Wednesday, 28 October 2015.
Arrangement of Business
My Lords, I do not think there will be a Division, but if there is we will adjourn for 10 minutes.
Enterprise Bill [HL]
Committee (2nd Day)
Relevant document: 9th Report from the Delegated Powers Committee
Clause 4: The SBC complaints scheme
16: Clause 4, page 4, line 27, at end insert—
“( ) A complaint under subsection (3) may be made anonymously.”
In moving this amendment, I will also speak to Amendment 33. I will also express support for Amendment 19, from the noble Lord, Lord Stoneham. These amendments relate to confidentiality and how the Small Business Commissioner should act in relation to such matters. Amendment 16 ensures that complaints to the commissioner are made anonymously and Amendment 33 governs the conduct of the commissioner in relation to the confidentiality of discussions, documents and other matters relating to complaints. Of course, this assumes a degree of discretion—which is difficult to see, given the tight drafting of the current legislation—and indeed judgment from whoever is the Small Business Commissioner. On this side of Room, we are still reeling from the news that even people in exalted office have considered this role for themselves, so we believe the job will be taken by someone who has a degree of judgment.
These provisions deal with two important situations. The first is where a complaint is made in circumstances where a particular company is unable to pursue it for a variety of reasons, where its particular experience could be interpreted in a variety of ways and where there may be something of a pattern. A Small Business Commissioner can be empowered because small businesses are able to provide details that the commissioner can draw broader lessons from. The second situation is much more pernicious—where there is a real and genuine fear of retribution.
We have a strong evidential base for the proposition that the fear of retribution is causing problems in bringing forward complaints to regulatory authorities and adjudicators, especially about payment terms. The example of the Groceries Code Adjudicator, of course, springs to mind. It has been established for five years and operating for two, and it has a chief executive. It has had an unfortunate mishap with confidential information in recent times.
Following the release of some details, we have been able to identify that such concerns are widespread. In a survey produced for the Groceries Code Adjudicator, the issues that suppliers had could be identified. They were not just about delays in payment, which was a significant problem, but about such things as variations of supply agreement, the terms of supply, unjustified charges for consumer complaints, the obligation to contribute towards marketing costs, and lack of compensation for forecasting errors. The issue of payments as a condition of being a supplier was also remarkably similar to that of late payments. The range of issues that were dealt with covered a multitude of sins, most of which are not covered by the Small Business Commissioner. Even taking account of all those circumstances, the Groceries Code Adjudicator’s public response made it absolutely clear that the fear of reprisal is still the single biggest inhibitor to raising a case; indeed, one-fifth of those surveyed would not raise a case at all for fear of retribution. There are even larger problems when we take into account concerns about the adjudicator’s ability to address asymmetries of power.
This is not just about the fear of retribution, but confidence that the Groceries Code Adjudicator can maintain confidentiality or even do anything, given the strength of the businesses with which she is dealing. This issue came to the public’s attention when the adjudicator admitted recently that fear of retribution was probably her single biggest challenge, the biggest reason why suppliers did not raise issues with her, and that these matters had to be dealt with. Christine Tacon said at a conference in London that building trust with suppliers to encourage them to raise these issues is a major challenge for her. The measures we are discussing would give the Small Business Commissioner much greater ability to address these issues, and the means—or part of the means—to do so. We strongly believe that it is very important that the commissioner be able to gain the confidence of suppliers, maintain confidentiality, use discretion, address these issues and find better ways to resolve them. I beg to move.
I do not think there is much more to say than was said by the noble Lord, Lord Mendelsohn, in introducing these amendments. Amendment 19 stands in my name and I support all three amendments in the group. They are all about confidentiality and discretion. I am sure the Minister will support them as well because the principal problem is how you get people to complain, or at least raise problems, if they fear that doing so will affect their business and associated relationships in the future. If we want the office of the Small Business Commissioner to work and to enable them to do their job properly, we need to address this important issue. Confidence and discretion must be maintained unless the complainant agrees otherwise.
My Lords, if there are very few complaints, I suppose that everything is operating well in markets. Anonymity and fear might make a very good PhD subject for someone but I do not want to concentrate on the psychology of this issue. We have the example of two and a half years’ operation of an anonymity provision in a similar Act of Parliament: the Groceries Code Adjudicator Act 2013, in which anonymity features quite significantly. I would be most grateful if the Minister brought us up to date on how this concept of anonymity is working, because during the passage of that Act there was a good deal of debate about it and we thought it might prove quite difficult to enforce. How is she getting on with the concept of anonymity?
Will the Minister also take account of the fact that one of the big problem areas in relation to payment is the construction industry, which has a dreadful record of blacklisting the people who work in it? We are talking about something not dissimilar here—people simply being erased from future contract applications if they have a record of causing difficulty and asking questions.
I realise that it is not the same issue, but I am talking about an industry—the construction industry—in which there are a lot of problems relating to payment. That people could be discriminated against on the basis of having made complaints is not that different from the case of shop stewards who have energetically defended their members’ health and safety rights on building sites in the recent past.
Thankfully, we are moving away from the blacklisting of workers in the construction industry. However, the people who did the blacklisting are the same people who could well take advantage of those whose anonymity was not quite as dark and complete as we would like it to be. When these complaints come up, you do not need two eyes to work out who has been making them. It is an issue of some sensitivity, and the Government need to be sure that people will not suffer as a result of trying to get a legitimate settlement for a grievance. In some industries there is a record of discriminatory handling of people with justified complaints, which puts their businesses in jeopardy. I therefore hope that the Minister will take account of that in her response.
My Lords, I thank noble Lords for their amendments and welcome my noble friend Lord Eccles to our debate. I also thank the noble Lord, Lord O’Neill, for the points he has made about the construction industry. I think we will come on to talk about the construction industry more fully, because at the moment it is not really covered.
Some small businesses which raise complaints may indeed fear that this could affect their commercial negotiations negatively. That is the underlying point. Noble Lords therefore rightly raised points about anonymity, confidentiality and fear of reprisal and shared with the Committee the experience of the Groceries Code Adjudicator. Indeed, I remember when I was regulated—by a regulator that no longer exists, so I can probably mention it—getting the confidential figures for another supermarket by mistake, and the pleasure with which I rang them back and said, “By the way, these aren’t ours—you’ve obviously got the schedules muddled up”. I am sure that these things do not happen nowadays, but that underlines the difficulties.
Small and larger businesses must have faith in the commissioner and their processes. For the commissioner to make sound recommendations, both parties also have to have meaningful input into the inquiry, which, in a sense, is the rub. We agree with Christine Tacon that it is crucial that the commissioner builds trust. I would like to develop our thinking on the Groceries Code Adjudicator a little more fully and perhaps will write to my noble friend Lord Eccles.
Amendment 16 provides for totally anonymous complaints. However, to consider a complaint properly the commissioner may need further information from the complainant. Without knowing who the complainant is and being able to contact them, the commissioner may be unable to address the complaint—that is the difficulty we are in. As regards the advice and information function, we expect, for example, to be able to afford some anonymity where an inquirer has a general query; that is relatively straightforward. We will ensure that our user-testing of the web portal, which I promised on Monday, informs the extent of anonymity that is possible within that context.
On Amendments 19 and 33, I agree with noble Lords that there must be safeguards against the commissioner identifying a complainant to third parties. That is why Clause 8, on confidentiality, restricts the commissioner’s scope to disclose information. However, for the reasons I have already explained, we believe it will generally be appropriate to identify the complainant to the respondent. It is right that a respondent should know who has complained so that they can respond fully. Amendment 33 would go further and require consent for the sharing of all information pertaining to a complaint, including to the respondent. This would be disproportionate.
I should add that in comparing notes with the Australian small business commissioner, we found that he had taken an approach to anonymity similar to the one we are proposing. I hope that I have been able to reassure the noble Lord, and that he is willing to withdraw his amendment.
I thank the Minister for those comments and will just make a few points in reply. It is a limited pool, but we illustrated some of the lessons that can be drawn from the Groceries Code Adjudicator for various reasons. The situation is slightly different but, when it comes to what the consequences and fears are, the numbers are so stark that it gives us some sort of base. The important point to note is that if the Small Business Commissioner had the same uphill struggle to get anywhere near the velocity we need to make this work, the situation would be extremely difficult. The difference between the Groceries Code Adjudicator and what we are trying to do here is that, as the adjudicator said at the London conference to try to convince suppliers, she has a legal duty to protect them. That is a very important principle, which we think should be considered. If someone with a legal duty to protect suppliers is not able to engender that sort of confidence after this long, the Government should consider that point in due course.
The Minister finished a little too quickly—I was about to whip out Mark Brennan’s article on mediation. In mediation it is absolutely essential that you do not have conditions of anonymity, largely because the process of mediation is about coming to a commercially realistic solution, in keeping with our suggestion that a degree of compromise is required. However, the small business commissioner in Australia does take anonymous complaints, in order to be able to identify potential patterns, and does have greater powers to look at such issues and learn broader lessons. That helps to inform the rest of their activities.
However, I see that we have a chink of light. I was not particularly happy, given that we have been trying all along to get the Small Business Commissioner a little more discretion and the ability to consider matters in the round, that one of the measures was described as “disproportionate”. That is not our intention—we are encouraging discretion. I hope that in due course the Government may be able to consider these matters in a fresh light. Given the Minister’s comments, I beg leave to withdraw the amendment.
Amendment 16 withdrawn.
Amendments 17 and 18 not moved.
Clause 5: Enquiry into, consideration and determination of complaints
Amendment 19 not moved.
20: Clause 5, page 5, line 35, at end insert—
“( ) Where the respondent fails to provide information voluntarily, the Commissioner has the authority to investigate and enforce compliance with information requests on contract terms.”
My Lords, in moving Amendment 20, I will speak to Amendments 21 and 22 and address some of the issues relating to Amendments 23 and 31, in the name of the ever-present and astute noble Lord, Lord Stoneham. This cuts to the very heart of what we are trying to get the commissioner to do: how the commissioner can operate most effectively and what some of the powers are that make the whole system work. This is very important to consider in the light of the narrow focus of the objectives in the short term and the hope that the office will establish objectives that will make a big difference to small business over time.
Amendment 20 would provide greater power for the commissioner to investigate and call for information. Amendment 21 would reinforce this by specifying the breadth of areas where they can call information from: government departments, local authorities, public sector bodies and companies. This is largely because there are very few powers available in the Bill, and the ability for another organisation to frustrate the commissioner is clear. So in our view, Amendment 22 is extremely important because it provides what is in a sense a lever which encourages people to go through a process of mediation.
The objective of the office of small business commissioner—in a sense, the classic design—is to enhance competition and a fair operating environment for small businesses. The investigation of small business complaints, business behaviour and facilitating the resolution of disputes form the core, whether or not that involves greater accessing of information and education, influencing government and their agencies to be much more focused on small business, or even acting as an advocate for government. But at its very core, the function of helping disputes gain some traction and thus resolve matters for small businesses is extremely important. These underpinning powers give it the force to make sure it can get to the heart of any matter, and that it has sufficient leverage to encourage some form of mediation. The Small Business Commissioner needs a power to encourage as well as to discourage.
The cost of a dispute for a small business is not just the financial costs but lost business and the cost of pursuing any resolution, such as legal costs. There is also a considerable opportunity cost, and a great deal of stress. The opportunity costs include what would otherwise have been achieved for the business in terms of time and effort. So, if a small business which is resolving a dispute takes someone out of the business, added to those costs is the disruption caused for the operators themselves.
Small business disputes face a particular difficulty, which is that they do not generally arise in the ordinary course of operating such businesses. They are periodic and emerge in unusual circumstances, and accordingly small business operators may not identify an emerging dispute until quite late on in the process, and might not have developed the skills to resolve the dispute. Through the early identification of emerging disputes, financial costs can be dealt with easily, incurring much less of a burden for both parties; and it also means that relationships that are critical to running small businesses can be maintained.
As we have seen with previous legislation, a small business commissioner and effective alternative dispute resolution operate speedily and at low cost. We would hope that the Government would consider mediation to be an additional tool that could be used over time. It is an informal and collaborative process and is generally of far greater benefit to small businesses, principally because it facilitates parties continuing their commercial relationships. Also, the potential costs of legal proceedings outweigh what small businesses would gain from the dispute. Long, drawn-out legal proceedings with the possibility of appeal may also hinder the parties so that they do not deal with each other commercially while the action proceeds, and the breaking of the business relationship is likely to persist. Accordingly, in alternative dispute resolution a strong emphasis is put on things which can be signposted by the Small Business Commissioner, such as those which they can supervise or take some sort of role in. This encourages the parties to be commercially realistic rather than intransigent, and to seek an outcome that is not 100% in favour of one side.
In order to create such a role, it is clear that some kind of lever is required. Amendment 22—my particular favourite—states that if one party is uncooperative or is unwilling to go through sensible mediation, the Small Business Commissioner can provide a commentary that will be taken into consideration when the question of costs is considered if that matter goes to litigation. Australia is a good and successful example of the use of this power, which helps to ensure that the parties come to a resolution. A small business can rack up massive costs when the Small Business Commissioner has reached a firm conclusion, and we have seen how resolutions can be reached over time much more collaboratively, in keeping with the intention of maintaining good business relations. That is not axiomatic; there are of course provisions for the court to take different views and provide protections, so that people do not game the system. But the notion that a small business commissioner, using their discretion, can ensure that someone comes to the table in a co-operative and collaborative spirit, and that all parties take a sensible view, underpinned by the idea that someone else will be accountable for costs, is a considerable and beneficial power.
All in all, we are hoping to the narrow focus of the Small Business Commissioner. The Bill already narrows who it covers, who it deals with and what it can do in general. The Small Business Commissioner, by the very definition of a small business—by the exclusion of large entities being able to contact it; by its roles and functions, its capacities and flexibilities; in providing no scope to deal with local authorities; by its staffing, its capabilities and the unusual power that the Secretary of State has to abolish it; and by its levers for enforcement and information—relates only to a small proportion of the type of disputes that can be dealt with. On late payments, it is already narrowed by the legal definition of the contract terms it can cover. It deals only with disputes with large businesses, even if large businesses are a consequent part of the step. It excludes the public sector and most contract term variations, along with anything that can go through an alternative complaint procedure.
As we near the end of these clauses, I am hoping that, while we have not been able to address such issues, the Minister might be sympathetic to giving the provision greater teeth and flexibility, so that progress can be made. I beg to move.
My Lords, I have some sympathy with this amendment. It offers the possibility of speeding up the process of resolving complaints. For the respondent—that is, the person about whom the complaint has been made—time is his friend. He has the money so the longer that he can spin it out, delay and obfuscate, the better. The complainant may lose heart and give up, but in any case in the mean time he hangs on for money. There may be occasions when the Small Business Commissioner says, “Actually, if we could get that particular piece of information, we could resolve this. We could cut to the chase and reach a resolution”. Up to that point, the respondent could have been trying to flatter to deceive, appearing quite helpful and giving lots of answers, but not actually giving the answers to the questions that were relevant to the point at issue.
I think that the noble Lord, Lord Mendelsohn, has made a good point. I would like to see us find ways in the Bill to facilitate the speeding up of this process by the Small Business Commissioner being able to cut through the Gordian knot—if he believes that such a situation exists—by requiring that information which has not been offered voluntarily can be compelled to be disclosed with a view to making his job and the whole process work more efficiently.
I, too, lend my support to this series of amendments. I have a particular interest in Amendments 23 and 31. I will not bother to repeat all the arguments made by the noble Lords, Lord Mendelsohn and Lord Hodgson, because I support them entirely. On Amendment 23, throughout our debates I have expressed concern that there just was not sufficient power or clout at the end of the process for us to encourage a resolution, and indeed to encourage people to complain. If someone is dealing with an intransigent company or organisation and they think there are no sanctions at the end of the line, they may well think there is not much point in raising the issue, because the company or organisation will continue to be intransigent.
Amendment 31 deals with the end of a process where it is clear to the commissioner that they are getting repeated complaints about a particular organisation, and it is failing to apply any of the recommendations they have made. At that final stage, the commissioner should have some power. I accept that this may not be completely refined yet, but I hope that the Minister can respond on that point.
The commissioner should have some final power to recommend to the Minister, the Secretary of State or whoever is appropriate that there might be some final sanction that can ensure compliance. This would give the complainant the motivation at the start of the process to get involved with the Small Business Commissioner, and the company that is the source of the complaint some incentive to resolve the matter. Otherwise, there is a danger that the credibility of the organisation and the work of the commissioner will be undermined.
My Lords, briefly, Amendment 31 seems to introduce a new dimension to the responsibilities of the commissioner, quite apart from the matter of fines, which I would not be in favour of. In the small business sector, lots of businesses are being formed, but lots, I regret to say, are going out of business. That also applies to their customers—the larger businesses. Plenty of them get into trouble from time to time. Repeated failure to pay an invoice may be simply a signal that the invoices are never going to be paid. If one is not careful, the idea that the commissioner should become responsible for credit checks and for a whole host of commercial interventions completely changes the situation.
As I understand it, the commissioner is there to look in particular at the question of late payment as a cultural issue, and to change the culture in a business which appears to have worsened in recent years. I can understand that, but the minute that we start to get into the detailed financial circumstances of individual businesses, the commissioner is in real trouble.
I thank noble Lords for their comments. I emphasise that the Government consider that a punitive approach involving compulsion or financial penalties in the round is not the right one to take if the commissioner is to contribute to culture change in payment practices. We want the commissioner to develop trust and have credibility with small and large businesses alike. The commissioner therefore couples an approach of building the confidence and capability of small businesses to assert themselves with proportionate powers to disincentivise unfavourable practices. Notably, this will be through the power to publish individual reports which can name respondents and draw attention to themes and issues in the annual report.
Turning to Amendment 20, the commissioner has the power in our clauses as drafted to ask the commissioner or respondent to provide voluntary information or documents relevant to a complaint. The amendment seeks to force a respondent to comply with such a request where it concerns contract terms and gives the commissioner a power of investigation. Diligent businesses will want to engage constructively with the commissioner and will not need to be forced. They will be keen to make sure that their small suppliers are being treated in a fair and reasonable way. That makes good business sense. They are being investigated by the Small Businesses Commissioner. Secondly, they will want to protect their reputation and avoid being named and shamed. Anything more heavy-handed would introduce an adversarial and legalistic element to the process. I was interested to hear from my noble friend Viscount Eccles that he felt that that was the right way to go.
Turning to Amendment 21, the handling of a complaint is primarily a matter for the complainant, the respondent and the commissioner. However, if third parties including Government have material relevant to a complaint, there is nothing in the legislation that prevents them approaching the commissioner with such information.
Turning to Amendment 22, which the noble Lord, Lord Mendelsohn, referred to as his favourite, the commissioner has broad scope to recommend steps which he or she considers could remedy, resolve or mitigate issues in complaints. We intend that the commissioner will support small businesses’ use of alternative dispute resolution. The commissioner could, for example, recommend mediation, which, as the noble Lord said, is generally much more expensive, and hopefully quicker, than a long drawn-out legal case. But it is not considered appropriate for the commissioner to require parties to engage in mediation, directly or indirectly. This includes giving the commissioner power to influence costs in litigation where mediation has been refused. Rather, the Government consider that it is the role of the court to determine costs in legal cases. Legal cases are already expected to be conducted at a proportionate cost, and there are of course mechanisms to keep costs reasonable in the courts.
My Lords, we do not believe it right to make the commissioner’s recommendations legally binding—an issue addressed in Amendments 23 and 31. Requiring a party to provide an outline of costs for litigation would require the party to engage with the process and strategy of litigating—for example, looking into instructing lawyers—whereas our aim, as I have said, is to encourage alternative approaches to litigation. Of course, courts may consider a party’s refusal to mediate to be unreasonable, and can address this when considering court costs.
We also agree that it is important to encourage the two sides to come together. We believe, however, as I said at the start, that a punitive approach to costs is not the right way. Stakeholders told us in our consultation that the gaps in knowledge about alternative dispute resolution was the key issue, and we have obviously respected that feedback. The primary intention is that the commissioner will make recommendations that enable the parties to resolve the dispute, rather than being an arbitrator. In certain cases, the commissioner may be considering lawful, if unfair, acts. To accept these amendments would effectively allow the commissioner to create rules on what is and is not good payment practice—quasi-legislating—and this is not the role of the office as we see it. Rather, the Government believe that it is vital that the commissioner build up a position of trust and influence with all parts of the business community.
As is obvious, I do not really agree with the move to broaden the role of the Small Business Commissioner. As I said on Monday, I believe that focus is what we should go for, but I will of course read carefully our various discussions. However, I am not persuaded that, despite the eloquence of the noble Lords who have spoken—including the noble Lord, Lord Hodgson, who made some points about incentives—we would be right to change these provisions.
Before the Minister sits down, could she perhaps explain something to me? I understand that the commissioner’s approach is broadly similar to that of an ombudsman, but it goes a little further in trying to resolve the disagreement. However, we have already suggested that, if this process is successful, a lot more people than the anticipated figure of 500 may well come forward with complaints. Within that, there may well be recalcitrants who will not honour their obligations.
Does the Minister envisage a situation in which, if this softly-softly approach does not work as well as she would like, it would be appropriate for the annual report—which we might not see but she certainly will—to require legislation? Regulation and legislation are the last resort, we all accept that. But we would not want to have the door closed and locked, so that it takes a considerable number of years for us to return to this issue.
It has taken a long time for us to get this far on questions of payment. I suspect that the legislative programme of successive Governments may well be such that it will take them an equally long time to return to it. Therefore, we need to have from the Minister at least some kind of veiled threat of legislation if the conciliatory approach does not work. There are some very nasty people who are not paying their bills or meeting their requirements. I am not sure if ear-stroking in itself will be the ultimate answer to this problem.
I am grateful to the noble Lord for his intervention and the opportunity to say that the commissioner can raise issues about his powers in the annual report, which, as I said on another occasion, will be available to Parliament, and which we have to table in Parliament unamended. He also has the power to name and shame, so he can publish the report and comment. The Australian commissioner is getting a lot of airtime, but he has found that that power has been useful in the conversations he has had in Australia on difficult cases. That will therefore help a lot and will help to change the culture, as I was saying on the Floor of the House this afternoon. There is also a review of the success of the commissioner, which I think some noble Lords questioned on Monday, two years after the coming into force of the Bill—assuming that noble Lords agree it—and then every three years. Therefore, that also gives us another opportunity.
This is a novel area, and we are moving forward in uncharted territory. We are bringing in a number of changes. I remember that when I dealt with planning in the 1980s as a civil servant, we made what seemed like quite small changes to the regime of planning, which obviously was in guidance, and that had a huge effect. My own view and hope is that these changes that we are making on transparency, payment terms—following the EU directive that I was talking about this afternoon—and of course on this vital Small Business Commissioner, will make a big change to the landscape.
I was disappointed by some of the Minister’s comments at the very end, because arguments were set up which we clearly have not made or would make, and nothing we have said during the entire course of these proceedings would suggest that we would make such points. We think a weakness is that we have not learned the lessons—from Victoria to Queensland to New South Wales, to the Australian commissioner. Mediating one case does not establish a rule; it will not do in Victoria, Queensland—no one has ever suggested such a thing and it was wrong to suggest that we would. Similarly, the court determines costs and the Small Business Commissioner can make a particular point. The Minister presented a whole series of arguments which are wrong.
I will focus on reputation and naming and shaming. I accept that the Government think there is some huge benefit to this, saying that we can deal with naming and shaming and reputations, and that it is some kind of Aladdin’s lamp. However, frankly, people need a little more, and the noble Lord, Lord Hodgson, made exactly that point. You can string out an awful lot of the process by not being able to do it. Someone needs a lever so that they can say, “If you choose to frustrate a process and to refuse to do these things, there are other ways you can deal with this. Or, if you feel that you are being strung out, it will not work totally and wholly to your detriment”. That is quite important.
The noble Viscount, Lord Eccles, made the point that we should not make a detailed examination of particular businesses. Certainly, it would be extremely concerning if, when every business qualified, a series of checks about its health were made. However, these matters are relevant to how a conclusion is reached. There may well be restrictions when there is a payment dispute, the contract term is a problem and the larger business is willing to change it, but a broader change is required. You sometimes have to get into those issues where you are resolving a case. When a company is going to be named and shamed, its willingness to address that in the circumstances is the sort of issue that will certainly weigh on the Small Business Commissioner. If it found that there was a problem, it would reflect on whether the magic lever of naming and shaming should be applied if the company showed some sort of good faith and good will.
I have one simple question for the Minister, who has declined to do too much that would give a degree of discretion. These amendments would give some sort of benefit. I would like her to see whether or not a large company could contract lawyers to design a contract that would allow them to carry on with exactly what they were doing, with long payment terms and terrible practices, and that would not come under the Small Business Commissioner. I would like to know that before Report. One of the large magic circle firms has indeed drafted a contract that would exclude any large business from coming under this provision.
The only provisions in this legislation that are outside core payment terms relate to new fees, altering the price of fees agreed, and replacing the payment of a fee that is provided for by a contract but not previously relied upon. They are new areas, and I understand the area of law that they are in. If you establish a contract that has provisions that allow for arrangements freely entered into, there is a huge imbalance and you can design a contract that would exclude large businesses from coming under this ambit. That is my problem with the narrow focus. That is my problem with relying on naming and shaming. That is my problem with relying on the good will of the people involved in this process. The Government themselves have provided the focus on this. They want to deal with the most egregious problems first, and this does not address them. They should at least give the Small Business Commissioner some powers.
I will certainly look at the point that the noble Lord makes about avoidance contracts, as it were. I was trying to explain the amendments that have been put down, partly in an exploratory way, and what effect they seem to have. Obviously, what we are doing is debating these issues and trying to find the right way forward. I am informed that a small business can raise a complaint if the larger company seeks to exclude the commissioner from answering. That is a sort of interim answer to the point that he has made about magic circle law firms seeking to get around what we see as a new conversation between big and small companies, initiated by the Small Business Commissioner so that we can improve the culture and, as he said, deal with the more egregious cases, so that that will change how people behave and we will not have large numbers of cases ending up with the Small Business Commissioner.
The point that you can include things is the point that comes before, and the point that where you exclude it is the point where I picked up. For the purposes of brevity, I thought I would leave out the first part but I am happy for the first part to be mentioned in reverse order to where it appears, even in the Government’s own documents. Before we come to some very clever amendments that I hope the Minister will be very sympathetic to, all I am trying to say is, at least give the Small Business Commissioner some latitude. Allow it to apply its discretion and encourage people of good standing and with good experience to come forward and use that discretion to good effect, to be able to help small businesses. I beg leave to withdraw the amendment.
Amendment 20 withdrawn.
Amendments 21 to 24 not moved.
Clause 5 agreed.
Clause 6: Reports on complaints
25: Clause 6, page 6, line 12, leave out “may” and insert “must”
I shall also speak to Amendment 26. Amendment 25 is another amendment on the same theme that we have already been discussing: whether the commissioner needs some extra power. The two amendments would principally ensure that a report is published if an inquiry is entered into and that the respondents should be identified.
The reason for putting this proposal forward is that we are again seeking more effective powers and oomph for the Small Business Commissioner. We are assuming that if the complaints scheme is entered into, there will be a period before the initial approach is made for some sort of opportunity for conciliation. Indeed, I would have thought that most issues should be encouraged towards resolution before going into any kind of formal complaints scheme or procedure. As I say, there should be an opportunity for conciliation. To encourage that process and to provide an incentive to settle matters quickly and informally, some pressure should be applied. Once we have entered into the formal complaints scheme or procedure, a report would then be published and the respondent would be named.
The respondent may fear that they would attract unwanted publicity if matters were published in this way, but if the respondent has no concerns that they have done anything wrong and there is nothing they need to put right, they should have no anxiety about this, and that could be another way of applying pressure to get something resolved.
There is one further element to these amendments. There may be examples where the commissioner finds that a particular respondent is using undue pressure arising from its position in the marketplace and, indeed, is benefiting from undue dominance. We think the Bill should state that the commissioner should have the power to notify the Competition and Markets Authority where he or she considers that there is an abuse of market power, so that is an additional power which we are seeking through these amendments. I beg to move.
This group of amendments is significant, in so far as it is another indication of the change of mindset in the Liberal Democrat ranks. We have seen them voting with enthusiasm against the Government in the past few days, and here we have what must be regarded as a classic example of Opposition Committee stage amendments. Where you see a “must” you make it a “may” and where you see a “shall” you make it a “will”. I remember some 35 or more years ago as a young Back Bencher being told that that is what I had to do when I was debating the Committee stage of a Bill in order to scrutinise it properly, but in effect the idea was really to hold up proceedings for as long as possible. That was because in those days, time was the only weapon in the Commons that Oppositions had. I am sure that the noble Lord, Lord Cope, bears the scars of many such confrontations.
This is a basic type of amendment but it is none the less worthy because of that. It offers to put teeth into the legislation, and I think it is useful for us to get a greater degree of accountability—a bit of an edge. As I said earlier, the softly-softly approach is okay, but it should be, “Walk quietly, but carry a big stick”. The stick does not have to be used, but the threat is there. The Minister recognises that here is an opportunity to have a bit of cross-Committee co-operation, and may accept what is a modest but none the less worthwhile group of amendments.
I hope that I do not sound patronising, but this has brought back to me memories of the delights of the Augean stables of Scottish secondary legislation, on which I spent many years. I will not sustain the metaphor, but noble Lords will get my point. As I say, the amendments deserve the support of the Committee, because they are well-intentioned and should enhance and give more force to the Bill.
My Lords, I add our support for the first of the measures. I thank the noble Lord, Lord Stoneham, for introducing it into our discussions and the noble Lord, Lord O’Neill, for his excellent comments.
Amendment 30, in my name and that of my noble friend Lord Stevenson, would give the Small Business Commissioner a role in commenting on access to finance and to make a simple and straightforward case. A number of measures try to increase access to finance, whether they be the provision of overdrafts for very small businesses, forms of growth capital, older forms of asset finance, newer forms of peer-to-peer lending or other forms of finance. Many people look at these schemes and programmes; indeed, committees in this House, the Government and other bodies have looked at the performance of a number of the initiatives that are available and whether they give the right benefits and whether too much is taken out of them.
The purpose of the Small Business Commissioner is to take the perspective of a small business to try to find ways in which such schemes work to best effect on behalf of small business. In many ways, this is our thinly veiled attempt to enable the Small Business Commissioner to be the advocate of small businesses and to take a particular perspective that encourages the voice of those who require access to finance to come to the fore. Where the Small Business Commissioner is able to draw on the lessons learnt from resolving disputes—where there are broader lessons, challenges and problems—those comments can be made. Invariably, the problem is not just about cash flow. If you have a problem with cash flow, access to finance will be the crucial test of whether you are able to survive.
My Lords, I just want to say a word about Amendment 30, to which the noble Lord, Lord Mendelsohn, has just spoken. On Monday, at our first meeting in Committee, I said that I thought that the SBC role had been drawn in a way that is a bit too focused, but I say to the noble Lord that Amendment 30 would take that role well beyond the bounds of what the Small Business Commissioner should be doing. The comments that I made on Monday about payday loans apply equally here. This is not part of his competence. Hundreds of bodies and people make recommendations about how to improve finances for small and medium-sized companies. That is a serious issue, but it is not part of what he should be doing. He is focused on a different part of the field. I am sure that my noble friend will not accept the amendment, as plenty of bodies are looking into the provision of finance to small business and this would be a distraction from the commissioner’s central task, albeit that I still think that the central task is a little too narrowly drawn.
My Lords, I thank all noble Lords for their comments and the noble Lord, Lord O’Neill, for his humour and for his lessons in how to amend Bills, which will be useful when I return to the Back Benches.
We believe that the commissioner will be able to achieve maximum impact by publishing reports on complaints only if he or she has the discretion when to use this power in a targeted way. Amendment 25 would require the commissioner to publish a report on every complaint that he or she considers. We believe that that is unnecessary. The commissioner may, for example, consider a series of very similar complaints and may find that there is little value in compiling a report for each separate complaint when the activity could be captured instead in the aggregate annual report. In other cases, the complaint might have arisen from very particular circumstances, meaning that the determination had no wider application and was of little public interest. We believe that the commissioner should have the freedom to decide. This is a matter of his independence.
I turn to Amendments 26 and 27. A blanket approach of publishing the names of respondents, as set out in Amendment 26, has the potential to be unfair—for example, when a complaint is not upheld. It could indeed encourage mischievous complaints. Under this proposal, anyone who was complained about would be the subject of publicity. Giving the commissioner the discretion to choose whether to name the respondent will be a real incentive for businesses to work constructively with the commissioner, to pick up on the last discussion. We will see a real change in behaviour being encouraged.
Amendment 28 would remove the obligation on the commissioner to allow the parties to a complaint to make representations about the publication of a report on that complaint. The right to be heard is an important safeguard to ensure that both parties to a complaint can make their cases and, to recall my earlier example, to allow for necessary accuracy checks to be made before a report is issued.
On Amendment 29, a good point was made about the CMA because the CMA may well find these reports useful in its wider work, but the commissioner does not need a power to send the reports to the CMA. Under the existing provisions, annual reports and individual reports can go to the CMA.
As the noble Lord, Lord Mendelsohn, explained, Amendment 30 would allow the commissioner to make recommendations to the Secretary of State on access to finance for small business. It is a vital area for growth and innovation. We now have 5.4 million small businesses and lots of different sources of finance. In the interests of time I will not go through them all, but the Small Business Commissioner is being set up to address poor payment practices and focus and consider complaints in this important area.
Small businesses may seek general advice on a range of matters. Issues such as finance may be brought to the attention of the commissioner. The advice and information that we will provide online and the links from the website will be important, as will the report that the commissioner makes each year on the most significant matters raised. However, I am afraid that I agree with my noble friend Lord Hodgson that this amendment would broaden the work of the Small Business Commissioner too far, and I ask the noble Lord to withdraw his amendment.
I thank the noble Lords, Lord Mendelsohn and Lord O’Neill, for their support. The noble Lord, Lord O’Neill, used the phrase “talk softly but carry a big stick”. I thought that he carried a big stick but did not use it, so I am grateful for that. Obviously I listened to what the Minister said. We have to look at this in the round, once we have been through all these clauses, to see what sort of powers are sufficient for the commissioner. I am grateful for the confirmation about the Competition and Markets Authority, because that is an important point. With the proviso that we may return to this on Report, I am happy to withdraw the amendment.
Amendment 25 withdrawn.
Amendments 26 to 29 not moved.
Clause 6 agreed.
Amendments 30 and 31 not moved.
Clause 7: Scheme regulations
Amendment 32 not moved.
Clause 7 agreed.
Clause 8: Confidentiality
Amendment 33 not moved.
Clause 8 agreed.
Amendment 34 not moved.
Clause 9: Annual report
Amendments 35 to 37 not moved.
Clause 9 agreed.
Clause 10: Review of Commissioner's performance
Amendment 38 not moved.
Clause 10 agreed.
Clauses 11 and 12 agreed.
39: After Clause 12, insert the following new Clause—
“Payment practices: protection of retention monies in the construction industry
(1) The Secretary of State shall arrange a review of the practice in the construction industry of withholding monies which would otherwise be due under a contract, the effect of which is to provide the paying party with security for the current and future performance by the party carrying out construction operations of any or all of the latter’s obligations under the contract (“retention monies”).
(2) The review shall make recommendations regarding—
(a) the maximum period of time for which retention monies can be withheld; and(b) the most effective mechanism for protecting retention monies against the risk of the paying party becoming insolvent. (3) The review shall be completed by the end of the period of 9 months beginning with the day on which this Act is passed.
(4) On completion of the review the Secretary of State shall lay a copy of the report of the review before each House of Parliament.
(5) Within the period of 18 months following completion of the review the Secretary of State shall by regulations implement the recommendations in the review.”
My Lords, I listened with great interest to the debates in Committee on Monday and was very struck by the Minister’s description of the prime focus of this part of the Bill. She made a great point of the intention that the Bill should be very tightly focused. The prime focus was described as being:
“on late payment, particularly when there is an imbalance of power between big business and small business”.—[Official Report, 26/10/15; col. GC 126.]
Amendment 39 falls squarely within that description but regrettably, if not astonishingly, it is not addressed in the Bill, nor do I believe that its aims would be met by the establishment of the Small Business Commissioner as defined.
The amendment is designed to address the specific issue of cash retentions in the construction sector, possibly the most significant payment issue facing the 250,000 or so small businesses in the sector. I will summarise the issue briefly. Retentions are supposedly held back as security for defective work. On average they amount to about 5% of payments due and about half of this is retained well beyond practical completion of a project, on average for a further 12 months but sometimes for very much longer. Some £3 billion of cash is estimated to be held back in the form of retentions at any time. This year alone, small businesses have already lost £30 million as a result of their debtor companies going into liquidation before paying the sums that they owe but have retained.
Small companies generally have little or no say over whether to accept the practice of retentions. They are essentially at the mercy of the larger firms on whose business they depend. Both the noble Lord, Lord Hodgson, and the noble Baroness, Lady Hayter, gave some specific examples on Monday of situations where small firms find themselves under unfair pressure from larger firms. The result is that small firms are deprived of funds that are due to them and are therefore unable to invest in new technology or equipment, unable to recruit new staff or take on apprentices, unable to grow their business and, in the worst cases, unable even to survive. Meanwhile, adding insult to injury, the funds wrongly withheld from them are used to provide working capital and investment resources for the client companies that have failed to pay up.
This is not a new issue. Two Commons committees in 2003 and 2008, the first chaired by the noble Lord, Lord O’Neill of Clackmannan, recommended the ending of retentions, at least in the public sector. The construction sector supply chain charter, and I think I got my tongue round that one, agreed by the Government’s Construction Leadership Council and issued by BIS last year, included the aim of moving to zero retentions by 2025. I have been made aware of even earlier reports from 1993 and as far back as 1963—I think even further back than the noble Lord, Lord Cope’s 40-year experience of late payment issues—recommending that retention should be abolished or at least placed in trust. Quite a few leading contractors in both the public and private sectors manage perfectly well without retentions.
The Bill presents a perfect opportunity finally to address this festering issue. I am not suggesting that retention should be abolished overnight or removed altogether. I am suggesting that the Government could deliver a really good stimulus to the productivity and output of small firms in the construction sector by starting the process of lifting this unfair burden from them now, with a view to having a better system in place by the end of this Parliament rather than having to wait for 2025 or even longer.
My amendment picks up the Minister’s very welcome commitment on Second Reading to commission analysis on the costs and benefits of such practices—cash retentions—to inform future action. First, the amendment sets a time limit for this analysis to be completed within nine months of the Bill passing into law. Secondly, it requires the Government to take action on the findings of the review, again with a time limit of 18 months from completion of the review. That should ensure that new rules are in place by the end of the current Parliament.
I thought of putting down a separate, more detailed amendment to set out a specific approach to ending the most unacceptable aspects of retentions by requiring them to be held in a separate bank account, in trust for the subcontractor to which they are owed. However, for the moment I would be happy to go along with the Minister’s proposed review, so long as it leads to action in the timescale set out in my amendment. I and some of the numerous bodies representing the small construction sector, virtually all of which wish to see this issue addressed, would always be happy to discuss the specific form of such action with the Minister and her officials. I have no reason to doubt the Government’s own desire to see an end to this pernicious practice of retentions in due course. Indeed, I was encouraged by the Minister’s response to the Oral Question today when she said that the Government acknowledge the issue but, given that action on this has been called for since 1963, if not before, “due course” does not seem soon enough.
Amendment 46, in the name of the noble Lord, Lord Stevenson, sets out a process for doing away with retentions in greater detail. I look forward to hearing the noble Lord’s arguments for this process, which I very much welcome as another route toward at long last making some real progress on this issue.
I have no connection with the construction sector, but I have run a number of small firms and am fully aware of the central importance of cash flow and the difficulty of keeping afloat, let alone investing in productivity and growth, if payments for work done are not received in full and in reasonable time. I was quite shocked to learn about the prevalence and impact of this practice of retentions and how long it has gone on without being fixed.
Small firms, which are without the resources of their bigger brethren, and indeed are dependent on them for their survival and success, are often bullied into accepting unfair terms. That is exactly why they need help and protection from government. Although the Small Business Commissioner would be a welcome part of such help, it really does not do what is most needed for small construction firms. The Bill presents a golden opportunity to inject some real spark into the small construction sector by tackling this issue of retentions, so long and so widely recognised as being objectionable, harmful and unjust. I beg to move.
Is the noble Lord’s definition of retention moneys any moneys that are retained after a completion certificate has been issued? Is the issue that the works are agreed to have been completed, but we need something in case we have snagging and have to deal with it? Or is it that I am just being kept from my money?
That is indeed the most objectionable part: on practical completion of the project, a substantial amount—often 2.5%—is retained, often for a year, two years, three years or even more. I am not attempting in this amendment to tackle the fact that retentions are withheld at each stage of the project, although that in itself would be another challenge.
There could be an interesting distinction between practical completion and the issue of a completion certificate under the terms of the contract. Both parties might agree that the work has been finished, but it is probably in the contract that 5%, or whatever it might be will be retained for a period of time, which should be defined in the contract, in order to deal with snagging. I think the noble Lord’s position is that the contract is not written in sufficient detail to cover exactly what it is the parties have agreed.
Another issue, beyond what the noble Viscount has said, is that very often there needs to be some limit on when practical completion has been achieved. There are situations where a small firm has been involved at the very beginning of a large project and the larger contractor is arguing that the project has not been completed and is refusing to release the money until a reasonable period down the track of that large project.
I support the noble Lord, Lord Aberdare. As I mentioned at Second Reading, I have an interest in this area, which is on record. The question raised here is a good one and is evidence of the need for proper consideration of the broad range of problems that retentions imply. Certainly, it is well noted that when you have major construction projects, very often the people who are in at the very beginning—for example, those doing the foundations and the steelwork—do not get their payments until the car park is completed. I am not sure whether that would be covered by a completion certificate. Let us face it, the construction industry is not really the most litigious of industries; indeed, people in it often cannot afford to have recourse to the law. Equally, they do not always have very detailed and specific contracts and, as we go down the supply side, the degree of vagueness becomes even more apparent.
I return to the amendment and its request for a review of retentions. As the noble Lord, Lord Aberdare, said, there have already been a number of inquiries. I was engaged in a couple of them in the first decade of this century. These inquiries recognised that retentions occur. Indeed, it has been noted that there is an all-industry agreement that they should end by 2025. However, certainly the noble Lord, Lord Aberdare, and I believe that they should end as soon as is practicably possible. To do that, we should have a proper inquiry. If retentions occur on the scale that has been suggested, the 10-year process is far too slow and leaves too many businesses exposed to what is in effect malpractice.
Many allegations of payment abuse have been made. The substance of these allegations has been considered, as I said, and the view has been expressed that while retentions may take place, it is not a major problem. It is a bit like when you say, “We only have 2% unemployment”, but the people who are unemployed are 100% unemployed. The people who have not received payment are very often part of small businesses. We are talking here about almost micro-businesses, where families have mortgaged their house to set up in business and the owner’s wife probably does the books. They have probably put their homes on the line, as I say. For them to be put in a difficult position is intolerable and we should seek to end this as quickly as we can.
The amendment would require evidence of retention abuse to be gathered and to be assessed within nine months, and for the regulations to be brought in 18 months later. I realise that this will be our Achilles heel on this amendment, as Governments must never be dictated to. They must never be given timescales that would embarrass them if they were not able to meet them; that is too explicit and dictatorial. However, I say to the Minister that matters of that nature can be addressed by amendments and discussion between the people in this Committee. That is why we have Committee and Report stages. If there are deficiencies in the wording, I am sure that it is not beyond the wit and intelligence of the vast army of civil servants in Victoria Street to come up with a form of words on this issue that would be mutually acceptable.
As I said earlier, the real objective of the amendment is that the evidence should be gathered and the scale of the problem should be assessed. If the concerns are justified, waiting 10 years for them to end is wholly unreasonable, particularly if the problems could be resolved rather more quickly. A timescale is hinted at. Regardless of whether we have to be specific, it would be rather good if before this Government leave office in 2020 they could say, “Well at least we did one thing right and ended retentions”. The Minister may well find that that is her memorial when she leaves office: she was the Minister who ended retentions.
This is a moderate and modest amendment that could make a great deal of difference. At the heart of the retentions issue was the distrust that existed between the various tiers of contractual involvement in the construction industry. People never believed that the work was going to be done properly, so they would always screw them to make sure that the work was done. I have to say that my experience of construction is that we are now living in different times, and indeed there is evidence that a number of the major contractors do not carry on this process. However, I have to say that in the public sector—that is, the health service and local government—I am sure that a number of examples would come out in a review of this issue. We would find that it is not just the baddies in the private sector that I as a Labour man might wish to castigate; many local authorities, probably including some that are controlled by the Labour Party, are just as guilty of holding on to money for far too long before they make the payments.
The construction industry is rather rough and ready in a number of respects, and it requires specific and special treatment outwith the terms of reference of the Small Business Commissioner and his responsibility for payments. There is a degree of exceptionalism within the construction industry and this amendment will not resolve the problem, but I think that it would serve to provide the Government with the evidence that hitherto they have not been prepared to collect properly—or, if they have had sight of it, to deal with properly. We know that the Minister is concerned about the issue of payment abuse. In my view this is a classic example of payment abuse for a specific industry in which it is more widespread than it needs to be or than it should be. It should be made a far greater priority than saying that we will try to have it all done by 2025. We could in fact resolve the matter by the end of this Parliament if we just took out the rather specific timescale.
The Government have a responsibility to address this issue with a degree of speed and consideration for a large number of people who I have to say are more likely to support parties other than the Labour Party; some of them may even be supporters of UKIP who the Government are trying to pull back. The fact is, though, that these are people who have made great sacrifices to start up new businesses. They are very vulnerable so they need a degree of protection and support, and they need it quickly.
My Lords, I too am sympathetic to the idea of a review of this subject. I do not go along entirely with the precise wording of the amendment. The noble Lord has just identified the final subsection of the proposed new clause with its requirement for the Secretary of State to implement in regulations whatever is suggested in the review. I do not really think that that would work, nor would it be satisfactory from Parliament’s point of view, as we discovered on Monday. Nevertheless, the idea of a review is important. Quite a lot has already been said about the problems in this area. I think of it in terms of, for example, bricklayers. Many bricklaying companies are quite small concerns doing a lot of specialist work. If one of them is involved in a large project, which may be part of a major commercial project or an estate of houses, its work is done at quite an early stage.
In some cases, the work is organised by not very substantial firms—the developers do not necessarily have huge reserves in comparison with the size of the projects. Also, not all housing estates that are built sell readily, which can cause great problems for the developers. However, they should not be able to take that out on the bricklayers who did their work several years before, or for that matter on the fellows who laid the drains, as that work has to be done at the start and it has to be examined at the start. It is no good complaining that the drains were not properly laid when everything else has been done; that is the wrong time to find out. The clerk of works and the building inspectors should discover that at a much earlier stage.
The suggested purpose of retention—to make sure that the work has been properly done—therefore has less force than might be supposed in a case of that kind. If the bricklayers are not being paid for maybe five years after they have done their work, that is an extremely difficult situation to be in. The subcontracting nature of the construction industry, which adds great value in flexibility for the industry—that is why the system has grown up as it has—is an important factor in considering how retention works. I am in favour of this proposal being examined to see what can be done to improve the situation. As has been said, some contractors manage without it, but the public sector on the whole does not. Perhaps this requires not law but instructions from the Government concerning the public sector’s attitude towards contracts of this kind.
My Lords, I too support the amendment in the name of the noble Lord, Lord Aberdare. I should declare my interests, and not only those on the register of the House—until earlier this year, I had been for 10 years or so a director of the construction bond insurance companies in the Hiscox group, as well as having been responsible for the bit of Hiscox which dealt with United Kingdom household insurances and which was therefore rebuilding the houses of our clients.
I congratulate the noble Lord on the thinking behind the amendment. This is an interestingly complex area. We have heard about the problem of bad behaviour, but the other problem is the failure of the various parties concerned to understand the credit risks involved in construction contracts. In the JCT standard construction contracts, there are provisions for payments of the retention moneys into trust accounts, which I suspect are never really honoured. That is a big area which should be looked at.
A lot of the business that the construction bond area of Hiscox dealt in was Irish. Ireland had a particularly severe construction dip following the financial crisis and there was quite a bit of evidence of what I would call the domino effect. A head contractor would get into financial difficulties and would drag down a lot of smaller contractors and, because trust accounts were not in place, the smaller contractors lost out. Given the Government’s theme of trying to give every help to the small and the brave, I believe that this could be dealt with. It would not be expensive and could easily benefit small businesses quite a bit.
I have a lot of sympathy with the amendment but, unlike my noble friend Lord Cope or the noble Lord, Lord O’Neill, I am interested in what happens at the end of the contract, when retention moneys and liquidated damages wash one into another. The concept of liquidated damages is perfectly fair. It is designed to make the main manufacturer finish on time; if he fails to do so, a penalty is attached. Of course, the main contractor then passes the penalty on in his subcontract. This can mean that the penalty in relation to the value of the work of the subcontractor can be very small indeed, and that the retentions become commensurately large.
For example, take a company bypassing a piece of road with liquidating damages of maybe several thousand pounds a week for delays beyond the contract date, and a subcontractor whose job it is to put up the signage at the end. The chap who does the foundations is a bit late; it is a very wet, cold and rainy winter so the earth-moving is behind; and the spring is late in coming so the tarmac cannot be laid. By the time the small firm that was subcontracted to do the signage comes to do its job, it is very close up against the end of the contract date. Of course that firm is carrying in its contract the liquidating damages sum for the contract as a whole, which has been passed on to it. In these circumstances, retentions can very often be withheld against the completion of the contract as a whole, in case it is argued that the subcontractor played some role or part in the overall delay. The fact that he may have had an incredibly small amount of time to do his work because the people before him were delayed is of course something to be argued about by lawyers, and it is hard for small subcontractors to have sufficient equality of arms.
As we begin to develop this idea, I hope that the issues of liquidating damages and how they impact in contractual terms on small subcontractors can form part of the retention-moneys and withholding-of-sums-due concerns.
I need to declare my interest as chair of Housing & Care 21. We built 1,000 homes last year. We have built far fewer this year but are very engaged in this intricate industry.
All the points have been made but I just wanted to say that this industry is very cyclical. The other feature of it is that it is dependent on a mass of subcontracts, so it is very complex. If we are going to do a review, now is a good time. We are at the beginning of the cyclical upturn and there is a concern to get work done. The whole capacity of the industry needs looking at because a lot of it was wiped out in the recession. Anything we can do to improve the capacity of the industry and make it more resilient is good. As sure as fate, whatever happens, there will be another recession and some of these problems will re-emerge. My whole experience of the industry is that it just goes suddenly dead. It is the most scary industry because people stop buying homes and it goes right through the chain, and then of course it is the small guy who loses out because he has no capacity to get his money back—he is down and dusted—and a huge part of the capacity of the industry goes with it every time. These measures are needed to build confidence in the industry, to build capacity and to allow it at the end of the day to produce more homes at less risk.
My Lords, I should declare an interest as my wife is a partner in a firm of solicitors and her expertise is in construction contracts. She does not talk to me about it so I do not know anything at all, but I still thought I should declare it.
This is the third time around the track on this particular topic. The quality of debate has not dipped; indeed, the interesting thing is that more people are now joining in. An emerging theme is now being drawn out, and I think it is a good one. For me, there are two points which have not been picked up, and I would like to reinforce them. First, as the noble Lord, Lord Stoneham, was saying, construction is an interesting sector and a very important one for the economy, so we must be very careful about it. The ONS produces figures on the progress of our recovery which always feature an element of construction. It is important at a local level and an everyday level but also in a macroeconomic way, and we should give regard to that.
The second thing is that there is a way that this could be sorted out by the sector itself, and it has not been. The contractual arrangements could be reformed, and the JCT, which has been mentioned, has indeed begun to think through some of these things. There are available options for people who want to make contracts that take advantage of them. But the interesting thing is that that has not happened. Something is going on here and that simple point has been made in some of the briefing we have received. There is “grand theft auto” of the working capital. The unfairness is that while this is a resource that should be of benefit to the contractors who are owed it at the end of whatever contractual period they have signed up for, it is withheld from them. The consequence of course is that it does not feature in their ability to raise finance for ongoing projects later on.
That is an important issue, which makes this practice very pernicious in the way it is applied. The original idea was that you held back the cash in case the constructor did not come back to do any remedial works that might be required. But as my noble friend Lord O’Neill said, this is a story from the past because contracting has got its act together now and is much better. Also, the contractual arrangements are better, so I do not think that it is as much of a danger as it was. My last project, which was a small one, was interesting. When you analysed the retentions money, it explained why senior members of the company kept popping up on our doorstep. The retention represented the directors’ bonus for completing a good project. They were aware of what was going on and they were very keen that we did not retain any money, and we did not. It is a fact that it is woven into the way in which these people operate, and it will be difficult to get out of.
Our amendments suggest that we already know enough about this for the Government to act. The consensus in the Room is that we should think about a review and then act promptly, but certainly set a more ambitious timetable of 2020 rather than 2025. In proposing our amendment, we simply add to the pressure that must now be felt by the department and I hope very much that when we come to hear the Minister, she will be able to respond to that.
My Lords, I am extremely grateful to the noble Lord, Lord Aberdare, for his Amendment 39 and for Amendment 46. The common ground is that they both call for a review of this practice. I am grateful to the noble Lord, Lord O’Neill, for his comments both in the Chamber and in the private conversation we had one evening on our way home together.
I was delighted that the noble Earl, Lord Kinnoull, could bring his own practical experience of the market to the debate, including his experience during the financial crisis. That was picked up well by the noble Lord, Lord Stoneham, who rightly emphasised the cyclical nature of this vital UK industry.
Retentions themselves are not always a bad thing. One knows that from having domestic household repairs where frankly it is essential practice to keep back a small sum in case remedial work needs to be done. However, I have been persuaded by discussion at Second Reading and this afternoon that a review of the practice of retentions would be a good idea. The existing timeframes for change are extraordinary. I did not dare say that last time we discussed this before the election, but I am glad to be able to say it today and to hear the same comment from the noble Lord, Lord Stevenson.
I would be keen to make sure that the review was likely to develop recommendations capable of providing an enduring solution to what is a pretty deep-seated and rather complex issue—we are all agreed that it is not the simplest thing in the world. There is some work to do to ensure that the review is well grounded. Of course, it needs to cover a number of issues such as cash flow, and look at the period of time before retention must be released. It also needs to look at the small business angle, which is obviously relevant to today’s debate, including bricklaying.
I propose that the Government consider the best way to take the review forward. I will write to noble Lords in due course setting out precisely how we will do that; the terms of reference and a detailed timetable outside the Bill. If it helps, I am happy to commit to the review being completed within nine months of the Bill being passed, as suggested in Amendment 39 by the noble Lord, Lord Aberdare. This will give a little incentive to speed, because we have been here before and it would be nice to feel that progress could be made. I hope that the noble Lord, Lord O’Neill of Clackmannan, will not be disappointed by my helpfulness in that respect.
There is not a lot more to say. I hope that noble Lords will welcome the review and will feel able to close down the issue today. On the basis that I have described, I hope that they will happily withdraw their amendments.
My Lords, I am extremely grateful to all noble Lords who have spoken in this debate. I have been very encouraged by the general tone of the debate. A number of noble Lords raised important practical questions which the review will address. I am particularly encouraged and pleased by the Minister’s response, for which I thank her. I very much look forward to receiving details of the review and the basis on which it will be conducted. I declare myself ready to do whatever I can to ensure that she secures her place in history as the Minister who ended retentions. I am happy to withdraw my amendment.
Amendment 39 withdrawn.
Amendments 40 to 43 not moved.
44: After Clause 12, insert the following new Clause—
“Duty to report outstanding interest payments on unpaid invoices
(1) A company with outstanding liabilities relating to overdue payments at the end of an accounting period must record these in their statutory accounts.
(2) Where any of the outstanding liabilities include interest on overdue payments, the company must disclose these amounts by way of a note to the accounts, which should also record comparable outstanding liabilities, if any, for the preceding six financial years.
(3) Where companies fail to disclose this information during the course of an audit, their auditors are required to report that failure to the Small Business Commissioner, and may comment on the issue of their audit report.”
My Lords, we seem to have reached the point at the end of the first part of the Bill where many of us feel a little discouraged. The powers in the Bill for the Small Business Commissioner are not going to match the aspirations that have been trotted out on a number of occasions across the first 43 amendments that we have looked at. The only concession or move in any direction is the one we have just had, for which we are very grateful. We do not want the Minister to change her mind on that. However, I feel that on Report we may want to test the water again on the question of whether some stiffening of the approach, attitude and powers of the Small Business Commissioner could be configured into the Bill.
However, the growing awareness that the Minister was not for moving and that the department had drawn a line in the sand and would not be able to cross it prompted a wider thought about what we could do in other areas. Amendment 44 seeks—probably in rather infelicitous language which needs to be tidied up—to do something which at heart is quite straightforward and simple, and perhaps not contentious. If noble Lords think about the way in which individual statutory accounts are drawn up, they will find in the profit and loss accounts of most companies a record of the liabilities which are owed and the debtors who owe money to the company. Part of those making up the accounts in the liabilities area are payments which need to be made by the company to its suppliers. It is probably the case that these will appear as a single lump sum and will not be differentiated. It might be a smart move and aid transparency if it were possible to require companies that had outstanding liabilities at balance sheet date to be required to disclose by note situations where their invoices had been accompanied by any overdue fees or costs that occurred as a result of the invoices being overdue.
We have had some work done on this. We calculate that in a year, when you look at the statutory accounts registered at Companies House—obviously they are delayed, so we are talking about a nine-month gap to look back on, which is quite a lot of time—an approximate figure is around £15 billion outstanding at balance sheet date. The noble Lord, Lord Cope, who was also an accountant as I was, is looking a bit stern about that, but as far as I understand it, that is the figure. I make no judgment on it; it is simply the way that business operates, which is that it takes time to make payments.
If we make an assumption that some of these invoices were late, and the provisions that could be made in relation to that were added on to those, then we reckon that about £900 million a month would be available to be disclosed for companies that had overdue invoices and had accumulated, say, at 8% above base rate, which would be the fee if they did not pay within, in our suggestion, 30 days, although it could be 60 days. Obviously it would be a variable figure, but to make my point, we are talking about approximately £1 billion that could be regarded as being the cost to the economy—certainly a cost to smaller businesses—of invoices that have not been paid. If that were disclosed, the question is whether that would help transparency, and our argument is that it might. It would be particularly helpful, if it was necessary to do so, for auditors auditing these accounts and coming across this overdue amount within the portfolio of liabilities to have to contact the Small Business Commissioner and inform her or him about it so that a virtuous circle is created. Where there was a problem in a small business that was due money that was not there, it would have some sense of that because the information would be available to the Small Business Commissioner.
The great advantage would be that it would shine a light on larger companies that were not paying their invoices on time, and thus accumulating late payment costs which would have to be disclosed in the statutory accounts. It would not cost anything to do this because it would be done automatically anyway by any good internal accountant, and the information would be absolutely fantastic for the Small Business Commissioner. Our contribution to getting around this power blockage in the Government’s mind in terms of the Small Business Commissioner is to use existing disclosure arrangements for small companies and large companies— the published accounts—to report on and note the activity that is actually going on in this sector. I beg to move.
My Lords, I hope that my noble friend the Minister will take this point seriously. First, the figure which has been produced by the noble Lord is remarkable. Even if you were to halve it, it would still be remarkable, so I am very interested in that. I want to tell the Committee about my own experience of the construction industry, in which I had a company for some time, but no longer. The comment made by the noble Lord, who is now no longer in his place, that it is not a litigious industry seems to be totally contrary to the truth. It is probably the most litigious of industries. Indeed in many cases, certainly in the past, that is how decisions were made: you made contracts where you knew you were going to go to court at the end of it. That is how you made your decisions. I am afraid that it is a very unhappy history. Anyone who has read the Egan report or indeed the one before his would see just how this business has not changed to the degree that we all hoped it would.
The point I want to draw to the attention of my noble friend is that many companies in other areas manage to have very few bad debts and few bills. Every month, the board of the company of which I am the chairman gets a report on bad debts. I am happy to say that it is a very short report and they do not carry on through to the next month. That is because the company is well run and chases these things up. I do not think that there is a company of any kind in the construction industry which could possibly say that, because it is not the nature of the industry. Once people get into the habit of thinking that this is the way they can behave, that is the way they behave. It becomes a kind of chain: because you do not get your money, you do not pay the money to the other person. They do not get their money and it goes on in that way.
We have to break into that chain. I had not come across this idea until I read the amendment. It seems to me quite an original idea. However, I hope my noble friend will recognise that this is at the heart of the problem. We are talking here about an amount of money that is sufficiently large to make a huge difference if it were redistributed rather quickly. If this situation occurred in any other major industry, there would be cries of outrage, although it does not apply anywhere else that I can think of. My business interests are spread over quite a lot of different companies and I do not think I have ever known the kind of reaction that one has in the construction industry. Therefore, I hope very much that my noble friend will take this seriously. It may not be the answer but it may give her a clue how to provide another answer.
I thank noble Lords for this amendment and, indeed, for the whole series of amendments on the Small Business Commissioner, which have enabled us to have a very good debate. I am glad that my noble friend Lord Deben joined the debate and note his comments on construction, which we can consider in the context of the review that we have just agreed to. However, as he says, more generally, in other sectors some companies are much better payers. What we want to do is to change the culture so that this is the norm rather than the exception, if it is the exception. I do not know the exact facts but the overall numbers are a cause of concern, as we have said on a number of occasions.
The amendment before us, which is not really concerned with construction, would require companies to report outstanding liabilities relating to overdue payment, including interest payments on the unpaid invoices. It would require any failure to disclose this information to be reported to the commissioner.
During Report of the small business Bill in the Lords, I brought forward amendments, as noble Lords may recall, to specify in the Bill how the reporting power could be used in relation to payment performance and interest owed and paid in respect of late payment. Over the summer, my officials have been working with stakeholders on the regulations. We have established a working group to draft non-statutory guidance to ensure that companies are clear on their reporting obligations, and that the information reported is robust and comparable.
From next year we will require companies to report online every six months against a comprehensive set of metrics. That includes the proportion of invoices paid beyond agreed terms and the proportion of invoices paid within 30 days, between 31 and 60 days, and beyond 60 days. That is a lot of information for the top 14,000 companies. It will not be in the annual accounts as we want the information to be provided quickly. The information will, however, be rigorously monitored and will be timely and accessible—more so than putting something into the annual accounts.
The new prompt payment reporting requirement will enable us to bring increased transparency on payment practices and performance. We can legislate by regulation for the Small Business Commissioner to monitor that information, which I think is one of the things that the noble Lord emphasised in his presentation of the amendment. The commissioner may also highlight good and poor performers as part of his or her efforts to drive a fundamental change in behaviour. This will help exert the necessary pressure—a point we keep returning to—on companies to make sure that their suppliers are paid on time and fairly compensated when that is not done.
I am confident that the measures imposed on the Small Business Commissioner will lead to significant change in the UK’s payment culture. I note that the noble Lord said he would want to return to issues to stiffen powers on Report. I would only say in conclusion that I would very much regret seeing an adversarial element developing in this proposal. We do not want more costs, more lawyers and more delay. I think that we have a shared objective of trying to make the Small Business Commissioner a success, but in the mean time I ask the noble Lord to withdraw the amendment.
Before the Minister sits down, can I clarify that the amendment addresses none of the points that she made? It is really about identifying the liabilities you have for the interest payments where you did not make a payment. As such, that addresses the ability of large businesses to be able to say that if you do not believe that someone will chase you—a small business will chase you for a payment you are due—you can write it off as a liability very quickly on the basis that you do not believe that it will be chased. It addresses that sort of liability.
Yes, certainly. For late payments, fines can be attendant to it. They tend not to be incurred, largely because companies do not pursue them. This simply establishes that a company has to establish it as a long-term liability in its account that could be claimed. In pursuing the Minister’s argument about culture, it helps to establish whether the company is fulfilling all its duties, including under the Prompt Payment Code.
My Lords, there might be merit in further discussion on the finer points of this. The point I wanted to make is that it is important to also look at what we are planning in terms of payment transparency; perhaps we could discuss that outside the Room before Report.
I thank the noble Lord, Lord Deben, for intervening in this debate. For his information, the figures I quoted, which were large, were in fact for the whole economy, not just construction: although construction is big, it is not that big. They came from a company called Satago, which provides a service for automated chasing of customers for payment and aims to reduce outstanding invoices. Therefore those figures are reputable and based on trade practice, so not necessarily far out.
I thank the Minister for her helpful intervention. It is true that there is a lot of similarity between what we are saying in this amendment and the proposals under the Prompt Payment Code. Am I right in saying that the code will remain a voluntary obligation on companies, not a statutory one?
Just to clarify, the payment regulations we are bringing in are statutory requirements to share information on payments. The noble Lord is right that the Prompt Payment Code is voluntary. There are various different points, but the key thing is to look at them in the round, which we can do when we discuss them to make sure that we are capturing things that we feel are necessary.
I was not trying to be antagonistic at all on this—I was simply trying to clarify this point. The Prompt Payment Code has a slightly bad smell about it. The regulations that the Government are bringing forward will presumably be consulted upon, and then in the House we will reach out to a lot of the points that I was making in my submission. I absolutely agree with that, and it is good. However, the noble Baroness can see where we are heading. In a sense it is only a proportion of the companies, albeit the big ones; and it is an additional regulation, when we were suggesting that you can do it within an existing provision. However, the Minister is also right to point out that relying on statutory audit with the delays that come with that and the registration difficulties means that is all a bit late. I accept that.
The Minister’s suggestion of a chat about this is a good idea—let us see if we can work something out. We are not trying to push this particularly hard: it was an idea that came to us, which is already very close to where the Minister is, and I think we can probably leave it. With that in mind, I beg leave to withdraw the amendment.
Amendment 44 withdrawn.
Amendments 45 to 48 not moved.
Clause 13: Extension of target to provisions made by regulators
48A: Clause 13, page 10, line 32, at end insert—
“( ) In subsection (2), after “means” insert “—
(a) all regulatory provisions made under section 2(2) of the European Communities Act 1972,(b) regulatory provisions which are subject to the affirmative resolution procedure in both Houses of Parliament, and(c) ”.”
We now move to the next stage in the Bill—regulatory measures—which is progress of sorts. We had hoped to be there on Monday night, but we are moving forward, so it will go very fast now. It is a great pity that the noble Earl, Lord Lindsay, is not able to be with us today, because I know that this is an area he speaks on, but we have expertise in the Room and I am sure that we will be able to hear from it later on. I am glad that there is a bigger club than just a few of us who are interested in regulation.
Regulations are very important. Some people call them the rules of engagement that define quite a lot of modern life. They range from things such as whether it is possible to adjust the volume of ice cream van musical jingles to the question of how you value complex financial instruments, so they are everywhere. They are pervasive and important. A lot of complete guff—if that is a parliamentary term—is talked about them. No Government will introduce a new regulation believing it is going to make life worse for their citizens, and yet the public perception of regulations is of a relentless, negative story, with faceless bureaucrats—poor chaps—imposing rules in an inflexible and often absurd manner.
We need to bear in mind that, as we in your Lordships’ House bear witness every day, no regulation is implemented without political oversight and a great deal of scrutiny. We think about, debate and discuss regulations, and try to make sure that they do the job they are intended to do. They help to balance risk in society and provide a framework for a stronger and more productive economy. They protect the vulnerable from harm and uphold the rights of consumers and new businesses, as well as more generally promoting a level playing field for business. Done well, the process of regulation can be a spur to competition and growth; done badly, of course, it can become a stifling burden.
The challenge facing policymakers is that the costs and benefits of regulation are not shared equally across all parts of society. Also, it is often only the direct impacts that are measured by Governments when they design new policies. Indirect impacts, particularly compliance and transaction costs, are often important but are extremely difficult to pin down. The ultimate impacts—GDP growth or, as it is more fashionable to talk about now, well-being—are rarely discussed at all. This imbalance between the costs and benefits of regulation is often felt most keenly by businesses, which in turn seek to pass on a proportion of any higher costs to consumers, leading to a sort of stealth taxation.
My purpose in giving a bit of an introduction which is not directly related to Amendment 48A—which I do wish to move at the end of what I am saying—is that I am a fan of regulation. We have to find a way of using not only this Bill but other Bills and other legislation to try and persuade people that there is good to be found in intelligent legislation. We have all tried in the past, on both sides of your Lordships’ House, to think about how to make good regulations and about regulation in the round—for example through the Better Regulation Task Force. But we do not ever really start by saying that regulation is what matters and that it will be important to how things are done. The laws that we pass are statements of principle; the regulations are the rules of engagement, and we are right to spend as much time on them as we do.
I want to pay credit to the previous, coalition Government for the impact they had on the stock of regulation. Although I will criticise the one-in, one-out—or one-in, two-out—measure in later amendments, it is a good concept. Although it might be trivial to suggest that one in, three out should be the Government’s next target—indeed, we have an amendment on that topic—the noble Baroness will get the point of what I am trying to say. There is no requirement that the stock should remain static. There is every argument to say that proper and intelligent interrogation of the regulatory stock might reduce the burden on people. That said, we do not want to get to a point where we believe that regulation is not necessary—it is necessary and it is good for us.
Having praised the previous Government and admired the ambition of the current Government in coming back again for yet another round of deregulatory measures—even though there is not that much of it this time—I wonder whether we are not missing a trick. I want to put on record that our approach is not meant to be antagonistic: it is meant, first, to be constructive and about engaging in dialogue about whether or not there are better ways both to create a culture of regulation and, secondly, to make us think harder about what we do when we say something is a regulatory measure and is increasing or decreasing the impact on people. The way we do it currently is not right.
Thirdly—this is a three-legged stool—we need to think harder about some of the impact work that is done. Not everybody has the current impact statement to hand, which is shocking—the Minister just had to reach for it—but for those of us who have spent happy nights skimming through it, the issue is not whether or not the work has been done but that it has become a bit of boiler plate and almost a tick-box exercise. We have all seen it, but some of the propositions that have been made, particularly in relatively small-scale regulations, are pretty trivial. One option is to do nothing and you do not get many marks for imagining that. Another is “the Minister has asked us to research this one, so we might as well do that”. Occasionally, if you are lucky, a straw man is put up, but it is usually not very effective. I wonder whether we cannot do a little more on impact assessments. This may not be the Bill for it and this may not even be the time for it, but I would like to raise that.
I end this opening section by picking up on a couple of fun facts that were drawn to our attention. The Government used to publish a bi-annual statement of new regulations, typically produced in July and December. That has stopped since the general election and I wonder whether the Minister could research why that is the case because it was not a bad idea. However, the independent Regulatory Policy Committee has continued to publish its own reviews of individual departmental impact assessments. To date, there have been 13 assessments. Of those, 10 of the major changes were judged to be increases in the overall cost of regulation, and only three reduced the cost. Just under half were deemed “out of scope” under current government rules, so of the regulations produced they were not even considered by the Government in terms of their in/out scenarios. Of those in scope, the total additional cost to business was about £60 million. By the way, three of the 13 impact assessments, all produced by BIS, were judged not fit for purpose. I am sure that improvement is on the horizon.
The group of amendments including Amendment 48A is really about that old saw, “what you measure gets reported”. In particular, I want to highlight for the benefit of the Committee that—and I had not realised this until I looked into it in more detail—the way that the Government count regulatory burdens is to exclude EU regulations en bloc. In other words, on the one hand we blame the EU, often unfairly, for a huge regulatory burden, but we do not count it when we bring it into scope in the UK. That is pretty clever, and I suspect that it is up to Members of your Lordships’ House to feel a little stupid for not having realised that. All the stuff about how much regulation has been saved has to be considered in the context that quite a lot of that regulation, which had a significant impact on the UK economy, was not counted.
The second point I want to make is that the Regulatory Policy Committee reported recently that,
“nearly half of the approximately 1,000 laws enacted during the previous Parliament”—
under the coalition Government—
“were outside the scope of the Government's One-in, One-out and one-in, Two- out rules. Nearly 70 per cent of these were of EU origin”.
The RPC reported that mutually.
I do not honestly think that businessmen and women would care whether the regulations they have to work to come from this place or across the channel. However, they have an impact on their work and therefore we should fess up and try to get a measure into play in the way that we think about all regulation that impacts on business. That seems to be the issue.
On Amendment 48B, we have a definition of regulatory provision in the Small Business, Enterprise and Employment Act, which works well for primary legislation. But we have not been able to find—perhaps the Minister can respond on this point—a proper system for defining regulations that are secondary in nature, whether they are in or out of scope and how they are measured. That whole package needs to be looked at again. Our amendment suggests that the Government should commission from the Regulatory Policy Committee a full-scale assessment of what is and is not included.
There is room for debate around some of the claims made by the previous Government, which suggested that some £10.6 billion of savings were made during that Parliament because of reductions in red tape and regulation. A close read of the independent Regulatory Policy Committee suggests that that is a great overstatement and that more costs were incurred than were saved. If we are going to get this right, it falls back to a definition, and I ask the noble Baroness to take that thought away. It may not be something that we can do within the Bill, but there is a big job of work to be done. We must think again about how we make regulations, how the impact assessments are done to support them and how we discuss them. I beg to move.
My Lords, I rise to speak to Amendment 49CA. I declare my interests as set out in the register, especially in insurance. The amendment is about old gold plate, which I talked about at Second Reading. I will first pick up on something that the noble Lord, Lord Stevenson, said in his thought-provoking introduction, which was that businesses do not care where things come from. I am not sure that I agree with that. One thing they certainly do care about is the level playing field. If a business has a European Union regulation and it is over-implemented in its home nation and not in its competitor nations, it is at a disadvantage and cares a lot.
The old gold plate—it should be called lead plate because it is a great drain on business resource—problem can be briefly summarised by saying that there have been three eras of transposition of EU regulations. In reverse order, there is the era from coalition times—2011—until today, where there are very good transposition arrangements: a good solid anti-gold plate look at any legislation and sunset and review clauses to ensure that things are self-righting if they are not quite right.
Then there is the period from 2006 and the Davidson review—of which more in a second—when the issue had been recognised and there were good anti-gold plate arrangements, but the use of sunset and review clauses was limited. Then there is the period prior to that, which I call old gold plate, where there was no self-righting mechanism for the shedding of the gold plate and the bringing into line of the UK with the other competitor nations of our regulatory environment.
I had a quick look at Lord Davidson’s review in preparation for this debate. I noticed that chapter 2 is called “Cases of Gold Plating”. The first three words of chapter 2 are “insurance mediation directive”. I was reminded last night by senior insurance industry colleagues that the 12 pages of that directive were turned by the FSA into more than 1,000 pages of stuff, which has been a source of great pain for my beloved home industry.
The reason behind the amendment is to try to provide a mechanism for getting the old gold plate reviewed. It is a mechanism which is compliant with the coalition, in that it is a one-shot mechanism—an individual, as a regulator, is in charge of reviewing themselves once and writing a report. That is all they have to do. It is a sort of reverse name and shame mechanism.
It was the best that I could do in terms of thinking up how one could attack the problem. It could be the case, but I hope it is not, that the Minister does not consider this a suitable Bill in which to begin attacking the problem. Sooner or later, for sound commercial reasons, we are going to have to tackle the old gold plate. I note that Lord Davidson’s report was in 2006, and nothing substantial has happened on his recommendations about the insurance mediation directive.
I thank noble Lords for their amendments in this group. I am grateful for the noble Lord, Lord Stevenson’s introduction. In the interests of time, I suggest I respond constructively over a drink to some of his more philosophical points. Yesterday, the World Bank published its Doing Business 2016 report and ranked the UK as sixth-best country in the world for ease of doing business—something to celebrate. This is partly due to the work on the regulation stock and the regulation flow that we are all trying to make a success. This Government want to make the UK the best place in the world to start and grow a business, and the Bill is a step towards achieving that. So there is more to do, and I believe that adding regulators to the purview of debate on regulation will help to reduce burdens on business. I commend the RPC for its independence and honesty, which is well illustrated by the comments that have been made.
Amendment 48A would amend the Small Business, Enterprise and Employment Act so that the business impact target automatically included all EU-derived legislation that required the UK to implement regulations. It would also include all regulations agreed by the affirmative resolution procedure. To answer the point that was made, Section 22(6)(b) of that Act includes secondary regulations within the scope of the target, so they are there.
There is a clear need for regulatory reform in Europe and the best way of achieving that is to tackle it at source, securing in Brussels controls that match those we have here at home. Our influence is beginning to pay off in this area. In May the Commission published better regulation proposals, which I do not think many people know about but include greater independence for the Commission’s regulatory scrutiny board, a renewed commitment to lighter regimes for SMEs—small business, which we are caring about today—and a commitment to embed better regulation across three EU institutions in an inter-institutional agreement. We welcome this. We want the Commission to go further, which is why at my urging last December the Competitiveness Council unanimously asked the Commission to bring forward proposals for EU burden-reduction targets and an independent expert system of assessment like that of our RPC.
Meanwhile, this Government are working on the principle that it is right to be transparent about everything but target only what we can control. So we are transparent but, as the noble Lord has said, in the context of EU measures that means counting not all the EU burdens but the domestic decisions where we overimplement or gold-plate, where obviously we have full control over what we are doing.
The Small Business, Enterprise and Employment Act already requires transparency in our EU-derived legislation, but it gives the Government of the day discretion about what to target so they can decide to target some or no EU-derived legislation. The proposed amendment would remove that discretion and instead require the target to include all EU-derived legislation. I believe that that approach is too prescriptive. We decided to exclude EU-derived legislation from the target. Under the reporting requirements in Section 23, we will still be required to report transparently on the quantity of our legislation and on any instances where gold-plating occurs. So the sauce Anglaise, in the elegant words of the noble Earl, Lord Kinnoull, is being addressed.
Amendment 48A would oblige the Secretary of State to include in his target all secondary legislation made by affirmative resolution. Section 22 of the Act, as I have said, currently requires the choice around the scope to be made in a transparent way and provides clear legislative parameters within which that choice has to be made. However, it also provides flexibility to ensure that the scope can be set in a way that reflects the policy objectives of the Government of the day while avoiding unintended consequences.
I turn to the amendment from the noble Earl, Lord Kinnoull. I agree with him about the importance of enforcement and a level playing field across the EU. Enforcement is a key aspect of the new single market proposals produced today by the Commission and a focus of work there. He is right that the coalition did a lot of work on eliminating new gold-plating, but of course there is historic gold-plating to look at. The amendment would create a one-off reporting duty on regulators in scope of the growth duty to publish a report on historic gold-plating.
This Government already have a process in place to deliver that outcome. We are working with departments, and with regulators now—assuming this Bill is approved—and business on a series of “cutting red tape” reviews to identify opportunities for regulatory reform, improved enforcement and implementation practices and savings to business from all those sources. The involvement of departments as well as the regulators is important. They have a responsibility for removing gold-plating wherever it lies.
We welcome evidence from everyone on gold-plating. I have noted carefully the noble Lord’s remarks about the insurance mediation directive. We will look at the scope for doing something about that under the current system.
Amendment 48B talks about tax administration. However, in the interests of time, I will move on and if there are questions on that aspect I am very happy to discuss them with noble Lords.
The final question that was asked was: why has the statement of regulation stopped? The answer is that this will be replaced by the annual report on performance under the business impact target, which will be published in due course. I am not sure of the exact timing. But that is why, as it were, the figures have not been published in the way that noble Lords would expect. Transparency is important but we have slightly changed the system.
The Secretary of State is required to report his decisions on the content of the business impact target by May, but in fact I am sure he will do it rather earlier than that. We will listen to the arguments noble Lords have made, but in the mean time we should not reduce the flexibility which the SBE Act gives to the Government of the day to meet the challenges of the day. I hope that, with that explanation, the noble Lord will feel able to withdraw the amendment. I have not sought to respond on the details of the £200 million to £300 million over the last five years, but again, I am very happy to have a discussion on that outside the Room.
I thank noble Lords for their contributions. On the point raised by the noble Earl, Lord Kinnoull, I was not saying that people did not care about where the regulations came from in terms of whether they came from Europe or from Britain—I probably did say it but I did not mean it—but that what they cared about was being regulated. More regulation is usually bad for them. I absolutely accept the point that many of them are setting up on an unlevel playing field. I agree with the Minister that every effort should be made to try to stop that; it seems patently unfair and anti-competitive.
However, I do not think I got a response to the point that I was trying to make as gently as possible, which is that it seems a little odd that the Government can choose the game they are playing, can set the goalposts at the distance apart that they wish and then score as many goals as possible and claim a victory, when in fact there is another game going on elsewhere where people are being beaten up by what in their view is excessive regulation, often gold-plated, and we do not seem to get transparency. I hope that what I said will be thought about and perhaps we can come back to it.
There is an excellent report by the Regulatory Policy Committee with which the noble Lord may be familiar. That report gives all the information on the EU figures as well. In the last report EU financial systemic risk measures were a very large element, £1.6 billion in that particular time period. I think we were saying that the target that we have chosen to set and have put in legislation should reflect what we can control. The noble Lord is right that we should be transparent, and we have sought to be transparent through the work of the RPC, which can hold us to account.
My Lords, that is the point: £1.6 billion is excluded from the Government’s target because it relates to an area that they choose not to report on. It is up to the RPC to give us the full picture, and it is good that it does. I am saying as gently as possible that I think transparency might be the buzzword of the day, but it is not going to get us there if the Government do not accept that it would be better in the long run if the full burdens of regulation were calculated in a certain way. We will come on later to amendments about how we might do that. If they set out their targets in terms of that full load and then reported on them, I think we would be better off. That is for another day, though, so I beg leave to withdraw the amendment.
Amendment 48A withdrawn.
Amendment 48B not moved.
48C: Clause 13, page 10, line 40, after “State” insert “, but those regulations cannot specify the Equality and Human Rights Commission”
My Lords, I am having a busy day. Again, this is a rewind in glorious technicolour, because we spent a lot of time on this over the last two years of the last Parliament. It is back again for reasons that I do not understand; I hope that the Minister will listen again to the arguments we have made, because I will end up by quoting from her the exact case that I wish to make—indeed, I might shorten my speech if I simply cut to that chase. I would have done, except that just before this meeting of the Committee the Minister published by Written Statement a list of all the bodies that are likely to come into scope of the provisions of the Bill. That was somewhat worrying to read, because I understood that the proposals in the Bill were to require bodies called “regulators”—there is a very large list of those—to undertake new responsibilities with regard to growth and reporting. The growth part came in earlier legislation and the reporting is largely brought in here. However, the number of regulators is being extended.
We are making the point that in a business-focused Bill it seems strange to us to receive representations from bodies affected by this which do not carry out business activity. An example here is obviously the Equality and Human Rights Commission. My noble friend Lady Hayter will raise other ones, including the Charity Commission, for which there can be no question of whether they are providing business regulation or an impact on business. Indeed, in the case of the Equality and Human Rights Commission it is quite the reverse.
Clause 13 extends the BIT requirements to all national statutory regulators so that they must assess the financial cost to business of changes to designated statutory regulatory functions and then secure validation of that assessment from an independent body and report annually on this aspect of their work. The stated purpose in the Bill is to ensure that regulators improve the understanding and transparency of the effect of their regulatory activities on business and to broaden the responsibility beyond government to achieve the target of reducing the associated regulatory burdens on businesses—which is said to be £10 billion, but we beg to differ on that point.
If you have a regulator who is not involved in advising businesses how they should operate and is not providing advice and everything else, I do not understand why it is included in the list. There is no question that we support the aim of the Bill; in fact, the impact on the main statutory regulations is good and something we can support. However, we have a problem with the unintended consequences of trying to include everybody listed in the lists that were published.
The two main concerns that have been raised with us is that as the commission does not set standards in the sense that other regulators do, feeling that that is a job for the legislature and the judiciary, it has no power to go in and inspect businesses, nor does it have to charge fees or recover costs from them, so it is to some extent by its own definition excluded from the activities they are trying to be involved with. However, the more important point is that the imposition of this requirement on the commission would jeopardise its high standing as a United Nations-accredited “A” status body, which depends under the UN Paris principles on being independent from government interference, direction or control. By passing a law of this nature the commission believes strongly—and I think that this argument was accepted by the Government last time round—that it would not be able to be regarded as independent from government interference, direction or control by definition. The last time we brought this up, the Minister, in responding during the passage of the Small Business, Enterprise and Employment Act at Third Reading, said:
“The Government have always maintained that the EHRC is a very special case and should not be subject to the duty to appoint a champion. We considered that an exemption in secondary legislation would be sufficient, but noble Lords were concerned about this and the potential implication for the EHRC’s “A” status as a national human rights institution. The Government believe that there is only a very small risk here, but we have listened to noble Lords and agreed to eliminate the risk altogether with this amendment, which I know from the debate will be welcomed across the House”.—[Official Report, 17/3/15; col. 1007.]
I would be grateful if the Minister could explain what is different this time round. I beg to move.
My Lords, having been given the lead-in, I will rise to speak at this point, and I do so very much from the point of view of the consumer. In the helpful note that was sent to me and, I am sure, to others by the Minister on 27 October, she rightly stresses that the list is not definitive and the views of business, regulators and other respondents will inform the legislation. Something that always worries me, of course, is that business and regulators have whole departments that are able to respond on this while the consumer—or, as I will come to it, the patient—never does. They do not know about these things and therefore we have a particular duty to think about that.
As my noble friend Lord Stevenson has said, the first list sets out the statutory bodies that are under consideration for being brought into scope. I find the inclusion of the Charity Commission difficult to understand. It is to protect the use of charitable money and make sure that it is spent on charitable aims and objectives. It is not to further the interests of business, to make business more efficient or to help growth. It is a protection, particularly for people who donate to charities, to ensure that their money is used correctly, so I find it slightly surprising that the commission is in there. Again, though, I worry about how the sort of people who donate to charities would ever get their views heard if there was a risk that that regulator had in some way to take more account of the interests of businesses that may have a charitable arm than those of individual donors.
There are two others on the list that I worry about for similar reasons. One is the Information Commissioner and the other is the Pensions Regulator. I used to sit on the determinations panel of the Pensions Regulator, but I no longer have that interest to declare. They are both protectors of the interests of groups of the public. The Information Commissioner is in a way quasijudicial because it is looking at whether a company has perhaps misused its mailing lists or, in the case of a bank, its bank details. It would worry me a lot if it was the bank that was giving evidence about whether the regulation of its data by the Information Commissioner was too intrusive while the views of people like us with bank accounts or any other data—our shopping experience with a big retailer or whatever it might be—will not have our views heard when this is looked at. I have concerns about a body like the Information Commissioner that is there to protect the public.
I have similar concerns about the Pensions Regulator, which is also in a sense quasijudicial. Certainly, the sort of cases that I used to hear were dealt with in a court. The regulator is there to protect pensions very often where a company may be in difficulties and there are really difficult issues to be dealt with around its pension scheme. The regulator is there to protect the pensions and to look after those interests. If that regulator is told that it must look at the business interests rather than those of the pensioners, that would worry me. Again, I do not know how would-be pensioners, who have no idea about this or that they may be in a scheme which the Pensions Regulator is looking at, will be heard.
Lastly, although they come under the second sub-heading “Regulators for further discussion”, are the bodies regulated by the Professional Standards Authority for Health and Social Care, which is what I think we used to call the professions allied to medicine, and now with social work included. Again, this is about setting standards to protect patients—which is what they will usually be, although sometimes in social care they will be clients rather than patients. A big care agency may say, “Look, this regulation is a bit hard on us”, but these standards are there to protect us as patients, as people being looked after in care homes or as whatever—the Committee is fairly familiar with the areas that this covers.
These provisions are very much there to protect users, consumers, patients, residents of care homes and anyone who has information held by a big retailer or company, and I hope that the Government can offer a little more justification as to why the regulator will be perhaps nudged to look towards growth and the business aspect rather than the interests of the consumer and the public.
My Lords, I will speak very briefly to support the exclusion of the Equality and Human Rights Commission. The noble Lord, Lord Stevenson, has gone through the argument and laid out the case for this exclusion very fully so I will not go over that again, but I want to add one point. Far from imposing extra burdens on business, the Equality and Human Rights Commission does quite a lot to relieve business of burdens by producing things such as guidance and codes of practice that explain the position and help to guide business through the legal maze of discrimination law, making it a good deal easier for business to deal with these issues when they come up. It does not seem appropriate, when that is the function of the Equality and Human Rights Commission and the way that it works, to tie the commission up in the sort of red tape that its work—its codes of practice and guidance and so on—goes quite a long way to ridding business of.
My Lords, I thank noble Lords for their amendments and their constructive contribution to the Bill. I am delighted that the noble Baroness, Lady Hayter, and the noble Lord, Lord Low, have joined the debate.
As has been said, the amendments would ensure that the EHRC could not be subject to, or required to report on, three key regulatory policies: the business impact target, the growth duty and the Regulators’ Code. Extending the business impact target to statutory regulators is a key part of Government’s aim to ensure that regulators across the board continue to achieve high standards of regulation in order to drive growth and ensure a strong economy. I think we have agreement on that broad principle.
However, although we are asking regulators to be transparent in reporting the impact of their decisions on business, the Bill will give us no powers to interfere in the decisions they take. There is a clear distinction to be drawn. The fact that a regulator may not be aimed at business does not mean that the regulator does not affect business or the voluntary sector. To my mind, there is nothing wrong with having an incentive to look at the impact of the way you design measures to ensure that, for example, they are constructed in a sensible way for small businesses. Regulatory independence of course underpins business confidence, and is vital to all regulators—it is not only true, as has been said, for the EHRC.
We have seen the EHRC’s briefing note on these issues, which says that it produces approximately 30 pieces of guidance a year and operates across the whole economy. So the range of business making use of the guidance is very substantial. For all those businesses to keep track of that guidance is a cost to business. Sometimes it can outweigh the cost to the commission of assessing the impact as and when it issues new guidance.
I know from experience that the EHRC issues very valuable guidance—for example, the religion or belief guidance for employers issued in 2013. I remember when I worked in the retail sector talking to the EHRC about what it might do to address concerns it had among big employers. So there is an interaction. It is important work, but obviously there is a need to ensure that the guidance is appropriately prepared for business and minimises the burden of any such directions. I hope that the EHRC will look carefully at its relationship with business and ensure that it reflects on the cost which it is imposing. This is what inclusion in the business impact target would achieve and why we have proposed it.
The EHRC—I am not sure people are aware of this—is already within the scope of the Regulator’s Code and is also covered by its predecessor, which was introduced in 2008, by the then Labour Administration. I understand that the EHRC already complies with the code and is transparent about its activities reporting annually. That transparency is just what Clause 14 is aiming to achieve. In practical terms, it will make little difference to what the EHRC currently does, which is why I am not convinced of Amendment 48F.
Amendment 49C prevents the reporting requirements for those in scope of the growth duty from applying to the EHRC. We had the debate less than a year ago when considering the growth duty. The Government’s initial view was that the duty should apply. However, in the light of debate and representations from your Lordships, we undertook that the EHRC would be excluded. I am happy to repeat that the Government will not seek to apply the growth duty to the EHRC. I want to be completely clear about that. The assurances were sufficient for your Lordships in the last Parliament and I hope they will be sufficient again.
The key reason given for excluding EHRC from these three policies, as far as I can see, is that it might prejudice their international A status as a human rights body, which is obviously incredibly important. However, there is not a risk with the growth duty, as it does not apply to the EHRC nor does the EHRC have a small business champion for the reasons that we discussed last time and on which the noble Lord quoted me. We know it is not the case with the code, because it has applied successfully to the EHRC for years, and it has been accredited internationally while it has been in place.
The business impact target is a transparency measure. It does not fetter the independence of the regulator to make its own decisions in relation to the changes it introduces. Inclusion in the target would require EHRC to measure and report its impact on business, and have the figures validated by the RPC. The RPC is not government, as we discussed, it is a body of independent experts and looks only at the evidence and analysis.
The noble Baroness, Lady Hayter, talked about the Charities Commission. The point has been made that it does not affect business. However, the business impact target covers the impact on both the private sector and the Third Sector. The Charity Commission certainly affects the third sector. We will consult in the new year on the list of regulators and welcome the views of Peers and regulators. We are trying to reduce red tape in life; reduce red tape for small business. I believe that a lot of charities—the noble Baroness may play this back at me on another occasion—have quite a lot in common with small businesses.
How does the inclusion of the Charity Commission help those who donate? In her inimitable way, the noble Baroness, Lady Hayter, talked about the consumer. Including the Charity Commission would encourage it to minimise burdens on charities ensuring, I would say, that more of donors’ money benefits good causes rather than being tied up in meeting the commission’s requirements.
There was also a point in Amendments 56 and 57 on retrospectivity. The focus of concern is the potential to change the legal effect of actions already taken.
The Minister might like to look at the statutory objectives laid down in the Charities Act on the Charity Commission and its effective operation. We may get into duplication here. Five statutory requirements have to be complied with, one of which certainly overlaps. Unfortunately, I do not have the Act with me and I cannot remember the precise wording, but it might be worthwhile looking at it, otherwise, we may get a degree of duplication. Perhaps the Committee can come back to that.
My noble friend, as always, makes a good point. We will certainly look at what is already happening. I suppose the idea is that if you can, ex-post, gather the information together and see what progress you are making in terms of reducing burdens, that could be helpful in itself. If in fact the figure already exists, which may be the implication of what my noble friend was saying, the task is not that difficult. I am grateful for that intervention.
Briefly, the actual retrospective effect of the provisions of the Bill does not have the consequences that noble Lords are concerned about. The provisions can have no impact on the status or effect of the regulatory policy changes made by regulators prior to the Bill being passed. The limit element of retrospection is appropriate and justified because it is about measuring delivery against the Government’s targets. The targets are set for the life of a Parliament, so if there were no limited retrospection, one would not be able to count any reductions in red tape that took place between the beginning of the Parliament and the writing of the report by the regulators concerned. We were trying in the drafting to tackle that gap.
I have also arranged a meeting with the noble Baroness, Lady O’Neill, who is chair of the EHRC, in early November and I will report back to the House on the outcome of that meeting on Report. I hope that what I have said on this important issue helps to reassure noble Lords that the proposed amendments are not required. In any event, I hope that the noble Lord will feel able to withdraw his amendment.
I thank the Minister for that full and comprehensive response, but I am afraid the answer to her question is that, no, it does not reassure us. I accept the assurances that she has given that the growth duty and the small business champion role do not apply to the EHRC. They are welcome and we would want that.
I hope that the Minister bears in mind that while on the one hand we would love to see her go down in history as the Minister who abolished retentions, we do not want to see her go down as the one who scuppered the country’s grade A-listed champion of human rights. I am sure she will realise that if it gets to that point, we will have to have a serious conversation. I take the points about retrospection. The intention was—if one might call it this—gold-plating on the part of the EHRC to make sure that it could not be caught at some future date, so her reassurance is helpful on that. But the fact still remains that if the EHRC feels that its international status is jeopardised by this, I do not think that the Government have much wiggle room on this matter. I hope that we return to that point on Report. However, let us continue to talk about that until then. I am sure that the contribution from the chair of the commission will be helpful. In the mean time, I beg leave to withdraw the amendment.
Amendment 48C withdrawn.
48D: Clause 13, page 11, line 20, at end insert—
“( ) Section 21 of the Small Business, Enterprise and Employment Act 2015 is amended as follows.
“( ) For subsection (3)(b) substitute—
“(b) the independent body, as provided for by section 25, must publish a methodology to be used for assessing the economic impact mentioned in subsection (1)(a).””
My Lords, this group of amendments focuses on strengthening the work and role of the Regulatory Policy Committee. As the Minister has already said, it is good to find an independent body able to look widely across the regulatory field and make recommendations without fear or favour, and we value its work. However, it is a little hampered by the fact that it is not currently able to report except in terms of where the Government set their objectives. I have already criticised that and we should put that aside for the moment and say, well, those are the objectives. But we should also reflect, if we can, on where we might go on that.
The point has been made, better than I could possibly make it, in a quotation that I would like to read:
“if you have the privilege of being in government, you should try and think about the long term and not just today. And in the long term, I think the country would be better off if we thought about wellbeing and quality of life as well as economic growth”.
That was the Prime Minister. That sentiment is picked up by work that has been done in a number of think tanks, notably the Legatum Institute. The noble Lord, Lord O’Donnell, has picked up the idea of thinking more widely about where Governments should be aiming in what they do about the impact of their legislative and regulatory programmes.
There are two minor points in this group that I also want to pick up. First, as I understand it, the Treasury has now changed its view about how impact assessments are owned and operated through Whitehall by asking for a business-critical model to be introduced for many impact statements, where there is a senior responsible owner quoted as a named individual of sufficient seniority to take responsibility for the model throughout its lifecycle and to sign it off as fit for purpose prior to use. Is that now common practice across Whitehall or is this a work in progress? If the latter, will the out-turn be something that we can look forward to in terms of improving the quality of impact statements? I think the reason for this is the west coast main line franchise fracas. I need not say much more about that, since it was quite clear that there was not sufficient seniority in the department to take responsibility for what went wrong there.
My point here is that if we are seeing changes in some of the infrastructure activity in preparing for legislation and regulation, this would be an opportunity to have that on the table so that we could make judgments about it. I beg to move.
My Lords, I thank noble Lords for their amendments. I am grateful to the noble Lord, Lord Stevenson, for quoting the Prime Minister—perhaps a signal of the constructive and harmonious nature of our debates in this Committee in the Moses Room. Amendment 48D would remove the responsibility for choosing and publishing the methodology for assessing economic impact under the business impact target from the Secretary of State, as I understand it, to the independent verification body.
We see the target, scope and methodology as a single package. They need to work together and be set together. It is unrealistic to expect that the Government should set a target having no idea about how the impacts will be measured against it—that sort of delegates responsibility. So there is a fundamental problem there. The purpose behind setting targets of this nature is to deliver the right incentive, change behaviour within government and improve the way we regulate to achieve the better regulation vision that has been expostulated today.
To my mind, it is right that this remains a matter for Ministers. We have to be accountable to Parliament and to the people at elections. Amending the role of the verification body would place an unusual amount of power in one unelected body and remove the flexibility for future Administrations to determine the methodology appropriate for assessing business impact in their particular circumstances. Of course we are consulting the Regulatory Policy Committee about the methodology for this Parliament, and we will continue to work with it to resolve questions of interpretation that inevitably arise.
Amendment 48EA seeks to stipulate that the target must comprise both a number of regulations and the monetary value. It is right for the Government of the day to decide methodology, and of course we have indicated our broad direction with our manifesto commitment of £10 billion of deregulatory savings. The change would limit options for future Administrations. I myself think that the number of regulations is less important than their economic value, but we could debate that. The point is that we would like to leave this broad and have discretion for the Government of the day.
Amendment 48E relates to the annual report on the Government’s performance against the target and would require the Secretary of State to publish additional information in respect of regulatory provisions which do not fall within scope. Transparency about such measures is important, and I can give some reassurances. Measures which do not score for the business impact target still receive proportionate appraisal and independent scrutiny under administrative requirements which will continue in this Parliament. That means that significant measures are required to have an impact assessment, even where they are excluded, as I think we discussed in respect of the EU financial measures.
Other than for regulatory measures with very small impacts, the relevant impact assessment is subject to independent scrutiny by the RPC. Impact assessments must be published at the final stage alongside the legislation to which they relate. This transparency is incredibly important. I have already said that I think the RPC is the biggest reform of administrative procedure in Whitehall since I last worked in government, and I am very pleased to see the teeth that it has. It seems to me to be proportionate and to avoid duplication. This approach does not detract from established principles. I am glad to see the noble Lord, Lord Curry, here, because he has been very involved in making sure that this regulatory system works correctly and that it is independent.
There are some technical issues with the drafting of Amendment 48EB. The RPC does not have a separate legal existence, but I can address the intent behind the amendment. The RPC is an enduring cornerstone of the regulatory framework, and the Government focused the verification functions on those that it was absolutely necessary to set out in statute. If there are further comments on the detail of this, I will be very happy to discuss them, but I will just respond to the question asked by the noble Lord, Lord Stevenson, about the senior responsible owner of impact assessments. As he says, he has great intelligence networks. The Treasury is looking to strengthen government project management, including business cases. We are not sure that this will affect impact assessments as such, but I am certainly happy to update him on what is involved here. As he implies, it is potentially another important administrative innovation.
These amendments are to some extent probing but are also about trying to constrain the operation of the system. As I have said, some degree of operational flexibility is needed for the Government of the day. When we put proposals forward in the last Parliament, we put them forward with that in mind, and I would be reluctant to go down a different road.
I thank the noble Baroness for that very full response. These were of course probing amendments, but she might like to note for future reference that we struggled hard with the clerks to expand the range of things that we wanted to talk about. It was a fight of great intensity, which we lost on two areas that I thought we would be able to include. We could not put into Amendment 48EA a third point which would require the evaluation of the impact of all regulatory measures on well-being, because they said that that was not about enterprise, for some reason, and did not fall into the long title of the Bill. We also wanted to probe the question of whether or not the RPC would be able to follow up its idea that impact assessments should not just be generated sui generis within a department but should be exposed to external review as well, which would have given another cornerstone to the way in which impacts are measured and assessed and would help the law-making process. But these are much bigger and broader issues and cover more of a constitutional than a legislative area. They are matters to be discussed when we have that drink. With that, I beg leave to withdraw the amendment.
Amendment 48D withdrawn.
Amendments 48E and 48EA not moved.
Clause 13 agreed.
Amendment 48EB not moved.
Schedule 2 agreed.
Clause 14: Duty to report on effect of regulators’ code
Amendment 48F not moved.
48G: Clause 14, page 11, line 42, at end insert—
“( ) of the measures adopted by the relevant regulator to simplify the regulatory making process in a manner which is comprehensible to small businesses, where regulations have an impact on small businesses, and( ) of measures taken to promote awareness of regulations which affect small businesses;”
My Lords, I do not think that these amendments will take up too much time. In moving Amendment 48G I shall speak also to Amendments 48H and 49A. This deals with another of our good ideas which are dreamt up late at night. We thought that a focus on productivity seems to be lacking in this Bill. Enterprise is there in spades, but productivity does not appear, although it is the cause célèbre of our time. We ought to have something about it, and I wonder whether it would be possible to have the Bill team look at the question of whether obligations can be placed on the regulators to look at this dimension when considering how they will extend their programme of work as well as report on it. We also felt that this was something that the Small Business Commissioner might want to look at, although given the response we have had so far on extending the remit of the commissioner, I do not expect to get very far with this one. But it is a good idea and I would be grateful if the noble Baroness could consider it. I beg to move.
My Lords, I rise to speak to my Amendment 49ZA. Earlier today we heard a lot of the arguments expressed eloquently by the noble Lord, Lord Mendelsohn, in the first group of amendments concerning the importance of anonymity in certain circumstances, and those arguments apply here. The danger is that people, whether warranted or not, fear that they would be punished by a regulator if they make a complaint. I will say a couple of things in addition.
First, in commercial life I have always been interested to see the complaints that have come in, mercifully not too many at Hiscox because I am delighted to know that the Minister is a customer. But they have enabled us to make our business better by understanding what was going wrong, and so as a regulator I would say that you want to see as many complaints as possible and that an anonymity mechanism is in your interests. Secondly, in my speech at Second Reading I talked about the attitude of regulators. I have dealt with a heck of a lot of regulators in many different countries during my business career. Taking a leap, the most amusing one was definitely when Hiscox ended up owning a sugar refinery in Brazil, or a controlling interest in it. I was on its board for three years, and the regulator concerned was the rabbi who had to give us the kosher certificate for our sugar before we could sell to Coca-Cola or to Sara Lee, the cake company.
The best regulators are definitely people with a collaborative and helpful approach, and the worst ones represent a great bind on business. I think that the naming and shaming mechanism, which this would drive as well, because the regulators will have to write an annual report, of having consistent comment about poor attitude would be one way in which my concerns about trying to improve the attitude of all regulators in Britain—we all know some who have a bad attitude—could be addressed and the situation improved. There may be other opportunities in the Bill for it to be improved, and I would like to talk about that outside this Room. But driving good attitude is something which is in the interests of small businesses and more generally.
I thank noble Lords for these amendments and agree with the noble Earl, Lord Kinnoull, about the importance of, as it were, rewarding the good as well as shaming the evil because I think that is very important in almost all aspects of life, including childcare.
It strikes me that at the heart of this amendment is a desire to ensure that regulators take the specific needs of small business seriously and are transparent about the action they have taken in this regard. This is a desire we all share. The Regulators’ Code, to which regulators must have regard, is clear that regulators should design regulatory approaches that are proportionate and based on factors such as business size and capacity. The new reporting requirement set out in Clause 14 will ensure that regulators are transparent about the effect that these considerations have had on the way they exercise their regulatory functions and the impact they have had on those they regulate, including small businesses.
I am very grateful to the noble Lord for raising the issue of productivity in the UK because when I was on the Back Benches I was always researching productivity in the Library and trying to raise it. It was not the fashion but now it has been recognised as an extremely important driver for the long-term growth and success of our nation. It is one of the key economic challenges for this Parliament because, obviously, it has not grown as strongly as we would have liked in recent years. Business has a critical role in taking the agenda forward, which is why we published Fixing the Foundations in July—a 15-point plan that I think sets out a very ambitious vision for where we want to be in 2020.
The growth duty reporting requirement in the Bill ensures transparency over the actions a regulator has taken as a result of the growth duty, including where the duty has enabled a regulator to contribute to productivity. We intend to issue guidance on the preparation of these performance reports. I will certainly reflect on the productivity point in that guidance, which is perhaps where it could sit, as it is important because it contributes to growth.
Turning to Amendment 49ZA, I understand the concerns around the perception that business, especially small businesses, may attract greater scrutiny from a regulator if they were to make a complaint about it. I also very much agree about the value of feedback—the point made by the noble Earl, Lord Kinnoull. If you are in business, as I was for many years, complaints are jewels to be treasured because they tell you how your business is interacting with your customers, whichever sector you are in. Good practice exists in some regulators. For example, I understand that the Pensions Regulator—not the most fashionable of regulators—runs straightforward anonymous feedback surveys on its website as a routine. In developing the guidance I have mentioned on how the reporting duty will work, we will want to tap into good practice elsewhere. If noble Lords have examples of that, it would be extremely good to have them.
On Amendment 49A, the commissioner will have a focused remit and great personal authority and credibility, which will change culture and practice on payment issues. This approach received broad support during consultation. As I have said many times, I do not believe that we should widen the scope of the Small Business Commissioner. However, where issues in relation to regulatory activity are relevant to the commissioner’s scope, this can be addressed in the commissioner’s annual report. I hope that my response will help noble Lords to feel a little happier about the way this part of the Bill is developing, and that the noble Lord will feel able to withdraw the amendment.
My Lords, I just add one comment on this, prompted by the comments of the noble Earl, Lord Kinnoull. The prevailing culture with the regulator is very important. I value the Minister’s comments on that. Part of my role has been to try to encourage a better relationship between the regulator and the business community—namely for it to regard the businesses as clients it needs to work with to deliver an outcome. I believe that we made some progress in that respect. As noble Lords know, in the small business Bill we had the small business champion. I hope that businesses will feel they have a recourse to approach the small business champion if they are dissatisfied with the regulator.
My Lords, I think that this session has been one of conciliation and support. I do not think there is any sense of a divide between us, and that last contribution helps to say that this is a cultural issue but it is also important, and if we can do more to help as we go forward then we would like to do so. I hope that the idea we had of trying to use the new structures to create even more impact is taken on, although I reflect that the fact that so many new ideas are bouncing around suggests that there might perhaps have been some advantage in taking more time over the Bill and taking more advice from others before it came forward. Still, we are where we are. There may be time to build on some of those issues, and I look forward to reading Hansard carefully and to seeing what happens as we move on to Report. With that, I beg leave to withdraw the amendment.
Amendment 48G withdrawn.
Amendment 48H not moved.
49: Clause 14, page 12, line 3, at end insert—
“(c) details of the activities, including the costs, of any organisation employed to undertake work on behalf of the regulator”
My Lords, this is a probing amendment directed at the same clause as Amendments 48H and 48G from the noble Lord, Lord Stevenson. It is about the performance report of the regulators. The amendment seeks to add a requirement that the report should contain information relating to work undertaken on behalf of the regulator in the execution and performance of the regulatory duties.
It is obvious that the activities of a regulator come at a cost: there is the cost to the regulator itself in terms of its own budget and the cost to those that it regulates, either the direct costs or the hidden costs, such as having to set up systems to ensure compliance. Obviously all this can be a considerable economic burden, and it is therefore extremely welcome that the Government have emphasised in the Explanatory Memorandum, and indeed in the Bill, the importance of regulators having to have regard to the promotion of economic growth and to report thereupon.
One of the ways in which it happens that regulators are kept under control is that they have a budget within which they have to live. This forces a degree of focus by the regulator on the essential aspects of its duties; in effect, it concentrates them on the must-haves rather than the nice-to-haves. I am concerned that there may be ways for regulators to avoid these budgetary constraints and instead end up with a great deal of nice-to-haves that may not have a commensurate cost-benefit relationship.
I have explained this to the Bill team because it is quite a specialist point: in the Financial Services and Markets Act, which I am using as a practical example, Section 166 is called “Reports by skilled persons”. Section 166(1) says:
“The Authority may, by notice in writing given to a person … require him to provide the Authority with a report on any matter about which the Authority has required or could require the provision of information or production of documents”.
That is a very widely drawn section, and Section 166 inquiries have become very prolific in the financial services area. There are organisations that have several of these running. The regulator comes along and says, “We’re not satisfied about this aspect of your operation, and under Section 166 we instruct you to get a skilled person to provide an independent report on it”. The skilled person will be an accounting firm or maybe a lawyer. The regulator continues: “The report is to be sent to us and the bill is to be sent to you, the firm”. These reports will cost probably a couple of hundred thousand pounds by the time they have reached the end of the road.
This means that there is no financial constraint on the regulator because the regulator can pursue issues without concern as to the operational impact on their own organisation. I accept that the wording is almost certainly imperfect, but the amendment is designed to require regulators to disclose when they are subcontracting regulation so that we can have an independent idea of what they are spending outside their own budgets. I am not saying that the regulator should not be able to do that, but I am anxious to make sure that proper disclosure takes place. I am not sure whether other regulators—I have given the financial services sector as an example—are engaged in the same practice. Of course, it is challenging to get the drafting right because these additional costs are invoiced to the regulated firms, not to the regulator.
There is an issue here that needs addressing if the Government are to achieve fully their welcome objective of getting a regulatory system that is focused and effective but run with regard to the costs being incurred. I beg to move.
I thank my noble friend for tabling this amendment, which seeks to include in the Bill a specific reporting requirement for regulators subject to the code to provide details of the activities, including costs, of any organisation employed to undertake work on their behalf. At the heart of the amendment lies a concern about the hidden costs to business. The example that he gave was that financial service regulators may seek to discharge their regulatory functions by using their powers to commission reviews by “skilled persons” and charging the businesses concerned for the cost of that work. As I understand it, that is at the heart of the problem that my noble friend has identified.
My noble friend is right to seek transparency and accountability about how these powers are used and I think that we have made some progress in this area. Both the FSA and the PRA now routinely publish information on their Section 166 Financial Services and Markets Act 2000 activity. This includes quarterly reporting on the number of skilled persons reports that they have commissioned and annual reporting on the aggregate costs of these reports. As my noble friend probably knows, this information is available online. It seems to me that the disclosure that he seeks is being addressed and I am not sure that there is harm elsewhere that justifies creating new regulation in this area. In the interests of brevity, I do not see a case to amend the Bill and ask him to withdraw the amendment.
I am grateful to my noble friend for that full response. One of the questions is, of course, that I just happen to know about the financial services area, where there are lots of regulators that we are considering as part of this section of the Bill. It would be helpful if we could try to ascertain whether other regulators are engaged in the same process because it enables them to add to the regulatory burden very considerably. I am grateful for the comments and the further research that the Bill team have done on this matter and I beg leave to withdraw the amendment.
Amendment 49 withdrawn.
Amendments 49ZA and 49A not moved.
Clause 14 agreed.
49B: After Clause 14, insert the following new Clause—
“Report on money laundering regulations
(1) The Small Business Commissioner shall prepare and publish a report assessing a regulator’s performance and effectiveness at ensuring regulations are proportionate, user friendly, widely promoted and easily adapted by small businesses in relation to money laundering regulations.
(2) The report provided for by subsection (1) must include an assessment of the role of the Financial Conduct Authority and its activities to encourage awareness of the impact of money laundering regulations on small businesses.
(3) In this section a regulator is a person with regulatory functions to which section 108 of the Deregulation Act 2015 applies.”
My Lords, I should declare at the start of these amendments that I am regulated by the FCA, so this is actually terribly in my interest. This relates to being able to give small business some guidance. Very briefly, money-lending regulations apply to a whole range of small practices ranging from financial and credit services, accountants, lawyers, estate agents and a number of others.
As ever, the regulations are quite complex within this context; there are duties to assess the risk of the business, your own business activity being used by criminals, who you are conducting business with, checking the identity of beneficial owners, monitoring their business actions and reporting on management control systems, or keeping documents and making sure that you are training your employees. I am bound to say that as ever, these obligations on companies that try to comply are very hard on them indeed; small businesses in particular find that very tough. For those who have no intention of bothering to comply with them it is exceptionally easy; I cannot say this comprehensively, but in cases that I checked the fines are significantly smaller than the costs of having to comply by having a compliance adviser or other sorts of people.
We therefore hope that the Small Business Commissioner will be able to play a role here to help define what is good activity rather than the constant uncertainties that happen, especially over something such as this. Is it sensible for a small business with two or three people in one of these areas to have to phone up the company secretary at a FTSE 100 company to say, “Can I have the passports and identity checks of your company directors?” and to have to carry on referring them in those sorts of circumstances? Perhaps this may not be a formal role, but this now famous annual report may well have some provisions which will be helpful to at least simplify this for small businesses.
Secondly, on awareness of share sale fraud—I apologise that we may not have drafted this to the most exacting standards that we would otherwise have liked to have done—I will try to give noble Lords the thrust of the measure. Again, small businesses are particularly vulnerable to a number of frauds that take place where people try to sell bogus financial services and products and other sorts of things. This affects areas where online fraud is established or verified through the use of things such as addresses or other sorts of things as well as when online and offline meet. We are trying to give the regulators some ability, obligation or duty to communicate; hopefully the back end of how that might work best for government would be between the enforcement agencies and the regulators. I will give a great example, which was, of course, when City of London Trading Standards sought a conviction against Regus Management, which housed just the address of a particularly fraudulent scheme. When contacted by—on this occasion—consumers, the company said that its offices were based there, when, of course, it was just a postal address. Just by saying that it was based there gave it a credibility which led to a couple of people being defrauded.
It is also very useful to know that the police are now enforcing a crackdown on boiler room fraudsters in the City of London and Canary Wharf. This is good practice; we would like to encourage regulators to get the message out so that there is reasonable coverage across the rest of the country. This is just about trying to place a duty on them to try to make sure that something can be done to help support small businesses across the country. I beg to move.
I cannot resist, although I know that the Committee is like a horse heading for the stable, therefore I shall be very brief indeed. On the comments made by the noble Lord, Lord Mendelsohn, on money laundering, this area has a life of its own, and the impact on smaller businesses is stupendous and without any real evidence of any efficacy whatever. This area is still growing, and the tentacles of bureaucracy are widening all the time, therefore the burden will be greater. I therefore very much support the idea that we take any steps to make sure that it is effective—not that we should not do it, but that it is effective. That is the thrust of the noble Lord’s Amendment 49B and trying to make sure that we try to prevent the further spread of this. I have today received a request about money laundering from my clearing bank. When I left university in 1964 I went to work in America. The bank has written to me saying, “We see you worked in America in the 1960s; tell us what you were paid as part of our money laundering investigation”. What that can possibly add to its knowledge of me 50 years ago I cannot possibly imagine. If you use the term “money laundering” everyone says it must be a good idea. It will require a big effort to make sure that we are effective. The question is: are we stopping people doing these terrible things, not just spraying information around and ticking boxes? Therefore, all power to the Minister.
My Lords, I share the sentiment behind Amendment 49B to ensure that regulators have regard to the needs of business when dealing with money laundering requirements. As I used to say when I was on the Back Benches, the regime was excessively burdensome and some businesses feel confused by overlapping or restrictive guidance. However, these concerns cannot be addressed by simply looking at how regulators deal with small business. There may be examples of requirements that are particularly difficult for certain entities, but it is the interactions between different types of business and with the banks that is at the heart of the problem. So small companies with innovative business models or ways of complying with requirements, to know their customers, may find it difficult to maintain business relationships with large banks which do not understand how a particular model works. The bank may simply decide not to do business, rather than expose itself to the risk that the small company is being used for money laundering.
Difficulties can be caused by the guidance that is produced by the various regulators and supervisors. That is why we are looking at the regime in the round. We are now running a Cutting Red Tape review of money laundering controls. It is important that companies that are genuinely confused about what they need to do have this confusion addressed. Our call for evidence is open until 6 November—my husband is planning to send sacks of stuff—and we are keen to speak to all NGOs, businesses and trade associations with an interest, particularly SMEs.
We want to examine more seriously the potential to improve compliance and efficiency, by identifying aspects of the good supervisory regime that appears to businesses in the regulated sector to be unclear, cumbersome, conflicting or confusing. We are already speaking to a broad range of sectors and we would be very pleased to have examples from your Lordships. The Government understand that the regime can be improved. We published the first national risk assessment for money laundering and terrorist finance risks on 15 October and one of the findings was that the supervisory regime was inconsistent. We accept that this needs to be addressed.
The evidence being gathered by the BRE will help to inform work under the Government’s action plan to reform the regime and to ensure that it is consistent; treats large and small businesses sensibly and proportionately; and follows a truly risk-based approach allowing resources to be targeted at the areas that are at greatest risk of money laundering and terrorist financing. These are also important policy objectives which must not be forgotten in today’s discussions.
I hope that gives some reassurance. I have a good deal of excellent detail on Amendment 49D in relation to investment fraud, but given the lateness of the hour, I wonder if the Committee would like me to write about that. I think it means that we do not need to amend the Bill, but a lot of good work is being done by the FCA which I would like to share with noble Lords and give more publicity to in order to get after the scammers. I hope that the noble Lord will feel able to withdraw his amendment.
I did not quote the noble Baroness on this one; I am saving that for later, and some significant quotes that she made on other amendments. The argument was not about what small business’s compliance is able to do in transactions with the bank. I understand the Minister’s point, but the issue is really about small businesses being able to establish that they have fulfilled their regulatory duties, which would not have that consequential action.
The review is obviously very open. I was trying to explain that if you do a review that engages only small business, you will not necessarily be able to get the same savings as you would otherwise. I have come across this for example with estate agents: if you buy a property, and are a perfectly respectable person, you have to go through all the detail that the noble Lord was describing. If you are a company director, you are constantly having to produce ID again and again. If you take the 5.4 million businesses and find a saving, that is a lot of burden reduction. Obviously, equally, if you impose new burdens, and multiply that by 5.4 million, there is a problem. That sort of technique needs to be applied, which is what the BRE is doing with this study. We will certainly make sure that the noble Lord’s point is properly considered.
I do not want to labour the point, but especially in relation to estate agents, the difference is that it is disproportionate to expect an estate agent to establish the proper beneficial owners and other things. Banks, which have more resources to be able to do it, are much better placed. This was just about getting the balance right. However, I accept the point about the review. It felt like one of those sessions where so much was shared that I almost felt like unloading about being a politically exposed person and how often that becomes a bit of a problem, but I will leave that for another occasion. I beg leave to withdraw the amendment.
Amendment 49B withdrawn.
Clause 15 agreed.
Amendments 49C and 49CA not moved.
Clauses 16 and 17 agreed.
Amendment 49D not moved.
Committee adjourned at 7.17 pm.