Report (1st Day)
Clause 3: Companies: duty to publish report on payment practices
1: Clause 3, page 4, line 1, after “policies” insert “and performance”
My Lords, I shall speak also to Amendment 2, which is consequential to Amendment 1. I also ask the House to note the register of interests, which lists my interests in small businesses as an owner, worker and occupier and in other connections.
These amendments provide that companies must produce a quarterly statement that lists all the payments to suppliers which have been paid more than 30 days after the suppliers’ agreed payment terms without a formal query having been made. The amendments also confirm that in all those instances interest equalling the Bank of England rate, which is the base rate, plus 8% has been paid to compensate the supplier. Where interest has not yet been paid, it sets out a payment plan to ensure that compensation is promptly paid. The obligation is on the payer to pay. Finally, we are seeking assurances from the relevant auditor that the company is maintaining accurate and honest financial records and statements.
We are pleased that the Government have attempted to address late payments but unconvinced that their current approach is sufficient. The central thrust of government policy is to change the culture of late payments and to believe that that culture change will lead to a significant and speedy change in what has become current business practice. This is achieved principally through the Prompt Payment Code.
We support the measures in the Bill requiring large unlisted companies to publish information about payment performance and practices and to strengthen the Prompt Payment Code, which commits signatories to pay within agreed and clearly defined terms. However, late payment legislation already provides for a maximum 30-day period in which to quibble after receipt. Many shareholders are unsure that the additional legislation will achieve any real change. Small companies fear that they will be pressured into not levelling their potential claims or will be squeezed in other ways. One reason why we suggested in Committee that dates be introduced—and I see that the Government have responded to that in the Prompt Payment Code, which is to be welcomed—is that we already have a statement of dates. We were also encouraged that the Minister, at our urging, wrote to the FTSE 350 companies to suggest that they become members of the Prompt Payment Code. Our concern was, as expressed in the letter, that this was really about reputation, corporate social responsibility and obligations, which are all important in dealing with culture changes, but insufficient. This approach is not enough.
Our approach is to ensure that payments are made by placing the onus on the person paying and not the person chasing; it is not fair for the smaller supplier to be coerced or pressured or even to have to face potential consequences to make sure that they are paid on time. We asked for our alternative approach to be considered in the consultations on the duty to report and enforcement, which we believe were drawn too narrowly. As Henry Ford always said, if he had asked his customers what they wanted, he would have designed a faster horse. We do not need a faster horse; we need to invent something that is relevant, like the motor car, which deals with the problem.
Why do we believe that an alternative approach is essential? There are a number of reasons. The first is the sheer scale of the problem. In 2008, there was £18.6 billion outstanding in late payments; in 2014, according to many reports, the number had grown to £46.1 billion. In Committee, we had a number of estimates in excess of £50 billion and, today, estimates say that we are moving very close to going through the £60 billion mark. That is an extraordinary growth. Since the 2011 EU directive on late payments, which became law in this country in 2013, other reports that we have received suggest that the number has got even higher, even quicker. So these large rises have taken place even during the time when we have said that we are dealing with the problem. I fear that the large problem of late payments will not be addressed by the Prompt Payment Code, which has been co-signed by 1,700 firms. It needs a much more fundamental attack, and we argue that contracts should be void if they specify more than 60 days in the terms.
Although the Prompt Payment Code is of course a good thing, there are considerable limits to it; so the measures to strengthen it are positive. However, policy is too reliant on it. As I said, the code has approximately 1,700 signatories, made up of companies and public authorities. The number of large businesses—defined as those with more than 250 employees—stands at 7,000, so 1,700 signatories sounds like a jolly good number. However, companies employing between 50 and 250 employees add another 32,000, while those employing between 10 and 49 add another 195,000, with micro-businesses increasing the number by more than 5 million. Micro-businesses, which employ fewer than nine people, are included in this code. Out of a universe that is now in excess of 5 million companies, we have 1,700 signatories. I do not believe that this will ever grow sufficiently large to change the culture. Given that the code also includes public authorities, it is very hard to see how it can gain that scale.
Moreover, the stated intention of the code is to ensure that it remains a gold standard. If it is a standard for some to aspire to, that inherently means that others will not meet the standard and will therefore be excluded—and the culture will not inherently be transferred to them. To be perfectly honest, for those companies that see it as a badge of honour, you are dealing with suppliers that may think that the badge of honour is an important consideration, but I suspect that whether they have a serviceable need that a business addresses, or a route to market, is probably far more significant.
It is also the case that some of the signatories are part of the problem. There have been significant news reports about a number of the people currently signed up to the code in terms of their extended payments and late payments. The changes to the payment code which have been suggested—reducing the number of days and having the means to remove people from the code—have certainly not yet been adopted by all the members of the code. They are being written to, but all the responses have not come through.
I therefore suggest that the code is limited not only in its design but even in addressing its own recommendations on how to change the culture. I think I have been diligent in trying to make sure that I got to know as much as possible about the Prompt Payment Code. I looked at its website. As I say, we support the Prompt Payment Code. I appreciate that it identifies that co-signatories undertake to pay suppliers on time, give clear guidance to suppliers and encourage good practice.
I looked at those things. I looked at the clear guidance to suppliers because I thought that that was very relevant. It says that you must provide,
“suppliers with clear and easily accessible guidance on payment procedures”,
and that you may click to see the “Treating Suppliers Fairly” guide. Naturally, I clicked to see the guide. When I did, I was taken to the site of the organisation that runs the code, the Chartered Institute of Credit Management, and it says:
“We can’t seem to find the relevant information, you may be able to find the information you require using the menu above”.
I could not find it in the menu. I put it into the search mechanism and came back with two results:
“Business leaders believe late payment can be overcome”;
“Credit managers urge Sir Alan to act promptly on late payments”.
That related to a statement made by my noble friend Lord Sugar in 2009, in his previous job as the enterprise champion, to address late payments. I do not think I need to say any more about the way in which this has been adopted.
We are relying on a code. Other countries in Europe have relied on legislation and have had much more success. We have a problem in that there is no evidence that the code will be able to address the ever increasing sophistication of the extended payment problems and the mechanisms used by companies. It is insufficient in its own right.
Finally, I shall give another reason why I think it insufficient to rely on a code. We all agree that growth in the economy is essential, that supporting small businesses is essential and that cash flow and the velocity of money in the economy are very important. As a measure to help trigger a more dynamic UK domestic economy, this is essential. Overseas suppliers who rely on letters of credit with guaranteed bank payments are better served than UK businesses as matters currently stand.
It was reported at the weekend that the Groceries Code Adjudicator was in receipt of complaints that Lidl has now extended its payment terms to 120 days. It was reported that that was in great contrast to the 30 days that it uses to pay in its home market of Germany. It is time to get serious in tackling late payments and in not placing UK small business behind others. We accept and support the code, but it is insufficient. We need to move much more in establishing that the payers need to pay on time and that the level of late payments needs to come down, since these take place on an enormous scale and are a huge drag on our economy. I beg to move.
My Lords, I support this amendment and will take the illustration of the insurance industry. There are special features connected with the insurance industry. Hence, it has its own legislation. However, the Minister dealing with what was then the Insurance Bill, the noble Lord, Lord Newby, indicated that other steps and avenues would be pursued to see that the insurance industry could be brought within the scope of some statutory obligations on late payment.
The history of this, briefly, in the insurance industry is as follows. Lloyds of London has unilaterally been able to veto a strong recommendation from the Law Commission which was accepted by everybody else in the industry, including all the main insurance companies, that there be such a statutory duty in that sector so it could be brought into line.
Evidence from other sectors, including overseas parts of the industry, shows that the present arrangement, whereby London has no such guarantees against late payment, is doing serious reputational damage to that major industry. However, the rubric has it that one actor in that industry, namely Lloyds of London, which represents maybe 25% of the industry, which we all agree is not insignificant, can cast such a veto in its own interests against public policy, government legislation, simply by stating—this is the astonishing point—that it finds such a clause, recommended strongly and unanimously by the Law Commission, “controversial”. In other words, to deem a clause such as that to be controversial means that the Bill would fall.
Therefore, in Committee, some noble Lords who supported the amendment generally did not want to take that risk. However, the Minister in that context, in seeking the withdrawal of the amendment, undertook to pursue the issue on the basis that it was not going to be left there and that other means—other legislation—would be explored and pursued. This amendment is a good exemplar of how that commitment should be honoured.
My Lords, I rise to speak against these amendments. I must first declare an interest because I run a large public company, TalkTalk, which would clearly be subject to this legislation.
I agree with the Government’s prompt payment proposals, and it is worth us pausing to recognise how robust they are and how tough a reporting requirement this will be. To report quarterly in detail on your payment performance and policies is more detailed than the report I have to make on the financial performance of my company. I have an obligation to report in full on a half-yearly basis. I would not underestimate the power of transparency—of having to report this publicly and clearly. We see this in a whole range of compliance areas in business. Having to explain publicly to your customers as much as to your suppliers what you are doing acts as a strong brake on bad behaviour and is the beginning of the culture change in payment policy that I am sure that all sides of the House want to see.
I am not persuaded, however, by the Opposition’s amendments. There is a real danger that we try to overcomplicate and second-guess how businesses will wish to negotiate with each other. There are also a lot of unintended consequences—I am sure that they are genuinely unintended—in the Opposition’s amendments that will simply lead businesses to avoid the provisions and will create the very problem that they are seeking to avoid, which is the negotiation of much longer payment terms that meet all the requirements of a much more tightly defined code but actually do not enable small businesses to be paid faster.
It is therefore important that we support the Bill and the improvement in publicising and shining a light on poor payment policies and performance. But we in this House must not think that we can create culture change by specifying in ever more precise detail what businesses can and cannot do. That would have the opposite effect on the culture that we are trying to change.
My Lords, I start by coming back at what the noble Baroness, Lady Harding, has just mentioned. I know that she runs an exceptionally good company; I do not know what TalkTalk’s payment terms are, but I bet that they are good and that it pays on time.
However, there are many people out there, including many large companies, whose behaviour is quite disgusting. We have seen in the past few months egregious examples of big customers stuffing their suppliers. I will give a few examples. Diageo, the owner of Guinness and Johnny Walker, recently informed its suppliers that it would extend its payment terms from 60 to 90 days. AB InBev, owner of Budweiser, Stella and Boddingtons, has extended its terms of payment to 120 days. Heinz has doubled its payment terms—I wanted to say from Heinz 57 but it is not quite that—from 45 to 97 days, and the list goes on to include Monsoon, GlaxoSmithKline and Debenhams, to name just a few more. It is a common theme. These companies put the squeeze on their suppliers for two reasons. First, they want to accumulate as much cash as they can. That is understandable as they want to boost their balance sheets. More perniciously, they do it simply because they can. It is bullying.
Many of us have run small businesses and we know all too well the perils of cash flow management. We know what it is like to sweat while waiting for our big customer to make the payment. That is what keeps us up at night and what this amendment aims to rectify. According to the Institute of Directors, two-thirds of its members with fewer than 250 employees suffer from late payments. It is estimated that payments delayed over and above the contractual terms total—well, in my notes I have £40 billion but my noble friend Lord Mendelsohn says £60 billion. Whatever it is, it is a very large number. It is not just the supplier who suffers; it goes to the supplier’s own suppliers and to all the families who work with these companies that are now at risk. It permeates everything.
In this amendment we seek to introduce a radical change. Where a late payment occurs, an automatic interest rate penalty will kick in at the Bank of England base rate plus 8%. I can promise that if there is an outstanding payment with interest rates clicking up at 10% or 11%, it will gain everybody’s attention and will be paid.
I should like to make one more comment. Later this afternoon we are going to be addressing the issue of government schemes to improve finance for small business. I have no doubt that the best way to improve SME finances quickly and effectively would be to improve cash flows.
My Lords, I support the thinking of both the previous speakers because there is a problem with late payment. I know that the noble Lord, Lord Mitchell, has a lot of business experience of this, particularly working with small businesses—and the noble Baroness, Lady Harding, also has a lot of experience in the business world. The argument here is really that the Bill is a move forward. It is trying to open up the issue of what terms companies are offering and attempting to make sure that they are properly reported.
However, the Labour amendment is unduly prescriptive and there will be a lot of unintended consequences if companies are forced down from their current credit terms of 60 or 90 days to 30 days. There would be the bureaucracy of quarterly payments and quarterly reporting and the information that would have to be provided on what is in those quarterly reports. We have to be clear that this is a very prescriptive amendment, which to be properly considered would need a great deal of consultation with business, particularly small businesses, on its consequences—because they could be quite dramatic.
I suspect that first there would be a big jump in the number of invoices being queried; that would be bound to happen. This would inevitably damage the legislation’s attempt to make companies more accountable and for the first time properly report publicly what they are doing—instead of having the information just drift out as a result of complaints from suppliers. People will be able to see what companies are doing, and the companies can be held accountable. It seems that that is the first stage. If there are consequences we want to look at, it would be better to deal with them gradually, so that we get genuine improvement on payment terms, rather than setting up a very bureaucratic and prescriptive solution that could damage a lot of companies and even deter business.
My Lords, I also have doubts about the terms of the amendment, both for the reasons that my noble friend has just given and because we have to consider who is laying down the payment terms. The amendment refers to the supplier’s payment terms as though the supplier—the small business that we are thinking of—is able to say that it wants payment within a certain time. However, in the instances that the noble Lord, Lord Mitchell, gave just now of large companies extending the terms in which they make payments, it is of course the customer who lays down the terms. If you do not like those terms—the extension to a larger number of days—then you do not supply. A big company in a powerful position in its market will be able to lay down its terms and that will drive a coach and horses through the amendment. Therefore, I do not think that this is the solution.
I do not for a moment say that there is no problem—of course there is. I entirely accept what was said earlier and in Committee about the difficulties of late payment, and these are not new difficulties; we have had them for years. I think that the amendment to the existing law proposed in the Bill is a step forward. I would like to see that come into law rather than the more prescriptive version suggested by the Opposition.
My Lords, I thank the noble Lord, Lord Mendelsohn, for his amendments on the important matter of late payment and for the general support that he has given to the Bill’s provisions. I also thank him for his diligence and interest. I am grateful, too, to the noble Lord, Lord Lea, to my noble friend Lady Harding, and the noble Lord, Lord Mitchell, with their business experience, to my noble friend Lord Cope and to my noble friend Lord Stoneham for his perceptive and practical comments about the risk of unintended consequences—gleaned, I think, from his very careful study and attendance every day in Committee.
Before turning to the amendments, I want to reassure the House about the Government’s unwavering commitment to tackling late payment. The measures we are taking forward in the Bill form part of a comprehensive package of measures to bring an end to the UK’s late payment culture. The Government are absolutely clear that large companies should lead by example and pay their small suppliers within 30 days. We need to shake up corporate culture to drive home our message—that it is not fair and not right to pay your suppliers late or use unfair payment terms.
That is why we are taking action in the Bill to require the UK’s larger companies to report on their payment practices, and we have already consulted on the detail of what this might look like. We proposed that companies report quarterly against a comprehensive set of metrics, including the proportion of invoices paid beyond 30, 60, 90 and 120 days and the average time taken overall to pay invoices. Therefore, there is a real incentive to show that you pay promptly and on time, and an opportunity for companies to explain if payment is late. It is a strong brake on bad behaviour, as my noble friend Lady Harding suggested.
This reporting will be rigorously monitored, with a company director required to sign it off, and breaches will be sanctionable by a criminal offence. Importantly, we will require companies to make this information public, so there will also be the power of transparency. The new reporting requirements will mean that poor payment practices are exposed, and it is this transparency that will drive a fundamental change in corporate behaviour. I also highlight that on Monday the Government published a summary of responses to our consultation. While the Government are still considering the evidence received, I am pleased that a clear majority of stakeholders agreed with our overall approach, although there were concerns about some aspects, including our very rigorous reporting requirements.
Last week, my right honourable friend Matthew Hancock MP also announced significant changes to the Prompt Payment Code. I know that the noble Lord, Lord Mendelsohn, and others have encouraged us to strengthen this, and the code will now promote 30-day payment terms as standard and enforce maximum 60-day terms. The change will be rigorously enforced by the new code compliance board, which will include people from business representative bodies who will investigate challenges made against signatories to the code by their suppliers. The compliance board will remove signatories found to be in breach of the code’s principles and standards. This will shine further light on poor payment practices. The Government are also seeking views on how to provide business representatives bodies with additional legal powers to challenge grossly unfair contractual terms or practices, which will build on existing protections for small businesses.
The noble Lord, Lord Mendelsohn, highlighted the issue of Lidl. The Government are clear that large companies including Lidl, which is a leading German supermarket chain, should lead by example and pay their small suppliers within 30 days. It is neither fair nor right to use unduly long payment terms. As I said earlier, we are already taking action in the Bill to require such companies to report on their payment practices through very tough requirements, including the detailed metrics that I have already described.
The noble Lord, Lord Lea, talked about the situation in the insurance industry and I will certainly look at the points that he raised. The noble Lord, Lord Mitchell, gave us a list of companies reported to be squeezing suppliers. This is further evidence, frankly, of the need for change and the action we are taking in this Bill and in the regulations made under it. He mentioned Diageo, which is already being investigated by the Prompt Payment Code administrator. The Government are being tough for small business, and we will take the necessary steps to stamp out poor practices.
I turn to the specific amendments. I recognise the strength of feeling that has been expressed and I am pleased to say I have been persuaded by some of the noble Lord’s arguments. I can confirm today that we will table amendments at Third Reading to insert the word “performance” into Clause 3, which was a concern that the noble Lord pressed in Committee to which we have listened. I also commit that we will use this power to require companies to report on the amount of interest owed on late payment because we agree that this will help to exert the necessary pressure on companies to make sure that their suppliers are fairly compensated. We will make express reference in the Bill to interest owed and paid. We will introduce amendments on both these points at Third Reading.
I now turn to the proposal to require companies to prepare a compensation plan on each instance that they fail to pay late payment interest. I am afraid that, on this point, I continue to believe that introducing this measure would lead to unintended and undesirable consequences. For example, businesses could lengthen their payment terms to avoid accidently having to pay out. If they do get caught by the requirement, there could be debates about whether payment plans provided cover for delaying tactics. While we are committed to tackling late payment, we are equally committed to trying to incentivise prompt payment with as little bureaucracy as possible. The discussions that we had with stakeholders indicated support for this view. These discussions reinforced the findings from our 2012 consultation that introducing further penalties would not tackle the problem of late payment. Instead, respondents called for greater transparency on payment practices, which this Bill delivers.
The noble Lord gave us some interesting feedback on the website. He will be glad to hear that BIS has just awarded the Chartered Institute of Credit Management £50,000 to improve that very website, so he is on the money. The improved website will go live later this month and I can only thank him for identifying this issue and sharing it with the House. I shall take it away and ensure that it is addressed urgently.
It is clear that the noble Lord and I are united in our mission to tackle late payment, but we must make sure that any interventions will work to the benefit of the very small businesses that we seek to protect.
I turn to the question of ensuring the report’s accuracy. Our consultation proposed that the reporting frequency be quarterly, as companies’ ability to pay or practices in paying trade creditors can change quickly. Therefore, we are not proposing that companies report in their annual report. Instead, we propose that the report should be signed off by the company’s director, with breaches sanctionable by criminal penalties, using the power in the Bill to mandate reporting. The summary of responses we have published shows broad support for this proposal. Respondents clearly feel that these measures would suffice to ensure the report’s accuracy and I therefore do not agree that we should require further assurances from an auditor.
I am grateful to noble Lords for their significant contribution to the scrutiny of these provisions. We have considered very carefully the proposals set out in the amendment and I hope that, with my commitment to bring back some changes at Third Reading, the noble Lord will feel able to withdraw the amendment.
I thank the Minister for her extensive response to these amendments. I shall go through a few issues and then come back to them. In general, I thank the Minister for her very constructive and open approach throughout to these issues and to making improvements to the Bill. We share a great interest in and concern for helping to develop small businesses and doing what we can for them.
I am very grateful to the noble Baroness, Lady Harding. I had the great pleasure of talking about her, and our close connection, when she made her maiden speech. She is a remarkable business figure and I will address a number of the issues that she raised. The criticism has been made that we are trying to change culture through legislation. That is not our approach; it is the Government’s. The noble Baroness talked about the limitations of this. I have no doubt there are benefits to it, which I support, but I do not find myself on the same side of the argument as her on that one. We are adding duties and obligations because we have come to the conclusion that that is the way to address the size and scale of the problem. It is certainly true that legislation rarely changes the heart but, as the phrase goes, it can restrain the heartless. There are times when you have to use legislation as a lever to make things happen. I agree that the reporting requirements are an obligation, but they are a necessary one, and I hope that her support for them is heard by many other people in business.
I do not think that the issue of how customers and suppliers contract with each other comes up until the next set of amendments. They are slightly more complex so I will address that issue then. I want to say to the noble Baroness that I have become a bit of a junkie on the website. I am grateful that it is to get a £50,000 refresh, and perhaps even an app. Having looked through the Prompt Payment Code, I noticed that TalkTalk is not a signatory to it. We are talking about changing the culture, but if someone sitting in this House does not yet have a sense of how that culture should change, it is an issue when we come to address business at large. It is my feeling that culture change is insufficient in and of itself.
The noble Lord, Lord Stoneham, talked about being overly prescriptive, and he raised those concerns in Committee. I listened carefully to what he said and I have done my research on it. I felt at the time that the point was insufficient because of the scale of the problem and the way it is growing. When we look at how other countries with far less significant economic problems, or even problems in how to deal with this issue, we can see that they are the ones that have been infinitely more prescriptive. We can look at Ireland, while legislation in Germany passed just last year shows how that country has moved forward. It is only by being more prescriptive that we get clarity and avoid unintended consequences, which are more likely to arise in circumstances where a variety of alternative payment terms or arrangements are allowed to be put in place.
The noble Lord, Lord Cope, raised similar issues in Committee. Again, I listened carefully to him and I decided to take my cue from the GOV.UK website on the question of how we look at the dates. The website explains when a payment becomes late. It states:
“If you haven’t already agreed when the money will be paid, the law says the payment is late after 30 days for public authorities and business transactions after either: the customer gets the invoice”,
“you deliver the goods or provide the service”.
That is how we reach the point where this can be tested.
I am grateful to the Minister and we are encouraged by some of the changes that have been made. We feel that the areas of performance and being able to identify the interest payments are useful steps. However, I am bound to say that my noble friend Lord Mitchell made a powerful speech, going through yet again those companies that have good records in a variety of areas but allow themselves to do what has become far too natural and far too easy in the context of the UK. We stand out from others because we are not as strong as we should be on dealing with prompt payment and people who get into late payments. The prize is there. We are talking about close to £60 billion, so putting even a small proportion of that sum into the economy will have a huge accelerating impact. We on this side think that being on the side of small businesses means getting more money racing through the economy. The need to increase employment prospects requires us to press the amendments and push to see whether we can get the economy moving by getting these late payments to small businesses sorted out much sooner than would otherwise be the case. Therefore, I wish to test the opinion of the House.
Amendment 2 not moved.
3: After Clause 3, insert the following new Clause—
“Companies: dealing with suppliers
(1) The Secretary of State may make regulations—
(a) imposing a limit on the number of days after receipt of a supplier’s invoice a company can seek to challenge that invoice,(b) prohibiting the practice of a company seeking to change the payment terms of a supplier company unilaterally, and(c) prohibiting a company from requiring a supplier company to make a payment in order to join that company’s list of suppliers.”
My Lords, I will also speak to Amendment 4. Our amendments deal with an entirely connected element of late payment and other sorts of payment practices. Amendment 3 addresses concerns about companies exceeding payment agreements, discounting for prompt payment and retrospective discounting. This proposed new clause gives the Secretary of State new regulation-making powers to impose,
“a limit on the number of days after receipt of a supplier’s invoice a company can seek to challenge that invoice”,
and to prohibit companies from,
“seeking to change the payment terms of a supplier company unilaterally”,
or requiring supplier companies to pay to join that company’s list of suppliers or remain on it. Amendment 3 takes forward some fairly straightforward measures on what I would describe as abuses but on which I think there is a fair degree of consensus. Amendment 4 is perhaps slightly more exotic. It makes provision for the Secretary of State to,
“make regulations prohibiting the practice of a company seeking to reverse fixed payments and apply retrospective rebates and charges to a supplier company”.
Companies looking to extend their payment terms still could be on the right side of a prompt payment code if they use a variety of other practices to provide extended payment and credit terms to themselves. They can also add unfair terms using the asymmetry of power and information. Across much of the rest of the Bill the Government’s proposals have done a somewhat reasonable job to start addressing that issue, which afflicts small businesses, but companies can still change terms unfairly or even force unfair terms on weaker companies. “Pay to stay” must be the most egregious such practice but it is certainly not the only one. A weak approach to late payments coupled with no action on unfair practices or terms will mean that small businesses are unlikely to gain much from this Bill, which will seriously affect their cash flow or make their ability to fund and finance themselves not as strong as we really need with our current economy.
I have also witnessed at first hand the inventiveness of large companies to obfuscate and stop meeting their obligations on other payments. I have even had the misfortune with one particularly large supplier of meeting someone called “supplier disputes resolution”; this really means that they are a lawyer from the legal team, there to cause more problems rather than resolve anything.
I must thank the many small businesses and their advisers and representatives who are providing us with information on this. They have told us strongly, chiming with my own experience, of just some of the wariness that they feel is associated with raising the problems of poor practices of other companies, and of the nature of some of the pressures that they are under. These problems could include larger companies withholding payments, imposing fines or even creating retrospective payments or charges.
One has only to talk to small businesses for a short period to understand the iconic nature of the Premier Foods controversy, where it was forcing suppliers to pay to stay on its supplier list, which is perhaps one of the more appalling practices. Others force businesses to pay to go on the supplier list, which distorts competition and tries to use market power against smaller companies. Our measures will ensure that the problems of late payments are not transferred to other practices. The amendments also have the benefit of addressing legitimately some of the terrible and detrimental practices that small businesses suffer from large companies which exceed their agreements and act retrospectively, leading to tremendously bad consequences for other companies.
Withholding payments or arranging debits on control invoices can be caused by disputes or by issues about quality. These should rightly be raised prior to any unilateral fine, debit, discount or withholding of payment, and swiftly resolved between the parties. We agree with the Government that when there are disputes the most important thing is to resolve them as swiftly as possible. These amendments give the Secretary of State new regulation-making powers to address these issues.
There are cases where businesses retrospectively, at the end of the year, impose cuts to meet the previously agreed supplier prices to meet their margins, with no regard for the established contract. This is levelled against many plcs. Recently, we saw Debenhams unilaterally conducting a 2.5% discount on supplier prices as a last-minute attempt to boost its failing profit margins. Sending retrospective debit notes is on the basis of investments made to provide benefits to suppliers—very supposed benefits indeed. This is not to say that they do not make for a plausible argument; but the manner in which these can be applied and that they rarely have any performance-reporting, a direct correlation to those benefits or even requirement of proof that they were spent on this show the ways in which companies also impose egregious practices.
The contract terms, conditions and price negotiations are really up to the parties. Commercial terms, such as marketing discounts, early-payment discounts, stock write-downs, rebates and charging for central distribution costs appear to affect more the long-term performance of the companies operating them, and distort their price negotiations. But those are within the gift of companies if they decide to use those sorts of practices and the matter is clearly up to them. These terms can be entered into by parties, but it should not be possible to impose them retrospectively or coercively by means of threats or market power.
I am looking forward to the Minister’s response to these amendments. In Committee, the Government understood some of the concerns and they have not been deaf to the many stories that they have heard about the application of practices of this sort and the problems they create. They also seemed to acknowledge that their initial responses were not sufficient. In Committee, their view was that in practice requests for changes of payment terms are not imposed unilaterally and that they are made with the agreement of both parties, even if the smaller party may feel that it has no option other than to agree. We patently know that that is not the case. We have seen many examples of where changes have been made unilaterally.
The late payment directive is explicit that unfair contractual terms and practices are not acceptable. I spent some time looking at the late payment directive, which I was assured had significant UK participation in its drafting. I have to confess that it is rather good. It talks about the way in which these sorts of changes are not acceptable and should not be acceptable and says that, even in circumstances when they are imposed on the smaller party, they should not be.
The Government argue that concern about doing something about “pay to stay” may have the unintended consequence of stopping supplier lists, which may be a good thing. We agree with them. This is not meant to stop supplier lists. It is important for companies to be able to manage supplier lists. The problem is the terms on which people join those lists. We suggest amendments which give the Secretary of State the ability to make those changes. We are not being prescriptive. We are broad in defining what they can address. It remains for future consultations, regulations and other things to implement them. What we are trying to get at is clear. It is also clear that we are doing something, which is not too prescriptive. I know that some noble Lords have concerns about that. In many ways we have taken, perhaps for the first time, the argument that the Government presented in Committee that “may” cannot become “must”—so rather than “must” we have said “may”. It is important for the Government to understand that these are some of the issues they should address. Given the scale and size of the problem, we can identify late payments, as opposed to poor and extended payment terms, as somewhere where we need action to help small businesses. I beg to move.
My Lords, “pay to stay” and retrospective terms are examples of thuggish behaviour which large companies use to beat up their suppliers. I listened to what the noble Lord, Lord Cope, said on the previous amendment about suppliers having a choice about whether they want to supply large companies. I do not think it is quite that simple. The companies we are talking about—major supermarkets and the like—have tremendous power, and suppliers have no option but to supply them, so this is not a contest of equals but of David and Goliath, and in this case Goliath usually wins.
As my noble friend Lord Mendelsohn said, just before Christmas Premier Foods, the maker of Mr Kipling cakes and Hovis bread, told suppliers that they could lose their contracts unless they made cash payments to remain suppliers. That time, it misjudged the mood. The press took up against it, and very quickly it backed down. Perhaps that is a good example of shaming some of these companies about what they do. However, the practice still exists and our amendment gives the Secretary of State power to prohibit a company requiring a supplier to make a payment in order to join that company’s list of suppliers.
Even worse is the ability of companies to alter the terms of payments unilaterally. I have seen it personally in a family business and with suppliers to big retailers. A supplier fulfils all the terms of the contract and he waits and waits for a payment that never comes. Eventually the company contacts the supplier and says that payment could be made in a couple of days if only the supplier could accept a hefty discount. This is odious behaviour and in this amendment we seek to contain it.
I thank noble Lords for tabling these amendments on unfair practices and the noble Lord, Lord Mendelsohn, for sharing his experience, including points of agreement. Unfair payment terms and practices hit small businesses the hardest and are simply unacceptable. I consequently have considerable sympathy with the intention behind these amendments.
Our intention is to drive a fundamental shift in payment culture—a paradigm shift in UK corporate behaviour to stamp out poor payment practices. Obviously, the key question is how we achieve this. One option is to seek to tackle each and every harmful practice as we spot it, but I suggest that this is futile. As the previous debate suggested, if businesses want to exert undue pressure on their suppliers, they are likely to find ways to do so. Because banning individual practices only tackles the symptoms, it will not drive a change in underlying corporate culture. We are doing something different and using a new transparency to drive change in corporate behaviour. The power of the new reporting requirement should not be dismissed. It will subject companies’ payment practices to full public scrutiny, thereby allowing poorer-performing companies to be named and shamed. In so doing, it will exert significant pressure on companies to move away from unfair practices.
The noble Lord, Lord Mendelsohn, mentioned the case of Premier Foods, which I believe shows that transparency can successfully lead to swift change in practices. Following public scrutiny of its “pay to stay” practice, which the noble Lord, Lord Mendelsohn, rightly described as egregious, Premier Foods moved quickly to simplify its controversial supplier list scheme. The Government are clear that large companies should not be using their economic power to place further strains on already hard-pressed small businesses. The Secretary of State has already asked the Competition and Markets Authority to consider the available evidence on “pay to stay” clauses, which I hope will be welcome to the noble Lords, Lord Mendelsohn and Lord Mitchell. The new reporting requirement will also elevate poor payment practices to become a boardroom issue. We have proposed that a company director signs off the report to ensure it is taken seriously at the very top.
We have tested this proposition with stakeholders, and most have shown little appetite for greater regulation on specific practices. Businesses in the UK value the freedom of contract that has been built up over hundreds of years but they strongly agree with the Government that increased transparency will help us to take significant steps to address the current imbalance in economic power which noble Lords have described so graphically. That is why we must focus our efforts on getting transparency right by putting in place a comprehensive, robust reporting requirement for all the UK’s larger companies. Clause 3 is already drafted sufficiently widely to allow the Government to require reporting on the subject of these amendments through secondary legislation.
I turn briefly to the detail of the amendments. Late payment legislation already sets a maximum 30-day period to quibble after the receipt of relevant goods and services. We sought views on this issue during our recent consultation. There continues to be little appetite for legislation. Our stakeholders tell us that they are reluctant to use current avenues to challenge due to fears of damaging relations with customers—a point which has already been made. We also heard concerns that the change, as proposed, could result in unintended consequences, with companies starting to dispute more invoices as a means of gaining time to review them. Our stakeholders have instead called for increased transparency on dispute resolution processes. The Government will therefore require companies to report on these as part of the mandatory reporting requirement.
We also consulted on unilateral changes to payment terms. As a matter of contract law, unilateral changes cannot be imposed on a contracting party after the contract has been agreed. However, in reality, smaller companies, as has been said, may feel that they have no option other than to agree when such changes to an existing contract are proposed by bigger companies. A ban as proposed would not prevent this practice, as it would not prevent bigger companies from seeking changes and would not address the reasons why smaller companies feel unable to resist such changes—while effectively rewriting the core principles of contract law. Instead, therefore, our stakeholders supported increased transparency to shine a light on poor behaviour. I again propose to mandate reporting on this in our reporting requirement.
Charging suppliers to join or remain on supplier lists and seeking to reverse fixed payment and apply retrospective discounts and charges are deeply concerning practices. Although we could put in place a blanket prohibition on these practices, they are but two of the ways in which larger companies can seek unreasonable commercial advantage from smaller suppliers. Our stakeholders believe that bans on specific practices would be easy to sidestep.
Once again, increased transparency will help address the economic imbalance involved. Our stakeholders support increased transparency on the use of “pay to stay” clauses. I can commit to requiring companies to report on these practices in the reporting requirement. We also commit to holding further discussions with stakeholders to discuss whether reporting on other practices mentioned, such as retrospective discounts or charges, should be mandated in the prompt payment report—which, of course, we have the power to do. I hope the noble Lord agrees that I have sought to address his concerns through the medium of transparency and, on that basis, will feel able to withdraw his amendment.
I thank the Minister for that reply, although I have to say that I remain extremely concerned about part of the approach. I know that the Minister shares a great deal of the concerns about this and that she is a very practical person who has looked at different ways to deal with it. Talking about transparency, culture and the possibility that there will be attempts to sidestep this is rather similar to closing the door after the horse has bolted. We are in that situation now. The Minister says that doing something more prescriptive will obviate what she is trying to do on culture, but I happen to think that it will work, while her approach will not.
I will give the example of a good friend of mine—perhaps they will not be after I have raised this—who is a senior member of a company that uses a method called central distribution charges, which is effectively “pay to stay” by another means. It uses it in the UK, but not in Germany, France or Italy. In the end, that is because it is not allowed to use it, as it is not a proper term. My concern is that we can say, “They will sidestep it”, but we are in that situation now.
Companies come to all sorts of arrangements. We hear great stories from companies such as Next, Dunelm or John Lewis, where the price you pay is the price you pay, but there are far too few of them. Many others use a variety of measures to ensure that they meet a margin way in excess of what they have agreed the contract should deliver. That is our concern. It is wrong to say we can do this using the means of the reporting mechanism, because there are other contract terms you can use to sidestep the reporting mechanisms that we have. A much better and more effective way of doing this and stopping every such method is to create the architecture and a framework to look at what you can stop.
A very famous online company has a 40 to 50-day payment period. At 90 days they send fines, which you then have to contest. There is no individual you can speak to—it has to be done online. Eventually, you will get your payment terms, possibly within 180 days. They extend it through a variety of mechanisms which would not be covered by the existing provisions or by the transparency arrangements. Those are the problems which we are still some way from meaningfully addressing. It is very important for us to consider how we go further on these asymmetries and poor practices and to look at the sorts of things which others, using more prescriptive means, have been able to address through legislation or regulation.
There is a strong case for these amendments. I am conscious that the Minister has made some progress, if it is somewhat glacial compared to what I would prefer. However, on the basis that we can get the Government to take these matters seriously and that they are prepared to deal with the most egregious examples and to start dealing with where companies and poor practice ends up, I beg leave to withdraw the amendment.
Amendment 3 withdrawn.
Amendment 4 not moved.
5: After Clause 3, insert the following new Clause—
“Payment practices: retention of monies
(1) The Secretary of State may by regulations impose requirements on certain companies to publish information about their policies, practices and performance in holding, safeguarding and releasing sums withheld by, or on behalf of, a payer from monies which would otherwise be due under a contract, the effect of which would provide the payer with security for the current and future performance by the payee of any or all of the payee’s obligations under the contract (“retention monies”).
(2) The regulations under subsection (1) may prescribe—
(a) the companies or type of companies to which the regulations apply;(b) the information required to be published;(c) the intervals at which, and format and manner in which, publication must take place; and(d) the type of description of contractual provision to which the regulations apply.(3) The restrictions on regulations in section 3(3) shall apply to regulations made under subsection (1) of this section.
(4) The Secretary of State shall arrange a review of the operation of the type of contractual provisions mentioned in subsection (1) after a period of 18 months following the coming into force of the first regulations made under subsection (1), and shall lay a copy of the report of the review before each House of Parliament.
(5) The review provided for under subsection (4) may make recommendations for requirements and obligations to be imposed upon certain types or descriptions of companies in relation to the practice of retaining monies as described in subsection (1).
(6) After public consultation, the Secretary of State may by regulations impose such requirements and obligations on prescribed companies as were recommended by the review, in whole or in part and with such amendments as the Secretary of State believes to be required in order to—
(a) ensure that the practice of withholding retention monies does not give rise to unfair treatment of payees;(b) provide assurance that retention monies are held securely; and(c) ensure that the position of a payee company from whom retention monies are being withheld is protected when a payer company becomes insolvent.”
My Lords, Amendment 5 is in my name and that of my noble friend Lord Mendelsohn. I declare an interest in that my wife is a practising solicitor who deals with construction contracts. When we raised this issue in Committee I made the following points. Recent research shows that about £3 billion is outstanding within the construction industry, and only in that industry, by way of cash retentions; that the practice unfairly enhances the working capital of the party deducting them; and that most of those who retained moneys openly accepted that they added cash retentions to their working capital or actually reinvested them. The effect is that bodies that are commissioning work are also in effect borrowing from the small firms that are carrying out the work. This is counterproductive to good economic activity at a time when such firms are also having major problems in accessing finance.
The key issue is that cash retentions are being deducted from payments already earned. However, there is no statutory protection for the retained moneys that will ensure that they will in fact be available for release if, in the event, there are no uncompleted remedial works that need to be done. There is a good case for any retention funds to be kept separate from working capital, perhaps within an escrow account—as is now used for government contracts—or a separate trust account.
When the Minister responded to the debate, as well as outlining the new but still rather patchy approach to payments being adopted by the Government, she agreed that there were a number of issues of concern with the payment culture in the construction industry. But she said that the current statutory framework governing contractual terms on payment—which was introduced in 2011—with a prohibition on “pay-when-paid” clauses and a right to adjudication, would be sufficient to see out this unfortunate practice. She added that since 2014, the Government have been working with the industry to implement a payment charter that contains 11 commitments, including one specifically aimed at removing the need for retentions, with the intention of moving by 2025 to a position where retentions are no longer necessary.
The noble Baroness pointed out that the powers being taken in the Bill would be sufficient to gather the information needed for a review of current policy, and I take that point. But she was a little unconvincing about why it will take 10 years to gather the information about this issue, even if there were a need to go wider than just the construction industry. If this amendment is accepted, it would have far-reaching benefits for small businesses throughout the construction industry. They would not have to wait another 10 years before this practice is outlawed—but even if they did have to wait that long there is surely a case, which I have outlined above, for action now to require the use of escrow accounts for this type of payment. I beg to move.
My Lords, I thank the noble Lord for this amendment and for providing the opportunity for us to look again at the important matter of retention payments. Following Committee we have been busy. We have consulted with stakeholders on payment terms, and it is clear that the practice of retentions is an issue, as we suspected, largely confined to the construction sector. As with other payment issues in construction, issues with retentions go to the heart of the industry’s business models. These models are driven by a broad and diverse range of customers—and, of course, there is an extensive reliance on subcontracting. The work is project based and frequently short term, with no ongoing relationships. Typically, low levels of capitalisation mean that the industry is heavily reliant on cash flow.
On the amendment, government is already able to include a new obligation to report on retention practices through the powers in the Bill. Since Committee, we have held a round table with key construction representative bodies to discuss how this might be done. We are following that up with a series of bilateral discussions to make sure that we get it right. The amendment would also require government to undertake a review of the practice of retentions. Following debate in Committee, we have held discussions with a wide range of stakeholders in the construction industry, and we found that there was a range of opinions. A proper assessment across the industry of the costs and benefits of the retention system will be vital to get the policy right—and it needs to be done in partnership with the industry.
I am pleased to inform noble Lords that the Government will therefore work with the Construction Leadership Council to undertake an analysis of retention payments under construction contracts. We are currently agreeing the project specification and it is our intention that the final report should be published early in 2016. That will provide an evidence base much more quickly than the 18 months after the coming into force of the reporting requirement envisaged by this amendment. The partnership is also important; an enduring solution to the issues rests in culture change. Legislation on its own is never likely to achieve change. The outcome of the research will inform the discussion about how the industry moves to a position of zero retentions.
Finally, the amendment would require government to take a power to introduce regulations. The Government’s work with the Construction Leadership Council will provide the evidence base for any action needed. Before that review has taken place, and given the lack of a clear consensus in the industry and among its customer base, the Government do not believe it appropriate to take such a power at this stage. We are taking a number of steps which will address the key issues at the heart of this amendment—and, on that basis, I hope that the noble Lord will feel able to withdraw his amendment.
I am very grateful to the Minister for that response. I agree with her that the issue is the business model in play in the construction industry. It is almost certain that the conclusion that will come out of the review that she is talking about is the one that we have been talking about—that there will need to be a new model for how the industry deals with the problem of how it contracts for and pays for the work that has been undertaken on construction contracts. That cannot happen too soon, because there are a lot of issues that need to be picked up in that regard.
I was very glad to hear of the work that has already been started. It is a good way forward—and, of course, there is an advantage in having a sector group responsible for construction that is well embedded in the department. That should, I would have thought, bring forward some of the issues that she has mentioned.
It is rare for the Opposition to offer the Government a chance to get their hands on an unmoderated handle of power, which they might use on some unspecified future date, because we generally take the view that that is not a good thing to do. We did that in this amendment, but it has been turned down and spurned. I simply regret that—but I beg leave to withdraw the amendment.
Amendment 5 withdrawn.
6: After Clause 5, insert the following new Clause—
“Small and Medium Sized Enterprises Access to Finance
(1) The Secretary of State has a duty to conduct a review on alternative forms of finance available to small businesses as defined in section 33(2) and micro businesses as defined in section 33(3).
(2) The review should include, but is not limited to—
(a) an assessment of how the banking sector is catering to the finance needs of SMEs,(b) current methods used by the Government and relevant organisations to encourage SME consideration of alternative forms of finance, and(c) the extent to which alternative forms of finance have been used by SMEs.(3) The Secretary of State shall release a report on the findings of this review and lay it before both Houses of Parliament within one year of the commencement of this Act.
(4) The Secretary of State may, by regulations, act on the findings of the review.”
My Lords, I have addressed your Lordships’ House many times to take the Government to task for the slow take-up of new schemes designed to provide finance to small and medium-sized businesses. My theme has been constant. There have been so many initiatives over the period of this Government that even I, who really ought to know about these things, am confused. If I do not get it, how can small businesses understand the options when they seldom have to deal with them?
I have cited Funding for Lending as an example. I know that the Government think that it has been a resounding success, but that is not what I hear at the coalface. One banker said to me, “What am I to do? The Government throw money at us, and I have a choice: whether to deploy these funds on small businesses, which are risky and difficult and costly to analyse and administer, or else use the cheap funding to build my mortgage business where I can assess the risk, and it is easy to run”. It is also not what the figures show. More often than not, one quarter followed by the next quarter, the amount of funding extended by Funding for Lending has gone down.
While all these government initiatives have been sputtering along, there has been a very acceptable growth in non-government schemes. The market for alternative finance has exploded, largely as a result of the paralysis of the high street banks, and we on these Benches think that that is to be encouraged. Challenger banks have made a very big impression. Metro Bank, Aldermore and others, such as Santander, are changing the landscape. Peer-to-peer lending has taken off and is becoming a major force. We, as I say, welcome these changes. The traditional banks have let down small business, and it is perfect that alternative sources are stepping into their shoes.
We need, however, to know what is happening in the marketplace. So many questions are asked in your Lordships’ House on this issue, and the truth is that no one seems to know the answer. This amendment will place a duty on the Secretary of State to conduct a review of alternative forms of finance available to small business. This review will examine how the banking sector is catering to the finance needs of SMEs and how SMEs are being encouraged to use alternative forms of finance.
We need the facts, and only an obligation on the Secretary of State will give us the information we require. I beg to move.
My Lords, as the noble Lord, Lord Mitchell, has said, we have debated access to finance and all the various schemes, both government and private sector, on a number of occasions. I agree with him that there is an awful lot going on in this field. A lot of improvements have been made, by the Government’s efforts, these new forms of alternative finance and so on. I go along with the noble Lord, Lord Mitchell, on all that and on the difficulties of assessing quite what is happening and where the best developments are.
Where I get into trouble with Amendment 6 is the last little bit—proposed new subsection (4)—which says that, at the end of this review, when it is laid before Parliament:
“The Secretary of State may, by regulations, act on the findings of the review”.
That is an incredibly sweeping power, which I would be wholly reluctant to give the Government. I heard what the noble Lord, Lord Stevenson, said at the end of the debate on the previous amendment, but this is a very sweeping power indeed, about which I am very cautious.
My Lords, I support the amendment of the noble Lord, Lord Mitchell, and will be very surprised if the Government do not see merit in it. The coalition Government have made very serious efforts to address the impact on the economy of a shortfall in credit availability. They have launched multiple schemes, as the noble Lord, Lord Mitchell, indicated. The previous Government, of which I was a member, did likewise, and we found it extremely difficult to stimulate sensible extensions of credit to support business. The coalition Government found that they finally got lending going largely through the mortgage market. Only time will tell whether that has long-term economic benefit.
The Government have encouraged us to leave relatively undisturbed the dominance of the major banks. The market share of our major banks would be sufficient in normal circumstances to have triggered a competition inquiry many years ago. The dominance of the major banks is reflected largely in the absence of any differentiation in their products and pricing, and their basic business model is the same. They do not compete aggressively for market share; they do so at the margin but, on the whole, they sit on large legacy books of existing relationships. We know that, statistically, one is more likely to divorce than to change one’s bank.
Therefore, the Government should be encouraged to promote new forms of lending and should see this as an important adjunct to their own policies to support the economy. In those circumstances, I should like to believe that the Government would see real merit in the amendment of the noble Lord, Lord Mitchell, thereby ensuring that we get clarity about how the banking and credit availability system is working. I do not think that Santander is a challenger bank; it is the old Abbey National. Aldermore, Virgin, Metro and Bank One are challenger banks, but not Santander. However, if progress is not made by these banks, that is precisely the circumstance in which the Government would want to reach to independent evidence to show this.
I do not quite share the anxiety of the Benches opposite about the sweeping powers implied by the final part of the amendment. I imagine that they could be exercised only within the powers of existing law. I hope that a Government who are committed to furthering and promoting competition and transparency will not put themselves into contortions to reject the amendment. If they do so, they will stir continued anxiety that sitting opposite are a Government of bankers, for the bankers, rather than for society and our broader economy.
My Lords, as has been said, we have discussed finance for SMEs at length and it will continue to be a perennial topic. I welcome Clause 5. All the challenger banks—the noble Lord, Lord Myners, named some of them but I was thinking more of the crowdfunding-type organisations—are very excited about what is going to happen in the market. I have talked to some of the big four clearing banks and they are excited. Despite the fact that one might have thought that they would be nervous about the clause, which will almost force them to send their customers to challenger banks, they are keen and excited about, and welcome, this event.
On the surface, the amendment looks sensible, other than—I reinforce the point made by my noble friend Lord Cope—proposed subsection (4), which is open-ended. Business is nervous about this sort of provision. It is worried by some of the pronouncements that have been made by the Opposition. A Labour Party proposal that has not been raised in this House suggests that if a business chooses not to raise finance, or is not successful in raising it, but actually seeks to find a purchaser of more than half its equity, before such a transaction can be completed to a purchaser of the choice of the vendor, the vendor will be required to offer the business to all its employees on comparable terms. That was proposed in a recent speech by the leader of the Labour Party because he wants a John Lewis-type economy. While I understand that direction of travel, it is, of course, totally impractical and destructive to business life. That sort of policy might be brought in under subsection (4) of the amendment. That makes me nervous and is one of the reasons why I would not be happy about the proposed new clause.
My Lords, I am grateful to the noble Lord, Lord Mitchell, for proposing the new clause, for his survey of finance for small and micro businesses, and for his welcome for some of the positive innovations that there have been in this sector in recent years. It was also extremely useful to have the comments of the noble Lord, Lord Myners, with his great experience in the City and in government, but I also heard the concern of my noble friend Lord Cope about the sweeping nature of the power. It was good to hear the comments of my noble friend Lord Leigh of Hurley.
The noble Lord has proposed a new duty on the Secretary of State to publish a review on alternative forms of finance available to small and micro businesses within a year of the commencement of this Act. I start by reassuring noble Lords that the Government share their conviction that small and micro businesses need greater access to alternative forms of finance. Lending to small business, as has been said, is still concentrated within the four largest banks, which account for almost 90% of business loans by volume. Overall rejection rates for loans and overdrafts are declining, but still stand at around one in four over the past 18 months. Access to appropriately regulated alternative sources of finance can provide a real counterbalance to the mainstream banking sector.
I fully agree with the noble Lord that we should seek transparency on the availability of alternative forms of finance. I disagree, however, that a new review is necessary as it would duplicate existing publications on small business finance. One of these publications is the British Business Bank’s report on small business finance markets, which was published in December 2014. Its main focus was on the increasing use of alternative forms of finance by small business. I believe that this is what noble Lords are largely seeking from this clause. I can confirm that the British Business Bank intends to publish its small business finance report annually. I am happy to commit today to place this report in the Library of the House when it is published again this year.
The British Business Bank’s publication sits alongside a number of other independent pieces of research into this important subject, including the Bank of England’s quarterly Trends in Lending report, last published in January, the quarterly independent SME Finance Monitor, most recently published last week and Professor Russel Griggs’s report on the banks’ lending appeals process, published this week.
My response to the noble Lord would not be complete without touching on an even more important report—the work of the Competition and Markets Authority, the new, independent competition regulator. The CMA is conducting a market investigation into the retail banking sector, including the provision of banking services to small businesses. It has a wide range of powers available if it finds there are problems in the sector. The existence of this investigation helps to respond to the points made by the noble Lord, Lord Myners. The CMA is due to report by April 2016 and I know that it will be of huge interest to this House. The Government will then respond to any recommendations made within 90 days. Any legislation that follows this response would, of course, be subject to parliamentary scrutiny in the usual way. I believe that we should let the regulator do its job and not pre-empt its recommendations with a concurrent review by the Secretary of State of how the banking sector is catering for the needs of SMEs.
Finally, I draw the noble Lord’s attention to the positive measures in this Bill to promote access to finance. Clause 1 removes a contractual barrier to invoice finance. Clause 4 provides for greater sharing of information through credit reference agencies. Clause 5 provides for the UK’s larger banks to be required to refer rejected finance applicants on to alternative finance providers. These provisions got a good degree of support across the House in Committee. I believe that all these measures will make a real difference to the availability of alternative finance for small business. Given the activity described, I am not convinced that a further report as proposed in this clause would be of merit. I hope that the noble Lord will feel reassured by what I have said and that he will feel able to withdraw his amendment.
I thank the Minister for her reply. I thank the noble Lord, Lord Cope, for his insightful addition to what was said and on reflection I think that he may have a point on Clause 4. I also thank the noble Lord, Lord Leigh. He and I know each other well. I have never before heard the statement that he made but he has my email so he knows exactly where to send it. I also thank the noble Lord, Lord Myners—I find it very hard to say that and am tempted to say “my noble friend”—for making the comments that he did. I have always felt that the banks are, and act like, a cartel and that you cannot tell one from the other. It is really good that they are now starting to change and are being forced to change. If my particular area—digital technology—is making that happen, so much the better. Crowdfunding has been very exciting but many of the new challenger banks have been able to come into this because of the technology they are using. That is absolutely fantastic.
I thank the noble Baroness for her comments and feel very reassured that the Government are working in this direction. The facts are really clear. Whether we are in government or not, I would like to be standing here in a year’s time having a conversation like this with the facts at hand. I beg leave to withdraw the amendment.
Amendment 6 withdrawn.
Clause 13: Electronic paying in of cheques etc
7: Clause 13, page 13, line 18, leave out from second “instrument,” to end of line 19 and insert “if”
My Lords, Amendments 7 to 19 and 84 make two technical but essential changes to the cheque-clearing provisions relating, first, to consistency in the treatment of cheque and non-cheque paper instruments and, secondly, to the continuation of current statutory protections for the paying customer.
Amendments 7 to 9 and 19 are designed to ensure that non-cheque instruments, such as warrants and travellers’ cheques, are treated in the same way as traditional paper cheques under the new provisions for electronic presentment. Under the new legislation for cheque imaging, as currently drafted, it would be possible for corporate customers and other large non-bank customers to make arrangements to submit cheque images directly to the central switch that clears cheque transactions for all member banks, rather than their bank submitting images on their behalf. This would make the clearing process more efficient. However, the current drafting means that this option will not be available for non-cheque paper instruments that are not drawn on a bank.
The Government’s policy intention is to provide for a system that treats cheques and non-cheques in the same way, and therefore it is necessary to make these amendments to ensure the equal treatment of non-cheque instruments in all circumstances of presentment. On the basis of current practice, this approach does not present any difficulties. However, it is possible that the position could change in the future—for example, as a result of the development of new types of instruments that do not currently exist. For this reason, Amendment 9 confers a power on the Treasury to restrict the circumstances in which presentment by image is permissible. This power is intended to be used to deal only with any unforeseen issues that may arise in the future and could not be used to have any retrospective effect on instruments that have already been presented by image. It is subject to the affirmative procedure.
Amendment 12 is intended to ensure the continuation of current statutory protections for the paying customer. Under the existing cheque clearing system, a customer who makes a payment with a cheque can request the original cheque to be stamped “paid”, which stands as prima facie evidence that the payee has received the amount payable. This provides a protection for the payer in situations where the payee claims that they have not received payment.
The legislation for cheque imaging does not provide for an equivalent protection when cheques or other paper instruments are paid in by electronic image and the physical instrument does not end up in the possession of a bank. It has become clear that the loss of this protection would remove a useful service currently relied upon by some cheque users. Therefore, it is necessary to make an amendment to preserve this type of protection for the paying customer under electronic cheque clearing. This amendment will confer a power on the Treasury to make appropriate provision in regulations, subject to the affirmative procedure, because the precise nature of the evidence to be provided to the payer may depend on the technical design of the clearing system. The regulations will be able to set out the nature of the evidence to be provided to the payer and the effect of that evidence, including the weight to be given to such evidence.
Amendments 10, 11, 13 to 18 and 84 are consequential amendments dealing with the procedure for making regulations under Amendments 9 and 12, and they provide minor and technical clarifications of the drafting.
To conclude, these amendments will ensure that the provisions for electronic presentment treat cheques and non-cheques consistently and that existing customer protections continue under the new system. I beg to move.
My Lords, I welcome the contribution to this debate by the noble Lord, Lord Newby, and for his helpful explanation of the matters that are being considered by this large group of amendments. We had a fair bash at this in Committee, so I was a little surprised to see so many additional regulations on this matter, particularly as this is an attempt to simplify rather than make more complicated an already rather obscure area of financial transactions. Indeed, in some senses these amendments seem to take us back rather than forward in that they seem to provide a bolstering of a paper-based or evidence-based solution to a number of things that one would have hoped could have moved on to an electronic age. But I am sure that the intention behind them is entirely correct, and we support the general direction of the move.
I wanted to pick up on one point. In the wording of the amendments on the Marshalled List there is reference to the power for the Treasury to make regulations, but it does not specify how they are to be exercised in practice. I agree that the number of occasions will be limited, but the Minister mentioned that the first group would be subject to the affirmative procedure and did not say anything about the second or third groups and whether they would be subject to the negative or the affirmative procedures. Could he clarify that for me please before we leave this point? If it is too difficult to do now, I am very happy to have that in correspondence, but we have no objection to this in general.
My Lords, I think I said that the second group would be subject to affirmative resolution. My understanding is that the two issues that we are debating will both be subject to the affirmative procedure. If I am mistaken, of course I will write to the noble Lord.
Amendment 7 agreed.
Amendments 8 to 19
8: Clause 13, page 13, line 22, after “to” insert “regulations under subsection (1A) and to”
9: Clause 13, page 13, line 22, at end insert—
“(1A) The Treasury may by regulations prescribe circumstances in which subsection (1) does not apply.
(1B) Regulations under subsection (1A) may in particular prescribe circumstances by reference to—
(a) descriptions of instrument;(b) arrangements under which presentment is made;(c) descriptions of persons by or to whom presentment is made; (d) descriptions of persons receiving payment or on whose behalf payment is received.”
10: Clause 13, page 14, line 12, leave out “is” and insert “appears to be”
11: Clause 13, page 14, line 37, leave out second “banker” and insert “person”
12: Clause 13, page 14, line 37, at end insert—
“89CA Copies of instruments and evidence of payment
(1) The Treasury may by regulations make provision for—
(a) requiring a copy of an instrument paid as a result of presentment under section 89A to be provided, on request, to the creator of the instrument by the banker who paid the instrument;(b) a copy of an instrument provided in accordance with the regulations to be evidence of receipt by a person identified in accordance with the regulations of the sum payable by the instrument.(2) Regulations under subsection (1)(a) may in particular—
(a) prescribe the manner and form in which a copy is to be provided;(b) require the copy to be certified to be a true copy of the electronic image provided to the banker making the payment on presentment under section 89A;(c) provide for the copy to be accompanied by prescribed information;(d) require any copy to be provided free of charge or permit charges to be made for the provision of copies in prescribed circumstances.(3) The reference in subsection (1)(a) to the creator of the instrument is—
(a) in the case of a bill of exchange, a reference to the drawer;(b) in the case of a promissory note, a reference to the maker.”
13: Clause 13, page 14, line 43, leave out “subsection (1)” and insert “this section”
14: Clause 13, page 15, line 47, at end insert—
15: Clause 13, page 15, line 48, leave out “section” and insert “Part”
16: Clause 13, page 16, line 7, leave out “section” and insert “Part”
17: Clause 13, page 16, line 9, leave out from “containing” to “may” in line 10 and insert “—
(a) regulations under section 89A or 89CA, or(b) the first regulations to be made under section 89D,”
18: Clause 13, page 16, line 12, leave out “this section” and insert “section 89D”
19: Clause 13, page 16, line 14, at end insert—
“(12) For the purposes of this Part, a banker collects payment of an instrument on behalf of a customer by—
(a) receiving payment of the instrument for the customer, or(b) receiving payment of the instrument for the banker (but not as holder), having—(i) credited the customer’s account with the amount of the instrument, or(ii) otherwise given value to the customer in respect of the instrument.(13) Section 89D(4) applies for the purposes of subsection (12) in its application to section 89D.””
Amendments 8 to 19 agreed.
Clause 17: Review of regulators’ complaints and appeals procedures
20: Clause 17, page 19, line 14, at end insert—
“( ) The following regulators are excluded from the provisions outlined in this section—
(a) the Equality and Human Rights Commission;(b) the relevant regulators in—(i) the Department of Health;(ii) the Department of Transport;(iii) the Department for Work and Pensions;(iv) the Department for Business, Innovation and Skills;(v) the Department for Culture, Media and Sport;(vi) the Department for Communities and Local Government.”
My Lords, my noble friend Lady Thornton would have preferred to have been in her place on this matter, but unfortunately she has suffered an unexpected bereavement. I am sure that your Lordships’ House would wish to send her its commiserations and hope that she is in good spirits at this difficult time.
The question of whether the Government have the relationship with the EHRC correct has featured on a number of occasions in this Bill and the Deregulation Bill. The Minister will be aware that the EHRC enjoys an A status as a national human rights institution. It is therefore right that on all occasions the Government are crystal clear that it is not appropriate to apply general regulations to the EHRC. The A status is awarded by the United Nations International Coordinating Committee of National Human Rights Institutions, which regularly reviews the EHRC’s compliance with the United Nations Paris principles, which require the EHRC to be an independent body.
We have to avoid the reality, or indeed the perception, of interfering with the commission’s ability to perform its regulatory functions and ensure that it is always and at all times independent. If that were jeopardised, it would in turn jeopardise the A status, which is generally agreed to be of importance to the UK’s international standing and reputation. For example, it enables the UK to influence the protection of fundamental rights globally and gives us a voice at the United Nations Human Rights Council. Any downgrading of the commission’s status would have a significant negative impact on the UK’s global influence.
The amendment also deals with regulators in other departments unspecified, which suggests that there may be regulators within each or any of the departments that might have the same characteristics as those applying to the EHRC. In some senses, that is a reflection of the fact that we are still in discussions within the Deregulation Bill about exactly how this process will be developed.
We understand—the Minister may be able to confirm—that it has now been decided to exclude at least one regulator in the Department of Health. If that is the case, the exclusion should also appear in the Bill, as that of the EHRC will if the amendment is accepted.
When she replied to this debate in Committee, the Minister said that this amendment was not necessary, primarily because the list of regulators to which the small business appeals champion provisions can apply will be set out in regulations and that, because these will be taken under the affirmative procedure, there would be adequate control of the process. It is well established within this House, and Parliament generally, that it is not possible to amend secondary legislation. Therefore, this is not really the answer to the question of whether it is appropriate to bring forward a list of specified regulators in secondary legislation. There are three main reasons why the Government should accept this amendment, which would provide clarity.
The first, which has already been mentioned, is the need to protect the EHRC from any possible imputation that it is not independent. Secondly, the noble Baroness herself argued that financial regulators should be excluded from the Bill because they already have an extensive statutory framework for engaging with business stakeholders. This makes it easier for other regulators in the other departments mentioned to be excluded. Following the line taken on financial regulators, it would be appropriate to think about whether there are specific regulators to which similar arguments apply and they should also be listed in the Bill. Thirdly—and more generally—it provides the opportunity for regulators to have uncertainty about their position removed, because they will not have to wait for secondary legislation to come forward to know whether they will be included in a future regulatory provision. As we all know, uncertainty is very bad for business.
The Minister said in Committee that she agreed that there may be regulators for which the growth duty—an issue that is for the Deregulation Bill, not this one—is not appropriate, but she did not think it would be appropriate to start excluding certain regulators within the Bill because,
“regulators may change over time and it is important that there is flexibility to amend the list accordingly”.—[Official Report, 12/1/15; col. GC 100.]
As I have tried to explain, the opportunity for flexibility is not given, because the secondary legislation process does not provide it. Real flexibility would be to determine now which regulators go into the Bill and which do not. That is why the amendment would be important in making sure that there is clarity. I hope the Minister will accept that there is at least a case for looking at this issue again and, perhaps, coming back to it at Third Reading. I beg to move.
I do not find the second half of the amendment compelling, but the first half is very important indeed. The EHRC has a very special role in society and it is looked at very carefully by people outside. The Government have to be super-careful: we know perfectly well that this will not, of course, interfere with the EHRC. This is not, in any way, some sinister operation, but there are people out there who will find sinister operations in anything, particularly when one is dealing with something as delicate as the issues with which the EHRC is concerned. The trouble is that the mischievous people come from both ends of the spectrum: one end wants the EHRC to be more dominant and expansive in its role and the other end wants to have as little to do with it as possible. It is, therefore, important that the wording is right and I hope that my noble friend will have been able to consider this, both in relation to this Bill and on the other occasion that this issue has been raised. I hope she understands that this is not because either side really thinks that there is something here that is wicked or hidden and being covered up. It is simply that there is a very blanket view from outside and it is quite hard to see why it is so difficult to exclude the EHRC. I very much hope that my noble friend will be able to help on that part, at least. The other part of the amendment is probably otiose: I shall not argue with it but I would not want to support it. However, the EHRC is particular, special and has a real reputation in the rest of the world that we do not want to see undermined.
My Lords, I also have a problem with a large part of the amendment. I disagree with the argument of the noble Lord, Lord Stevenson, that putting some departments and regulators in the Bill would make it more flexible than using secondary legislation. The Bill provides a requirement for that secondary legislation to be debated by Parliament. My other concern is the very wide exemption that the amendment suggests for a large number of regulators that fall under the six departments cited. This would undermine and threaten a policy that has been developed specifically to support small businesses and would send an unhelpful message. The policy is simply aimed at improving the appeals and complaints processes of a regulator when dealing with small businesses.
We should not forget that driving greater efficiency, accountability and transparency into the interaction between regulators and those they regulate has to make sense, as does having a simpler, more effective, more transparent, less costly and better understood series of processes by which small businesses are able to challenge regulators’ decisions and behaviour. Ensuring that regulators have appeals and complaints processes that work well and are fit for purpose, that rectify wrongs with minimal delay and are sensitive to small businesses—and micro-businesses in particular—must be good news for the economy as well as for the objectives that regulators are seeking to deliver. I would be very uneasy at the thought of the Bill exempting the number of departments and the very large number of regulators that the amendment proposes. I agree about the EHRC, but I understand that the Government will use secondary legislation to exempt it from this section.
My Lords, I thank the noble Lord, Lord Stevenson, for his comments on Amendment 20, which would restrict the regulators to which the provisions on small business appeals champions can apply. It was also good to hear from my noble friends Lord Deben and Lord Lindsay.
Clause 18 already provides that the list of regulators to be covered by the appeals champions should be set out in regulations. A consultation on the list of regulators closed in January. We intend to publish a summary of the consultation and our response before Parliament rises, based on careful consideration. The Government’s response will then become the basis of the regulations which will bring regulators into scope. These regulations will be subject to affirmative resolution, so Parliament will have the opportunity to consider which regulators should be on the list. On other occasions, the noble Lord, Lord Stevenson, has called for just that affirmative resolution. Although the consultation has closed, we shall take into account representations that noble Lords have made during discussions on the Bill. I am coming on to reassure about the EHRC, but I encourage any noble Lord who has particular concerns about anything else to let me know: we will give them a fair hearing.
Listing inclusions and exemptions would make the Bill cumbersome and unwieldy. Pre-empting our case-by-case consideration through a blanket exemption is not the right way ahead. The amendment first seeks to exclude the EHRC. Noble Lords have linked this to the protection of the EHRC’s A status as a national human rights organisation. The Government share the determination to protect the commission’s status and we understand that, as a regulator, the EHRC is different and needs to maintain its independence from government.
The Government’s position is that the EHRC will not be in the scope of the champions policy. It was not included in our consultation on the list of regulators to be brought into scope. No specific regulatory functions of any other particular named body are listed for inclusion or exclusion in the Bill and it is not necessary to do so in relation to the regulatory functions of the EHRC. Doing so would set a precedent that might lead to overly complex legislation. We have never proposed to include the EHRC, and today I can make a commitment not to do so. The Government will not include the EHRC in the small business champions policy. I hope that noble Lords will accept that full, unequivocal and repeated assurance. In Committee, the noble Baroness, Lady Thornton, was kind enough to accept my assurance on this point, and the majority of noble Lords accepted similar assurances in respect of the growth duty during the passage of the Deregulation Bill. I hope that the House will be willing to do the same today.
The second part of the amendment proposes to exclude any regulator belonging to a list of departments. The proposal would exclude more than half of the regulators we propose to include. Many of them have considerable contact with small businesses. There is broad support for small business appeals champions to make sure that businesses have effective routes to regulators. The amendment would deny that assurance to care homes, which need to challenge rulings by the Care Quality Commission or businesses challenging inspections by the Health and Safety Executive. I do not understand why we should emasculate a policy that has such widespread backing.
The noble Lord, Lord Stevenson, asked whether the Government had decided to exclude a health regulator from the appeals champion policy. We have made no decisions yet, and we shall do so on a case-by-case basis. As I have said, if any noble Lord or regulator is in this situation, they should make representations to us. We intend to make a decision on the list and publish our response before the end of the Parliament.
This is not the growth duty. This is simply a policy that aims to improve public administration and provide an assurance that regulators have the procedures and processes in place to support business appropriately. We all agree that small businesses need a better deal, and we should be aiming to apply this policy to regulators where possible rather than looking at potentially wide exemptions. I hope that, in the circumstances, the noble Lord will feel reassured and that he will agree to withdraw the amendment.
I thank all those who have contributed to the debate. Perhaps I may make one or two points about it. I would say to the noble Earl, Lord Lindsay, who obviously has great knowledge of and experience in this area, that I can understand why he might think so. However, I draw his attention to the fact that the intention in the second part of the amendment is to select a group of regulators equivalent or similar to the EHRC in the sense that they are required to be taken out of a broader approach. It does not attack all the regulators in a department. If he misunderstood that, I apologise, but it is clear that what we are trying to do here is to say that because we were not involved in drawing up the list of regulators, we are not absolutely clear which are in and which are not. In that sense, it is imperfect and we would have to be quite inventive, if the amendment were to be accepted, to come to the right conclusion. I accept that it is not as well done as it could have been. However, it has provoked a good debate and that is the point. Indeed, the noble Baroness has already accepted that there may be one or two regulators that might well be included in the list of the growth duty within the Deregulation Bill. That might not be appropriate for small businesses—and vice versa. We are in a situation where we are not sure how the lists will bottom out. It is that unease which I was trying to attack, and in that sense I hope that the noble Earl is reassured on the point.
It is worth reflecting on the fact that, to do what is required in the Bill, as I understand it, appointments would need to be made to various regulators at board level. That would have an impact on how these bodies operate. I do not think it is an entirely free-riding champion helping to resolve appeals. These are people who, by their constitutional and statutory position, will have to have an involvement in the day-to-day work of these regulators. By accepting this, we are accepting by implication that there will be a change—perhaps a beneficial one—to the way that some regulators will operate in the future; they will not do so as they were originally set up. Again, that is what I am trying to reflect in this debate.
However, I accept that, as presently drafted, the amendment would not achieve the ambitions we had for it and there may be better ways to approach this. It may be that the rather convoluted process whereby I think the noble Baroness was inviting individual Members of your Lordships’ House to write in with special and favourite regulators to be excluded will mean that we arrive at a resolution in an appropriate way. I am sure that this will come out all right in the wash, but at the moment it seems rather a complicated way of doing it.
I will say again that it will not be possible for either House of this Parliament to pick and mix within the secondary legislation. Either it must be accepted as it stands or we can vote against the whole of the SI. It is not fair to say that we will have a choice at the time when these regulations are going through. The choice will have to be made outside Parliament and before the Government, whichever Government they are, put forward the secondary legislation. We have to be realistic about the fact that there will not be the same level of scrutiny.
I broadly take the points which have been made. It will be interesting to see how they go through. We made it clear in Committee that we are not against the idea of there being appeals business champions, as it were. I think we agreed that we would call them “small business champions” in relation to regulation. It is a good idea but I am not quite sure whether it will work in practice; only time will tell.
Finally, on the EHRC, I am grateful to the noble Lord, Lord Deben, for his consistent support for this issue. If it is so clear in the minds of Ministers that the EHRC is not, will not and never can be part of the processes involved in this Bill or in the Deregulation Bill, why on earth can they not just accept that it would be sensible to table an amendment at Third Reading stating that the EHRC is not involved? That would peradventure put beyond doubt the question of whether the EHRC is ever around. There may be evil forces at work and there may not. We do not think there are, and we are not looking at it with suspicion. However, enough damage has already been done to the EHRC, for heaven’s sake, and what is left of it needs to be protected. It would be a positive and rather a noble thing for the Government to accept at this stage that it would be right to have that line in an amendment, just because the EHRC is so special, as the noble Lord said, and to be super-careful because of the particular nature of the commission. That is for the Minister to reflect on and perhaps to come back at Third Reading.
I very much take the point that the noble Lord has made. I am happy to consider whether we could put the EHRC into the Bill, but whether I can do that, I am not sure. Giving the commission that clarity seems to be widely supported around the House.
That is a very generous offer and I think it would solve an awful lot of problems. Indeed, we have been discussing it week after week for the past two or three months. I would be very pleased if she can do this, but I repeat that I am happy to withdraw the amendment at this stage.
Amendment 20 withdrawn.
Clause 19: Guidance by the Secretary of State
21: Clause 19, page 20, line 1, after “must” insert “—
My Lords, government Amendments 21, 22 and 23 respond directly to our Committee debates regarding the small business appeals champion and the business impact target. Regarding the champion, the noble Lord, Lord Mendelsohn, made a number of helpful observations about how it might work in practice. He was keen to ensure that any guidance issued to the champions should be laid before both Houses as well as published. I made it clear in Committee that this was already our intention and I am pleased to confirm it with Amendments 21 and 22.
I turn now to the business impact target. I thank the noble Lord, Lord Stevenson, for his comments in Committee regarding the scope of the target. In particular, he raised concerns around the clarity of the coverage regarding voluntary and community bodies. I have reflected on this issue and I agree that there is more that we can do in the Bill to clarify it. I have therefore tabled Amendment 23, which is a relatively straightforward provision to simplify Clause 27(5). It will remove the current membership threshold of at least 21 individuals for unincorporated bodies that do not distribute any surplus to their members. As I am sure many noble Lords will be aware from their own work in the voluntary sector, such bodies can be adversely affected by redundant, ineffective or excessively burdensome regulation, just as much as businesses can. Therefore, including them within the scope of the business impact target makes a lot of sense. It will not harm the voluntary sector, but will help to ensure that any burdens from new regulations are minimised and that there is transparent reporting of impacts.
This Government have already made a number of changes that have made it easier to set up and run charities and social enterprises. Those include providing greater legal clarity on volunteer liability and supporting proposals to make criminal record checks simpler and less onerous. The amendment will mean that such bodies are not excluded from the definition of “small” and “micro” businesses in Clauses 33 and 34, meaning that they can benefit from any regulatory exemptions made by reference to that definition. I hope noble Lords will welcome the amendments, and I beg to move.
Amendment 21 agreed.
22: Clause 19, page 20, line 2, at end insert “, and
(b) lay any such guidance or revised guidance before Parliament.”
Amendment 22 agreed.
Clause 27: Sections 21 to 25 etc: interpretation
23: Clause 27, page 26, line 16, leave out sub-paragraph (i)
Amendment 23 agreed.
Clause 28: Duty to review regulatory provisions in secondary legislation
24: Clause 28, page 27, line 23, at end insert—
“( ) The Secretary of State shall conduct a review of the current regulatory machinery used to consider regulatory and deregulatory proposals.
( ) The review should include, but not be limited to, the work of the Regulatory Policy Committee.
( ) Following the findings of the review the Secretary of State shall bring forward regulations to enhance the role of the Regulatory Policy Committee and its recommendations.”
My Lords, the amendment is in my name and that of my noble friend Lord Mendelsohn.
The amendment might have been raised within the Deregulation Bill, because it deals with the overall architecture of the regulatory framework. Although I am proposing the amendment to Clause 28, to some extent it is possibly echoed in some other phrases and clauses in the Bill. However, it would be useful to get a response from the Government on the issue. I look forward to hearing what the Minister is able to say in response to my comments.
By way of background, I want to reflect a little on the purposes of regulation. The purpose of the amendment is to probe further the Government’s intentions in the changes that they are making to the regulatory machinery, particularly that bit currently undertaken by the RPC, which reflects on secondary legislation and gives the Government an external view of how that regulation will work in practice, particularly in the business area but not restricted to that.
Regulation is a word that we use extensively in this Bill and the Deregulation Bill. It takes several forms, and we should be careful to try not to mix them up too much. There are things that businesses have to do to be compliant, either with industry standards or with health and safety. But there are, in some senses, different types of regulation, including pre-emptive measures by businesses to reduce the likelihood of being sued, inspection-based regulations for food and hygiene standards, and workplace and financial regulations, particularly health and safety. Many of these will offer benefits to businesses outside of simple compliance, but, in many cases, they are there in generic form and do not specifically help an individual business.
It is important to bear in mind that the culture and context within which businesses operate, which we talked about a lot in earlier amendments, results from a combination of legislation and regulation. The two go together and cannot be distinguished, but where they are coming from and what they are trying to achieve must be carefully thought through.
I say all that because the Government have made a virtue of their one-in, one-out approach—now one in, two out. Doing it by numbers has rather taken the eye, rather than trying to lead into proper consideration of what the regulation is about. In some senses, it is a good thing. Simply saying that there has to be a reduction in regulation does focus the mind. But, and I offer this simply by way of observation, I feel that, in the Deregulation Bill, we got a response by numbers and not by intention or principle, which is not necessarily the right way. There may be a better approach, which might be to think harder about what it is that regulation is attempting to do and try to work out, across the various aspects of it, how it could be made more appropriate to the job.
Such an approach really has to answer questions about whether regulation is the right approach or there is some other solution; whether the regulations come from an external force, such as European Union requirements; and whether it will be easy to comply with. These are all areas that follow on from the need that one has. One hopes that, in doing that, the assessments that are made in the preparation of regulation answer those questions and, in aggregate, provide a better environment in which regulation operates. As part of that arrangement, the Government have set up and use an independent body, the RPC, to look at regulations put forward. It provides a kind of “traffic light” solution, which is relatively crude in its outline, as well as some detailed comments about whether the regulations are fit for purpose, whether they will achieve what is intended and whether they need to be rethought in terms of their impact.
If we are to continue to have the approach that I have outlined, which is not just a by-numbers approach but one which reflects the kind of economy that we are trying to build, supporting high-quality skills and other things, and where regulation in totality is fit for purpose and is as good as can be got, there is a role for a body which looks across the totality of government and considers more than just how the Government are proposing regulations but how they will apply. It is a two-sided approach: both looking at the words in the regulations and the impact that they will have, not just on business but on society more generally. One then has to ask what needs to be set up in order to do that.
As I understand it, Clause 28 requires departments to review secondary legislation that they propose. In our earlier exchanges in Committee, the impression was gained—I would like the Minister to confirm or deny it—that this would affect the work of the existing RPC, which is very well regarded. It is not entirely clear from Clause 28 what exactly is happening here, so I would be grateful if we could have more detail on that. Will the RPC be made statutory? Will there be more bodies that each department will have? Will the new arrangements being introduced be limited to secondary legislation or will they have a wider remit, as has the RPC, for all regulation, including regulation that impacts on other groups such as consumers, charities and other bodies?
Where will responsibility for the new system lie within government? Will it be within BIS or will it go to the Cabinet Office? That would be a more logical place to locate it, because the arrangements have to apply around Whitehall and not just within the business department.
The primary purpose of the amendment is to add some more detail to what was said in Committee and to enable us to reflect more carefully on the position of the RPC. I beg to move.
My Lords, in moving the amendment in his name and that of the noble Lord, Lord Mendelsohn, the noble Lord, Lord Stevenson, raises a number of interesting issues. I am delighted to be able to share many of the sentiments that lie behind the proposal, having served both the previous Government under both their Prime Ministers and this Government on a number of independent bodies advising them on better regulation.
While supporting and sharing the sentiments that lie behind the amendment, I am not completely convinced that the Bill is the right place in which to progress them. I am also concerned that, as written, there could be unintended consequences.
I wholly agree that the Secretary of State should be reviewing the current regulatory machinery used to consider regulatory and deregulatory proposals. I would prefer to see—which I believe is the case—the relevant Secretary of State regularly reviewing the entire regime that oversees regulation and deregulation; so rather than it being a one-off exercise, this, as it were, should be a regular exercise undertaken by any Government.
Going on to the next part of the amendment, I also agree that the scope of the review should include the RPC, but not be limited to the RPC. That is absolutely right. Not only are regular reviews very important, but the reviews should be very broad and should cover the broad scope that the noble Lord, Lord Stevenson, set out in terms of the landscape that surrounds and underpins legislation and determines the culture that produces legislation, regulation and so forth.
The ecology of regulation is certainly a very long and quite complex one. The review should look at how the better regulation machinery deals with policy-making prior to regulatory proposals being brought forward. It should look, as the RPC does, at specific proposals that come forward, but it should also look at compliance and enforcement issues. As the noble Lord, Lord Stevenson, mentioned, it should also look at the extent to which alternatives to regulation are properly considered. I share the motives behind this amendment, but, as I said, I have concerns about the exact proposal for putting this in the Bill.
In terms of the possible unintended consequences, it is the third part of the amendment that I have some concerns about. It is, to an extent, pre-emptive. To have a review of the better regulatory regime, and then presume that it must be the RPC that needs to be strengthened, is almost pre-empting the outcome of any such review. I wholly agree with the noble Lord that, at the moment, the RPC is the best show in town. It is doing an excellent job. It is well established, very well respected and extraordinarily effective. It is providing robust and independent scrutiny and analysis, supporting new regulatory proposals.
At 3 pm today I went to the launch of the RPC’s latest annual report. It was a well attended event. It looked back at the work it had done since 2010, over the lifetime of this Parliament. There are some very impressive statistics in the report. For example, it has managed to drive an improvement in the percentage of impact assessments from departments that are judged to be fit for purpose to around 80%. That is a much higher percentage than was the case in 2010, and some departments are achieving a much higher percentage than 80%. If noble Lords read nothing else but the executive summary, they will see a page or two of very impressive achievements elsewhere on what it has managed to deliver by way of progress. Further to the remarks of the noble Lord, Lord Stevenson, in those five years the RPC has scrutinised more than 1,200 regulatory proposals and issued just over 2,000 opinions on the quality of the evidence base supporting those proposals. It has done an extremely important piece of work throughout the past five years. I agree that the RPC’s role is absolutely fundamental to the current better regulation regime.
If we had been debating this matter eight years ago, we would have said that the Better Regulation Commission was the best show in town. A similar amendment then would have suggested putting the BRC in the Bill. If we had been discussing it 12 years ago, we would have said that the Better Regulation Task Force was the best show in town and would have suggested putting that in the Bill. One of the strengths of the better regulation effort by successive Governments over the past 10 to 15 years has been its ability to evolve. My concern about the last part of this amendment is therefore that it presumes the continuity of the current body. The RPC is, as I said, doing an extraordinarily effective job at the moment; but given what we have learnt from the past 15 years, it is not unlikely that we might eventually want either the RPC to evolve into a successor body or to create another body alongside it to broaden its duties or scope.
The last chapter of the RPC annual report which was launched today deals with the future. It is a very interesting chapter in that the RPC speculates, with the experience it has gained, on how it could be more effective and how the better regulation effort could be more effective in the years to come. Although I favour leaving the Bill as it is, the noble Lord’s comments in moving the amendment, and the issues which the amendment raises, are very important. The Secretary of State should regularly conduct major reviews of the machinery and landscape surrounding regulation. Those reviews should be very broad-ranging and should look both at current bodies and at new bodies that may be sensibly developed in the future. In the mean time, I welcome that the Bill provides for the continuity of the role that the RPC performs and the outcomes that it delivers. That is the most important thing—that the role is undertaken and the outcomes achieved.
Under the business impact target, the Secretary of State must appoint an independent body to verify the impact of new regulations that are scored under the target. That is set out in Clause 25 and has been welcomed by the RPC. I agree that it is an important signal that independent scrutiny will continue to play a central role under any future Administration. The current arrangements under the RPC are working very well, and the RPC has developed a strong foundation for the future. However, to assume that the current machinery will be the right machinery in three or five years’ time might not be the best way to proceed with the Bill. Otherwise, I welcome the issues that have prompted the noble Lord to table this amendment.
I thank the noble Lord, Lord Stevenson, for his amendment and for his comments on the work of the Regulatory Policy Committee. I liked his comment on the “traffic light” solution. Indeed, I give credit to the party opposite for its decision to establish the RPC in the first place. That created an important and enduring cornerstone for the regulatory machinery—one which this Government have continued to develop and improve.
The amendment requires the Secretary of State to review the current regulatory machinery used to consider regulatory and deregulatory proposals. Of course, such reviews already take place from time to time. They look both at the distribution of responsibilities between different bodies, and at the specific rules and requirements. When this Government came into office, they carried out their own review as to what arrangements were required to deliver their key policy priorities for better regulation. Critically, that involved a strengthening of the RPC’s independent scrutiny role.
The Government carried out a further review in 2012, when some useful changes were made, including a “fast track” route for proposals whose impact on business is modest. That change has helped make the system more efficient for both departments and the RPC. I am sure that the Government will ensure that reviews of the system will continue to take place as and when necessary. Given the terms of the amendment, I am equally sure that the Opposition, were they to be in our place, would do the same.
However, the benefit of reviews needs to be balanced against the need for stability in the system. This is why, for example, the appointment of the verification body under the business impact target in Clause 25 is required to be for the duration of a Parliament. An open-ended duty to review, as proposed in this amendment, could potentially undermine that stability and as a consequence put at risk a future Administration’s ability to deliver against the business impact target. It would also generate uncertainty for stakeholders about the wider regulatory system.
The amendment also requires that once a review of the machinery has been completed the Secretary of State must bring forward proposals to enhance the role of the RPC. The Government are by no means opposed to expanding the role of the RPC where it can add value—in 2013, we asked the RPC to scrutinise the new small and micro-business assessment—but it is very odd to create a statutory commitment to a further expansion of the RPC’s role in advance of the review that the amendment envisages.
The noble Lord, Lord Stevenson, asked whether the Government were legislating for the RPC. We are legislating to underpin the business impact target with robust independent scrutiny. Clause 25 requires the Secretary of State to appoint an independent body to perform that verification function. The proposals in the Bill entrench in legislation the verification role currently performed by the RPC but do not change the status or independence of the RPC. As regards the status of the RPC, it is an advisory non-departmental public body of BIS. It is not established in statute and does not have a separate legal personality. Its members are independent from the Government.
There is cross-party support for the RPC, the wider framework within which it operates and the principle that, from time to time, that framework should be reviewed. We can rely on that consensus to secure such reviews when they are needed. We do not need a statutory provision to do so. I hope that the noble Lord will be persuaded by my explanations and will agree to withdraw his amendment.
I thank the Minister for that response and also the noble Earl, Lord Lindsay, for his comments. We are at exactly the same place on this. I was only a bit sad that I got caught out trying to have my cake and eat it by sketching out the work which I think we agree is continuing and necessary, which will be to think harder about the regulatory functions, how best they can be delivered and—constructively and creatively—how best to do that work of review and scrutiny. On the other hand, I was taken by the “best show in town” argument: since we need something like this, why not just build on what we have, because it seems to be the best version of the body we all seem to think is necessary?
The Minister is right: the ecology of regulation needs a bit more scrutiny than it sometimes gets. Of course, his work and experience here were instrumental in our thinking on this. Without that scrutiny, we will not be in a very strong place to build on the policy issues we are talking about, and to think harder about the way in which legislation and regulation will bite on individuals, companies and society as a whole. There is not an easy solution. We must just keep it under review.
I note what the Minister said in his response. Maybe we should leave things as they are for the moment, but the lessons need to be taken back to all departments, not just BIS. There may be some argument for BIS perhaps loosening its hold on this and encouraging other departments to have a bigger share of it. Although in some senses that makes it less likely to be effective because there is no champion within government, it might have the impact of raising other people’s game, which would be good. We need more thinking around that—I am not saying that we would necessarily do it at this stage.
The annual report of the RPC is very impressive, as the noble Lord said. The volume of work it does is astonishing, given that it is independent, non-statutory and has no particular locus within government. I do not know how we get these people to do the work they do, but it is a message we might pick up in other areas. With that, I beg leave to withdraw the amendment.
Amendment 24 withdrawn.