Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill (Second sitting)

Jeff Smith Excerpts

Committee stage
Tuesday 6th July 2021 Public Bill Committees

[The Chair]

Thank you. This session will run to 2.45 pm. As you will understand, you will be questioned by members of the Committee. Are you going to start the questioning, Mr Smith?

[Jeff Smith (Manchester, Withington) (Lab)]

Q40 Yes. Good afternoon; thank you for being with us. I thought it might be useful to start by asking both of you to make some introductory remarks about, in particular, clause 1 of the Bill and whether you think that it is the appropriate way of dealing with the problems that the Government have flagged up.

Adrian Blaylock: Local government has faced significant financial pressure since the start of the pandemic—and before that, for other reasons—and the Bill attempts to address, potentially, some of the issues that local government could face if the covid restrictions are not prevented from being considered in the material change of circumstance appeals. The potential loss of income to local government could be pretty significant, and what local government really needs is continuity of funding and certainty of funding, so to carry the risk of material change of circumstances, which could be the case for many years, depending on how long they take to actually make their way through the system, is significant. I think that the Bill addresses that potential issue; it does what it is intended to do.

David Magor: Adrian is correct in his summary. Certainly the impact of the material change of circumstances and the challenges that were outstanding will have had a significant financial effect on local government, and of course that will have reduced Government revenues. The Chancellor, in the Budget, had not forecast the anticipated loss as a result of these material changes in circumstance. The rating professionals, the rating advisers to the ratepayers, had chosen what was the only route available to them at the time; the route that they lawfully had to take was to treat the coronavirus impact as a material change of circumstance and act reasonably on behalf of their clients, which they did. But of course the financial impact was going to be considerable and so we have a situation where Government have intervened and said that a better way of dealing with it is through a relief scheme. All things considered, and provided that the relief is paid in a timely manner and the amount of relief is appropriate, that is a satisfactory way of dealing with it.

That having been said, the reductions in assessment that were being mooted with regard to the material change of circumstance were quite considerable, and it has raised expectations of ratepayers. One hopes that when the Bill is passed into law, as we expect it to be, and the relief scheme is put in place, the amount of relief will be sufficient to satisfy the desires of those particular ratepayers. Certain sectors, like retail, hospitality and leisure, have done very well out of the reliefs that have been awarded to them. This measure, of course, picks up others, who were not covered by those particular rules. One hopes that, when the Bill becomes law and the relief scheme is put in place, it will meet the needs of the ratepayers.

[Jeff Smith]

Q Thank you; that is very helpful. We will probably come back in a second to the issue of the amount. I suppose that this measure can be considered as shifting the risk from local authorities to Government and businesses—well, hopefully not businesses if the Government provide the money. Do you have any comments on the view from business and whether there are businesses and sectors that are particularly concerned? We have been approached by, for example, the airports, which do not think the money that will be available will be enough to tide them through the problems that they are facing. Other businesses or sectors may have a similar view. I am just wondering whether you have a view on that.

David Magor: Obviously, the Chancellor made provision for the airports with a special airport scheme, but of course the rateable value of the major airports in England is very significant. One can look at Heathrow, for example. It has a very significant value, and the amount of relief that was made available to it was nowhere near its rates liability. You can look at all the airports in England and compare those airports with the way airports have been treated in, for example, Scotland, where they have had 100% relief. The expectations of the airport providers and the companies running the airports are very high. However, the amount does not appear to be sufficient to meet the desires of all the ratepayers who had outstanding challenges and large assessments, like the airports. The challenge for the Government is to ensure that those particular ratepayers are satisfied.

As far as businesses generally are concerned, there are of course those that have done very well through the pandemic: their trading positions and profits have remained stable. You can argue that giving relief to them, as well as to those that have really suffered—particularly companies in the supply chain—would be unfair. Of course, if the new relief scheme is going to be dealt with by application—companies can choose to apply—one hopes the criteria of that relief scheme will ensure that relief is paid to those who are entitled to it. Meeting the expectations of the ratepayers who have had challenges in is going to be the real problem with the outcome of this Bill.

[Jeff Smith]

Q That takes me on to another question, specifically for Mr Magor, but Mr Blaylock may have a comment as well. The IRRV written evidence that we received flags up the issue of how you differentiate between covid and non-covid challenges and says that a “transparent, evidence-based process” needs to be adopted. I completely agree. I suppose the big question is how you do that. Would you have any comments on how you might define the difference between a covid and a non-covid challenge?

David Magor: The challenges are laid down in legislation; we know what the challenges, and the circumstances surrounding those challenges, are. It is for the valuation officer to look at every individual challenge and how that challenge is made up, and to decide whether it is covid-related or related to a normal material change of circumstance.

The important thing is that the valuation officer inspects every challenge and makes a reasonable decision in every case. That will be absolutely critical. The ones that are covid alone will stand out quite clearly. However, with those where you perhaps have a change in the high street, with the closure of a major retailer because of trading patterns, you have to be very careful to make sure that you do not mistake the fact that the retailer was intending to close anyway for the impact of covid. Remember, the valuation officer is very experienced in this process. The material change of circumstance legislation has been around for a long time, and there is lots of case law. There is absolutely no reason why the valuation officer cannot act in a reasonable and transparent way.

Adrian Blaylock: What David says is absolutely right. It is important to recognise that there are material changes of circumstance that are not related to covid. These can still go through the normal process, and the Valuation Office Agency should be able to distinguish between the different types.

[Seema Malhotra (Feltham and Heston) (Lab/Co-op)]

Q Thank you both for giving evidence to us today. I wonder if I could get your views on the value of what I think you have described as a “funding pot”—the £1.5 billion that has been allocated. Do you have concerns about the sufficiency of that, and what are those concerns based on?

The second question is more specifically to Mr Blaylock and relates to the IRRV’s evidence, in particular to paragraph 6, where you are talking about the benefits of amending provisions of section 47 of the Local Government Finance Act 1988. It would be useful to talk through your argument there to help us understand it.

Adrian Blaylock: That is probably aimed at Mr Magor, rather than me. It is really hard to know whether the size of the pot—the £1.5 billion—is large enough or not. The way I expect this scheme to work is for the Government to release guidance on the types of business they expect local government to support. In the announcement on 25 March, they gave a couple of examples of types of businesses that have not been affected but would see a reduction due to a material change of circumstance, and one that has been affected but would not see a reduction through a material change of circumstance.

Local government has to follow guidance issued by the Ministry of Housing, Communities and Local Government. That is in the regulations; section 47 of the Local Government Finance Act 1988 says that it must be taken into account. Until we know exactly the types of business the Government are expecting local government to give support to, it is really hard to say whether £1.5 billion is enough. Airports were given as an example. If airports appear in the guidance as something that the Government want local government to support, as Mr Magor says, their rateable values are large, and therefore the pot probably would not be sufficient, but it is really hard to say at this point in time.

David Magor: On the size of the overall pot, we at the institute have the advantage of having a comprehensive database going back to 1990 of all non-domestic properties. We have been looking at that database and trying to do some early forecasting of how big the pot should be.

You can see from the ministerial statements that the Minister has made quite clear exactly the direction that he wants the relief to go in. You can do a rough calculation by taking out retail, hospitality and leisure properties, exempt properties, small businesses and so on, and you are left with an effective amount of rateable value and an effective number of properties that would get the relief. Of course, the Government have also added local economic factors into the decision on the distribution of the pot, and we do not know the detail of them.

If you look at the eligible rateable value and the eligible properties, once you take out the exempt properties and those that have already received relief, you start to come to a figure well in excess of £1.5 billion. You are starting to look at a figure perhaps three times that amount. Initially, that sounds quite frightening, but of course we do not know the economic impact of covid on individual companies. Again, the Minister said in his guidance that the scheme will be by application, so it will be for companies to choose whether they apply.

No doubt, if we see the draft guidance and it gives clear indications of the way local government is to work, you can frame an application form in such a way that it will target the relief at those in most need. Until we see the guidance, it is difficult to give a clear forecast of whether the pot is large enough, mainly because of the mysterious economic factor. The implication from the Minister’s statements is that it will differ from area to area, so it will be impossible to know what figures the Minister has taken into account unless we have absolute transparency and those figures are made available.

Of course, there is a danger that individual local authorities will challenge the figure. If it is not sufficiently clear, the first thing that elected members will do is compare their figure with that of a similar local authority, and if it is significantly different, they will want to know why, so there are a few challenges ahead for the Minister.

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[Seema Malhotra]

Q To ask a follow-up question, you were talking about local authorities and schemes they may need to set up, Mr Magor. What are you expecting in the guidance from Ministers? How soon does that guidance need to come? We heard concerns about how quickly this needs to happen. From your experience, could you share your view on how long that pot could last? Does there need to be reporting and review of expenditure? What do you expect from the Government on that and on working with local authorities on this?

David Magor: I know Adrian will pick up on the impact of it, but I will start. On the guidance, for reliefs under section 47 of the Local Government Finance Act 1988, the Minster is required to give guidance and local authorities to have regard to it. You would expect the guidance to be sufficient to enable local authorities to develop a scheme within the Government’s wishes. From ministerial statements, we know that that scheme will not include awarding relief to retail, hospitality and leisure, or those in receipt of other reliefs that remove their rate liability, and that economic factors will be considered from company to company. I would expect the guidance to clarify those issues and make it clear how the individual pots will operate.

I would also expect it to give local authorities an element of discretion—after all, section 47 is about discretionary relief—to have a scheme shaped for their area. This is why it has to be done in stages. The first is passing the Bill into law. Then, you issue the guidance with the distribution, give local authorities a chance to analyse that distribution and understand whether it is fair, and what to do at a local level. Local authorities then have regard to that guidance and devise a scheme, which has to be done quickly.

If we had not had this proposed change in the law, the valuation officer and ratepayers’ agents would be settling matters now, and I suspect refunds would have started to circulate. If this scheme is to replace those MCC challenges, you would like to think it would be in force later this year, and that any reliefs would be paid during the current financial year— that must be the aim.

The pot is a one-off that would be distributed as quickly as possible, because now is the time when the money is needed. The real issue for local authorities is devising a scheme and ensuring that they can distribute the pot fairly, and that they do not run out of money. That, in itself, will be a massive problem.

Adrian Blaylock: The only point I would add to that is timing. I think you questioned the timing and the need for haste; as David said, businesses need this money now. The only thing I would question is to ask what this relief pot meant to be compensating for. The majority of the lockdown measures and the restrictions applied during 2020-21 rather than during 2021-22, and there is a specific part of section 47 of the Local Government Finance Act that says that a local authority cannot take a decision more than six months after the financial year to which the decision relates. So, strictly speaking, as at the end of September a local authority will not be permitted to give discretionary relief rate back into 2020-21. That means that either everything needs to be in place and all the local schemes need to be up and running by the end of September, or the relief is not given for 2020-21 but is given for 2021-22 instead. However, what then happens to the businesses that had a material change of circumstances lodged for 2020-21 that are no longer in existence? They have missed out on that.

As for the timing, it is important that the Bill gets through as quickly as possible, but it is also important for people to understand that local government also have to go through their own governance processes. Devising a scheme is not just a case of somebody sitting at a desk and saying, “There you go, this is our scheme”. It needs to go through the proper governance process, which will take time. It could take two or three months for all that to go through its own internal processes, on top of whatever time it takes for the legislation to be passed and the guidance and allocations to be issued by MHCLG. Timing is crucial in this process.

[Jeff Smith]

Q Looking at the parliamentary timetable, it seems very unlikely that the Bill will be passed before the end of September, which creates the problem that you have just identified. I think we are all fairly clear that the Bill will pass at some point. Is there any reason, in your view, why the Government cannot give indicative guidance ahead of—you talked about it being in three stages—stage 1 being completed? Is there any reason why indicative guidance and possibly indicative valuation amounts for each local authority could not be given?

Adrian Blaylock: I do not see why not. If the Government have already taken the decision on the value of the pot—I do not know what they are doing about the allocations, but if they can work out what the allocations need to be for each local authority, they must have a clue now what they want to support, what areas they want to support and where they want local government to focus their attention. If that was to happen, it would allow local government to start formulating plans and start going through the process of putting together their own local policies. I think that would be a positive step.

David Magor: I agree wholeheartedly with that. Draft guidance and an indicative figure of the amount for each local authority would be most welcome at this stage. It would enable planning to start; it would also enable the local authorities to challenge. Better those challenges come now, as we are preparing. We are going through—let us hope—a long, hot summer, and through that long, hot summer local government accountants have nothing better to do than to work out what their relief should be, so I am sure that they would be pleased to see some indicative figures and draft guidance.

[Jeff Smith]

Q Clause 1 is effectively trying to make retrospective the regulations that were passed in March. I appreciate that only three months or so have passed since then, so it may be too early to make a judgment, but is there anything we can learn from the way that businesses or local authorities have reacted to those regulations? Are there any lessons that we can take from those operations so far?

Adrian Blaylock: Not to my knowledge.

David Magor: I think the overall reaction to where we are now has been relatively positive. The Government are in the process of removing this element of the material change of circumstance, and are replacing it with a grant scheme—with funding of a relief scheme. I think the only problem is the timing—that is the issue. If there is any lesson to be learned, it is that ratepayers are expecting their relief now and local authorities need to provide it in the current financial year, because they are the customer-facing service. They face the ratepayer and have to deal with the complaints that the relief has not been paid promptly enough.

[The Chair]

Gentlemen, your timing has been excellent, because you have concluded answers to the questions just within the time limit. On behalf of the Committee, I thank you both for your evidence this afternoon.

Examination of Witness

Sarah Pickup gave evidence.

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[The Chair]

Q We have until 3.15 pm for this session. Could you confirm your details for the record?

Sarah Pickup: I am Sarah Pickup. I am deputy chief executive of the Local Government Association, with a lead on finance. I do not have the level of technical, detailed knowledge that your preceding witnesses had, but I can certainly bring you the LGA’s views on questions.

[Jeff Smith]

Q By way of introduction, could I ask for the view of the LGA on the principle of the Bill, which I think you welcome, and your concerns about any of the detail?

Sarah Pickup: You are correct: we welcome the principle of the Bill. An unquantified amount of material change of circumstances resolved over an unspecified period of time would be a really difficult prospect for local government to manage, and the need to make provisions would have been substantial. We have spoken to Manchester City Council, for example, which said it had calculated that it might need to make provision of around £11 million in respect of these material change of circumstances, which obviously would have meant that it had to take that resource from somewhere else. We think that there is a substantial level of challenges—we understand around 50,000 nationally. Manchester alone has had a 569% increase in those appeals on the year before, and 88% of those were to do with material change of circumstances, so certainly something needed to be done.

We welcome the prospect of a discretionary scheme, because we think councils will be able to assess where the real damage and the hit is on businesses in their area, but there are of course some challenges in devising a scheme within a fixed sum of money, so we await the guidance. A plus to local discretion is that you can try to fit it to your circumstances, but of course you have to fulfil the promises you set out in your scheme, and the resources put a cap on that. There are some challenges here, but in principle we absolutely welcome this as a way forward.

The other thing I just refer to is the timing issue, which was referred to by the previous witness. Our understanding is the same—that if someone has not made a decision by September, they cannot relate the change to the previous year. The appeals that have come in have come in largely for 2020-21; certainly, the Manchester increase refers to 2020-21. I think that is what businesses were applying for. The fact that it is ongoing into 2021-22 raises another question. There is a question about whether this fund is intended to apply to 2020-21, 2021-22 or to an unspecified period over which coronavirus has an impact. Those things will need to be addressed in the guidance, and we will need to understand whether we are trying to meet the losses to businesses in one year or in more than one year, and the timing of the regulations is important there as well.

[Jeff Smith]

Q That is really helpful. My second question was going to be whether you feel that £1.5 billion sounds like an adequate figure based on the indications you have had from local authorities. Given that you find it difficult to work out the time period involved, I am guessing that it is even more difficult to judge whether £1.5 billion is sufficient. Do you have any view on that?

Sarah Pickup: It is extremely difficult, actually. If we assume that it is meant to be for one year, I think Manchester’s assessment of £11 million represents about 1% of its rateable value. If in a very rough, back-of-the-envelope calculation you were to extrapolate that up to a national picture, it would take you to about £1.1 billion. However, that is a big extrapolation. Manchester has calculated what share it thinks it might get of the £1.5 billion pot, and it thinks that will permit it to offer reductions of around 10% to non-hospitality and leisure properties across its area. Of course, not all of them may need a reduction or will qualify for a payment from this fund, but I think it reinforces the point made earlier—that the expectations of business of what the fund might be able to deliver for them might not be realised in reality, for two reasons. First, more than one year is at stake here, and, secondly, people will have to design their schemes within the confines of the resources available through the distribution mechanism.

It is difficult without knowing how prescriptive the guidance will be. We understand there will be discretions here, for the very reason that you have to fit your scheme to the money available. What we do not want is some guidance that leads businesses to expect more than councils can possibly deliver within the sum available in their area.

[Jeff Smith]

Q Clearly, the guidance is absolutely key. Can you confirm whether discussions are happening with the LGA or individual councils about drafting that guidance?

Sarah Pickup: Not that I am aware of. The guidance would normally follow from the legislation. Obviously, people will have to give some thought to it alongside the passing of the Bill. We have not been involved to date in discussions about developing that guidance. We would welcome the opportunity to get involved in that with the Department.

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[Ms Rimmer]

Thank you.

[Jeff Smith]

Q When we get the guidance—I imagine that the LGA would welcome an early indication of what that might look like—there will be quite a job for councils. They will have to design the scheme and agree it with their members. They will then have to do all the eligibility assessments. There might be IT updates to facilitate the new relief and there will presumably be some sort of reporting requirements. That is a lot of extra burden. I am guessing that the LGA might welcome some new burdens funding. Do you have any thoughts on that and what an appropriate amount might be?

Sarah Pickup: I could not give you an estimate of the amount of funding, but it is clearly a new burden. In most of the instances when new burdens have come along during the pandemic, some resourcing has been put in place to help with the design of new schemes.

Of course, revenues and benefits officers—in particular, finance officers in councils—have implemented a huge number of different schemes, some of which they have had to consult on and some of which have been much more directed and put in place by the Government. They have done that throughout the pandemic and this is another instance of something they will have to do.

The key thing, of course, is that those officers are given time. Sometimes, what we have found is that the money is announced, the guidance is passed or the regulations are put in place and then immediately everyone starts asking councils, “Where is the money? Why has it not been put out yet?”. As you said, councils need to be given time to go through due process to put schemes in place. A lot will depend on what the guidance says—and yes, early sight of it or early drafts and indications of the direction of travel, as well as early indications of the sums of money available, would be extremely helpful in helping councils to prepare.

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[The Chair]

Q As we have concluded the second panel slightly earlier than scheduled, we move to the third panel. I welcome Andrew Agathangelou. This session can run until 4 o’clock. I ask our witness from the Transparency Task Force to introduce himself for the record.

Andrew Agathangelou: Good afternoon. I am Andy Agathangelou, the founder of the Transparency Task Force. The Transparency Task Force is a certified social enterprise dedicated to helping ensure that consumers are treated fairly by the financial industry. I should also mention in passing that I am involved with two all-party parliamentary groups: one on pension scams and the other on personal banking and fairer financial services. My involvement is as the chair of the secretariat committee to both those APPGs. If the Chair would like, I would be very happy to elaborate on the work of the Transparency Task Force and our particular interest in this matter.

[Jeff Smith]

Q Welcome, and thank you for being with us. Following on from your last comment, it would be a helpful start if you could indicate your particular interest in this legislation, to what extent you welcome it and what the concerns around it are.

Andrew Agathangelou: The Transparency Task Force is all about trying to bring about regulatory reforms so that consumers get a better deal from the financial industry. An increasingly large proportion of our time and effort goes towards trying to sort out the terrible mess that occurs when people are scammed. We are very interested in cases such as Blackmore Bond, London Capital & Finance, Connaught, Lendy and Ark. There is a very long and very sad list of scams that have affected quite literally thousands of people in our country.

The reason I am particularly interested in the Bill is that we have noticed over many years that a colossal amount of carnage is being caused by a relatively small number of criminally minded individuals. It will not surprise you that one of their methodologies—one of the ways that they work—is phoenixing. As soon as they start to feel the temperature rise around them, they close down shop and reappear somewhere else. These individuals tend to be highly intelligent, very sophisticated and very good at planning and strategising their next step. They always have a plan B, C, D, E and F up their sleeves. Frankly, they have been running rings around the regulators and enforcement agencies. One of the most powerful weapons they have is the ability to dissolve their organisations and pop up somewhere else. That is why the Bill is of real interest to me. It will also be of enormous interest, I am sure, to the many tens of thousands of people out there who have lost as a consequence of criminal activity.

I do feel the need, if I may, to elaborate on the loss. When somebody finds that they have lost their entire life savings, quite literally in some cases, when they are in their 60s—in other words, too late in their life to do much about it—the financial loss is absolutely horrific, but the emotional consequences, the shock to the system, can be so bad that they find themselves self-harming. People find themselves under huge amounts of emotional stress and strain. It is particularly bad when, let us say, it is the husband who has had his entire pension savings taken from him by crooks; he is so fearful of the situation he has created for himself and his family that he has not even told his wife that it has happened. There are people out there who are living day by day with a horrific secret—that they have lost a lot of money—and they have not quite got it in them to tell their partners and families what has happened.

I am very deliberately painting this picture for you, Mr Smith, because the work that you are doing with the Bill is of great importance. If there is anything that can be done to mitigate the risk of that kind of emotional and catastrophic carnage, I would be very pleased to give it all the support I can, and I am sure everybody else would feel the same way.

The very, very worst manifestation of this—in fact, I will give you two. The worst manifestation is when you learn about children who self-harm routinely and repetitively because of the stress-induced state of the household resulting from the family’s life savings being tricked away from them by criminals. Of course, one step beyond that is when people take their own lives. There have been many suicides as a direct consequence of this kind of malpractice. That is why I am so pleased to be here today to share whatever I can about this Bill.

[Jeff Smith]

Q Thank you. You make a very powerful case for the ability to take action against these kinds of individuals. The question that follows on from that is: do you think the measures in the Bill are significant enough to have a material effect on the kind of individuals you are talking about who dissolve companies? Are they enough of a deterrent to make a real difference to this issue?

Andrew Agathangelou: The short answer is yes. I would characterise this Bill as a worthwhile step in the right direction. However, there is ample scope for improvement in relation to all the other areas that it touches on. I see it, hopefully, as a spearhead that might lead to other things happening as a direct consequence.

I will give you one quick example. There has been so much in the way of catastrophic regulatory failure over recent years that all the related enforcement agencies and bits of the regulatory framework need to wake up to the fact that our country has a horrific situation on its hands, in terms of the amount of crime that is going on. I believe I am right in saying that the National Crime Agency says that the annual cost of fraud in this country is something like £190 billion. That is a very big figure. Just to put that in context, I think it is well over half what the NHS costs. However, according to Anthony Stansfeld, the former Thames Valley police and crime commissioner, who is a man we have admired for quite some time for reasons that I will go on to, something like 0.03% of the amount lost in fraud, white-collar crime and economic crime is being given to the police as a resource to go and fight it. I believe I am right in saying that only 1% of the police budget goes towards fighting those sorts of issues.

My point is: yes, brilliant, let us stop criminally-minded directors from phoenixing, but please understand that this is just one small part of the ecosystem. What Parliament might want to do as a consequence of this Bill is to sit back and say, “Fine. We’ve done something really worth while in moving this Bill forward, but let’s not kid ourselves that the job is done. We’ve actually only just started to scratch the surface.”

Organisations such as Action Fraud, which, by the way—I can’t resist the joke—we call “Inaction Fraud”, the Financial Reporting Council, the Financial Conduct Authority, the Pensions Regulator, the National Crime Agency, the Serious Fraud Office, City of London police, the Insolvency Service itself, the Solicitors Regulation Authority and the professional bodies for the accounting and audit professions are all part of the landscape. They all need sorting out because of the part that they play in allowing a lot of crime to go on that really should not happen.

Let me give one further quick example. I am aware that there are people who are at risk of being scammed by directors of organisations operating today that were doing exactly the same thing last year, the year before that and the year before that. I think we can go back as far as 11 years. We are aware of dodgy directors who were scamming people 11 years ago, and were known to be scammers, but are still operating. Frankly—excuse my language—it drives me nuts.

[Jeff Smith]

Q What tools should the Government use to follow and recoup the money from the directors identified as culpable in these circumstances?

Andrew Agathangelou: I am quite a plain-speaking person, so forgive me, but I am about to be quite plain. The regulators need to enforce. There is evidence to suggest that, for example, despite the fact that one of the most important statutory duties of the Financial Conduct Authority—our primary conduct regulator in the UK for the financial service industry—is to try to protect consumers from harm, it is a little reluctant to enforce. That is not my opinion; the chief executive and the chairman of the Financial Conduct Authority gave evidence to the Treasury Committee earlier this year—I will try to find the link for you—admitting, frankly, that they were risk averse, I think the phrase was, when it comes to enforcing and mitigating. That is not verbatim, but that was the gist of it.

Would it not be good, ladies and gentlemen, if as well as having rules in place designed to protect consumers, we had a regulatory framework that had the gumption to go after the baddies whenever it could? There are two very important reasons for that. First, we might get them locked up or make them pay fines, and so on. That is great. That is exactly what we want, but even more importantly than that, it will show that there is good reason for these dodgy directors to not carry on their wicked craft.

It is currently a very low-risk career path for somebody to become a criminally minded director of a company. The chances of their getting caught are very low. The chances of their paying a fine are very low. The chances of their being banged up are also very low. Why? Because the regulatory framework as a whole is not built to cope with the tsunami of criminal activity that is going on. I would say, from a long list of potential improvements, that one of them would be to please encourage our regulators to regulate robustly and enforce effectively.

[Seema Malhotra]

Q Let me follow up on that. Thank you for giving evidence. You laid out a broad landscape of institutions and organisations that you said were together allowing the crime to go on, on the scale that you believe it is. You went on to say that the regulation is not really built to cope with what is happening. As part of that systemic issue, what do you think the Insolvency Service is not doing as well as it should, and does it have the resources that it needs to perform its functions effectively?

Andrew Agathangelou: I will answer your question, but before I do I would like to elaborate on a small point that you made. I actually think that the regulatory framework has been built by Parliament to do what it is designed to do. The problem is not that it is not capable of doing it; it just does not do it. It is a bit like having a really fast car that is just not being driven fast by the driver. The problem is not the vehicle; it is who or what is controlling it. I just thought I would throw that in.

To respond to your question more specifically, again I am a plain-speaking person. The Transparency Task Force ran an event last Thursday, with the title “The Great Insolvency Scam”. I can provide the Committee with the recorded video testimony of that. The reason why we ran an event called “The Great Insolvency Scam” is that we see insolvency as a very dark and murky part of the world of business and commerce. We believe that there is a pile of evidence suggesting that the Insolvency Service has been weaponised. That is where the Insolvency Service is frankly abusing its very extensive powers.

The net result is that people sometimes have their homes or businesses taken away from them, as a consequence of engineered bankruptcies. It really is an horrific, dark area. It sometimes results in people self-harming, committing suicide and all the rest of it. I will now answer your question directly. Personally, the Insolvency Service is a can of worms. I will repeat that it is my personal opinion. I think the Insolvency Service, in part, is a can of worms that needs to be opened up and looked into. It needs to be properly regulated.

I have enormous concern about giving the Insolvency Service lots more money to carry out the additional work that is going to be necessary as a consequence of this Bill going through, if it does, without first ensuring that the service is fit for purpose. These are very strong views. I am not an extreme individual who has crazy ideas. I have just listened to and seen the testimony of people who have suffered as a consequence of the types of things I am talking about.

Think of this Bill as the start of an ongoing process of reform. Please do not think of it as the end point. Please do not make the mistake of thinking that it is a “job done” situation. It really is not. There is so much to be looked at. I ask the Committee to do all it can, on behalf of the British public, to ensure that the Insolvency Service stops doing what it sometimes does.

--- Later in debate ---

[Jeff Smith]

Q Welcome, Kate. We are keen to get the view of business about how this legislation will affect businesses. Of course, UKHospitality will primarily be about hospitality businesses, but I am sure that you have supply chain businesses—and you will certainly be concerned with supply chain businesses that are some of the targets for the funding in this package.

I suppose my first question is this: what is the general view of UKHospitality of the measures, allied with the £1.5 billion funding package that goes with them?

Kate Nicholls: The key point that we would make is that we have had a high degree of support from the hospitality sector and the supply chain that goes alongside it throughout the course of the pandemic. We have a challenge in the supply chain in so far as the discretionary grants made available to our businesses within the supply chain have been allocated by local authorities, and by and large that has not flowed through as swiftly or as seamlessly as could possibly have been the case.

In addition, the business rate support made available to the supply chain businesses, and those businesses operating in the wider hospitality community that have been excluded from the hospitality and leisure grants, is not flowing through to the level that it needs to. Perhaps that is an indication of the large volume of businesses that are trying to get to grips with things and trying to get part of the wider funding available. There is a relatively small pot for a large number of businesses, particularly small and medium-sized enterprises.

[Jeff Smith]

Q I suppose the question that follows on from that is this: if the discretionary grants have not really been swift and seamless, as you have said, for various reasons, what lessons can we learn in trying to put in a regime for the grants that go along with this package to help businesses and local authorities in particular to manage the grant regime better?

Kate Nicholls: Part of what would be really helpful would be to have greater guidance made available to local authorities about the types of businesses that are particularly impacted by the pandemic and particularly dependent on the hospitality sector.

Hospitality is quite unique in that it has a supply chain that almost exclusively derives its income from hospitality businesses; with hospitality businesses, either 90% or 100% of their income comes from hospitality, but 75% of supply chain businesses within the sector gain more than 80% of their income from hospitality. More detail needs to be given to local authorities. Local discretion is meaningless unless you have really clear national guidance about the type of businesses that are to be supported and the impacts that they have had.

Greater clarity and economic advice centrally would help, as well as a comprehensive overhaul of the central guidance to make it clear that a multiplicity of funds have been available throughout this process—some of which have closed now, some of which remain open and some of which have been extended. That would be helpful: to provide greater clarity to those local authorities about the types of businesses that are able to be supported and how long this money is expected to last. There has been a general reticence about giving out funds when you might have a further call on income going further forward. However, now that we are towards the end of the pandemic, overhauling that guidance and providing greater certainty would be helpful.

[Jeff Smith]

Q In terms of the quantum of the figure—the £1.5 billion—do you have a view on whether that is sufficient? What kind of businesses ought to be prioritised in the guidance when it comes through?

Kate Nicholls: The businesses that need to be prioritised are those that have been most significantly affected by the covid crisis: both those frontline businesses in hospitality that have not benefited from the grants and the supply chain businesses to tourism, hospitality and leisure—and also those that are not business-based.

One of the areas that has been missing in a lot of the grant distribution has been food wholesale and food distribution—logistics companies wholly dependent on hospitality—but also our event caterers, business caterers and contract caterers. Those are the businesses that operate from a museum or an office, and not from their own units. They have therefore been totally excluded from grant support going forward.

In terms of the quantum available, we need to look at the allocation per local authority and make sure that that is given on the basis of the number of businesses they have that are disproportionately affected, so that we do not end up with the situation that we have had in the past, where constituencies in local authority areas that have a high concentration of these adversely affected businesses get a relatively small pot of money, because it is allocated per head, or per resident, or it reflects a different form of demographic.

We need to look at the pockets of deepest concern. As we come out of this, we want to avoid a whole-economy approach and be much more targeted and specific with the funds that need to be available in a greater volume to businesses particularly affected.

[Jeff Smith]

Q Finally, have you had any conversations with the Government about that mechanism and guidance? Are they taking soundings from hospitality businesses in particular about how that might work?

Kate Nicholls: Yes, they are. We are having conversations with the three main Departments that we work with—the Department for Business, Energy and Industrial Strategy, the Department for Digital, Culture, Media and Sport and the Department for Environment, Food and Rural Affairs, on the food supply and wholesale side—to ensure they are pushing to make sure that grant guidance is as comprehensive as possible and identifies the businesses that need to be caught that have been missed in the past but are disproportionally affected by covid. We are also urging that concern and care are taken to include businesses that have been particularly adversely affected as a result of the delay in step 4.

[Seema Malhotra]

Q Thank you very much, Ms Nicholls, for your evidence. Do you want to add anything further about businesses that have been excluded from other support that you believe should be within the scope and remit of—and therefore eligible for—this funding? Secondly, are you concerned about delays to the funding? How quickly do you think it needs to be made available?

Kate Nicholls: The quicker, the better is all I can say. A lot of hospitality businesses and their supply chains are clinging on by their fingertips, particularly given that they have had an extra month of restrictions imposed on them. A quarter of hospitality businesses have not been able to open and legally cannot until 19 July.

The remainder are subject to severe restrictions, meaning a loss of revenue of £3 billion. That impacts up the supply chain because if we are not operating at full capacity, we cannot get our supply chain kickstarted. The delay and cooling effect of that month of extra restrictions is significant, particularly in our town and city centre businesses.

We need to have that money as rapidly as possible, particularly because business rates bills started to kick in again for hospitality from the 1st of this month. Some £100 million of business rates bills started to be felt by the most affected businesses; that flows up through the supply chain as it tightens the credit and liquidity within the market.

The money needs to come as rapidly as possible and local authorities need to be given incentives to make that payment as rapidly as they can through the mechanism, so that delays do not hit. The danger is that if you leave it too late, you fail to get support to the businesses that are teetering on the brink and nearly surviving. We have lost an awful lot within hospitality in our supply chain, and we need to make sure we can keep those that are on the brink. The more swiftly we get money to them, the better.

On those businesses that have not benefited and need to be prioritised in this round of funding, the main ones highlighted are events, contract and office catering, particularly those in town and city centres where the delays will happen. You need a concentration on activities in central London, where businesses will not get back on their feet until we get international travel and office workers back in significant volumes. London hospitality is operating at about 20% to 30% of normal revenue levels; in the rest of the country, it is about 60% to 70%.

There is a severe lag on the central London activity zone and a heavy concentration of affected businesses in those two local authority areas, as well as Southwark on the south bank. You need to have focus on town and city centre areas, as well as the other businesses such as catering, weddings, events, conferences and banqueting, the freelance support and supply chain businesses that sit alongside those, and food wholesale, distribution and logistics.

[Seema Malhotra]

Q Finally, have you seen a rise in businesses that may have experienced debt and other challenges being dissolved? What does the data in your membership say about what has been driving that? Are there any wider issues around the dissolving of companies that we should be aware of?

Kate Nicholls: Thankfully, we have seen very few companies in this sector go into liquidation. We have seen some administrations and some companies being revived with inward investment, particularly in the late-night sector. The areas where we have seen the biggest contractions are office-based and London-based.

We have seen a high number of business failures of individual sites and small and medium-sized enterprises. In particular, we have had contraction in the market of 12,000 hospitality businesses from covid from April 2020 to March 2021. That is a contraction of about minus 8% for pubs and bars, plus 10% for restaurants and hotels, but in major conurbations in the heart of our cities, one in five businesses has failed through the covid crisis. Part of that is very high levels of debt, and that will continue to accelerate business failure and business closure as we come out of this. The first date at which our sector can go cash positive is 19 July, but it is estimated it will take two years before the sector can recover to 2019 pre-pandemic revenue levels and profitability.

As we come out of this, we see a heavily in-debt sector. Previously, debt was used to fund growth and further investment. Pre-pandemic, we were opening two sites a day as we expanded our pubs, bars, restaurants and hotel chains; that was funded largely through the debt and earnings of the businesses. Over the course of the pandemic, we have seen that while the rest of the economy has corporate deposits that are twice the level of corporate debt, in hospitality it is exactly the opposite. We have twice the level of debt as corporate deposits, which means that our sector is going to come out with an anchor on its potential growth and recovery, because it will have to pay down and service that debt and that will delay the recovery further.

You are looking at about £2 billion or £2.5 billion of rent debt. We are waiting to see the Government’s proposals in the detail of the Bill that will help to resolve that. There is also £6 billion of Government-backed loans, which many businesses started to repay this month. That is very challenging when they have limited revenue coming in or heavily restricted revenue. Paying down that debt will to take a lot of time to get through and to get over, and we fear very much that the level of business failure that we saw during the covid crisis will be replicated in the two years as we come out of it, as we try to recover.

[Jeff Smith]

Q Can I follow up on a specific question that follows from something you said earlier? I was interested to hear you say that the hospitality trading levels in London are 20% to 30% of what they would normally be, and in the rest of the country it is around 60% to 70%. That is partly down to international travel, and I am guessing that there might also be areas—maybe coastal towns—that might be similarly affected by lack of footfall. I am wondering whether there is an evidence base for those regional or city-based variations that the Government might take into account in guiding the allocations, or is that a little bit too sophisticated to get into?

Kate Nicholls: It is certainly challenging to be able to get into, and I am not sure it would drill down as closely as local authority by local authority level, but there are certainly indications. You can measure footfall drops by high street data: there is good data from Springboard about footfall in our high streets, towns and city centres, as well as shopping centres. They are measuring it for retailers, but that would also apply to hospitality businesses. It is not just the international tourists: it is the offices, the work from home, and it affects different city centres differently according to the demographic that uses them. It is less to do with our coastal towns—they are benefiting from more domestic tourism and domestic footfall—but you are seeing it in London, Edinburgh, Glasgow, Manchester, and to a lesser extent Leeds, Sheffield and Newcastle. They are seeing a drop, but London is particularly badly affected because 70% of London hospitality is inbound tourism, and we are not going to see any pick-up in inbound tourism any time soon.

I think there are broad regional differences that you can apply: it is a very rough and ready crude assessment that you can place on it, but there is a possibility of looking at footfall data. However, I would urge the Government to look at the areas of the country and the constituencies where you have a disproportionately dense population of hospitality and tourism businesses—many of which will be SMEs—and where you have the supply chain businesses that support them. They tend to be local supply chains and to be geographically co-located, so that would be a good indicator of where that support needs to be directed.

[Luke Hall]

Q We are clearly moved to give 100% rate relief to many businesses with a £16 billion pot. Of course, I understand that some of the businesses you work with and represent will have been disappointed about where the line was drawn, so to speak. I just wonder, notwithstanding the point you made earlier in answer to the question about guidance, whether there is anything you would like local authorities to start thinking about as they start to draw up their own guidance schemes in response to some of the early challenges that have been faced by some of the businesses you will be working with.

Kate Nicholls: We would urge local authorities to work with us to identify themselves where the areas of greatest need are. One of the things that has frustrated a lot of our businesses is that there is a central message from Government, and it is not necessarily interpreted on the ground as fluidly as Government might have hoped. When you look at some of the local authority areas, we have had businesses that are clearly designed to be captured and covered by the support mechanisms that are available, but local authorities have often taken the view that if it is not directly specified in guidance and it is not a named company or a named type of business, they are precluded from using their discretion and being able to provide support to those businesses. That is the frustration that our businesses have had on the ground going forward.

It would be helpful if local authorities could be a bit more permissive in identifying the businesses that they know are hurting at a local level, rather than applying a prescriptive approach that says, “If your name’s not down, you’re not coming in,” or “Here’s a tick, you are covered.” That would help immeasurably in those businesses that tend to fall between the cracks because they are not clearcut: if you are a coach operator, are you a tourist business or are you not? A local authority should be able to understand its local area and know which ones are and therefore need to be helped, and which ones actually managed okay. Those are the kinds of areas in which we would like local authorities to use their own discretion, not wait to be told specifically by Government that they can help those businesses.