechanism.

It was the best that I could do in terms of thinking up how one could attack the problem. It could be the case, but I hope it is not, that the Minister does not consider this a suitable Bill in which to begin attacking the problem. Sooner or later, for sound commercial reasons, we are going to have to tackle the old gold plate. I note that Lord Davidson’s report was in 2006, and nothing substantial has happened on his recommendations about the insurance mediation directive.

[Baroness Neville-Rolfe]

I thank noble Lords for their amendments in this group. I am grateful for the noble Lord, Lord Stevenson’s introduction. In the interests of time, I suggest I respond constructively over a drink to some of his more philosophical points. Yesterday, the World Bank published its Doing Business 2016 report and ranked the UK as sixth-best country in the world for ease of doing business—something to celebrate. This is partly due to the work on the regulation stock and the regulation flow that we are all trying to make a success. This Government want to make the UK the best place in the world to start and grow a business, and the Bill is a step towards achieving that. So there is more to do, and I believe that adding regulators to the purview of debate on regulation will help to reduce burdens on business. I commend the RPC for its independence and honesty, which is well illustrated by the comments that have been made.

--- Later in debate ---

[Lord Stevenson of Balmacara]

My Lords, I do not think that these amendments will take up too much time. In moving Amendment 48G I shall speak also to Amendments 48H and 49A. This deals with another of our good ideas which are dreamt up late at night. We thought that a focus on productivity seems to be lacking in this Bill. Enterprise is there in spades, but productivity does not appear, although it is the cause célèbre of our time. We ought to have something about it, and I wonder whether it would be possible to have the Bill team look at the question of whether obligations can be placed on the regulators to look at this dimension when considering how they will extend their programme of work as well as report on it. We also felt that this was something that the Small Business Commissioner might want to look at, although given the response we have had so far on extending the remit of the commissioner, I do not expect to get very far with this one. But it is a good idea and I would be grateful if the noble Baroness could consider it. I beg to move.

[The Earl of Kinnoull]

My Lords, I rise to speak to my Amendment 49ZA. Earlier today we heard a lot of the arguments expressed eloquently by the noble Lord, Lord Mendelsohn, in the first group of amendments concerning the importance of anonymity in certain circumstances, and those arguments apply here. The danger is that people, whether warranted or not, fear that they would be punished by a regulator if they make a complaint. I will say a couple of things in addition.

First, in commercial life I have always been interested to see the complaints that have come in, mercifully not too many at Hiscox because I am delighted to know that the Minister is a customer. But they have enabled us to make our business better by understanding what was going wrong, and so as a regulator I would say that you want to see as many complaints as possible and that an anonymity mechanism is in your interests. Secondly, in my speech at Second Reading I talked about the attitude of regulators. I have dealt with a heck of a lot of regulators in many different countries during my business career. Taking a leap, the most amusing one was definitely when Hiscox ended up owning a sugar refinery in Brazil, or a controlling interest in it. I was on its board for three years, and the regulator concerned was the rabbi who had to give us the kosher certificate for our sugar before we could sell to Coca-Cola or to Sara Lee, the cake company.

The best regulators are definitely people with a collaborative and helpful approach, and the worst ones represent a great bind on business. I think that the naming and shaming mechanism, which this would drive as well, because the regulators will have to write an annual report, of having consistent comment about poor attitude would be one way in which my concerns about trying to improve the attitude of all regulators in Britain—we all know some who have a bad attitude—could be addressed and the situation improved. There may be other opportunities in the Bill for it to be improved, and I would like to talk about that outside this Room. But driving good attitude is something which is in the interests of small businesses and more generally.