Monday, 10 February 2014.
My Lords, as is usual on these occasions, before we start proceedings, I must advise that if there is a Division in the House—I think it is unlikely—the Committee will adjourn for 10 minutes.
Town and Country Planning (Fees for Applications, Deemed Applications, Requests and Site Visits) (England) (Amendment) Regulations 2014
Motion to Consider
That the Grand Committee do consider the Town and Country Planning (Fees for Applications, Deemed Applications, Requests and Site Visits) (England) (Amendment) Regulations 2014.
Relevant documents: 17th Report from the Joint Committee on Statutory Instruments, 28th Report from the Secondary Legislation Scrutiny Committee.
My Lords, the regulations amend the Town and Country Planning (Fees for Applications, Deemed Applications, Requests and Site Visits) (England) Regulations 2012. The draft regulations have been approved in the other place and, if approved by this House after consideration by the Grand Committee, would come into effect at the end of February. The regulations clarify how local planning authorities should calculate the level of fees payable for proposals for oil and gas extraction.
The coalition Government believe that shale gas has the potential to provide the UK with greater energy security, growth and jobs. We are creating a framework that will accelerate shale gas in a responsible, safe and sustainable way. We have a robust regulatory regime in place, which is grounded in an effective, locally led planning system. That is why local authorities—county councils and unitary authorities in this case—have the responsibility for determining planning applications. They take decisions in accordance with local plans and the National Planning Policy Framework. I want to be clear that this amendment is intended to clarify only one particular point of law.
Departmental guidance going back to 1992 makes clear the Government’s long-standing intention that, for oil and gas applications, fees should be calculated on the basis of the area of the surface works. This is also a practice that has been employed by authorities for many years. Planning authorities have regarded the application boundary of a site by reference to the surface area and charged a fee accordingly. However, the fee regulations themselves refer to the,
“land to which the application relates”—
in other words, the extent of development, including underground works.
Until relatively recently, the tension between the regulations and the guidance has not been an issue in practice. Traditionally, onshore oil and gas development has involved vertical drilling. It is only with the advent of horizontal drilling, including the prospect of hydraulic fracturing of shale, that we have become aware of questions on this issue from the sector and local authorities in recent months. As paragraph 7.3 of the Explanatory Memorandum points out, there are instances in which this alternative interpretation has been adopted. The simple purpose of the regulations is to clarify the law beyond doubt. Therefore, Regulation 2 provides that a fee is not payable for any part of an oil and gas development that takes place underground if there is no oil and gas development on the surface directly above the operations.
We also recognise the confusion and uncertainty over how to interpret the term,
“land to which the application relates”,
when providing information on oil and gas applications, especially on how to show this on a map. Our national planning policy guidance, which will be published in due course, will address this. Applicants will be expected to indicate the horizontal extent of drilling, although this will not affect what they are charged. It is important to understand the likely extent of the proposed development. For example, planning authorities need to know to publicise the applications in relation to the larger area. It is also essential that the planning permission indicates where the underground development is allowed to take place. This is necessary to ensure effective monitoring and enforcement of planning conditions.
We are also taking this opportunity to increase the fees for applications for oil and gas development. As part of our consultation last year, the UK onshore oil and gas industry, which represents the majority of onshore operators, offered to increase the level of fees by 10%. It did so because it recognised that applications for oil and gas extraction, especially shale gas, may be subject to increased public scrutiny. Therefore Regulation 3 provides for application fees to rise by an above-average increase of 10% for all oil and gas applications. Let me be clear, however, that this is not a 10% increase across all categories of development. It affects only applications for oil and gas.
I should now like to address the concerns expressed by the Secondary Legislation Scrutiny Committee. It expressed concern at the lack of time for effective scrutiny of these regulations, as well as the others that were introduced last month. There has been an exchange of correspondence between my department and the committee, and that has been published by the committee. As noble Lords will see from that document, it relates to both today’s regulations and another set of regulations, which are not before us today.
We fully recognise the importance of providing Parliament with sufficient time to scrutinise statutory instruments. We were working to issue the supporting material—the impact assessment and the summary of consultation responses—alongside the statutory instrument before Christmas. However, there was a longer delay than we anticipated in doing so. I am sorry that the scrutiny committee was inconvenienced in this way. It was never our intention to impact on Parliament's consideration of these instruments. However, I am grateful that it was still able to consider the statutory instruments last month.
The scrutiny committee also expressed concern that the department had not systematically evaluated the financial impact on the public sector of the new arrangements. This is even though we acknowledge that applications might be subject to increased public scrutiny, and so the costs to planning authorities of handling them might increase.
The level of fees is not set by examining the cost of processing each type of development in isolation. The fee is based on the average cost of determination across all local authorities in England. These regulations will affect an average of 32 applications per year. That is 32 out of more than 450,000 received by planning authorities in England each year. It is wholly disproportionate to carry out a detailed financial analysis in such circumstances.
We set out our assessment of the changes to these regulations in the impact assessment for the other statutory instrument. Fees are outside the scope of the Government's “one in, two out” procedure for better regulation. However, that does not mean that we do not take seriously the impact on planning authorities that have to handle such applications. We have concluded that there will be a small positive impact. This is based on the Government's intention for how fees should be calculated, as well as the past practice employed by many planning authorities. We must also not forget that planning fees for oil and gas development are already higher than the average fee.
The scrutiny committee also asked why the Government are keen to progress with these changes when there is such a degree of opposition, and after what it perceived as a relatively short period of consultation. I can assure noble Lords that we carefully considered the nature and impact of these proposals when considering the length of time for consultation on the draft regulations. Our consultation period was in line with the revised Cabinet Office consultation principles, which we support and follow. We also carefully considered the responses before pressing ahead with our proposals. Of course, these proposals do not just cover shale, they also cover other oil and gas extraction.
While some local planning authorities might not welcome this proposal, since it could deprive them of an opportunity to raise more income through the planning system, the point is that the statutory planning functions are not just financed through the fees which are set; they are also subsidised by government grant and local raised revenue.
It is important for me to stress that these regulations simply clarify the Government’s long-standing intentions by seeking to clarify the level of fees for onshore oil and gas operators. They will provide clarity for investors, local authorities and local communities alike, and the modest fee increase we have set will help planning authorities to meet the costs of these applications. We have responded to the committee, and our response and the committee’s letter to my right honourable friend the Secretary of State have been published and are available. I commend these regulations to the Grand Committee. I beg to move.
My Lords, I welcome the opportunity to make a contribution to this debate as a member of the Secondary Legislation Scrutiny Committee. As noble Lords have already heard, the committee has had considerable reservations about the way in which these regulations have been processed. During my public service career I have generally taken the view that when things go wrong it is the result of incompetence rather than malign conspiracy, but I have to say that the way in which this has been handled may cause me to revisit my position.
Let us revisit the facts from a slightly different perspective from the one we have already heard. The original consultation took place in September and October and allowed just six weeks for responses. The Government’s own new consultation principles, which were published in July 2012 and have not been without controversy, provide:
“For a new and contentious policy”—
such as a new policy on nuclear energy—
“12 weeks or more may still be appropriate”.
As the chairman of the Secondary Legislation Scrutiny Committee pointed out, streamlining procedures in relation to fracking might very well be seen as a new and contentious policy. Given that the Government allowed only six weeks for this consultation, it is hard to imagine what policy considerations might lead them to allow 12 weeks or longer for other consultations.
Let us carry on with the story. The regulations were laid on 20 December last year; that is, during the parliamentary Recess and a day or two before most of us were involved in other festivities. They were brought into force on 13 January this year, just one week after the end of the Recess. As the chairman of the committee, the noble Lord, Lord Goodlad, pointed out in a letter to the Minister, Mr Nick Boles, clearly this gave,
“scant opportunity for Parliament to scrutinise the instrument before it took effect”,
which, given that this is a controversial issue, was especially “regrettable”. The fact that it applies to only a small number of planning applications each year does not change the fact that this is a controversial issue.
To make things worse, as the Minister herself has said, the department failed to publish a detailed analysis of the consultation responses or any impact assessment when the instruments were ultimately laid. Therefore, such scrutiny as Parliament was able to provide was not informed by this important material. The committee pressed for this but it was not provided until 24 January, a full month after the instruments were laid. It showed that only seven of the responses were in favour of the Government’s proposed changes and 155 were against. I am not making points about the content of the regulations—others may want to—but it is right that Parliament should know the outcome of the consultation when the instruments were laid.
When these concerns were put to the Minister, Mr Boles, by the chairman of the committee, the response was close to dismissive. The department does, it seems, support and adhere to the revised Cabinet Office guidelines but, on the advice of its own deregulation unit, felt that the six weeks allowed in this case was proportionate. As for laying the instruments just before Christmas and without the necessary supporting material, we were to be reassured that there was no intent to impact on Parliament’s consideration of them.
I think that the way in which this has been managed is regrettable. It has shown scant respect for Parliament and scant respect for effective consultation, which is an important cornerstone of our democratic system. I hope that the Minister, in addition to the assurances that she has already given us, will be able to offer some greater reassurance than did Mr Boles that this sort of thing will not be allowed to happen again. There may not be many people here to hear this debate today, but these issues go to the heart of our constitutional process.
As the noble Lord, Lord Bichard, said, there are not many people here, but this issue is incredibly topical, particularly given that Cuadrilla announced last week that it intends to apply for planning permission for two new sites in Lancashire for fracking. As the noble Lord mentioned, the Secondary Legislation Scrutiny Committee considered this statutory instrument alongside another one, which would amend the requirements for applicants to notify owners and tenants of land individually of applications for such development. I shall not repeat the apposite and pertinent comments that the noble Lord has made—I echo them entirely—but shall pick up on one of them and make one further, final remark.
As he said, the Government failed to publish a detailed analysis of the consultation when they laid these instruments before Parliament. That reluctance is probably understandable when we look in detail at that analysis. As the noble Lord said, only seven of those responses were in favour, with 155 against. That is really important, and not just in terms of how we take forward the issue of fracking; it is about how we have a process for planning that involves the local community. The broader principles of what planning is for were debated at length by many of us in this House in the context of the Localism Bill and the National Planning Policy Framework. It is to be deeply regretted that the views then expressed about what the purpose of the planning system should be—it is about balancing the competing demands to achieve truly sustainable development for our country—appear not to have been heeded.
I am particularly grateful to the Secondary Legislation Scrutiny Committee for highlighting the shortcomings in the Government’s procedure on this matter. It highlighted to those of us in this House who care deeply about ensuring that we have a fair planning process that we will have to watch developments even more closely in future. Again, this is particularly topical, given that it is likely that there will be announcements in Europe this month about the future of GM crops. It will be interesting to note what the department might be planning for in terms of applications in that new area of development.
My Lords, I thank the Minister for introducing these regulations. As we have heard, they are concerned with planning arrangements for onshore operations for the winning and working of oil or natural gas, including exploration drilling. Onshore oil and gas activities are of course not new to the UK, but the more recent development of hydraulic fracturing or fracking is contentious and, as the noble Baroness, Lady Parminter, said, certainly topical.
The Government sought to address the regulatory regime for onshore oil and gas in the publication of planning practice guidance in 2013. At that time, they indicated that proposals would be brought forward to address issues relating to the application process and the level of fees payable to local planning authorities.
The first of these was the subject of a negative instrument that was slipped through Parliament over the Christmas period, giving, as we have heard, scant opportunity for debate; the second is the one that is before us today. So far as process is concerned, the department has been justifiably criticised by the Secondary Legislation Scrutiny Committee for laying these instruments without proper impact assessments and a proper analysis of the related consultation exercise, which itself attracted criticism for being over just a six-week period. The noble Lord, Lord Bichard, thoroughly expressed the concerns of that committee. Indeed, we share those concerns. Why does the department continue to get these matters so horribly wrong, showing scant respect for Parliament, as the noble Lord said? This is probably not the occasion to enter into a full-scale debate about future energy policy and energy security, but we are clear that gas has a role to play in the future balanced energy mix, along with renewables, nuclear and carbon capture and storage. Within that, there is a prospect for shale gas, but with a precautionary approach that needs to address legitimate environmental concerns.
The instrument before us today, which came into effect in January, represents easements for the extraction industry, although perhaps modest ones. These appear to go against the grain of the September 2013 consultation exercise, although the Government’s response does not provide us with details, numbers or percentages of those supporting or opposing the three broad propositions that were canvassed, including the third one, which is the standard application form. Please can these be provided to us?
Specifically, this instrument addresses how planning fees are calculated when there are drilling activities both above and below ground. This is pertinent because activity below the surface will take place horizontally as well as vertically, thereby spreading out much wider than the surface area. It is asserted that the basis of fees for oil and gas applications has long been intended to be related to the area of the surface works only, and that what is before us is a clarification to achieve that objective. That clarification comes with a general 10% fee uplift for all oil and gas applications, which was apparently offered by the offshore industry. Perhaps the Minister could clarify the basis of that calculation and how it relates to the costs that local planning authorities are likely to incur in dealing with applications. Was 10% the industry’s first offer, and what was the range of the negotiations that might have ensued?
The Minister in another place suggested that statutory planning functions are financed from a combination of fees, government grant and locally raised revenue. Indeed, the Minister reiterated that this afternoon. Perhaps she can advise us as to what grants are involved and the future trajectory of grant levels. The Minister in the other place told the Seventh Delegated Legislation Committee:
“Statutory planning functions are not only financed through the fees set, but subsidised by Government grant and locally raised revenue. Our approach to setting fees in England is that they are set nationally and grouped into broad categories such as housing, business and commercial, and onshore oil and gas, approximating to the amount of work involved. The fee is based on the average cost of determination across all local authorities in England. The principle underlying the planning fee regime is that would-be applicants should meet the majority of the costs incurred by planning authorities in determining planning applications”.—[Official Report, Commons, Seventh Delegated Legislation Committee, 5/2/14; cols. 3-4.]
Given the relatively small number of mineral planning authorities it is estimated might be involved in fracking applications, what work has been done to evaluate whether the average for oil and gas applications is appropriate?
The Explanatory Note sets out the government view that planning authorities should concentrate mainly—not exclusively—on the surface impacts of onshore oil and gas development and rely more on the regulatory regimes to manage sub-surface issues. Can the Minister give us some information on the necessary involvement of planning authorities in the non-surface impacts and on how this differs between applications involving hydraulic fracturing and those involving other onshore oil and gas applications, whether concerning exploration, appraisal or production?
Thus far the Government have not been convincing on how they have brought forward these proposals or how they have arrived at the new fee levels. Of course, there are much bigger issues around energy policy, hydraulic fracturing and how communities should be involved and share in the benefits of other developments, but consideration of these matters is not helped when relatively small issues such as this are not dealt with effectively and openly.
My Lords, I am grateful to all noble Lords who have contributed to the debate. As the noble Lord, Lord McKenzie, acknowledged, these regulations are not about energy policy or the planning process more widely. However, important issues have been raised by noble Lords which I shall seek to clarify and respond to. The noble Lord, Lord Bichard, echoed some of the concerns expressed by the Secondary Legislation Scrutiny Committee. I very much regret—my colleagues in the department share my view—that that committee felt moved to comment on the process that we followed in bringing forward these regulations. As I said in my opening remarks, we recognise the importance of providing Parliament with sufficient time and evidence to scrutinise the documentation and the responses to the consultation. In laying the material before Christmas, we did not expect the significant delay that then transpired between that happening and the consultation responses being provided. I assure noble Lords that there is no conspiracy here but I very much take on board the criticism and will reflect on it for the future.
The noble Lord’s remarks on the length of the consultation exercise and the consideration of responses to it were echoed by my noble friend Lady Parminter and the noble Lord, Lord McKenzie of Luton. It is important for me to stress again that these regulations are very narrow in their purpose. They clarify the existing law and ensure that the Government’s long-standing intention is clear. The other regulations, which are not before us today but were referred to in the scrutiny committee’s report, are important as far as a change around notification is concerned. Those regulations focus very narrowly on notification prior to an application being made by a relevant organisation and certainly do not affect the ongoing process of consultation, which is very important to the process that will be followed if exploration is continued. Therefore, we thought it right to follow the principles set out in the Cabinet Office code, and we felt that six weeks was an appropriate and proportionate amount of time for the consultation period.
As regards analysing the responses, we considered them very carefully but, not surprisingly, because shale gas is a contentious matter, many of those who responded to the consultation, and certainly those who opposed these regulations, used it—this is perfectly understandable and I am certainly not criticising anyone for doing this—to express their opposition in principle to shale. Once the responses were carefully analysed, the number of those who opposed the regulations were opposed less to what was being proposed in the regulations than to the principle of shale itself. They were therefore addressing a different matter in their responses. We have published the consultation responses, albeit belatedly. The noble Lord, Lord McKenzie, asked for further detail on this, and our analysis of the consultation is already available in the public domain.
The noble Lord, Lord Bichard, asked about the impact of the regulations and questioned whether we have done enough to assess their impact. As I mentioned in opening the debate, we considered the impact of these regulations on both the public sector and the private sector, but we did not feel that the extent of that impact was so great as to justify the level of detailed assessment that might quite rightly be expected in different circumstances.
My noble friend Lady Parminter asked about the ongoing process of consultation as progress is made with shale exploration. I say to her and to the Committee that the changes we have made are very much around clarifying an existing point of law. As far as the process of consultation and notification is concerned in the future, there is absolutely no question whatever of removing the requirement to notify landowners and tenants. What is happening here is a change to how that is done. Furthermore, applicants must still negotiate with landowners and tenants to gain access to their land. I should say that these proposals are part of an ongoing process as far as consultation is concerned within the planning process. They mark a minimum and they certainly do not prevent any applicant from engaging with local communities beyond what is required as the legal minimum. We still expect and would strongly encourage early and proactive engagement with local communities prior to an application being submitted. If an application was then to progress, that would lead to full consultation with local communities.
The noble Lord, Lord McKenzie, asked some specific questions about the regulations before us. He asked what work has been done to assess the average costs of processing oil and gas exploration applications. As I think I have already explained, we have not made a separate analysis of the costs of handling oil and gas consultations in isolation. The fees are not calculated in that way. They are based on the average cost of determination across all local authorities in England.
My Lords, perhaps I may deal with this point before it slips my memory. As I understand it, the fees relate to the averages of different categories, of which oil and gas is one category. My question was whether the average in respect of oil and gas is fairly representative when you have an oil and gas operation that involves fracking; that is, whether the nature of that operation means that the average for that subset of what is happening across England is fair and reasonable.
I am sure that my colleagues will confirm if I am wrong, but I would say that it is. This is about being clear that the fee is for the planning application and that that application, even if it is for shale or other forms of oil and gas, should apply in the same way. The relevant area is the surface area, so the process of determining the fee is the same; the fee is for the planning process rather than for carrying out the work that will take place. However, I gather that it is difficult to assess the averages of such applications, given the small number of applications so far.
The noble Lord, Lord McKenzie, asked about the 10% offer from the oil industry in terms of an increase in fees. This proposal came from the industry in response to the consultation exercise. It was not something on which the Government entered into negotiation with the industry. The noble Lord also asked about the role of planning authorities in surface and non-surface input and applications. The planning practice guidance published in July provides clarity on the role of the planning system and other regulatory regimes. The planning role is largely focused on surface impact, while the sub-surface matters are largely assessed by the Environment Agency, the Health and Safety Executive and DECC.
I promise not to interrupt again. The Explanatory Note makes reference to surface impact being mainly involved, but opens up the possibility that it is not exclusively surface impact. I am trying to understand, having looked at the guidance, what specifically might be involved in other aspects of the process.
Does the noble Lord mean in terms of the planning application fee?
In terms of what is involved in dealing with a planning application.
I will see if something further comes for me on that while I am on my feet, but I may have to follow it up in writing to the noble Lord.
The noble Lord also asked—this may also answer the point he has just raised—whether the planning fees should cover wider issues than processing an application. The planning legislation is clear that fees may be payable to the planning authority for considering an application; their use for any other purpose would not be possible. Other regulations already exist to ensure that the operator is liable for any damage or pollution that operations may cause. The operator is also responsible for safe abandonment of the wells and for restoring the well site to its previous state, or a suitable condition for reuse. If that is where the noble Lord was coming from, my point is that if there were other costs involved, they are already covered by other regulations. As I do not seem to be receiving any signal that I will be able to answer the noble Lord’s question while I am on my feet, I hope that he will accept my offer of following that up in writing.
In conclusion, I stress again that I hear loudly and clearly the concerns that have been expressed by the scrutiny committee, which have been echoed by the noble Lord, Lord Bichard, and others today. However, I emphasise again that these regulations clarify a point of law so that the Government’s long-standing policy intention is clear. They are nothing more substantial than that in terms of the contentious but important issue of shale exploration. On that basis, I hope that noble Lords will feel that I have answered all their points.
Financial Services and Markets Act 2000 (Consumer Credit) (Designated Activities) Order 2014
Motion to Consider
That the Grand Committee do consider the Financial Services and Markets Act 2000 (Consumer Credit) (Designated Activities) Order 2014.
Relevant document: 18th Report from the Joint Committee on Statutory Instruments.
My Lords, I am pleased to introduce the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2014 and the Financial Services and Markets Act 2000 (Consumer Credit) (Designated Activities) Order 2014. With the Committee’s permission, I will refer to them as the regulated activities amendment order and the designated activities order.
A well functioning consumer credit market is vital to the economy and to society. However, the market is not functioning as it should and consumers are not being properly protected. The current licensing regime run by the Office of Fair Trading and established under the Consumer Credit Act 1974 lacks the capacity and powers comprehensively to tackle consumer detriment. It cannot keep pace with this fast-innovating market. That is why we are moving the regulation of consumer credit to the Financial Conduct Authority from this April. We will make sure that the regime is proportionate and supports a sustainable and competitive credit market. The Government laid statutory instruments last summer to provide the framework for this regulatory transfer. However, there remain a small number of largely technical issues to address to ensure that the transfer runs smoothly and is proportionate for business. I shall set out how the statutory instruments we are considering today will address these outstanding issues.
The regulated activities amendment order addresses the following principal points. As regards local authorities’ credit activities, they are not required to hold a consumer credit licence under the current regime. The Government set out in their March 2013 consultation their intention to preserve this status quo. Local authorities will need to be FCA-authorised only where this is necessary for compliance with the consumer credit directive. This will minimise burdens on local authorities and avoid gold-plating. To further minimise burdens on local authorities, the instrument provides that those which require authorisation should be eligible for the FCA’s limited permission regime, where costs and regulatory burdens will be lower.
As regards the provision relating to the retained Consumer Credit Act provisions, the Financial Services and Markets Act, on which the new consumer credit regime is based, provides for a rule-based approach to allow more flexible and responsive regulation of this market. The Government have already repealed many provisions in the Consumer Credit Act and associated secondary legislation so that they can be replicated in FCA rules. However, the Government decided to carry forward a number of important consumer rights and protections from the CCA where they cannot be replicated easily under the Financial Services and Markets Act.
In the longer term, however, the Government are confident that many of these provisions can be replaced by rules-based consumer protections. This instrument therefore places a requirement on the FCA to review retained CCA provisions by 2019. It will recommend to government which remaining such provisions can be repealed and replaced with FCA rules, taking into account the implications for consumer protection and burdens for firms. The FCA will report to the Treasury, but the order requires the Treasury to lay a copy of the report before Parliament. This review was proposed in the Government’s March 2013 consultation and was well received by respondents from both industry and consumer groups. Ultimately it will help to ensure that the consumer credit regime is based on the powers and requirements set out in FiSMA, unifying the basis for conduct regulation of financial services in the UK.
The order also makes provisions relating to peer-to-peer lending. The Government are keen for regulation of this sector to balance the protection of consumer borrowing and lending through the platforms with a proportionate regime that can support the growth of the sector.
This instrument makes sure that there is a clear distinction between the activity of credit broking and the activity of operating an electronic system in relation to lending. Credit brokers were concerned that they might be treated under the new regime as electronic systems, for which they would need additional regulatory permission. We have listened to these concerns. The instrument also extends the definition of a credit agreement to include loans from an individual to a business, via a platform. This ensures that individuals lending to businesses through a platform are afforded the same protection as individuals lending to individuals via such a platform.
With regard to insolvency practitioners, the Government are committed to avoiding double regulation by excluding such practitioners from consumer credit regulation where professional insolvency rules apply, or where the insolvency practitioner provides debt advice in genuine and reasonable contemplation of formal appointment as an insolvency practitioner. However, where an insolvency practitioner is carrying out other regulated consumer credit business, such as debt management, it is important that he is FCA-authorised and regulated in order to protect consumers. This instrument, therefore, includes provisions to provide greater flexibility and a more proportionate solution for insolvency practitioners, by replacing the current statutory exemptions for certain debt-related activities with exclusions.
In response to concerns raised by industry, the instrument also allows firms to refer to both the OFT and the FCA as the supervisory authority during a five-month period following this order coming into force. This will help to smooth the transition for firms and avoid their having to change all their systems and documentation on the stroke of midnight on 31 March, while still ensuring that consumers are clear on the regulatory status of the firms that they are dealing with. The instrument also makes a number of other consequential amendments.
I turn now to the designated activities order, which addresses illegal trading. The Government tabled an amendment to the Financial Services Act 2012 to make it a criminal offence for an authorised person to carry out particular FiSMA-regulated activities outside their permission. This instrument specifies that debt collecting and lending will be the activities in question. This is where there is the clearest evidence of exploitation of consumers. A number of loan sharks and unscrupulous debt collectors have been prosecuted for lending and debt collecting under the cover of an OFT licence for a lower-risk credit activity. This instrument will make sure that such practices remain criminal offences under the new regime.
I hope I have reassured the Committee that these SIs will help to ensure that the Government’s plans for fundamental reform of consumer credit regulation run smoothly, and strike the right balance between improving consumer protection and ensuring that regulation is proportionate.
My Lords, I shall speak to both orders. The first takes up little more than a page, while the Explanatory Memorandum attached to it takes up 49 pages. The second order takes up 30 pages and the Explanatory Memorandum for that also takes up 49 pages, but is essentially the same text as the first one. That is not a complaint: the Explanatory Memorandum is a model of its kind—it is clear, thorough and indicates clearly areas of doubt or uncertainty.
There is one area of doubt or uncertainty arising: the effect on SMEs—not as providers of credit but as customers of credit providers. The impact assessment estimates the cost of the measures over 10 years at £336 billion and the benefit at £689 million—an estimated net benefit of £353 billion. However, the impact assessment does not say how this net benefit is distributed. That is my first question: are SMEs net beneficiaries or is all the benefit delivered elsewhere?
The impact assessment also makes it clear that it expects a shrinking of the credit market. It estimates that 9,000, or 20%, of credit organisations will exit the market. It is true that these organisations represent only a small percentage by volume of total credit, but is this lost lending concentrated in the SME sector? That is my second question to the Minister. We know that net lending to SMEs continues to decline. Can the Minister provide some general reassurance that the measures before us will not make the position worse?
The note in paragraph 53 on page 13 of the impact assessment makes the point that the FCA’s most effective regulatory tools and framework to be brought about by these orders will be,
“effective in tackling known consumer detriment occurring in the non-mainstream lending market such as: payday loans, credit brokerage, debt management and home collected credit”.
That is an important improvement and I welcome it, especially as it will apply to payday loans. However, at first reading there seem to be some areas missing from the list. The impact assessment notes in paragraph 25 on page 8, as a rationale for intervention,
“that the market is not functioning as well as it should and the regulatory regime cannot keep pace with the market”.
However, as far as I can detect, no explicit mention is made anywhere in the orders or the Explanatory Memorandums of crowdfunding or peer-to-peer lending. As the Minister knows, these are rapidly growing credit areas, and ones that offer additional opportunities for SME funding. Can the Minister confirm for the Committee that crowdfunding and peer-to-peer lending will fall within the ambit of these orders? I think I heard the Minister say that that is the case for peer-to-peer lending, but I should like to know whether it is also the case for crowdfunding.
Before I conclude, I should like to ask the Minister a little more about the effects of these orders on payday lenders. The Minister has previously confirmed elsewhere that under the terms of the EU e-commerce directive, the UK has no power to cap the cost of payday loans extended by companies based in the EEA and trading only electronically in the UK. However, I notice in paragraph (5)(e) on page 16 of the second order that the authority has the power to prohibit the entry into credit agreements by an EEA authorised payment institution if that institution,
“engages in business practices appearing to the Authority to be deceitful or oppressive or otherwise unfair or improper (including practices that appear to the Authority to involve irresponsible lending)”.
Does this provision apply to payday lenders based in the EEA and operating only electronically here in the UK?
My Lords, I welcome these two orders. It is the duty of Her Majesty’s Opposition to study secondary legislation and then to oppose it where we find errors and faults, but I have to say that I have not been as successful as the noble Lord, Lord Sharkey, in finding questions to pose to the Minister, so at least my words will give him a little time to collect together his notes on those technical areas. While we welcome the orders, my honourable friend in another place did ask one or two questions which seemed to be answered satisfactorily. As far as I can tell, the orders do their job. With the permission of the Committee, I should like in a sense to celebrate these orders because they represent the last hurdles of effecting the transfer of responsibilities for consumer credit from the OFT to the FCA. Over the past many months, we have all been concerned about the consumer credit market, in particular its grey areas and payday lending.
I, too, have studied all 49 pages of the impact assessment, although I did not find the same inconsistencies as the noble Lord. I did pick up an implication that the resources to be devoted to the area seem to be tripling from around £10 million per annum to £30 million, and I would be grateful if the Minister could confirm the extent to which new resources are being made available for this new activity. What does this represent in terms of resources and people at the FCA devoted to the consumer credit market? Will it involve the transfer of people from the OFT? Will it involve new and perhaps more capable people working in this market? Will there be a change in attitude and culture on the part of those working in this area?
As has been pointed out, there are some detailed areas, but the really serious evil here is the loan sharks, the rogue lenders and the payday loans market. That market is pretty worrying at every level, from the one-person operator through to major organisations. It involves probably some of the most vulnerable consumers in the land, who are people making decisions in very difficult and stressful circumstances. If ever a market needed intelligent, proactive government regulation, it is this one, and I hope that what the Government have designed will do it.
I would be grateful if the Minister could say a few words about how the regulators will be more proactive. The documentation makes the point that the FCA can be forward-looking and create regulations quickly. I would be grateful if the Minister could expand on that and give me some reassurance—in response to a point made by a colleague—that the new unit will be able to strangle products at birth; in other words, will be sufficiently proactive to sweep the market for the emergence of new products and move quickly to kill them before they do the social harm that we know they can do.
One of the aspirations of these changes is to bring rogue firms under control, which I think we all welcome. The problem is that it might increase opportunities for illegal operations. I feel as though I am in a pantomime now and saying, “Look behind you”, because notes are at the Minister’s right hand. To what extent will the unit work with the police where it sees the early emergence of illegal operations and stamp them out before they can create the evil which we know happens in communities under stress?
I am grateful to both noble Lords who have spoken. Even by the standards of statutory instruments, these are extremely opaque, but the powers they contain are important and, as the noble Lord, Lord Tunnicliffe, said, tidy up and, one hopes, finalise the secondary legislation that is needed to effect their transfer.
The noble Lord, Lord Sharkey, asked a number of questions about the extent to which SMEs could be adversely affected by the regulations. While there may be some impact on lending to SMEs by some non-bank lenders, we would expect it to be extremely small. The stock of lending to business that is consumer credit is estimated to be, at most, 5% of total lending to SMEs. If we are talking about a small proportion of that 5% disappearing, it is a very small impact. We believe that the Government’s wider initiatives, such as the Funding for Lending scheme, will over time far outweigh the negative impact of the transfer. It is worth bearing in mind that SMEs, like any other consumers, can enter into credit agreements that may drive them into unsustainable levels of debt. The enhanced consumer protection that we hope and expect will flow from this transfer will benefit SME debtors.
The noble Lord, Lord Sharkey, asked me a specific question about whether the orders apply to crowdfunding as they do to peer-to-peer lending. I confirm that that is the case. Does this make it better or worse—or easier or more difficult—for the P2P and crowdfunding sectors to grow? Enhancing the protection—the order extends protection to individuals lending to businesses as well as individuals lending to individuals—will, we hope, reassure potential investors that they are covered by the legislation and, therefore, will result in an enhanced level of interest in the sector.
On the broader issue of how we increase lending to small businesses, which we have debated many times in your Lordships’ House, it is extremely interesting to note that the number of lenders to SMEs reached 91 last year, having reached a record low when the crisis bottomed out in 2009. There are a lot of new players in the market and the Government encourage that. An initiative that we are trying to promote is to encourage the high-street banks, which very often cannot make loans to SMEs, to refer the latter on to P2P and crowdfunding sources. It is fair to say that this is still at an embryonic stage but that is a way in which we hope, and expect, the sector will grow. However, the key thing about P2P lending is that as people see that it works—this will be its biggest impetus to further growth—and as those running small businesses see their colleagues running businesses successfully, having raised funds in that manner, word will get around even more quickly than it is already doing. We expect the sector to continue to grow.
The noble Lord, Lord Sharkey, also asked a question about the EU and how the provisions allow the FCA to stop payday lenders passporting into the UK from abroad. This is a big issue, as we know, but it is separate from the application of this SI. As the noble Lord knows, the FCA is looking at the whole complex issue of how to ensure that we can effectively cap payday lending costs.
The noble Lord, Lord Tunnicliffe, asked a number of questions about the resources and attitude that will now be brought to bear on this sector. He asked about the level of overall resource devoted to consumer credit regulation. I can confirm the figures in the impact assessment. The relevant figure will roughly triple as a result of the transfer. There will be a transfer of personnel from the OFT to the FCA, but, obviously, the FCA has fundamentally different powers and objectives from the OFT, particularly as regards consumer protection objectives. Therefore, while we hope that we can get the best of the experience coming across, we feel that needs to be augmented.
This bears on the second point made by the noble Lord, Lord Tunnicliffe, about the extent to which there will be a change of attitude and culture in regulating consumer credit. We certainly think that there will as, compared with the outgoing OFT regime, the FCA has a far more rigorous and proactive attitude towards consumer detriment generally, and this will impact on how it approaches the consumer credit market. It will, we think, be able to keep pace with developments in the market to a greater extent than the OFT was able to. It is more flexible and contains stronger powers for the regulator to tackle detrimental practices and root out rogue firms. As to whether it will be able to do it at an early enough stage—the “strangling at birth”—the key power that the FCA has that the OFT did not have in the same form is the product intervention power, which allows the FCA to mandate, restrict or ban certain features of a financial product, to restrict its sale to certain groups of consumers, or to ban it outright. It can use these powers at any stage, including at an early stage. We are confident that it will want to do so.
The noble Lord’s final point was on whether the FCA would be working closely with the police in cases where rogue firms are established and seen to be operating. Yes, I am confident that it will. The FCA is very clear that that forms part of its overall mandate in dealing with consumer credit. On that basis, I commend the SIs to the Grand Committee.
Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2014
Motion to Consider
That the Grand Committee do consider the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2014.
Relevant document: 18th Report from the Joint Committee on Statutory Instruments.
Civil Legal Aid (Merits Criteria) (Amendment) (No. 3) Regulations 2013
Motion to Consider
That the Grand Committee do consider the Civil Legal Aid (Merits Criteria) (Amendment) (No. 3) Regulations 2014.
Relevant document: 19th Report from the Joint Committee on Statutory Instruments.
Regulation (EU) No. 604/2013 of the European Parliament and of the Council of 26 June 2013 establishes the criteria and mechanisms for determining the member state responsible for examining an application for international protection lodged in one of the member states by a third-country national or a stateless person, known as the Dublin III arrangements. Under these arrangements, the United Kingdom can apply for another member state to consider an asylum application, and provide appropriate protection if that application is successful, where an individual’s first point of entry to the European Union is that other member state but an application for asylum is made in the United Kingdom.
Under these arrangements, a member state is required, if the financial means of the individual and merits of the case justify it, to provide free legal assistance and representation in relation to an appeal or review of certain decisions made under Dublin III. The Dublin III arrangements replace those set out in Council Regulations (EC) No 343/2003 of 18 February 2003, known as Dublin II. We have in this country routinely provided legal aid in relation to Dublin II matters.
The key difference between the old and the new arrangements, from the Ministry of Justice’s perspective, is that the requirement to provide free legal assistance for certain appeals, which in the UK is met through judicial review, is made explicit. The explicit provision in Dublin III for legal aid also prescribes a merits test, particular to it, that is to be applied. These regulations amend the Civil Legal Aid (Merits Criteria) Regulations 2013 to give effect to the particular merits test. The merits criteria are tests which the Director of Legal Aid Casework must apply in deciding whether an individual qualifies for civil legal services.
The amendment before us today allows for the merits test set out in Dublin III to apply—namely that the prospects of success of an individual case must be judged to be greater than,
“no tangible prospect of success”.
The instrument therefore makes provision to ensure that we meet our international obligations but changes nothing else. Noble Lords will be aware that the Ministry of Justice laid an urgency statement alongside this instrument, in order that it could come into force without delay, as per the procedures set out in Section 41(9) of the Legal Aid, Sentencing and Punishment of Offenders Act 2012.
Due to an administrative oversight, my officials at the Ministry of Justice failed to recognise that there was a subtle difference between the merits test prescribed in Dublin III and the existing tests more generally applied to applications for judicial review. In the case of judicial review, the prospects of success must be at least moderate. By the time this oversight was recognised, insufficient time remained to make the necessary changes via the standard draft affirmative procedure. The urgency procedure was used to ensure that the appropriate test applied from the point when the Dublin III arrangements came into effect, on 1 January this year. This means that there was no risk of an individual being unfairly disadvantaged by having the incorrect test applied to their application for legal aid, hence the urgency. I hope that my explanation has been of assistance to noble Lords. I commend this instrument to the Committee and beg to move.
My Lords, this is a rare opportunity for me to congratulate the Government on breaking the habits of this Parliament’s lifetime on access to legal aid. It is only 12 days since we had a debate about prison law and entered into a discussion about borderline cases for legal aid, when the noble Lord was vigorously supported by precisely no members of the Government—nor, indeed, anybody else—in a debate in which 15 Members were exercised about the restrictions on legal aid and the merits criteria under which these decisions will be taken.
However, on this occasion, the Government have not only done better than that, they have also refrained from stigmatising European legislation as an outrage to our constitution which should not be implemented if at all possible. For that small mercy, I am sure that we are grateful. Perhaps the noble Lord would like to convey to his Secretary of State the fact that a move towards something less stringent than the previous formulation about “no tangible prospect of success”, which is effectively what we are ending up with in other areas, would also be better applied to the remaining legal aid jurisdiction and not just that which is invoked by the European treaty and Dublin III. Having said that, we very much welcome the regulations.
My Lords, congratulations being in short supply in the context of legal aid, I gratefully accept them from the noble Lord, Lord Beecham. I will pass on his comments on the lack of stigmatisation of European legislation and his suggestion to amend the merits test. I am sure that the Secretary of State will read carefully his comments in Hansard.
There is little more for me to add, except that this should enable no injustice to be done. Legal aid should be available. The urgency, while regrettable, has been explained to the Committee. In those circumstances, I commend this instrument.
Tribunal Security Order 2014
Motion to Consider
Moved by Lord Faulks
That the Grand Committee do consider the Tribunal Security Order 2014.
Relevant document: 19th Report from the Joint Committee on Statutory Instruments.
The Minister of State, Ministry of Justice (Lord Faulks) (Con): My Lords, the purpose of this order is to provide that tribunal security officers at tribunal venues have powers consistent with those already available to court security officers throughout England and Wales. By way of background, the Coroners and Justice Act 2009 (Commencement No. 16) Order 2013 brought into force Section 148 of the Coroners and Justice Act 2009, which contains a power for the Lord Chancellor to make an order allowing for the designation of tribunal security officers and to apply to tribunals the provisions in Part 4 of the Courts Act 2003 relating to court security.
The current security presence at Crown Courts, county courts and magistrates’ courts enables court business to be carried on without interference or delay, maintains order and secures the safety of any person in the court building, including members of the judiciary, staff, professionals and other court users. Court security officers have specific powers, provided by the Courts Act 2003, to enable them to discharge their duties. These include: the power to search any individual attempting to enter, or already on, the premises, including any baggage et cetera in their possession; the powers to request the surrender of any article or, where the request is refused, to seize it, with specific regulations in relation to knives; and the power to remove, exclude or restrain a person who is in a court building. In addition, the Courts Act 2003 provides that it is a criminal offence to assault or obstruct a court security officer in the execution of their duties.
The current security guarding provision differs greatly across tribunal venues, and has no statutory backing. The provision ranges from general administrative roles to patrolling the premises. The order before us will enable the consistent management of all risks, recognition of the exposure some tribunals face due to a lack of security, and direct action to ensure that incidents are kept to a minimum and, when they do arise, are dealt with effectively.
Ensuring the smooth running of the administration of justice in tribunal venues is important. The Government, therefore, seek to expand the powers of the present court security contingent to cover tribunal venues and hearing centres throughout England and Wales. I commend the draft order to the Committee and I beg to move.
My Lords, this is a perfectly sensible change to the rules to provide for security on tribunal premises. I do not expect the Minister to be able to answer the one or two questions I have immediately, but it would be interesting to know whether there is a record of any significant incidents in which the presence of a security officer with these powers would have made a difference. It would be interesting to know how many problems have arisen or are arising, and how that compares with the other courts. That said, it is clearly sensible to have these provisions. However, can the Minister say how the Government intend to proceed in terms of the employment of such staff? Will they be seeking to contract this operation out, like so much else of the administration of justice, to contractors such as G4S and Serco? Or will it be done, as it were, in-house?
Secondly, will they, in any event, ensure that staff employed on this important task are paid at least a living wage? I fear that people may be employed on part-time, minimum-wage conditions. Given the nature of the job, that would be entirely unjustified. It would be helpful to know, if not now then subsequently, what the Government’s attitude would be, whether it is providing the services directly or contracting them out. Subject to these observations, I very much endorse the regulations.
Contrary to his expectation, I think I can answer some of the questions posed by the noble Lord, Lord Beecham.
In the reporting period from April 2013 to 31 December 2013, a total of 75 security incidents were reported from tribunal venues and hearing centres. Those incidents are classified in a number of ways. Examples include verbal abuse, verbal threats and unauthorised access through to security systems or loss of ID. I do not have any further breakdown, but I hope that gives the noble Lord at least some idea of the scale. I also do not have information comparing that with security incidents at courts, but it can be seen that it is a substantial potential threat, and the noble Lord has been good enough to acknowledge that it is appropriate to make this change. Of course, it was not possible under the 2003 Act until the Tribunals Service was brought within the overall control of the Courts Service.
I turn to the questions around employment. Important pre-employment checks will be made on contractors—and there will be independent contractors—to assess their suitability to work within the organisation. I am instructed that the guards will be provided by G4S and Mitie. Some tribunal venues and hearing centres are covered by the PRIME contract. The contract has input from the Department for Work and Pensions and is managed by a private organisation, Telereal Trillium. The guards will be supplied to these sites by G4S or Mitie depending on their geographical location, and the template seen across the court sites will be used to manage security within tribunal venues and hearing centres.
As part of the employment process, the relevant contractor will undertake pre-employment checks to assess applicants’ suitability to work within their organisation, including obtaining references, interviews and so on. Before designation—the word apparently used in this context—HMCTS undertakes further suitability checks to confirm the identity of the individual. Checks are made of disclosure and barring service certificates, and an assessment is made of the appropriate level of training required. The assessment of this suitability is part of the designation process, with assurances going to the Lord Chancellor. As part of the application process, all potential designates must hold a current Security Industry Authority licence and have completed training on conflict management and physical intervention. There is also continuing monitoring of employees’ ability, but I will not provide all the details now.
I noticed that the noble Lord’s eyebrows were raised slightly by the reference to G4S. He may be thinking back to the question of electronic monitoring and tagging. The tagging contract is not linked to the provision of security on court sites; rather, it is managed by a separate department within G4S. I hope that that provides some assurance for the noble Lord.
Will the noble Lord respond to the questions about the conditions of the staff in terms of earnings, zero hour contracts and so on?
I am grateful to the noble Lord for reminding me about the question of the living wage. I do not have any details on the precise wages, but I will write to him.
My Lords, the Grand Committee is not quorate at the moment so I suggest that it adjourns for a few minutes.
My Lords, the Grand Committee is now quorate.
Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2014
Motion to Consider
That the Grand Committee do consider the Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2014.
Relevant document: 19th Report from the Joint Committee on Statutory Instruments.
My Lords, I am pleased to introduce this instrument, which was laid before the House on 15 January. I am satisfied that it is compatible with the European Convention on Human Rights.
Our task today is to consider the automatic enrolment figures that will set minimum savings levels from this April. The automatic enrolment earnings trigger sets the automatic entry point to determine who saves in a workplace pension. The qualifying earnings band then determines how much people save and sets employer minimum contribution levels.
This debate is now an annual fixture on our calendar—automatic enrolment is business as usual in so many respects. There is much on which we agree and we share common ground on the principles of automatic enrolment. The aim of automatic enrolment is to broaden access to workplace pensions and increase savings levels. In the end everybody should be able to say, “I’m in”, because saving is the norm. We can see from early opt-out figures that the trend is to stay in. That is enormously encouraging.
First and foremost, automatic enrolment needs to target those workers who are not saving but should be. To do this, it needs to exclude those very low earners for whom saving on top of the pension that they will get from the state may not make economic sense, especially while they have other priorities. It also needs to provide low earners with access to pension saving—with an employer contribution—if saving is the right decision for them.
This year there is a new element in the mix. This will be the significant year when automatic enrolment moves to the SME—small and medium-sized enterprise—sector. We will bring companies employing between 250 and 50 people on board. Some of these employers will be putting a pension scheme in place for the first time. Many of their workers will be new to pension saving. We need to be realistic about automatic enrolment costs. Although some workers will have personal pensions, many will not have had access to an employer’s scheme and will see a new deduction from their pay for the first time. Affordability is very important.
Parliament has already made some arrangements to address this issue. Minimum contribution levels are being phased in to get non-savers and employers who are new to pension schemes starting slowly. The absolute minimum is 1% from both workers and employers for the first five years. Some schemes will require more, but the 1% matched is the absolute minimum. This soft landing will help to mainstream automatic enrolment.
However, we still have a balancing act when it comes to the annual thresholds. Automatic enrolment is a tailored policy. It does not force pension saving on to everyone regardless of earnings. Our overall aim in setting the figures in this instrument is to maximise the number of people saving who can afford it, while excluding those who cannot. It also needs to cap minimum employer contributions for higher-paid staff and let existing arrangements cater for this market.
The Government still believe that the automatic enrolment trigger should exclude workers who do not earn enough to pay tax and it makes sense to align the existing payroll thresholds. If you pay tax, you pay into a pension. This is a simple principle that employers can use to explain automatic enrolment.
This brings me to safeguards, opt-in and the impact on women in particular. Saving should be an individual decision for people whose earnings hover around the tax threshold. That decision is likely to be influenced by other domestic and financial circumstances and the make-up of the household. That is why the right to opt in, with an employer contribution, is such an important feature of automatic enrolment.
Schemes designed to cater for the under-pensioned market and those targeting low-to-moderate earners use the relief-at-source tax relief mechanism precisely because it gives access to tax relief to help low earners. This, too, is an important feature of how pension saving works.
We fully recognise that any rise in the trigger will disproportionately affect women. This is not a gender issue; we think that the outcome of this review is right for people on very low incomes, regardless of gender.
The other danger that we have to avoid is pitching the trigger too low. We know that people say that they do not save in a pension because they cannot afford it—that is the principal reason given. If we set the trigger too low, people will simply opt out, which serves no one in terms of increasing the amount of pension saving that takes place.
The automatic enrolment trigger does not exist in isolation. It is an entry point to saving that works hand in hand with the qualifying earnings band. The band sets a minimum definition of pensionable pay. In simple terms, if you earn £10,000 a year, you will pay pension contributions on anything over £5,772.
We have linked this lower figure of the qualifying earnings band to the national insurance lower limit. Our aim is to have a system that facilitates private pension income to sit on the foundation of the state single-tier pension. State pension starts to accrue on earnings equal to the national insurance lower earnings limit. This gives us synergy, to build private pension saving alongside state pension accruals.
I said earlier that setting these thresholds is a balancing act. In that respect, we acknowledge that there is no right or wrong answer. We believe that these proposals continue to provide broad access to pension saving and maintain contribution levels for the target group. We aimed to set the trigger and the qualifying earnings band so that they work in harmony to deliver three objectives: to bring the right people into pension saving; for them to save at least a reasonable but affordable minimum starting amount; and to balance the costs and benefits to individuals and employers. With that assurance, I commend this instrument to the Committee.
My Lords, I wish to speak on the earnings trigger in particular. I offer my apologies to the Committee: this item of business was not published and I have been sitting in a finance sub-committee taking evidence from Her Majesty’s Treasury and Her Majesty’s Revenue and Customs, which was quite compelling. I therefore ask your Lordships to accept my apologies for being a few minutes late.
I rise to speak on this statutory instrument because we see another year and another increase in the earnings trigger for automatic enrolment and another several thousand more women being disadvantaged and excluded from the UK pension system. I shall persist with this issue year after year because I fear that we are taking what started as a well designed private pension system, certainly in intent, and trying to make it an increasingly part-time-women-free area.
In 2011-12, 600,000 individuals, 78% of them women, were excluded from automatic enrolment. In 2012-13, the Government excluded another 100,000 people, 82% of them of women, by virtue of raising the earnings trigger. In 2013-14, another 420,000 people were excluded, 72% of them women, and now, for 2014-15, by increasing the trigger to £10,000, another 170,000 people will be excluded, 69% of them women. It reads as a rather depressing roll-call. The culling of women from the UK private pension system has almost become the Government’s annual sport.
I find it quite extraordinary that the coalition Government are so determined to carve out so many women from the UK private pension system. If women and men who earn below £10,000 are not automatically enrolled and do not, because of inertia, voluntarily opt in to their employer’s workplace scheme, many of them will experience several disadvantages. When automatic enrolment is phased in to their employer, they will not be in the pension scheme. Those excluded—mostly women—will suffer a loss in lifetime pay, albeit deferred pay, because they do not have access to the employer’s 3%—for some, where the employer contribution is above 3%, the loss is even greater. However, they will still lose out from any reduction in wage levels that flows from the cost to the employer of automatic enrolment.
When they move from a full-time job with one employer to a part-time job with another, they may not join the new employer’s scheme and are therefore at risk, first, of becoming an inactive member and subject to inactive member charge premiums on their existing pension pot unless the Government ban active member discounts—whether they will do that is a big question. Secondly, they are at risk of being defaulted into a personal pension by their previous employer, who does not allow ex-employees to stay in their workplace scheme. Therefore they leave an employer and are full-time, and then as a part-time employee they are not covered by auto-enrolment. Their accrued pot is vulnerable to higher charges and would not be protected by a pot-follows-member or any other aggregation mechanism.
As I said, they would not benefit from any aggregation mechanism, so they are not in their new employer’s scheme. They are not an active member, so their previous pension pot will flounder. When I raised this point in Committee the last time we discussed the increase in the earnings trigger for auto-enrolment, it was before we had the detail of pot follows member. The Minister, Lord Freud, commented:
“I will stand my ground a little bit on this, because these are some of the issues that really come into consideration when we look at the broader issue of pension pots”.—[Official Report, 22/5/12; col. GC 20.]
However, we now know that pot follows member will apply only where an individual is an active member of their employer’s scheme. Therefore, if these women are not automatically enrolled and inertia keeps them out of their scheme, they are unprotected; they are not protected by pot follows member. The noble Lord, Lord Freud, may have stood his ground then, but I am afraid that, now that we know the details of pot follows member, that ground has now moved from beneath him. Those women’s pots will just flounder without protection.
If part-time workers earning below £10,000 are not persistent low earners over their lifetime, which many will not be—a point confirmed in the Johnson review commissioned by the Government—and are not automatically enrolled into their employer’s pension scheme when they are on the lower earnings, the persistency of the savings habit that they built up will be broken and the accumulated value of their pension pot over their lifetime of pension saving will be reduced. Given the advent of the single-tier pension, which will be set at a level only slightly above pension credit but which will be based on national insurance record and crediting and not means-testing, the fact that low-paid workers are not automatically enrolled into their employer’s pension scheme means that they will simply be denied the opportunity to accrue even a modest amount of capital. That is yet another example of the awful attitude that says that public policy does not need to assist low-paid workers to accumulate capital or assets.
The reasons why the earnings trigger should not be raised any further are absolutely clear. Not all those earning below the earnings trigger of £10,000 are persistent low earners. Low earners should be able to accumulate savings over and above the single-tier pension, and the trivial commutation rules will allow most of them to take it in cash. This disproportionately affects women and breaches a basic principle that, in designing state and private pension systems, both systems should work for women, yet each time this earnings trigger is raised we carve out or cull thousands of women from the UK private pensions system.
Let us look in detail at some of the Government’s arguments—their preoccupation with the low earners. Almost half of those in the lowest-earning group are in couples where one works part-time and the other full-time. Most very low earners are women who live in households with others on higher earnings and they are receiving working tax credits. These are precisely the people who should be automatically enrolled in saving, yet we have seen persistently a rising earnings trigger that excludes them. Furthermore, the value of the loss of the employer’s contribution of 3% of qualifying earnings from raising the earnings trigger and not being auto-enrolled is greater than the tax reduction that they get from increasing the tax threshold. The combination of the two therefore means that the lowest earners could be worse off. They lose more from not being auto-enrolled than they gain from the increase in the tax thresholds.
Earnings are not static for many workers, either men or women. They can change significantly over a lifetime. Most low earners go on to earn more, so saving would still be beneficial because of the continuing contribution to their pensions over their working lives. Millions of women have a life pattern in which periods of full-time work are interspersed with significant periods of part-time work when caring responsibilities are at their greatest. Part-time working is part of the systemic solution to childcare in this country. When we look at the labour market statistics, we see that we respond by saying, “We are not going to auto-enrol you into your employer’s pension scheme when you are working part-time for periods of childcare or other forms of care”.
The Explanatory Memorandum states:
“The Secretary of State has concluded that it is appropriate to enrol people automatically into workplace pension saving once they earn enough to pay income tax”.
However, this disregards how working-age benefits can make it pay to save. The 100% disregard of individuals’ pension contributions from income brought to account when calculating entitlement to universal credit has been maintained thanks to the intervention of the Minister and the consequence is that it provides a positive incentive to save for many low-paid people. However, what are we doing? We are excluding them from the benefits of auto-enrolment by raising the earnings trigger.
As to persistent low earners, because within that population there will be some, the argument that they should not save because they get state pension and benefits means that yet again there will be no asset accumulation strategy for them. That position is even more indefensible with the advent of the single tier because it is not means-tested, so there is no means-tested track against the single tier that they can genuinely build up, even by only a modest amount of capital, by being auto-enrolled, that will not be lost on the means-tested basis against that single tier.
On my approximate estimates, increasing the earnings trigger to £10,000 from its original level has excluded 1,290,000 individuals per year from workplace pensions, 75% of whom would be women, at a loss to those individuals of approximately £40 million of employer pension contributions. But the cumulative total of those impacted, because different individuals are impacted year on year, will be much higher. This suggests that the group targeted to benefit from workplace pension reform will comprise approximately 65% men and only 35% women.
I come back to my basic point. We are increasingly designing, or “undesigning”, a private pension scheme to exclude ever greater numbers of women every time the earnings trigger is raised. It is simply not a credible argument to say that the impact of the earnings trigger can be mitigated by those earning below the £10,000 threshold being allowed to opt in voluntarily. Inertia prevents people from saving, and that is the whole point of auto-enrolment. You cannot say, “Because the rest of the population will not save we have to have auto-enrolment, but the very low earners can opt in”. It is an absolute nonsense. Low earners are not exempt from the maxim that inertia stops people saving, which is why you need auto-enrolment. As I said, a key principle of pension reform is to enable women to build up a pension in their own right. The higher the earnings threshold for auto-enrolment, the less the reforms will work for women. Each year since 2010, the Government have consistently excluded more and more women from the UK private pensions system.
The numbers remaining in employers’ pension schemes as a consequence of auto-enrolment have been a success for the Government. To date, roughly 90% of people have embraced auto-enrolment and stayed in. Perhaps that will drop a little when we get to the smaller companies, but it has been a success and the Government should be pleased with that. But when it comes to the reforms working for women, particularly women who work part-time, the Government are in danger of snatching failure from the jaws of success.
With the exclusion of 1.25 million women—and rising, because I am sure that the earnings trigger will go up again—we are designing a private pension system that does not work for women who work part-time. We know that in five or 10 years’ time the absolute failure of that decision will be exposed, as previously when women who work part-time were excluded from pensions. But by that time millions of women will have lost the advantage of being auto-enrolled into a private pension. The Government are simply wrong to say that simplicity for employers is worth the price of excluding 1.25 million women—and rising—from the benefits of auto-enrolment.
My Lords, I thank the Minister for his explanation of this order, and I apologise for missing the first few seconds of it. Like my noble friend, I was caught out by the omission of this order from today’s lists, and I apologise to the Committee. I also thank my noble friend Lady Drake for her very detailed and extraordinarily learned analysis of the impact of this order and the ones that have preceded it. I hope very much that the Minister will be able to give it the answer it deserves, and I look forward to hearing that.
A helpful note on this subject from the House of Commons Library dated 17 December 2013 reminds us that the original idea proposed by the Pensions Commission chaired by the noble Lord, Lord Turner, of which my noble friend Lady Drake was such a distinguished member, was that the qualifying earnings band should start at the primary threshold for national insurance purposes and should finish at the NI upper earnings limit. The previous Government said in their 2006 pensions White Paper that they would adopt broadly this approach, so the lower and upper limits of the qualifying earnings band were set at £5,035 and £33,540 respectively, and provision was made for both limits to be increased in line with earnings.
The real jump came with the Government’s Pensions Act 2011, which introduced an earnings trigger for auto-enrolment set at a level higher than the lower limit of the qualifying earnings band, on which contributions are paid. As we have heard, for 2011-12 the trigger was set at £7,475 rather than the planned threshold of £5,035 in 2006-07 terms, and the effect of that was to exclude 600,000 individuals, 75% of them women. My noble friend went through some of these figures but I think it is worth rehearsing them because the Minister will have to give us an answer about the effect of these changes.
Since then, the exclusions have mounted up. In 2012-13, the trigger rose to £8,105, excluding 100,000 people, 82% of them women. In 2013-14, it rose to £9,440, excluding some 420,000 people, of whom 300,000—72%—were women. Now, as we have heard, by going up again from £9,440 to £10,000, the Government will exclude another 170,000 people, of whom 120,000—69%—are women. I would be very interested to know if the Government agree with the figure offered by my noble friend Lady Drake about the cumulative number of people who have been excluded from auto-enrolment by these changes.
The DWP paper titled Review of the Automatic Enrolment Earnings Trigger and Qualifying Earnings Band for 2014/15: Supporting Analysis—I commend the officials on its title—issued in December 2013, offers the defence that the reason that so many women are affected is that women are more likely to work part-time and to earn less than men, so they will be disproportionately represented in the group excluded from auto-enrolment. Well, yes, of course. That is not a defence, it is a reason, but that still leaves the problem. Now another 170,000 are to be excluded from the benefits of auto-enrolment into pension saving.
Of course, not only are women more likely to work part-time but there are those who work in more than one mini-job, neither of which takes them above the trigger point for being brought into this. Those women could, in fact, be earning significant sums of money on which contributions would be payable but because neither job takes them above the trigger they will not be auto-enrolled in either job. I would be interested if the Minister could comment on that.
As so much has been said already, I will ask just a small number of questions of the Minister. The DWP document I mentioned noted—and the Minister reinforced a version of this in his speech—that the Government used three principles in reviewing the automatic enrolment thresholds. The first of these is whether the right people are being brought into pension saving. Can the Minister tell the Committee how the Government reached the conclusion that excluding another 170,000 low-paid workers from the benefits of auto-enrolment met the condition that the right people are being brought into pension saving?
Secondly, with a trigger of £9,440, the target population for auto-enrolment is around 10 million individuals, of which only 37% are women; going up to £10,000, that falls slightly to 36%. When the Minister considers that figure, which came from the DWP’s excitingly named document, and the high proportion of those excluded who are women, is he satisfied that the Government’s approach to auto-enrolment is serving women workers well?
Finally, the paper argues that workers paid below the earnings trigger are likely to be able to achieve their target replacement rates through the single-tier pension if they remain low earners, and it may therefore not be beneficial to direct income from working life into workplace pension savings. If an individual earning £9,999 a year has an option to contribute to a DC scheme, should she take it?
My Lords, first, both the noble Baronesses referred to the speed with which we have gone through the Order Paper. In fact, that caught all sides on the hop, and apologies are due all round. The responsibility, of course, lies in the preceding orders going too speedily. However, I am grateful to both noble Baronesses, who, in the exchanges we have had over many sittings on the Pensions Bill, have demonstrated their incredible grasp and knowledge of these complex areas, and have spoken passionately about the impact upon women in particular. I will come to these points, and respond to them as best I can.
One of the key things I said in the concluding remarks of my speech was that we recognise that setting these thresholds is a balancing act and that there is no right or wrong answer. It is therefore right that there should be a debate and that it has become an annual debate. It is an affirmative instrument and therefore any changes that are made annually have to come before your Lordships’ House for consideration. That is the right way to do it.
The other point of context we need to acknowledge, which the noble Baroness, Lady Drake, was good enough to make, is that the figures for auto-enrolment, which I accept came out of the Turner commission, which in turn came out of the Pensions Act 2008 under the previous Government, have been impressive. Significant progress has been made in encouraging the right people to save for their retirement. In pursuing that, we are absolutely on common ground.
It might be helpful if I went through some of the figures that we have for the number of people affected. Raising the 2014-15 value of the automatic enrolment trigger from £9,440 to £10,000 will exclude around 170,000 individuals, of whom around 120,000—69%—are women. Raising the 2013-14 value of the automatic enrolment trigger from £8,105 to £9,440 excluded around 420,000 individuals, of whom 300,000—72%—are women. I am going back through these numbers because it is a rough way of getting back to the calculation made by the noble Baroness, Lady Drake, which the noble Baroness, Lady Sherlock, asked me whether I agreed with. Raising the 2013 value of the automatic enrolment trigger from £7,475 to £8,105 excluded around 100,000 people, 82% of whom were women. Finally, raising the 2011-12 value of the automatic enrolment trigger from £5,035—in 2006-07 terms—to £7,475 excluded 600,000 individuals, 78% of whom were women. If one calculates those figures, one begins to recognise the numbers that the noble Baroness, Lady Drake, presented to us.
However, it is not so simple as to say that 70,000 women would be in automatic enrolment if their part-time earnings were brought together. I realise that there is a big education job to be done here, because many women who are underneath the threshold need to realise that if they are above £5,772 in terms of the lower earnings limit, they can opt in and therefore get the benefits that would accrue from that.
Does the Minister agree that we do not ask the rest of the population to opt in to get the benefits of pension saving and an employer contribution? Why should we ask women to opt in to get the benefit, when all the evidence is that most people will not opt in? Why do we discriminate against lower earners in that way? We do not expect a £40,000-earning male to overcome his own inertia. Why do we expect a £9,000-earning woman to overcome her own inertia?
I take the point, but the threshold needs to be drawn somewhere. That is the discussion that we are having. There has to be a threshold somewhere because, below a certain level, the benefits of saving will not be as acute for the retirement pension. The question that we are debating is where that threshold should be set. We are not saying that this is a gender issue; we are saying that it is a threshold and income issue.
The noble Baroness is perhaps being a little harsh on this Government’s record on auto-enrolment, but it is worth pointing out that we have also taken a very large number of people, mostly female, out of tax altogether. The rises in the personal allowance since 2010 have taken 2.7 million people out of paying tax. The majority of those people will be female. That is a very positive thing, but I accept that more needs to be done to encourage people to save for their retirement. The benefits of the 3% employer contribution, which the noble Baroness, Lady Drake, pointed to, will come when the scheme is fully implemented in 2018 and the thresholds and contribution levels increase. At the moment it is 1%, but it is very important that people engage at that 1% level so that their savings can rise as the employer contribution increases.
Of course, in addition to the employer contribution increasing, the employee contribution will rise, and many people who do not make pension savings point to the fact that affordability is the key issue that they are wrestling with.
I am sorry for interrupting, but I feel really strongly about this point and I shall come back to it year after year. We are, admittedly, phasing in the contribution rate. However, you cannot get the benefit of the 3% contribution rate unless you are also enrolled at the 1% contribution rate.
I do not think we disagree with that. I accept that you need to enrol in—to opt in to—the scheme. We are saying that you can opt in and get tax relief from the lower earnings limit of £5,772, and that your employer will have to do that from £10,000. Therefore, we agree on that. Persistent low earners tend to find that the state pension alone provides them with a retirement income similar to that which they would have had during their working life.
The noble Lord is arguing that if someone is poor all their life they can make do on the single tier and we are not obliged to give them the opportunity to build up a little capital—is that the policy of the coalition Government?
The noble Baroness knows that is not our argument. We are encouraging people to save, as far as possible, but we recognise that savings, and how people spend their disposable income, is a choice. At what point does it become an automatic responsibility of the employer to enrol an employee in the scheme? That is what we are debating, not whether people are being encouraged to save. I hope that there is genuine cross-party agreement on this, coming out of the Turner commission, of which the noble Baroness was a distinguished member.
Of course, the whole objective is to increase savings across society. Thirteen million people are not saving enough for their retirement and we want that figure to improve. We want to ensure that as many people as possible are automatically enrolled. The Government believe that the decision on lower earnings is a decision for each person to take, and I hope they will take advantage of it.
The noble Lord is defending arguments that are untrue. Auto-enrolment does not work on the basis of it being a decision for individuals. They are put in, they have to come out. They have the choice to come out, but they are put in in the first place. These women are not getting the advantages of auto-enrolment. The point of inertia is that it is not based on informed choice; it is based on the assumption that the individual does this because it is in their best interest.
We accept that. However, basically we are talking about the same issue: whether people have to opt out when they are put in an auto-enrolled scheme. They have the opportunity to decide to opt out. If they are above £5,772 they have the opportunity to opt in. I take the point that the threshold has to be set somewhere. Having looked at all the evidence, this is where the Government have come down—for this year. As the scheme gathers pace, more information will be available to us and we will be able to make that information available to your Lordships and have it influence decisions.
I do not want to be too difficult. However, the Secretary of State has stated clearly that this is driven by his view that people should not be auto-enrolled into pensions until they start paying tax. That is not doing a balancing act; that has been the Government’s consistent position since 2010. The Hansard record shows that I keep asking the question, “Are you going to keep tracking the tax threshold, because if you keep doing that you will exclude more and more women?”. That is not a balancing act. If you did a balancing act, you would say, “What is the balance between that approach and the number of women excluded?”.
The Government have locked themselves in, both by the Secretary of State’s statement and by their behaviour since 2010, when they said that people who do not pay tax should not have the advantage of auto-enrolment. The benefit of releasing them from a certain level of tax is reduced by the fact that they lose the employer’s contribution, and we are now getting to a point where the gain from the increase in the tax threshold is less than the loss of the 3% of the employer’s contribution. So over their lifetime, the low-paid person is actually worse off.
My Lords, before the Minister answers that, I asked him whether he felt that the way in which the Government have designed the service served women well. His defence appeared to be that there has to be a line somewhere. The point I was trying to put to him is that the Government have designed this scheme in such a way that only a third of its target population are women; in other words, they have designed a scheme that will benefit two men for every woman. Does he feel that the way the Government have chosen to design the scheme benefits women?
No more or less than raising the personal tax allowance thresholds is a policy that is designed to disproportionately benefit women compared to men. When the tax threshold goes up from £7,475 to £10,000, that is a massive benefit to women, particularly in lower income positions. That is money coming into their households, so they can decide what to do with it. Anyone with earnings over £5,772 will retain the right to opt in, as I have already said, with employer contributions.
The Pensions Act requires the Secretary of State to review the thresholds each tax year. That is a discussion which takes place. There is a strong argument that says there is synergy there between personal tax allowances at the £10,000 level, helping employers and employees to understand where that mark falls, but in no way does that guarantee what the policy will be going forward. It will be for the policy to be announced and the review to take place and the instruments to come forward next year.
I am trying to work my way through the many questions that the noble Baronesses have put to me. I am not sure whether I have answered all the points.
I will let the Minister off the first two, if only on the grounds that I am unlikely to elicit an answer that I will find helpful. But my last question was very specific: if an individual earning just less than £10,000 a year had an opportunity to contribute to a DC scheme, does the Minister think that she should take it?
The view is that this will be a personal choice for the individual faced with that challenge. It is a specific point. I know that the noble Baroness feels very strongly about this.
I am not asking this question because I feel strongly about it; I am trying to test the Government’s argument that the reason low earners should not be auto-enrolled is that it is not worth saving small sums of money. Do the Government assume that same stricture should apply to private pensions as well as to auto-enrolment?
Each individual’s situation will be different. In some cases, they will have partners who will be earning more and therefore they will take a household decision to take advantage of the same scheme. For some people, that will not be the case and therefore they will not. We are saying that we want there to be a scheme. We want it to be as simple and straightforward as possible so that as many employers and employees as possible can get full benefit from it, and so that people can get into the habit of saving. It will be up for annual review. There needs to be much more education to ensure that all people who earn below that threshold realise that they can opt in should they wish to and should their personal circumstances make that the right choice for them.
I have tried to address as many as possible of the questions that have been put forward by the noble Baronesses, for which I thank them.
Statutory Sick Pay Percentage Threshold (Revocations, Transitional and Saving Provisions) (Great Britain and Northern Ireland) Order 2014
Motion to Consider
That the Grand Committee do consider the Statutory Sick Pay Percentage Threshold (Revocations, Transitional and Saving Provisions) (Great Britain and Northern Ireland) Order 2014.
Relevant document: 19th Report from the Joint Committee on Statutory Instruments.
My Lords, in my view the Statutory Sick Pay Percentage Threshold (Revocations, Transitional and Saving Provisions) (Great Britain and Northern Ireland) Order 2014 is compatible with the European Convention on Human Rights.
I am aware that there are minor typographical errors in the draft order before the Committe. These do not affect the meaning of the order and they will be put right if Parliament approves the order and it is signed and reprinted.
By way of background, every year, more than 130 million working days are lost to sickness absence with huge associated costs to employers, employees and the wider economy. For example, sickness absences cost the economy around £15 billion a year, predominantly in lost output. Employers face an annual bill of around £9 billion for sick pay and associated costs, and individuals miss out on £4 billion a year through lost earnings. In addition to this, around 300,000 people a year fall out of work and into the welfare system because of health-related issues.
The state spends around £12 billion a year on health-related benefits and £2 billion a year on healthcare, sick pay reimbursement and forgone taxes. The levels of sickness absence and the effect on individuals, business and the economy are clearly a cause for concern and the Government must do what they can to address these issues. We know that, in general, being in work improves well-being. There is a strong correlation between remaining in work and positive health and well-being outcomes. This is why, back in 2010, the Government commissioned an independent review of sickness absence to investigate the current system. The aim of the review was to find ways to minimise the loss of work through ill health and to reduce the burden on and costs to employers, individuals and the state.
As noble Lords will be aware, the review was published in 2011. It made a number of observations and recommendations to improve the effectiveness of restoring people to work including: the abolition of the statutory sick pay percentage threshold scheme, which offers limited reimbursement to some employers for statutory sick pay costs; the creation of an independent, state-funded health and advice service available to employees, employers and general practitioners; and tax incentives to encourage active sickness absence management.
By way of background, employers have a responsibility to pay statutory sick pay to qualifying employees who are absent from work due to ill health. The weekly rate of statutory sick pay is currently £86.70 and it is payable for up to 28 weeks. The percentage threshold scheme allows employers to claim reimbursement of statutory sick pay costs when they reach above a set percentage—in this case, 13%—of their monthly national insurance liability.
Returning to the review, the Government agreed with the reviewers, Dame Carol Black and David Frost CBE, that the percentage threshold scheme can be seen to financially reward employers where sickness absence is highest and provides no incentive to manage sickness absence in the workforce. This was not the intention of the scheme when it was introduced in 1995. Therefore, the Government have accepted the recommendation to abolish the statutory sick pay percentage threshold scheme. This is part of a wider programme of measures to encourage a more proactive approach to managing sickness absence in the workplace by both employers and employees. The abolition of the scheme gives us the means to invest into establishing the recommended state health and work assessment and advisory service. To be known as the health and work service, it will be implemented in Great Britain in 2014 and will ensure that public funds are used to tackle sickness absence in a more effective and targeted way than the percentage threshold scheme.
The proposed new service has been broadly welcomed by business. For the first time many smaller businesses will have access to work-focused occupational health assessment and advice, which will support an earlier return to work for their employees. To further help employers, the Government are planning a tax exemption for any health-related interventions funded by employers for their employees, as was recommended by the independent review.
In conclusion, I am sure that your Lordships will agree that the money currently spent each year on the percentage threshold scheme will be more effective when reinvested into the new health and work service. We expect a reduction in lost working days and an earlier return to work for many employees. In return, this will bring benefits to business, employees and the wider economy. I commend the order to the Committee.
My Lords, I thank the Minister for that explanation. I woke yesterday morning to hear on the radio an announcement about a wonderful new scheme the Government are planning to introduce called the health and work service, which would cover England, Wales and Scotland. I wonder what happens in Northern Ireland. I am not sure I caught that. This scheme would offer voluntary medical assessments and treatment plans for employees. There was nothing in that bulletin to inform the listener that this would be paid for by scrapping the percentage threshold scheme, or PTS, which enables employers to reclaim some of the costs of statutory sick pay, or SSP, from the state. I will be charitable and assume that this is because Parliament has not yet approved this order. I know that Ministers are loath to let anything slip out to the media before Parliament has had the opportunity to scrutinise it in great detail—although I confess that, somehow, the BBC had got hold of that side of the story on its website a little later.
These regulations abolish the percentage threshold scheme, and we are assured that stakeholders welcomed the change, apart from one employer representative group which was concerned about the impact on small employers of removing the remaining element of SSP reimbursement. We were told that the average amount claimed under the scheme in 2009-10 was £500 per year, per claimant—that is, per employer claiming. That may not sound a lot, but the impact assessment also tells us that micro-employers, those with fewer than 10 workers, receive 70% of the recovery, and £500 can be a lot of money to a micro-employer.
I know of a church in Durham, where I live, the sole employee of which is a rather wonderful youth worker; the vicar, of course, is paid by the diocese. Sadly, the youth worker has been off sick for some months. It was a big decision for the church to hire her, but it decided to dip into its reserves to hire a youth worker to work not just with the children in the church but children in the local community. Unfortunately, she has developed a condition which means that she has been off sick for some months. She is brilliant and the church does not want to lose her, but money is tight. Thanks to the PTS, it has been able to get some of the SSP back, so it can afford to pay a locum to do at least some of the work. At the moment, a locum youth worker is running a wonderful club for a few weeks for year 6 children in the neighbourhood to help them prepare for moving up to secondary school. However, my point is that £500 to that church is a lot of money. Can the Minister tell the Committee whether the Government have talked to micro-employers about the likely impact of this change on their operations? According to the Black review of sickness absence, micro-employers represent 82% of employers; obviously, they represent a smaller percentage of employees, but that is a lot of employers.
The argument made in the Black review is that PTS compensates mainly small employers for “higher-than-average sickness absence” but fails to promote attendance management; I think that was the point the Minister was making. That seems to me to fail to distinguish between two things that were rammed home to me in business school in assessing sickness absence in an organisation: the number of periods of sickness and the number of days of sickness. If you have a lot of periods of sickness, a lot of employees off for a small number of days, that can tell you something about whether people are taking sick leave a lot and it can tell you something about morale. The total number of days can be completely skewed in a small organisation by one person having a very serious illness. I did not see that distinction made. A good example would be this church, which would look as though it had a terrible sickness record but that is because one youth worker happened to develop a condition.
I am trying to draw this out, because I wonder if the Minister could help me to understand. The assumption is that those who get most of the money are small organisations with higher than average sickness absences, which therefore fail to promote attendance management. I wonder whether the evidence backs that up. Can the Minister help me to understand that rationale? The impact assessment says that the abolition of the PTS removes a transfer of some £50 million from the Exchequer to businesses and that the new health and work advisory service will generate a net value of around £70 million for employers—£120 million in benefits minus £50 million in intervention costs, I gather. There will also be a presumed benefit to the state.
The Minister can correct me if I am wrong, but my understanding is that that means that all the current spend on the PTS of £50 million is being recycled into the new scheme. Can the Minister confirm that? The assumption is therefore that businesses are not losing out. However, if that is true, what calculations have been made as to how evenly the gains and losses will be distributed? After all, if 70% of the benefit of the PTS goes to micro-employers, is it assumed that 70% of the benefits of the new service will be enjoyed by micro-employers? The impact assessment says that smaller employers are expected to benefit disproportionately, as they are less likely to have their own rehabilitation and occupational health services, but it did not quantify that. Can the Minister tell the Committee if any assessment was made? If so, what is the distinction? Within smaller employers is a large group: micro-employers are those who have fewer than 10 workers. Was any distinction made between those two categories?
A crucial question is whether the fact that in future employers will bear the full cost of SSP is likely to have any effect on their willingness to hire or retain staff whom they may judge likely to need it. In other words, will they discriminate against staff who have a potential health issue or have had a health record in the past that gives them cause for concern? The impact analysis does not address that directly, but under the heading “Key Assumptions/Sensitivities/Risks” it includes the following assumption:
“The removal of the PTS doesn’t precipitate (illegal) discrimination by employers against employees with poor sickness absence records”.
Can the Minister tell the Committee what evidence underpins that assumption? I am not saying that that will happen but I would be glad to know why the noble Lord, Lord Freud, felt sufficiently confident that it would not to sign off the impact assessment without that assumption spelt out in it.
My other question about these regulations relates to whether there is any risk that employees will be less likely to receive SSP under the new system. In consequence of the abolition of the PTS, the Government have also produced a set of regulations which have not yet taken effect, which propose to abolish the requirement on employers to maintain records for each employee relating to sickness absence and the payment of SSP for three years after the end of the tax year where SSP was paid. I refer to the Statutory Sick Pay (Maintenance of Records) (Revocation) Regulations 2014.
Can the Minister tell us what risk assessment the Government have undertaken as to the likelihood of employers not paying SSP correctly or at all once the record-keeping requirement is abolished alongside the order we are discussing today? The Explanatory Note which covers both orders tells us that HMRC will retain the power to require an employer to produce records to show them that SSP has been paid appropriately. What discussions has the department had with HMRC to satisfy itself that there will not be an unintended consequence of some employees not getting the money to which they are entitled? The Explanatory Note also says:
“Stakeholder engagement found that employers maintain records of sickness absence for payroll, tax and other staff management reasons”.
Can the Minister confirm that those stakeholders include individuals from or representing micro-enterprises?
Finally, the 2011 Black review on sickness absence recommended that the Government should carry out further research into the reasons behind the significant number of people claiming ill health benefits who come straight from work, especially from smaller employers. That is the earlier Black review. It recommended that the Government carry out further research into the reason why significant numbers of people claiming ill health benefits who come straight from work appear not to have been paid sick pay by their employer beforehand. Has that been done?
My very final question is that the impact assessment notes that HMRC periodically visits businesses to see if their payroll is running smoothly and it reviews payroll documentation including SSP and sickness absence records. Can the Minister clarify whether on those visits HMRC will still routinely review SSP records? I look forward to the Minister’s reply.
I thank the noble Baroness for her questions and for the case study she gave us from the diocese of Durham, which of course I have a strong affinity with and want to see everything possible done to help. In considering that, the best thing that could happen to any small employer in that situation is that the employee returns to the workplace. The question is whether, through this reallocation of the resource from the threshold scheme to the health and work service, it is more likely that the person concerned will find a pathway back to the employer and the workplace, which is the best solution all round. Our view is that it will and that it is a better use of the resource.
The noble Baroness asked how the £50 million that is currently paid under the threshold scheme will be allocated. It will be used to fund the health and work scheme and the tax exemption for interventions which was announced in the Autumn Statement. Where interventions are recommended to get somebody back to work which incur a cost—for example, the provision of physiotherapy or a particular piece of equipment or a change in working practices—the employer will be able to offset that cost. Many large national or multinational companies have sophisticated HR departments which seek to address all these issues to get employees back into the workplace as soon as possible. However, micro-employers do not have that facility. They will be able to take advantage of the new scheme and make some savings as a result of it. That is one of the reasons why it is widely welcomed by them. Micro-employers will benefit more than larger employers for the reasons I have outlined.
Less than 10% of micro-employers make claims under the percentage threshold scheme, which raises another point that the scheme is so complicated and complex that many micro-employers who could benefit from it do not take advantage of it at present because they do not appreciate that it is there. We hope that with the publicity surrounding the new way of working through GPs and employers and employees, more will take advantage of the service, and that will be to the benefit of all. Micro-employers currently receive around 70% of the money paid out under the scheme. The average claim under the scheme is less than £500 a year, but this masks considerable variation. For example, around 25% of micro-employers claimed less than £200 in 2008-09.
The noble Baroness asked about a particular church employee. The health and work service will support the employee and the employer in the diocese to try to find a plan to enable the person concerned to return to work under the new scheme. She also asked why the scheme will not apply to Northern Ireland. However, this is a fully devolved matter for Northern Ireland and therefore it will make its own decisions on how the scheme will operate. The health and work scheme will apply just to England and Wales.
The noble Baroness asked about the abolition of associated SSP record-keeping. Employers will still need to maintain SSP records for pay-as-you-earn and tax purposes. There is no evidence to suggest that employers will not meet their SSP obligations as a result of record-keeping abolition. The HMRC statutory payments disputes process will continue to ensure that employers meet their obligations. There will be ongoing monitoring of disputes and the actions which are taken.
I think that that covers many of the points which were made. However, the noble Baroness may be about to tell me—
I would hate to disappoint the Minister and I thank him for going through so many of my questions.
I have a couple of specific points. His answer to my concerns about the record-keeping point was that the Government assume that since employers keep records anyway, there is no reason to assume they will cease to keep them. They say that in its routine visits HMRC currently inspects payroll records, including SSP records. Is it the intention of the Government that it will continue to inspect SSP records on these visits, even though companies are not specifically required to keep them in the form that is described here? The suspense is killing me—I look forward to hearing that answer.
Can the Minister explain again the position of micro-employers? My understanding was that 70% of the benefit was going to micro-employers, but I think he said it would be only 10% of the claims. Perhaps he could help me to understand that. The point I was trying to draw him out on, about the fact that the new service will more than compensate for the loss of the PTS, was that I can see that across populations that is true but if, as a micro-employer, you have only one or two employees and they cannot be got back to work because of the nature of their conditions, they will lose out. Was any thought given to whether they might be protected from that in some way?
The noble Baroness asked about the HMRC visits. I am delighted to give her the answer, which is yes. She also asked for clarification on the 10% figure. I said that less than 10% of micro-employers make claims under the percentage threshold scheme, which I think was the point she was asking for clarification on.
I hope that noble Lords will agree that the abolition of the percentage threshold scheme is important so that savings can be reinvested in the new health and work service, which will benefit both employers and employees in reducing lost working days and increasing economic output. I commend the order to the Committee.
Question for Short Debate
To ask Her Majesty’s Government what assessment they have made of the place and value of competition in the National Health Service.
My Lords, I am delighted to have this opportunity to debate the place and value of competition in the NHS. It is perhaps a little unfortunate that I received notice that I had secured this debate rather late last week. As a result, we have a rather select and distinguished band of noble Lords speaking today.
I want to make the case that we now have an unhealthy degree of competition, but in doing so I do not want to suggest that competition per se is necessarily a bad thing; nor do I want to get sidetracked into an ideological argument about the relative merits of free markets versus collective action. I want to try to tease out what the evidence really is for the value of competition in the NHS.
It is probably a basic human urge to compete. When I was a physician working in a hospital in Salford and when I was dean of Manchester’s medical school—here I express my interests in both—I have no hesitation in admitting that I was competitive in wanting my hospital and my medical school to be the best in the country if not in the world. It so happens that Salford Royal hospital is now lauded as being one of the most advanced in the way that it provides its services—it has obviously taken advantage of my absence to do great things.
However, when one comes to the National Health Service—that is, the national service—naked competition can become very counterproductive. We can certainly have too much of a good thing and the unhealthy degree of competition that we have now is interfering with our need for that collaboration and co-operation that are so vital for optimal patient care, to say nothing of its impact on integration as I will describe.
It is not as if we have never had competition before now; indeed, the previous Labour Government introduced the principle of opening up services to private providers. However, we took a devastating leap forward, or more accurately backward, with the health Act 2012 and the unloved Section 75, which placed a virtual obligation on commissioners to go out to tender for any and every service. It is that obligation that distinguishes it from what went before. We need to get the balance right between healthy and unhealthy competition. I shall give some of the many examples of where we have not got it right in a moment or two.
Those who promote competition in health services say that it improves patient care and efficiency, but what is the evidence for that? Does it work and, if so, in what circumstances and for what particular services? As one might expect, there have been a number of academic studies to try to tease this out and the results have been far from conclusive. The Office of Health Economics report in 2012 was very cautious and found that while some aspects were improved, others were made worse. Let us listen to those who have done the research. Dr Light wrote in the Journal of Health Politics:
“Promotion of competition is guided by political and ideological considerations and is not supported by any scientific evidence”.
Valentina Zigante and her colleagues have written:
“The ideology of competition and choice is running way ahead of the evidence that it improves efficiency, equity or quality”.
Dixon and Le Grand have said that there is,
“no evidence that the choice policy has resulted in significant changes for the patient or to patient pathways”.
However, we do not need to rely on academic studies to recognise the difficulties that we now have with the competition agenda: the problems are absolutely clear in the many day-to-day examples in the NHS. One only has to look at the gross case of Poole and Bournemouth, where everyone involved—the public, local authority, the doctors, nurses and managers—all agreed that amalgamation of the trusts’ services was essential if they were to be able to provide a safe and efficient accident and emergency service, avoid the £8 million black hole that was looming and save £14 million a year. After reportedly spending some £6 million on legal fees and gathering mountains of documentation, the whole thing was blocked by the Competition Commission. You do not need too many examples like that for managers around the country to run a mile before engaging in similar rational mergers or use of resources.
There are many other examples. Let us take the case of the CCGs in Blackpool which had found a better and cheaper way of dealing with patients with headaches than having to send them to a hospital, only to be challenged by Spire private healthcare for not sending them enough cases. The cost to the CCGs in money and time of having to sift through mountains of records to fight the case was very high and will certainly make others think twice before going down the same route. There are reports that in Bristol, the unified cancer care pathway has been put on hold, while at King’s College Hospital the plan to integrate care for the elderly with the local council has been stopped by competition law.
It is not as if this bonanza for the lawyers was not predicted. In our debate on the Section 75 regulations last April, several speakers, including myself, warned of just this sort of costly litigation. As Sir David Nicholson said to the Health Select Commons Committee recently, the NHS is getting,
“bogged down in a morass of competition law”.
Despite all the reassurances given by the noble Earl when we debated the statutory instrument last April, managers in the health service are running scared of coming up against competition law whenever they set up their contracts for services. It is hardly surprising, according to a recent survey in the Health Service Journal, that nine out of 10 chief executives are making their top priority the cutting back of competition rules, and it is not difficult to see why they feel obliged to avoid litigation when they have Monitor breathing down their necks, as well as the Office of Fair Trading backed by UK public procurement regulations and EU competition law looming above them. It is of little use to managers that the kindly David Bennett of Monitor is hinting that he will not pursue them if they take a sensible approach and do not go out to tender for anything and everything, because in practice the law is biting hard.
It is hard, too, to see how multiple contracts with a range of providers can fail to impact on the need to focus specialised services in a smaller number of hospitals or to centralise scarce facilities. These rational and laudable aims can hardly avoid being inhibited by the drive to competition. And, of course, there is the knotty issue of integrating care across the hospital/community divide, which everyone wants to see but which will be inhibited by competition for the different elements of what should be seamless care. There seems little doubt that uncontrolled competition can result in a fragmentation of services that simply frustrates the need for a strong and coherent set of services.
What can be done about it? We have to tackle the legal driver of competition law which is creating such an expensive diversion of resources and manpower away from more important work like caring for patients. It is no use saying that commissioners have the freedom given by reassurances from Monitor on the one hand when they find that they have to defend themselves from legal action taken by private providers on the other. I have only one question for the Minister. Will he help to obviate this legal quagmire into which we seem to have blundered by repealing this onerous and damaging set of regulations and starting again with a less destructive set?
My Lords, I hope that the Minister is not feeling got at, and I am extremely pleased to note that the noble Baroness, Lady Brinton, will be speaking in the gap. I think that the lack of speakers in this debate bears out what we knew during the passage of the Bill—that this is a hellishly complicated matter. I wonder, indeed, where the noble Lords, Lord Clement-Jones and Lord Marks, and the noble Baroness, Lady Williams, are. I know that the noble Baroness, Lady Jolly, is here today, but she is now bound to support what the Minister has to say. Where are the noble Lords who helped to get the current competition regime through your Lordships’ House and on to the statute book two years ago, and why are they not here to explain how well they think it is working and that their support for it is therefore justified?
We know that people are fearful, as my noble friend has explained. They are fearful on the ground. They do not know how to express their worries, and often they realise too late that something precious has been undermined when the decisions their doctor is making may have something to do with Spire Healthcare or Richard Branson’s Virgin Care on the bottom line than what might be best for them—or that, at the least, those two things are being balanced against each other.
We know that competition comes in many flavours. Peer competition, as expressed by my noble friend, for clinical excellence is fine. Indeed, I have long championed the provision of social enterprises, and what value they can bring to some healthcare as being good for everyone concerned—not least the taxpayer because 5% to 10% is not being siphoned off into the pockets of shareholders across the world. That profit is being ploughed back into the social purpose of the provider and innovation. Indeed, we know that there has always been a mixed market in the provision of healthcare, and always as part of a planned process of provision.
Competition in various forms between NHS providers has been tried, as with the wide choice of acute providers for routine operations. As my noble friend has said, by 2010 the Labour Government had come to accept that there may be some occasions when an incumbent NHS provision could not be brought to the required standard and an open competition might be best. Tactical use of open competition could therefore be a tool. However, the Health and Social Care Act was always about competition as a strategy which essentially sees healthcare as a commodity and, essentially, Part 3 of the Act brings into play the ideas that have been used for the privatisation of utilities in the past. We went through this at length and, on this side of the House, we predicted what might happen.
The NHS has now tendered three-quarters of new contracts to competition. Section 75 regulations were made under the Health and Social Care Act in April last year. They appear to force competition on to the NHS in contravention of ministerial promises made during the stormy passage of the Act itself. At a critical juncture, the then Health Secretary Andrew Lansley wrote to the new local—as they became—clinical commissioning groups, telling them that,
“I know many of you have read that you will be forced to fragment services, or put services out to tender. This is absolutely not the case. It is a fundamental principle of the Bill that you as commissioners, not the Secretary of State and not regulators, should decide when and how competition should be used to serve your patients’ interests”.
He told the House of Commons:
“There is absolutely nothing in the Bill that promotes or permits the transfer of NHS activities to the private sector”.—[Official Report, Commons, 13/3/13; col. 169.]
Indeed, the noble Earl, Lord Howe, promised us here in your Lordships’ House:
“Clinicians will be free to commission services in the way they consider best. We intend to make it clear that commissioners will have a full range of options”.—[Official Report, 6/3/13; col. 1691.]
However, when the regulations emerged, there was a storm of protest. The noble Earl repeated:
“It has never been and is absolutely not the Government’s intention to make all NHS services subject to competitive tendering”.—[Official Report, 12/11/13; col. GC266.]
Can the Minister put a percentage on what he thinks is a reasonable amount to go out to tender and what he thinks is not a reasonable amount to do so?
Critics, including leading lawyers, say the redrafted regulations did no such thing; they did not fulfil the promise that the noble Earl had said that they would. They still enforced compulsory markets in the NHS, regardless of clinical or local wishes and in contravention of government promises. Indeed, my noble friend has given some examples.
In the debate on 24 April 2013, Liberal Democrat health spokesperson, the noble Lord, Lord Clement-Jones, told the House of Lords:
“Commissioners will not be forced to tender”.—[Official Report, 24/4/13; col. 1486.]
Indeed, the noble Earl backed him up, saying that,
“it is NHS commissioners and no one else who will decide whether, where and how competition in service provision should be introduced”.—[Official Report, 24/4/13; col. 1508.]
The noble Baroness, Lady Williams, told the Lords:
“We have learnt in the debates in this House to trust the noble Earl, Lord Howe”.—[Official Report, 24/4/13; col. 1496.]
Well this is a matter not of trust or otherwise, but of whether the Government’s course is the right one. We believe that the evidence now shows that, indeed, it is not. The proof of the pudding is in the eating, as my noble friend has said.
Is the Minister now prepared to release the Government’s legal advice on this matter, which has not been released so far despite requests from various people, including my noble friend Lord Hunt? Overall, the impact of the Health and Social Care Act has been negative, as it has deflected money and energy from clinical care into administration. We have seen the fears from CCGs around what Section 75 means. It appears to mean—certainly, this is what many CCGs understand—that almost every service has to be competitively tendered.
We have seen a CCG offering the biggest NHS contract in history, in Cambridge, and making a thorough mess of that process. We have seen claims by a CCG in Oxford to be leading on competition for outcomes, and, again, stalling when confronted by providers. My noble friend has also mentioned what has been happening in Blackpool, in relation to Spire. I would like the Minister’s comments on what has happened in Blackpool, and what he thinks are the implications of the Spire challenge, and Monitor’s support for it.
I also want to ask the noble Earl about the amount of money that has had to be spent in Bournemouth and Poole on the merging of the hospitals there. The merger seems to be completely justified on clinical grounds; however millions of pounds have been spent on lawyers and paperwork. This is one of the hospitals that already have a deficit: the merger is urgently needed. Does the noble Earl think that can be justified in today’s cash-strapped NHS?
We have heard from many people that they believe that the requirement for competition is hindering the need for integration and co-operation—as we said it would. The people who seem to be benefiting most from the new regulations and the new NHS, as structured by the Government, are competition lawyers. They are being allowed to call the shots, it would appear. Most of all, the vision expressed by Mr Lansley in 2006 for a regulated market for our healthcare seems to be losing its supporters and its driving force is gone. Indeed, rumours abound that the once-enthusiastic Liberal Democrat fellow travellers are now seeing the light. Much of what Mr Lansley wanted is being rolled back or ignored.
The problem is that the market requires no strategic direction because it has its own impetus, which is to make profits where they can best be made. The NHS needs a strategic direction. The Government, however, are incapable of delivering that strategic direction because in the passage of this Act they have given away the levers that would allow them to do so. They can make statements, they can make plans, they can pass strategies, but they no longer have the levers to be able to deliver them.
What does the future hold? Would the Minister speculate about what the next Conservative manifesto might offer the NHS? Noble Lords may remember that the Prime Minister promised that there would be no more tiresome, meddlesome top-down restructuring. That statement may have been wiped off the internet by the Conservative Party, but we remember it very well. What does the Conservative Party think that it might bring forward in its next manifesto? I finish by quoting what David Nicholson, the retiring head of NHS England, has said about this:
“We are bogged down in a morass of competition law. We have competition lawyers all over the place telling us what to do and causing enormous difficulty”.
He also said,
“All of [the politicians who drew up the Health and Social Care Act] wanted competition as a tool to improve quality for patients. That’s what they intended to happen, and we haven’t got that…”.
My Lords, I am grateful for being allowed to speak in the gap, and I congratulate the noble Lord, Lord Turnberg, on securing this debate. The noble Baroness, Lady Thornton, may wish to know that the noble Lord, Lord Clement-Jones, had hoped to speak in this debate, but is speaking instead on the Immigration Bill in the main Chamber.
I am pleased that he and other Liberal Democrats persuaded the Government to make some key changes to Part 3, on procurement, in the Health and Social Care Act, which limited private practice in the NHS and beefed up Monitor with regard to the promotion of competition, in order to provide reassurance that other factors could and should be taken into consideration.
This nuance in the debate is often lost by the two opposing views of pro- and anti-competition. Not all competition is bad, as the noble Lord, Lord Turnberg, has pointed out. The Labour Government were quite content to have it in the NHS. I, for example, was using Healthcare at Home, which was contracted by a number of hospitals prior to the coalition Government to provide domiciliary support for patients injecting medication at home. The service and support were excellent, and the economies of scale, I am sure, enabled them to provide that at a good price. The ancillary contracts are, I hope, less contentious than deciding how to contract out core clinical services: those issues are justly more sensitive. That is why I am grateful to my noble friend Lord Clement-Jones for his perseverance last year in pushing for amendments to the regulations to ensure that cost is not the only guide to winning a procurement contract. Transparent, proportionate and non-discriminatory processes must be evidenced to support procurement decisions.
The new guidance will remove doubt about where quality and competition interact, and Monitor’s role in taking the lead over the OFT and the Competition Commission is a positive step forward. The Monitor guidance on the National Health Service (Procurement, Patient Choice and Competition) Regulations 2013 makes this abundantly clear. For commissioners, this will mean a considerable change in approach to procurement. Finally, the guidance is so explicit that cost alone is not the route to follow that even the competition lawyers will have to take note. Patient need, quality, and improvement of service are key factors that must be taken into account.
The EU directive on public procurement due to be implemented during this year reinforces this. The new regime for health service contracts requires that,
“award criteria can take into consideration important elements in the provision of health services including quality, continuity, accessibility, comprehensiveness of services and innovation”.
Further, the directive makes it clear that,
“greater emphasis is put on considering environmental and social issues in public procurements … Simply considering price, rather than quality, as the only award criterion will be discouraged”.
I hope that this will provide clarity for future CCGs as they start to consider whether they need to tender.
Finally, we should remember the core principle in competition and choice in the provision of healthcare services in the NHS in England, which is that competition should be employed where it serves the interests of patients; it must not be an end in itself. NHS England has said that competition is just one means of improving the quality and efficiency of NHS clinical services and securing value for money. I would ask my noble friend the Minister, given all the noise we are hearing at the moment about problems with competition lawyers and others disagreeing about where the lines are drawn, whether the EU directive guidance and the Monitor guidance will clarify matters enough to remove that doubt. If that is the case, I hope that improved transparency, a focus on patient needs and proportionality will act as the guardians of our excellent services in the NHS.
My Lords, I declare my interests as chairman of an NHS foundation trust, as president of GS1 UK, and as a consultant trainer with Cumberlege Connections Ltd. I, too, welcome my noble friend’s debate and the opportunity to return to the issue of competition. I think that it has to be seen in a wider context. No one can be in any doubt about the pressure that the National Health Service is currently under, often because of conflicting policy objectives that the Government are setting. On the one hand, quality and safety demand more staff, but on the other hand, that must take place at a time when the NHS is in its worst financial position. The health service also has to face up to huge demographic pressures. However, the response so far has been to see a vast number of frail elderly people being admitted to hospital and then staying in too long because of a lack of appropriate community care and support. We have debated the urge for seven-day working in our hospitals, which is to be highly commended, but that is being jeopardised by the failure of primary care and social care to respond in parallel. Instead of leadership, co-ordination and partnership, the Lansley changes have bequeathed a dysfunctional system where essentially the Government have legislated for fragmentation—and fragmentation is certainly what has been delivered.
Clinical commissioning groups, often staffed by very good people working with the best will in the world, cover too small a population to be able to give strategic direction across a health economy. The local area teams of NHS England are focused exclusively on micro-management rather than leadership, under the weight of excessive performance management from NHS England headquarters. NHS England was itself promised autonomy, but is getting anything but. Its target-obsessed approach seems strangely at odds with the post-Francis culture that is required. Fragmentation at the local level seems to be matched by confusion that reigns at the national level. The Lansley “hands-off” model has been ripped up by the current Secretary of State, who intervenes at every turn. How else can we explain the weekly meetings that he has with the bosses of NHS England, Monitor and the CQC, all supposedly independent bodies? Independent, my foot.
On top of all this, we have competition, which we have debated many times. Of course, choice and competition have a role to play in the National Health Service—on that, I agree with my noble friends. Indeed, when in government I was involved in involving the private sector to help provide extra capacity, speed up hip replacements and cataract surgery, and reduce waiting times for the NHS. Moreover, I have no doubt whatever that where existing services have consistently underperformed, alternative providers, including the private sector, third sector, mutuals and social enterprises, are important as a way to turn things round. However, to conclude that market principles are a panacea is simply wrong. It is enforced competition and enforced marketisation that we on the opposition Benches are opposed to.
I know what the Minister is going to say. He has consistently told us when we have debated these issues that CCGs were free to commission services and would not have to create markets against the best interest of patients, but I remain of the view that Part 3 of the 2012 Act and the Section 75 regulations mandate the open tendering of services.
I listened with great interest to the noble Baroness, Lady Brinton, and welcome her to our debate. I say to her that while I accept that the Section 75 regulations were withdrawn and rewritten, my reading of them remains as I read them at the time: that, in the end, CCGs will essentially be forced to tender all services. That is certainly what the health service thinks. We can see already the impact of this. FOI requests have unearthed the fact that in the first six months of the new system, clinical commissioning groups had spent at least £5 million on external competition lawyers. We also know that NHS providers have reported a sharp rise in their legal bills as a result.
Both my noble friends have mentioned the intervention of the Office of Fair Trading, which is causing absolute havoc. We have the cases in Dorset and in Bristol. The impact of this has been the putting of a lot of sensible reconfiguration proposals into cold storage but, my goodness me, how much we need bold reconfiguration proposals to be implemented in order to provide high-quality, safe care. What has happened in Greater Manchester, where the move to centralise cancer services into fewer top-performing specialist centres is apparently in jeopardy because it is being claimed that it will be anti-competitive and reduce patient choice? My noble friend mentioned the Blackpool case, and I hope that the Minister will respond to that. My understanding is that the CCGs have had to hire administrative staff to collect thousands of documents, tracking every referral from GPs. What a complete waste of time and effort. I refer the noble Earl to a survey of hospital chiefs conducted by the Health Service Journal last December, in which 88% of them said that securing change to competition and choice rules should be a priority for the incoming chief executive officer of NHS England. What a lot of priorities he will have to face when he starts in April.
All this is well known both to the noble Earl’s department and to NHS England. I do not want to repeat what his honourable friend Norman Lamb said, because my noble friends have already done it, or the evidence that Sir David Nicholson gave to the Health Select Committee last November, when he highlighted the cost and frustration caused by the way in which competition law was being used.
I want to ask the noble Earl about the proposals that NHS England is putting forward to centralise specialist services in a small number of centres—or at least it has been said that that is what it is going to be doing. Can the noble Earl confirm that? Is he confident that such proposals will not lead to Office of Fair Trading interventions if he is reducing the number of specialist centres? In view of what Mr Lamb and Sir David have said, will the Government bring proposals to the House in the next Session to put this right? The Opposition stand ready to help the noble Earl make changes to legislation in this regard.
Clearly, competition has a place—I have no doubt about that. I stand by the work that I did to encourage some private sector involvement in order to get waiting times down. That is a very good example of when it is useful to use the private sector. But competition is not the be-all and end-all; it is not the panacea that some claim. The noble Baroness, Lady Brinton, made a very reasoned argument. My response to her and to the noble Earl is that I know that we are getting guidance and further work is being done in this area, but the fact is that the health service thinks it has to tender almost all services. I am afraid that once you do that, in effect you have a competitive market. That is the problem we face. I hope very much that the noble Earl will tell us that the department and the Government will actually listen to the concerns which have been expressed by a considerable number of people in the NHS, NHS England and his own department.
My Lords, I join other noble Lords in thanking the noble Lord, Lord Turnberg, for tabling this topic for debate. I will begin with three simple statements, to serve as mental marker posts, as it were, before I respond to the questions that have been raised.
First, amid the many changes that we made to NHS commissioning through the Health and Social Care Act, one area of the law that has not changed one iota is the law relating to competitive tendering. That law has been in place for a number of years; it has been governed by a European directive; and, as regards the rules governing NHS procurement, the Section 75 regulations change nothing at all.
Secondly, the noble Baroness, Lady Thornton, referred to “Mr Lansley’s agenda” on privatisation. There is no government agenda to privatise NHS services—quite the contrary. We made it illegal in the Health and Social Care Act for the Secretary of State, Monitor or NHS England to have a policy deliberately favouring the independent sector.
Thirdly, the noble Lord, Lord Hunt, spoke of a deliberate policy of enforced competition and marketisation. I must correct him. It is NHS commissioners alone who will decide whether, where and how competition in service provision should be introduced. There are no obligations on commissioners to create or promote markets; nor are they required to fragment services against the interests of patients.
Those three points are key to understanding what the Government are doing and what we are not doing. I will now turn to the place and value of competition in the NHS, which has long existed. As the noble Lord, Lord Turnberg, pointed out, patients have long exercised choice over where they receive services from. I was pleased to hear the noble Lord, Lord Hunt, acknowledge that third sector and independent providers play an important part in providing NHS care; for example, in hospice care for terminally ill patients, mental health services and long-term nursing care for the frail elderly.
We have seen over the past decade the independent sector treatment centre programme and the introduction of payment by results in 2003, the advent of patient choice in 2006, and the transforming community services programme of 2008. I must point out to the noble Lord, Lord Turnberg, that it was this changing landscape that introduced greater competition to the NHS; it was not the Health and Social Care Act. There is robust evidence from a variety of sources that quality-based competition can work to the benefit of patients, and I shall come on to cite that evidence in a moment.
The previous Administration put in place a set of rules to manage that competition, known as the Principles and Rules for Co-operation and Competition, and the Government committed in their response to the NHS Future Forum report to maintain these and place them on a statutory footing so that they could continue to apply to commissioners. That is exactly what we have done; there has been absolute continuity in how the rules apply. Clinical commissioning groups work within this framework to secure the best services for patients that they can, from whichever provider best offers that prospect. In essence that is the value of this framework of rules. They will be supported in this activity by guidance from NHS England and Monitor, and through the work of commissioning support units.
The noble Baroness, Lady Thornton, asked me what I would regard as a reasonable proportion of NHS activity to be put out to tender. I have no view on this, and nor should I. The decisions on tendering are entirely up to commissioners and not Ministers. The noble Baroness also indicated that seven out of 10 NHS contracts have gone to the private sector since last April. I point out that that figure is highly misleading. It was quoted in a newspaper article, but the contracts in the sample that was quoted amount to a tiny and unrepresentative sample of the scale of NHS activity. In reality, spending on healthcare from private-sector providers equates only to around 6% of total NHS expenditure. It was roughly 5% at the end of the previous Administration.
My noble friend Lady Brinton asked whether there will be guidance from Monitor to clarify the duties on commissioners, and the noble Lord, Lord Hunt, suggested that commissioners are confused about that. Monitor has now published its guidance to support commissioners in understanding and complying with the Section 75 regulations. Monitor, along with NHS England, will undertake further engagement with commissioners to support them in understanding the requirements. I acknowledge that there is a degree of misunderstanding out there, but not everywhere. NHS England’s forthcoming procurement guidance will provide further guidance on the EU requirements.
The noble Lord, Lord Hunt, raised concerns about fragmentation and barriers to integration. To the extent that fragmentation exists, I say to him that it existed as greatly under his Government. I am proud to say that this Government are taking practical steps to make integration more commonplace throughout the country. We are supporting a number of integration pioneer sites, which will trailblaze new ideas to bring care closer together. They will be leaders of change—a change we have to see in the system if we want to offer the best-quality care.
We are also supporting the system through the £3.8 billion Better Care Fund, which will encourage organisations to act earlier to prevent people reaching crisis point, to offer seven-day services, and to deliver care that is centred on people’s needs. That idea and that fund have been widely welcomed. Therefore, our focus is for commissioners to innovate and to work with partners in the sector to design integrated care pathways for patients that allow for a seamless experience of care. I assure the Committee that the competition rules do not stand in the way of that. In fact, the Section 75 regulations explicitly allow for it.
Under the regulations, the objective of a commissioner must always be to secure the needs of patients, including through services being integrated. For example, in Milton Keynes, substance misuse services used to be delivered by several providers, resulting in fragmented care. Users found services difficult to navigate, which impacted on treatment entry and retention rates. In response to this, NHS Milton Keynes CCG and Milton Keynes Council developed an outcomes-based approach to commissioning. Existing services were brought together into one fully integrated, recovery-focused service, delivered by a third sector organisation, which enabled more effective delivery of care and efficiency savings of 15% to 20%. That is a clear example of good commissioning delivering improved services for patients.
I turn to the OFT’s role and the review of mergers. Again, it is important to realise that the NHS has long had arrangements in place to review mergers on competition grounds, and that in considering mergers the competition authorities are acting under their existing powers under the Enterprise Act 2002.
The noble Lord, Lord Turnberg, criticised Part 3 of the Health and Social Care Act. Repealing Part 3 of that Act would not remove the powers of the competition authorities. In fact, the 2012 Act was important in clarifying those powers in order to address the legal uncertainty for NHS bodies as to whether mergers between them would be considered by the OFT or the CCP. Without this clarification, providers would have been at risk of double jeopardy, with both bodies potentially seeking to undertake a review.
The noble Lord, Lord Turnberg, cited several examples of challenges being issued on competition grounds which he attributes to the existence of Part 3 of the Act. I do not want to comment on the detail of those cases—it would be wrong of me to do so—but I would point out that challenges of that kind would have been quite capable of being brought even if the Government had never introduced the Health and Social Care Bill.
My Lords, I understand where the noble Earl is coming from in relation to the Enterprise Act. However, is it not a fact that essentially what happened was that the 2012 Act was a signal to the market that a market was being put in place? Why have a 300-page Act and why have the Section 75 competition regulations? In essence, the Government opened the door in this regard and that is why these challenges are now taking place. They did not take place before the 2012 Act.
The market, however, did exist, which was the point that I made. The market was out there well before the 2012 Act and well before this Government came to office. It was incumbent on us to clarify and simplify the rules that the previous Government put in place. We did that through Part 3 of the Act. It was not a signal to anybody to marketise the NHS. Indeed, as I said, we explicitly provided for it to be illegal for Ministers or Monitor to prefer the independent sector over public sector providers. That is explicit in the Act, so the noble Lord cannot accuse the Government of enabling legislation to promote marketisation.
My noble friend’s question was actually about the signal. If, as the noble Earl has told us, all these things existed before the Act, why did we have to have Part 3 of the Act? Why was it necessary? The only reason that it seems to have been necessary—we think that the evidence now shows that to be the case—is that it increased marketisation in the NHS.
Let me be clear. Repealing Part 3 of the Health and Social Care Act, which is what the noble Baroness appears to be suggesting is desirable, would not stop competition law applying. It would not remove the powers that the OFT has, which were introduced by the previous Government. It would just mean that a health expert regulator—Monitor—would not be the body considering the application of competition law to the NHS. I do not believe that that is in the best interests of patients. That provision was widely welcomed by those who understood these matters.
I was asked about the case involving Blackpool and Spire. It would not be appropriate for me to comment on an ongoing investigation by the independent regulator but I stress that, in considering this case, Monitor is doing nothing that the Co-operation and Competition Panel could not have done under the principles and rules for co-operation and competition. As regards the Greater Manchester proposals which the noble Lord, Lord Hunt, raised, I can inform him that Monitor has closed that case and NHS England is pursuing its procurement of these services.
The noble Baroness, Lady Thornton, asked about Bournemouth and Poole. I want to be clear that there is nothing to stop two providers coming together if it is in the best interest of patients. The OFT has already cleared two out of three mergers. However, while in some places mergers have improved things for patients, there is evidence that some mergers can be costly and may not deliver the benefits that were intended. It is therefore right that these are examined. The competition authorities have listened to concerns raised in the system. That is why, in October last year, they set out their commitment to work together with Monitor to ensure that the interests of patients are always at the heart of the merger review process; that the process works quickly and predictably; and, importantly, that any costs can be minimised.
Monitor will take a more active role in supporting merging parties and advising the OFT. This means that some mergers may not need to go to the competition authorities at all, and that those which do can be dealt with more quickly. For example, the proposed merger involving Torbay and Southern Devon Health and Care NHS Trust—an integration pioneer—and the South Devon Healthcare NHS Foundation Trust is one of the first cases in which, with the help of Monitor, the trusts have been able to self-assess and conclude that they do not need to notify the merger to the OFT, as it would be unlikely to raise concerns from a competition perspective.
The noble Lord, Lord Turnberg, challenged me on the evidence for the value of competition. There is robust evidence, as I have already mentioned. A report of January 2012 by the Office of Health Economics states that,
“evidence both from the UK and internationally suggests that quality based competition with prices fixed by a regulator can be beneficial, producing higher quality care at the same cost on average and, importantly, not leading to increased inequity in access to care”.
Researchers at the London School of Economics have found that hospitals in areas where patients have more choice of provider have shorter lengths of stay in hospital and lower death rates than in less competitive markets. Research by York University found an increase in quality at a hospital stimulated local rivals to respond, as well as to increase the quality of their services. The research found improvements in relation to mortality rates, stroke readmission and patient satisfaction.
There are various other answers that I would like to give, but I have been advised that I am well over time, for which I apologise. I simply conclude by saying that this has been, as ever, a stimulating debate on a topic to which I am sure we will return in coming months. I hope that my comments today have at least partially clarified the legal position and wholly clarified our intentions regarding the place of competition in the NHS. I hope, too, that they have provided some measure of reassurance to noble Lords that the system is acting upon the concerns that it hears.
Committee adjourned at 6.52 pm.