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Public Bill Committees

Debated on Thursday 11 February 2016

Bank of England and Financial Services Bill [ Lords ] (Third sitting)

The Committee consisted of the following Members:

Chairs: † Mr Graham Brady, Phil Wilson

† Baldwin, Harriett (Economic Secretary to the Treasury)

† Burgon, Richard (Leeds East) (Lab)

† Caulfield, Maria (Lewes) (Con)

† Cooper, Julie (Burnley) (Lab)

† Donelan, Michelle (Chippenham) (Con)

† Fysh, Marcus (Yeovil) (Con)

† Hall, Luke (Thornbury and Yate) (Con)

† Kerevan, George (East Lothian) (SNP)

† McMahon, Jim (Oldham West and Royton) (Lab)

† McGinn, Conor (St Helens North) (Lab)

† Mak, Mr Alan (Havant) (Con)

Mann, John (Bassetlaw) (Lab)

† Marris, Rob (Wolverhampton South West) (Lab)

† Mullin, Roger (Kirkcaldy and Cowdenbeath) (SNP)

† Newton, Sarah (Truro and Falmouth) (Con)

† Skidmore, Chris (Kingswood) (Con)

† Tolhurst, Kelly (Rochester and Strood) (Con)

† Wood, Mike (Dudley South) (Con)

Matthew Hamlyn, Fergus Reid, Committee Clerks

† attended the Committee

Public Bill Committee

Thursday 11 February 2016

(Morning)

[Mr Graham Brady in the Chair]

Bank of England and Financial Services Bill [Lords]

Clause 12

Bank to act as Prudential Regulation Authority

Question proposed, That the clause stand part of the Bill.

With this it will be convenient to discuss the following:

Clause 13 stand part.

That schedule 1 be the First schedule to the Bill.

Clauses 14 to 16 stand part.

That schedule 2 be the Second schedule to the Bill.

Clause 17 stand part.

That schedule 3 be the Third schedule to the Bill.

The Committee will see that I have not selected any amendments that would leave out clauses or schedules. That is because the more effective proceeding is simply to vote against the stand part question, but the amendments were a helpful and proper indicator. As clauses 13 to 17 and schedule 1 to 3 are all closely dependent on clause 12, no amendments to any of them were selectable. I propose that it is convenient to consider the clauses and schedules together in debating the question that clause 12 stand part of the Bill. Members will have the opportunity, should they wish, of dividing the Committee on individual clauses or schedules in turn.

It is a pleasure to serve under your chairmanship, Mr Brady, on this sunny February morning. The clauses and schedules together end the subsidiary status of the Prudential Regulation Authority and integrate microprudential regulation more fully into the Bank of England. I hope I can make it clear that the changes increase the PRA’s effectiveness, but do not undermine its independence.

First, I will talk about increasing effectiveness. Placing the Prudential Regulation Committee on the same footing as the Monetary Policy Committee—and, with our changes, the Financial Policy Committee—will elevate the status of the microprudential responsibilities of the Bank to the same level as monetary policy and macroprudential policy. That reinforces not only to Bank staff but to the public to whom the Bank must be transparent and accountable that the Bank is not simply an organisation dedicated to setting interest rates, but one with equally important macro and microprudential responsibilities.

The Bank has told us that closer integration has increased the feeling among PRA staff that they are integral to the Bank’s mission and have broader opportunities for progression across the whole Bank. That can only assist recruitment of the best people to the supervisor. Another benefit is increased clarity of governance. As the Parliamentary Commission on Banking Standards noted in discussing the existing regime:

“The accountability arrangements of the new structures are more complex than those of the previous regulatory regime. The PRA is a subsidiary of the Bank, and the FPC is a sub-committee of the Court of the Bank.”

Ending the subsidiary status of the PRA and establishing the PRC, MPC and FPC on the same statutory basis simplifies and clarifies Bank governance.

A further benefit of ending the PRA’s subsidiary status is that it enables the members of the new committee to devote more time to microprudential policy and operations. As the Governor explained at the Treasury Committee, the change will

“liberate…a portion of the time of the members of the PRA Board that is spent duly exercising their responsibilities as directors of a company”,

while noting the important responsibility PRC members will continue to have for ensuring the prudential regulation functions are adequately resourced. The Governor concluded

“that time is freed up to do their core job—what they are there for—which is to provide guidance on judgment-led supervision.”

For example, the PRC will not have to spend so much time discussing IT provision since that will be a concern for the Bank at large, and ultimately for its governing body, the court. Equally, whereas the PRA board had to be involved in discussions on staff terms and conditions and recruitment, the new committee will be able to leave those important concerns to the wider organisation and focus more on supervision.

Secondly, in terms of protecting independence, the PRA is a wholly owned subsidiary of the Bank, staffed by Bank employees. The Bank appoints the non-executive directors of the PRA board, subject to the approval of the Treasury. The transfer of the PRA’s functions to the Bank does not therefore transform the PRA from a body that is independent of the Bank to one that is not.

It may be worth explaining what “independence of the PRA” actually means. The Basel core principles on banking supervision state that legal safeguards should ensure that a regulator has

“operational independence, transparent processes, sound governance, budgetary processes that do not undermine autonomy and adequate resources”.

The Bill provides for all of those things. It provides that the Bank’s PRA functions may be exercised only through the new Prudential Regulation Committee. The Bank may not exercise its prudential regulation role in any other way.

The Prudential Regulation Committee will have a clear majority of external members. There will be at least seven external members, including at least six appointed by the Chancellor plus the CEO of the Financial Conduct Authority, and five internal members, comprising four Bank officers and one member appointed by the Governor. It is important to note that that is an increase in the weight of external members from the PRA board, on which a majority of only one is required.

Continuing with the protections for the PRA’s operational independence, the Basel core principles call for transparent processes and sound governance. The Bill sets out clear processes for the new committee’s decision making. The core principles also stress adequate resources. Every year, the committee will report directly to the Chancellor on the adequacy of its resources and the independence of its operations. The requirement for the Bank to separate resolution and supervisory functions will ensure that the UK complies with the European Union directives that insist on separation.

Finally, the Bill grants a strong statutory role to the PRA’s chief executive. He or she will be responsible for the day-to-day management and implementation of the prudential regulation strategy, and for determining how resources are allocated, managing policy development and overseeing supervisory decisions that do not reach the level of the committee. Our changes will increase the PRA’s effectiveness without undermining its independence. I commend the clauses to the Committee.

It is a great pleasure to serve under your chairmanship on this sunny day, Mr Brady, or indeed on any other day.

The effect of clause 12 will be to demote the PRA from being a separate authority to being a mere sub-committee within the Bank of England. We tabled an amendment to remove the clause and those that are consequential upon it. We think that the Treasury is dismantling another significant part of its regulatory reforms, which came into being through the Financial Services (Banking Reform) Act 2013. The clause would make the Bank of England as a corporate entity responsible for microprudential regulation. Our principal concern is with the manner in which microprudential regulation is to be conducted. We are concerned that the new PRC will be less independent than the PRA.

The risk is that the Government are demoting concerns about microprudential regulation by devolving the functions of the rule-making, free-standing regulatory authority, which is supposed to oversee that, to a sub-committee of the Bank. That is not a minor matter. The PRA is a separate corporate body and a distinct authority. It can be held separately liable and accountable for its actions and interactions. If it becomes merely a committee within a much larger corporate body, it will not be possible to hold it to account in the same way.

In the other place, my shadow Treasury colleague, Lord Tunnicliffe, said:

“The thing that keeps it clean is the fact that the PRA is a subsidiary—an independent company, as mentioned, governed by company law—and, therefore, there has to be an arm’s-length relationship between it and the FPC.”—[Official Report, House of Lords, 1 November 2015; Vol. 765, c. 2005.]

I do not believe that moving the PRA closer to the Bank and, by definition, closer to the FPC is a good thing. The present separation works and should continue.

The former Treasury Committee Chair, Lord McFall, said that the clause is

“downgrading the PRA to a mere committee”.—[Official Report, House of Lords, 26 October 2015; Vol. 765, c. 1059.]

The desubsidiarisation—a bit of a mouthful—of the PRA may simplify the Bank of England’s governance, as its current and outgoing chair, Andrew Bailey, said at the Treasury Committee. But will it make it more competent and more effective in carrying out its work? Our concern is that it will not, and there is no evidence that we are aware of to demonstrate that.

In Mr Bailey’s discussion at the Treasury Committee, the Chair of the Committee, the right hon. Member for Chichester (Mr Tyrie), raised concerns that there will not be sufficient independence owing to the make-up of the committee’s membership. He highlighted:

“the Chairman of the FPC, who will also be the Chairman of the PRC, who will also be the Governor of the Bank.”

Mr Bailey said,

“We have to be very clear in our own roles and thinking which hat we are wearing at any given point in time”.

He also said that the body will be more integrated into the Bank, but that it also has certain functions that it needs to carry out independently. The Governor was also pushed on this, again by a Treasury Committee member, the hon. Member for Wycombe (Mr Baker), who said:

“In addition to being Governor, you chair the Financial Stability Board, you are a member of Court, and you chair the FPC, the MPC and soon the PRC.”

He warned that,

“the institutions are set up in such a way that they strongly depend on the Governor’s capacity to act independently in different contexts.”

Also at the Treasury Committee, the hon. Member for East Lothian asked the Governor whether the overlap of personnel meant there were grounds for conflict

“if we have the PRC reporting on its independence from the rest of the Bank.”

I am sorry to quote the Treasury Committee at such length, but the discussion there threw up contradictions, and it is not clear to me that those contradictions have been sufficiently resolved. So can the Minister say whether the body can be both more integrated and remain independent? We welcome joined-up thinking and ensuring a broad overview. We also heard about the dangers of groupthink in Committee the other day, and the Governor of the Bank told the Treasury Committee that the Bill did not specifically address that. If we have too many key persons juggling too many tasks, is there not a risk of oversight being impaired or conflict of interest setting in?

An authority employs its own staff who are therefore dedicated to the pursuit of its particular goals, in this instance microprudential regulation. By creating a committee of senior figures, microprudential regulation becomes simply another series of talking points among senior executives, as opposed to an ongoing regulatory activity. There are many very important functions that must be performed by a microprudential regulator in the wake of the last financial crisis: first, the conduct of stress tests to ensure that individual financial institutions are putting to one side sufficient capital. That is a microprudential activity that relates to the solvency of the institutions. We are surely not arguing that it is no longer important.

With the creation of new starter banks, there is a greater need than ever for microprudential regulation as those institutions start up in business. If we continue to start new credit unions and new blockchain banks and so on, microprudential regulations remain fundamentally important. Also, there continue to be high street banks in financial difficulties, such as the Co-operative and Britannia. The danger of the Prudential Regulation Committee being appointed as is currently suggested makes it more likely that groupthink will develop.

The strength of having different agencies in existence simultaneously is that there is a useful tension between them as each of them considers the same question from a different angle in terms of the systemic risks, the risks to the solvency of individual banks, and in terms of activity on individual markets. So the political and economic context should be considered elsewhere beyond those regulatory bodies.

It is remarkable that we are witnessing what some commentators would call a downgrading of micro- prudential regulation UK at a time when financial institutions such as the Co-operative Bank and the Britannia, as I have just mentioned, face such serious solvency problems. The PRA was created for exactly that sort of situation. I therefore want to spend time on the arguments raised in relation to that change.

It has been stated that the PRA is being put on the same footing as other activities and that it is being taken back in-house. Taking the PRA back in-house is an odd idea. The PRA is currently a subsidiary of the Bank of England, so it is already in-house. A subsidiary is something that is owned by a parent company; the PRA was already a part of the Bank of England and in any event was answerable, through a statutory scheme, to the Governor.

There was a new post of deputy governor of the Bank of England, which was assigned to head up the PRA in the Financial Services Act 2012. So what is the problem with governance over it? What prompted this change from authority to committee in the first place? We wish to argue for the retention of the PRA as a distinct regulatory authority and believe that it ought to be given a shot in the arm, so that it comes out of the shadow of the FCA and begins to fight for microprudential regulation. We are of the view that the case to vest the powers of the PRA into the Bank, in a new committee called the PRC, is a good one and we will push our amendment to leave out clause 12 to the vote.

I now move on to the rest of our comments about clause 13. Once a Division has been held on clause 12, as you say, Mr Brady, that guides us on the following clauses, which are consequential upon it. However, I wish to take a moment here to say that the question is: why does it matter whether the PRA is an authority or a committee? We have discussed that in relation to clause 12. The Treasury is empowered to give a notice in writing to the new prudential regulation committee, making recommendations about aspects of economic policy.

At one level, that is dangerous, because it allows economic policy to influence microprudential regulation. The importance of microprudential regulation is that it must continue to assess the solvency of individual banks without outside influence. If it allows itself to ask whether it would be better in economic terms for a bank to continue operating or not, that would distract it from deciding whether or not the bank actually has sufficient assets to stay solvent.

The only strength of the 2013 regulatory reforms, which were introduced at the European level originally, is that they require different agencies to consider each problem from a different perspective, so that groupthink, which I mentioned earlier, is less likely to develop.

Given the discussion on clause 12 that we have already had, I will leave it there on clause 13.

We have nothing further to add to clause 14, on “Accounts relating to Bank’s functions as Prudential Regulation Authority” and evidently we will not push our amendment to a vote. The same is true of clause 15.

In relation to clause 16, Mr Brady, you will be aware that we have tabled an amendment to schedule 2, which is introduced by clause 16, to rename the Bank of England’s “Court” as a “Board”. We will now propose that amendment at a later stage, which I am sure the whole Committee is anticipating eagerly, in a new clause alongside the SNP’s discussion on the bank’s name. I do not know which one the Committee will consider the more radical proposal; I do not want to get into a competition with the hon. Member for East Lothian for radicalism or moderatism, if that is the phrase. However, our plan is one that would put the Bank on a similar footing to some of the major financial institutions in the City. On that basis, I have nothing further to add to clause 16 now and we will not push our amendment to a vote.

Finally, I can confirm that again we have nothing further to add to clause 17 and schedule 3, which has been grouped with these clauses, and will not push amendments to them to a vote.

Like other Members, I add my delight at serving under your chairmanship on this bright morning, Mr Brady.

There is no best way of constructing the Bank and its regulatory functions. In this instance, however, having set up a structure, I think we should let it work itself out and see what the issues are, rather than tear it up so quickly. From that perspective, I will support the line of argument followed by the hon. Member for Leeds East.

May I remind the Minister and the Committee that we have been here before? There was a long period when the Bank was effectively the prudential authority, and it did not do a good job. One can mention the Bank of Credit and Commerce International. One can mention Barings. The Bank failed at the very simple task of examining the imminent failure of major banking institutions and not ensuring that that did not happen before it became a public catastrophe.

For that reason, in the Bank of England Act 1998, prudential conduct responsibility was taken away from the Bank and invested in the Financial Services Authority. That model, as we saw subsequently, did not work, in the sense that completely separating prudential conduct from the Bank led to a chasm between the two agencies in terms of who was letting whom know and who was responsible for tidying up.

In a sense, the halfway house that we now have, where we have put prudential conduct into the orbit of the Bank but kept it semi-discrete, is better than what we had before. Will it work in the long run? I doubt that any bureaucratic system ever works in all circumstances, but we have set it up; let us test it to destruction before we make another bureaucratic change. From that point of view, we have a model that seems to work.

The issues brought up in the Treasury Committee related particularly to the resources that were deployable to the PRA to conduct its activities and whether the main board of the Bank was providing sufficient financial and staff resources to the PRA to allow it to do its work. My worry is that the change proposed by the Government makes it too easy for the Bank’s main board to ration resources for the soon-to-be PRC. It would be better to leave a degree of independence within the PRC, so that if it comes to a debate over resources, the PRC has some muscle and can go public if it feels that it is not getting the physical and staffing support it needs from the main board.

We may need to come back to the structure of the Bank at some point; the Minister may want to reflect on that. As I said in the previous sitting, we are in danger of creating too many committees of the Bank. We may be in danger of reinforcing a silo mentality, even though the Governor serves on all the different committees. We may have to discuss at some point whether we need to separate the Monetary Policy Committee and the Financial Policy Committee, but we should certainly test the prudential part of the administration in its present form. Changing it now simply because we will get a better and prettier bureaucratic chart is not a sufficient reason.

As I am sure you are aware, Mr Brady, desubsidiarisation of the PRA is not something they talk about very often down at the Dog and Duck, but it is incredibly important. Committee members have raised important issues, to which I would like to respond.

If one were in the pub discussing the Bank of England, the extent of people’s knowledge of what it does probably would stop with the changing of interest rates; the hon. Member for Leeds East made that point clearly. He said that the change represented a downgrade of the incredibly important microprudential responsibilities of the PRA, but I would argue that it is an upgrade, in the sense that it gives the PRA the status of a committee—the Prudential Regulation Committee—that has the same status as the Monetary Policy Committee. That reinforces to not only Bank staff but drinkers in the Dog and Duck and the public at large that it is an incredibly important function. I completely agree with hon. Members who raised that point.

The microprudential responsibilities of the prudential regulator are extremely important. The hon. Member for East Lothian made the important point that, in the 300 years of history of the Bank of England, until its independence under the Bank of England Act 1998, there were obvious failures. Firms did fail, and no one should be under the illusion that we are in a zero-failure regime for banks.

However, it is clear that the decision to separate that microprudential function and move it to the FSA created a system that was tested to destruction. That separation under the failed regulatory regime of tripartite arrangements meant there was insufficient communication between the microprudential regulation at the FSA and the day-to-day liquidity challenges that banks were experiencing in the markets in the run-up to the crash. That seems to me the strongest possible argument for having moved the microprudential function back to the Bank of England. I am glad that Committee Members have supported that important change. By following the logic of that argument, one is compelled to see that it makes sense to go one step one further, and change the PRA from being a subsidiary into being at the heart of the Bank with the same status as the Monetary Policy Committee.

By making the points he did, the hon. Member for East Lothian has made my argument for me—for having that much closer feeling of all staff being part of one Bank, which is the agenda that the Governor has set out. That not only gives a much higher status within the organisation to the incredibly important function of microprudential regulation but it reinforces the ability of the organisation to communicate with the important other parts of the organisation, and gives them more time to do it. They will not have to worry about all of the responsibilities of being a separate company.

I am glad to see that the hon. Gentleman, a thoughtful and intelligent man, is nodding vigorously as I make my argument.

The hon. Member for Leeds East asked what prompted the decision. It was very much the one-Bank agenda that the Governor has followed. He argues that it makes sense to have different points of view and not be captured by groupthink. Although I agree with the importance of having a range of views on these committees, I would counter that argument by saying that the tripartite arrangements were so clearly inadequate that that difference meant that no one spoke to each other about what they were seeing.

I hope that the Treasury Committee returns to evaluate how the transition has worked. I want to reassure hon. Members on resources, because they are incredibly important. We want to ensure that the microprudential function does not have to compete for resources or find itself starved of them. It is important to note that the levy will continue to provide those resources. No changes are being made under this legislation to the available resources for microprudential regulation.

The hon. Member for Leeds East mentioned the importance of the role of the Governor. Of course, the Governor is an incredibly important person who sits on all the committees. That is an important function of having a one-Bank organisation. He is obviously a very responsible person. With those responsibilities comes accountability, not only through the Chancellor but to Parliament through the Treasury Committee. I emphasise that that arrangement does not change as a result of these clauses.

Having reviewed all the questions raised against making the changes, I insist that the changes will improve the Bank of England’s governance.

Question put, That the clause stand part of the Bill.

Clause 12 ordered to stand part of the Bill.

Clause 13 ordered to stand part of the Bill.

Schedule 1 agreed to.

Clauses 14 to 16 ordered to stand part of the Bill.

Schedule 2 agreed to.

Clause 17 ordered to stand part of the Bill.

Schedule 3 agreed to.

Clause 18

Financial Conduct Authority

I beg to move amendment 37, in clause 18, page 16, line 12, leave out paragraph (a) and insert—

“(a) publish any notice under subsection (1) within one month of giving such a notice, and”.

With this it will be convenient to discuss amendment 38, in clause 18, page 16, line 14, after “before”, insert

“and make a statement to both Houses of”

It is a ray of sunshine to be serving under your chairmanship on this bright day, Mr Brady. Amendments 37 and 38 are straightforward, and I am sure that the Government will accept them, so perhaps we can move on to debate the clause. Proposed new section 1JA(1) gives the Treasury the power to give directions to the Financial Conduct Authority. The rest of the new section deals with how that power shall be exercised at least once in each Parliament, and with the publication of those directions. Our straightforward amendments would tidy that up.

One must recognise that there is a balancing act between the FCA’s independence and the need for public accountability, refracted through the Treasury. That is always difficult, and we accept that, but there is a bit of a problem with the Financial Conduct Authority. Immediately after Second Reading a couple of weeks ago, there was a debate for more than two hours in which I think it would be fair to say that Members from both sides of the House expressed grave concerns about some of the actions or inaction of the Financial Conduct Authority. It is purportedly independent of the Government and the Bank of England, but there is so much cosy overlap.

We have Dr Bailey, who now seems to have all kinds of hats. I stand to be corrected, but I think he is the deputy governor for prudential regulation and has been the chief executive officer of the Prudential Regulation Authority since April 2013. He is therefore also a member of the Bank’s board of directors, the PRA board and the Financial Policy Committee, and now he is going to the Financial Conduct Authority. There are questions not about that gentleman’s integrity, but about perceived conflicts of interests and so on. There is someone on the FCA board, Jane Platt—she also joined in April 2013—who is the chief executive of National Savings and Investments. Sir Brian Pomeroy, CBE, joined the FSA board in November 2009. I think that he may still be on the FCA website.

The FSA was abolished because it was, shall we say, pretty useless. Private Eye, correctly in my mind, used to characterise it as the Fundamentally Supine Authority. If we look at the prosecutions, or the lack thereof, and the steps taken by the FSA after the crash in 2008, or the lack thereof, it did not exactly cover itself in glory as an institution. I make no comments on the individuals within it; I am referring to the institution. The Government recognised that, and therefore we had the Financial Conduct Authority.

It is all a bit cosy. The noun of this Committee thus far seems to be groupthink. That refers to the risk that those who have a cosy relationship will start to be blinkered in the way in which they exercise their regulatory functions. The FSA has been characterised by Professor Alastair Hudson, whom I thank for his assistance in tackling what is quite a technical Bill. He said, “The FSA previously began to think of itself as being in partnership with the financial institutions which it was supposed to regulate.” I think he had a point. So, I suspect, did the Government, which is why we now have the FCA, not the FSA.

However, there is still a big question mark over the FCA’s relationship with the Government, which is to do with how independent it is. The Minister has previously told the House that the FCA’s decision to abandon its investigation into the culture of banking, which had not actually started, had nothing to do with the Treasury. That, of course, touches on questions of groupthink, blinkered thinking and so on. I do not impugn her for saying that, but looking at it from the perspective of Labour Members, that is a surprising situation. It is relevant to what we are discussing, because of course proposed new section 1JA, to be inserted by clause 18, talks about the Treasury giving directions to the FCA in certain circumstances.

The FCA, in its business plan for 2015-16—the year we are in—said that it would do a culture review:

“In 2015/16 we will conduct a new thematic review on whether culture change programmes in retail and wholesale banks are driving the right behaviour, in particular focusing on remuneration, appraisal and promotion decisions of middle management, as well as how concerns are reported and acted on.”

It would have been very useful to have had the fruits of that culture review before us when debating the Bill.

Is the hon. Gentleman aware that there are quite a number of studies that indicate that approximately 70% of major organisational failures can be attributed primarily to cultural problems?

I was not aware of that statistic, but it does not entirely surprise me. I thank the hon. Gentleman for that.

We have the chair of the FCA’s foreword to its business plan for 2015-16—as I said, the current year. That is John Griffith-Jones, who by the way worked at KPMG from 1975 to 2012; we all know that KPMG has questions to answer about what it was doing in relation to the financial institutions in the lead-up to the meltdown in 2008. I was talking about cosiness; he comes from KPMG, and he said in that foreword:

“In our last Risk Outlook we identified the seven most important forward-looking areas of focus in our view. We do the same again this year. Unsurprisingly, given the long-term nature of these risks and the underlying drivers, the list is largely unchanged. Poor culture and controls continue to concern us, notwithstanding the efforts being made by firms to improve both.”

So there he is, in his foreword to the business plan, less than 12 months ago, stressing again the concerns about “poor culture and controls”. The FCA said in the business plan that would investigate the culture of banking and financial institutions and then, in a whiff of smoke, it was gone—no investigation whatsoever. The Minister says that is nothing to do with the Treasury, but I hope she will recognise that the Opposition are a little concerned about the relationship between the Treasury and the FCA. We are concerned about how much control and direction the Treasury can give the FCA.

The FCA is constitutionally a creature of statute, hence the Bill and previous legislation, but in everyday terms it is somewhat a creature of the Treasury. It would be helpful if, when addressing clause 18 and the minor amendments 37 and 38, the Minister said a little more about the current relationship between Her Majesty’s Government, refracted through the Treasury, and the FCA, and what she foresees that future relationship being in the changed landscape that the Bill introduces.

Clause 18 is effectively about remit letters, which I think is why the hon. Gentleman took the opportunity to bring a lot of fairly extraneous issues into discussion. I will respond to some of them in the course of my remarks.

It is important that regulation takes account of both the implications of the economic environment for the regulators and of the regulators’ own impact on that economic environment. I am sure all members of the Committee agree with that. That is reflected in the statutory remits of the regulators. For example, both regulators have a duty to have regard to the desirability of sustainable economic growth in the medium or long term. The objectives of both regulators recognise the importance of effective competition, and I trust that members of the Committee do not wish to raise any controversy or have any criticism about that.

Clearly, therefore, both regulators need to understand how the Government’s economic policy may affect their work. I want to be absolutely clear that the recommendations in the letters that the Government will be able to send to the regulators will indicate the Government’s economic policy. They will be recommendations and will not be binding. They will certainly not be what the hon. Gentleman termed “direction”. They will not compromise, modify or override the regulators’ statutory objectives in any way, nor, importantly, will they relate to individual firms or cases.

The hon. Gentleman raised one of his favourite topics: the fact that the FCA had a bank culture review in its business plan for the year ahead. Despite my assurances to him in the Chamber that the first the Treasury heard of that was when it was covered in the media over the new year, he does not seem convinced by what we have said. We have replied to numerous written questions with the same response, and I repeat it for his benefit today.

The FCA is clearly operationally independent. It took an operationally independent decision to change what it is going to focus on over the coming year, and that decision was made completely separately from the Government.

I take what the hon. Lady says. Is she comfortable that that was the right decision for the FCA to take? It was made by a body that is so incompetent that it could not even monitor the share dealings of its own staff.

The hon. Gentleman cannot have it both ways. If he thinks that I should have no operational interference in whether the FCA does a cultural review study, obviously I should not have any operational interference in whether it reinstates the study. That is the situation in which operational independence results. Where the Government have a role is through sending these non-binding remit letters and through the power to appoint the chief executive and the board. The hon. Gentleman has described the history of the predecessor organisation, the FSA, and obviously we had to abolish that organisation—that is the power of the Government of the day. His party’s Front Benchers have a range of different and fairly eccentric ideas about the independence of the Bank of England, which are on the public record. I will not entertain the Committee by talking about them.

The hon. Gentleman is serving in the team of a shadow Chancellor who wants to end the independence of the Bank of England.

I hear and accept entirely what the Minister says about not interfering in operational matters. However, I invite her to indicate whether, at some stage, a review of the culture would help the Government.

I think we can all agree that that would be a fascinating study to read, but I will not get involved in directing the FCA to change its business plan. That would be interfering with the operational independence of the FCA, which I am sure Opposition Members do not want me to do.

I thank the hon. Lady for being so generous in giving way. Actually, I never said anything about not interfering in operational matters. She rightly says that, in theory, the Government could abolish the FCA. This clause does not cover a directive to the FCA; it talks about a recommendation. A recommendation from the Treasury, a body that could abolish the FCA, is something akin, in everyday parlance, to a directive. Pursuant to proposed new section 1JA(1)(b) of the Financial Services and Markets Act 2000, such recommendations could be on “how to advance” one or more of its operational directives.

I have outlined some of the things that the Government put in their remit letter, which is not binding on the organisation but provides important context for what the Government, elected by the British people, want to focus on.

Let me now turn to the amendments. Amendment 37 would require the Treasury to publish the recommendations it makes to the FCA within one month, and amendment 38 would require the notice laid before Parliament to be accompanied by a statement to each House. The amendments raise the important issue of transparency, which is at the heart of the Government’s proposals for these remit letters. The remit letters themselves form an important element of transparency, and they provide a transparent and formal means of conveying Government economic policy to the regulators, so it is an important part of the provision that the Treasury must publish its recommendations and lay a copy before both Houses of Parliament.

These probing amendments have been useful to confirm how the process will work. I assure members of the Committee that I cannot foresee any circumstances in which the notification for either regulator would not be published and laid before Parliament within a month. I am happy to commit the Government to that practice. I am not going quite as far as accepting the hon. Gentleman’s amendment, but I am happy to commit the Government on the record to that practice. I hope my assurance will be sufficient.

We need to retain flexibility about the best way of informing the House. For example, the updated recommendations might be issued as part of the Budget statement. In that case, it would be more appropriate and efficient for the House to be informed of the new recommendations in the Budget speech, as has happened when the FPC remit letter is updated at that time.

The hon. Gentleman raised a few other points, and it might be helpful if I respond to them. Without criticising Mr Andrew Bailey in any way, the hon. Gentleman did imply that he thought he was doing too much. However, I can assure the hon. Gentleman that Mr Bailey will stop being the chief executive of the PRA on the day he moves over to be chief executive of the FCA. The hon. Gentleman referred to conflicts. I hope that he is not alluding to any specific conflict of interest, because that would be inappropriate in terms of impugning Mr Bailey’s integrity.

The hon. Gentleman mentioned a “cosy” relationship. There were a lot of allegations relating to the fact that many individuals involved have worked with, and have experience of, other organisations. However, that is where the operational independence, structure and framework of statutory duties and responsibilities, as set out by Parliament, is so important. FSMA, for example, made it clear that the terms of all appointments have to ensure that the appointee cannot be directed by the Treasury or any other person, including the Bank.

When we make appointments, we consider the appointee’s current and previous background—of course we do —including any material conflicts. In our view, it would be entirely appropriate for people who are appointed to these important functions to have extensive experience of a relevant institution. Therefore, I do not think that the hon. Gentleman is right to talk about “cosiness”; he ought to be saying how important it is to have experience and wisdom in the statutory framework that we are discussing.

Without more ado, I hope that my points on the amendment and the clause have been sufficient to satisfy the hon. Gentleman. I am very grateful for his probing amendments. I hope I have been able to address the concerns and that the clause may stand part of the Bill.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 18 ordered to stand part of the Bill.

Clause 19

Diversity

Question proposed, That the clause stand part of the Bill.

The clause shows how valuable it can be for Ministers to have their Bill start in the House of Lords, given that we often find that we benefit from their insights as the Bill proceeds through the other place, particularly on subjects on which their lordships have so much wisdom.

The clause amends the general regulatory principles that apply to both the Financial Conduct Authority and the Prudential Regulation Authority. That is a direct way of ensuring that the regulators fully consider the differences between types of business, including—importantly—mutual institutions, across the breadth of work that they undertake, when it is appropriate to do so. The clause makes it clear that both regulators must take into account the differences between the varying forms of business organisation adopted by firms, including —importantly—mutual societies, where appropriate whenever they are discharging their general functions.

I hope that introducing the clause, which puts consideration of mutuality and other types of business organisation into the regulators’ guiding principles, provides reassurance that the Government strongly support a diverse financial services sector and the part that mutuals play in achieving that. We are building on previous action that the Government have taken to support the sector, including: carving out the building societies from the Independent Commission on Banking ring-fencing regulations; increasing the maximum interest rates that credit unions may charge on loans from 2% to 3% a month; spending £38 million in the credit union sector through the Department for Work and Pensions credit union expansion project; and ensuring that universal credit and pensions payments may be paid into a credit union account.

Moreover, Government support for the Mutuals’ Deferred Shares Act 2015, which received Royal Assent in March 2015, underlined our commitment to fostering growth and competition in the sector by seeking to address mutual insurers’ inability to access external capital without the need to demutualise.

Clause 19 provides a further step to ensure that regulators fully consider the particular issues that relate to mutual institutions and other forms of business across all their work. It highlights the role of mutual financial institutions in the UK’s evolving financial services marketplace and ensures that, where appropriate, the specific challenges that the mutuals sector faces are taken into consideration when the regulators are discharging their general objectives.

We on the Labour Benches—I do not know about colleagues in the Scottish National party—welcome clause 19. I say that as someone who first joined a credit union more than 40 years ago. Diversity is important in the financial sector, as in many sectors. The parallel that some of us may remember from our schooldays is crop rotation, for which we need ecological diversity. If we go for monoculture with crops, it is seriously bad news if a pest comes, because our one and only crop is gone.

There is a parallel with financial institutions. By and large, the mutuals sector, including building societies, fared better than mainstream, privately owned banks in the crisis. Where there were problems, in particular, was with some former building societies that had demutualised. I say that as someone who voted against demutualisation for at least three building societies. Two of those were the Staffordshire and the Cheltenham & Gloucester. We lost both of those, but we won with the Nationwide building society—it is still a mutual, and I still have an account there. It is a very big mutual—a very big financial institution. At the other end of the spectrum are institutions such as the Wolverhampton credit union—I am not sure what it is called now, because it keeps changing its name—of which I have been a member for many years. Compared with the Nationwide building society, it is a very small institution, but that is part of diversity.

I am pleased that this Government and their predecessor, the coalition Government, have embraced diversity. The Minister mentioned some of the things that have been done: the £38 million for credit unions and the £2 million. I salute the work that the coalition Government did, and that I hope this Government will continue to do, in relation to the mutuals sector. For example, the previous Government supported disclosure of lending data by the main high street banks to understand patterns of lending across the UK. There has been the lowering of barriers to entry to the financial services market to help to increase competition—challenger banks and so on. I do not think that the Minister mentioned the good work on schools-based financial literacy programmes, which were brought in. That is not directly about mutuals, but it has to do with that concept of a broader view to financial services than simply the high street banks.

A few more things need to be done, and if you will indulge me briefly, Mr Brady, I will mention one or two of them. I am indebted to the Community Investment Coalition for some of these suggestions. A review of existing affordable financial tools would assist, as would supporting and encouraging FinTech innovation, which the Government are starting to do—it is likely to be a growing sector—but it needs to be done in a way that will also benefit people on lower incomes. Also needed is a clear direction to economic regulators—something we discussed in our debate on the previous clause—to ensure that the financial services market provides easily understandable and appropriate products. There is a constant battle there, because products keep mutating and so on. Broadening and strengthening the existing voluntary framework for disclosure of lending data would take further what the Government have already done.

It would be useful to have stressed by the Government—practising some of their recommendations to the FCA, not directions—the value and importance of community finance. They need to ensure some competition and diversity in the financial services sector, which should benefit all communities if it works properly. A review of community finance provision across the UK would be very helpful to identify where there are strong and sustainable community finance providers, but also where there are gaps in provision. Again, that would be carrying on the work of the previous Government, which this Government, in their nine months, have carried on with clause 19 on diversity.

The final suggestion is about trying, inasmuch as Government can, and they have a role to play—the Minister mentioned the £38 million for the credit union sector given by the previous Government—to scale up the community finance sector. For example, there could be assistance with investment in IT infrastructure—not the FinTech stuff, just IT infrastructure for the community finance sector. Computers are still quite expensive, let alone programming and so on. If the Government could assist with that, with their push towards diversity, as exemplified in the clause, that would be very helpful.

I will respond briefly because we are now in an area where harmony is breaking out. I welcome the hon. Gentleman’s comments on diversity in the financial sector and the points he made about community finance. That is something we feel strongly about. He mentioned some of the aspects such as the challenger bank agenda. He did not mention the new bank unit that has just been set up between the FCA and the PRA, shortly to be the PRC.

The hon. Gentleman did mention the importance of affordable financial tools. We have set up the financial advice market review, which is designed to make advice more affordable and accessible. He also mentioned FinTech, and we are enthusiastic about ensuring that the UK remains the best place in the world to locate a FinTech business. We are seeing a dramatic growth in that sector at the moment. He will also be aware of the importance of the peer-to-peer sector in providing community finance across the country, and what we are doing to encourage that.

There is a range of different things and he highlighted some of them. Interestingly, he mentioned a review. I am not convinced by that idea, based on the fact that in the 13 years of Labour government there were 20 reviews into competition in banking, but only one new bank was set up. In the previous Parliament, eight firms got banking licences, and we have set ourselves the ambitious goal of 15 new firms to get banking licences during the course of this Parliament. That is something we are very focused on and I appreciated the hon. Gentleman’s comments on that.

Question put and agreed to.

Clause 19 accordingly ordered to stand part of the Bill.

Clause 20

Extension of relevant authorised persons regime to all authorised persons

Question proposed, That the clause stand part of the Bill.

I fear that the harmony in the Committee might diminish with clause 20, which introduces schedule 4, making provisions to extend the senior managers and certification regime across the financial services industry to all authorised firms, replacing the discredited approved persons regime.

Before setting out the reasoning for that, it is worth outlining the history and development of the senior managers and certification regime. Currently, individuals who work in the financial services industry are regulated through the approved persons regime. Under that regime, authorised financial services firms may not employ a person to perform “controlled functions”, by which is meant functions specified by the Prudential Regulation Authority or the Financial Conduct Authority in their rules, unless that person has been approved by the appropriate regulator following an application by the firm concerned.

The financial crisis in 2007-08 and more recent events have highlighted concerns about the performance and behaviour of many of the individuals working in the financial services industry. It is clear that the approved persons regime has not been a successful way of regulating individuals working in the industry.

As the Parliamentary Commission on Banking Standards argued, the regime is too broad and insufficiently focused on senior management. In fact, it called it a “complex and confused mess”. Specifically, the commission criticised the approved persons regime for being mostly

“an initial gateway to taking up a post, rather than serving as a system through which the regulators can ensure the continuing exercise of individual responsibility at the most senior levels within banks”.

In addition, the commission noted that there was a lack of clarity around the responsibilities of individuals at the senior level, and that institutions did not take enough responsibility for the fitness and propriety of their own staff at more junior levels. It is clear, therefore, that the approved persons regime is not fit for purpose. It is being replaced from March by the senior manager and certification regime for firms in the banking sector.

This regime requires the regulatory pre-approval of individuals at the top of the firm, along with statements of responsibility setting out the areas of the firm’s business for which they are responsible. It also requires certification for other key individuals upon hiring, and thereafter annually.

This new regime represents a significant strengthening of personal accountability among the top senior management in firms. It will improve corporate governance, thereby advancing the safety and soundness of regulated firms. It also provides a more effective and proportionate means to raise the standards of conduct of key staff more broadly, supported by robust enforcement powers for the regulators.

It is important to recognise, however, that the activities of firms outside the banking sector can pose significant risks to market integrity or to good outcomes for consumers, and the Parliamentary Commission on Banking Standards expected that the deficiencies of the approved persons regime would not be confined to the banking sector.

Consequently, the Government have decided to extend the senior managers and certification regime to all authorised financial services firms in all sectors of the financial services industry. This action is also supported by the recommendations of the fair and effective markets review, which argued that misconduct in fixed-income currency and commodity markets had not been limited to banks. Indeed, the review noted that extending the senior managers and certification regime would emphasise the personal responsibility of individuals working in all firms to observe proper standards of market conduct.

The application of the senior managers and certification regime to all authorised financial services firms will bring in a stronger, more comprehensive regime across the financial services industry. It will enable the effective and efficient regulation of groups with a variety of financial services firms within them, and it will support a level playing field for competition. Therefore, extending the senior managers and certification regime to all authorised firms is covered by clause 20.

Mr Brady, I seek your guidance. We on the Labour Benches have no problem with a schedule 4 being added to the Bill, which is what clause 20 would do—we are therefore content with clause 20. However, regarding the exact content of schedule 4 and the attendant linked debates, we wish to have an opportunity —in a moment—to put our views, after the stand part debate on clause 20, I would suggest.

I can reassure you, Mr Marris, that there will be an opportunity subsequently to do exactly that.

Not on clause 20 itself, no.

Question put and agreed to.

Clause 20 accordingly ordered to stand part of the Bill.

Schedule 4

Extension of relevant authorised persons regime to all authorised persons

With this, it will be convenient to discuss the following:

That the schedule be the Fourth schedule to the Bill.

Clauses 21 to 23 stand part.

Amendment 34, in clause 24, page 19, leave out lines 29 to 34.

Amendment 31, in clause 24, page 19, line 34, at end insert “and insert new subsections (6), (7) and (8)—

‘(6) Where the authorised person mentioned in subsection (5) is a relevant authorised person, as defined under section 71A of the Financial Services and Markets Act 2000, subsection (5)(d) does not apply and subsections (7) and (8) do apply.

(7) If the FCA satisfies itself that a person (P), who is a senior manager in relation to a relevant authorised person, is guilty of misconduct by virtue of subsection (5)(a)-(c), then P shall be guilty of misconduct, subject only to subsection (8).

(8) But P is not guilty of misconduct by virtue of subsections (5)(a)-(c) and (7) if P satisfies the FCA that P had taken such steps as a person in P’s position could reasonably be expected to take to avoid the contravention occurring (or continuing).””

Amendment 35, in clause 24, page 20, leave out lines 1 to 6.

Amendment 32, in clause 24, page 20, line 6, at end insert

“and insert new subsections (6), (7) and (8)—

‘(6) Where the PRA-authorised person mentioned in subsection (5) is a relevant authorised person, as defined under section 71A of the Financial Services and Markets Act 2000, subsection (5)(d) does not apply and subsections (7) and (8) do apply.

(7) If the PRA satisfies itself that a person (P) who is a senior manager in relation to a relevant PRA-authorised person is guilty of misconduct by virtue of subsection (5)(a)-(c), then P shall be guilty of misconduct, subject only to subsection (8).

(8) But P is not guilty of misconduct by virtue of subsections (5)(a)-(c) and (7) if P satisfies the PRA that P had taken such steps as a person in P’s position could reasonably be expected to take to avoid the contravention occurring (or continuing).”

Clause 24 stand part.

The lead amendment in this group, amendment 33, stands in my name and that of my hon. Friend the Member for Leeds East. Unless the Government accepts this amendment—I hope they do—we will seek your permission to divide the Committee, Mr Brady.

I thought that I would start with this group with what may be some of the less contentious material; the contentious material is likely to focus on schedule 4 and particularly on clause 24, the reverse burden of proof, and so on. Starting with the perhaps more straightforward stuff—that does not mean that we should all be friends and agree on this—it would help if the Minister could provide clarification regarding clause 21(3)(a), which states that the Treasury may

“confer functions on the FCA”

by regulations. What kind of “functions” do the Government have in mind that the Treasury might confer?

Much more important and perhaps more contentious is clause 21(3), which says:

“Regulations under subsection (2)”—

that is, made by the Treasury if it so chooses—

“may…modify, exclude or apply (with or without modifications) any primary or subordinate legislation (including any provision of, or made under, this Act).”

So clause 21(3)(b) gives the Treasury regulatory power to modify, exclude or apply primary legislation, as well as other powers. I am uneasy about that as a constitutional way forward. No doubt, the Minister will tell me that that has been done by Governments when I served as a Back Bencher, the previous coalition Government and so on, but I still think that, on a constitutional basis and particularly on something as important as the financial stability of our economy, an explanation from the Minister of why the Government are seeking powers under the Bill by regulation to be able to amend primary legislation would be helpful.

Overall, clause 21, “Rules about controlled functions: power to make transitional provision”, seems fairly sensible. Examples of controlled functions include being a director of a regulated firm, overseeing the firm’s systems and controls, being responsible for compliance with rules and so on. One would expect a Government to ensure that there were proper rules about such controlled functions. However, there is that concern about regulations making primary legislation.

Clause 22 deals with the administration of the senior managers regime, part of the senior managers and certification regime which, as hon. Members know, I prefer to call SMACR, or “smacker”, because it suggests what may on occasions metaphorically need doing to those involved in financial services who step out of line. The clause makes a number of changes to the senior managers regime, and perhaps, because these have been wisely grouped together, that will come out in the wash during the debate on reverse burden of proof.

Clause 23, “Rules of conduct”, is not so controversial, I suspect, but there is a question mark for me. I draw the Committee’s attention to subsection (3)(c) which omits section 64B(5) of the Financial Services and Markets Act 2000. I stand to be corrected, but as I understand it, section 64B(5) imposes a duty to report when a manager or senior person knows or suspects that someone in their firm or organisation has failed to comply with conduct rules, and clause 23 is about rules of conduct. If the rules of conduct clause in the Bill omits what appears to be a strong and central provision of previous legislation, that is prima facie extraordinary. If a duty to report actual or suspected wrongdoing is to be removed, I scratch my head. Perhaps the Minister can reassure me and the Committee either that I have misunderstood what the soon-to-be-omitted section 64B(5) does, or that, although that subsection does what I think it does, other provisions are being brought in that strengthen or are at least equivalent to that provision of the 2000 Act.

Clause 20 introduces schedule 4, which will extend the relevant authorised persons regime to all authorised persons. Committee members will be relieved to hear that I do not propose to repeat what I said on Second Reading—namely, that the Labour party’s position is that removing the reverse burden of proof, albeit as part of a suite of changes that the Government are introducing, is a mistake. Our position is in between that of the Government and that set out in the Scottish National party’s amendment. There are two interlinked issues here: whether the reverse burden of proof on senior managers should exist, and, if so, whether it should extend to all managers or, as the acronym SMACR implies, just to senior managers. That is the substance of it. Should we have the reverse burden of proof? If so, to whom should it extend?

As I understand it, and I stand to be corrected—I find it a bit difficult to hold these things in my head, so somebody, perhaps my hon. Friend the Member for Leeds East, can nudge me if I am getting it wrong—the Government are saying, “We will extend this part of the regime to everyone. SMACR will apply to everybody in financial services, but the reverse burden of proof will no longer apply to anybody, senior or junior.” At the other end of the spectrum—again, the hon. Members for East Lothian and for Kirkcaldy and Cowdenbeath can correct me if I am wrong—the Scottish National party is saying, “Extend SMACR to everybody, but retain the reverse burden of proof.” Our position, given that it is harder for smaller organisations to comply with what, frankly, can be labyrinthine regulatory controls, is that the reverse burden of proof should be retained for senior managers, but not for junior managers; extend the regime to junior managers, but not the part of it that pertains to the reverse burden of proof.

The Labour party, as is so often the case, finds itself in tune with the Institute of Directors—not on the particular issue, but on the general background. Paragraph 10 of its helpful written submission states:

“Confidence and trust in banking is at an all-time low. We accept that the behaviour and culture within the banking community contributed to the last financial crisis.”

To be absolutely clear, the Institute of Directors, in paragraph 13 of its written submission, welcomes the Government’s proposals to remove the reverse burden of proof from the legislation. The Government and their coalition partners introduced that legislation recently, but it has never got beyond the statute book and been put into practice, so there is no evidence one way or the other about whether the reverse burden of proof has altered behaviour. As I understand it, it would only have applied—and will only apply, if the Government generously accept our amendments—from 7 March, which is when the SMACR regime comes into force. The Government’s position, although perhaps the Minister will announce a change of heart today, is that the Bill will be close enough to the statute books by 7 March that any investigation into wrongdoing that takes place after that date will be against the backdrop of the normal burden of proof, rather than the reverse burden of proof.

The reverse burden of proof places a higher duty of care on the individual who is accused of engaging in wrongdoing to demonstrate that they did not in fact do so. It is not as strict as what we lawyers—there are several in this room—call strict liability. An example of strict liability in England—I do not know about Scotland; I am a bit rusty on this area of law—is that if a customer under the age of 18 is served alcohol by a member of staff in licensed drinking premises unbeknown to the licensee, which we can imagine happening in many pubs, the licensee is strictly liable for the offence, even though they might have been in a different room or even been on holiday. That is partly to drive managers or licence holders of licensed premises to ensure their staff are aware of the law and apply it. It is called strict liability, and it is very strict. It happens in certain other areas of the law. I venture that most hon. Members have, in their time—I know the Minister has, because she told us earlier that she frequents the Dog and Duck—been to drinking establishments, when over the age of 18 of course, and so will be able to understand that.

The reverse burden of proof is not strict liability. It is a higher threshold that requires a greater level of engagement by the accused—the person it is suggested has engaged, in the scenario of financial services, in wrongdoing. The reasons put forward by the Government in Lord Bridges’ letter were not convincing to Labour Members, and clearly not to SNP Members either. That is why, albeit using different wording, we have tabled a package of amendments, of which amendment 33 is a more minor one, to reverse the reversal of the reverse burden of proof—that is, to maintain the reverse burden of proof—in order to drive higher standards in the banking and financial services sector.

Lord Bridges, the Minister in the other place, was, from reports from my colleagues there who dealt with the Bill, open, flexible and interested in ideas to improve the Bill. The Minister here today has already referred to one such idea: clause 19 on diversity was inserted in the Lords, and clearly the Government found it helpful because they have retained it in the Bill. On the reverse burden of proof, which is a thorny issue, Lord Bridges helpfully explained in a letter the Government’s position and thinking. He said that senior managers were busy organising themselves so that it would be difficult to impose liability on any individual. That is the problem: when things went wrong in the lead-up to 2008, it was very difficult, because of the regulatory regime—much of it introduced by my own party’s Government—to assign individual culpability, let alone criminal culpability, to an individual. An institution may have acted in a very irresponsible way, but drilling down to the level of the individual proved almost impossible. That has an echo in this Bill, because there is widespread agreement—as I always say, that does not mean it is true, but it is a bit of an indication—that were we to have a regime that stressed individual responsibility more highly and ensured that it obtained more widely, conduct would be likely to be better than it was by some individuals leading up to 2008.

We need a system where there are what in other spheres are called accountable officers, so that it is no good just to say, “I didn’t know what was going on.” One ought to say, “You are culpable because you should have known what was going on.” I think the Government agree with that concept. I am not at all sure that the legislation and the amendments to the legislation introduced by the Bill go in the right direction in translating that theory—“You should have known and therefore you are culpable”—into practice in a way that will not lead to loads of people going to prison but will dissuade them from undertaking risky activities that affect us and many of our constituents. That is what we want. Probably no members of the Committee are hangers and floggers. We do not want loads of people caught out; we want them to act responsibly, so that they cannot be caught out and, more importantly, so that the risks are not manifested as meltdowns in the financial system.

The Government have also expressed a fear that were the regime not to be changed as proposed in the Bill, there would be a checklist mentality. I have to say that a lot of people are alive today because of checklists. Where introduced, they have transformed surgery. The surgeon, or whoever is the accountable officer in the operating theatre—it might be the senior nurse—goes through a checklist, for example to check that the spare blood is of the right blood group. We all make mistakes and it can on occasion be too easy to make mistakes; in a team it can be too easy to think that something is someone else’s responsibility. Checklists are not the be all and end all, but they help.

I have in my mind—only some in the room will remember this—the 1974 World cup final, refereed by a man who lived in my constituency, Jack Taylor—a lovely man, whom I have met. He went out on to the pitch just before the World cup final started and he went through a mental checklist. Looking around, he found that there were no corner flags. Jack was arguably the best referee in the world, and he knew that the problem with having no corner flags was that when it was discovered, the game would have to be restarted. It was not simply a matter of 10 minutes in, “Oh, no corner flags. We will just bang one in each corner.” Restarting any top-class game is difficult; restarting the World cup final would be severely embarrassing for everyone concerned, including Jack Taylor. However, he went through a mental checklist and disaster was averted. You will not remember that, Mr Brady, because you are too young, but some of us do. That story demonstrates that checklists can on occasion be helpful as part of a regime. Jack Taylor did not referee that game—in which, from memory, he gave two penalties, one early on—through a checklist. He refereed the game using his judgment, training, wisdom and experience, but part of what he did to ensure that he did so properly was to use a mental checklist.

As I mentioned earlier, the Government wish to change a regime that they introduced little more than two years ago and that has never been brought into force. Some say, “Well, we have never had any prosecutions, so what are we going to do?” Well, of course we have not had any prosecutions; the provision was never brought into force. In the hope, perhaps vain, of evidence-based decision making by legislators in all parts of the House, bringing something into force is often, although not always, helpful. The hon. Member for East Lothian earlier today referred to testing something to destruction—but I am not sure that I want to test banking regulation to destruction, because it could get a bit messy. He was perhaps talking in a slightly different context.

The real point is that we should have adequate regulation. The difficulty with the Bill is not only to do with the removal of the reverse burden of proof—the double reverse ferret, as I called it on Second Reading. The problem is that even after this Bill is enacted, and even if the Government wisely accept our amendments, the regulatory regime, sadly, will still need a big overhaul, because the wrongdoing that led up to and contributed to the meltdown in 2008 has continued since then to the tune of fines of almost £3 billion levied this year, seven and a half years after the big crash, for wrongdoing in the financial services sector in the United Kingdom, or by UK institutions, that took place after the meltdown in 2008.

So the Government are right to recognise in the Bill that the current regulatory regime is not working. However, they are wrong in shying away from a complete overhaul and to some extent tinkering with this authority becoming that committee, and with this reverse burden of proof being removed but more people being brought in. I think we need a bit more of an overhaul. I will not spell out the kind of overhaul that I think we need, Mr Brady, because you would quite properly rule me out of order.

We have the PRA being downgraded in the Bill, which is unfortunate. We have a dilution of individual managers’ responsibility, particularly senior managers, and the reverse burden of proof removed. That measure was part of the Government’s response to the Parliamentary Commission on Banking Standards, which had three main recommendations: the first was the reverse burden of proof; the second was extending the time limit for commencing disciplinary action against senior persons; and the third was giving regulators the power to make approvals of senior persons subject to conditions or time limits. So it was not a big overhaul that was suggested by the Parliamentary Commission on Banking Standards, but one of the three legs of that three-legged table—the reverse burden of proof—is being removed and we therefore fear that the table may fall over, to the cost of us all, particularly our constituents.

My excellent researcher, Imogen Watson, has dug out a series of quotes from 2013 from people such as the Chancellor of the Exchequer. She has dug out quotes—if I may put it this way—from the top all the way down, extolling the virtues of this new regime of the reverse burden of proof. I will not read them all out, but any hon. Member can come to me if they want to see them. There are people still in the Cabinet, besides the right hon. Member for Tatton (Mr Osborne), who were extolling the virtues of this kind of regime, and yet it has never been fully brought into force, and now it is going to be undone. That is most regrettable.

Our amendments are very reasonable. As I set out earlier, on the spectrum of the two interlinked issues to which I referred—the reverse burden of proof and the width of the net—we are in between the Scottish National party, which is a bit too far one way, and the Government, who are a bit too far the other. Therefore, as reasonable people—as moderates, no doubt—the Government will think again and accept our excellent amendments, although I appreciate that when they do that, they may say to us, “On Report, we will need to tweak the wording a bit.”

I will be reasonably brief, because the hon. Member for Wolverhampton South West has covered a lot of the points. The burden of our amendments 34 and 35 is to preserve the existing Financial Services (Banking Reform) Act 2013, which has not yet come into force—it comes into force next month—with regard to the reverse burden of proof. I think that at this stage, before the reverse burden of proof has been tried, to take it out of the legislation sends the wrong signal to the financial community. That is the most serious issue. We could argue the rights and wrongs of what is the best possible kind of regulatory regime, but much of this depends on mood, culture and signals.

The senior managers in the financial community in the City of London have been worried about the import of this legislation—there is no doubt about that. I understand that in their circumstances, because I have met many of them and they are not going out of their way to impose regulatory infractions. I think there is a new mood in the City, with people trying to get it right. Some senior managers were fearful of the extent of the legislation, but it would have been better to have tried to talk to them and explain it than, by withdrawing it, to imply that something was wrong and that it was too onerous. The signals were all wrong.

First, given the fragile nature of public opinion about the banking system, one would implore the Minister that withdrawing the legislation is not a good thing to do. What we are engaged in today is not an exercise in bank bashing, but trying to find a regulatory system that not only works, but finds the public confidence we desperately need. We need only look at the fact that since the autumn banking shares across western Europe, including the UK, have collapsed by about 37%. That shows that the markets are jittery about what is going on in the banking system. I press that on the Minister.

Secondly, where did the idea of the so-called reversed burden of proof come from? It has got into the legislation, and it came through the Parliamentary Commission on Banking Standards. We then have to ask: did the commission come up with the idea? Did its members suddenly think, “That would be a good idea”? There was lobbying on behalf of key figures in the regulatory community and the political sphere who said, “This is a good idea and you should look at it.” I gently say to the Minister that some people who raised that idea originally have now run for cover, and I think that sends the wrong signal. It suggests that in the regulatory family and within Government people are willing to press legislation home. That is dangerous for clarity in such a regime.

Thirdly, the one argument that has been brought up that one should pay heed to about the reverse burden of proof is proportionality. In widening the senior managers and certification regime through the legislation, which is the correct thing to do, there is a danger that we place onerous burdens on smaller companies or make them fear that such burdens will be put on them. I accept, as the hon. Member for Wolverhampton South West said, that there is a reasonable case for splitting the application of the reverse burden of proof between senior managers in the major systemic institution banks and funds and the smaller companies. How far I am prepared to press my amendments will depend on how emollient the Minister will be, but even if that is to be applied as a blanket rule, it is ultimately up to the PRA and the FCA to decide at what point they use their powers.

I remind the Minister that there has to have been a regulatory infraction before the reversed burden of proof comes into play—something serious has to have been proved to have gone wrong by either the FCA or the PRA, or by both. The senior named managers in their sphere of operation are already culpable for something having gone wrong, so all the legislation says is, “You have to prove why you got it wrong. You were in charge, you were on the deck and something has gone wrong.” It does not pick on that manager randomly. Something has gone wrong in their sphere of operation, so it says, “Why did that happen? You were responsible. Tell us what went wrong.” Even in the sphere of the current legislation and widening the certification regime, it is still up to the FCA or the PRA to say to a senior manager, “Tell us.”

I am willing to say that if that makes things clearer and helps get over the proportionality argument so that we can keep the degree of scrutiny and responsibility for the same managers in the systemic institution, that might be the way to go. So far, the Government have been in wholesale retreat from the original legislation of only two and a half years ago. They are sending the wrong signal in doing that, and the Minister has to explain why, when there are alternatives, she feels the need to take this measure off the statute book.

It is important that I take this opportunity to send a strong signal on financial services. The financial services sector is vital to the strength and health of the UK economy. We have seen what the opposite looks like, and we know we do not want that to happen again. I emphasise that we are very committed to effective, strong regulation of financial services, to ensure financial stability, market integrity and strong protection for consumers. There can be no more important element of that regulation than the surrounding conduct. Conduct, and responsibility for conduct, are vital to the financial services sector. I welcome this opportunity to send that strong signal.

I also reiterate, for the Committee’s benefit, that we have done a number of other things outside the scope of the Bill. For example, we have introduced a new criminal offence to ensure that criminal penalties, including imprisonment, can be imposed upon people who manipulate key financial benchmarks such as LIBOR. We have brought in the toughest rules of any major financial centre when it comes to clawing back bank bonuses. Bringing in the senior managers and certification regime for the whole financial sector, which I remind the Committee includes a duty of responsibility to cover all financial services firms, is a very important strengthening of the failed and lacklustre approved persons regime. We are also bringing in new criminal offences so that criminal penalties can be imposed on senior managers whose reckless misconduct in managing a bank results in that bank’s failure.

The group of provisions we are considering cover, in a number of clauses and in one schedule, changes to the senior managers and certification regime, as well as amendments tabled to the provisions relating specifically to the replacement of the reverse burden of proof with the statutory duty of responsibility. I will explain briefly the purposes of the provisions in the group before addressing the amendments tabled by Opposition Members and trying to respond to points raised by the hon. Member for Wolverhampton South West.

Schedule 4 makes detailed technical changes to the Financial Services and Markets Act 2000 that are needed to extend the senior managers and certification regime to cover all authorised financial services firms, including removing the definition of a relevant authorised person. It also makes a small number of consequential amendments to the Financial Services (Banking Reform) Act 2013.

Clause 21 gives the regulators expanded powers to include transitional provisions in their rules when they make rules that create new controlled functions or change the definition of an existing controlled function. They will need those powers when they specify the new senior management functions that will form the basis for rolling out the senior managers and certification regime to all authorised persons. Clause 21 also gives the Treasury a power to make any additional provision needed in connection with those rule changes through regulations.

The hon. Member for Wolverhampton South West asked specifically about the conferring of functions. For example, that power could be used when responsibility for certain controlled functions is switched from one regulator to another, or when other changes are needed that effectively alter the boundary between what the PRA, or the PRC as it will be after the Bill becomes law, and FCA regimes do. We do not think it would be appropriate for the regulators themselves to have that power. Another example would be giving the regulators power to make rules allowing for grandfathering new controlled functions, or allowing changes between regulators. That is an example of what the powers might be.

It is not unusual to amend legislation in regulations along these lines. The affirmative resolution procedure is required. The provision was reported to the Delegated Powers and Regulatory Reform Committee in the usual way, and it did not express any concerns about it.

Clause 22 makes a number of technical changes to the detailed legislation underpinning the senior managers regime, including corrections to put right minor errors or omissions in the original legislation in 2013. The hon. Gentleman had some technical questions on subsection (2), which ensures that when statements of responsibilities are changed, both regulators will, where relevant, receive copies. Subsection (3) allows time limits imposed on an approval to subsequently be varied. At present, only the conditions imposed on approvals can be changed, so time limits are an important addition. Subsection (5) makes a technical change to ensure that the PRA can bring disciplinary proceedings for the failure to provide an updated statement of responsibilities. Again, the clause is important yet technical.

Clause 23, which is where all the controversy is today, gives effect to the Government’s reforms of the senior managers and certification regime provisions relating to rules of conduct. Although the hon. Gentleman was restrained in not reading out quotes from various different people on the controversy, I want to highlight the fact that Lord Turnbull, who was on the Parliamentary Commission on Banking Standards, said that the Bill’s proposal

“tackles directly the difficulty with establishing personal liability and the Pontius Pilate defence…In future, senior managers will have to take responsibility for what goes on in the teams for which they are responsible and for the actions of the people whom they have appointed and thereby given accreditation.”

The proposal gives that responsibility to the senior manager. He also said that

“I still fail to see why the reverse burden of proof is the only way to get people to understand that.”—[Official Report, House of Lords, 15 December 2015; Vol. 767, c. 2026.]

The Archbishop of Canterbury also served on the Commission. His representative, the Lord Bishop of Southwark, said in the other place that he was at one with the Archbishop of Canterbury

“in supporting the Government’s intentions on the reverse burden of proof…This goes against the ancient common-law principle of ‘innocent until proven guilty’…It is absolutely right that the individual is obligated to ensure that they take reasonable steps to prevent regulatory breaches in their financial institution but, as with other parts of society, it is right that the burden of proof should sit with the regulator to prove such breaches beyond reasonable doubt.”—[Official Report, House of Lords, 11 November 2015; Vol. 765, c. 2018-19.]

It is also worth reminding the Committee that we had a discussion on clause 19 about the importance of diversity in financial services. By broadening the senior managers and certification regime to include all financial services firms, we get a very consistent regime. It is important to highlight the fact that the credit union movement has welcomed the changes, as has the building society movement. Those important, diverse groups of financial institutions have welcomed the fact that the senior managers and certification regime clearly spells out where responsibility lies and what it is, and does not include a reverse burden of proof, which would make it increasingly hard, in the opinion of the Building Societies Association, to find the right people to take up senior roles in management or on the boards of those organisations.

On clause 23, which is about the rules of conduct for directors, I clarify that the Government legislated in the Financial Services (Banking Reform) Act 2013 to enable the regulators to apply the rules of conduct to all senior managers and all employees. That does not necessarily cover all non-executive directors, as some will not be senior managers and they will not normally be employees of the firm concerned. The clause addresses that issue by allowing the regulators to make rules of conduct for all directors.

I wonder whether the Minister has a chance now or in a moment to deal with a concern I expressed about clause 23(3)(c), which is to omit section 64B(5) of the Financial Services and Markets Act 2000, about the duty to report wrongdoing and so on.

I fully intend to address that. The hon. Gentleman will have to bear with me, I am afraid. I am getting a little confused with all my different subsections, as he did in his remarks. I will, however, be addressing that.

On the hon. Gentleman’s earlier question about why we did not simply implement the reverse burden of proof, allow time for it to bed down and see how it worked, my colleague in the other place, Lord Bridges, has pointed out that evidence had already started to emerge that unhelpful effects were becoming apparent as firms prepared for its introduction. We were losing the essence of the purpose of the regime, which is to ensure that everyone knows and understands their responsibilities and what they are for. We therefore felt that there was no need to wait before making the changes.

Clause 23 also removes a provision that requires firms to report all known or suspected breaches of rules of conduct to the regulators. That requirement is unnecessary, because the regulators can use their existing powers to require firms to notify them of matters that they want to know about. The provision, which requires notification of all suspected, as well as confirmed, breaches of rules of conducts, is unnecessary because it goes much further than the principles we want to operate. It would be unnecessarily onerous for firms and regulators.

As the hon. Gentleman can imagine, such a provision could effectively force firms to work out a point at which the possible indications of a breach of rules of conduct might amount to a genuine suspicion. Firms would need systems to ensure that the information is captured and transmitted to the regulators, and having been notified of a suspicion, the regulators would have to decide whether to investigate and, if appropriate, consider what action to take. In many cases there would be nothing more than suspicion, so no action would be taken, but meanwhile the regulators would have to consider and prioritise all notifications received. That would be bound to limit their ability to respond appropriately in real cases, thereby imposing costs and burdens on the regulators and using up their time. Similarly, it can be argued that the suspicious activity reports used in the money laundering regime generate many false positives.

The Government thought hard about the provision and decided that removing the requirement would help to ensure that the regulatory system can work proportionately, without putting potentially costly burdens on firms that are disproportionate to any regulatory gain. Regulators will continue to be able to require firms to notify them of matters that they want to know about. The provisions introduced by the 2013 Act as section 64C of the 2000 Act remain. The requirement that firms must report disciplinary action that they take against employees will therefore remain in force. I hope that reassures the hon. Gentleman.

Amendments 31 and 32 would reinstate the reverse burden of proof for banking sector firms—the banks, building societies, credit unions and systemically important investment firms regulated by the PRA. Amendment 33 would allow the definition of the “relevant authorised persons” to remain in the Financial Services and Markets Act, which would be needed for amendments 31 and 32 to work as intended. Amendments 34 and 35 would apply the reverse burden of proof to all authorised persons across the entire industry. I will address the specific problems that each amendment would cause.

It is important that the Committee understands that the reverse burden of proof is simply not necessary to embed senior manager accountability in the senior managers and certification regime. The Parliamentary Commission on Banking Standards clearly established that the approved persons regime was wholly inadequate. We believe that the senior managers and certification regime clarifies the responsibilities of individual senior managers, which is something that any effective regulatory regime must deliver. Moreover, it will deter senior managers from taking a reckless or negligent approach to managing their responsibilities in the first place. I know that the whole Committee will agree with that. The duty of responsibility is a powerful incentive that encourages senior managers to take effective action to prevent such failings.

I have already set out how the new regime will deliver a step change in senior manager accountability. Regulators and firms will have the necessary clarity about who is responsible for what, and there will be no wriggling off the hook. Senior managers will need to take full ownership of their respective areas of responsibility. Each bank will have to submit to the regulators a responsibilities map, which will set out how responsibility for the business of the firm as a whole is allocated and minimise the risk of any responsibilities falling through the cracks between different senior managers.

The new regime places tough obligations on senior managers to act responsibly, and imposes stringent penalties if they fail to do so. For example, under the duty, a senior manager can be found guilty of misconduct by the regulator if a breach of regulation occurs in the area of the firm’s business for which they are responsible and they did not take reasonable steps to avoid the contravention. It does not matter whether they were aware of the regulatory breach. As in the example that the hon. Gentleman raised earlier, ignorance is not a defence. What matters is whether they took reasonable steps to prevent the breach. If they did not, they are guilty of misconduct. They will not be able to avoid liability simply because the email trail has gone cold.

Removing the reverse burden of proof does not change the penalties that can be applied. If found guilty of misconduct under the statutory duty of responsibility, a senior manager will face an unlimited fine or prohibition from working in the industry. As the chief executive officer of the Prudential Regulation Authority, Andrew Bailey, said, introducing the statutory duty of responsibility instead of the reverse burden of proof

“makes little difference to the substance to the new regime…This change is one of process”.

The Government are rolling out the senior managers regime to all authorised firms, including the fixed-income currency and commodities market. In the light of that extension of the regime, we must consider whether it is appropriate to apply the reverse burden of proof to every single firm in the financial services regulated sector, given how rigorous the regime is.

I sense you are getting slightly restless, Mr Brady, but I am nearing the end of my remarks. Amendments 34 and 35 would apply the reverse burden of proof to all authorised persons, the vast majority of which are small firms. It would be simply disproportionate to apply it to senior managers in all of those firms. I have spoken about the overly legalistic approach. We think it could lead to a perverse outcome, leaving senior managers in the largest firms less exposed to legal risk under the reverse burden of proof than those in small firms.

I have spoken at length about the clauses and set out why I strongly disagree with the Opposition’s amendments. I hope I have convinced everyone of the merits of my argument. I ask the Committee to oppose the amendments and accept the clauses.

Ordered, That the debate be now adjourned.—(Sarah Newton.)

Adjourned till this day at Two o’clock.

The Committee consisted of the following Members:

Chairs: † Mr Graham Brady, Phil Wilson

† Baldwin, Harriett (Economic Secretary to the Treasury)

† Burgon, Richard (Leeds East) (Lab)

† Caulfield, Maria (Lewes) (Con)

† Cooper, Julie (Burnley) (Lab)

† Donelan, Michelle (Chippenham) (Con)

† Fysh, Marcus (Yeovil) (Con)

† Hall, Luke (Thornbury and Yate) (Con)

† Kerevan, George (East Lothian) (SNP)

† McMahon, Jim (Oldham West and Royton) (Lab)

† McGinn, Conor (St Helens North) (Lab)

† Mak, Mr Alan (Havant) (Con)

Mann, John (Bassetlaw) (Lab)

† Marris, Rob (Wolverhampton South West) (Lab)

† Mullin, Roger (Kirkcaldy and Cowdenbeath) (SNP)

† Newton, Sarah (Truro and Falmouth) (Con)

† Skidmore, Chris (Kingswood) (Con)

† Tolhurst, Kelly (Rochester and Strood) (Con)

† Wood, Mike (Dudley South) (Con)

Matthew Hamlyn, Fergus Reid, Committee Clerks

† attended the Committee

Public Bill Committee

Thursday 11 February 2016

(Morning)

[Mr Graham Brady in the Chair]

Bank of England and Financial Services Bill [Lords]

Clause 12

Bank to act as Prudential Regulation Authority

Question proposed, That the clause stand part of the Bill.

With this it will be convenient to discuss the following:

Clause 13 stand part.

That schedule 1 be the First schedule to the Bill.

Clauses 14 to 16 stand part.

That schedule 2 be the Second schedule to the Bill.

Clause 17 stand part.

That schedule 3 be the Third schedule to the Bill.

The Committee will see that I have not selected any amendments that would leave out clauses or schedules. That is because the more effective proceeding is simply to vote against the stand part question, but the amendments were a helpful and proper indicator. As clauses 13 to 17 and schedule 1 to 3 are all closely dependent on clause 12, no amendments to any of them were selectable. I propose that it is convenient to consider the clauses and schedules together in debating the question that clause 12 stand part of the Bill. Members will have the opportunity, should they wish, of dividing the Committee on individual clauses or schedules in turn.

It is a pleasure to serve under your chairmanship, Mr Brady, on this sunny February morning. The clauses and schedules together end the subsidiary status of the Prudential Regulation Authority and integrate microprudential regulation more fully into the Bank of England. I hope I can make it clear that the changes increase the PRA’s effectiveness, but do not undermine its independence.

First, I will talk about increasing effectiveness. Placing the Prudential Regulation Committee on the same footing as the Monetary Policy Committee—and, with our changes, the Financial Policy Committee—will elevate the status of the microprudential responsibilities of the Bank to the same level as monetary policy and macroprudential policy. That reinforces not only to Bank staff but to the public to whom the Bank must be transparent and accountable that the Bank is not simply an organisation dedicated to setting interest rates, but one with equally important macro and microprudential responsibilities.

The Bank has told us that closer integration has increased the feeling among PRA staff that they are integral to the Bank’s mission and have broader opportunities for progression across the whole Bank. That can only assist recruitment of the best people to the supervisor. Another benefit is increased clarity of governance. As the Parliamentary Commission on Banking Standards noted in discussing the existing regime:

“The accountability arrangements of the new structures are more complex than those of the previous regulatory regime. The PRA is a subsidiary of the Bank, and the FPC is a sub-committee of the Court of the Bank.”

Ending the subsidiary status of the PRA and establishing the PRC, MPC and FPC on the same statutory basis simplifies and clarifies Bank governance.

A further benefit of ending the PRA’s subsidiary status is that it enables the members of the new committee to devote more time to microprudential policy and operations. As the Governor explained at the Treasury Committee, the change will

“liberate…a portion of the time of the members of the PRA Board that is spent duly exercising their responsibilities as directors of a company”,

while noting the important responsibility PRC members will continue to have for ensuring the prudential regulation functions are adequately resourced. The Governor concluded

“that time is freed up to do their core job—what they are there for—which is to provide guidance on judgment-led supervision.”

For example, the PRC will not have to spend so much time discussing IT provision since that will be a concern for the Bank at large, and ultimately for its governing body, the court. Equally, whereas the PRA board had to be involved in discussions on staff terms and conditions and recruitment, the new committee will be able to leave those important concerns to the wider organisation and focus more on supervision.

Secondly, in terms of protecting independence, the PRA is a wholly owned subsidiary of the Bank, staffed by Bank employees. The Bank appoints the non-executive directors of the PRA board, subject to the approval of the Treasury. The transfer of the PRA’s functions to the Bank does not therefore transform the PRA from a body that is independent of the Bank to one that is not.

It may be worth explaining what “independence of the PRA” actually means. The Basel core principles on banking supervision state that legal safeguards should ensure that a regulator has

“operational independence, transparent processes, sound governance, budgetary processes that do not undermine autonomy and adequate resources”.

The Bill provides for all of those things. It provides that the Bank’s PRA functions may be exercised only through the new Prudential Regulation Committee. The Bank may not exercise its prudential regulation role in any other way.

The Prudential Regulation Committee will have a clear majority of external members. There will be at least seven external members, including at least six appointed by the Chancellor plus the CEO of the Financial Conduct Authority, and five internal members, comprising four Bank officers and one member appointed by the Governor. It is important to note that that is an increase in the weight of external members from the PRA board, on which a majority of only one is required.

Continuing with the protections for the PRA’s operational independence, the Basel core principles call for transparent processes and sound governance. The Bill sets out clear processes for the new committee’s decision making. The core principles also stress adequate resources. Every year, the committee will report directly to the Chancellor on the adequacy of its resources and the independence of its operations. The requirement for the Bank to separate resolution and supervisory functions will ensure that the UK complies with the European Union directives that insist on separation.

Finally, the Bill grants a strong statutory role to the PRA’s chief executive. He or she will be responsible for the day-to-day management and implementation of the prudential regulation strategy, and for determining how resources are allocated, managing policy development and overseeing supervisory decisions that do not reach the level of the committee. Our changes will increase the PRA’s effectiveness without undermining its independence. I commend the clauses to the Committee.

It is a great pleasure to serve under your chairmanship on this sunny day, Mr Brady, or indeed on any other day.

The effect of clause 12 will be to demote the PRA from being a separate authority to being a mere sub-committee within the Bank of England. We tabled an amendment to remove the clause and those that are consequential upon it. We think that the Treasury is dismantling another significant part of its regulatory reforms, which came into being through the Financial Services (Banking Reform) Act 2013. The clause would make the Bank of England as a corporate entity responsible for microprudential regulation. Our principal concern is with the manner in which microprudential regulation is to be conducted. We are concerned that the new PRC will be less independent than the PRA.

The risk is that the Government are demoting concerns about microprudential regulation by devolving the functions of the rule-making, free-standing regulatory authority, which is supposed to oversee that, to a sub-committee of the Bank. That is not a minor matter. The PRA is a separate corporate body and a distinct authority. It can be held separately liable and accountable for its actions and interactions. If it becomes merely a committee within a much larger corporate body, it will not be possible to hold it to account in the same way.

In the other place, my shadow Treasury colleague, Lord Tunnicliffe, said:

“The thing that keeps it clean is the fact that the PRA is a subsidiary—an independent company, as mentioned, governed by company law—and, therefore, there has to be an arm’s-length relationship between it and the FPC.”—[Official Report, House of Lords, 1 November 2015; Vol. 765, c. 2005.]

I do not believe that moving the PRA closer to the Bank and, by definition, closer to the FPC is a good thing. The present separation works and should continue.

The former Treasury Committee Chair, Lord McFall, said that the clause is

“downgrading the PRA to a mere committee”.—[Official Report, House of Lords, 26 October 2015; Vol. 765, c. 1059.]

The desubsidiarisation—a bit of a mouthful—of the PRA may simplify the Bank of England’s governance, as its current and outgoing chair, Andrew Bailey, said at the Treasury Committee. But will it make it more competent and more effective in carrying out its work? Our concern is that it will not, and there is no evidence that we are aware of to demonstrate that.

In Mr Bailey’s discussion at the Treasury Committee, the Chair of the Committee, the right hon. Member for Chichester (Mr Tyrie), raised concerns that there will not be sufficient independence owing to the make-up of the committee’s membership. He highlighted:

“the Chairman of the FPC, who will also be the Chairman of the PRC, who will also be the Governor of the Bank.”

Mr Bailey said,

“We have to be very clear in our own roles and thinking which hat we are wearing at any given point in time”.

He also said that the body will be more integrated into the Bank, but that it also has certain functions that it needs to carry out independently. The Governor was also pushed on this, again by a Treasury Committee member, the hon. Member for Wycombe (Mr Baker), who said:

“In addition to being Governor, you chair the Financial Stability Board, you are a member of Court, and you chair the FPC, the MPC and soon the PRC.”

He warned that,

“the institutions are set up in such a way that they strongly depend on the Governor’s capacity to act independently in different contexts.”

Also at the Treasury Committee, the hon. Member for East Lothian asked the Governor whether the overlap of personnel meant there were grounds for conflict

“if we have the PRC reporting on its independence from the rest of the Bank.”

I am sorry to quote the Treasury Committee at such length, but the discussion there threw up contradictions, and it is not clear to me that those contradictions have been sufficiently resolved. So can the Minister say whether the body can be both more integrated and remain independent? We welcome joined-up thinking and ensuring a broad overview. We also heard about the dangers of groupthink in Committee the other day, and the Governor of the Bank told the Treasury Committee that the Bill did not specifically address that. If we have too many key persons juggling too many tasks, is there not a risk of oversight being impaired or conflict of interest setting in?

An authority employs its own staff who are therefore dedicated to the pursuit of its particular goals, in this instance microprudential regulation. By creating a committee of senior figures, microprudential regulation becomes simply another series of talking points among senior executives, as opposed to an ongoing regulatory activity. There are many very important functions that must be performed by a microprudential regulator in the wake of the last financial crisis: first, the conduct of stress tests to ensure that individual financial institutions are putting to one side sufficient capital. That is a microprudential activity that relates to the solvency of the institutions. We are surely not arguing that it is no longer important.

With the creation of new starter banks, there is a greater need than ever for microprudential regulation as those institutions start up in business. If we continue to start new credit unions and new blockchain banks and so on, microprudential regulations remain fundamentally important. Also, there continue to be high street banks in financial difficulties, such as the Co-operative and Britannia. The danger of the Prudential Regulation Committee being appointed as is currently suggested makes it more likely that groupthink will develop.

The strength of having different agencies in existence simultaneously is that there is a useful tension between them as each of them considers the same question from a different angle in terms of the systemic risks, the risks to the solvency of individual banks, and in terms of activity on individual markets. So the political and economic context should be considered elsewhere beyond those regulatory bodies.

It is remarkable that we are witnessing what some commentators would call a downgrading of micro- prudential regulation UK at a time when financial institutions such as the Co-operative Bank and the Britannia, as I have just mentioned, face such serious solvency problems. The PRA was created for exactly that sort of situation. I therefore want to spend time on the arguments raised in relation to that change.

It has been stated that the PRA is being put on the same footing as other activities and that it is being taken back in-house. Taking the PRA back in-house is an odd idea. The PRA is currently a subsidiary of the Bank of England, so it is already in-house. A subsidiary is something that is owned by a parent company; the PRA was already a part of the Bank of England and in any event was answerable, through a statutory scheme, to the Governor.

There was a new post of deputy governor of the Bank of England, which was assigned to head up the PRA in the Financial Services Act 2012. So what is the problem with governance over it? What prompted this change from authority to committee in the first place? We wish to argue for the retention of the PRA as a distinct regulatory authority and believe that it ought to be given a shot in the arm, so that it comes out of the shadow of the FCA and begins to fight for microprudential regulation. We are of the view that the case to vest the powers of the PRA into the Bank, in a new committee called the PRC, is a good one and we will push our amendment to leave out clause 12 to the vote.

I now move on to the rest of our comments about clause 13. Once a Division has been held on clause 12, as you say, Mr Brady, that guides us on the following clauses, which are consequential upon it. However, I wish to take a moment here to say that the question is: why does it matter whether the PRA is an authority or a committee? We have discussed that in relation to clause 12. The Treasury is empowered to give a notice in writing to the new prudential regulation committee, making recommendations about aspects of economic policy.

At one level, that is dangerous, because it allows economic policy to influence microprudential regulation. The importance of microprudential regulation is that it must continue to assess the solvency of individual banks without outside influence. If it allows itself to ask whether it would be better in economic terms for a bank to continue operating or not, that would distract it from deciding whether or not the bank actually has sufficient assets to stay solvent.

The only strength of the 2013 regulatory reforms, which were introduced at the European level originally, is that they require different agencies to consider each problem from a different perspective, so that groupthink, which I mentioned earlier, is less likely to develop.

Given the discussion on clause 12 that we have already had, I will leave it there on clause 13.

We have nothing further to add to clause 14, on “Accounts relating to Bank’s functions as Prudential Regulation Authority” and evidently we will not push our amendment to a vote. The same is true of clause 15.

In relation to clause 16, Mr Brady, you will be aware that we have tabled an amendment to schedule 2, which is introduced by clause 16, to rename the Bank of England’s “Court” as a “Board”. We will now propose that amendment at a later stage, which I am sure the whole Committee is anticipating eagerly, in a new clause alongside the SNP’s discussion on the bank’s name. I do not know which one the Committee will consider the more radical proposal; I do not want to get into a competition with the hon. Member for East Lothian for radicalism or moderatism, if that is the phrase. However, our plan is one that would put the Bank on a similar footing to some of the major financial institutions in the City. On that basis, I have nothing further to add to clause 16 now and we will not push our amendment to a vote.

Finally, I can confirm that again we have nothing further to add to clause 17 and schedule 3, which has been grouped with these clauses, and will not push amendments to them to a vote.

Like other Members, I add my delight at serving under your chairmanship on this bright morning, Mr Brady.

There is no best way of constructing the Bank and its regulatory functions. In this instance, however, having set up a structure, I think we should let it work itself out and see what the issues are, rather than tear it up so quickly. From that perspective, I will support the line of argument followed by the hon. Member for Leeds East.

May I remind the Minister and the Committee that we have been here before? There was a long period when the Bank was effectively the prudential authority, and it did not do a good job. One can mention the Bank of Credit and Commerce International. One can mention Barings. The Bank failed at the very simple task of examining the imminent failure of major banking institutions and not ensuring that that did not happen before it became a public catastrophe.

For that reason, in the Bank of England Act 1998, prudential conduct responsibility was taken away from the Bank and invested in the Financial Services Authority. That model, as we saw subsequently, did not work, in the sense that completely separating prudential conduct from the Bank led to a chasm between the two agencies in terms of who was letting whom know and who was responsible for tidying up.

In a sense, the halfway house that we now have, where we have put prudential conduct into the orbit of the Bank but kept it semi-discrete, is better than what we had before. Will it work in the long run? I doubt that any bureaucratic system ever works in all circumstances, but we have set it up; let us test it to destruction before we make another bureaucratic change. From that point of view, we have a model that seems to work.

The issues brought up in the Treasury Committee related particularly to the resources that were deployable to the PRA to conduct its activities and whether the main board of the Bank was providing sufficient financial and staff resources to the PRA to allow it to do its work. My worry is that the change proposed by the Government makes it too easy for the Bank’s main board to ration resources for the soon-to-be PRC. It would be better to leave a degree of independence within the PRC, so that if it comes to a debate over resources, the PRC has some muscle and can go public if it feels that it is not getting the physical and staffing support it needs from the main board.

We may need to come back to the structure of the Bank at some point; the Minister may want to reflect on that. As I said in the previous sitting, we are in danger of creating too many committees of the Bank. We may be in danger of reinforcing a silo mentality, even though the Governor serves on all the different committees. We may have to discuss at some point whether we need to separate the Monetary Policy Committee and the Financial Policy Committee, but we should certainly test the prudential part of the administration in its present form. Changing it now simply because we will get a better and prettier bureaucratic chart is not a sufficient reason.

As I am sure you are aware, Mr Brady, desubsidiarisation of the PRA is not something they talk about very often down at the Dog and Duck, but it is incredibly important. Committee members have raised important issues, to which I would like to respond.

If one were in the pub discussing the Bank of England, the extent of people’s knowledge of what it does probably would stop with the changing of interest rates; the hon. Member for Leeds East made that point clearly. He said that the change represented a downgrade of the incredibly important microprudential responsibilities of the PRA, but I would argue that it is an upgrade, in the sense that it gives the PRA the status of a committee—the Prudential Regulation Committee—that has the same status as the Monetary Policy Committee. That reinforces to not only Bank staff but drinkers in the Dog and Duck and the public at large that it is an incredibly important function. I completely agree with hon. Members who raised that point.

The microprudential responsibilities of the prudential regulator are extremely important. The hon. Member for East Lothian made the important point that, in the 300 years of history of the Bank of England, until its independence under the Bank of England Act 1998, there were obvious failures. Firms did fail, and no one should be under the illusion that we are in a zero-failure regime for banks.

However, it is clear that the decision to separate that microprudential function and move it to the FSA created a system that was tested to destruction. That separation under the failed regulatory regime of tripartite arrangements meant there was insufficient communication between the microprudential regulation at the FSA and the day-to-day liquidity challenges that banks were experiencing in the markets in the run-up to the crash. That seems to me the strongest possible argument for having moved the microprudential function back to the Bank of England. I am glad that Committee Members have supported that important change. By following the logic of that argument, one is compelled to see that it makes sense to go one step one further, and change the PRA from being a subsidiary into being at the heart of the Bank with the same status as the Monetary Policy Committee.

By making the points he did, the hon. Member for East Lothian has made my argument for me—for having that much closer feeling of all staff being part of one Bank, which is the agenda that the Governor has set out. That not only gives a much higher status within the organisation to the incredibly important function of microprudential regulation but it reinforces the ability of the organisation to communicate with the important other parts of the organisation, and gives them more time to do it. They will not have to worry about all of the responsibilities of being a separate company.

indicated assent.

I am glad to see that the hon. Gentleman, a thoughtful and intelligent man, is nodding vigorously as I make my argument.

The hon. Member for Leeds East asked what prompted the decision. It was very much the one-Bank agenda that the Governor has followed. He argues that it makes sense to have different points of view and not be captured by groupthink. Although I agree with the importance of having a range of views on these committees, I would counter that argument by saying that the tripartite arrangements were so clearly inadequate that that difference meant that no one spoke to each other about what they were seeing.

I hope that the Treasury Committee returns to evaluate how the transition has worked. I want to reassure hon. Members on resources, because they are incredibly important. We want to ensure that the microprudential function does not have to compete for resources or find itself starved of them. It is important to note that the levy will continue to provide those resources. No changes are being made under this legislation to the available resources for microprudential regulation.

The hon. Member for Leeds East mentioned the importance of the role of the Governor. Of course, the Governor is an incredibly important person who sits on all the committees. That is an important function of having a one-Bank organisation. He is obviously a very responsible person. With those responsibilities comes accountability, not only through the Chancellor but to Parliament through the Treasury Committee. I emphasise that that arrangement does not change as a result of these clauses.

Having reviewed all the questions raised against making the changes, I insist that the changes will improve the Bank of England’s governance.

Question put, That the clause stand part of the Bill.

Clause 12 ordered to stand part of the Bill.

Clause 13 ordered to stand part of the Bill.

Schedule 1 agreed to.

Clauses 14 to 16 ordered to stand part of the Bill.

Schedule 2 agreed to.

Clause 17 ordered to stand part of the Bill.

Schedule 3 agreed to.

Clause 18

Financial Conduct Authority

I beg to move amendment 37, in clause 18, page 16, line 12, leave out paragraph (a) and insert—

“(a) publish any notice under subsection (1) within one month of giving such a notice, and”.

With this it will be convenient to discuss amendment 38, in clause 18, page 16, line 14, after “before”, insert

“and make a statement to both Houses of”

It is a ray of sunshine to be serving under your chairmanship on this bright day, Mr Brady. Amendments 37 and 38 are straightforward, and I am sure that the Government will accept them, so perhaps we can move on to debate the clause. Proposed new section 1JA(1) gives the Treasury the power to give directions to the Financial Conduct Authority. The rest of the new section deals with how that power shall be exercised at least once in each Parliament, and with the publication of those directions. Our straightforward amendments would tidy that up.

One must recognise that there is a balancing act between the FCA’s independence and the need for public accountability, refracted through the Treasury. That is always difficult, and we accept that, but there is a bit of a problem with the Financial Conduct Authority. Immediately after Second Reading a couple of weeks ago, there was a debate for more than two hours in which I think it would be fair to say that Members from both sides of the House expressed grave concerns about some of the actions or inaction of the Financial Conduct Authority. It is purportedly independent of the Government and the Bank of England, but there is so much cosy overlap.

We have Dr Bailey, who now seems to have all kinds of hats. I stand to be corrected, but I think he is the deputy governor for prudential regulation and has been the chief executive officer of the Prudential Regulation Authority since April 2013. He is therefore also a member of the Bank’s board of directors, the PRA board and the Financial Policy Committee, and now he is going to the Financial Conduct Authority. There are questions not about that gentleman’s integrity, but about perceived conflicts of interests and so on. There is someone on the FCA board, Jane Platt—she also joined in April 2013—who is the chief executive of National Savings and Investments. Sir Brian Pomeroy, CBE, joined the FSA board in November 2009. I think that he may still be on the FCA website.

The FSA was abolished because it was, shall we say, pretty useless. Private Eye, correctly in my mind, used to characterise it as the Fundamentally Supine Authority. If we look at the prosecutions, or the lack thereof, and the steps taken by the FSA after the crash in 2008, or the lack thereof, it did not exactly cover itself in glory as an institution. I make no comments on the individuals within it; I am referring to the institution. The Government recognised that, and therefore we had the Financial Conduct Authority.

It is all a bit cosy. The noun of this Committee thus far seems to be groupthink. That refers to the risk that those who have a cosy relationship will start to be blinkered in the way in which they exercise their regulatory functions. The FSA has been characterised by Professor Alastair Hudson, whom I thank for his assistance in tackling what is quite a technical Bill. He said, “The FSA previously began to think of itself as being in partnership with the financial institutions which it was supposed to regulate.” I think he had a point. So, I suspect, did the Government, which is why we now have the FCA, not the FSA.

However, there is still a big question mark over the FCA’s relationship with the Government, which is to do with how independent it is. The Minister has previously told the House that the FCA’s decision to abandon its investigation into the culture of banking, which had not actually started, had nothing to do with the Treasury. That, of course, touches on questions of groupthink, blinkered thinking and so on. I do not impugn her for saying that, but looking at it from the perspective of Labour Members, that is a surprising situation. It is relevant to what we are discussing, because of course proposed new section 1JA, to be inserted by clause 18, talks about the Treasury giving directions to the FCA in certain circumstances.

The FCA, in its business plan for 2015-16—the year we are in—said that it would do a culture review:

“In 2015/16 we will conduct a new thematic review on whether culture change programmes in retail and wholesale banks are driving the right behaviour, in particular focusing on remuneration, appraisal and promotion decisions of middle management, as well as how concerns are reported and acted on.”

It would have been very useful to have had the fruits of that culture review before us when debating the Bill.

Is the hon. Gentleman aware that there are quite a number of studies that indicate that approximately 70% of major organisational failures can be attributed primarily to cultural problems?

I was not aware of that statistic, but it does not entirely surprise me. I thank the hon. Gentleman for that.

We have the chair of the FCA’s foreword to its business plan for 2015-16—as I said, the current year. That is John Griffith-Jones, who by the way worked at KPMG from 1975 to 2012; we all know that KPMG has questions to answer about what it was doing in relation to the financial institutions in the lead-up to the meltdown in 2008. I was talking about cosiness; he comes from KPMG, and he said in that foreword:

“In our last Risk Outlook we identified the seven most important forward-looking areas of focus in our view. We do the same again this year. Unsurprisingly, given the long-term nature of these risks and the underlying drivers, the list is largely unchanged. Poor culture and controls continue to concern us, notwithstanding the efforts being made by firms to improve both.”

So there he is, in his foreword to the business plan, less than 12 months ago, stressing again the concerns about “poor culture and controls”. The FCA said in the business plan that would investigate the culture of banking and financial institutions and then, in a whiff of smoke, it was gone—no investigation whatsoever. The Minister says that is nothing to do with the Treasury, but I hope she will recognise that the Opposition are a little concerned about the relationship between the Treasury and the FCA. We are concerned about how much control and direction the Treasury can give the FCA.

The FCA is constitutionally a creature of statute, hence the Bill and previous legislation, but in everyday terms it is somewhat a creature of the Treasury. It would be helpful if, when addressing clause 18 and the minor amendments 37 and 38, the Minister said a little more about the current relationship between Her Majesty’s Government, refracted through the Treasury, and the FCA, and what she foresees that future relationship being in the changed landscape that the Bill introduces.

Clause 18 is effectively about remit letters, which I think is why the hon. Gentleman took the opportunity to bring a lot of fairly extraneous issues into discussion. I will respond to some of them in the course of my remarks.

It is important that regulation takes account of both the implications of the economic environment for the regulators and of the regulators’ own impact on that economic environment. I am sure all members of the Committee agree with that. That is reflected in the statutory remits of the regulators. For example, both regulators have a duty to have regard to the desirability of sustainable economic growth in the medium or long term. The objectives of both regulators recognise the importance of effective competition, and I trust that members of the Committee do not wish to raise any controversy or have any criticism about that.

Clearly, therefore, both regulators need to understand how the Government’s economic policy may affect their work. I want to be absolutely clear that the recommendations in the letters that the Government will be able to send to the regulators will indicate the Government’s economic policy. They will be recommendations and will not be binding. They will certainly not be what the hon. Gentleman termed “direction”. They will not compromise, modify or override the regulators’ statutory objectives in any way, nor, importantly, will they relate to individual firms or cases.

The hon. Gentleman raised one of his favourite topics: the fact that the FCA had a bank culture review in its business plan for the year ahead. Despite my assurances to him in the Chamber that the first the Treasury heard of that was when it was covered in the media over the new year, he does not seem convinced by what we have said. We have replied to numerous written questions with the same response, and I repeat it for his benefit today.

The FCA is clearly operationally independent. It took an operationally independent decision to change what it is going to focus on over the coming year, and that decision was made completely separately from the Government.

I take what the hon. Lady says. Is she comfortable that that was the right decision for the FCA to take? It was made by a body that is so incompetent that it could not even monitor the share dealings of its own staff.

The hon. Gentleman cannot have it both ways. If he thinks that I should have no operational interference in whether the FCA does a cultural review study, obviously I should not have any operational interference in whether it reinstates the study. That is the situation in which operational independence results. Where the Government have a role is through sending these non-binding remit letters and through the power to appoint the chief executive and the board. The hon. Gentleman has described the history of the predecessor organisation, the FSA, and obviously we had to abolish that organisation—that is the power of the Government of the day. His party’s Front Benchers have a range of different and fairly eccentric ideas about the independence of the Bank of England, which are on the public record. I will not entertain the Committee by talking about them.

Not me, guv.

The hon. Gentleman is serving in the team of a shadow Chancellor who wants to end the independence of the Bank of England.

I hear and accept entirely what the Minister says about not interfering in operational matters. However, I invite her to indicate whether, at some stage, a review of the culture would help the Government.

I think we can all agree that that would be a fascinating study to read, but I will not get involved in directing the FCA to change its business plan. That would be interfering with the operational independence of the FCA, which I am sure Opposition Members do not want me to do.

I thank the hon. Lady for being so generous in giving way. Actually, I never said anything about not interfering in operational matters. She rightly says that, in theory, the Government could abolish the FCA. This clause does not cover a directive to the FCA; it talks about a recommendation. A recommendation from the Treasury, a body that could abolish the FCA, is something akin, in everyday parlance, to a directive. Pursuant to proposed new section 1JA(1)(b) of the Financial Services and Markets Act 2000, such recommendations could be on “how to advance” one or more of its operational directives.

I have outlined some of the things that the Government put in their remit letter, which is not binding on the organisation but provides important context for what the Government, elected by the British people, want to focus on.

Let me now turn to the amendments. Amendment 37 would require the Treasury to publish the recommendations it makes to the FCA within one month, and amendment 38 would require the notice laid before Parliament to be accompanied by a statement to each House. The amendments raise the important issue of transparency, which is at the heart of the Government’s proposals for these remit letters. The remit letters themselves form an important element of transparency, and they provide a transparent and formal means of conveying Government economic policy to the regulators, so it is an important part of the provision that the Treasury must publish its recommendations and lay a copy before both Houses of Parliament.

These probing amendments have been useful to confirm how the process will work. I assure members of the Committee that I cannot foresee any circumstances in which the notification for either regulator would not be published and laid before Parliament within a month. I am happy to commit the Government to that practice. I am not going quite as far as accepting the hon. Gentleman’s amendment, but I am happy to commit the Government on the record to that practice. I hope my assurance will be sufficient.

We need to retain flexibility about the best way of informing the House. For example, the updated recommendations might be issued as part of the Budget statement. In that case, it would be more appropriate and efficient for the House to be informed of the new recommendations in the Budget speech, as has happened when the FPC remit letter is updated at that time.

The hon. Gentleman raised a few other points, and it might be helpful if I respond to them. Without criticising Mr Andrew Bailey in any way, the hon. Gentleman did imply that he thought he was doing too much. However, I can assure the hon. Gentleman that Mr Bailey will stop being the chief executive of the PRA on the day he moves over to be chief executive of the FCA. The hon. Gentleman referred to conflicts. I hope that he is not alluding to any specific conflict of interest, because that would be inappropriate in terms of impugning Mr Bailey’s integrity.

The hon. Gentleman mentioned a “cosy” relationship. There were a lot of allegations relating to the fact that many individuals involved have worked with, and have experience of, other organisations. However, that is where the operational independence, structure and framework of statutory duties and responsibilities, as set out by Parliament, is so important. FSMA, for example, made it clear that the terms of all appointments have to ensure that the appointee cannot be directed by the Treasury or any other person, including the Bank.

When we make appointments, we consider the appointee’s current and previous background—of course we do —including any material conflicts. In our view, it would be entirely appropriate for people who are appointed to these important functions to have extensive experience of a relevant institution. Therefore, I do not think that the hon. Gentleman is right to talk about “cosiness”; he ought to be saying how important it is to have experience and wisdom in the statutory framework that we are discussing.

Without more ado, I hope that my points on the amendment and the clause have been sufficient to satisfy the hon. Gentleman. I am very grateful for his probing amendments. I hope I have been able to address the concerns and that the clause may stand part of the Bill.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 18 ordered to stand part of the Bill.

Clause 19

Diversity

Question proposed, That the clause stand part of the Bill.

The clause shows how valuable it can be for Ministers to have their Bill start in the House of Lords, given that we often find that we benefit from their insights as the Bill proceeds through the other place, particularly on subjects on which their lordships have so much wisdom.

The clause amends the general regulatory principles that apply to both the Financial Conduct Authority and the Prudential Regulation Authority. That is a direct way of ensuring that the regulators fully consider the differences between types of business, including—importantly—mutual institutions, across the breadth of work that they undertake, when it is appropriate to do so. The clause makes it clear that both regulators must take into account the differences between the varying forms of business organisation adopted by firms, including —importantly—mutual societies, where appropriate whenever they are discharging their general functions.

I hope that introducing the clause, which puts consideration of mutuality and other types of business organisation into the regulators’ guiding principles, provides reassurance that the Government strongly support a diverse financial services sector and the part that mutuals play in achieving that. We are building on previous action that the Government have taken to support the sector, including: carving out the building societies from the Independent Commission on Banking ring-fencing regulations; increasing the maximum interest rates that credit unions may charge on loans from 2% to 3% a month; spending £38 million in the credit union sector through the Department for Work and Pensions credit union expansion project; and ensuring that universal credit and pensions payments may be paid into a credit union account.

Moreover, Government support for the Mutuals’ Deferred Shares Act 2015, which received Royal Assent in March 2015, underlined our commitment to fostering growth and competition in the sector by seeking to address mutual insurers’ inability to access external capital without the need to demutualise.

Clause 19 provides a further step to ensure that regulators fully consider the particular issues that relate to mutual institutions and other forms of business across all their work. It highlights the role of mutual financial institutions in the UK’s evolving financial services marketplace and ensures that, where appropriate, the specific challenges that the mutuals sector faces are taken into consideration when the regulators are discharging their general objectives.

We on the Labour Benches—I do not know about colleagues in the Scottish National party—welcome clause 19. I say that as someone who first joined a credit union more than 40 years ago. Diversity is important in the financial sector, as in many sectors. The parallel that some of us may remember from our schooldays is crop rotation, for which we need ecological diversity. If we go for monoculture with crops, it is seriously bad news if a pest comes, because our one and only crop is gone.

There is a parallel with financial institutions. By and large, the mutuals sector, including building societies, fared better than mainstream, privately owned banks in the crisis. Where there were problems, in particular, was with some former building societies that had demutualised. I say that as someone who voted against demutualisation for at least three building societies. Two of those were the Staffordshire and the Cheltenham & Gloucester. We lost both of those, but we won with the Nationwide building society—it is still a mutual, and I still have an account there. It is a very big mutual—a very big financial institution. At the other end of the spectrum are institutions such as the Wolverhampton credit union—I am not sure what it is called now, because it keeps changing its name—of which I have been a member for many years. Compared with the Nationwide building society, it is a very small institution, but that is part of diversity.

I am pleased that this Government and their predecessor, the coalition Government, have embraced diversity. The Minister mentioned some of the things that have been done: the £38 million for credit unions and the £2 million. I salute the work that the coalition Government did, and that I hope this Government will continue to do, in relation to the mutuals sector. For example, the previous Government supported disclosure of lending data by the main high street banks to understand patterns of lending across the UK. There has been the lowering of barriers to entry to the financial services market to help to increase competition—challenger banks and so on. I do not think that the Minister mentioned the good work on schools-based financial literacy programmes, which were brought in. That is not directly about mutuals, but it has to do with that concept of a broader view to financial services than simply the high street banks.

A few more things need to be done, and if you will indulge me briefly, Mr Brady, I will mention one or two of them. I am indebted to the Community Investment Coalition for some of these suggestions. A review of existing affordable financial tools would assist, as would supporting and encouraging FinTech innovation, which the Government are starting to do—it is likely to be a growing sector—but it needs to be done in a way that will also benefit people on lower incomes. Also needed is a clear direction to economic regulators—something we discussed in our debate on the previous clause—to ensure that the financial services market provides easily understandable and appropriate products. There is a constant battle there, because products keep mutating and so on. Broadening and strengthening the existing voluntary framework for disclosure of lending data would take further what the Government have already done.

It would be useful to have stressed by the Government—practising some of their recommendations to the FCA, not directions—the value and importance of community finance. They need to ensure some competition and diversity in the financial services sector, which should benefit all communities if it works properly. A review of community finance provision across the UK would be very helpful to identify where there are strong and sustainable community finance providers, but also where there are gaps in provision. Again, that would be carrying on the work of the previous Government, which this Government, in their nine months, have carried on with clause 19 on diversity.

The final suggestion is about trying, inasmuch as Government can, and they have a role to play—the Minister mentioned the £38 million for the credit union sector given by the previous Government—to scale up the community finance sector. For example, there could be assistance with investment in IT infrastructure—not the FinTech stuff, just IT infrastructure for the community finance sector. Computers are still quite expensive, let alone programming and so on. If the Government could assist with that, with their push towards diversity, as exemplified in the clause, that would be very helpful.

I will respond briefly because we are now in an area where harmony is breaking out. I welcome the hon. Gentleman’s comments on diversity in the financial sector and the points he made about community finance. That is something we feel strongly about. He mentioned some of the aspects such as the challenger bank agenda. He did not mention the new bank unit that has just been set up between the FCA and the PRA, shortly to be the PRC.

The hon. Gentleman did mention the importance of affordable financial tools. We have set up the financial advice market review, which is designed to make advice more affordable and accessible. He also mentioned FinTech, and we are enthusiastic about ensuring that the UK remains the best place in the world to locate a FinTech business. We are seeing a dramatic growth in that sector at the moment. He will also be aware of the importance of the peer-to-peer sector in providing community finance across the country, and what we are doing to encourage that.

There is a range of different things and he highlighted some of them. Interestingly, he mentioned a review. I am not convinced by that idea, based on the fact that in the 13 years of Labour government there were 20 reviews into competition in banking, but only one new bank was set up. In the previous Parliament, eight firms got banking licences, and we have set ourselves the ambitious goal of 15 new firms to get banking licences during the course of this Parliament. That is something we are very focused on and I appreciated the hon. Gentleman’s comments on that.

Question put and agreed to.

Clause 19 accordingly ordered to stand part of the Bill.

Clause 20

Extension of relevant authorised persons regime to all authorised persons

Question proposed, That the clause stand part of the Bill.

I fear that the harmony in the Committee might diminish with clause 20, which introduces schedule 4, making provisions to extend the senior managers and certification regime across the financial services industry to all authorised firms, replacing the discredited approved persons regime.

Before setting out the reasoning for that, it is worth outlining the history and development of the senior managers and certification regime. Currently, individuals who work in the financial services industry are regulated through the approved persons regime. Under that regime, authorised financial services firms may not employ a person to perform “controlled functions”, by which is meant functions specified by the Prudential Regulation Authority or the Financial Conduct Authority in their rules, unless that person has been approved by the appropriate regulator following an application by the firm concerned.

The financial crisis in 2007-08 and more recent events have highlighted concerns about the performance and behaviour of many of the individuals working in the financial services industry. It is clear that the approved persons regime has not been a successful way of regulating individuals working in the industry.

As the Parliamentary Commission on Banking Standards argued, the regime is too broad and insufficiently focused on senior management. In fact, it called it a “complex and confused mess”. Specifically, the commission criticised the approved persons regime for being mostly

“an initial gateway to taking up a post, rather than serving as a system through which the regulators can ensure the continuing exercise of individual responsibility at the most senior levels within banks”.

In addition, the commission noted that there was a lack of clarity around the responsibilities of individuals at the senior level, and that institutions did not take enough responsibility for the fitness and propriety of their own staff at more junior levels. It is clear, therefore, that the approved persons regime is not fit for purpose. It is being replaced from March by the senior manager and certification regime for firms in the banking sector.

This regime requires the regulatory pre-approval of individuals at the top of the firm, along with statements of responsibility setting out the areas of the firm’s business for which they are responsible. It also requires certification for other key individuals upon hiring, and thereafter annually.

This new regime represents a significant strengthening of personal accountability among the top senior management in firms. It will improve corporate governance, thereby advancing the safety and soundness of regulated firms. It also provides a more effective and proportionate means to raise the standards of conduct of key staff more broadly, supported by robust enforcement powers for the regulators.

It is important to recognise, however, that the activities of firms outside the banking sector can pose significant risks to market integrity or to good outcomes for consumers, and the Parliamentary Commission on Banking Standards expected that the deficiencies of the approved persons regime would not be confined to the banking sector.

Consequently, the Government have decided to extend the senior managers and certification regime to all authorised financial services firms in all sectors of the financial services industry. This action is also supported by the recommendations of the fair and effective markets review, which argued that misconduct in fixed-income currency and commodity markets had not been limited to banks. Indeed, the review noted that extending the senior managers and certification regime would emphasise the personal responsibility of individuals working in all firms to observe proper standards of market conduct.

The application of the senior managers and certification regime to all authorised financial services firms will bring in a stronger, more comprehensive regime across the financial services industry. It will enable the effective and efficient regulation of groups with a variety of financial services firms within them, and it will support a level playing field for competition. Therefore, extending the senior managers and certification regime to all authorised firms is covered by clause 20.

Mr Brady, I seek your guidance. We on the Labour Benches have no problem with a schedule 4 being added to the Bill, which is what clause 20 would do—we are therefore content with clause 20. However, regarding the exact content of schedule 4 and the attendant linked debates, we wish to have an opportunity —in a moment—to put our views, after the stand part debate on clause 20, I would suggest.

I can reassure you, Mr Marris, that there will be an opportunity subsequently to do exactly that.

Thank you.

Do you have any further comments?

Not on clause 20 itself, no.

Question put and agreed to.

Clause 20 accordingly ordered to stand part of the Bill.

Schedule 4

Extension of relevant authorised persons regime to all authorised persons

I beg to move amendment 33, in schedule 4, page 58, line 2, leave out paragraph 18.

With this, it will be convenient to discuss the following:

That the schedule be the Fourth schedule to the Bill.

Clauses 21 to 23 stand part.

Amendment 34, in clause 24, page 19, leave out lines 29 to 34.

Amendment 31, in clause 24, page 19, line 34, at end insert “and insert new subsections (6), (7) and (8)—

‘(6) Where the authorised person mentioned in subsection (5) is a relevant authorised person, as defined under section 71A of the Financial Services and Markets Act 2000, subsection (5)(d) does not apply and subsections (7) and (8) do apply.

(7) If the FCA satisfies itself that a person (P), who is a senior manager in relation to a relevant authorised person, is guilty of misconduct by virtue of subsection (5)(a)-(c), then P shall be guilty of misconduct, subject only to subsection (8).

(8) But P is not guilty of misconduct by virtue of subsections (5)(a)-(c) and (7) if P satisfies the FCA that P had taken such steps as a person in P’s position could reasonably be expected to take to avoid the contravention occurring (or continuing).””

Amendment 35, in clause 24, page 20, leave out lines 1 to 6.

Amendment 32, in clause 24, page 20, line 6, at end insert

“and insert new subsections (6), (7) and (8)—

‘(6) Where the PRA-authorised person mentioned in subsection (5) is a relevant authorised person, as defined under section 71A of the Financial Services and Markets Act 2000, subsection (5)(d) does not apply and subsections (7) and (8) do apply.

(7) If the PRA satisfies itself that a person (P) who is a senior manager in relation to a relevant PRA-authorised person is guilty of misconduct by virtue of subsection (5)(a)-(c), then P shall be guilty of misconduct, subject only to subsection (8).

(8) But P is not guilty of misconduct by virtue of subsections (5)(a)-(c) and (7) if P satisfies the PRA that P had taken such steps as a person in P’s position could reasonably be expected to take to avoid the contravention occurring (or continuing).”

Clause 24 stand part.

The lead amendment in this group, amendment 33, stands in my name and that of my hon. Friend the Member for Leeds East. Unless the Government accepts this amendment—I hope they do—we will seek your permission to divide the Committee, Mr Brady.

I thought that I would start with this group with what may be some of the less contentious material; the contentious material is likely to focus on schedule 4 and particularly on clause 24, the reverse burden of proof, and so on. Starting with the perhaps more straightforward stuff—that does not mean that we should all be friends and agree on this—it would help if the Minister could provide clarification regarding clause 21(3)(a), which states that the Treasury may

“confer functions on the FCA”

by regulations. What kind of “functions” do the Government have in mind that the Treasury might confer?

Much more important and perhaps more contentious is clause 21(3), which says:

“Regulations under subsection (2)”—

that is, made by the Treasury if it so chooses—

“may…modify, exclude or apply (with or without modifications) any primary or subordinate legislation (including any provision of, or made under, this Act).”

So clause 21(3)(b) gives the Treasury regulatory power to modify, exclude or apply primary legislation, as well as other powers. I am uneasy about that as a constitutional way forward. No doubt, the Minister will tell me that that has been done by Governments when I served as a Back Bencher, the previous coalition Government and so on, but I still think that, on a constitutional basis and particularly on something as important as the financial stability of our economy, an explanation from the Minister of why the Government are seeking powers under the Bill by regulation to be able to amend primary legislation would be helpful.

Overall, clause 21, “Rules about controlled functions: power to make transitional provision”, seems fairly sensible. Examples of controlled functions include being a director of a regulated firm, overseeing the firm’s systems and controls, being responsible for compliance with rules and so on. One would expect a Government to ensure that there were proper rules about such controlled functions. However, there is that concern about regulations making primary legislation.

Clause 22 deals with the administration of the senior managers regime, part of the senior managers and certification regime which, as hon. Members know, I prefer to call SMACR, or “smacker”, because it suggests what may on occasions metaphorically need doing to those involved in financial services who step out of line. The clause makes a number of changes to the senior managers regime, and perhaps, because these have been wisely grouped together, that will come out in the wash during the debate on reverse burden of proof.

Clause 23, “Rules of conduct”, is not so controversial, I suspect, but there is a question mark for me. I draw the Committee’s attention to subsection (3)(c) which omits section 64B(5) of the Financial Services and Markets Act 2000. I stand to be corrected, but as I understand it, section 64B(5) imposes a duty to report when a manager or senior person knows or suspects that someone in their firm or organisation has failed to comply with conduct rules, and clause 23 is about rules of conduct. If the rules of conduct clause in the Bill omits what appears to be a strong and central provision of previous legislation, that is prima facie extraordinary. If a duty to report actual or suspected wrongdoing is to be removed, I scratch my head. Perhaps the Minister can reassure me and the Committee either that I have misunderstood what the soon-to-be-omitted section 64B(5) does, or that, although that subsection does what I think it does, other provisions are being brought in that strengthen or are at least equivalent to that provision of the 2000 Act.

Clause 20 introduces schedule 4, which will extend the relevant authorised persons regime to all authorised persons. Committee members will be relieved to hear that I do not propose to repeat what I said on Second Reading—namely, that the Labour party’s position is that removing the reverse burden of proof, albeit as part of a suite of changes that the Government are introducing, is a mistake. Our position is in between that of the Government and that set out in the Scottish National party’s amendment. There are two interlinked issues here: whether the reverse burden of proof on senior managers should exist, and, if so, whether it should extend to all managers or, as the acronym SMACR implies, just to senior managers. That is the substance of it. Should we have the reverse burden of proof? If so, to whom should it extend?

As I understand it, and I stand to be corrected—I find it a bit difficult to hold these things in my head, so somebody, perhaps my hon. Friend the Member for Leeds East, can nudge me if I am getting it wrong—the Government are saying, “We will extend this part of the regime to everyone. SMACR will apply to everybody in financial services, but the reverse burden of proof will no longer apply to anybody, senior or junior.” At the other end of the spectrum—again, the hon. Members for East Lothian and for Kirkcaldy and Cowdenbeath can correct me if I am wrong—the Scottish National party is saying, “Extend SMACR to everybody, but retain the reverse burden of proof.” Our position, given that it is harder for smaller organisations to comply with what, frankly, can be labyrinthine regulatory controls, is that the reverse burden of proof should be retained for senior managers, but not for junior managers; extend the regime to junior managers, but not the part of it that pertains to the reverse burden of proof.

The Labour party, as is so often the case, finds itself in tune with the Institute of Directors—not on the particular issue, but on the general background. Paragraph 10 of its helpful written submission states:

“Confidence and trust in banking is at an all-time low. We accept that the behaviour and culture within the banking community contributed to the last financial crisis.”

To be absolutely clear, the Institute of Directors, in paragraph 13 of its written submission, welcomes the Government’s proposals to remove the reverse burden of proof from the legislation. The Government and their coalition partners introduced that legislation recently, but it has never got beyond the statute book and been put into practice, so there is no evidence one way or the other about whether the reverse burden of proof has altered behaviour. As I understand it, it would only have applied—and will only apply, if the Government generously accept our amendments—from 7 March, which is when the SMACR regime comes into force. The Government’s position, although perhaps the Minister will announce a change of heart today, is that the Bill will be close enough to the statute books by 7 March that any investigation into wrongdoing that takes place after that date will be against the backdrop of the normal burden of proof, rather than the reverse burden of proof.

The reverse burden of proof places a higher duty of care on the individual who is accused of engaging in wrongdoing to demonstrate that they did not in fact do so. It is not as strict as what we lawyers—there are several in this room—call strict liability. An example of strict liability in England—I do not know about Scotland; I am a bit rusty on this area of law—is that if a customer under the age of 18 is served alcohol by a member of staff in licensed drinking premises unbeknown to the licensee, which we can imagine happening in many pubs, the licensee is strictly liable for the offence, even though they might have been in a different room or even been on holiday. That is partly to drive managers or licence holders of licensed premises to ensure their staff are aware of the law and apply it. It is called strict liability, and it is very strict. It happens in certain other areas of the law. I venture that most hon. Members have, in their time—I know the Minister has, because she told us earlier that she frequents the Dog and Duck—been to drinking establishments, when over the age of 18 of course, and so will be able to understand that.

The reverse burden of proof is not strict liability. It is a higher threshold that requires a greater level of engagement by the accused—the person it is suggested has engaged, in the scenario of financial services, in wrongdoing. The reasons put forward by the Government in Lord Bridges’ letter were not convincing to Labour Members, and clearly not to SNP Members either. That is why, albeit using different wording, we have tabled a package of amendments, of which amendment 33 is a more minor one, to reverse the reversal of the reverse burden of proof—that is, to maintain the reverse burden of proof—in order to drive higher standards in the banking and financial services sector.

Lord Bridges, the Minister in the other place, was, from reports from my colleagues there who dealt with the Bill, open, flexible and interested in ideas to improve the Bill. The Minister here today has already referred to one such idea: clause 19 on diversity was inserted in the Lords, and clearly the Government found it helpful because they have retained it in the Bill. On the reverse burden of proof, which is a thorny issue, Lord Bridges helpfully explained in a letter the Government’s position and thinking. He said that senior managers were busy organising themselves so that it would be difficult to impose liability on any individual. That is the problem: when things went wrong in the lead-up to 2008, it was very difficult, because of the regulatory regime—much of it introduced by my own party’s Government—to assign individual culpability, let alone criminal culpability, to an individual. An institution may have acted in a very irresponsible way, but drilling down to the level of the individual proved almost impossible. That has an echo in this Bill, because there is widespread agreement—as I always say, that does not mean it is true, but it is a bit of an indication—that were we to have a regime that stressed individual responsibility more highly and ensured that it obtained more widely, conduct would be likely to be better than it was by some individuals leading up to 2008.

We need a system where there are what in other spheres are called accountable officers, so that it is no good just to say, “I didn’t know what was going on.” One ought to say, “You are culpable because you should have known what was going on.” I think the Government agree with that concept. I am not at all sure that the legislation and the amendments to the legislation introduced by the Bill go in the right direction in translating that theory—“You should have known and therefore you are culpable”—into practice in a way that will not lead to loads of people going to prison but will dissuade them from undertaking risky activities that affect us and many of our constituents. That is what we want. Probably no members of the Committee are hangers and floggers. We do not want loads of people caught out; we want them to act responsibly, so that they cannot be caught out and, more importantly, so that the risks are not manifested as meltdowns in the financial system.

The Government have also expressed a fear that were the regime not to be changed as proposed in the Bill, there would be a checklist mentality. I have to say that a lot of people are alive today because of checklists. Where introduced, they have transformed surgery. The surgeon, or whoever is the accountable officer in the operating theatre—it might be the senior nurse—goes through a checklist, for example to check that the spare blood is of the right blood group. We all make mistakes and it can on occasion be too easy to make mistakes; in a team it can be too easy to think that something is someone else’s responsibility. Checklists are not the be all and end all, but they help.

I have in my mind—only some in the room will remember this—the 1974 World cup final, refereed by a man who lived in my constituency, Jack Taylor—a lovely man, whom I have met. He went out on to the pitch just before the World cup final started and he went through a mental checklist. Looking around, he found that there were no corner flags. Jack was arguably the best referee in the world, and he knew that the problem with having no corner flags was that when it was discovered, the game would have to be restarted. It was not simply a matter of 10 minutes in, “Oh, no corner flags. We will just bang one in each corner.” Restarting any top-class game is difficult; restarting the World cup final would be severely embarrassing for everyone concerned, including Jack Taylor. However, he went through a mental checklist and disaster was averted. You will not remember that, Mr Brady, because you are too young, but some of us do. That story demonstrates that checklists can on occasion be helpful as part of a regime. Jack Taylor did not referee that game—in which, from memory, he gave two penalties, one early on—through a checklist. He refereed the game using his judgment, training, wisdom and experience, but part of what he did to ensure that he did so properly was to use a mental checklist.

As I mentioned earlier, the Government wish to change a regime that they introduced little more than two years ago and that has never been brought into force. Some say, “Well, we have never had any prosecutions, so what are we going to do?” Well, of course we have not had any prosecutions; the provision was never brought into force. In the hope, perhaps vain, of evidence-based decision making by legislators in all parts of the House, bringing something into force is often, although not always, helpful. The hon. Member for East Lothian earlier today referred to testing something to destruction—but I am not sure that I want to test banking regulation to destruction, because it could get a bit messy. He was perhaps talking in a slightly different context.

The real point is that we should have adequate regulation. The difficulty with the Bill is not only to do with the removal of the reverse burden of proof—the double reverse ferret, as I called it on Second Reading. The problem is that even after this Bill is enacted, and even if the Government wisely accept our amendments, the regulatory regime, sadly, will still need a big overhaul, because the wrongdoing that led up to and contributed to the meltdown in 2008 has continued since then to the tune of fines of almost £3 billion levied this year, seven and a half years after the big crash, for wrongdoing in the financial services sector in the United Kingdom, or by UK institutions, that took place after the meltdown in 2008.

So the Government are right to recognise in the Bill that the current regulatory regime is not working. However, they are wrong in shying away from a complete overhaul and to some extent tinkering with this authority becoming that committee, and with this reverse burden of proof being removed but more people being brought in. I think we need a bit more of an overhaul. I will not spell out the kind of overhaul that I think we need, Mr Brady, because you would quite properly rule me out of order.

We have the PRA being downgraded in the Bill, which is unfortunate. We have a dilution of individual managers’ responsibility, particularly senior managers, and the reverse burden of proof removed. That measure was part of the Government’s response to the Parliamentary Commission on Banking Standards, which had three main recommendations: the first was the reverse burden of proof; the second was extending the time limit for commencing disciplinary action against senior persons; and the third was giving regulators the power to make approvals of senior persons subject to conditions or time limits. So it was not a big overhaul that was suggested by the Parliamentary Commission on Banking Standards, but one of the three legs of that three-legged table—the reverse burden of proof—is being removed and we therefore fear that the table may fall over, to the cost of us all, particularly our constituents.

My excellent researcher, Imogen Watson, has dug out a series of quotes from 2013 from people such as the Chancellor of the Exchequer. She has dug out quotes—if I may put it this way—from the top all the way down, extolling the virtues of this new regime of the reverse burden of proof. I will not read them all out, but any hon. Member can come to me if they want to see them. There are people still in the Cabinet, besides the right hon. Member for Tatton (Mr Osborne), who were extolling the virtues of this kind of regime, and yet it has never been fully brought into force, and now it is going to be undone. That is most regrettable.

Our amendments are very reasonable. As I set out earlier, on the spectrum of the two interlinked issues to which I referred—the reverse burden of proof and the width of the net—we are in between the Scottish National party, which is a bit too far one way, and the Government, who are a bit too far the other. Therefore, as reasonable people—as moderates, no doubt—the Government will think again and accept our excellent amendments, although I appreciate that when they do that, they may say to us, “On Report, we will need to tweak the wording a bit.”

I will be reasonably brief, because the hon. Member for Wolverhampton South West has covered a lot of the points. The burden of our amendments 34 and 35 is to preserve the existing Financial Services (Banking Reform) Act 2013, which has not yet come into force—it comes into force next month—with regard to the reverse burden of proof. I think that at this stage, before the reverse burden of proof has been tried, to take it out of the legislation sends the wrong signal to the financial community. That is the most serious issue. We could argue the rights and wrongs of what is the best possible kind of regulatory regime, but much of this depends on mood, culture and signals.

The senior managers in the financial community in the City of London have been worried about the import of this legislation—there is no doubt about that. I understand that in their circumstances, because I have met many of them and they are not going out of their way to impose regulatory infractions. I think there is a new mood in the City, with people trying to get it right. Some senior managers were fearful of the extent of the legislation, but it would have been better to have tried to talk to them and explain it than, by withdrawing it, to imply that something was wrong and that it was too onerous. The signals were all wrong.

First, given the fragile nature of public opinion about the banking system, one would implore the Minister that withdrawing the legislation is not a good thing to do. What we are engaged in today is not an exercise in bank bashing, but trying to find a regulatory system that not only works, but finds the public confidence we desperately need. We need only look at the fact that since the autumn banking shares across western Europe, including the UK, have collapsed by about 37%. That shows that the markets are jittery about what is going on in the banking system. I press that on the Minister.

Secondly, where did the idea of the so-called reversed burden of proof come from? It has got into the legislation, and it came through the Parliamentary Commission on Banking Standards. We then have to ask: did the commission come up with the idea? Did its members suddenly think, “That would be a good idea”? There was lobbying on behalf of key figures in the regulatory community and the political sphere who said, “This is a good idea and you should look at it.” I gently say to the Minister that some people who raised that idea originally have now run for cover, and I think that sends the wrong signal. It suggests that in the regulatory family and within Government people are willing to press legislation home. That is dangerous for clarity in such a regime.

Thirdly, the one argument that has been brought up that one should pay heed to about the reverse burden of proof is proportionality. In widening the senior managers and certification regime through the legislation, which is the correct thing to do, there is a danger that we place onerous burdens on smaller companies or make them fear that such burdens will be put on them. I accept, as the hon. Member for Wolverhampton South West said, that there is a reasonable case for splitting the application of the reverse burden of proof between senior managers in the major systemic institution banks and funds and the smaller companies. How far I am prepared to press my amendments will depend on how emollient the Minister will be, but even if that is to be applied as a blanket rule, it is ultimately up to the PRA and the FCA to decide at what point they use their powers.

I remind the Minister that there has to have been a regulatory infraction before the reversed burden of proof comes into play—something serious has to have been proved to have gone wrong by either the FCA or the PRA, or by both. The senior named managers in their sphere of operation are already culpable for something having gone wrong, so all the legislation says is, “You have to prove why you got it wrong. You were in charge, you were on the deck and something has gone wrong.” It does not pick on that manager randomly. Something has gone wrong in their sphere of operation, so it says, “Why did that happen? You were responsible. Tell us what went wrong.” Even in the sphere of the current legislation and widening the certification regime, it is still up to the FCA or the PRA to say to a senior manager, “Tell us.”

I am willing to say that if that makes things clearer and helps get over the proportionality argument so that we can keep the degree of scrutiny and responsibility for the same managers in the systemic institution, that might be the way to go. So far, the Government have been in wholesale retreat from the original legislation of only two and a half years ago. They are sending the wrong signal in doing that, and the Minister has to explain why, when there are alternatives, she feels the need to take this measure off the statute book.

It is important that I take this opportunity to send a strong signal on financial services. The financial services sector is vital to the strength and health of the UK economy. We have seen what the opposite looks like, and we know we do not want that to happen again. I emphasise that we are very committed to effective, strong regulation of financial services, to ensure financial stability, market integrity and strong protection for consumers. There can be no more important element of that regulation than the surrounding conduct. Conduct, and responsibility for conduct, are vital to the financial services sector. I welcome this opportunity to send that strong signal.

I also reiterate, for the Committee’s benefit, that we have done a number of other things outside the scope of the Bill. For example, we have introduced a new criminal offence to ensure that criminal penalties, including imprisonment, can be imposed upon people who manipulate key financial benchmarks such as LIBOR. We have brought in the toughest rules of any major financial centre when it comes to clawing back bank bonuses. Bringing in the senior managers and certification regime for the whole financial sector, which I remind the Committee includes a duty of responsibility to cover all financial services firms, is a very important strengthening of the failed and lacklustre approved persons regime. We are also bringing in new criminal offences so that criminal penalties can be imposed on senior managers whose reckless misconduct in managing a bank results in that bank’s failure.

The group of provisions we are considering cover, in a number of clauses and in one schedule, changes to the senior managers and certification regime, as well as amendments tabled to the provisions relating specifically to the replacement of the reverse burden of proof with the statutory duty of responsibility. I will explain briefly the purposes of the provisions in the group before addressing the amendments tabled by Opposition Members and trying to respond to points raised by the hon. Member for Wolverhampton South West.

Schedule 4 makes detailed technical changes to the Financial Services and Markets Act 2000 that are needed to extend the senior managers and certification regime to cover all authorised financial services firms, including removing the definition of a relevant authorised person. It also makes a small number of consequential amendments to the Financial Services (Banking Reform) Act 2013.

Clause 21 gives the regulators expanded powers to include transitional provisions in their rules when they make rules that create new controlled functions or change the definition of an existing controlled function. They will need those powers when they specify the new senior management functions that will form the basis for rolling out the senior managers and certification regime to all authorised persons. Clause 21 also gives the Treasury a power to make any additional provision needed in connection with those rule changes through regulations.

The hon. Member for Wolverhampton South West asked specifically about the conferring of functions. For example, that power could be used when responsibility for certain controlled functions is switched from one regulator to another, or when other changes are needed that effectively alter the boundary between what the PRA, or the PRC as it will be after the Bill becomes law, and FCA regimes do. We do not think it would be appropriate for the regulators themselves to have that power. Another example would be giving the regulators power to make rules allowing for grandfathering new controlled functions, or allowing changes between regulators. That is an example of what the powers might be.

It is not unusual to amend legislation in regulations along these lines. The affirmative resolution procedure is required. The provision was reported to the Delegated Powers and Regulatory Reform Committee in the usual way, and it did not express any concerns about it.

Clause 22 makes a number of technical changes to the detailed legislation underpinning the senior managers regime, including corrections to put right minor errors or omissions in the original legislation in 2013. The hon. Gentleman had some technical questions on subsection (2), which ensures that when statements of responsibilities are changed, both regulators will, where relevant, receive copies. Subsection (3) allows time limits imposed on an approval to subsequently be varied. At present, only the conditions imposed on approvals can be changed, so time limits are an important addition. Subsection (5) makes a technical change to ensure that the PRA can bring disciplinary proceedings for the failure to provide an updated statement of responsibilities. Again, the clause is important yet technical.

Clause 23, which is where all the controversy is today, gives effect to the Government’s reforms of the senior managers and certification regime provisions relating to rules of conduct. Although the hon. Gentleman was restrained in not reading out quotes from various different people on the controversy, I want to highlight the fact that Lord Turnbull, who was on the Parliamentary Commission on Banking Standards, said that the Bill’s proposal

“tackles directly the difficulty with establishing personal liability and the Pontius Pilate defence…In future, senior managers will have to take responsibility for what goes on in the teams for which they are responsible and for the actions of the people whom they have appointed and thereby given accreditation.”

The proposal gives that responsibility to the senior manager. He also said that

“I still fail to see why the reverse burden of proof is the only way to get people to understand that.”—[Official Report, House of Lords, 15 December 2015; Vol. 767, c. 2026.]

The Archbishop of Canterbury also served on the Commission. His representative, the Lord Bishop of Southwark, said in the other place that he was at one with the Archbishop of Canterbury

“in supporting the Government’s intentions on the reverse burden of proof…This goes against the ancient common-law principle of ‘innocent until proven guilty’…It is absolutely right that the individual is obligated to ensure that they take reasonable steps to prevent regulatory breaches in their financial institution but, as with other parts of society, it is right that the burden of proof should sit with the regulator to prove such breaches beyond reasonable doubt.”—[Official Report, House of Lords, 11 November 2015; Vol. 765, c. 2018-19.]

It is also worth reminding the Committee that we had a discussion on clause 19 about the importance of diversity in financial services. By broadening the senior managers and certification regime to include all financial services firms, we get a very consistent regime. It is important to highlight the fact that the credit union movement has welcomed the changes, as has the building society movement. Those important, diverse groups of financial institutions have welcomed the fact that the senior managers and certification regime clearly spells out where responsibility lies and what it is, and does not include a reverse burden of proof, which would make it increasingly hard, in the opinion of the Building Societies Association, to find the right people to take up senior roles in management or on the boards of those organisations.

On clause 23, which is about the rules of conduct for directors, I clarify that the Government legislated in the Financial Services (Banking Reform) Act 2013 to enable the regulators to apply the rules of conduct to all senior managers and all employees. That does not necessarily cover all non-executive directors, as some will not be senior managers and they will not normally be employees of the firm concerned. The clause addresses that issue by allowing the regulators to make rules of conduct for all directors.

I wonder whether the Minister has a chance now or in a moment to deal with a concern I expressed about clause 23(3)(c), which is to omit section 64B(5) of the Financial Services and Markets Act 2000, about the duty to report wrongdoing and so on.

I fully intend to address that. The hon. Gentleman will have to bear with me, I am afraid. I am getting a little confused with all my different subsections, as he did in his remarks. I will, however, be addressing that.

On the hon. Gentleman’s earlier question about why we did not simply implement the reverse burden of proof, allow time for it to bed down and see how it worked, my colleague in the other place, Lord Bridges, has pointed out that evidence had already started to emerge that unhelpful effects were becoming apparent as firms prepared for its introduction. We were losing the essence of the purpose of the regime, which is to ensure that everyone knows and understands their responsibilities and what they are for. We therefore felt that there was no need to wait before making the changes.

Clause 23 also removes a provision that requires firms to report all known or suspected breaches of rules of conduct to the regulators. That requirement is unnecessary, because the regulators can use their existing powers to require firms to notify them of matters that they want to know about. The provision, which requires notification of all suspected, as well as confirmed, breaches of rules of conducts, is unnecessary because it goes much further than the principles we want to operate. It would be unnecessarily onerous for firms and regulators.

As the hon. Gentleman can imagine, such a provision could effectively force firms to work out a point at which the possible indications of a breach of rules of conduct might amount to a genuine suspicion. Firms would need systems to ensure that the information is captured and transmitted to the regulators, and having been notified of a suspicion, the regulators would have to decide whether to investigate and, if appropriate, consider what action to take. In many cases there would be nothing more than suspicion, so no action would be taken, but meanwhile the regulators would have to consider and prioritise all notifications received. That would be bound to limit their ability to respond appropriately in real cases, thereby imposing costs and burdens on the regulators and using up their time. Similarly, it can be argued that the suspicious activity reports used in the money laundering regime generate many false positives.

The Government thought hard about the provision and decided that removing the requirement would help to ensure that the regulatory system can work proportionately, without putting potentially costly burdens on firms that are disproportionate to any regulatory gain. Regulators will continue to be able to require firms to notify them of matters that they want to know about. The provisions introduced by the 2013 Act as section 64C of the 2000 Act remain. The requirement that firms must report disciplinary action that they take against employees will therefore remain in force. I hope that reassures the hon. Gentleman.

Amendments 31 and 32 would reinstate the reverse burden of proof for banking sector firms—the banks, building societies, credit unions and systemically important investment firms regulated by the PRA. Amendment 33 would allow the definition of the “relevant authorised persons” to remain in the Financial Services and Markets Act, which would be needed for amendments 31 and 32 to work as intended. Amendments 34 and 35 would apply the reverse burden of proof to all authorised persons across the entire industry. I will address the specific problems that each amendment would cause.

It is important that the Committee understands that the reverse burden of proof is simply not necessary to embed senior manager accountability in the senior managers and certification regime. The Parliamentary Commission on Banking Standards clearly established that the approved persons regime was wholly inadequate. We believe that the senior managers and certification regime clarifies the responsibilities of individual senior managers, which is something that any effective regulatory regime must deliver. Moreover, it will deter senior managers from taking a reckless or negligent approach to managing their responsibilities in the first place. I know that the whole Committee will agree with that. The duty of responsibility is a powerful incentive that encourages senior managers to take effective action to prevent such failings.

I have already set out how the new regime will deliver a step change in senior manager accountability. Regulators and firms will have the necessary clarity about who is responsible for what, and there will be no wriggling off the hook. Senior managers will need to take full ownership of their respective areas of responsibility. Each bank will have to submit to the regulators a responsibilities map, which will set out how responsibility for the business of the firm as a whole is allocated and minimise the risk of any responsibilities falling through the cracks between different senior managers.

The new regime places tough obligations on senior managers to act responsibly, and imposes stringent penalties if they fail to do so. For example, under the duty, a senior manager can be found guilty of misconduct by the regulator if a breach of regulation occurs in the area of the firm’s business for which they are responsible and they did not take reasonable steps to avoid the contravention. It does not matter whether they were aware of the regulatory breach. As in the example that the hon. Gentleman raised earlier, ignorance is not a defence. What matters is whether they took reasonable steps to prevent the breach. If they did not, they are guilty of misconduct. They will not be able to avoid liability simply because the email trail has gone cold.

Removing the reverse burden of proof does not change the penalties that can be applied. If found guilty of misconduct under the statutory duty of responsibility, a senior manager will face an unlimited fine or prohibition from working in the industry. As the chief executive officer of the Prudential Regulation Authority, Andrew Bailey, said, introducing the statutory duty of responsibility instead of the reverse burden of proof

“makes little difference to the substance to the new regime…This change is one of process”.

The Government are rolling out the senior managers regime to all authorised firms, including the fixed-income currency and commodities market. In the light of that extension of the regime, we must consider whether it is appropriate to apply the reverse burden of proof to every single firm in the financial services regulated sector, given how rigorous the regime is.

I sense you are getting slightly restless, Mr Brady, but I am nearing the end of my remarks. Amendments 34 and 35 would apply the reverse burden of proof to all authorised persons, the vast majority of which are small firms. It would be simply disproportionate to apply it to senior managers in all of those firms. I have spoken about the overly legalistic approach. We think it could lead to a perverse outcome, leaving senior managers in the largest firms less exposed to legal risk under the reverse burden of proof than those in small firms.

I have spoken at length about the clauses and set out why I strongly disagree with the Opposition’s amendments. I hope I have convinced everyone of the merits of my argument. I ask the Committee to oppose the amendments and accept the clauses.

Ordered, That the debate be now adjourned.—(Sarah Newton.)

Adjourned till this day at Two o’clock.

Bank of England and Financial Services Bill [ Lords ] (Fourth sitting)

The Committee consisted of the following Members:

Chairs: Mr Graham Brady, † Phil Wilson

† Baldwin, Harriett (Economic Secretary to the Treasury)

† Burgon, Richard (Leeds East) (Lab)

† Caulfield, Maria (Lewes) (Con)

† Cooper, Julie (Burnley) (Lab)

† Donelan, Michelle (Chippenham) (Con)

† Fysh, Marcus (Yeovil) (Con)

† Hall, Luke (Thornbury and Yate) (Con)

† Kerevan, George (East Lothian) (SNP)

† McMahon, Jim (Oldham West and Royton) (Lab)

† McGinn, Conor (St Helens North) (Lab)

† Mak, Mr Alan (Havant) (Con)

Mann, John (Bassetlaw) (Lab)

† Marris, Rob (Wolverhampton South West) (Lab)

† Mullin, Roger (Kirkcaldy and Cowdenbeath) (SNP)

† Newton, Sarah (Truro and Falmouth) (Con)

† Skidmore, Chris (Kingswood) (Con)

† Tolhurst, Kelly (Rochester and Strood) (Con)

† Wood, Mike (Dudley South) (Con)

Matthew Hamlyn, Fergus Reid, Committee Clerks

† attended the Committee

Public Bill Committee

Thursday 11 February 2016

(Afternoon)

[Phil Wilson in the Chair]

Bank of England and Financial Services Bill [Lords]

Schedule 4

Extension of relevant authorised persons regime to all authorised persons

Amendment proposed (this day): 33, in schedule 4, page 58, line 2, leave out paragraph 18.—(Rob Marris.)

Question again proposed, That the amendment be made.

I remind the Committee that with this we are discussing the following:

That the schedule be the Fourth schedule to the Bill.

Clauses 21 to 23 stand part.

Amendment 34, in clause 24, page 19, leave out lines 29 to 34.

Amendment 31, in clause 24, page 19, line 34, at end insert “and insert new subsections (6), (7) and (8)—

‘(6) Where the authorised person mentioned in subsection (5) is a relevant authorised person, as defined under section 71A of the Financial Services and Markets Act 2000, subsection (5)(d) does not apply and subsections (7) and (8) do apply.

(7) If the FCA satisfies itself that a person (P), who is a senior manager in relation to a relevant authorised person, is guilty of misconduct by virtue of subsection (5)(a)-(c), then P shall be guilty of misconduct, subject only to subsection (8).

(8) But P is not guilty of misconduct by virtue of subsections (5)(a)-(c) and (7) if P satisfies the FCA that P had taken such steps as a person in P’s position could reasonably be expected to take to avoid the contravention occurring (or continuing).””

Amendment 35, in clause 24, page 20, leave out lines 1 to 6.

Amendment 32, in clause 24, page 20, line 6, at end insert “and insert new subsections (6), (7) and (8)—

‘(6) Where the PRA-authorised person mentioned in subsection (5) is a relevant authorised person, as defined under section 71A of the Financial Services and Markets Act 2000, subsection (5)(d) does not apply and subsections (7) and (8) do apply.

(7) If the PRA satisfies itself that a person (P) who is a senior manager in relation to a relevant PRA-authorised person is guilty of misconduct by virtue of subsection (5)(a)-(c), then P shall be guilty of misconduct, subject only to subsection (8).

(8) But P is not guilty of misconduct by virtue of subsections (5)(a)-(c) and (7) if P satisfies the PRA that P had taken such steps as a person in P’s position could reasonably be expected to take to avoid the contravention occurring (or continuing).”

Clause 24 stand part.

Mr Wilson, it is good of you to come along this afternoon to hear the conclusion of my speech. I reassure the Committee that, having had lunch, I have been able to recollect a couple of other small points that I wanted to mention to the hon. Member for Wolverhampton South West. Earlier, he raised the question of the powers in clause 21, and I said that the Delegated Powers and Regulatory Reform Committee expressed no concerns about those powers. In fact, I can go further and reassure him that the Committee actually thought that the original provision tabled by the Government, which provided for use of the negative resolution procedure, was not ideal, and it recommended the affirmative resolution procedure—that is in the Bill today. The amendment was made after discussion with the Delegated Powers and Regulatory Reform Committee, which I hope reassures him. The Committee was not concerned about the powers.

Before lunch, we were talking about how important it is that this country has a strong and effective regulatory framework. With these clauses we are talking about the importance of conduct and the signals that we, as regulators and parliamentarians, send out about the importance of conduct and responsibility. We have achieved that with the introduction of the senior managers and certification regime across the financial services industry, together with the duty of responsibility. Opposition Members should bear in mind the wise words of Lord Turnbull in the other place, He was a member of the Parliamentary Commission on Banking Standards, and he said of the burden of proof in the original proposal:

“I signed up to its proposal, but I believe that the proposal now in the Bill is superior. Many philosophers have said, ‘Second thoughts are often best’… This is a time to follow that dictum. In this case, second thoughts are best. I hope that the House will reach the same conclusion as I have put forward and not support the amendment.”—[Official Report, House of Lords, 15 December 2015; Vol. 767, c. 2028.]

I agree with those wise words, and I therefore commend these clauses and request that they stand part of the Bill.

It is a pleasure to be here with you, Mr Wilson.

I have listened to the Minister’s patient explanation, which has not convinced me. I therefore seek a Division on amendment 33. I appreciate that, to state the obvious, were the amendment for some strange reason not to pass, my other amendments would not proceed because they are consequential upon it—it is up to the SNP to decide on the other amendments.

Question put, That the amendment be made.

Schedule 4 agreed to.

Clauses 21 to 24 ordered to stand part of the Bill.

Clause 25

Decisions causing a financial institution to fail: meaning of insolvency

Question proposed, That the clause stand part of the Bill.

The clause makes some technical corrections to the criminal offence in section 36 of the Financial Services (Banking Reform) Act 2013. The offence is intended to punish, and therefore deter, reckless misconduct that causes a bank to fail. It does not form part of the senior managers and certification regime, although it was included in the same legislation and was also recommended by the Parliamentary Commission on Banking Standards.

For the avoidance of any doubt, I want first to make it clear that the Government are not proposing to extend the offence to the rest of the financial services industry, which would not be appropriate. The offence was designed to deter reckless decision making that causes systemically important financial institutions to fail. The collapse of such institutions could do serious harm to financial stability or impose huge costs on the financial services compensation scheme to protect depositors. The offence was therefore limited to UK banks, building societies, Prudential Regulation Authority-regulated investment firms and large investment banks that happen not to be deposit takers. The offence will not apply to credit unions, and it would clearly make no sense to apply it to the firms that the Government now propose to bring into the senior managers and certification regime.

The clause simply fills some gaps in the coverage of the offence. It makes it clear that the offence could be committed if a building society or an investment bank were to fail by being put into the special insolvency and administration regimes created for them in secondary legislation made under the Banking Act 2009. That was always the intention behind the 2013 Act, and we are taking the opportunity now to make the position clear.

Question put and agreed to.

Clause 25 accordingly ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned. —(Sarah Newton.)

Adjourned till Tuesday 23 February at twenty-five minutes past Nine o’clock.

Written evidence reported to the House

BoE 02 Sandbag Climate Campaign

The Committee consisted of the following Members:

Chairs: Mr Graham Brady, † Phil Wilson

† Baldwin, Harriett (Economic Secretary to the Treasury)

† Burgon, Richard (Leeds East) (Lab)

† Caulfield, Maria (Lewes) (Con)

† Cooper, Julie (Burnley) (Lab)

† Donelan, Michelle (Chippenham) (Con)

† Fysh, Marcus (Yeovil) (Con)

† Hall, Luke (Thornbury and Yate) (Con)

† Kerevan, George (East Lothian) (SNP)

† McMahon, Jim (Oldham West and Royton) (Lab)

† McGinn, Conor (St Helens North) (Lab)

† Mak, Mr Alan (Havant) (Con)

Mann, John (Bassetlaw) (Lab)

† Marris, Rob (Wolverhampton South West) (Lab)

† Mullin, Roger (Kirkcaldy and Cowdenbeath) (SNP)

† Newton, Sarah (Truro and Falmouth) (Con)

† Skidmore, Chris (Kingswood) (Con)

† Tolhurst, Kelly (Rochester and Strood) (Con)

† Wood, Mike (Dudley South) (Con)

Matthew Hamlyn, Fergus Reid, Committee Clerks

† attended the Committee

Public Bill Committee

Thursday 11 February 2016

(Afternoon)

[Phil Wilson in the Chair]

Bank of England and Financial Services Bill [Lords]

Schedule 4

Extension of relevant authorised persons regime to all authorised persons

Amendment proposed (this day): 33, in schedule 4, page 58, line 2, leave out paragraph 18.—(Rob Marris.)

Question again proposed, That the amendment be made.

I remind the Committee that with this we are discussing the following:

That the schedule be the Fourth schedule to the Bill.

Clauses 21 to 23 stand part.

Amendment 34, in clause 24, page 19, leave out lines 29 to 34.

Amendment 31, in clause 24, page 19, line 34, at end insert “and insert new subsections (6), (7) and (8)—

‘(6) Where the authorised person mentioned in subsection (5) is a relevant authorised person, as defined under section 71A of the Financial Services and Markets Act 2000, subsection (5)(d) does not apply and subsections (7) and (8) do apply.

(7) If the FCA satisfies itself that a person (P), who is a senior manager in relation to a relevant authorised person, is guilty of misconduct by virtue of subsection (5)(a)-(c), then P shall be guilty of misconduct, subject only to subsection (8).

(8) But P is not guilty of misconduct by virtue of subsections (5)(a)-(c) and (7) if P satisfies the FCA that P had taken such steps as a person in P’s position could reasonably be expected to take to avoid the contravention occurring (or continuing).””

Amendment 35, in clause 24, page 20, leave out lines 1 to 6.

Amendment 32, in clause 24, page 20, line 6, at end insert “and insert new subsections (6), (7) and (8)—

‘(6) Where the PRA-authorised person mentioned in subsection (5) is a relevant authorised person, as defined under section 71A of the Financial Services and Markets Act 2000, subsection (5)(d) does not apply and subsections (7) and (8) do apply.

(7) If the PRA satisfies itself that a person (P) who is a senior manager in relation to a relevant PRA-authorised person is guilty of misconduct by virtue of subsection (5)(a)-(c), then P shall be guilty of misconduct, subject only to subsection (8).

(8) But P is not guilty of misconduct by virtue of subsections (5)(a)-(c) and (7) if P satisfies the PRA that P had taken such steps as a person in P’s position could reasonably be expected to take to avoid the contravention occurring (or continuing).”

Clause 24 stand part.

Mr Wilson, it is good of you to come along this afternoon to hear the conclusion of my speech. I reassure the Committee that, having had lunch, I have been able to recollect a couple of other small points that I wanted to mention to the hon. Member for Wolverhampton South West. Earlier, he raised the question of the powers in clause 21, and I said that the Delegated Powers and Regulatory Reform Committee expressed no concerns about those powers. In fact, I can go further and reassure him that the Committee actually thought that the original provision tabled by the Government, which provided for use of the negative resolution procedure, was not ideal, and it recommended the affirmative resolution procedure—that is in the Bill today. The amendment was made after discussion with the Delegated Powers and Regulatory Reform Committee, which I hope reassures him. The Committee was not concerned about the powers.

Before lunch, we were talking about how important it is that this country has a strong and effective regulatory framework. With these clauses we are talking about the importance of conduct and the signals that we, as regulators and parliamentarians, send out about the importance of conduct and responsibility. We have achieved that with the introduction of the senior managers and certification regime across the financial services industry, together with the duty of responsibility. Opposition Members should bear in mind the wise words of Lord Turnbull in the other place, He was a member of the Parliamentary Commission on Banking Standards, and he said of the burden of proof in the original proposal:

“I signed up to its proposal, but I believe that the proposal now in the Bill is superior. Many philosophers have said, ‘Second thoughts are often best’… This is a time to follow that dictum. In this case, second thoughts are best. I hope that the House will reach the same conclusion as I have put forward and not support the amendment.”—[Official Report, House of Lords, 15 December 2015; Vol. 767, c. 2028.]

I agree with those wise words, and I therefore commend these clauses and request that they stand part of the Bill.

It is a pleasure to be here with you, Mr Wilson.

I have listened to the Minister’s patient explanation, which has not convinced me. I therefore seek a Division on amendment 33. I appreciate that, to state the obvious, were the amendment for some strange reason not to pass, my other amendments would not proceed because they are consequential upon it—it is up to the SNP to decide on the other amendments.

Question put, That the amendment be made.

Schedule 4 agreed to.

Clauses 21 to 24 ordered to stand part of the Bill.

Clause 25

Decisions causing a financial institution to fail: meaning of insolvency

Question proposed, That the clause stand part of the Bill.

The clause makes some technical corrections to the criminal offence in section 36 of the Financial Services (Banking Reform) Act 2013. The offence is intended to punish, and therefore deter, reckless misconduct that causes a bank to fail. It does not form part of the senior managers and certification regime, although it was included in the same legislation and was also recommended by the Parliamentary Commission on Banking Standards.

For the avoidance of any doubt, I want first to make it clear that the Government are not proposing to extend the offence to the rest of the financial services industry, which would not be appropriate. The offence was designed to deter reckless decision making that causes systemically important financial institutions to fail. The collapse of such institutions could do serious harm to financial stability or impose huge costs on the financial services compensation scheme to protect depositors. The offence was therefore limited to UK banks, building societies, Prudential Regulation Authority-regulated investment firms and large investment banks that happen not to be deposit takers. The offence will not apply to credit unions, and it would clearly make no sense to apply it to the firms that the Government now propose to bring into the senior managers and certification regime.

The clause simply fills some gaps in the coverage of the offence. It makes it clear that the offence could be committed if a building society or an investment bank were to fail by being put into the special insolvency and administration regimes created for them in secondary legislation made under the Banking Act 2009. That was always the intention behind the 2013 Act, and we are taking the opportunity now to make the position clear.

Question put and agreed to.

Clause 25 accordingly ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned. —(Sarah Newton.)

Adjourned till Tuesday 23 February at twenty-five minutes past Nine o’clock.

Written evidence reported to the House

BoE 02 Sandbag Climate Campaign

Enterprise Bill [ Lords ] (Third sitting)

The Committee consisted of the following Members:

Chairs: † Sir David Amess, Ms Karen Buck

† Argar, Edward (Charnwood) (Con)

† Barclay, Stephen (North East Cambridgeshire) (Con)

Bardell, Hannah (Livingston) (SNP)

† Brennan, Kevin (Cardiff West) (Lab)

† Brown, Alan (Kilmarnock and Loudoun) (SNP)

† Churchill, Jo (Bury St Edmunds) (Con)

† Creagh, Mary (Wakefield) (Lab)

† Esterson, Bill (Sefton Central) (Lab)

Flint, Caroline (Don Valley) (Lab)

† Frazer, Lucy (South East Cambridgeshire) (Con)

† Howell, John (Henley) (Con)

† Lewis, Brandon (Minister for Housing and Planning)

† McKinnell, Catherine (Newcastle upon Tyne North) (Lab)

† Mackintosh, David (Northampton South) (Con)

† Morden, Jessica (Newport East) (Lab)

† Pawsey, Mark (Rugby) (Con)

† Solloway, Amanda (Derby North) (Con)

† Soubry, Anna (Minister for Small Business, Industry and Enterprise)

Joanna Welham, Committee Clerk

† attended the Committee

Public Bill Committee

Thursday 11 February 2016

(Morning)

[Sir David Amess in the Chair]

Enterprise Bill [Lords]

Clause 6

Reports on complaints

I beg to move amendment 55, in clause 6, page 6, line 12, leave out “may” and insert “must”.

This amendment would require the Commissioner to publish a report of the enquiry into, consideration and determination of a complaint made under the SBC complaints scheme.

Good morning—and welcome back, Sir David. May I say what a fine question you asked in the Chamber this morning? Your point about switching energy suppliers is important, and it could well have been the subject of an amendment to the remit of the small business commissioner.

Of course, that has nothing to do with why I said any of that.

Like the amendments we moved on Tuesday, amendment 55 would preserve anonymity for a complainant. The amendment would introduce the threat of naming and shaming large companies that rely on the unwillingness of their suppliers to come forward as a means of paying their suppliers late. The need for naming and shaming was raised by the Minister’s colleague, the hon. Member for Huntingdon (Mr Djanogly), on Second Reading:

“On the complaints side, the SBC can demand and order little. For example, the commissioner will not be able to order the production of documents from a company that has been complained about. Given the lack of hard powers for the SBC, the question is how effective they will be. I think that a big part of the answer will be the SBC’s ability to name and shame.”—[Official Report, 2 February 2016; Vol. 605, c. 829-30.]

The Minister accepted that on Tuesday. The hon. Member for Huntingdon went on to ask the Minister to explain how the legislation, as it stands, will allow for naming and shaming, and I repeat that request.

The amendment, originally moved in the other place, would introduce a stark solution: that every complaint will be published. I trust that the Minister appreciates that this is a probing amendment, our intention being to continue exploring the idea of how exactly the presence of the small business commissioner will encourage good payment practice when phone calls to chief executives and signposting to small businesses do not achieve the intended result. How will it happen without publishing every unresolved complaint? When direct approaches have not worked, what will be the small business commissioner’s role in making that difference in improving late payment practice in individual and general cases?

The comments made by Lord Stoneham when he moved the amendment in the other place are worth considering:

“we are again seeking more effective powers and oomph for the Small Business Commissioner. We are assuming that if the complaints scheme is entered into, there will be a period before the initial approach is made for some sort of opportunity for conciliation. Indeed, I would have thought that most issues should be encouraged towards resolution before going into any kind of formal complaints scheme or procedure.”

He was making the argument for mediation’s being a direct part of the small business commissioner’s remit, as we discussed on Tuesday. He continued:

“To encourage that process and to provide an incentive to settle matters quickly and informally, some pressure should be applied. Once we have entered into the formal complaints scheme or procedure, a report would then be published and the respondent would be named.

The respondent may fear that they would attract unwanted publicity if matters were published in this way, but if the respondent has no concerns that they have done anything wrong and there is nothing they need to put right, they should have no anxiety about this, and that could be another way of applying pressure to get something resolved.”

Or, as Lord O’Neill of Clackmannan said rather more bluntly:

“It offers to put teeth into the legislation, and I think it is useful for us to get a greater degree of accountability—a bit of an edge…the softly-softly approach is okay, but it should be, ‘Walk quietly, but carry a big stick’.”—[Official Report, House of Lords, 28 October 2015; Vol. 765, c. GC207-GC208.]

I think it was President Wilson in the early part of the last century who said that, but it is no less effective when quoted by Lord O’Neill. Where is the “big stick” in the small business commissioner’s role?

It is a pleasure to serve under your chairmanship, Sir David. I cannot comment on what happened earlier in the day. No doubt you said some wise words—but that is just me being a creep.

The hon. Member for Sefton Central is right to table the amendment. I do not want him to press it to a vote, but he is right to probe the matter; it raises important points. First, the primary function of the small business commissioner is to address the problem of late payments and, secondly, their success will depend largely on their own abilities. It will depend on their having credibility with big businesses—so that those will be in fear of not responding to a phone call, taking action or engaging; and on their having the respect of the small business community, which will know that that person is its champion.

The next question is what the commissioner can do to achieve what we all want, which is a change in the culture of late payments. Having discretion, rather than leading to a “softly, softly” approach, can be an extremely powerful tool—more powerful than an arbitrary “They will publish.” The discretion to publish is the key tool, because the commissioner needs to consider the appropriateness of publishing a report and naming a respondent, in the light of the particular facts of each case. Having discretion preserves their independence. To put things in crude terms, the commissioner can say to someone: “Look, it’s very simple. Either you sort this complaint out in favour of the small business, or I will remind you of my powers, in my annual report, to publish your name.” I think that discretion will be hugely important.

There is something else. A complaint based on a very particular circumstance may have no wider public interest application. It may be a valid complaint but it may not need to go into the public domain, because that serves no wider interest. It may be resolved immediately and not warrant the resource and time required to publish it in a full report. It can be simply and swiftly sorted out.

The commissioner’s power to choose not to publish a report is a key incentive for businesses to work constructively with the commissioner. We do not want to lose the drive for cultural change that I have mentioned. We also have evidence that a discretionary approach works. The Australian small business commissioner, of whom we have heard much, exercises his power to name respondents in exceptional circumstances. He uses influence, authority and the threat of reputational damage to resolve cases successfully.

The commissioner will, as I have said, act impartially towards both parties, and be independent of Government, but both parties must have confidence in his or her approach, and many of our stakeholders have said that the level of transparency I am outlining would be effective in changing payment practices in individual cases, and more broadly.

I hope that that reassures the hon. Gentleman. We have considered the issue carefully and we think that discretion is the stronger way to get what we all want.

As ever, it is very important for us to be as accurate as we can in our comments. I should make a correction to what I said when I was testing the Committee on American history: as I am sure everyone knew, it was of course Teddy Roosevelt who made the comment about walking softly and carrying a big stick. I thank my hon. Friend the Member for Cardiff West for his prompting on that point.

I take on board the Minister’s comments about credibility, the fear of not responding, and the commissioner’s ability to ensure that a chief executive will take the phone call and that the matters will be addressed down the chain. The amendment is about situations where that does not happen. Taken as a package, I think it is in the category of areas where, as the office develops, we may need to come back and consider again how the commissioner is able to work, and whether, if things are not going well enough, such an approach is needed.

I mentioned mediation and its effectiveness in avoiding the need for punitive action, including naming and shaming, which could be quite difficult. Naming and shaming is one of those areas where it could cause problems for the ongoing business relationship between a small business and its customers. Ideally, we want not to be in the position where there have to be reports about individual cases of late payment. However, if we get to the point where this is a voluntary approach in the reports that the commissioner publishes, then I hope that the commissioner and the Minister will think again at that stage. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 6 ordered to stand part of the Bill.

Clause 7

Scheme regulations

I beg to move amendment 56, in clause 7, page 7, line 24, leave out paragraph (vii)

This amendment would remove from regulations the power to dismiss a complaint which the Commissioner considers has previously been considered under the complaints scheme or by another complaints-handling body, ombudsman or regulator.

The amendment would remove from regulations the power to dismiss a complaint that the commissioner considers has previously been considered under the complaints scheme or by another complaints handling body, ombudsman or regulator. It is about the nature of the complaints that the commissioner will deal with.

On Tuesday, by means of a number of groups of amendments, we discussed our concerns about narrowness of remit, given how the small business commissioner’s office is set up. We believe that, to do the job properly, the commissioner needs to have much more flexibility about the issues that they investigate. Amendment 56 would remove from regulations the power to dismiss a complaint that has previously been considered by another organisation. The logic is fairly simple. We hope that the small business commissioner will offer a markedly different function from existing regulators and ombudsmen. What would be the point of creating the office if that were not the case?

It does not seem right automatically to discount complaints just because they have been looked at by another complaints handling body. It may be that the complaint process took too long under the other body or that the ombudsman found that it fell outside their scope. The amendment would allow the small business commissioner to consider something that it had not been possible properly and fully, in the opinion of the commissioner, to consider elsewhere, even if, as far as the other body or ombudsman was concerned, it had been considered. We are concerned that, under the current Bill, some complaints could fall through the gaps.

The Minister has talked a number of times about the need for flexibility for the commissioner. That is the reason that she has given for opposing or asking us to withdraw a number of our amendments, which would have laid out the small business commissioner’s functions in greater detail and widened the remit considerably. We are now asking for that flexibility. If a complaint comes to the small business commissioner, let them decide whether they will investigate it, instead of there being a prescriptive approach that may tie the commissioner’s hands over an issue that they might like to run with. Amendment 56 would allow them to be the arbiter of whether another complaints handling body has given the matter sufficient consideration.

The scheme regulations, as outlined in clause 7, will set out details of how and when complaints should be raised with the commissioner. They may also, among other things, set out factors or circumstances in which the commissioner can refuse to consider a complaint; the circumstances can change.

The Bill does not prevent the commissioner from reconsidering a complaint that has been raised somewhere else, but it enables them to refuse a complaint when that is appropriate. In other words, it comes back to the power to trust the commissioner to exercise discretion according to the particular circumstances of a complaint. I think that is absolutely right, because it is not prescriptive. It vests power with the commissioner and it trusts the small business commissioner to do the right thing depending on the particular circumstances.

I am an old lawyer, and one thing that really annoys lawyers is when Parliament—no doubt for the very best of reasons—is overly prescriptive and does not put down in legislation, “Save for exceptional circumstances”, which gives the ability to look at the peculiarities that often arise.

It is easy for us to sit in this place and sometimes to see things in black and white. Sometimes we are not able to imagine a particular set of circumstances that suddenly can arise in real life. The judge—or, in this case, the small business commissioner—is then left without any discretion at all and has to rush down a route that he or she knows is absolutely wrong, because we failed to allow that discretion. That is what the scheme regulations will do: vest the power of discretion with the small business commissioner. That is good law, which is why I resist the amendment.

I take on board the Minister’s comments and I remind her that we are as keen for flexibility as she is. It is important to discuss these matters and to get her comments on the record. She has now made her comments and I am sure that, as the office of the commissioner develops, her words will be an important reminder of exactly what is intended and exactly how the commissioner should work. My understanding of the way in which legislation is crafted is that the Minister’s comments in Committee have legal standing. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 7 ordered to stand part of the Bill.

Clause 8 ordered to stand part of the Bill.

Clause 9

Annual report

I beg to move amendment 58, in clause 9, page 8, line 42, at end insert—

“(d) outlines a summary of relevant complaints made by—

(i) small businesses against other businesses and

(ii) small businesses against government departments.

(1A) In subsection (1)(d) “relevant complaint” has the same meaning at subsections 4(3) and (4)”

This amendment would require the Small Business Commissioner’s Annual Report to outline complaints made by small businesses against other businesses and against Government departments.

With this it will be convenient to discuss amendment 59, in clause 9, page 9, line 3, leave out “Secretary of State” and insert “Commissioner”

This amendment would require the Small Business Commissioner to report directly to Parliament.

Amendments 58 and 59 relate to the issue of the commissioner’s annual report. We ask for the report to include complaints made by Government Departments, which is consistent with other points we have made in earlier amendments. We also ask that the commissioner, rather than the Secretary of State, reports directly to Parliament. We have called for the remit of the small business commissioner’s work to be widened in a number of ways, but the inclusion of the public sector is one of the most important elements of our request, hence amendment 58.

The importance of including complaints made by Government Departments boils down to the expectation of what small businesses want and expect from the small business commissioner. Small businesses that face the problem of late payments do so in the public sector and in the private sector, and it is only right that the annual reports reflect where the complaints come from and who the sources of the late payments are. The issue of late payments is one of the most crippling faced by small businesses. It seems to us and to small business organisations that have commented on the provisions that it is arbitrary to narrow down and attack only one part of the problem by considering only the private sector—and the larger element of the private sector, at that.

The amendment reflects the crossover between Government Departments and big business when it comes to late payments. Government Departments sign the prompt payment code. They are expected to pay their suppliers in good time; the target is to pay within five working days and that is a good standard. However, only 18 of the Government’s 33 biggest suppliers, all of which are major businesses, are signatories of the code. That means that 15 major suppliers are not signed up to the prompt payment code. As a result, it is quite likely that smaller suppliers in the supply chain—particularly of those 15 that have not signed up to the code—are victims of late payments in a contract that, ultimately, comes from the Government. That includes the issue of the construction sector and cash retention, which we discussed on Tuesday.

The situation is complicated further still with contracts of the size we are considering. We talk about the 33 largest suppliers to the Government, but there is often a chain of a number of suppliers. Of the 18 suppliers that are signed up to the code, how many of their suppliers are signed up to that same code? There are relatively large businesses, which may also be late payers, in the middle of supply chains, and in a supply chain of three, four or five companies, the smallest firms at the end of the chain are often the ones that bear the brunt.

The amendment is important because it is not just a case of saying that the small business commissioner should be able to report on the complaints of small businesses against Government Departments. The point is that some of the biggest contracts that a small business gets in the private sector can be part of a chain that leads back to Government Departments, and we want the commissioner to be able to name and shame chronic late payers in the annual report. I know that the Minister agrees with my point about naming and shaming.

We also want the small business commissioner to offer something of a strategic approach—an overview of problems that run through major supply chains—in the annual reports. The fact is that supply chains are often a muddle of private and public sectors, and big business and Government Departments. A line of investigation might not start with a complaint against the public authority, but it might implicate the public authority as part of the chain. Will the Minister clarify whether that will be in the scope of the small business commissioner? I have raised that point with her before and I am not entirely sure that I have had a clear answer. Perhaps she will address that either now or at the end.

We want the small business commissioner to follow an investigation to wherever it leads. If it leads to the shortcomings of Government Departments’ enforcement of the prompt payment code, their slip-ups on paper-based invoices that lead them to be late payers, their dealings with a company that is a major late payer and is benefiting somewhere down the supply chain from taxpayers’ money, we want to know about it in the annual report. Covering those complaints in the small business commissioner’s annual report would say as much about how we view the small business commissioner as it would about what we want the report to include.

Amendment 58 is a statement of intent that we would give the small business commissioner a certain standing. It would send a message to more than 5 million businesses that when they have a complaint, they will have someone to communicate it to. Crucially, that person will have the authority to take the complaint all the way to Government and to Parliament, hence amendment 59.

There are two very different models on offer that provide examples to follow: the Australian small business commissioner and the American Small Business Administration. What they have in common is that they provide a vehicle for the concerns of small businesses to reach the very highest level. The Australian small business commissioner reports directly to the Australian Parliament and can submit special reports directly to Parliament whenever they feel it appropriate. What we are asking for is much simpler, because it is an annual report to Parliament. It seems that the Australians appreciate, more than this Government, the concern that reporting just will not happen if the small business commissioner is toothless. Under the provisions of the Bill, the commissioner will be toothless because there is nowhere for them to take their findings, and the reliance—or, as we discussed on Tuesday, dependence—on the Secretary of State gives rise to concerns that reporting will just not happen.

The American Small Business Administration works strategically across government and ensures the views of small businesses and entrepreneurs are better heard in policy making. It gives small businesses a voice in government. The Small Business Administration reviews congressional legislation and conducts nationwide studies on the impact of regulation on small businesses. It is able to testify on behalf of small businesses when legislation is being debated.

We have to ensure that the small business commissioner is able to include in their report those points that make a difference to policy making and to small businesses. Whether this is through a nationwide survey that challenges supply chains ranging across the public and private sector; through a trend in small business complaints the small business commissioner has spotted over the year; or through their first-hand expertise on the concerns of small businesses that the small business commissioner wants to lay before policy makers; we have to give them the authority and opportunity to present the information that small businesses need us to see. Without giving the small business commissioner that authority in their annual reports, we are in danger of giving small businesses nothing more than a sympathetic ear.

I begin by drawing the Committee’s attention to my previous comments when we debated the remit of the small business commissioner and why I urged the Committee not to agree with the hon. Gentleman’s amendments to increase their remit to include public authorities.

I advanced that argument for a number of reasons, notably because the legislation is about small business and its relationship with larger businesses and because there are many other ways that small businesses can raise a complaint against the public sector. We do not want to duplicate much of that very good work. It is also important to remember that in March last year the Government restated our long-standing commitment to pay 80% of undisputed invoices in five days, with the remainder being paid within 30 days. Central Government are now required to report on that on the infamous gov.uk website.

Perhaps even more importantly—I hope this addresses specifically the very good point the hon. Gentleman makes about whether or not the good policy of payment is being trickled all the way down through the supply chain—the Public Contracts Regulations 2015 require 90-day payment terms to be passed down what we call public sector supply chains. That is what the regulations state. We all know that they must now bear fruit so that that becomes the absolute standard practice.

I tread carefully, because I am going to mention something that may cause a small titter among members of the Committee: the mystery shopper scheme—[Interruption] Exactly. It has unfortunate title, because it does not fully explain what it does. The important thing is what it does and it does that very well. It takes up these sorts of issues in the supply chain and makes sure that the regulations are being put into practice.

I urge the Committee not to support the hon. Gentleman’s amendment on the annual report and complaints against the public sector for all the reasons that I have given before—[Interruption] Sorry, I just can’t read that. I have been helpfully passed something about the mystery shopper; somebody’s writing is worse than mine and that is quite something. It says that if the ultimate customer is a Government Department or public sector, then the mystery shopper applies at the end of the chain. I’m not sure I understand that, but I’m sure it is terribly important. We will get some clarity on that when I next rise.

While I intervene, the Minister might want to get another copy of the note. The question we were trying to get answered was what happens when the public sector is the ultimate end of the chain and something goes wrong in that chain. Will the commissioner have the opportunity to investigate all the way to the public sector and not just the private sector elements of the problems with late payment? It could be the second, third, fourth or even fifth stage of the supply chain. I hope I have given the Minister long enough to get her notes.

As ever, my excellent Parliamentary Private Secretary knows more than I do. When the public sector is at the end of the chain it matters not, because if it is a question of going business to business in the rest of the supply chain, of course the small business commissioner will be able to act on any complaint about any of the relationships between businesses in that supply chain. That is the most important. Then when government becomes involved we have the mystery shopper scheme; but in any event we have all the other places to take complaints, such as the ombudsman, as was previously outlined.

Finally, I do not think that there is a need for the commissioner to lay the annual report. The Secretary of State must lay the annual report before Parliament unaltered; the commissioner’s doing it would make no difference at all. It would not increase their independence, so the amendment is what lawyers would call otiose. It is not necessary, because I am confident—I hope others agree—that the Bill delivers as we want it to.

The more the Minister says the words “mystery” and “shopper” together, the more I think her listeners suspend belief in the effectiveness of the scheme. As I think I said on Tuesday, I am familiar with mystery shopper schemes in the private sector and they can be effective, but the idea is not inspiring confidence.

I think we agree that the title may not be the best one, but that does not matter; it is a question of whether the job gets done. The evidence is clear: the scheme works extremely well.

I hear what the Minister says. I am afraid that, to anyone listening to our deliberations, the way hon. Members have laughed several times at the description would suggest that confidence may be lacking in whether the scheme will be as effective as it needs to be. There might be work to be done there.

The point about the supply chain is that if only 18 out of 33 major suppliers are signed up to the prompt payment code, and the Government are unable to make that 33 out of 33, and if Departments do not make sure that late payment is not a problem throughout the supply chain, something will have to change. Given that we are setting up an office called the small business commissioner, and that often it is small businesses that are the victims of late payment in the relevant situations, we need the commissioner to be able to consider public sector involvement all through the chain. The Minister said, as we discussed on Tuesday, that complaints are being dealt with elsewhere in a number of ways, but it is clear that that is not happening sufficiently well at the moment, and that a lot more work is needed.

In discussion of the amendments on the annual report, the Minister said we should not restrict the small business commissioner by insisting they could not do something in that case. I think that is a fair representation of what she said. She is now saying, with reference to the present group of amendments, as she did on Tuesday on a similar set of amendments, that the commissioner cannot investigate the public sector. Following the logic of what she said about the previous group, the commissioner should really investigate the public sector.

I thought we had established that we do not want to extend the remit of the small business commissioner. We want him or her to concentrate specifically on late payment between small businesses and larger businesses. We do not want to go into the public sector because we take the view that the existing schemes that are available—the ombudsman and all the others that I have described—are beginning absolutely to tackle that job.

As a Minister, one works with all the different commissioners and people such as the Groceries Code Adjudicator and there is never anything to preclude the small business commissioner from being able to raise any matter at any time—on the contrary, I would expect him or her to have that sort of relationship with any Minister in my role. I hope that gives the hon. Gentleman some satisfaction that if there were a feeling that things were not working in any other field, they would be able to raise that with the Minister. That was a bit long; I am sorry, Sir David.

I am glad that the Minister made such a long intervention. We are going to talk about the relationship with Government Departments when we discuss my next amendment. The problem is that we do not accept that there should be this restriction because of the relationship between the public sector and business and the way that the supply chains operate. The Government do not agree. We have a profound disagreement on this point. We base our evidence on what goes on elsewhere in the world—in Australia and America—with very successful systems, which very much have a wider remit that ensures the commissioner, or the Small Business Administration in the case of America, can investigate and report on the activities, operations and behaviours of the public sector in the way it deals with its suppliers, as well as the private sector.

Fundamentally, it is important to consider the private and the public sectors when thinking about how an economy operates and how contracts and payments are made. The Government are resisting this point, and we may well come back to it once the commissioner is up and running. We tested the Committee’s opinion on the inclusion of the public sector earlier and I do not feel the need to test it again. I think we know what the Committee as a whole thinks of this. With those remarks, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 9 ordered to stand part of the Bill.

Clause 10

Review of Commissioner’s performance

I beg to move amendment 60, in clause 10, page 9, line 26, at end insert—

‘(7) The Commissioner may assist the Government, including its agencies, to develop legislation, procedures and administration that provide alternative ways in which small businesses can comply with the requirements of the legislation, procedures and administration.’

This amendment would allow the Small Business Commissioner to assist other parts of Government, including the Secretary of State to develop procedures and processes.

The Minister just started to talk about relationships with Ministers, and this amendment is about the small business commissioner working with all parts of Government—including, but not limited to, the Secretary of State for Business, Innovation and Skills—to ensure that Government, their agencies, and all connected with the Government can be included in understanding what comes from the commissioner as a result of their relationship with small business when it comes to legislation and administration.

The amendment aims to help small business, and to help Government get their relationship with and the requirements of small business right as far as possible. It is drawn from a fundamental part of what the US Small Business Administration does. In addition to the signposting functions, which are very much a part of the Small Business Administration’s functions that the Government have chosen to adopt, the United States has a whole department devoted to giving small businesses a voice in government.

The US Small Business Administration’s Office of Advocacy advances the views of small businesses before Congress, the White House, the federal agencies, the federal courts and state policy makers. It has a three-pronged approach. First, it provides a nationwide source of small business statistics, making it the point of reference for policy makers on the impact that Government regulation and legislation are having in the small business community —on its most pressing concerns—and up-to-date frontline feedback on the challenges it faces from one year to the next.

Secondly, having a base in the federal Government gives it a permanent, independent voice with which to channel concerns to the highest level of government. Thirdly, as the watchdog for the Regulatory Flexibility Act, it is in a position to link its research and advocacy with an effective mechanism to bring small business concerns into the regulatory process. It has a finger on the pulse of small business concerns and a seat at the table for regulation and policy making. This is what we are trying to achieve with amendment 60.

By looking at the example of the US Small Business Administration, we see that the measure is entirely possible and can be used to great effect. Amendment 60 simply makes sure that when we set up the small business commissioner here, we will give them a clear mechanism to work strategically across Government to ensure the voices of small businesses and entrepreneurs are better heard in policy making.

Before last year’s general election, Labour said we would create a UK version of the US Small Business Administration, which would concentrate all business support and policy in one organisation. At the Federation of Small Businesses conference at the start of 2015, the then shadow Secretary of State for Business, Innovation and Skills, my hon. Friend the Member for Streatham (Mr Umunna) said,

“So Britain can grow its way out of the cost of living crisis and build a balanced recovery built to last, we need to do all we can to help our small businesses grow, create new jobs and meet their aspirations. We need government to be a better servant—and customer—of our small businesses and to make sure that entrepreneurs’ voices are heard at the top table. A UK Small Business Administration is necessary to realising this ambition. Based on the best examples from around the world, a UK Small Business Administration would create a step change in the opportunities for small businesses from government procurement and improve the quality of support available, operating along a proper British Investment Bank and a network of regional banks to ensure that start-ups and established firms can access the finance they need”.

Amendment 60 joins up the complaints from small businesses that the commissioner will receive and makes sure that this is factored into the implementation and development of regulations and Government policies. We have worded this carefully. We are not talking about making sure that the small business commissioner only has a seat at the table with the Department sponsoring them—they already have that, by definition. We do not doubt that he or she will have an open line of communication with the Business Secretary and his or her team.

If we are to effect real change, the commissioner needs a seat at the table right across Government Departments. Whether they come from the Cabinet Office, the Treasury, the Department for Communities and Local Government or any other Department, policy making and regulations have a tangible impact on small businesses. Amendment 60 will make sure that the small business commissioner is a part of this process, not confined to one Department. It seeks to ensure all the benefits to small business, jobs and the wider economy that we should all have in mind as we seek to develop this legislation and create the office of the small business commissioner.

The Bill already includes an absolute duty on the commissioner to prepare and publish an annual report, which must include any recommendations on how matters he or she has encountered might be addressed. That provides the very mechanism for the commissioner to raise suggestions from his or her experience. I very much want the small business commissioner to keep their firm focus and all their attention on the issue of late payment and the relationship between bigger businesses and small businesses.

We would all agree that this will depend on the character, ability and standing of whoever is appointed as the small business commissioner, but the last thing I want is for them to be sitting in meetings and talking shops. There is a danger that anything in Government, wherever or at whatever level, can turn into a bit of a talking shop, but I do not want the commissioner to be stuck in meetings; I want them looking at the complaints and then literally picking up the phone and/or doing a thorough investigation and not holding back. They must have the time to conduct an investigation. If necessary, they can then make reference to things in their annual report in the most robust of ways. That is the absolute role of that person. In any event, the small business commissioner will also be able to make impartial recommendations to help other branches and agencies of Government address the needs of small business. That is already in the legislation.

Finally, I take the view that the people who know best about business are actually those who are running business. I pay tribute to the Federation of Small Businesses, because it is beautifully and perfectly placed, particularly at national level—I have also seen good examples at a local level—to hold to the fire the collective feet of Government, agencies and all the other bodies involved in local and national Government. I trust organisations such as the FSB to do much of the work that the hon. Gentleman wants to be done. It is not the role of the small business commissioner to do that work for all the reasons that I have already outlined.

Like the Minister, I have a high regard for the Federation of Small Businesses and I have a good relationship with many of its officers. John Allan, the national chairman, lives in a constituency neighbouring mine. He is a fine man and has been a strong advocate for the organisation in his time in post, as have many other officers.

One of the interesting things about the Minister’s comment on the FSB is that the organisation wants many of the amendments that we have tabled in Committee and were tabled in the Lords. If the Government were actually listening to, working with and acting on the recommendations of the FSB, perhaps they would have accepted more of those amendments or included them in the draft legislation. Perhaps the Minister will reflect on that interesting comment and come back on Report with some of the amendments proposed by the FSB and debated here over the past few days as well as in the Grand Committee and on Report in the Lords.

The Minister said that she does not want the small business commissioner sitting in meetings all day when the challenges of late payment need addressing. I completely agree. She will have noticed that I described how the US system operates: a whole department, the Office of Advocacy, is devoted to the relationship with Government, doing the kind of work that I indicated would be beneficial. That is the sort of system that would achieve what amendment 60 proposes.

Government action and legislation have a profound impact on business, on the economy, on business relationships and on businesses being paid on time. That is why it is important that the Government are lobbied and listen to the lobbying. Along with the FSB, the Institute of Directors, the British Chambers of Commerce, the CBI, a range of excellent trade organisations and many individual businesses have an important role to play and have good relationships with Government Departments, Ministers, and Members of Parliament, whether from the Government or Opposition.

There is a lot to be said for the small business commissioner’s having a formal role and relationship with all Government Departments, given the important way in which small business operates in this country and how it contributes to a successful and thriving economy. Again, perhaps this can evolve over time. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 10 ordered to stand part of the Bill.

Clauses 11, 12 and 13 ordered to stand part of the Bill.

Clause 14

Extension of target to provisions made by regulators

I beg to move amendment 61, in clause 14, page 12, line 6, at end insert—

‘(1A) In subsection (2), after “means” insert”—

(a) all regulatory provisions made under section 2(2) of the European Communities Act 1972,

(b) regulatory provisions made by statutory instrument which are subject to the affirmative resolution procedure in both Houses of Parliament, and””

The amendment would require the Government’s business impact target to cover the impact of EU Regulations or regulatory provisions made my statutory instruments which are subject to the affirmative procedure.

With this it will be convenient to discuss the following:

Amendment 62, in clause 14, page 12, line 18, at end insert—

‘(4A) In section 21 of the Small Business, Enterprise and Employment Act 2015 (duty on Secretary of State to publish business impact target etc), at the end of subsection (2) insert “and must consist of—

(a) a nominal component, reflecting the total number of regulations, and

(b) a monetary component, reflecting the discounted cash flow.””

This amendment would ensure that the report includes an up-to-date tally of regulations, and the cost to business of those regulations.

Amendment 63, in clause 14, page 12, line 18, at end insert—

‘(4B) In section 21 (3)(b) of the Small Business, Enterprise and Employment Act 2015, after “methodology”, insert “, verified by the independent body appointed under section 25”.

This amendment would require the Secretary of State to publish the methodology used for assessing the economic impact of regulatory provisions and would require the methodology to be verified by an independent body.

Amendment 64, in clause 14, page 12, line 18, at end insert—

‘(4C) In section 23 of the Small Business, Enterprise and Employment Act 2015 (duty on Secretary of State to publish reports) after subsection (3)(f) insert—

“(g) a list of all the impact assessments that relate to the regulatory provisions for which a list is required under subsection (3)(f), including the names of the authorising Ministers, the names of the Senior Responsible Owners for quality assurance, and the assessments of the independent body appointed under section 25.”

This amendment would require the Secretary of State’s report to include a list of all the impact assessments relating to regulatory provisions which have come into force or ceased to be in force during the reporting period, including the names of the authorising Ministers and Senior Responsible Owners for quality assurance and the assessments of an independent body.

We now move away from discussing the creation of the small business commissioner to consider some of the wider aspects of the Bill. This group of amendments looks at the impact target. I will start with amendments 62 and 64.

The Government used to publish a twice-yearly statement of regulations. It might have been a bit of a blunt instrument because the relative impact of these regulations can vary enormously. However, it was a simple mechanism to ensure that the Government were publishing a tally of new regulations that had come into force during the reporting period. Lord Stevenson of Balmacara noted in Grand Committee that publication of the statements had stopped since the general election, and he asked Baroness Neville-Rolfe to find out why. I cannot see an answer to that question anywhere in Hansard; I apologise if I have missed it. Can the Minister tell me why the biannual statements stopped?

Amendments 62 and 64 deal with two important points on regulation that are too often overlooked: honesty and accountability. Amendment 62 suggests having a warts-and-all tally of regulations in the business impact target. It specifically calls for both a nominal component to give an update on the number of regulations, and a monetary component that tots up the total cost to businesses of the regulations. Amendment 64 ensures that, when we publish the reports, there is a chain of accountability so that everybody knows who has approved a new regulation and who is responsible for it.

The reason for amendment 62 is simple. While the Government have not been providing the reports, the Regulatory Policy Committee has. The committee found that, of 13 recent assessments, 10 showed increases in the overall cost of regulation. The Minister will tell us later that the Government have reduced the cost of regulation by some astronomical amount; she will probably cite a figure of £10 billion.

The Regulatory Policy Committee seems to be pointing at something slightly different. For some reason, the 10 increases in the overall cost of regulation that the Committee found were not reflected in Government statements on regulatory savings. Why that happened is an interesting question.

It also emerged that many Government regulations—just under half—were considered to be out of scope by the Government. Therefore, when the Minister no doubt gives the figure of £10 billion in a few minutes’ time, one must wonder what the true figure might be. The regulations increased the costs to business, but they are important for Government and I agree that they should be important. However, they were not reflected in the Government’s in-scope or out-of-scope scenarios. Many regulations come from the European Union, the mention of which will cause Government Members to start to—

I could not possibly repeat what my hon. Friend just said, but their ears will prick up and they will become interested. One or two of them will no doubt want to jump up and say something about the European Union.

The Government have an interest—[Interruption.] Government Members are being very well behaved today, which is remarkable. The Government have an interest in ensuring that they are seen to be reducing the regulatory burden, but when that is not the case, the Government cannot simply stop reporting it—for just under half the regulations—or shift the goalposts to make the situation look better than it is.

The Lords had a full debate on the matter and when those points were made there really was no response to say that that was not what had happened. When the Government report, they should be up front with businesses about who is responsible for the regulations. The reality is that business is interested in the overall impact of regulations, not where they come from. Ultimately, the issue is about the overall cost, not the cost of some regulations and not others, that really affects the business environment and businesses’ ability to operate as effectively as possible.

Amendment 61 would require the Government’s business impact target to cover the impact of EU regulations or regulatory provisions made by statutory instruments subject to the affirmative procedure. The Regulatory Policy Committee reported that

“nearly half of the approximately 1,000 laws enacted during the previous parliament were outside the scope of the Government’s… One-in, Two-out rules. Nearly 70% of these were of EU origin.”

If regulations have an impact on small businesses, it is important that they are considered within the scope of the business impact target. Otherwise, businesses will not be able to trust what it is being told, which is the point that I was making a moment ago.

It seems a false distinction to rule such regulations out. The origin of the regulations is different and the route when trying to make them work better for the business community or seeking to remove them would be different, but does the perspective of small businesses differ when a regulation comes from the EU? I do not think so. As Lord Stevenson said in Grand Committee,

“I do not honestly think that businessmen and women would care whether the regulations they have to work to come from this place or across the channel. However, they have an impact on their work and therefore I think that we should fess up and try to get a measure into play in the way that we think about all regulation that impacts on business.”—[Official Report, House of Lords, 28 October 2015; Vol. 765, c. GC229.]

I have heard the argument before that the point of the assessment is to focus on what we can control and change. That is important, but it is not a reason not to include such regulations because it gives a false impression of the cost of regulation and entirely misses the point. After all, the same EU regulations are applied differently in different EU member states. Perhaps there is an opportunity to learn from how other EU states apply regulations, if they are able to do so in a way that has a lower cost to business and a smaller impact on business than we currently find.

We should be on top of making sure that we are putting EU regulations to best use in the UK. We cannot do that if we pretend they do not exist when we are assessing the business impact target. EU regulations cost businesses £1.6 billion in the last period that the Regulatory Policy Committee was assessing, but they were never taken into account. Perhaps that suits the Government, as it would make a sizeable dent in the savings they have been congratulating themselves on. The point is that if regulations affect business and the Government have a genuine interest in making a frank assessment of the impact of regulations on business, it should not matter where the legislation originated.

I now want to talk about amendment 63. At its broadest, this group of amendments focuses on strengthening the work of the Regulatory Policy Committee. As an independent body, the committee takes a holistic view of the impact of regulations that affect businesses across the UK. The problem, which the amendments are intended to address, is that the work of the RPC is hampered when the Government set the objectives and methodology and decide what is or is not in scope. They take a valuable body and hamstring its efforts to offer an assessment of regulations.

The reason for amendment 63 was summed up best by Lord Stevenson in Grand Committee. He said:

“it seems a little odd that the Government can choose the game they are playing, can set the goalposts at the distance apart that they wish and then score as many goals as possible and claim a victory, when in fact there is another game going on elsewhere where people are being beaten up by what in their view is excessive regulation, often gold-plated, and we do not seem to get transparency.”—[Official Report, House of Lords, 28 October 2015; Vol. 765, c. GC232.]

Very well put.

Amendment 63 cuts to the heart of the matter. At the moment, the Government decide the methodology and we end up with a skewed version of the impact of regulations. Amendment 63 would reverse this relationship. Instead of an independent body working to the Government’s methodology, we would see the independent body verifying the Secretary of State’s methodology. Publishing that same methodology would make it open to wider scrutiny. Having it verified would invite greater confidence in the objectivity of the assessments carried out.

Order. I apologise to the Committee for the coldness of the room. The mechanism for closing the window is either jammed or broken. Help is on the way. It will probably be closed manually, when ladders arrive, during the luncheon break.

Thank you, Sir David. Actually, as a woman of a certain age I find it makes a great change. I was so worried about the hon. Member for Wakefield that this must go on the record: she was so cold that she had the hood of her jacket up. As I am mentioning her, may I congratulate her—she is now putting her snow mittens on—on her election yesterday? We all wish her well in her new role, which I am sure she will, unfortunately, play extremely effectively.

I must take issue with the hon. Member for Sefton Central about the previous Government’s achievement, which was great, in making huge savings to the costs of businesses across the piece, by way of reducing regulation. Our policy of one in, two out, was particularly successful, and I am helpfully reminded that in 2015 the World Bank rated the United Kingdom sixth out of 189 economies as a place to do business because of the reduction in regulation. Of course, this country was the first to adopt one in, two out. We have done incredibly well and our global competitiveness has increased as we begin to deregulate and untangle the abundance of red tape that often strangled business.

It was a pleasure in the previous Government, at a very low level, to take part in some of the great work that is often done behind the scenes, led by an excellent team of civil servants to whom I pay huge tribute. There is one in particular whom I often describe as the guru of deregulation. She has the most brilliant and incisive brain for untangling red tape—looking at where we overly regulate and at how we can do things better. It is now an even greater pleasure in this role to be right at the core of that work. It is often done very quietly but the benefits to business are huge. We have set ourselves another target to achieve savings of another £10 billion in the next five years. It will be difficult and I do not try to pretend otherwise, but that is one of the things addressed in this part of the Bill.

On amendment 61, we will focus the business impact target on the things that the Government can control. Gold-plating will therefore continue to be included. The burden of the legislation and directives that come from the European Union are better tackled at source. I strongly take the view that the package delivered by President Tusk delivers reforms in economic governance, competitiveness, sovereignty, benefits and the movement of labour that are exactly along the lines that we want to see in the future of the European Union.

I want to stay in the European Union, although I want reform. A wind of change is blowing. My Prime Minister has caught that wind and he is turning it into a gale. This movement to deregulate, to reduce the regulation on business and to change the way we do things in the European Union will gather momentum and pace, and those reforms will come to full fruition. The Government will continue to report administratively on the impact of all significant European Union regulation and have that impact independently validated. That is the point: all the work we do is independently validated.

The Minister’s support for staying in a reformed European Union is no surprise; I have heard her say that before. I completely agree, but I mentioned making the most of European Union regulations and learning from what goes on in other countries so that we can benefit from them and so that they do not become onerous or a cost to business. Does she take that point on board? What more does she think she and her fellow Ministers should be doing to ensure that regulations from the European Union are not onerous and can be more beneficial? Can we learn from the way other countries apply them?

Yes, we always want to learn from what other member states do, but gold-plating was a valid criticism—particularly, I could say, under the 13 years of Labour Government, but that would be a cheap political point that I would not want to make. In all seriousness, this nation did gold-plate things. One of the great tasks that has been performed and completed in the past five years—and which continues to be addressed—is whether we continue to gold-plate. We make it clear to all Government Ministers, Departments and so on that they should not gold-plate, but it is work that we continue to do. If we can learn from other member states in the European Union as to how to ensure we do not do that, so much the better. To finish on amendment 61, affirmative statutory instruments are already captured under the Small Business, Enterprise and Employment Act 2015.

Amendments 62 and 63 would limit the options of future Administrations in determining their target and would give an unusual amount of power to an unelected verification body. It is the Government who should determine the nature of the target, how it is measured and by what methodology. We are consulting the Regulatory Policy Committee about the methodology for this Parliament and will publish it soon.

I respectfully suggest that amendment 64 duplicates existing administrative requirements to publish impact assessments in the name of the responsible Minister alongside related legislation. In my new role, although it feels as though I have been there for some time, I have seen that the work on deregulation—in terms of the detail into which we all go and the aspiration and targets placed upon Departments—is quite outstanding. The demand is effectively set by a desire to achieve financial targets. None of us really like targets, but, goodness me, they are a fabulous driver for all of us to look at the existing regulation and anything new coming in to ensure that business is not over-regulated, invariably at huge cost to it.

Finally, the hon. Gentleman asked about the statement on new regulation. It has been replaced by an annual report under the business impact target that will be published this June and annually thereafter. That is the better way forward. Though interesting points were raised that, as ever, were listened to, I urge hon. Members not to support the amendment on the basis of all I have said.

It is really important to say that we agree on not having unnecessary regulations; I take on board the Minister’s point about that. I gently say to her, however, that small businesses are extremely concerned about some recently proposed additional regulation, not least the introduction of quarterly filing or additional reporting of tax information and the feared potential implications for extra bureaucracy. We have discussed that issue elsewhere. I do not know whether you would welcome a discussion on that now, Sir David, but such proposals cause concern. The Minister needs to be aware that there is a sense the Government need to think a few things through more carefully.

The point that the Regulatory Policy Committee was making was that by not including just under half of regulations, the Government are not counting them and are not showing that the gold-plating the Minister speaks of is not still happening. It leaves the sense that the Government are embarrassed by the fact that they have not done more to remove what she described as gold-plating or to learn from how some of our friends in the European Union have managed to apply EU regulations in a more cost-effective way, or done enough to reduce the cost of regulation from the European Union. That is why we agree with the Regulatory Policy Committee that such things should be within scope.

Among other things, the amendments highlight that if we measure and publish the methodology about something as important as regulation and its cost to business, we improve the chances of addressing those costs and the impact and of improving the business environment. That is one reason we tabled the amendments. The phrase “what gets measured gets done” is very true. By concentrating time and effort in government on these points and by ensuring that a proper, full and accurate measure is taken and that there is transparent reporting on how the Government are going around hitting their business impact targets, everybody in the business community is in a much stronger position to understand and have confidence that everything that can be done is being done.

I take the Minister’s points. We have had a good debate on this matter, as we did in the Lords. With those remarks, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 14 ordered to stand part of the Bill.

Schedule 2 agreed to.

Clause 15

Duty to report on effect of regulators’ code

I beg to move amendment 78, in clause 15, page 13, line 8, after “in”, insert

“section 21 (duty to have regard to the regulatory principles) and”

This amendment would make it clear that the reporting requirements include reporting on the duty under section 21 of the Legislative and Regulatory Reform Act 2006 to have regard to a defined set of regulatory principles.

With this it will be convenient to discuss the following:

Amendment 79, in clause 15, page 13, line 10, after “which”, insert “section 21 and”

See explanatory statement to amendment 78.

Amendment 80, in clause 15, page 13, line 14, after “businesses”, insert

“and such other persons as the regulator considers appropriate”

In conjunction with amendment 78, this amendment would require each relevant regulator to report not only on the views of businesses (and ‘other regulated persons’), but also on the views of such other persons as the relevant regulator considers appropriate.

Amendment 81, in clause 15, page 13, line 16, at end insert—

“(iii) of the effect of the duties under sections 21 and 22 on the proper exercise of its relevant functions;”

This amendment would require each relevant regulator to report on the effect of the performance of the duties on the proper exercise of the regulatory functions to which they apply.

Amendment 82, in clause 15, page 13, line 18, after “in”, insert “section 21 and”

See explanatory statement to amendment 78.

Amendment 85, in clause 15, page 13, line 41, after “in”, insert “section 21 and”

See explanatory statement to amendment 78.

Amendment 86, in clause 15, page 14, line 28, at end insert—

““businesses” includes businesses and other regulated persons;”

Amendment 87, in clause 15, page 14, line 30, after “by”, insert

“section 21 to have regard to the principles in subsection (2) of that section and”

See explanatory statement to amendment 78.

Amendment 83, in clause 15, page 13, line 31, at end insert—

“(d) the persons from whom information should be obtained for the purposes of a performance report.

This amendment would make provision for guidance to be issued on who should be asked for information for the purposes of preparing a performance report.

Amendment 84, in clause 15, page 13, line 31, at end insert—

“(6A) Before making guidance under subsection (5), the Minister must consult—

(a) persons carrying on businesses; and

(b) such other persons as the Minister considers appropriate.”

This amendment would require the relevant Minister of the Crown to consult businesses and such other persons as the Minister considers appropriate before making guidance relating to the performance reports.

Amendment 88, in clause 16, page 15, line 13, after “businesses”, insert

“and such other persons as the regulator considers appropriate”

See explanatory statement to amendment 80.

Amendment 89, in clause 16, page 15, line 15, at end insert—

“(iii) of the effect of the duties under section 21 and 22 on the proper exercise of its relevant functions;”

See explanatory statement under amendment 81.

Amendment 90, in clause 16, page 15, line 30, at end insert—

“(d) the persons from whom information should be obtained for the purposes of a performance report.”

See explanatory statement to amendment 83.

Amendment 91, in clause 16, page 15, line 30, at end insert—

“(5A) Before making Guidance under subsection (4), the Minister must consult—

(a) persons carrying on businesses; and

(b) such other persons as the Minister considers appropriate.”

See explanatory statement to amendment 84.

Amendment 92, in clause 16, page 15, line 42, after “businesses”, insert

“and such other persons as the Minister considers appropriate”

See explanatory statement to amendment 80.

Amendment 93, in clause 16, page 16, line 9, at end insert—

“(11A) In this section—

“businesses” includes businesses and other regulated persons.”

I apologise to the Committee, but I cannot feel my face anymore. It is quite cold in here. I appeal to the Chair that if the coldness carries on after lunch, perhaps we can all have a round of hot coffees from the Terrace cafeteria. I beg to move!

I thank the right hon. Member for Broxtowe for her congratulations, and I thank hon. and right hon. Members from all parts of the House. Whether or not they supported me for Chair, they have got me. I want to begin by talking about the Environmental Audit Committee and its environmental scorecard on the Government. In 2014, the Committee asserted that environmental regulations represent

“the essential underpinning of environmental protection.”

They also, of course, represent the essential underpinning of consumer protection and of health and safety for workers and the general public. Statutory regulators play an important role in the effective implementation and enforcement of environmental regulations.

We have had a drive to reduce the burden of regulation on business. We have seen that with the changes made by the Small Business, Enterprise, and Employment Act 2015, section 108 of the Deregulation Act 2015 and section 22 of the Legislative and Regulatory Reform Act 2006. My party is pro-business; we see it as essential to our society. We want to see industry growing. We are pro-growth. We are also pro-good regulation. In my time as shadow Environment Secretary, I lost count of the number of times when businesses would come in and complain about other businesses that were able to undercut them on price because of their ability to ignore the regulations.

People want to do the right thing in this country. We are lucky enough to have businesses that are so law- abiding and wish to do well on the basis of good business, good growth and green growth. One thing in the clauses is the Government’s failure perhaps to understand the role of regulation in promoting green growth, and I will give some examples of that towards the end of my remarks.

Good regulation protects the citizen from the powerful, whether those interests are of the commercial sector, the state or other large bodies. Good regulation protects patients, the old, those with disabilities, our built environment, our natural environment and many other areas of our lives. I tabled the amendments, which are probing, because I want the Minister to say what protections will be outlined if the measures go through. I have particular concerns about the proposal in clause 17 on Ofwat and the Office of the Rail Regulator. The duty of a regulator is to protect the public interest and there could be some very difficult decisions for those regulators.

I do not believe that there is evidence to suggest that the UK is over-regulated or that there are significant unnecessary costs associated with existing regulations, despite what the Minister said about so-called gold-plating. The costs associated with environmental regulations account for less than 2% of business sector turnover on average. If we focus solely on the costs of regulation to business, we ignore the wider socioeconomic and environmental benefits that regulations are intended to provide. Evidence suggests that the benefits of environmental regulations—only some of which can be quantified—cover the costs three times over.

I would like to give some examples of the costs and benefits. The Minister said earlier that they could be obscure and that we are not sure what they are, but regulators operate in the framework of UK law and European Union law. All the transposition of EU directives is subject to Whitehall cost benefit decisions. I have asked a variety of parliamentary questions on certain EU frameworks and I want to give the Committee some examples.

Back in 1995, it is generally accepted that the UK was seen as the “dirty man of Europe”—a slightly sexist phrase, but one that I am happy to use for the purposes of this discussion. Some 83% of household waste went to landfill and just 7% was recycled or composted. Younger members of the Committee may find it hard to remember those bad old dirty days. Basically, everything went into a bin in the kitchen. By 2014, thanks to a series of EU directives, which were transposed without gold-plating by the previous Labour Government in a very flexible way that allowed local authorities to make the right decisions about what was right in their communities and where they wanted to invest, the UK’s recycling rate had reached 45%. During that time, as our understanding of the finite nature of resources developed—whether they were wood, plastic or paper—and businesses understood that in order to have a sustainable and secure supply chain of raw materials, we could not keep on relying on raw products; we had to develop and grow our recycling industry and base. Hundreds, if not thousands, of new businesses were created in the recycling industry.

That is an example of good regulation creating green growth, green businesses and green jobs. The UK currently recycles 90% of construction materials, well ahead of other countries. We are seen as world leaders, for example, in civil engineering with the Crossrail and Olympics projects, both landmark Labour Government achievements, taking out the spoil and taking it away—by barge in the case of the Olympics, at a nice steady 3 miles an hour —and using it to create new nature reserves in Essex.

I also want to talk about the EU’s water framework directives. Again, younger members of the Committee may find it hard to believe that swimming in Blackpool as a child some 30 or 35 years ago, I emerged covered in oil. When people talk about the good old days, they forget just how good they were. Some 99% of British beaches now comply with EU minimum standards on cleanliness. What does that mean? We cannot really quantify the benefits to our seaside towns, but obviously cleaner beaches mean more tourists and stronger local economies.

In 2014, the Environment Agency, in response to a parliamentary question that I submitted, estimated that the net benefit in England and Wales of implementing the EU water framework directive will be £9 billion by 2027—that is £9 billion of benefit to the UK economy for transposition of that directive.

On air quality, we can similarly see that the UK’s nitrogen oxide—NOx—emissions have fallen by more than two-thirds, reducing the risk of respiratory disease. Over the same period, sulphur dioxide emissions in the UK dropped by 95%. Sulphur dioxide is what gives us acid rain, and when it goes into rivers and particularly into copper piping, it leaches away the copper from the pipes. This was particularly a Scandinavian problem. Perhaps they had more copper pipes or more blond people, but when blond people washed their hair, it turned green because of the acid rain. Again, that is another example of the good old days when industry was able to pollute the atmosphere, and there were unintended costs and consequences not only in terms of environmental degradation, but for blond people suffering green hair. That is probably not something we can quantify, but it must have been quite embarrassing for a child at school. However, those consequences have now been taken out.

We have another five minutes, so I will carry on. My examples illustrate some of the many benefits that regulation brings in terms of green growth and environmental benefits. Clauses 15 and 16 introduce reporting requirements on regulators in respect of their duties under the Legislative and Regulatory Reform Act 2006 to have regard to the code of practice and to the desirability of promoting economic growth. So regulators will have to produce an annual performance report setting out the effect that the duties have had, making explicit reference to the views of any affected businesses. My amendments would require widening that out from businesses so that the whole voice of civil society is heard in that report.

The duties risk unintended consequences. They have an overriding effect on the exercise of regulatory functions, and that could incentivise regulators to give greater emphasis to narrowly defined economic considerations and potentially compromise the protection of the environment —and the citizen, the disabled, the worker and the consumer. It could also compromise the responsibility of regulators to act always in the public interest. In both cases, the exercise of regulatory functions in accordance with their original purpose is not emphasised as a key consideration for regulators. I think that that is problematic.

In their response to the consultation on the growth duty, the Government stated that the duty would not

“compromise the independence of regulators or undermine the importance of the essential protections that they are there to deliver”.

However, the Joint Committee on the draft Deregulation Bill concluded that additional safeguards were required to ensure that the duty would not

“take precedence over regulation and that the overriding and principal objective of regulators remains the protection of the public interest.”

A proposal to amend the relevant clauses to make it clear that the duty would apply only in so far as it was consistent with the proper exercise of the regulatory functions was narrowly defeated in the House of Lords in February 2015. As currently drafted, the proposed reporting requirements are disproportionately focused on the views of businesses as to the effect of the performance of the duties. This is in spite of the risk that they may have an overriding effect on the regulatory functions to which they apply, with unintended consequences for the protection of the environment and the wider public interest.

Secondly, the stated aim of the new reporting requirements is

“to ensure regulators are more transparent about the action they have taken”,

and to

“allow Government, business and other interested stakeholders to hold regulators to account on how they have performed”

in respect of the duties. As I have said, I have concerns about this.

The amendments that I have tabled would make four changes. First, they would require each relevant regulator to report on the effect of performance of the duty under section 21 of the Legislative and Regulatory Reform Act 2006, as well as on the performance of the duties under section 22 of the LRRA and section 108 of the Deregulation Act 2015.

Secondly, in respect of the duties, the amendments would require each relevant regulator to report not only on the views of businesses and other regulated persons, but on the views of such other persons as the relevant regulator considers appropriate. Thirdly, they would require each relevant regulator to report on the effect of the performance of the duties and on the proper exercise of the regulatory functions to which they apply. Finally, they would require the relevant Minister of the Crown to consult businesses and such other persons as the Minister considers appropriate before making guidance relating to the performance reports, and such reports to be made public.

Ordered, That the debate be now adjourned.—(Stephen Barclay.)

Adjourned till this day at Two o’clock.

The Committee consisted of the following Members:

Chairs: † Sir David Amess, Ms Karen Buck

† Argar, Edward (Charnwood) (Con)

† Barclay, Stephen (North East Cambridgeshire) (Con)

Bardell, Hannah (Livingston) (SNP)

† Brennan, Kevin (Cardiff West) (Lab)

† Brown, Alan (Kilmarnock and Loudoun) (SNP)

† Churchill, Jo (Bury St Edmunds) (Con)

† Creagh, Mary (Wakefield) (Lab)

† Esterson, Bill (Sefton Central) (Lab)

Flint, Caroline (Don Valley) (Lab)

† Frazer, Lucy (South East Cambridgeshire) (Con)

† Howell, John (Henley) (Con)

† Lewis, Brandon (Minister for Housing and Planning)

† McKinnell, Catherine (Newcastle upon Tyne North) (Lab)

† Mackintosh, David (Northampton South) (Con)

† Morden, Jessica (Newport East) (Lab)

† Pawsey, Mark (Rugby) (Con)

† Solloway, Amanda (Derby North) (Con)

† Soubry, Anna (Minister for Small Business, Industry and Enterprise)

Joanna Welham, Committee Clerk

† attended the Committee

Public Bill Committee

Thursday 11 February 2016

(Morning)

[Sir David Amess in the Chair]

Enterprise Bill [Lords]

Clause 6

Reports on complaints

I beg to move amendment 55, in clause 6, page 6, line 12, leave out “may” and insert “must”.

This amendment would require the Commissioner to publish a report of the enquiry into, consideration and determination of a complaint made under the SBC complaints scheme.

Good morning—and welcome back, Sir David. May I say what a fine question you asked in the Chamber this morning? Your point about switching energy suppliers is important, and it could well have been the subject of an amendment to the remit of the small business commissioner.

Order. Flattery will get you everywhere.

Of course, that has nothing to do with why I said any of that.

Like the amendments we moved on Tuesday, amendment 55 would preserve anonymity for a complainant. The amendment would introduce the threat of naming and shaming large companies that rely on the unwillingness of their suppliers to come forward as a means of paying their suppliers late. The need for naming and shaming was raised by the Minister’s colleague, the hon. Member for Huntingdon (Mr Djanogly), on Second Reading:

“On the complaints side, the SBC can demand and order little. For example, the commissioner will not be able to order the production of documents from a company that has been complained about. Given the lack of hard powers for the SBC, the question is how effective they will be. I think that a big part of the answer will be the SBC’s ability to name and shame.”—[Official Report, 2 February 2016; Vol. 605, c. 829-30.]

The Minister accepted that on Tuesday. The hon. Member for Huntingdon went on to ask the Minister to explain how the legislation, as it stands, will allow for naming and shaming, and I repeat that request.

The amendment, originally moved in the other place, would introduce a stark solution: that every complaint will be published. I trust that the Minister appreciates that this is a probing amendment, our intention being to continue exploring the idea of how exactly the presence of the small business commissioner will encourage good payment practice when phone calls to chief executives and signposting to small businesses do not achieve the intended result. How will it happen without publishing every unresolved complaint? When direct approaches have not worked, what will be the small business commissioner’s role in making that difference in improving late payment practice in individual and general cases?

The comments made by Lord Stoneham when he moved the amendment in the other place are worth considering:

“we are again seeking more effective powers and oomph for the Small Business Commissioner. We are assuming that if the complaints scheme is entered into, there will be a period before the initial approach is made for some sort of opportunity for conciliation. Indeed, I would have thought that most issues should be encouraged towards resolution before going into any kind of formal complaints scheme or procedure.”

He was making the argument for mediation’s being a direct part of the small business commissioner’s remit, as we discussed on Tuesday. He continued:

“To encourage that process and to provide an incentive to settle matters quickly and informally, some pressure should be applied. Once we have entered into the formal complaints scheme or procedure, a report would then be published and the respondent would be named.

The respondent may fear that they would attract unwanted publicity if matters were published in this way, but if the respondent has no concerns that they have done anything wrong and there is nothing they need to put right, they should have no anxiety about this, and that could be another way of applying pressure to get something resolved.”

Or, as Lord O’Neill of Clackmannan said rather more bluntly:

“It offers to put teeth into the legislation, and I think it is useful for us to get a greater degree of accountability—a bit of an edge…the softly-softly approach is okay, but it should be, ‘Walk quietly, but carry a big stick’.”—[Official Report, House of Lords, 28 October 2015; Vol. 765, c. GC207-GC208.]

I think it was President Wilson in the early part of the last century who said that, but it is no less effective when quoted by Lord O’Neill. Where is the “big stick” in the small business commissioner’s role?

It is a pleasure to serve under your chairmanship, Sir David. I cannot comment on what happened earlier in the day. No doubt you said some wise words—but that is just me being a creep.

The hon. Member for Sefton Central is right to table the amendment. I do not want him to press it to a vote, but he is right to probe the matter; it raises important points. First, the primary function of the small business commissioner is to address the problem of late payments and, secondly, their success will depend largely on their own abilities. It will depend on their having credibility with big businesses—so that those will be in fear of not responding to a phone call, taking action or engaging; and on their having the respect of the small business community, which will know that that person is its champion.

The next question is what the commissioner can do to achieve what we all want, which is a change in the culture of late payments. Having discretion, rather than leading to a “softly, softly” approach, can be an extremely powerful tool—more powerful than an arbitrary “They will publish.” The discretion to publish is the key tool, because the commissioner needs to consider the appropriateness of publishing a report and naming a respondent, in the light of the particular facts of each case. Having discretion preserves their independence. To put things in crude terms, the commissioner can say to someone: “Look, it’s very simple. Either you sort this complaint out in favour of the small business, or I will remind you of my powers, in my annual report, to publish your name.” I think that discretion will be hugely important.

There is something else. A complaint based on a very particular circumstance may have no wider public interest application. It may be a valid complaint but it may not need to go into the public domain, because that serves no wider interest. It may be resolved immediately and not warrant the resource and time required to publish it in a full report. It can be simply and swiftly sorted out.

The commissioner’s power to choose not to publish a report is a key incentive for businesses to work constructively with the commissioner. We do not want to lose the drive for cultural change that I have mentioned. We also have evidence that a discretionary approach works. The Australian small business commissioner, of whom we have heard much, exercises his power to name respondents in exceptional circumstances. He uses influence, authority and the threat of reputational damage to resolve cases successfully.

The commissioner will, as I have said, act impartially towards both parties, and be independent of Government, but both parties must have confidence in his or her approach, and many of our stakeholders have said that the level of transparency I am outlining would be effective in changing payment practices in individual cases, and more broadly.

I hope that that reassures the hon. Gentleman. We have considered the issue carefully and we think that discretion is the stronger way to get what we all want.

As ever, it is very important for us to be as accurate as we can in our comments. I should make a correction to what I said when I was testing the Committee on American history: as I am sure everyone knew, it was of course Teddy Roosevelt who made the comment about walking softly and carrying a big stick. I thank my hon. Friend the Member for Cardiff West for his prompting on that point.

I take on board the Minister’s comments about credibility, the fear of not responding, and the commissioner’s ability to ensure that a chief executive will take the phone call and that the matters will be addressed down the chain. The amendment is about situations where that does not happen. Taken as a package, I think it is in the category of areas where, as the office develops, we may need to come back and consider again how the commissioner is able to work, and whether, if things are not going well enough, such an approach is needed.

I mentioned mediation and its effectiveness in avoiding the need for punitive action, including naming and shaming, which could be quite difficult. Naming and shaming is one of those areas where it could cause problems for the ongoing business relationship between a small business and its customers. Ideally, we want not to be in the position where there have to be reports about individual cases of late payment. However, if we get to the point where this is a voluntary approach in the reports that the commissioner publishes, then I hope that the commissioner and the Minister will think again at that stage. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 6 ordered to stand part of the Bill.

Clause 7

Scheme regulations

I beg to move amendment 56, in clause 7, page 7, line 24, leave out paragraph (vii)

This amendment would remove from regulations the power to dismiss a complaint which the Commissioner considers has previously been considered under the complaints scheme or by another complaints-handling body, ombudsman or regulator.

The amendment would remove from regulations the power to dismiss a complaint that the commissioner considers has previously been considered under the complaints scheme or by another complaints handling body, ombudsman or regulator. It is about the nature of the complaints that the commissioner will deal with.

On Tuesday, by means of a number of groups of amendments, we discussed our concerns about narrowness of remit, given how the small business commissioner’s office is set up. We believe that, to do the job properly, the commissioner needs to have much more flexibility about the issues that they investigate. Amendment 56 would remove from regulations the power to dismiss a complaint that has previously been considered by another organisation. The logic is fairly simple. We hope that the small business commissioner will offer a markedly different function from existing regulators and ombudsmen. What would be the point of creating the office if that were not the case?

It does not seem right automatically to discount complaints just because they have been looked at by another complaints handling body. It may be that the complaint process took too long under the other body or that the ombudsman found that it fell outside their scope. The amendment would allow the small business commissioner to consider something that it had not been possible properly and fully, in the opinion of the commissioner, to consider elsewhere, even if, as far as the other body or ombudsman was concerned, it had been considered. We are concerned that, under the current Bill, some complaints could fall through the gaps.

The Minister has talked a number of times about the need for flexibility for the commissioner. That is the reason that she has given for opposing or asking us to withdraw a number of our amendments, which would have laid out the small business commissioner’s functions in greater detail and widened the remit considerably. We are now asking for that flexibility. If a complaint comes to the small business commissioner, let them decide whether they will investigate it, instead of there being a prescriptive approach that may tie the commissioner’s hands over an issue that they might like to run with. Amendment 56 would allow them to be the arbiter of whether another complaints handling body has given the matter sufficient consideration.

The scheme regulations, as outlined in clause 7, will set out details of how and when complaints should be raised with the commissioner. They may also, among other things, set out factors or circumstances in which the commissioner can refuse to consider a complaint; the circumstances can change.

The Bill does not prevent the commissioner from reconsidering a complaint that has been raised somewhere else, but it enables them to refuse a complaint when that is appropriate. In other words, it comes back to the power to trust the commissioner to exercise discretion according to the particular circumstances of a complaint. I think that is absolutely right, because it is not prescriptive. It vests power with the commissioner and it trusts the small business commissioner to do the right thing depending on the particular circumstances.

I am an old lawyer, and one thing that really annoys lawyers is when Parliament—no doubt for the very best of reasons—is overly prescriptive and does not put down in legislation, “Save for exceptional circumstances”, which gives the ability to look at the peculiarities that often arise.

It is easy for us to sit in this place and sometimes to see things in black and white. Sometimes we are not able to imagine a particular set of circumstances that suddenly can arise in real life. The judge—or, in this case, the small business commissioner—is then left without any discretion at all and has to rush down a route that he or she knows is absolutely wrong, because we failed to allow that discretion. That is what the scheme regulations will do: vest the power of discretion with the small business commissioner. That is good law, which is why I resist the amendment.

I take on board the Minister’s comments and I remind her that we are as keen for flexibility as she is. It is important to discuss these matters and to get her comments on the record. She has now made her comments and I am sure that, as the office of the commissioner develops, her words will be an important reminder of exactly what is intended and exactly how the commissioner should work. My understanding of the way in which legislation is crafted is that the Minister’s comments in Committee have legal standing. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 7 ordered to stand part of the Bill.

Clause 8 ordered to stand part of the Bill.

Clause 9

Annual report

I beg to move amendment 58, in clause 9, page 8, line 42, at end insert—

“(d) outlines a summary of relevant complaints made by—

(i) small businesses against other businesses and

(ii) small businesses against government departments.

(1A) In subsection (1)(d) “relevant complaint” has the same meaning at subsections 4(3) and (4)”

This amendment would require the Small Business Commissioner’s Annual Report to outline complaints made by small businesses against other businesses and against Government departments.

With this it will be convenient to discuss amendment 59, in clause 9, page 9, line 3, leave out “Secretary of State” and insert “Commissioner”

This amendment would require the Small Business Commissioner to report directly to Parliament.

Amendments 58 and 59 relate to the issue of the commissioner’s annual report. We ask for the report to include complaints made by Government Departments, which is consistent with other points we have made in earlier amendments. We also ask that the commissioner, rather than the Secretary of State, reports directly to Parliament. We have called for the remit of the small business commissioner’s work to be widened in a number of ways, but the inclusion of the public sector is one of the most important elements of our request, hence amendment 58.

The importance of including complaints made by Government Departments boils down to the expectation of what small businesses want and expect from the small business commissioner. Small businesses that face the problem of late payments do so in the public sector and in the private sector, and it is only right that the annual reports reflect where the complaints come from and who the sources of the late payments are. The issue of late payments is one of the most crippling faced by small businesses. It seems to us and to small business organisations that have commented on the provisions that it is arbitrary to narrow down and attack only one part of the problem by considering only the private sector—and the larger element of the private sector, at that.

The amendment reflects the crossover between Government Departments and big business when it comes to late payments. Government Departments sign the prompt payment code. They are expected to pay their suppliers in good time; the target is to pay within five working days and that is a good standard. However, only 18 of the Government’s 33 biggest suppliers, all of which are major businesses, are signatories of the code. That means that 15 major suppliers are not signed up to the prompt payment code. As a result, it is quite likely that smaller suppliers in the supply chain—particularly of those 15 that have not signed up to the code—are victims of late payments in a contract that, ultimately, comes from the Government. That includes the issue of the construction sector and cash retention, which we discussed on Tuesday.

The situation is complicated further still with contracts of the size we are considering. We talk about the 33 largest suppliers to the Government, but there is often a chain of a number of suppliers. Of the 18 suppliers that are signed up to the code, how many of their suppliers are signed up to that same code? There are relatively large businesses, which may also be late payers, in the middle of supply chains, and in a supply chain of three, four or five companies, the smallest firms at the end of the chain are often the ones that bear the brunt.

The amendment is important because it is not just a case of saying that the small business commissioner should be able to report on the complaints of small businesses against Government Departments. The point is that some of the biggest contracts that a small business gets in the private sector can be part of a chain that leads back to Government Departments, and we want the commissioner to be able to name and shame chronic late payers in the annual report. I know that the Minister agrees with my point about naming and shaming.

We also want the small business commissioner to offer something of a strategic approach—an overview of problems that run through major supply chains—in the annual reports. The fact is that supply chains are often a muddle of private and public sectors, and big business and Government Departments. A line of investigation might not start with a complaint against the public authority, but it might implicate the public authority as part of the chain. Will the Minister clarify whether that will be in the scope of the small business commissioner? I have raised that point with her before and I am not entirely sure that I have had a clear answer. Perhaps she will address that either now or at the end.

At the end.

We want the small business commissioner to follow an investigation to wherever it leads. If it leads to the shortcomings of Government Departments’ enforcement of the prompt payment code, their slip-ups on paper-based invoices that lead them to be late payers, their dealings with a company that is a major late payer and is benefiting somewhere down the supply chain from taxpayers’ money, we want to know about it in the annual report. Covering those complaints in the small business commissioner’s annual report would say as much about how we view the small business commissioner as it would about what we want the report to include.

Amendment 58 is a statement of intent that we would give the small business commissioner a certain standing. It would send a message to more than 5 million businesses that when they have a complaint, they will have someone to communicate it to. Crucially, that person will have the authority to take the complaint all the way to Government and to Parliament, hence amendment 59.

There are two very different models on offer that provide examples to follow: the Australian small business commissioner and the American Small Business Administration. What they have in common is that they provide a vehicle for the concerns of small businesses to reach the very highest level. The Australian small business commissioner reports directly to the Australian Parliament and can submit special reports directly to Parliament whenever they feel it appropriate. What we are asking for is much simpler, because it is an annual report to Parliament. It seems that the Australians appreciate, more than this Government, the concern that reporting just will not happen if the small business commissioner is toothless. Under the provisions of the Bill, the commissioner will be toothless because there is nowhere for them to take their findings, and the reliance—or, as we discussed on Tuesday, dependence—on the Secretary of State gives rise to concerns that reporting will just not happen.

The American Small Business Administration works strategically across government and ensures the views of small businesses and entrepreneurs are better heard in policy making. It gives small businesses a voice in government. The Small Business Administration reviews congressional legislation and conducts nationwide studies on the impact of regulation on small businesses. It is able to testify on behalf of small businesses when legislation is being debated.

We have to ensure that the small business commissioner is able to include in their report those points that make a difference to policy making and to small businesses. Whether this is through a nationwide survey that challenges supply chains ranging across the public and private sector; through a trend in small business complaints the small business commissioner has spotted over the year; or through their first-hand expertise on the concerns of small businesses that the small business commissioner wants to lay before policy makers; we have to give them the authority and opportunity to present the information that small businesses need us to see. Without giving the small business commissioner that authority in their annual reports, we are in danger of giving small businesses nothing more than a sympathetic ear.

I begin by drawing the Committee’s attention to my previous comments when we debated the remit of the small business commissioner and why I urged the Committee not to agree with the hon. Gentleman’s amendments to increase their remit to include public authorities.

I advanced that argument for a number of reasons, notably because the legislation is about small business and its relationship with larger businesses and because there are many other ways that small businesses can raise a complaint against the public sector. We do not want to duplicate much of that very good work. It is also important to remember that in March last year the Government restated our long-standing commitment to pay 80% of undisputed invoices in five days, with the remainder being paid within 30 days. Central Government are now required to report on that on the infamous gov.uk website.

Perhaps even more importantly—I hope this addresses specifically the very good point the hon. Gentleman makes about whether or not the good policy of payment is being trickled all the way down through the supply chain—the Public Contracts Regulations 2015 require 90-day payment terms to be passed down what we call public sector supply chains. That is what the regulations state. We all know that they must now bear fruit so that that becomes the absolute standard practice.

I tread carefully, because I am going to mention something that may cause a small titter among members of the Committee: the mystery shopper scheme—[Interruption] Exactly. It has unfortunate title, because it does not fully explain what it does. The important thing is what it does and it does that very well. It takes up these sorts of issues in the supply chain and makes sure that the regulations are being put into practice.

I urge the Committee not to support the hon. Gentleman’s amendment on the annual report and complaints against the public sector for all the reasons that I have given before—[Interruption] Sorry, I just can’t read that. I have been helpfully passed something about the mystery shopper; somebody’s writing is worse than mine and that is quite something. It says that if the ultimate customer is a Government Department or public sector, then the mystery shopper applies at the end of the chain. I’m not sure I understand that, but I’m sure it is terribly important. We will get some clarity on that when I next rise.

May I intervene?

Of course; it might help me to understand this note.

While I intervene, the Minister might want to get another copy of the note. The question we were trying to get answered was what happens when the public sector is the ultimate end of the chain and something goes wrong in that chain. Will the commissioner have the opportunity to investigate all the way to the public sector and not just the private sector elements of the problems with late payment? It could be the second, third, fourth or even fifth stage of the supply chain. I hope I have given the Minister long enough to get her notes.

As ever, my excellent Parliamentary Private Secretary knows more than I do. When the public sector is at the end of the chain it matters not, because if it is a question of going business to business in the rest of the supply chain, of course the small business commissioner will be able to act on any complaint about any of the relationships between businesses in that supply chain. That is the most important. Then when government becomes involved we have the mystery shopper scheme; but in any event we have all the other places to take complaints, such as the ombudsman, as was previously outlined.

Finally, I do not think that there is a need for the commissioner to lay the annual report. The Secretary of State must lay the annual report before Parliament unaltered; the commissioner’s doing it would make no difference at all. It would not increase their independence, so the amendment is what lawyers would call otiose. It is not necessary, because I am confident—I hope others agree—that the Bill delivers as we want it to.

The more the Minister says the words “mystery” and “shopper” together, the more I think her listeners suspend belief in the effectiveness of the scheme. As I think I said on Tuesday, I am familiar with mystery shopper schemes in the private sector and they can be effective, but the idea is not inspiring confidence.

I think we agree that the title may not be the best one, but that does not matter; it is a question of whether the job gets done. The evidence is clear: the scheme works extremely well.

I hear what the Minister says. I am afraid that, to anyone listening to our deliberations, the way hon. Members have laughed several times at the description would suggest that confidence may be lacking in whether the scheme will be as effective as it needs to be. There might be work to be done there.

The point about the supply chain is that if only 18 out of 33 major suppliers are signed up to the prompt payment code, and the Government are unable to make that 33 out of 33, and if Departments do not make sure that late payment is not a problem throughout the supply chain, something will have to change. Given that we are setting up an office called the small business commissioner, and that often it is small businesses that are the victims of late payment in the relevant situations, we need the commissioner to be able to consider public sector involvement all through the chain. The Minister said, as we discussed on Tuesday, that complaints are being dealt with elsewhere in a number of ways, but it is clear that that is not happening sufficiently well at the moment, and that a lot more work is needed.

In discussion of the amendments on the annual report, the Minister said we should not restrict the small business commissioner by insisting they could not do something in that case. I think that is a fair representation of what she said. She is now saying, with reference to the present group of amendments, as she did on Tuesday on a similar set of amendments, that the commissioner cannot investigate the public sector. Following the logic of what she said about the previous group, the commissioner should really investigate the public sector.

I thought we had established that we do not want to extend the remit of the small business commissioner. We want him or her to concentrate specifically on late payment between small businesses and larger businesses. We do not want to go into the public sector because we take the view that the existing schemes that are available—the ombudsman and all the others that I have described—are beginning absolutely to tackle that job.

As a Minister, one works with all the different commissioners and people such as the Groceries Code Adjudicator and there is never anything to preclude the small business commissioner from being able to raise any matter at any time—on the contrary, I would expect him or her to have that sort of relationship with any Minister in my role. I hope that gives the hon. Gentleman some satisfaction that if there were a feeling that things were not working in any other field, they would be able to raise that with the Minister. That was a bit long; I am sorry, Sir David.

I am glad that the Minister made such a long intervention. We are going to talk about the relationship with Government Departments when we discuss my next amendment. The problem is that we do not accept that there should be this restriction because of the relationship between the public sector and business and the way that the supply chains operate. The Government do not agree. We have a profound disagreement on this point. We base our evidence on what goes on elsewhere in the world—in Australia and America—with very successful systems, which very much have a wider remit that ensures the commissioner, or the Small Business Administration in the case of America, can investigate and report on the activities, operations and behaviours of the public sector in the way it deals with its suppliers, as well as the private sector.

Fundamentally, it is important to consider the private and the public sectors when thinking about how an economy operates and how contracts and payments are made. The Government are resisting this point, and we may well come back to it once the commissioner is up and running. We tested the Committee’s opinion on the inclusion of the public sector earlier and I do not feel the need to test it again. I think we know what the Committee as a whole thinks of this. With those remarks, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 9 ordered to stand part of the Bill.

Clause 10

Review of Commissioner’s performance

I beg to move amendment 60, in clause 10, page 9, line 26, at end insert—

‘(7) The Commissioner may assist the Government, including its agencies, to develop legislation, procedures and administration that provide alternative ways in which small businesses can comply with the requirements of the legislation, procedures and administration.’

This amendment would allow the Small Business Commissioner to assist other parts of Government, including the Secretary of State to develop procedures and processes.

The Minister just started to talk about relationships with Ministers, and this amendment is about the small business commissioner working with all parts of Government—including, but not limited to, the Secretary of State for Business, Innovation and Skills—to ensure that Government, their agencies, and all connected with the Government can be included in understanding what comes from the commissioner as a result of their relationship with small business when it comes to legislation and administration.

The amendment aims to help small business, and to help Government get their relationship with and the requirements of small business right as far as possible. It is drawn from a fundamental part of what the US Small Business Administration does. In addition to the signposting functions, which are very much a part of the Small Business Administration’s functions that the Government have chosen to adopt, the United States has a whole department devoted to giving small businesses a voice in government.

The US Small Business Administration’s Office of Advocacy advances the views of small businesses before Congress, the White House, the federal agencies, the federal courts and state policy makers. It has a three-pronged approach. First, it provides a nationwide source of small business statistics, making it the point of reference for policy makers on the impact that Government regulation and legislation are having in the small business community —on its most pressing concerns—and up-to-date frontline feedback on the challenges it faces from one year to the next.

Secondly, having a base in the federal Government gives it a permanent, independent voice with which to channel concerns to the highest level of government. Thirdly, as the watchdog for the Regulatory Flexibility Act, it is in a position to link its research and advocacy with an effective mechanism to bring small business concerns into the regulatory process. It has a finger on the pulse of small business concerns and a seat at the table for regulation and policy making. This is what we are trying to achieve with amendment 60.

By looking at the example of the US Small Business Administration, we see that the measure is entirely possible and can be used to great effect. Amendment 60 simply makes sure that when we set up the small business commissioner here, we will give them a clear mechanism to work strategically across Government to ensure the voices of small businesses and entrepreneurs are better heard in policy making.

Before last year’s general election, Labour said we would create a UK version of the US Small Business Administration, which would concentrate all business support and policy in one organisation. At the Federation of Small Businesses conference at the start of 2015, the then shadow Secretary of State for Business, Innovation and Skills, my hon. Friend the Member for Streatham (Mr Umunna) said,

“So Britain can grow its way out of the cost of living crisis and build a balanced recovery built to last, we need to do all we can to help our small businesses grow, create new jobs and meet their aspirations. We need government to be a better servant—and customer—of our small businesses and to make sure that entrepreneurs’ voices are heard at the top table. A UK Small Business Administration is necessary to realising this ambition. Based on the best examples from around the world, a UK Small Business Administration would create a step change in the opportunities for small businesses from government procurement and improve the quality of support available, operating along a proper British Investment Bank and a network of regional banks to ensure that start-ups and established firms can access the finance they need”.

Amendment 60 joins up the complaints from small businesses that the commissioner will receive and makes sure that this is factored into the implementation and development of regulations and Government policies. We have worded this carefully. We are not talking about making sure that the small business commissioner only has a seat at the table with the Department sponsoring them—they already have that, by definition. We do not doubt that he or she will have an open line of communication with the Business Secretary and his or her team.

If we are to effect real change, the commissioner needs a seat at the table right across Government Departments. Whether they come from the Cabinet Office, the Treasury, the Department for Communities and Local Government or any other Department, policy making and regulations have a tangible impact on small businesses. Amendment 60 will make sure that the small business commissioner is a part of this process, not confined to one Department. It seeks to ensure all the benefits to small business, jobs and the wider economy that we should all have in mind as we seek to develop this legislation and create the office of the small business commissioner.

The Bill already includes an absolute duty on the commissioner to prepare and publish an annual report, which must include any recommendations on how matters he or she has encountered might be addressed. That provides the very mechanism for the commissioner to raise suggestions from his or her experience. I very much want the small business commissioner to keep their firm focus and all their attention on the issue of late payment and the relationship between bigger businesses and small businesses.

We would all agree that this will depend on the character, ability and standing of whoever is appointed as the small business commissioner, but the last thing I want is for them to be sitting in meetings and talking shops. There is a danger that anything in Government, wherever or at whatever level, can turn into a bit of a talking shop, but I do not want the commissioner to be stuck in meetings; I want them looking at the complaints and then literally picking up the phone and/or doing a thorough investigation and not holding back. They must have the time to conduct an investigation. If necessary, they can then make reference to things in their annual report in the most robust of ways. That is the absolute role of that person. In any event, the small business commissioner will also be able to make impartial recommendations to help other branches and agencies of Government address the needs of small business. That is already in the legislation.

Finally, I take the view that the people who know best about business are actually those who are running business. I pay tribute to the Federation of Small Businesses, because it is beautifully and perfectly placed, particularly at national level—I have also seen good examples at a local level—to hold to the fire the collective feet of Government, agencies and all the other bodies involved in local and national Government. I trust organisations such as the FSB to do much of the work that the hon. Gentleman wants to be done. It is not the role of the small business commissioner to do that work for all the reasons that I have already outlined.

Like the Minister, I have a high regard for the Federation of Small Businesses and I have a good relationship with many of its officers. John Allan, the national chairman, lives in a constituency neighbouring mine. He is a fine man and has been a strong advocate for the organisation in his time in post, as have many other officers.

One of the interesting things about the Minister’s comment on the FSB is that the organisation wants many of the amendments that we have tabled in Committee and were tabled in the Lords. If the Government were actually listening to, working with and acting on the recommendations of the FSB, perhaps they would have accepted more of those amendments or included them in the draft legislation. Perhaps the Minister will reflect on that interesting comment and come back on Report with some of the amendments proposed by the FSB and debated here over the past few days as well as in the Grand Committee and on Report in the Lords.

The Minister said that she does not want the small business commissioner sitting in meetings all day when the challenges of late payment need addressing. I completely agree. She will have noticed that I described how the US system operates: a whole department, the Office of Advocacy, is devoted to the relationship with Government, doing the kind of work that I indicated would be beneficial. That is the sort of system that would achieve what amendment 60 proposes.

Government action and legislation have a profound impact on business, on the economy, on business relationships and on businesses being paid on time. That is why it is important that the Government are lobbied and listen to the lobbying. Along with the FSB, the Institute of Directors, the British Chambers of Commerce, the CBI, a range of excellent trade organisations and many individual businesses have an important role to play and have good relationships with Government Departments, Ministers, and Members of Parliament, whether from the Government or Opposition.

There is a lot to be said for the small business commissioner’s having a formal role and relationship with all Government Departments, given the important way in which small business operates in this country and how it contributes to a successful and thriving economy. Again, perhaps this can evolve over time. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 10 ordered to stand part of the Bill.

Clauses 11, 12 and 13 ordered to stand part of the Bill.

Clause 14

Extension of target to provisions made by regulators

I beg to move amendment 61, in clause 14, page 12, line 6, at end insert—

‘(1A) In subsection (2), after “means” insert”—

(a) all regulatory provisions made under section 2(2) of the European Communities Act 1972,

(b) regulatory provisions made by statutory instrument which are subject to the affirmative resolution procedure in both Houses of Parliament, and””

The amendment would require the Government’s business impact target to cover the impact of EU Regulations or regulatory provisions made my statutory instruments which are subject to the affirmative procedure.

With this it will be convenient to discuss the following:

Amendment 62, in clause 14, page 12, line 18, at end insert—

‘(4A) In section 21 of the Small Business, Enterprise and Employment Act 2015 (duty on Secretary of State to publish business impact target etc), at the end of subsection (2) insert “and must consist of—

(a) a nominal component, reflecting the total number of regulations, and

(b) a monetary component, reflecting the discounted cash flow.””

This amendment would ensure that the report includes an up-to-date tally of regulations, and the cost to business of those regulations.

Amendment 63, in clause 14, page 12, line 18, at end insert—

‘(4B) In section 21 (3)(b) of the Small Business, Enterprise and Employment Act 2015, after “methodology”, insert “, verified by the independent body appointed under section 25”.

This amendment would require the Secretary of State to publish the methodology used for assessing the economic impact of regulatory provisions and would require the methodology to be verified by an independent body.

Amendment 64, in clause 14, page 12, line 18, at end insert—

‘(4C) In section 23 of the Small Business, Enterprise and Employment Act 2015 (duty on Secretary of State to publish reports) after subsection (3)(f) insert—

“(g) a list of all the impact assessments that relate to the regulatory provisions for which a list is required under subsection (3)(f), including the names of the authorising Ministers, the names of the Senior Responsible Owners for quality assurance, and the assessments of the independent body appointed under section 25.”

This amendment would require the Secretary of State’s report to include a list of all the impact assessments relating to regulatory provisions which have come into force or ceased to be in force during the reporting period, including the names of the authorising Ministers and Senior Responsible Owners for quality assurance and the assessments of an independent body.

We now move away from discussing the creation of the small business commissioner to consider some of the wider aspects of the Bill. This group of amendments looks at the impact target. I will start with amendments 62 and 64.

The Government used to publish a twice-yearly statement of regulations. It might have been a bit of a blunt instrument because the relative impact of these regulations can vary enormously. However, it was a simple mechanism to ensure that the Government were publishing a tally of new regulations that had come into force during the reporting period. Lord Stevenson of Balmacara noted in Grand Committee that publication of the statements had stopped since the general election, and he asked Baroness Neville-Rolfe to find out why. I cannot see an answer to that question anywhere in Hansard; I apologise if I have missed it. Can the Minister tell me why the biannual statements stopped?

Amendments 62 and 64 deal with two important points on regulation that are too often overlooked: honesty and accountability. Amendment 62 suggests having a warts-and-all tally of regulations in the business impact target. It specifically calls for both a nominal component to give an update on the number of regulations, and a monetary component that tots up the total cost to businesses of the regulations. Amendment 64 ensures that, when we publish the reports, there is a chain of accountability so that everybody knows who has approved a new regulation and who is responsible for it.

The reason for amendment 62 is simple. While the Government have not been providing the reports, the Regulatory Policy Committee has. The committee found that, of 13 recent assessments, 10 showed increases in the overall cost of regulation. The Minister will tell us later that the Government have reduced the cost of regulation by some astronomical amount; she will probably cite a figure of £10 billion.

Absolutely!

The Regulatory Policy Committee seems to be pointing at something slightly different. For some reason, the 10 increases in the overall cost of regulation that the Committee found were not reflected in Government statements on regulatory savings. Why that happened is an interesting question.

It also emerged that many Government regulations—just under half—were considered to be out of scope by the Government. Therefore, when the Minister no doubt gives the figure of £10 billion in a few minutes’ time, one must wonder what the true figure might be. The regulations increased the costs to business, but they are important for Government and I agree that they should be important. However, they were not reflected in the Government’s in-scope or out-of-scope scenarios. Many regulations come from the European Union, the mention of which will cause Government Members to start to—

Swivel-eyed!

I could not possibly repeat what my hon. Friend just said, but their ears will prick up and they will become interested. One or two of them will no doubt want to jump up and say something about the European Union.

The Government have an interest—[Interruption.] Government Members are being very well behaved today, which is remarkable. The Government have an interest in ensuring that they are seen to be reducing the regulatory burden, but when that is not the case, the Government cannot simply stop reporting it—for just under half the regulations—or shift the goalposts to make the situation look better than it is.

The Lords had a full debate on the matter and when those points were made there really was no response to say that that was not what had happened. When the Government report, they should be up front with businesses about who is responsible for the regulations. The reality is that business is interested in the overall impact of regulations, not where they come from. Ultimately, the issue is about the overall cost, not the cost of some regulations and not others, that really affects the business environment and businesses’ ability to operate as effectively as possible.

Amendment 61 would require the Government’s business impact target to cover the impact of EU regulations or regulatory provisions made by statutory instruments subject to the affirmative procedure. The Regulatory Policy Committee reported that

“nearly half of the approximately 1,000 laws enacted during the previous parliament were outside the scope of the Government’s… One-in, Two-out rules. Nearly 70% of these were of EU origin.”

If regulations have an impact on small businesses, it is important that they are considered within the scope of the business impact target. Otherwise, businesses will not be able to trust what it is being told, which is the point that I was making a moment ago.

It seems a false distinction to rule such regulations out. The origin of the regulations is different and the route when trying to make them work better for the business community or seeking to remove them would be different, but does the perspective of small businesses differ when a regulation comes from the EU? I do not think so. As Lord Stevenson said in Grand Committee,

“I do not honestly think that businessmen and women would care whether the regulations they have to work to come from this place or across the channel. However, they have an impact on their work and therefore I think that we should fess up and try to get a measure into play in the way that we think about all regulation that impacts on business.”—[Official Report, House of Lords, 28 October 2015; Vol. 765, c. GC229.]

I have heard the argument before that the point of the assessment is to focus on what we can control and change. That is important, but it is not a reason not to include such regulations because it gives a false impression of the cost of regulation and entirely misses the point. After all, the same EU regulations are applied differently in different EU member states. Perhaps there is an opportunity to learn from how other EU states apply regulations, if they are able to do so in a way that has a lower cost to business and a smaller impact on business than we currently find.

We should be on top of making sure that we are putting EU regulations to best use in the UK. We cannot do that if we pretend they do not exist when we are assessing the business impact target. EU regulations cost businesses £1.6 billion in the last period that the Regulatory Policy Committee was assessing, but they were never taken into account. Perhaps that suits the Government, as it would make a sizeable dent in the savings they have been congratulating themselves on. The point is that if regulations affect business and the Government have a genuine interest in making a frank assessment of the impact of regulations on business, it should not matter where the legislation originated.

I now want to talk about amendment 63. At its broadest, this group of amendments focuses on strengthening the work of the Regulatory Policy Committee. As an independent body, the committee takes a holistic view of the impact of regulations that affect businesses across the UK. The problem, which the amendments are intended to address, is that the work of the RPC is hampered when the Government set the objectives and methodology and decide what is or is not in scope. They take a valuable body and hamstring its efforts to offer an assessment of regulations.

The reason for amendment 63 was summed up best by Lord Stevenson in Grand Committee. He said:

“it seems a little odd that the Government can choose the game they are playing, can set the goalposts at the distance apart that they wish and then score as many goals as possible and claim a victory, when in fact there is another game going on elsewhere where people are being beaten up by what in their view is excessive regulation, often gold-plated, and we do not seem to get transparency.”—[Official Report, House of Lords, 28 October 2015; Vol. 765, c. GC232.]

Very well put.

Amendment 63 cuts to the heart of the matter. At the moment, the Government decide the methodology and we end up with a skewed version of the impact of regulations. Amendment 63 would reverse this relationship. Instead of an independent body working to the Government’s methodology, we would see the independent body verifying the Secretary of State’s methodology. Publishing that same methodology would make it open to wider scrutiny. Having it verified would invite greater confidence in the objectivity of the assessments carried out.

Order. I apologise to the Committee for the coldness of the room. The mechanism for closing the window is either jammed or broken. Help is on the way. It will probably be closed manually, when ladders arrive, during the luncheon break.

Thank you, Sir David. Actually, as a woman of a certain age I find it makes a great change. I was so worried about the hon. Member for Wakefield that this must go on the record: she was so cold that she had the hood of her jacket up. As I am mentioning her, may I congratulate her—she is now putting her snow mittens on—on her election yesterday? We all wish her well in her new role, which I am sure she will, unfortunately, play extremely effectively.

I must take issue with the hon. Member for Sefton Central about the previous Government’s achievement, which was great, in making huge savings to the costs of businesses across the piece, by way of reducing regulation. Our policy of one in, two out, was particularly successful, and I am helpfully reminded that in 2015 the World Bank rated the United Kingdom sixth out of 189 economies as a place to do business because of the reduction in regulation. Of course, this country was the first to adopt one in, two out. We have done incredibly well and our global competitiveness has increased as we begin to deregulate and untangle the abundance of red tape that often strangled business.

It was a pleasure in the previous Government, at a very low level, to take part in some of the great work that is often done behind the scenes, led by an excellent team of civil servants to whom I pay huge tribute. There is one in particular whom I often describe as the guru of deregulation. She has the most brilliant and incisive brain for untangling red tape—looking at where we overly regulate and at how we can do things better. It is now an even greater pleasure in this role to be right at the core of that work. It is often done very quietly but the benefits to business are huge. We have set ourselves another target to achieve savings of another £10 billion in the next five years. It will be difficult and I do not try to pretend otherwise, but that is one of the things addressed in this part of the Bill.

On amendment 61, we will focus the business impact target on the things that the Government can control. Gold-plating will therefore continue to be included. The burden of the legislation and directives that come from the European Union are better tackled at source. I strongly take the view that the package delivered by President Tusk delivers reforms in economic governance, competitiveness, sovereignty, benefits and the movement of labour that are exactly along the lines that we want to see in the future of the European Union.

I want to stay in the European Union, although I want reform. A wind of change is blowing. My Prime Minister has caught that wind and he is turning it into a gale. This movement to deregulate, to reduce the regulation on business and to change the way we do things in the European Union will gather momentum and pace, and those reforms will come to full fruition. The Government will continue to report administratively on the impact of all significant European Union regulation and have that impact independently validated. That is the point: all the work we do is independently validated.

The Minister’s support for staying in a reformed European Union is no surprise; I have heard her say that before. I completely agree, but I mentioned making the most of European Union regulations and learning from what goes on in other countries so that we can benefit from them and so that they do not become onerous or a cost to business. Does she take that point on board? What more does she think she and her fellow Ministers should be doing to ensure that regulations from the European Union are not onerous and can be more beneficial? Can we learn from the way other countries apply them?

Yes, we always want to learn from what other member states do, but gold-plating was a valid criticism—particularly, I could say, under the 13 years of Labour Government, but that would be a cheap political point that I would not want to make. In all seriousness, this nation did gold-plate things. One of the great tasks that has been performed and completed in the past five years—and which continues to be addressed—is whether we continue to gold-plate. We make it clear to all Government Ministers, Departments and so on that they should not gold-plate, but it is work that we continue to do. If we can learn from other member states in the European Union as to how to ensure we do not do that, so much the better. To finish on amendment 61, affirmative statutory instruments are already captured under the Small Business, Enterprise and Employment Act 2015.

Amendments 62 and 63 would limit the options of future Administrations in determining their target and would give an unusual amount of power to an unelected verification body. It is the Government who should determine the nature of the target, how it is measured and by what methodology. We are consulting the Regulatory Policy Committee about the methodology for this Parliament and will publish it soon.

I respectfully suggest that amendment 64 duplicates existing administrative requirements to publish impact assessments in the name of the responsible Minister alongside related legislation. In my new role, although it feels as though I have been there for some time, I have seen that the work on deregulation—in terms of the detail into which we all go and the aspiration and targets placed upon Departments—is quite outstanding. The demand is effectively set by a desire to achieve financial targets. None of us really like targets, but, goodness me, they are a fabulous driver for all of us to look at the existing regulation and anything new coming in to ensure that business is not over-regulated, invariably at huge cost to it.

Finally, the hon. Gentleman asked about the statement on new regulation. It has been replaced by an annual report under the business impact target that will be published this June and annually thereafter. That is the better way forward. Though interesting points were raised that, as ever, were listened to, I urge hon. Members not to support the amendment on the basis of all I have said.

It is really important to say that we agree on not having unnecessary regulations; I take on board the Minister’s point about that. I gently say to her, however, that small businesses are extremely concerned about some recently proposed additional regulation, not least the introduction of quarterly filing or additional reporting of tax information and the feared potential implications for extra bureaucracy. We have discussed that issue elsewhere. I do not know whether you would welcome a discussion on that now, Sir David, but such proposals cause concern. The Minister needs to be aware that there is a sense the Government need to think a few things through more carefully.

The point that the Regulatory Policy Committee was making was that by not including just under half of regulations, the Government are not counting them and are not showing that the gold-plating the Minister speaks of is not still happening. It leaves the sense that the Government are embarrassed by the fact that they have not done more to remove what she described as gold-plating or to learn from how some of our friends in the European Union have managed to apply EU regulations in a more cost-effective way, or done enough to reduce the cost of regulation from the European Union. That is why we agree with the Regulatory Policy Committee that such things should be within scope.

Among other things, the amendments highlight that if we measure and publish the methodology about something as important as regulation and its cost to business, we improve the chances of addressing those costs and the impact and of improving the business environment. That is one reason we tabled the amendments. The phrase “what gets measured gets done” is very true. By concentrating time and effort in government on these points and by ensuring that a proper, full and accurate measure is taken and that there is transparent reporting on how the Government are going around hitting their business impact targets, everybody in the business community is in a much stronger position to understand and have confidence that everything that can be done is being done.

I take the Minister’s points. We have had a good debate on this matter, as we did in the Lords. With those remarks, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 14 ordered to stand part of the Bill.

Schedule 2 agreed to.

Clause 15

Duty to report on effect of regulators’ code

I beg to move amendment 78, in clause 15, page 13, line 8, after “in”, insert

“section 21 (duty to have regard to the regulatory principles) and”

This amendment would make it clear that the reporting requirements include reporting on the duty under section 21 of the Legislative and Regulatory Reform Act 2006 to have regard to a defined set of regulatory principles.

With this it will be convenient to discuss the following:

Amendment 79, in clause 15, page 13, line 10, after “which”, insert “section 21 and”

See explanatory statement to amendment 78.

Amendment 80, in clause 15, page 13, line 14, after “businesses”, insert

“and such other persons as the regulator considers appropriate”

In conjunction with amendment 78, this amendment would require each relevant regulator to report not only on the views of businesses (and ‘other regulated persons’), but also on the views of such other persons as the relevant regulator considers appropriate.

Amendment 81, in clause 15, page 13, line 16, at end insert—

“(iii) of the effect of the duties under sections 21 and 22 on the proper exercise of its relevant functions;”

This amendment would require each relevant regulator to report on the effect of the performance of the duties on the proper exercise of the regulatory functions to which they apply.

Amendment 82, in clause 15, page 13, line 18, after “in”, insert “section 21 and”

See explanatory statement to amendment 78.

Amendment 85, in clause 15, page 13, line 41, after “in”, insert “section 21 and”

See explanatory statement to amendment 78.

Amendment 86, in clause 15, page 14, line 28, at end insert—

““businesses” includes businesses and other regulated persons;”

Amendment 87, in clause 15, page 14, line 30, after “by”, insert

“section 21 to have regard to the principles in subsection (2) of that section and”

See explanatory statement to amendment 78.

Amendment 83, in clause 15, page 13, line 31, at end insert—

“(d) the persons from whom information should be obtained for the purposes of a performance report.

This amendment would make provision for guidance to be issued on who should be asked for information for the purposes of preparing a performance report.

Amendment 84, in clause 15, page 13, line 31, at end insert—

“(6A) Before making guidance under subsection (5), the Minister must consult—

(a) persons carrying on businesses; and

(b) such other persons as the Minister considers appropriate.”

This amendment would require the relevant Minister of the Crown to consult businesses and such other persons as the Minister considers appropriate before making guidance relating to the performance reports.

Amendment 88, in clause 16, page 15, line 13, after “businesses”, insert

“and such other persons as the regulator considers appropriate”

See explanatory statement to amendment 80.

Amendment 89, in clause 16, page 15, line 15, at end insert—

“(iii) of the effect of the duties under section 21 and 22 on the proper exercise of its relevant functions;”

See explanatory statement under amendment 81.

Amendment 90, in clause 16, page 15, line 30, at end insert—

“(d) the persons from whom information should be obtained for the purposes of a performance report.”

See explanatory statement to amendment 83.

Amendment 91, in clause 16, page 15, line 30, at end insert—

“(5A) Before making Guidance under subsection (4), the Minister must consult—

(a) persons carrying on businesses; and

(b) such other persons as the Minister considers appropriate.”

See explanatory statement to amendment 84.

Amendment 92, in clause 16, page 15, line 42, after “businesses”, insert

“and such other persons as the Minister considers appropriate”

See explanatory statement to amendment 80.

Amendment 93, in clause 16, page 16, line 9, at end insert—

“(11A) In this section—

“businesses” includes businesses and other regulated persons.”

I apologise to the Committee, but I cannot feel my face anymore. It is quite cold in here. I appeal to the Chair that if the coldness carries on after lunch, perhaps we can all have a round of hot coffees from the Terrace cafeteria. I beg to move!

I thank the right hon. Member for Broxtowe for her congratulations, and I thank hon. and right hon. Members from all parts of the House. Whether or not they supported me for Chair, they have got me. I want to begin by talking about the Environmental Audit Committee and its environmental scorecard on the Government. In 2014, the Committee asserted that environmental regulations represent

“the essential underpinning of environmental protection.”

They also, of course, represent the essential underpinning of consumer protection and of health and safety for workers and the general public. Statutory regulators play an important role in the effective implementation and enforcement of environmental regulations.

We have had a drive to reduce the burden of regulation on business. We have seen that with the changes made by the Small Business, Enterprise, and Employment Act 2015, section 108 of the Deregulation Act 2015 and section 22 of the Legislative and Regulatory Reform Act 2006. My party is pro-business; we see it as essential to our society. We want to see industry growing. We are pro-growth. We are also pro-good regulation. In my time as shadow Environment Secretary, I lost count of the number of times when businesses would come in and complain about other businesses that were able to undercut them on price because of their ability to ignore the regulations.

People want to do the right thing in this country. We are lucky enough to have businesses that are so law- abiding and wish to do well on the basis of good business, good growth and green growth. One thing in the clauses is the Government’s failure perhaps to understand the role of regulation in promoting green growth, and I will give some examples of that towards the end of my remarks.

Good regulation protects the citizen from the powerful, whether those interests are of the commercial sector, the state or other large bodies. Good regulation protects patients, the old, those with disabilities, our built environment, our natural environment and many other areas of our lives. I tabled the amendments, which are probing, because I want the Minister to say what protections will be outlined if the measures go through. I have particular concerns about the proposal in clause 17 on Ofwat and the Office of the Rail Regulator. The duty of a regulator is to protect the public interest and there could be some very difficult decisions for those regulators.

I do not believe that there is evidence to suggest that the UK is over-regulated or that there are significant unnecessary costs associated with existing regulations, despite what the Minister said about so-called gold-plating. The costs associated with environmental regulations account for less than 2% of business sector turnover on average. If we focus solely on the costs of regulation to business, we ignore the wider socioeconomic and environmental benefits that regulations are intended to provide. Evidence suggests that the benefits of environmental regulations—only some of which can be quantified—cover the costs three times over.

I would like to give some examples of the costs and benefits. The Minister said earlier that they could be obscure and that we are not sure what they are, but regulators operate in the framework of UK law and European Union law. All the transposition of EU directives is subject to Whitehall cost benefit decisions. I have asked a variety of parliamentary questions on certain EU frameworks and I want to give the Committee some examples.

Back in 1995, it is generally accepted that the UK was seen as the “dirty man of Europe”—a slightly sexist phrase, but one that I am happy to use for the purposes of this discussion. Some 83% of household waste went to landfill and just 7% was recycled or composted. Younger members of the Committee may find it hard to remember those bad old dirty days. Basically, everything went into a bin in the kitchen. By 2014, thanks to a series of EU directives, which were transposed without gold-plating by the previous Labour Government in a very flexible way that allowed local authorities to make the right decisions about what was right in their communities and where they wanted to invest, the UK’s recycling rate had reached 45%. During that time, as our understanding of the finite nature of resources developed—whether they were wood, plastic or paper—and businesses understood that in order to have a sustainable and secure supply chain of raw materials, we could not keep on relying on raw products; we had to develop and grow our recycling industry and base. Hundreds, if not thousands, of new businesses were created in the recycling industry.

That is an example of good regulation creating green growth, green businesses and green jobs. The UK currently recycles 90% of construction materials, well ahead of other countries. We are seen as world leaders, for example, in civil engineering with the Crossrail and Olympics projects, both landmark Labour Government achievements, taking out the spoil and taking it away—by barge in the case of the Olympics, at a nice steady 3 miles an hour —and using it to create new nature reserves in Essex.

I also want to talk about the EU’s water framework directives. Again, younger members of the Committee may find it hard to believe that swimming in Blackpool as a child some 30 or 35 years ago, I emerged covered in oil. When people talk about the good old days, they forget just how good they were. Some 99% of British beaches now comply with EU minimum standards on cleanliness. What does that mean? We cannot really quantify the benefits to our seaside towns, but obviously cleaner beaches mean more tourists and stronger local economies.

In 2014, the Environment Agency, in response to a parliamentary question that I submitted, estimated that the net benefit in England and Wales of implementing the EU water framework directive will be £9 billion by 2027—that is £9 billion of benefit to the UK economy for transposition of that directive.

On air quality, we can similarly see that the UK’s nitrogen oxide—NOx—emissions have fallen by more than two-thirds, reducing the risk of respiratory disease. Over the same period, sulphur dioxide emissions in the UK dropped by 95%. Sulphur dioxide is what gives us acid rain, and when it goes into rivers and particularly into copper piping, it leaches away the copper from the pipes. This was particularly a Scandinavian problem. Perhaps they had more copper pipes or more blond people, but when blond people washed their hair, it turned green because of the acid rain. Again, that is another example of the good old days when industry was able to pollute the atmosphere, and there were unintended costs and consequences not only in terms of environmental degradation, but for blond people suffering green hair. That is probably not something we can quantify, but it must have been quite embarrassing for a child at school. However, those consequences have now been taken out.

We have another five minutes, so I will carry on. My examples illustrate some of the many benefits that regulation brings in terms of green growth and environmental benefits. Clauses 15 and 16 introduce reporting requirements on regulators in respect of their duties under the Legislative and Regulatory Reform Act 2006 to have regard to the code of practice and to the desirability of promoting economic growth. So regulators will have to produce an annual performance report setting out the effect that the duties have had, making explicit reference to the views of any affected businesses. My amendments would require widening that out from businesses so that the whole voice of civil society is heard in that report.

The duties risk unintended consequences. They have an overriding effect on the exercise of regulatory functions, and that could incentivise regulators to give greater emphasis to narrowly defined economic considerations and potentially compromise the protection of the environment —and the citizen, the disabled, the worker and the consumer. It could also compromise the responsibility of regulators to act always in the public interest. In both cases, the exercise of regulatory functions in accordance with their original purpose is not emphasised as a key consideration for regulators. I think that that is problematic.

In their response to the consultation on the growth duty, the Government stated that the duty would not

“compromise the independence of regulators or undermine the importance of the essential protections that they are there to deliver”.

However, the Joint Committee on the draft Deregulation Bill concluded that additional safeguards were required to ensure that the duty would not

“take precedence over regulation and that the overriding and principal objective of regulators remains the protection of the public interest.”

A proposal to amend the relevant clauses to make it clear that the duty would apply only in so far as it was consistent with the proper exercise of the regulatory functions was narrowly defeated in the House of Lords in February 2015. As currently drafted, the proposed reporting requirements are disproportionately focused on the views of businesses as to the effect of the performance of the duties. This is in spite of the risk that they may have an overriding effect on the regulatory functions to which they apply, with unintended consequences for the protection of the environment and the wider public interest.

Secondly, the stated aim of the new reporting requirements is

“to ensure regulators are more transparent about the action they have taken”,

and to

“allow Government, business and other interested stakeholders to hold regulators to account on how they have performed”

in respect of the duties. As I have said, I have concerns about this.

The amendments that I have tabled would make four changes. First, they would require each relevant regulator to report on the effect of performance of the duty under section 21 of the Legislative and Regulatory Reform Act 2006, as well as on the performance of the duties under section 22 of the LRRA and section 108 of the Deregulation Act 2015.

Secondly, in respect of the duties, the amendments would require each relevant regulator to report not only on the views of businesses and other regulated persons, but on the views of such other persons as the relevant regulator considers appropriate. Thirdly, they would require each relevant regulator to report on the effect of the performance of the duties and on the proper exercise of the regulatory functions to which they apply. Finally, they would require the relevant Minister of the Crown to consult businesses and such other persons as the Minister considers appropriate before making guidance relating to the performance reports, and such reports to be made public.

Ordered, That the debate be now adjourned.—(Stephen Barclay.)

Adjourned till this day at Two o’clock.

Enterprise Bill [ Lords ] (Fourth sitting)

The Committee consisted of the following Members:

Chairs: Sir David Amess, † Ms Karen Buck

† Argar, Edward (Charnwood) (Con)

† Barclay, Stephen (North East Cambridgeshire) (Con)

Bardell, Hannah (Livingston) (SNP)

† Brennan, Kevin (Cardiff West) (Lab)

† Brown, Alan (Kilmarnock and Loudoun) (SNP)

† Churchill, Jo (Bury St Edmunds) (Con)

† Creagh, Mary (Wakefield) (Lab)

† Esterson, Bill (Sefton Central) (Lab)

† Flint, Caroline (Don Valley) (Lab)

† Frazer, Lucy (South East Cambridgeshire) (Con)

† Howell, John (Henley) (Con)

† Lewis, Brandon (Minister for Housing and Planning)

† McKinnell, Catherine (Newcastle upon Tyne North) (Lab)

† Mackintosh, David (Northampton South) (Con)

† Morden, Jessica (Newport East) (Lab)

† Pawsey, Mark (Rugby) (Con)

† Solloway, Amanda (Derby North) (Con)

† Soubry, Anna (Minister for Small Business, Industry and Enterprise)

Glenn McKee, Committee Clerk

† attended the Committee

Public Bill Committee

Thursday 11 February 2016

(Afternoon)

[Ms Karen Buck in the Chair]

Enterprise Bill [Lords]

Clause 15

Duty to report on effect of regulators’ code

Amendment moved (this day): 78, in clause 15, page 13, line 8, after “in”, insert

“section 21 (duty to have regard to the regulatory principles) and” —(Mary Creagh.)

This amendment would make it clear that the reporting requirements include reporting on the duty under section 21 of the Legislative and Regulatory Reform Act 2006 to have regard to a defined set of regulatory principles.

I remind the Committee that with this we are discussing the following:

Amendment 79, in clause 15, page 13, line 10, after “which”, insert “section 21 and”

See explanatory statement to amendment 78.

Amendment 80, in clause 15, page 13, line 14, after “businesses”, insert

“and such other persons as the regulator considers appropriate”

In conjunction with amendment 78, this amendment would require each relevant regulator to report not only on the views of businesses (and ‘other regulated persons’), but also on the views of such other persons as the relevant regulator considers appropriate.

Amendment 81, in clause 15, page 13, line 16, at end insert—

(iii) of the effect of the duties under sections 21 and 22 on the proper exercise of its relevant functions;”

This amendment would require each relevant regulator to report on the effect of the performance of the duties on the proper exercise of the regulatory functions to which they apply.

Amendment 82, in clause 15, page 13, line 18, after “in”, insert “section 21 and”

See explanatory statement to amendment 78.

Amendment 85, in clause 15, page 13, line 41, after “in”, insert “section 21 and”

See explanatory statement to amendment 78.

Amendment 86, in clause 15, page 14, line 28, at end insert—

““businesses” includes businesses and other regulated persons;”

Amendment 87, in clause 15, page 14, line 30, after “by”, insert

“section 21 to have regard to the principles in subsection (2) of that section and”

See explanatory statement to amendment 78.

Amendment 83, in clause 15, page 13, line 31, at end insert—

“(d) the persons from whom information should be obtained for the purposes of a performance report.

This amendment would make provision for guidance to be issued on who should be asked for information for the purposes of preparing a performance report.

Amendment 84, in clause 15, page 13, line 31, at end insert—

‘(6A) Before making guidance under subsection (5), the Minister must consult—

(a) persons carrying on businesses; and

(b) such other persons as the Minister considers appropriate.”

This amendment would require the relevant Minister of the Crown to consult businesses and such other persons as the Minister considers appropriate before making guidance relating to the performance reports.

Amendment 88, in clause 16, page 15, line 13, after “businesses”, insert

“and such other persons as the regulator considers appropriate”

See explanatory statement to amendment 80.

Amendment 89, in clause 16, page 15, line 15, at end insert—

(iii) of the effect of the duties under section 21 and 22 on the proper exercise of its relevant functions;”

See explanatory statement under amendment 81.

Amendment 90, in clause 16, page 15, line 30, at end insert—

“(d) the persons from whom information should be obtained for the purposes of a performance report.”

See explanatory statement to amendment 83.

Amendment 91, in clause 16, page 15, line 30, at end insert—

‘(5A) Before making Guidance under subsection (4), the Minister must consult—

(a) persons carrying on businesses; and

(b) such other persons as the Minister considers appropriate.”

See explanatory statement to amendment 84.

Amendment 92, in clause 16, page 15, line 42, after “businesses”, insert

“and such other persons as the Minister considers appropriate”

See explanatory statement to amendment 80.

Amendment 93, in clause 16, page 16, line 9, at end insert—

‘(11A) In this section—

“businesses” includes businesses and other regulated persons.”

Congratulations to the Doorkeepers and engineers on shutting our window; I am sure we will all be peeling off our outer layers in due course.

I want to continue my remarks on the amendments to these regulatory clauses and the benefits of good regulation in creating green jobs and growth. In fact, in case we needed any further examples of that, there is a Waste and Resources Action Programme exhibition outside this very Committee Room, which has the strapline, “Less Waste More Jobs”. That beautifully illustrates what I was saying before lunch.

I want to take a little bit of time to look at the potential impact of the clauses on both the natural environment and the Office of Rail and Road. Let me begin with Natural England. Its statutory purpose is to

“ensure that the natural environment is conserved, enhanced, and managed for the benefit of present and future generations, thereby contributing to sustainable development.”

Its statutory purpose is to protect the natural environment, while the contribution to sustainable development, which includes economic considerations, is an outcome arising from that protection.

The clearest manifestation yet of the potential of the growth duty to have an overriding or undermining influence on the proper exercise of Natural England’s regulatory functions is its recent adoption of a new outcomes approach to the protection and management of our most important wildlife sites and precious places. That new approach was first introduced in a letter from Natural England’s chief executive, James Cross, to a number of key stakeholders in October 2015, with an amended version subsequently published online.

The stated aim is for Natural England to move

“away from being seen as regulators and more towards enablers”

through

“closer working with business to help them achieve their goals while also helping the environment”.

That will apparently involve

“radically reducing the need for regulation”,

and helping businesses to

“achieve their aims in a way that benefits the environment, but takes account of their circumstances”

by seeking

“the best outcomes for everybody, at the right pace”.

While it is right to seek to minimise conflict and to achieve win-win outcomes via the agreement of “common and shared objectives” when possible, there will often be situations where the objectives of businesses will conflict with the proper exercise of Natural England’s regulatory functions and its statutory purpose.

I cite that example in relation to the natural environment, but there are, of course, potential issues around the built environment because local authorities are also listed in clauses 15 and 16. As a former local councillor for seven years, I know that in these straitened times, councils will often err on the side of caution and will be fearful, particularly when making planning decisions. We can see a clear moment when officers will be advising on granting planning permission for something so that the growth duty or reporting requirements that will be placed on them are not subsequently challenged by businesses.

The final area I wish to talk about is the protection of the public interest in its most naked form: the health and safety of workers and the travelling public. Clause 17 applies this reporting duty to the Office of Rail and Road, Ofcom, Ofwat and Ofgem, which is the first time that has happened. In my time as shadow Secretary of State for Transport, I had a great deal to do with the ORR—the Rail Regulator, as it was then. Its statutory duty is to protect the health and safety of workers and the travelling public, to manage demand and supply for rail paths between freight operators and passenger operators and to protect the needs of disabled travellers and ensure they have access to the railway.

With this new duty, I can see clearly that the demands of growth could lead to conflicts of interest. For example, passenger rail travel has doubled over the past 20 years, and there is enormous pressure on those rail slots. It is the difficult duty of the rail regulator to decide which towns and cities get new train services and when the track operators will have access to freight paths to undertake the upkeep and engineering works that keep the railways going. Those decisions are made versus the interests of the commercial operators who run those passenger services. It is in the interests of the rail regulator to ensure that those paths are not too close together and do not run too quickly so as to maintain a safe distance between trains. It must also ensure that there is a requisite number of safety operatives to oversee workers carrying out minor engineering works on the track to avoid tragedies, which sadly occur far too often.

I am concerned that extending the duty to report performance to the Office of Rail and Road, in particular, could end up putting pressure on the regulator to make decisions in the interests of growth that are inimical to the public interest, the protection of public safety, the protection of the health and safety of the workers on the railway, and of course the protection of disabled travellers, whose additional needs in terms of boarding and getting off trains may hold up the smooth operation of the service for a couple of minutes. I have heard anecdotal evidence from my constituents in Wakefield of people being told, “You are holding up the train. We are going to miss our slot. You are going to make us late, and we will lose money as result.” Those pressures already exist, and adding a financial and growth pressure to the regulator could lead to perverse outcomes.

A similar argument could be made about Ofwat, which is responsible for making sure that water companies clean up the beaches, protect the rivers and maintain the reservoirs. The water companies might make more money if they invested less in the asset base but that would not necessarily be good if a reservoir failed and took out a town or village below it. When regulations fail, the consequences in terms of protection of the public are huge. When the Minister replies, I hope that she addresses in particular the issue of road and rail regulation.

Welcome back, Ms Buck. This is the first time that my hon. Friend the Member for Wakefield has spoken in the Committee since her success yesterday and I add my congratulations on her appointment as the new Chair of the Select Committee on Environmental Audit.

As my hon. Friend has said, the Labour party is pro-business, but we are not pro-business as usual and it is important that we challenge unacceptable business practice and exploitative practice. We support good regulation but at the same time we must ensure that unhelpful or damaging regulations are addressed. My hon. Friend cited excellent examples of good regulations that show how such reporting should be done. She also explained that we must take a longer-term view when we consider the environment or other aspects of life. The short-term, balance-sheet effects of regulation are not enough. Whether a regulation, an action or a change in the rules has an effect on a business or an economy in a matter of weeks, months or a year or so is very different from its longer-term impact, whether on the economy or, indeed, the environment. We should be trying to achieve the level playing field that has been a central theme of our deliberations on the Bill so far, and that level playing field should apply to business, consumers and the wider public. The costs of regulation to business can be apparently significant, but savings can be made elsewhere. My hon. Friend the Member for Wakefield has given many examples of exactly that, but I will give a few others as well.

When the minimum wage legislation came in during the early part of the Labour Government, there was criticism that the regulations would produce a big cost to business and to the economy; that they would cost jobs. That turned out to be scaremongering and untrue. There was in fact a benefit, not just to the workers who saw big increases in pay and protection of their terms and conditions, but to the wider economy. People were in a position to spend more money in the economy, which had benefits for business and the wider economy. There was also a benefit in the protections that were given to those businesses that had always been good employers and paid decent wages.

The same, of course, is true today when we debate the challenge of the exploitative use of zero-hours contracts. Sports Direct is an employer that is often cited. There is grave concern at the way zero-hours contracts are used in that business for people whose only or main employment is with that business. That does not just make life very difficult and precarious for the individual; the competitors of Sports Direct or similar businesses where the zero-hours culture is a concern face pressures that are unacceptable, unfair and damaging both to business and to the wider economy.

There are many examples of how regulation can be a force for good. It can be a way of improving the wider environment and economy. It can help business, even though at first glance it may appear not to do so. As we seek to create a fairer society and a fairer and more successful economy, these matters are very important and we rightly have the opportunity to debate them. My hon. Friend was right to table the amendments. They do the job of highlighting the concern and the challenge. She has highlighted the long-term environmental and economic benefits of ensuring that we measure and evaluate regulation—the immediate impact and apparent negative effects, but also the longer-term, beneficial effects. In many cases, what may appear to have a financial cost in the short term has a much greater financial and environmental benefit in the long term. I am therefore pleased that my hon. Friend has tabled the amendments and I am happy to support them.

We must remember that clause 15 is specifically for this purpose—to require regulators subject to the regulators’ code to report annually on the effect that the code has had and to obtain the views of business on that effect. That is what the clause is all about. Our approach does not preclude consideration of broader public interests when regulators report. As I have said, the key purpose is to address the impact on business, but that does not preclude all the other matters that the hon. Member for Wakefield has raised.

Regarding Ofgem, Ofcom, the rail regulator and Ofwat, clause 17 provides a way forward to include them in the regulators’ code. That clause will remove the exemption, but not of itself bring them into scope; that can be done only following consultation and through secondary legislation. Those are important points to make when looking at the aim of the clause.

In many ways, that is the whole thrust of the Bill and of the Government’s work—to turn everyone’s attention to business. When we regulate and when the regulators do their work, will they be looking at the interests of business? There is a strong argument, which I advance, that when business is able to do business, it is in everyone’s interest. When business does business it is growing, employing people and providing more taxation, so that we can have the right sort of economy and money available to provide the good and important services that national and local government deliver to people.

It is all about making sure that the regulators turn their attention—in a way that they have not done enough in the past—to considering the effect and burden often placed on business by the way in which they go about things. There is no conflict of interest, because the regulators’ obligations to regulate are not overridden. That is another important point. The regulator is required to have regard to the code, and of course to growth. Again, it is about changing the culture and moving the compass dial in the right direction. Expertise means that the regulator is best placed to weigh up all the interests. I am specifically talking to amendment 81 in making those points.

On amendment 83, reporting guidance can include guidance on whom regulators should approach for views when compiling their report, but that does not need to be specified in the Bill. On amendment 84, we will develop the guidance by working closely with the regulators and with business. Again, a statutory duty to consult is unnecessary and disproportionate. On amendments 88 and 93, we want to measure whether the code benefits business, which is why we are making it a requirement that the views of business are included in reports—I emphasise “requirement”. Regulators may include the views of others, if they wish, but that would not detract from the key policy objective of any of those regulators.

The purpose of amendment 89 is not clear. The new reporting obligation will require regulators to report on how the code is effective in the exercise of their regulatory functions, so the amendment is simply not necessary. If the implication of the amendment is that the code and principle somehow detract from the proper exercise of functions, that is not the case. The reality is that the code encourages the regulators to regulate effectively and proportionately, delivering greater protection at least cost. It does not undermine their capacity or capability to exercise their functions properly.

On amendment 90, reporting guidance may include guidance on the persons whom regulators should approach for views when compiling their report. Again, that does not need to be stated in the Bill. On amendment 91, we will develop the guidance by working closely with regulators and business. A statutory duty to consult is unnecessary and disproportionate. On amendment 92, we want to measure whether the growth duty benefits business. It is right, therefore, that Ministers may require regulators to provide them with the views of business, but the power does not need to be any wider. I strongly urge the Committee to come to the conclusion that the clause as drafted strikes the right balance between ensuring transparency and maintaining regulator independence.

As for amendments 78, 79, 82, 85 and 87, the regulators’ code is based on the five principles and its aim is to give effect to them. I respectfully suggest that the suggestion that the reporting duty should require them to be considered in addition to the code is confusing as well as unnecessary. On amendments 80 and 86, we want to measure whether the code benefits business—all the emphasis is on business. Therefore, it is right to include the views of business as a requirement. Regulators may include views of others if they wish, but to require it would detract from the key policy objective. I have already made my comments on amendment 81—sorry, I have not dealt with the points made by the hon. Member for Sefton Central, which I am more than happy to do.

I am so sorry. Then I will not address those, but I will thank the hon. Lady for her probing amendments. She makes some important points, but I just do not agree that we need to include the amendments. I thank her for the debate that we have had and I am delighted to note—Hansard needs to record this—that she has taken her ski jacket off, hopefully because she has warmed up.

The Minister said that there was nothing to prevent regulators from consulting with other bodies and people of interest, but that is to misunderstand the behavioural nature of large organisations that are set out in the statutory code, which tend to do what they are prescribed to do in statute. The clauses introduce a statutory requirement to consult with business and to report annually on the impact of businesses. By giving the regulator a duty to consult solely with the private interests of businesses while not consulting with the public interests that they are there to protect—of consumers, citizens, stakeholders and civil society organisations—she is putting the private interests above the public interests that the regulator exists to protect. I have made my point. She said that this would be done through secondary legislation. The House will have a chance to discuss the matter in the future and, no doubt, the debate will continue to rumble along. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

I beg to move amendment 65, in clause 15, page 13, line 16, at end insert—

“(iii) of the measures adopted by the relevant regulator to make regulations which have an impact on small businesses more comprehensible, and

(ii) of the measures taken to promote awareness of regulations which affect small businesses;”

This amendment would create a new obligation on Regulators to provide an assessment on how they are simplifying their regulations and ensuring that they report on their efforts to extend awareness of regulations.

With this it will be convenient to discuss the following:

Amendment 66, in clause 15, page 13, line 16, at end insert—

“(v) an assessment of how the relevant regulator’s regulatory provisions contribute to and improve productivity;”

This amendment would create a new obligation on Regulators to provide an assessment on how their provisions improve productivity.

Amendment 67, in clause 15, page 14, line 6, at end insert—

“(10A) A relevant regulator must give to the Small Business Commissioner any information that the Commissioner may from time to time request which relates to regulatory provisions and their impact on small businesses.”

This amendment would impose a regulatory duty on regulators to provide information on request to the Commissioner, to aid the communication of key issues around productivity to SMEs and regulators.

New clause 19—Report on money laundering regulations

(1) The Small Business Commissioner shall prepare and publish a report assessing a regulator’s performance and effectiveness at ensuring regulations relating to money laundering are proportionate, user friendly, widely promoted and easily adapted by small businesses.

(2) The report provided for by subsection (1) must include an assessment of the role of the Financial Conduct Authority and its activities to encourage awareness of the impact of money laundering regulations on small businesses.

(3) In this section a regulator is a person with regulatory functions to which section 108 of the Deregulation Act 2015 applies.

This new Clause would require the Small Business Commissioner to publish a report assessing a regulator’s performance and effectiveness at ensuring money laundering regulations are proportionate, user friendly, widely promoted and easily adapted by small businesses. This report must include assessment of the Financial Conduc