Lords Sitting of 9 October 2003

Preamble
The House met at eleven of the clock: The CHAIRMAN OF COMMITTEES on the Woolsack.
Prayers—Read by the Lord Bishop of Worcester.

Health and Social Care (Community Health and Standards) Bill
The Parliamentary Under-Secretary of State, Department of Health (Lord Warner): My Lords, I beg to move that the House do now again resolve itself into Committee on this Bill.
Moved, That the House do now again resolve itself into Committee.—(Lord Warner.)
On Question, Motion agreed to.
House in Committee accordingly.
[The CHAIRMAN OF COMMITTEES in the Chair.]
Schedule 1 [Constitution of public benefit corporations]:
[Amendment No. 21 not moved.]
Earl Howe Earl Howe moved Amendment No. 22:
Page 108, line 23, leave out sub-paragraph (4).
The noble Earl said: The membership of a foundation trust consists of those employees and members of the public who, in their separate constituencies, are eligible to elect representatives to sit as governors. Of these two constituencies, the staff constituency is the one that is more easily comprehensible. That is not to say that all is crystal clear. Paragraph 3(4) states that you will not actually have to be employed by the trust to count as a member of staff; and the notes tell us that agency nurses and people employed by sub-contractors are examples of those who might fall into the category of non-employees.
I am not clear how far this is supposed to go. Perhaps the Minister can explain. Could it, for example, include people who work for companies which act as suppliers to the trust? No doubt the Minister will say that these are detailed matters for the trust itself to determine, but it is rather difficult to see where the line can reasonably be drawn and why, therefore, the paragraph was inserted at the last minute in another place.
Should a trust include all agency nurses who had worked for it in the past year or only, let us say, those who had worked for a certain number days? One can envisage all kinds of arguments and bureaucratic complications arising from this debate.
I imagine that one category of person the Government have in mind is someone who works for a PFI contractor servicing the trust. It would be helpful to hear from the Minister what is the up-to-date position on the issue of retained employment in
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PFI hospitals because it is very clear that this is the single biggest stumbling block preventing financial close on a number of PFI projects currently pending. What guidance, if any, will be given to trusts on this aspect of the staff constituency?
If we look further down at paragraph 8, we see that the staff constituency appears to be very much the poor relation of the public constituency. Whereas the public constituency members must comprise at least 50 per cent of the board, the staff constituency membership of the board need consist of only one person. I am not quite sure why this is and it would be helpful to hear the Minister's thinking on how important the staff constituency and the staff governors are regarded as being. I beg to move.
Lord Walton of Detchant:Can the Minister explain whether the paragraph relates also to clinical, medical and dental staff employed by a university who have honorary clinical contracts with the trust?
Lord Warner:We have tried very hard to explain our general approach in relation to Schedule 1. The legislation deliberately sets out only minimum eligibility requirements for memberships of NHS foundation trusts in order to allow individual NHS foundation trusts the flexibility to tailor their own arrangements to meet local circumstances and on the basis of local conditions. I do not want to keep repeating that during the course of the debate, but I want to make it absolutely clear to the Committee that that is why we are not putting a great deal of prescriptive requirements into the legislation.
I find it slightly ironical that, after the debate on Tuesday in which there was a great deal of protestation from around the Committee about the problems of micro-management of the NHS, centralisation and laying down the law from Westminster and Whitehall, we now have a string of amendments which seek to do just that to this legislation.
Having got that off my chest, I feel a lot better. I shall turn now to the points raised by the noble Earl and explain our concerns about Amendment No. 22.
The amendment, if implemented, would prevent individuals not directly employed by foundation trusts from being eligible for the staff constituency. We believe that that would run quite counter to the flexibility arguments I have used. I do not know whether it is motivated by concerns that the constituency may allow inappropriate groups of people to have access to membership, but paragraph 3(4) simply gives NHS foundation trusts discretion to include those people who carry out functions of the trust, although not directly employed by the trust, to become members of the staff constituency. It certainly does not require them to do so, but it would enable, for example, the kinds of staff to which the noble Lord, Lord Walton, referred to fall into that group.
I shall have to write to the noble Earl about PFI contracts, as it is quite a technical issue. I will do that as soon as possible. Some staff groups are commonly not directly employed by trusts—for example, people

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working in contracted-out services, such as catering. However, these people have a keen interest in the organisation because they work there. Many of them were, in many cases, previously employed by the NHS and are now contractor staff, contributing to the services it provides. It is right, therefore, that they can also be members of the staff constituency. We believe that the amendment would prevent that and that it would be wrong to prevent people who often work in the hospital under a different contract of employment from direct employment with the NHS participating in these changes in the way provided for in the legislation.
Of course the staff are not a poor relation—the Bill provides for staff provision. But, as we have said consistently, this set of changes in relation to NHS foundation trusts is all about giving patients and local communities a much greater say in the development of their health services. The provision of at least one does not in any way prevent—we would not expect it to prevent—a much larger representation where it is appropriate in relation to particular foundation trust applications.
That is as clear as I can make the Government's position. I encourage the noble Earl to withdraw, or the Chamber to reject, the amendment.
Earl Howe: I had intended this to be a standard probing amendment. I think we all understand what the effect would be of removing this sub-paragraph—indeed, that was not my intention, as the noble Lord will appreciate. I understand that the Government are not being prescriptive as a whole in the schedule, but that surely does not mean that the Committee is not entitled to discuss the provisions it contains. I think that probing amendments are entirely in order, particularly in Committee.
The Minister has been helpful in drawing our attention to a number of aspects of this sub-paragraph. My main purpose for wanting to discuss it was that there had to be a reason why it was inserted into the Bill in another place at a late stage. I think we are closer to discerning what those reasons are. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 23 not moved]
11.15 a.m.
Lord Peyton of Yeovil Lord Peyton of Yeovil moved Amendment No. 24:
Page 109, line 3, after "minimum" insert "and a maximum"
The noble Lord said: Quite unusually, this amendment means exactly what it says, and I hope the noble Lord might consider accepting it. The thought behind it is that it is as well to limit rather than increase the number of people around a table. This may be a novel thought to Members of Her Majesty's Government, but numbers tend to add confusion rather than simplify anything. I beg to move.
Earl Howe: I support what my noble friend has said. The whole concept of a hospital's public constituency seems to me inherently flawed. The system is, by its
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very nature, socially excluding. Hospitals will land up with members who, being self-selected, will almost certainly be unrepresentative of the population at large. As such, these members will have absolutely no responsibility to have regard to the interests of people who may not have registered as members but who may nevertheless have an equal or better claim to have their interests represented on the board. Homeless people, those whose first language is not English, people with mental health problems and those seriously ill with long-term conditions will not be in a position to be active as members of a foundation trust. We are looking at a government model for the articulate middle classes.
In the worst-case scenario, hospitals will find that the governors who are elected by the public are people with narrow axes to grind on behalf of special interest groups. I am not clear from the Bill how this situation can be avoided. It is a phenomenon, as we know, known as entryism. The membership list could conceivably consist of only a very few individuals.
I do not think that the idea of a public constituency has any real validity unless there is a sensible minimum number of members. Below that sensible minimum entryism really will occur, almost regardless of anything else that is done.
Paragraph 4 simply says that there needs to be a minimum number of both public and staff; it does not say what that minimum should be. Of course the Minister will say that the Government do not want to be prescriptive, and I understand that. But do they really envisage that there should be a different minimum number for each foundation trust? Or are they prepared to say roughly what sort of minimum they envisage as sensible?
Baroness Cumberlege: I also support my noble friend Lord Peyton. One of the advantages of a Bill having several days in Committee is that one can think about the previous day's debates and how they will play into some of the later amendments put before us. This amendment is trying to achieve some structure around what the Government are proposing.
I have very serious reservations about handing over governance to an elected body. My earlier amendments, as the Minister has said, tried to get the necessary politics, the necessary accountability, into a rightful place with Parliament and the Government, freeing up the NHS from day-to-day political interference.
In discussing earlier amendments, the noble Lord, Lord Lipsey, who I am very pleased to see in his place today and who is an authority on electoral matters, argued the case against these reforms. At our previous sitting, he said,
"this Bill seeks to create a system that embeds politics in the management of our hospitals. Is that what we want?".—[Official Report, 7/10/03; col. 202.]
My answer to that is, "No, that is what many of us do not want". If noble Lords will indulge me, I shall do as the noble Lord, Lord Walton, has done in previous debates, and refer to past experience. Personal experience is one of the things that noble Lords bring to this

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Chamber. When I was first involved in the NHS, we had elected members. Mine on the whole were fairly reasonable, when they turned up; on the whole, they did not turn up. In Lambeth, the elected members were totally unreasonable. I remember these events very distinctly, because I was part of the same region. Those members fought their political battles within the governance of the NHS and in that particular health authority. They left in the middle of meetings for press briefings. They took the chairman to court and fought legal cases against the chair. They brought in their supporters to disrupt the meetings. They actually locked members of the board out of the boardroom and, in the end, the police had to come and attend regularly to ensure that there was some discipline in the governance of the NHS. The governance disintegrated and the commissioners were brought in. That did not happen overnight but took months and months and, as a consequence, no decisions were reached. The authority incurred enormous debts and the rest of us in the region had to bail it out. The staff were demoralised, and it took the local service years to recover. I am not exaggerating—I was there, and I saw that happen.
I accept that Lambeth may be one of the very worst examples of that happening, but it is easy to forget, in these arrangements, what politicising the health service is going to mean. As the noble Lord, Lord Lipsey, rightly said, we will then have party factions and Whips. We will bring in the party political system right down to ward level and into primary care trusts, and so on. That is dangerous, and it is not what the health service is about. The health service is about treating individual patients. We should reconsider the system that is being proposed.
In a previous debate, the Minister said that he was trying to get a system that was "fit for purpose". This is not fit for purpose; it is dangerous, and it has fundamental flaws. The Minister said that he would listen carefully to good arguments. Throughout the Committee stage of the Bill we will be putting forward good arguments. The Minister should listen well; in fact, he told us that he was going to. Perhaps he could tell the Committee, "We as a government have decided to think again". I hope that he will surprise us, will take account of what we are trying to do throughout the Committee stage and rethink some of the proposals.
Lord Warner: It would be a masterpiece of understatement to say that very few people in this Chamber would want to use the experience of Lambeth at a particular point in history as the basis for public policy. There is a fundamental difference, on the question of participation, between the position of noble Lords in some parts of the Chamber and the Government's position. We are concerned here to introduce a set of changes to enable communities and patients to participate more in the running of the health service locally. That is what we are about. We are trying to create a governance structure that achieves that objective. As I said, we will be prepared to listen to well thought out changes and proposals, but they must be proposals that do not deflect us from
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that particular key objective. Later on in our discussions, noble Lords will see the Government being very flexible and responding positively to some amendments. I do not want to anticipate that, but I wish to whet noble Lords' appetites so that we can make good progress towards those amendments.
We shall consider the issues carefully, but I should like to say what the downside is of the two amendments. Before I go on, however, I should put on record what I saw in the Daily Telegraph this morning. At a fringe meeting of the Conservative conference, Greg Clark, the head of policy at Conservative Central Office, said that one of the key principles for any future Conservative government was being committed to promoting more choice for communities and citizens. That seems to me to involve a participative approach. It is good to see that the news has travelled to Blackpool, as it suggests that we are getting support for the measures in this Bill.
Amendment No. 24 would require fixing a maximum membership in each constituency. That would risk excluding potential members, solely because of an arbitrary cap. We stated in A Guide to NHS Foundation Trusts that,
"there will be no limit on the number of people who can register as members if they meet the eligibility criteria".
That quote is from paragraph 2.10.
It would be totally unfair to exclude people who wanted to get involved in their local services because membership was limited. There is nothing to be gained from setting a maximum figure for membership. Amendment No. 24 is not well founded.
Amendment No. 25 would require a minimum membership of 50. Here, the arguments are slightly different. It would be wrong to set any arbitrary figure for local membership, as proposed in the amendment, as the circumstances of each NHS foundation trust will be different. We will discuss that matter when we arrive at the debate on governors and non-executive directors, so I shall not rehearse all the arguments. Many of the same arguments occur.
It is eminently more sensible, as the Bill provides in paragraph 4 of Schedule 1, to require individual foundation trusts to set their own minimum membership numbers as part of their constitutions, which are subject to the approval of the independent regulator. That would take into account the diversity of trusts. Classically, trusts range from those such as Rotherham, which has a single provider, a single commissioner and a clearly defined geographical territory, and places such as Moorfields, which draw their patients from an extremely wide geographical area. The same arguments apply to governors as to membership, in not being arbitrary in setting particular limits from Westminster and Whitehall.
Specifying a minimum of 50 members would not ensure a genuinely representative membership Fifty is too low a number of members for NHS trusts which become NHS foundation trusts and is likely to be too low for an NHS foundation trust that is established as a new organisation. We can tell from the work done by the first-wave trusts that there is a huge response from

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people wishing to be governors of trusts. In one case, well over 1,000 people came forward just to be governor, offering their services in that role. We are seeing a much more positive response than many noble Lords suggest. Some noble Lords are being too pessimistic about some of the public responses in some parts of the country. The amendment suggests an arbitrary requirement for a minimum membership, and we suggest that noble Lords rethink their proposal.
11.30 a.m.
Lord Peyton of Yeovil: I am grateful to those noble Lords who have participated in the debate on my modest amendment. I was reminded in the course of the discussion of a question that I once asked the noble Lord, Lord Hunt of Kings Heath, who used to speak for the Government on this subject. I asked him how many committees there were sitting under the aegis of the National Health Service. I realise that that was a terribly unfair question. I might as well have asked him to count the grains of sand on the seashore. He had no idea how many committees there are. However, I do not want to dwell on that painful subject.
I do want to say this. I have come to believe that keenness to serve on a committee perhaps ought to be considered as a very serious disqualification. The noble Lord, Lord Hunt, will be familiar with this thought of mine, although it did not persuade him. My feeling about committees is that they are almost always too large. Half of those sitting on them would be much better employed using their very important knowledge on much more important things, and the other half probably ought not to be released anywhere. When the Government say rather baldly, as the Minister did just now, that their aim is to have more participation, I hope they will bear in mind that they could get participation from all sorts of people who would produce only confusion and delay. Therefore, as the discussion went on, I began to think that my amendment was more and more worth attention. While I should be happy to withdraw it now, I must tell the noble Lord that certainly my present intention is to return to the subject later. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 25 not moved.]
The Chairman of Committees (Lord Brabazon of Tara): I should point out that there is a mistake in the Marshalled List and that Amendment No. 27 should come before Amendment No. 26. Therefore, I shall call Amendment No. 27.
Lord Clement-Jones Lord Clement-Jones moved Amendment No. 27:
Page 109, line 5, leave out paragraph 5.
The noble Lord said: In moving Amendment No. 27, I shall speak also to Amendment No. 26. It must be apparent to the Minister after a day in Committee and in the short time we have been speaking today that there is deep scepticism about the Government's arrangements
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as set out in Schedule 1, and in particular, as the noble Earl, Lord Howe, made clear, to the whole concept of the public constituency. It is notable that those criticisms come not only from the Opposition Benches but with great force from the noble Lords, Lord Lipsey and Lord Harris. I think that they have both made a particularly telling contribution in the course of the Bill.
In the Committee's first sitting, the Minister was very adamant about the shape of the governance. He said:
"We were trying, as we have done all along, to design something that was fit for the purpose".—[Official Report, 7/10/03; col. 214.]
That is precisely the bone of contention between us. Our view particularly on these Benches is that these provisions are not fit for the purpose. Undoubtedly as we go through the Bill and when we reach Report stage some of those propositions will be tested.
The Minister believes that we are all being far too pessimistic in our view of the governance arrangements. It is always tricky in these circumstances, but, as the Minister heard last time from my noble friend Lady Barker, we would like to see fundamental changes to the governance arrangements. However, on the basis that there is to be a public constituency, I think that the biggest nonsense within these provisions surely must be the requirement to pay £1. We do not know whether 5,000 people will pay £1, or 10,000, or whatever. When the noble Lord, Lord Hunt, speaks later we can hear whether he has something similar in mind.
The Minister also made great play of the fact that our current company law, and indeed the law appertaining to companies limited by guarantee, was not appropriate. The one thing that companies limited by guarantee do— and quite often those companies consist of 10 or 15 members—is to pay £1 for form's sake. That derives from a very 19th century concept. Becoming a subscriber to the memorandum of association of a company limited by guarantee is purely for form's sake. There is absolutely no need to do that. If we are talking about new forms of organisation—bright, shiny, new forms of organisation, about which the Minister was so eloquent in our earlier sitting—it seems to me that the requirement to pay £1 is completely superfluous. That is the very first thing that he should perhaps relinquish. Perhaps he was foreshadowing that in his previous speech. I beg to move.
The Chairman of Committees: I should point out that if this amendment is agreed to, I cannot call Amendments Nos. 26, 28 and 29.
Lord Hunt of Kings Heath: I should like to speak to my Amendment No. 28. I come at the issue from a rather different viewpoint from that of the noble Lord, Lord Clement-Jones. While I readily accept that the governance arrangements are by no means perfect, I do not take as pessimistic a view as the noble Lord or the noble Earl about how they will be implemented in practice. Clearly, we all want a large number of people to be interested in the work of their local National Health Service. I believe that having a strong membership based around each foundation trust is one very effective way of doing that.

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As for the £1 issue, when it was first proposed one could see the logic of asking people to show a visible sign of commitment to that organisation. Other organisations have a similar requirement; the noble Lord, Lord Clement-Jones, referred to some of them. I am a member of the Midlands Co-operative Society. Some years ago I had to pay over £1 to become a member, and I receive a calendar every year as a reward for having made that commitment. However, I am not really sure whether paying over that £1 has made me any more committed to the Midlands Co-operative Society than if I had simply signed an application form to join.
I have been persuaded by discussions with a number of the chairs and chief executives of the first tranche of applicants for the first wave of foundation trust status who believe that the £1 qualification requirement on the application form for those wishing to join might inhibit some from joining. As I should have thought that we all want as many people as possible to join these foundation trusts, I think that it would be wise, as the noble Lord, Lord Clement-Jones, said, to remove the £1 qualification.
Earl Howe: I should like to speak to Amendments Nos. 26 and 29 standing in my name. The public constituency works on the basis of members nominating themselves for membership and the hospital accepting the nomination, or not, as the case may be. Providing that they are accepted, all they then have to do to become members is undertake to pay £1 if called upon to do so at some time in the future. I differ slightly from the interpretation put on this part of the Bill by the noble Lord, Lord Clement-Jones—and, I think, from the noble Lord, Lord Hunt—in that what it says is that one has to undertake to pay £1, not actually pay it. I cannot imagine that the £1 will be collected by anyone; surely it is just a token contingent liability. While the noble Lord, Lord Hunt, speaks in terms of needing to have a visible sign of commitment. I think that this provision is not that. It is not a sign of commitment; it is only a token. I think that the Minister really does have to explain what on earth the point of it is.
We see from paragraph 5(2) that members can be disqualified. However, I should like to ask the Minister how and in what circumstances that could happen. It is not clear. It would be helpful if the Minister could bring us in on the Government's thinking. Surely it cannot mean that a hospital could exclude someone simply by virtue of the opinions they might hold on a moral issue such as abortion or stem cell research or the opinions they might hold on prioritising the care of patients afflicted with a particular condition. What are the implications of having different exclusion rules for different foundation trusts? I am troubled by that thought.
If the system underpinning the entitlement to vote is to be genuinely fair, this might be an area where there ought at least to be guidance from the Government—if not anything on the face of the Bill—to indicate what kind of exclusions a trust should countenance.
Lord Lipsey: Those Members of the Committee who are not with me on the pessimistic side of these governance arrangements say that there is tremendous enthusiasm out there to join these trusts. Therefore, it seems to me rather curious that some of them are now worried that the possibility of having to pay £1 will stop people participating. That is not a lot to pay to indulge one's enthusiasm.
Lord Warner: I am sure that the Committee will be pleased to hear from a sinner repenting. The Government have listened to concerns raised in the other place and by NHS foundation trust applicants. The requirement to make a nominal payment has been seen by some as a barrier to encouraging a large and representative membership which is, as I said earlier, our aim. I notice that the noble Lord, Lord Peyton, is not present but I should make it clear that I was not arguing that there should be more committees but that there should not be a limit on the membership, which was what his amendment was about. We do not wish to place a limit on the size of membership but in the light of the concerns that have been expressed the Government are willing to remove the requirement that members commit to pay up to£l.
However, the Bill still needs to make provision on how a member is to indicate that he or she is signing up to be a member. As I said, we are trying to achieve active participation. In return for making a commitment to their NHS foundation trust, local people, patients and staff receive a real opportunity to influence its governance and stewardship through the board of governors. I realise that not all Members of the Committee are as enthusiastic as we are about achieving that objective, but that is the Government's objective and that is what the Bill seeks to do.
The provisions and structure of Schedule 1 reflect that approach in requiring prospective members actively to sign up for membership. In removing the nominal sum, that commitment will instead be signified by actively applying to become a member. We propose to accept Amendment No. 28 in the name of the noble Lord, Lord Hunt, rather than the other amendments on the £1 payment as it replaces the requirement to commit a nominal sum with a requirement to make an application to the NHS foundation trust. Because the trust is able to set out additional detail in its constitution under paragraph 1 (2) of Schedule 1 to the Bill, we expect that each trust will specify in that document the application process for becoming a member. That deals with our response to Amendments Nos. 26, 27 and 28.
On the subject of limits to eligibility for membership—I refer to Amendments Nos. 29 and 27—it is important that NHS foundation trusts have a safety net so they can ensure that their membership is appropriate to local circumstances. However, we believe that there needs to be our old friend, flexibility, here. That means that foundation trusts must have a way to deal with circumstances where membership would be inappropriate. For example, an NHS foundation trust might need to exclude persons who have persistently harassed or assaulted staff and exclude persistently vexatious individuals. Sadly, we all know people who

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behave in that manner. I assure the noble Earl that we are not trying to be thought police but we feel that it is important to give trusts that flexibility where particularly difficult local circumstances exist; for example, if members of a children's trust had concerns about an individual on the sex offenders' register being a member of that trust.
We are not clever enough to prescribe all that in primary legislation; we should leave that to the judgment of individual foundation trusts taking account of guidance in this area provided by the regulator. We do not object to guidance. We are not arguing that there should not be guidance in this area but we do not think that it is right to prescribe these matters in primary legislation.
11.45 a.m.
Lord Hunt of Kings Heath: I thank my noble friend for his generosity in indicating that the Government welcome my amendment. I say to the noble Earl, Lord Howe, that I did not envisage £1 having to be paid over. I believe it was made clear in another place that that would not happen. I do not know whether it is proposed that one would have to tick a box on an application form and whether that box would state: "In the event of future failure, you may have to pay £1". That is not necessarily an attractive way of getting members. Although I am delighted that there is enthusiasm for foundation trust status among the public, we should do everything we can to make it easy for staff to join a foundation trust.
Will my noble friend reflect further on the matter of exclusions? I appreciate that it is perfectly appropriate to consider excluding from membership the people he mentioned. However, what about local people who campaigned against a mental health facility or a secure hospital being established in their area? Those people might try to take over the relevant mental health foundation trust. Would it be acceptable for that foundation trust to exclude people on that basis? Presumably, it could be argued that they were campaigning against a core aim of that trust. Or is it fair game for local people to be able to join a foundation trust on that basis?
Lord Warner: My noble friend is, as ever, perceptive in identifying some of the problems that might arise. My personal view is that it would be unsatisfactory for people to be discriminated against for expressing certain views about a policy. However, I do not believe that we can prescribe these matters in primary legislation. I shall reflect further on the points that my noble friend made to determine whether I can give him further reassurance at a later stage.
Lord Clement-Jones: I thank the Minister for his response. This is only a very small crack in the edifice but nevertheless it shows that the Government are actively thinking about the shape of the governance structure. It was a rococo piece of the architecture which is no longer usefully required. However, I say to the noble Lord, Lord Lipsey, that it certainly is not the make or break of
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this particular set of provisions and I remain just as pessimistic as before. But, in the mean time, I beg leave to withdraw Amendment No. 27.
Amendment, by leave, withdrawn.
[Amendment No. 26 not moved.]
Lord Hunt of Kings Heath Lord Hunt of Kings Heath moved Amendment No. 28:
Page 109, line 5, leave out from "may" to second "to" in line 6 and insert "become a member of a public benefit corporation on an application made"
On Question, amendment agreed to.
[Amendments Nos. 29 and 30 not moved.]
Baroness Noakes Baroness Noakes moved Amendment No. 31:
Page 109, line 10, at end insert—
"()The principal role of the board of governors is to advise the board of directors of the corporation as to its forward plans."
The noble Baroness said: I rise to move Amendment No. 31 which inserts a new sub-paragraph into paragraph 6 of Schedule 1. The effect of the amendment is to define what the principal role of the board of governors is.
On our first Committee day my noble friend Lady Hanham repeatedly asked the Minister to define what the board of governors was supposed to do. The Minister did not answer the question and indeed said:
"We thought that the role of the boards of governors was clear from the Bill".—[Official Report, 7/10/03; col. 216.]
Let me say to the Minister that the Bill is as clear as mud on the role of the board of governors. Amendment No. 31 seeks to provide that clarity.
The noble Baroness, Lady Barker, pointed out forcefully on the Committee's first day that the Government positively chose to turn their back on the various corporate models that already exist for non-profits. We do not agree with that approach but believe that, if the Government are set on it, it is incumbent on them to be absolutely clear about how the model is supposed to work and, specifically, who does what.
When the Government issued their guide to foundation trusts last December, they said in paragraph 2.33:
"Legislation will set out the minimum functions that the Board of Governors must be responsible for".
Those functions were described in paragraph 2.32 as,
"to work with the Management Board to ensure that the NHS Foundation Trust acts in a way that is consistent with its objects and with the conditions under which it is licensed to operate … and to help set the strategic direction".
The paragraph went on to state:
"The Board of Governors will not be involved in… day to day management".
I have searched very hard in Schedule 1 to see how those aims have been realised in the draft legislation. Various tasks are identified for the board of governors, including being consulted on forward planning under paragraph 25(2). However, there is no comprehensive statement of its functions, nor is any guiding principle set out, which is what our amendment seeks to do.
There are very real fears among the NHS trusts thinking of becoming foundation trusts that the board of governors will try to interfere in day-to-day issues. My noble friend Lady Hanham spoke on that from her considerable experience earlier this week. The NHS Confederation, which knows a thing or two about how organisations work in the NHS, supports the amendment and believes that clarity is essential.
The types of people who come forward for election as governors are more likely to have a detailed interest in how a foundation trust will operate than in its strategy. That is the nature of the world; strategic thinkers are few and far between. However, life would rapidly become impossible for a foundation trust if the board of governors, for example, tried to second guess the board of directors. Our amendment defines the governors' role as advisory.
I shall not claim perfection for the wording, but I believe that it is right in principle that the respective roles of the boards of governors and directors are clear from the outset. That is necessary if misunderstandings are to be avoided later. It is all the more important because of the quasi-democracy that drives the composition of the board of governors.
There is reasonable clarity about how the boards of NHS trusts currently operate. It is not perfect, as many with experience in the area will say. For example, new non-executive directors often take a while to learn about their non-executive functions. Now, foundation trusts will have an overlay of a largely untried and untested governing body, with no clear role specified for them. It would be hugely damaging to the NHS if boards of governors were to be created without clarity at the outset for their role. I beg to move.
Baroness Cumberlege: I support the amendment. I seek greater clarity about the boards of governors and directors and their relationship with the strategic health authorities. I understand that those authorities do not have a performance management role in the new set-up for foundation hospitals. We all know that the health service is very intricate. However, increasingly, we have seen clinical networks established that are proving to be a great move forward in improving clinical results.
Nevertheless, I am very anxious. There is a great danger that the progress already made will be lost without an overview from someone similar to a strategic health authority, and I want to know who undertakes that role and what the relationship is if we are to ensure that national standards are maintained. I appreciate that the Committee will later debate the role of the regulator and the Commission for Healthcare Audit and Inspection, which have a part in monitoring success or failure, but they will come in a retrospective sense. They will see when something has gone wrong. Surely we need to ensure the prevention of things going wrong. I would welcome the Minister's views on that.
Lord Hunt of Kings Heath: I do not agree with the terms of the amendment, but the noble Baroness, Lady Noakes, has started an important debate that
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will permeate much of our discussion of Schedule 1. I am sorry that the noble Baroness, Lady Hanham, is not in her place, because she reflected the views of almost all the chairs of the first-wave applicant foundation trusts in expressing concern about some aspects of the governance structure. The problem is that, in drafting the Bill, a new governing body has been placed alongside the current governance structure for NHS trusts. That does not quite work.
I disagree with the noble Baroness, Lady Noakes, in thinking that sovereignty should reside in the board of governors, whereas clearly she thinks that it should reside in the board of directors. I suspect that her view is shared by rather more foundation trust applicants than mine; indeed, I do not think that I have come across one foundation trust applicant that shares my view, which is why I have not tabled any amendment on it. I think it important that the governing body be seen as the sovereign body because the provisions are about transferring accountability of Ministers to Parliament for the running of health services to the local community. Unless the local community has a way to exercise that accountability, the provisions will not work. That is why I think it important that the governing body—the body that will have a majority of elected members—should be seen as the prime decision-making body in a foundation trust.
The Explanatory Notes describe the board of directors as being responsible for day-to-day management, but the Bill does not produce that. The Bill makes it clear that the corporate responsibility for foundation trusts resides in the board of directors. So far as I can see, the only power that the board of governors has is the nuclear option of being able to appoint and replace the non-execs, and to approve or not approve recommendations made by the chief executive in relation to the appointment of executive directors.
People will put their names forward for election to the governing body, and will presumably have to write, argue their case in a manifesto and go on the hustings. I assume that public meetings will be organised. When they get to their first meeting of the governing body, they will expect to govern—that is what governing bodies do. However, they will find that there is nothing to govern because they have no power whatever, except the power to deal with the appointment of non-execs and with the approval or not of recommendations made by the chief executive in relation to executive directors. That is a recipe for trouble, because there is a real risk that the good people elected to the governing body will walk away after a few weeks when they realise that there is no role for them to undertake. People who want to make trouble will make trouble.
We have gone too far down the line to change the architecture of the Bill as I suggest. For me, it is quite clear that we should have a governing body and a management board, and that the management board should comprise solely executive directors and should work under a scheme of delegation. That would be a very straightforward governance arrangement. However, I suspect that it is too difficult to make that change at present. We will have to depend on the skill

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of the chairs of the new foundation trusts to ensure that the governing bodies, notwithstanding that they have hardly any power, are given useful work to do so that their members feel that they are worth while.
It is significant that a large number of foundation trust applicants, in their consultation documents, do not describe the governing body as a governing body. They refer to it as a members' council. I am sure that statutorily that is just about all right, but it is a curious way of going about things when the Bill before us refers to a governing body.
In the course of this Committee stage we need to be absolutely clear about the role of the governing body and its relationship to the board of directors. I disagree with the noble Baroness because I believe she is wrong in trying to constrain power within the board of directors. That would be a recipe for great trouble ahead.
Noon
Lord Clement-Jones: It is a pleasure to agree with the noble Lord, Lord Hunt. I have similar concerns with regard to the amendment, and whatever the rights or wrongs of it, it is vital to define the powers of the individual bodies. While accepting that it is the role of the board of governors to set strategic direction, it is also its role to act in a representative capacity, to undertake overall governance of the trust and so forth. However, I doubt whether use of the word "sovereignty" is correct. There is a division of powers between the two bodies involved.
We have little experience of two-tier boards in this country, but here we have the Government picking random things off the shelf and not even defining what the two bodies are meant to do. It is a complex matter. Our company law on the matter runs to many pages— and that deals merely with a single board.
As regards company law, I am in favour of one of the European models of two-tier boards and can well envisage how they could operate successfully in NHS hospital trusts. But a lack of definition and power for the top tier will not work to the benefit of foundation hospitals.
I do not know where the "nuclear" option comes from. I agree with the noble Lord, Lord Hunt, that the only real option for the board of governors seems to be whether to sack the non-executives. Strangely enough, the nearest model I can think of is the European Parliament, which has the power to sack Commissioners if it does not like them. I do not believe that that has been a beneficial way of operating and it has had to change its constitution to give itself more power, as have successive IGCs.
Although not agreeing precisely with the terms of the amendment, I believe that the Minister needs to take back the whole of Schedule 1 and look again at the definition of powers. Of course there is plenty of time to do this.
Lord Lipsey: I agree with the amendment put forward by the noble Baroness, Lady Noakes, for
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precisely the reasons that my noble friend Lord Hunt disagrees with it. I understand the attraction of the view of foundation hospitals as some sort of Periclean Athens of the health service where the local community—a phrase I have always had difficulty in getting around because I have seen what operations it has carried out—make the decisions. I understand the attractions and I do not want to mock it too far, but for the reasons I stated in our debate on Tuesday I believe that the proposal goes much too far.
It seems to me that there are two ways in which that problem can be defused. One is along the lines put forward in the amendment; namely, to specify that the board of governors (perhaps that name should be changed) is advisory. The second way is to stop it being able to exercise the same options as the people of California in recalling non-executives each time a plausible film star presents himself as the person best equipped to run a local hospital.
Lord Hunt of Kings Heath: I am grateful to my noble friend for giving way. Would he not accept that if one constrains the board of governors to the recall vote and noting else, one can hardly be said to have transferred accountability for the running of local health services from Parliament to the local community? The proposal will not work unless accountability is transferred and it will not work unless the elected board is seen to be the corporate body that ultimately is responsible.
The problem we have at present is that the board of directors is being made solely responsible for the activities of that organisation.
Lord Lipsey: I am grateful to my noble friend, who has led me to my next comment. Accountability is a diffuse concept. In reality, it is rare that one can say that X is totally accountable. There are various levels and forms of accountability and it is right that there should be some accountability to the governing body. However, it should not have a monopoly on accountability, particularly on issues with which it is not, in my view, well equipped to deal.
This time, I am on the optimistic side and my noble friend Lord Hunt is on the pessimistic side. He said that the good people will not stay on unless they have the powers he put forward. I do not believe that. The fact that someone has an advisory function does not mean that they have a nil function. Perhaps I may give as examples Bills recently passed by this House. The consumer panel that exists in the Financial Services Authority does not have the power to compel anything, but it has jolly important advisory functions. On the Ofcom Bill that we passed in the previous Session, the consumer panel cannot direct the board of Ofcom to do anything—and thank God for that—but it has an extremely important advisory function.
The idea that, if these bodies have the vitality that my noble friend Lord Hunt believes they have and attract people to them, the board of directors will then ignore them seems to be pessimism run amok. They do not need to have a guillotine in their hands in order to

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have an appropriate measure of effect on the policies of the hospital and provide an appropriate degree of local accountability to local people.
For that reason, I strongly support the amendment. It starts to pave the way to defusing the bomb that will otherwise blow this whole attractive notion of foundation hospitals apart. I hope that it will be pursued at subsequent stages by the noble Baroness, Lady Noakes.
Baroness Finlay of Llandaff: I support the principle behind the amendment. I have a wider concern than the local accountability of the foundation trusts to their governors; that is, their role in relation to other services within the concept of the clinical network. If a service goes down in one part of the network as a result, for example, of sudden staff illness, the board of directors of the foundation trusts may have to act quickly in order to maintain continuity of service. That may result in some rapid reconfiguration.
I am concerned that unless the hospitals know what the boards of governors are able to do, and know that they are providing advice on an overall strategic direction, a great deal of confusion may arise. At present, the definition of roles is not clear in the Bill. In that regard, I am anxious for those who are running the clinical services.
Lord Warner: I hesitate to rise and to spoil the fun of my noble friends behind me in bringing their discussion to a conclusion. It is a well established principle of public governance that checks and balances are the key to success and the Bill provides many checks and balances, as I shall try to outline. The amendment, while well intentioned—I can see where the noble Baroness is coming from—is too narrow, as several Members have indicated.
The approach taken in the Bill is to set minimum requirements and to allow individual foundation trusts to develop arrangements locally that best suit their needs. While we have deliberately avoided prescribing the whole range of functions that the board might cover, we have made some things clear. It is worth reminding Members of the Committee that paragraph 14 provides that all the powers of the corporation are to be exercised by the directors. In addition, paragraph 1 provides that the powers cannot be exercised by anyone else. The governors, therefore, cannot have a direct role in the operation of the trust. That is crystal clear in the Bill as it is presently drafted. Governors have influence. They do not, for the most part, have executive decision-making powers, although they have an ability to ratify and be involved in particular appointments. That is already set out in the Bill.
The other day, the noble Baroness, Lady Hanham, challenged me to give a tutorial, so to speak, on governance arrangements and on the role of the board of governors. On Tuesday, I shirked that challenge but, if noble Lords will bear with me, I believe it would probably help the Committee if I set out clearly the Government's position. However, before doing so, I need to make it clear that I do not believe we should be
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diverted to having long debates about what goes into primary legislation, about who is formally accountable to whom and whether boards of governors can or should not exercise powers of veto. I believe that that would be to miss the point of the new arrangements.
The primary purpose of establishing boards of governors is to provide a voice and influence for local communities in defining the culture and strategic development of NHS foundation trusts. They will represent the interests of the members and partner organisations of the NHS foundation trust working with, and providing a source of information and guidance to, the board of directors.
However, information cannot just flow in one direction: it does not go only from the governors to the board of directors. The board of governors is also a mechanism for disseminating information to members and partner organisations about the NHS foundation trusts and their development and how their role fits into the workings of the local health economy. I shall say a little more about those relationships because concerns about them were clearly expressed in the previous debate.
That adds up to a radical shift in the relationship between NHS hospitals and the communities they serve. I believe that that radical shift is causing some of the nervousness among your Lordships. The board of governors will empower NHS foundation trusts to become far more responsive to the needs of NHS patients and local communities. And the boards will give the people who care most about what NHS hospitals do—the patients who use them, the staff who work in them and the partner organisations who work with them—a real voice in how they deliver the services that PCTs commission them to provide. That does not change the commissioning pattern but it does change the framework by which advice is given to the executive directors. To define this in legislation as,
"advising the National Health Service foundation trust on development of the forward business plan",
would only partly cover, and inappropriately circumscribe, what this shift in culture will mean in practice. I hope that I have made that absolutely clear.
Schedule 1 is not a dog's breakfast. It sets out clear minimum requirements in paragraphs 6 and 8 on the composition of the board of governors to ensure that there is representation of the key stakeholders by guaranteeing that patients, staff, the public, PCTs, local authorities and, where relevant, universities have seats on the board. The schedule also includes minimum requirements in paragraphs 25(2) and 26 of Schedule 1, ensuring that governors are consulted on the forward plans and that they receive information on the trusts' activities.
Governors also exercise significant influence through their powers to appoint the chair and non- executive directors of the foundation trust and to approve the appointment of the chief executive and other executive directors, as set out in paragraph 16 of Schedule 1. They also decide the terms of office and remuneration of the non-executive directors and

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appoint the auditor of the NHS foundation trust. Both those tasks benefit from being carried out by a body which is independent of the board of directors. We shall reach that issue at later stages in our consideration of the Bill.
The legislation sets out only minimum requirements for the duties of the board of governors, and it will be for individual trusts to include other provisions in their constitution concerning the role and duties of the board of governors, consistent with the requirements of Schedule 1. Therefore, we are not limiting their ability to give more authority to the boards of governors, subject to the requirements in the legislation that I have already mentioned. They may, for example, want to include governors on sub-committees established to advise the board of directors on development of the strategy and forward business plan. Pace the noble Lord, Lord Peyton, we do occasionally need the odd committee to bring people together to consider the future direction and pace of change.
The trusts may also want to establish a formal structure for liaison between the governors, members and partnership organisations that they are elected or appointed to represent so that there is a clear route for stakeholder views to feed into the organisation. We do not want to preclude development of that kind.
Some Peers have raised concerns that applicants may seek to sideline the board of governors and that the minimum legislative requirements would not necessarily prevent that. If I am honest, I was not totally reassured by one or two of the remarks of my noble friend Lord Hunt on that aspect. But perhaps I may say to those who are thinking of moving down that path—I shall try to reassure my noble friend Lord Hunt in particular—that the Secretary of State would not support applications that sought to bypass the board of governors, and the independent regulator will not issue an authorisation or agree any changes to the constitution if the trust does not abide by the spirit, as well as the letter, of the law. I am trying to set out this issue very clearly so that the Government's position on the board of governors is placed on the record.
The legislation is clear that the board of directors and not the board of governors will be responsible for the day-to-day running of the trust. Each board will have its own defined role, but they are all part of one organisation and, as such, will need to work together for the benefit of that organisation. They will be chaired— quite deliberately, despite the later amendment which deals with this matter—by the same person to help to facilitate working together. In the same way that members of a board need to resolve disagreements, these two boards will need to work through their differences. I would expect the skills of those chairs, with practical and experienced people such as the noble Baroness, Lady Hanham, who, sadly, is not in her place today, to enable some of the possible disputes to be avoided or resolved. The chair's skill will keep the two bodies in effective relationships with each other.
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Governors do not have a right of veto unless an NHS foundation trust makes specific provision in its constitution for particular matters to be referred to the board of governors; for example, the ratification of the chief executive and executive director appointments. However, as I have already said, governors have significant influence over the board of directors—and rightly so—because of their role in the appointment and removal of directors. The appointment of non-executive members to the board of directors should ensure that prudence and good management are adhered to. As I said, I believe that a failure to resolve disagreements, which is always a risk in any human organisation, would be indicative of wider failure in the organisation, and the independent regulator may wish to investigate that if it leads to the non-functioning of a trust.
Perhaps I may deal with the issue of relationships with others. As we have said previously and shall no doubt say again in our debates, the NHS foundation trust is not an island; it is a part of the local health economy. The noble Baroness, Lady Cumberlege, mentioned the strategic health authorities. The SHA sets the strategic direction for its territory, and any foundation trust will have to take account of that and, under the provisions of the Bill, work in co-operation with the other partners in the local health economy.
The other day I said—I shall elaborate on it a little because it may be of comfort to some Members of the Committee—that we are prepared to consider the issues raised by the noble Earl, Lord Howe, in his amendment on the review mechanism. Certainly I can say today that the Government are prepared to encourage the regulator to carry out a review of governance after the first wave. We shall look at some of the wider issues on governance that the noble Earl put in his amendment. We accept that it would be sensible after the first wave to review the experience of governance arrangements. We are not being rigid on this matter, but we do not believe that now is the time to make major changes to the detail of those arrangements that are already set out in the Bill.
12.15 p.m.
Baroness Carnegy of Lour: I have been enormously comforted by a more detailed description of the Government's thinking. 1 was shivering a little when I listened to the noble Lord, Lord Hunt, who I believe said that the whole point of the Bill was to move the running of the health service from central government to local communities. The noble Lord is nodding so I think that was the gist of what he said. We all know that central government should never have run the health service—that was the trouble—and to give it to local communities to run would be absolutely lethal. Anyone who has been in local government knows what would happen if that were the case. I do not believe that the aspirations of the noble Lord, Lord Hunt, in relation to this democratic element are sensible.
Nothing that the noble Lord said contradicts Amendment No. 31. It may be sensible to point out that the main role of the governors will be advisory. When the governors stand for election they will realise

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that that will be their role. I agree with the Minister that people are prepared to be elected to act in an advisory role. I do not know whether, in this case, it will be a satisfying job, but people do not mind being elected to advise.
It seems to me that this clarification is helpful. Those who understand the system very well believe that there is still some confusion in the Bill. I hope that the Government will find a way to clarify that. The word "governors" is peculiar for an advisory body. I believe that if there is to be a politicised body, it would be far better for it to be advisory rather than for it to have an executive role.
Baroness Noakes: I thank all noble Lords who have taken part in this interesting and important debate on our understanding of how foundation trusts are expected to work. All noble Lords, with the exception of the Minister, recognise that there was a problem with the lack of clarity about the respective roles of the different parts of the foundation trust structure. I am grateful to the noble Lord, Lord Hunt, for exposing the very conflicts that trouble so many people who consider this matter in detail. While I was grateful for the detailed explanation given by the Minister, at the end of it I am still not clear that the Bill could survive without alteration. I shall certainly read carefully what he has said. Although the Minister has stated how he sees the matter, my instinct is that we have not satisfactorily resolved the issues.
The noble Lord, Lord Hunt, said that it would be a recipe for trouble if governors do not govern, but I believe that there will be a recipe for trouble if governors try to interfere in management. That is the tension at the heart of the matter and it has to be resolved. I do not believe that this is a matter that can be left to local flexibility, although I know that we shall hear that said about almost every debate in relation to Schedule 1.
The matter is far too important to be left to local flexibility. I believe that there is a fatal flaw in the way in which Schedule 1 has been constructed. There may be different views around the Committee on how it should be reconstructed, but I earnestly hope that the Minister will take away from this debate the fact that Schedule 1, with its lack of clarity and ambiguity about the respective roles of the board of governors and the board of directors, cannot be allowed to stand in the Bill. I shall carefully read what the Minister has said, but I would not like him to be left with anything but the impression that we on these Benches are firmly resolved to see the issue dealt with satisfactorily in the Bill. I beg leave to withdraw the amendment.
Amendment by leave withdrawn.
[Amendments Nos. 32 to 34 not moved.]
Earl Howe Earl Howe moved Amendment No. 35:
Page 109, line 17, at end insert "using an electoral system to be specified in regulations made by the Secretary of State"
The noble Earl said: One of the many subjects on which the Bill is silent is the issue of the appropriate electoral system for the election of governors. If one
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goes around the country asking people what system of election they consider is best or fairest, one will encounter sharply differing views. Some may favour the first-past-the-post system, others the single transferable vote and others a different form of proportional representation altogether. Each of those systems has its merits.
I am of the view that the first-past-the-post system has the most to recommend it in the context of this debate. I believe that is a much surer guarantee against entryism than the single transferable vote—we can debate that. However, the point is whether we want different foundation trusts to decide to adopt different electoral systems. That kind of DIY approach sits oddly with the rest of these provisions, which seek to set the basic ground rules within which foundation trusts must work. We are looking at a mutual model. In imposing such a model on the health service, it seems extremely odd that the Government disclaim all interest in having a consistent voting system around the NHS as a whole. I believe that the consequences of having different voting systems around the country, as may happen, will cause immense resentment and a huge amount of argument and controversy. I believe that that energy could be better spent. I beg to move.
Lord Lipsey: As many Members of the Committee know, I speak as a member of the Jenkins commission and, as such, I have spent some time considering electoral systems. I have not thought in depth about the electoral system for this instance, save that this is an incredibly important matter. The noble Earl, Lord Howe, says that he fancies the first-past-the-post system. If this scheme goes ahead, it would be perfectly possible for there to be a large number of candidates for the posts on the governing body and under a first-past-the-post system there would be nothing to say that people could not be elected with just 25 per cent of the vote in a constituency—that happened in the 1992 election in Inverness—or with 15, 10 or 5 per cent of the vote. I applaud the vision that the optimists put forward about how this will all work out in that it will be part of local communities, but can any noble Lord explain how it can be right for hospitals to be responsible to people whose sole claim to legitimacy is that they have the support of 5 per cent of the vote?
I could go through all the options. I hope that proportionality is a red herring. Proportionality is a concept that applies only if one conducts elections on a party system—if people stand on a party ticket— although STD avoids that problem. If this scheme goes ahead we cannot stay silent on such matters. Given the nature of expertise required, it would be ridiculous to leave the matter to individual trusts to sort out.
I spent 12 months under the chairmanship of Lord Jenkins thinking day and night about appropriate electoral systems. There were things that I did not understand even by the end. To ask people who are supposed to be in charge of running hospitals to work out the best electoral system seems to be a bizarre diversion of effort. Therefore, we clearly need a change to the Bill—possibly along the lines proposed by the

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noble Earl, Lord Howe—and consultation on appropriate electoral systems, which can produce the least undesirable system.
12.30 p.m.
Lord Clement-Jones: As the Minister will no doubt understand, these Benches have very strong views about electoral systems, both historically and currently. I thought that the noble Lord, Lord Lipsey, put his finger on the issue, but I want to retrace our steps. Having no specification of electoral systems demonstrates the lack of sense involved in this whole public constituency aspect of the Bill.
However, the situation is worse than stated by the noble Lord, Lord Lipsey. He said that one needs a proportional system—I recognise that the noble Earl, Lord Howe, is in favour of a different system—only if there is a party system. Actually, with a ticket system one needs a proportional system. So, for instance, groups of council tax payers or groups of individuals can gather together under a particular banner and seek election. In those circumstances a proportional system would be extremely important. Indeed, one could have entryism on a massive scale. I know how much that frightens the Government with respect to these particular proposals. Therefore, I cannot understand why they do not scrap them and start again.
However, unless an electoral system is specified, all kinds of recipes for disaster will ensue. For instance, there is the clean sweep. If one has a first-past-the-post system and different groups of tickets, one ticket can sweep the board. We have seen that happen in local councils. In those circumstances, what kind of representative nature for that public constituency will the board of governors have?
One can see all kinds of problems involved in this issue and I hope the Minister will consider it very carefully.
Baroness Cumberlege: This has been a very interesting debate. It is not a subject to which I have really put my mind. What advice has been taken by the Minister's colleagues on this issue? We have the Electoral Commission, which I think does an extremely good job. As the noble Lord, Lord Lipsey, said, we have other bodies within this country with expertise in the matter. If we are to go down this road, which I do not support in any way, then at least we should try to ensure that the provision is as good as possible.
Lord Hunt of Kings Heath: I should have great concerns if the amendment were pressed, either today or on Report. If one were to go down the route of Secretary of State regulations and prescription on how elections are to be conducted, either those regulations will be so vague as to be virtually meaningless regarding the individual foundation trusts, or, as I suspect, they will create a straitjacket, which simply will not suit the individual circumstances of each foundation trust.
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We have 400 NHS trusts in England. They have very different circumstances. Some are local district general hospitals, some are specialist hospitals serving the rest of the country and some are university teaching hospitals. It would be difficult for the Department of Health to produce meaningful regulations without either severely constraining and therefore producing an inappropriate electoral system, or probably, as we have seen from the guidance that has already been given on governance, it will produce wishy-washy sentiments which will be of no help whatever.
Furthermore, if, as this Chamber has now discovered, the role of the governing body is advisory, why on earth should we be so worried about the electoral system? If the governing body is indeed a governing body, then I would understand the need for rigour in the process.
Lord Warner: Some warm words have come from behind me. I am grateful for them. Before I get down to the detail of this issue, I must say that, from memory, securing agreement with Liberal Democrats on electoral systems in the past proved to be a rather difficult task. So it would be quite remarkable for me to achieve success on that point today.
I do not want to go through the flexibility issue too much. My noble friend Lord Hunt made the point very well. I should like to elaborate on some of the arguments. The legislation deliberately allows NHS foundation trusts the flexibility they need to ensure that their membership and boards of governors are genuinely representative. There are, as my noble friend said, a wide variety of trusts. I indicated some of that breadth earlier, and we shall no doubt return to the issue.
Some NHS foundation trusts will want, in particular, to take steps to ensure that minority interests, such as deprived wards, are genuinely represented on their boards of governors. Flexibility of the electoral system will allow for local circumstances to be taken into account.
I am not sure why we are getting so hyped up about this issue. We have accepted very different electoral systems for different levels of governance—for example, building societies, mutual organisations and others. Why are we taking such a rigid view about NHS foundation trusts? The principle that seems to be increasingly established as we look at the needs of particular organisations, whether it is a tier of government or otherwise, is whether the electoral system is fit for its purpose? That should be what we are concerned about.
Looking at the range of electoral systems, we could, as the noble Earl said, have a first-past-the-post system. That is a very straightforward system. The Labour Party is very attracted to it; and it may be suitable for NHS foundation trusts with simple demographics.
Full membership voting is another alternative. Here people would stand for particular posts. We shall turn to some of the issues around that at a later stage, and there may be a need for technical amendments. But

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with this system one can actually have a degree of separation within, for example, a community group of the territory or groups which would be voting.
One could have a single transferable vote if that was thought beneficial. That system can help minority candidates achieve election, so there are some cases for that. Noble Lords are concerned that at the local level we are turning loose without any help these poor characters who are trying to invent electoral systems. That is a little wide of the mark.
Let me try to give some reassurance about the support available to applicants. NHS foundation trusts will be encouraged to draw on advice from organisations recognised as being expert in managing election processes. They will be able to draw on best practice in mutual and other organisations. It is perhaps worth mentioning the New Deal for Communities policy which enables the community to determine its own structure and election methods. Most new deal elections have achieved an electoral turnout double that of local government elections. It is worth bearing in mind that kind of consideration.
The Guide to Governance Arrangements will be supplemented with the learning from the experience of the first wave applicants. I repeat a point I made earlier: we are very willing to encourage the regulator to have a review of the governance arrangements and experience of the first wave applications. So I do not believe that this amendment is helpful or that the NHS foundation trust applicants are being turned loose in quite such an unsupported role as some noble Lords seem to think.
Earl Howe: I am grateful to all Members of the Committee who have taken part in the debate. I was particularly drawn to what the noble Lord, Lord Lipsey, said about holding some sort of consultation process on electoral systems. That is a huge question for each trust to decide and I cannot be quite as flippant as was the noble Lord, Lord Hunt of Kings Heath, in dismissing it as a minor element of their constitution. I must say that the noble Lord, Lord Clement-Jones, made some powerful points and I am prepared to be persuaded by him of the merits of PR if we have a conversation a little later, but the point is that hospitals should not be left to take what are immense decisions on the future shape of their democratic underpinning.
The noble Lord, Lord Hunt, said that there was a choice if we went down the regulatory route: we would end up either with something wishy-washy and vague; or with a straitjacket. I entirely take the point that different trusts have different circumstances, but it is not impossible for those differences to be catered for in regulations. For the Government to say, "Foundation trusts will have access to all sorts of advice if they want it", is to place too big a responsibility on those hospitals—whose business, after all, is not constructing a democratic system in Periclean fashion; it is looking after patients. That is an unfair burden to place on them; the work should be done by Parliament. I should like to test the opinion of the Committee.
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12.41 p.m.
On Question, Whether the said amendment (No. 35) shall be agreed to?
Their Lordships divided: Contents, 92; Not-Contents, 76.

Division No

CONTENTS

Addington, L.

Kimball, L.

Allenby of Megiddo, V.

King of Bridgwater, L.

Alton of Liverpool, L.

Knight of Collingtree, B.

Anelay of St Johns, B.

Luke, L.

Astor of Hever, L.

Lyell, L.

Attlee, E.

Mackie of Benshie, L.

Baker of Dorking, L.

Maclennan of Rogart L.

Biffen, L.

Maddock, B.

Blatch, B.

Miller of Hendon, B.

Bowness, L.

Molyneaux of Killead, L.

Bridgeman, V.

Mowbray and Stourton, L.

Brooke of Sutton Mandeville, L.

Moynihan, L.

Brougham and Vaux, L.

Newby, L.

Burnham, L.

Noakes, B.

Buscombe, B.

Oakeshott of Seagrove Bay, L.

Byford, B.

O'Cathain, B.

Caithness, E.

Pearson of Rannoch, L.

Carlisle of Bucklow, L.

Pilkington of Oxenford, L

Carnegy of Lour, B.

Platt of Writtle, B.

Chan, L.

Rawlings, B.

Clement-Jones, L.

Redesdale, L.

Cobbold, L.

Rees, L.

Colville of Culross, V.

Roper, L.

Cope of Berkeley, L. [Teller]

Rotherwick, L.

Cox, B.

Saltoun of Abernethy, Ly.

Craig of Radley, L.

Sandberg, L.

Cuckney, L.

Sandwich, E.

Cumberlege, B.

Scott of Needham Market, B.

Dahrendorf, L.

Seccombe, B. [Teller]

Dholakia, L.

Shaw of Northstead, L.

Elis-Thomas, L.

Skelmersdale, L.

Elliott of Morpeth, L.

Slim, V.

Emerton, B.

Smith of Clifton, L.

Finlay of Llandaff, B.

Stewartby, L.

Fookes, B.

Swinfen, L.

Freeman, L.

Tenby, V.

Glentoran, L.

Tordoff, L.

Higgins, L.

Vivian, L.

Hodgson of Astley Abbotts, L.

Waddington, L.

Hooson, L.

Wade of Chorlton, L.

Howe, E.

Walton of Detchant, L.

Howe of Aberavon, L.

Warnock, B.

Howell of Guildford, L.

Weatherill, L.

Hylton, L.

Wilcox, B.

Jenkin of Roding, L.

Williams of Crosby, B

Jopling, L.

Worcester, Bp.

NOT-CONTENTS

Acton, L.

Brett, L.

Amos, B.(Lord President of the Brooke of Alverthorpe, L.
Council)

Brookman, L.

Andrews, B.

Carter, L.

Archer of Sandwell, L.

Christopher, L.

Ashton of Upholland, B.

Clarke of Hampstead, L.

Bach, L.

Clinton-Davis, L.

Bassam of Brighton, L.

Crawley, B.

Berkeley, L.

David, B.

Bernstein of Craigweil, L.

Davies of Oldham, L. [Teller]

Billingham, B.

Dean of Thornton-le-Fylde, B.

Blackstone, B.

Desai, L.

Borrie, L.

Dubs, L.

Bragg, L.

Elder, L.

439

Evans ofParkside, L.

Morris of Manchester, L.

Evans of Temple Guiting, L.

Patel of Blackburn, L.

Farrington of Ribbleton, B.

Pendry, L.

Filkin, L.

Peston, L.

Gale, B.

Pitkeathley, B.

Gibson of Market Rasen, B.

Plant of Highfield, L.

Golding. B.

Ponsonby of Shulbrede, L.

Gordon of Strathblane, L.

Prys-Davies, L.

Gould of Pottemewton. B.

Radice.L.

Graham of Edmonton, L.

Ramasay of Cartvale, B.

Gocott.L.[Teller]

Rooker, L.

Harrison, L.

Sewel, L.

Haskel, L.

Sheldon, L.

Haskel, L.

simon, V.

Hilton of Eggardon, B.

Simon of Highbury, L.

Hogg of Cumbernauld, L.

Stone of Blackheath, L.

Hollis of Heigham, B.

Temple-Morris, L.

Howells of St. Davids, B.

Thornton, B.

Hughes of Woodside, L.

Turner of Camden, B.

Hunt of Kings Heath, L.

Warner, L.

Lockwood, B.

Wedderburn of Charlton, L.

Mclntosh of Haringey, L.

Whitaker, B.

MacKenzie of Culkein, L.

Whitty, L.

Mackenzie of Framwellgate, L.

Williams of Elvel, L.

Mitchell, L.

Williamson of Horton, L.

Resolved in the affirmative, and amendment agreed to accordingly.
12.52 p.m.
Baroness Noakes Baroness Noakes moved Amendment No. 36:
Page 109, line 29. leave out sub-paragraph (2).
The noble Baroness said: Amendment No. 36 would delete paragraph 7(2) of Schedule 1, which allows the constitution to make provision for the circumstances in which a person may not become, or continue to be, a member of the board of governors. It is very similar to paragraph 5(2), which my noble friend Lord Howe queried moments ago. I shall not go through all the argumentation again.
When we talked about the issue in relation to paragraph 5(2), the Minister mentioned getting rid of vexatious individuals. The noble Lord, Lord Hunt, then raised the important issue of special interest groups. That is at the heart of what we are trying to find out. There is a real fear that various special interest groups will develop, whether comprising people who wish to stop a particular development, as suggested by the noble Lord, Lord Hunt, such as a mental health development, people who wish to keep open a particular building against the strategic needs of the local health economy or individuals with political—with a small "p"—views on issues such as stem cell research.
Those are quite big issues. The Government are saying that there are loose provisions in the schedule that allow persons not to become members, or members not to become governors. The Government should deal with the issues in the schedule; it should not be left to local flexibility. Overall guidance, as a minimum, must be set out by the Government.
On Monday, my noble friend Lady Hanham asked the Minister direct questions about what happens if a staff constituency member leaves, or if a person moves away from a local area. The Minister said that her questions were rather detailed. The Committee stage is
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when we should thrash out detailed questions. The fact that someone has ceased to be a member of staff may well affect whether he can remain a member of the board of governors. It is important that we understand the parameters for membership. I beg to move.
Baroness Warnock: I support the amendment very strongly. Members of the Committee do not need to be told what passions are aroused by local hospital arrangements in certain areas. Issues such as lobbying by the friends of hospitals that are to be demolished, or that should be demolished on economic grounds, need to be settled in advance by guidelines. I can imagine enormous local hostility being caused by comparisons with neighbouring foundation hospitals, and great agitation in the local, if not national, press. That difficult area needs to be mapped out carefully in advance.
Lord Chan: In considering the amendment, will the Minister provide help as regards certain groups that should be included on grounds of equality of access, particularly minority and disadvantaged groups?
Lord Warner: A fundamental point is that we need to ensure probity and suitability of governors because of the responsibilities that they hold in a crucial public service. Paragraph 7(1) of Schedule 1 provides the standard exclusion criteria used in several different Acts, including Section 80 of the Local Government Act 1972, to disqualify involvement in public bodies. It deals with what one might call "the usual suspects" in this area.
It is important that NHS foundation trusts have flexibility to decide on other circumstances where membership of the board of governors would be inappropriate. Again I give the example of a children's hospital, which should be able to exclude people, subject to notification, under the Sex Offenders Act. A trust might want to exclude persistent vexatious complainants or those who have committed acts of violence against NHS trusts. A foundation trust might wish to exclude a person who is a governor or non-executive director of another foundation trust. The legislation cannot deal with every specific example and allow sufficient flexibility to take account of different circumstances.
It is one thing to suggest, as the noble Baroness started to, that there should be guidance. But the amendment would actually reduce flexibility. It is quite inappropriate, because it makes it more difficult, even if we had guidance, to deal with some of the circumstances that I have just described.
The noble Lord, Lord Chan, talked about the issues of minority groups, with which I have every sympathy. Sadly, the amendment could restrict our ability to have flexible voting systems, more like the single transferable vote, that could ensure the inclusion of more minority groups on foundation trusts. There is still a requirement on foundation trust applicants to ensure that their boards of governors are representative of the constituencies served. It would be a very strange application that did not ensure that membership of

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boards of governors was fairly representative of the community served. If there was a very large ethnic minority community in the area, it would be expected that the membership would be reflected in the applications.
I do not disagree with the idea of guidance on the matter. If that is the noble Baroness's concern, I am happy to consider it further. However, we strongly disagree with limiting the ability of foundation trusts in the future to take sensible decisions to exclude a particular person or group. I do not mean someone who has deeply held philosophical beliefs or a group protesting about a proposed development, because those are the things that we hold dear in a democratic society. The examples I gave do not fit into those categories. However, I am happy to look again at the issue of guidance.
Baroness Noakes: I thank the other noble Lords who have taken part in this debate and I am particularly grateful for the support of the noble Baroness, Lady Warnock. I should have stressed at the outset that this was a probing amendment and we have no intention of dividing the Committee. I accept that the amendment makes it more difficult to deal with the issue.
The Minister spoke about getting rid of individuals as if that were an easy thing to do. However, I think that the Government should look again at the kinds of processes that should be in place if individuals who may have already been elected to the governing body are to be excluded. Simply to allow the NHS foundation trust to devise its own arrangements to get rid of individuals that it deems inappropriate is not good enough. The Government should also deal with the issue of members of particular interest groups. The noble Baroness, Lady Warnock, reminded us of the trouble that can be caused by such groups.
I am grateful to the Minister for saying that he will go away and look at the guidance, but I suspect that the schedule itself needs some amendment in order to make any additional guidance valid. In the mean time, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 37 not moved.]
Lord Clement-Jones Lord Clement-Jones moved Amendment No. 37A:
Page 109, line 33, leave out "one member of the board is" and insert "one-fifth of the board are"
The noble Lord said: The provenance of this amendment is from one section of staff interest—the Royal College of Midwives. It is a probing amendment. The Minister has made it clear that he sees the nature of the board of governors as more like a council of members than anything else. As he pointed out, the schedule itself refers to the board of directors having the essential power to run a foundation trust. On that basis, it is extremely important that the board of governors is representative of a broad range of interests.
The language of paragraph 8 is interesting. In some cases it is numerical and in others, for example in the case of a public constituency, representation on the board of
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governors is expressed as a proportion of the board. As the Minister is aware, there are shortages and problems with morale in the medical profession and those allied to medicine. It seems sensible that there is adequate representation on the board of governors in these newly-formed foundation trusts.
The Royal College of Midwives believes that one way of tackling shortages is to build a greater sense of professional standing among staff. That must be right. One way of achieving that would be to give them an adequate voice on the board of governors. As it stands—of course we do not know what the normal size of a board of governors will be—the only provision is that one member of the board must be elected by the staff constituency. Many staff and those who represent them believe that that number should be higher. We have suggested one fifth, although I am interested to hear whether the Minister has any other figure in mind or whether there is a usual limit on that number. If there are large numbers of people on a board of governors and it is like a council of members, there should be more than one person from the staff side. I beg to move.
Lord Warner: We do not disagree with the sentiments behind the amendment, but we disagree with the precision with which it is executed. The legislation deliberately sets out only minimum eligibility requirements for membership of foundation trusts to allow those trusts flexibility to tailor their own arrangements to reflect local circumstances. I have tried to explain the safeguards that are in place to ensure that that flexibility is not used inappropriately.
Amendment No. 37A would restrict an NHS foundation trust's flexibility to set up arrangements that best suit its local circumstances. Specifying that a fifth of the governors must be elected by staff members would require trusts to have multiples of five governors on the board, which could be a considerable restriction. Perhaps the noble Lord intended to specify that at least a fifth of governors should be staff governors, but even that could cause troubles. For some trusts that may be the right approach, but to mandate a fixed proportion in legislation would seriously restrict the flexibility on board configurations, particularly for those trusts that are not intending to have very large boards.
Concern has been expressed in the House about the size of boards. I cite the example of a teaching hospital. Under this provision it would have to have a minimum of 13 governors to satisfy all of the number requirements in the Bill—and that is without provision for a partnership governor. It would have to have seven members elected by the public to outnumber the rest, at least one local authority member, at least one PCT member, a university member and then, by the noble Lord's formula, three elected by staff, not including a partnership governor. As drafted, the amendment could be an escalator to much larger boards, so I ask the noble Lord to consider that carefully.
Lord Clement-Jones: The Minister's reply is extremely interesting. It almost makes my case for me because, as we have decided, this is a representative not

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an executive board. Actually, 13 for a representative board—lucky or not—is about the right sort of size for this kind of body. People would be rather disturbed if the board of governors—or board of council members, as the noble Lord, Lord Hunt, called it—was rather less than 10.
When we are talking about representative capacity we should have the ability to cover a wide range of communities. I can think of many teaching hospitals, especially in London, that have a very diverse set of communities in their area. If we are to go down this track—and I should say that every time I move an amendment—seven public constituency members seems to be entirely sensible, and three elected by staff is not disproportionate in those circumstances.
I hear what the Minister says, but Ministers tend to adopt mantras as they go through Bills. The mantra of this Bill is flexibility. The noble Lord, Lord Hunt, will recall other mantras, I have no doubt. However, flexibility is clearly the watchword in this Bill. Sometimes, it is rather useful to deliver clear signposts and not give too much flexibility. The circumstances for staff representation in most foundation hospitals seem to be fairly common. Therefore, the wish to represent staff seems to be an entirely laudable one and one fifth seems to be modest. I will ponder what the Minister has said, but the Government should reconsider the guidance, even if the information does not appear in primary legislation. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Earl Howe Earl Howe moved Amendment No. 38:
Page 109, line 35, at end insert "and if the corporation provides goods and services for more than one Primary Care Trust, the right of appointment shall be given to the Primary Care Trust or Primary Care Trusts for which the greatest value of services is provided"
The noble Earl said: The board of governors of a foundation trust is a bit of an Irish stew. It has members elected by the public, at least one member elected by staff and members appointed from various quarters of what one might term its professional and governmental constituency. Paragraph 8(3), which provides for at least one member of the board to be appointed by a PCT begs several questions.
The first and most obvious question is: what is implied by the provision, where more than one PCT has a contract with the foundation trust? It would be unwieldy and unworkable, if every PCT that had a contract with the foundation trust were automatically able to nominate a governor to the board. Many teaching hospitals have a couple of dozen or more PCTs from which they accept patients. Moorfields Eye Hospital represents, I believe, 50 PCTs. Other hospitals have many more even than that.
We can see that the situation must be kept flexible, which is what the schedule, in effect, does. It leaves it up to the constitution of each trust to determine what arrangements to put in place. However, there is a difference between keeping the situation flexible and casting foundation trusts adrift without a rudder. If
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several PCTs have contracts with a hospital, who is to decide which of them should have the right to nominate a board member and on what basis that decision should be made? The Bill is silent on that issue. It might easily happen that no natural PCT suggests itself as the lead PCT, and, because referral patterns and service contracts change over time, it may well be that some foundation trusts will find that their constituency of PCTs also changes over time. Without some sort of steer, such as the one that I suggest in my amendment, one can envisage a great deal of argument taking place for little net benefit.
How do the Government see that part of their blueprint for boards of governors being implemented in practice? The Minister will probably tell me that "blueprint" is entirely the wrong word, but what I am trying to get at is: what are the Government trying to achieve through the provision? For many foundation trusts that go through the rigmarole of deciding how many PCT representatives to include on the board and where those representatives should come from, there may still be considerable dissatisfaction among the commissioning PCTs that they serve. Where there are a lot of them, there is bound to be a majority that feels that its interests are not being represented. That is inevitable.
One then has to ask what meaning the PCT board appointment has. How meaningful is it for a PCT governor to be appointed on the basis that he or she represents 2 per cent of a hospital's activity? No one will want to be a token presence around a board table, but that is what is bound to happen unless there is something truly representational about that person's appointment. If we imagine such representation, we presuppose that three dozen PCTs are prepared to get together to find a way through their competing interests. It is by no means obvious to me how or why they would be prepared to do that. Each will feel that it has if not the legal right then certainly the moral right to have its views represented at foundation trust level.
I hope that the Minister will steer us through those issues. I beg to move.
Lord Clement-Jones: The noble Earl, Lord Howe, has made an enlightening contribution. The more one thinks about the provision, the more difficult it gets, not only on the question of numbers. After all, we know that there are major hospitals from which many PCTs commission. Determining which PCT should be represented on the board of governors will be difficult, unless there is a proper mechanism for that.
The last part of the noble Earl's contribution was even more interesting. Should PCTs be represented in the first place? How will that work? Will it be a token representation? I would take it a step further: is there not a potential conflict of interest? After all, the PCT— especially if it is the major commissioning PCT—will have a conflict of interest with the trust. It must be in a position to commission without fear or favour. What happens if, suddenly, that PCT decides to withdraw a range of services that it had previously commissioned from a trust?

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The more I thought about it, as the noble Earl, Lord Howe, made his speech, the more conflicting the situation seemed to become. I am sure that it is being done for the right reasons, such as ensuring that there is broad representation, but the relationship between commissioner and provider is an important one. I wonder whether the PCT should be represented on the board of governors in the first place.
Baroness Carnegy of Lour: Will the Minister give us the Government's view on the conflict of interest issue? It is an important one.
1.15p.m.
Lord Warner: I am not sure that there is a conflict of interest. I want to put the amendment and some of the remarks that have been made in their proper context.
If a PCT commissions a particular range of services from a foundation trust, it will have a relationship with the trust that is totally outside any involvement through the board of governors. If it is doing its job properly, it will want to ensure, through the normal processes of "contractual arrangements", that the foundation trust or any other NHS trust delivers the required services. That relationship will not be governed by membership of a board of governors. An individual PCT will not discuss its concerns about the delivery of particular services, which may be relatively small issues in comparison with the other things that are discussed by the board of governors. Such discussions will be held directly with the providing body, as part of the PCT's day-to-day relationship with that body.
We are trying to ensure that the commissioning perspective is taken account of in the activities and deliberations of the board of governors. I shall not repeat the debate that we had about the role of the board of governors. It must be seen in the context that the board of governors is not an executive, decision- making body as regards the contractual relationship between a PCT and a provider. We must start from that position.
The amendment raises the issue of who is best fitted to be the PCT representation on the board of governors. The noble Earl cited the case of Moorfields, but the range is enormous. Rotherham and Stockport each have service level agreements with a single PCT. I shall run through just a few first-wave trusts. City Hospitals Sunderland NHS Trust and Sheffield Teaching Hospitals NHS Trust, both of which provide district general hospital services, have in the range of three to five service agreements with PCTs. The Nuffield Orthopaedic Centre NHS Trust and the Marsden— specialist trusts—have, respectively, 25 and 34 service level agreements with PCTs. Services commissioned from Moorfields represent more than 1 per cent of activity for 9 PCTs and between 0.1 and 1 per cent of activity for a further 50. Some services are provided for 133 PCTs.
With that range and given that the value of the contracts—the service level agreements—is likely, if history is any indicator, to change over time, we should
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not lay down rules on the basis of value. It would put us into boxes that are inappropriate and for which many PCTs would not thank us.
Although there will be a need to have a discussion among the PCTs, they will want a manageable number of relationships with boards of governors. If they are working with a great number of foundation trusts, that will impose obligations on PCTs which must not be too onerous for them to discharge. Being prescriptive will not help. I urge the noble Earl to reconsider his amendment.
Earl Howe: I tabled the amendment because I felt that it was right to have the debate; I am glad that I did. I am grateful to the Minister for what he said, but this is yet another example of the Government's arrangements for foundation trusts being half-baked. Unless there is greater clarity for trusts and PCTs, there will be a good deal of frustration and also, probably, misunderstanding when these provisions come into force. The essential question is: what is the PCT representative there to do? What is his or her function? I am not sure that we are any closer to that.
The noble Lord, Lord Clement-Jones, put it well. Possibly there is not a conflict of interests, but there could be. I need to understand better the Government's thinking in inserting this provision. Nevertheless, we have some thinking time left. I am sure that we shall reflect carefully on what the Minister said. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Baroness Noakes Baroness Noakes moved Amendment No. 39:
Page 109, line 43, leave out sub-paragraph (6).
The noble Baroness said: Amendment No. 39, which deletes sub-paragraph (6) of paragraph 8 in Schedule 1, is a probing amendment. Sub-paragraph (6) provides that an organisation may be specified in a foundation trust constitution as,
"a partnership organisation which may appoint a member of the board".
My amendment removes that. I invite the Minister to explain what is meant by this provision and to explain what types of organisation might be covered. As the Minister will be aware, this provision was introduced by the Government on Report in another place and was not debated. As with so much of this Bill, the Explanatory Notes explain nothing.
Will the Minister say what a partnership organisation is? How does one recognise a partnership organisation if one meets one in the street? The Minister will be aware that one of the most over-used words in the new Labour lexicon is partnership. It certainly does not mean partnership in any legal sense. As far as I am aware, there is no authoritative government definition. Will the Minister give a definition for the purposes of the Bill?
I have some further questions. Who will judge whether an organisation is a partnership organisation? What happens if the quality of partnership disappears

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from a relationship with an organisation? Who will decide that? Can these partnership organisations be from the private sector or must they be from the public or voluntary sector? Can trade unions be partnership organisations? If so, how will that affect the staff constituency? How many partnership organisations with a seat on the board of governors can a foundation hospital have?
This is another area that the Government are making up as they go along. As regards the governance of foundation trusts, David Hinchliffe, chairman of the Health Select Committee in another place, said:
"The policy is part of a growing trend of policy making on the hoof". (Official Report, Commons, 8/7/03; col 937.)
I invite the Minister to prove him wrong and to give a coherent account of this piece of the jigsaw. I beg to move.
Lord Warner: As I recall, when I was a director of social services, partnership used to be in the lexicon of the Conservative Party too. It has been set out in the guide to NHS foundation trusts, published in December 2002, that foundation trusts may decide to extend representation of local partnership organisations on boards of governors beyond the minimum legislative requirements; that is, to PCTs, local authorities and universities, if relevant.
The noble Baroness asked me to give examples, which could include other NHS and social care bodies in a particular local health economy, such as an ambulance trust; or voluntary sector providers and charities, such as palliative care providers and patient support groups. As a former chairman of the National Council for Voluntary Organisations, I must declare a personal interest in ensuring that voluntary organisations, which may be important providers in a particular local area, should be able to participate in this way.
There could be other organisations that have a particularly important responsibility for the education and training of non-medical staff. This is a labour-intensive organisation and there are increasingly new and interesting models for training staff. These organisations have close links with health service providers because of their important role in ensuring a competent, trained workforce.
Those are the types of organisations that would be cut out of the jigsaw by this amendment. We are keen to give—with all due respect to the noble Lord, Lord Clement-Jones, to use the mantra again— flexibility to foundation trusts, when it is appropriate in their particular area, to bring these other bodies into the game. We would not want that flexibility to be lost. I hope that I have explained some of the thinking, which has not been made up on the hoof. These bodies are in the real world providing these services in all parts of the country. Now we want to ensure that they can participate as foundation trusts are set up.
Lord Hunt of Kings Heath: I do not know if this helps the noble Baroness. I have looked at the
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consultative document issued by my local Birmingham University NHS trust. Out of a board of 35, it is proposing up to 12 partner organisations, including the PCT, the local authority and the University of Birmingham. But it is also consulting with other partnership organisations, including the University of Central England, Birmingham and Solihull Learning and Skills Council, Advantage West Midlands, the Birmingham Chamber of Commerce, the Birmingham Voluntary Service Council, the Royal Centre for Defence Medicine—a large organisation now that the MoD has moved to Birmingham in order to work with the health service there—various high sector groups, business groups, such as the CBI, and hospital volunteer services. It is clear that there can be a huge range of organisations, all of which clearly have an impact on health services. That indicates that foundation trusts can be left to sort this matter out for themselves.
Lord Clement-Jones: The noble Lord, Lord Hunt has, as ever, raised an interesting point. No doubt he speaks from the peculiar circumstances in Birmingham, although they may be replicated elsewhere. It would be extremely helpful if the Minister had information in the department about the average or actual numbers on the board of governors proposed by applicants for foundation trusts at the moment. He was talking about 13 being a somewhat extravagant number, whereas 35 seems to be an incredible number for a board of governors in those circumstances.
Lord Warner: Perhaps I may just clarify my position. I was not saying that 13 was an adequate, too large or too small number. I was using that example to show how the noble Lord's formula would work in a particular set of circumstances. I was not prejudging the right and appropriateness of any foundation trust to have a board of governors appropriate to its circumstances.
Lord Clement-Jones: That makes the numbers look rather modest and, therefore, the outcome of my proposal look extremely modest when compared to the 35 which the noble Lord, Lord Hunt, so usefully mentioned.
Lord Hunt of Kings Heath: Surely the point is this. If it is now decided that this is an advisory body, what is the problem in having a large number of people on it? Clearly, it has no real decisions to make. It is an advisory body; it might as well have as many groups and interests as it can.
Lord Clement-Jones: I could not agree more. I was not disagreeing with the noble Lord, Lord Hunt, or what the hospital proposes. But it makes 13 representatives, which the Minister said had to be the minimum number if there was to be one-fifth staff representation in those circumstances, look very modest. Therefore, my original amendment looks entirely reasonable and acceptable.
1.30 p.m.
Baroness Noakes: The noble Lord, Lord Hunt, has possibly shone greater illumination on this topic than did the Minister, although I am grateful to him for his response. I was surprised by the number of 35 and by the very long list of so-called partnership organisations which seem collectively to dominate that board of governors. I found that strange.
It may be that my probing amendment to search out the meaning of a "partnership organisation" was the wrong one to bring forward; perhaps we need a harder definition of which partnership organisations should be allowed to take part and what proportions would be appropriate for them.
The Minister did not answer fully the questions that I put to him. I asked him who is to judge whether an organisation is a partnership body. The noble Lord, Lord Hunt, cited a long list of local bodies.
Lord Warner: Perhaps I may clarify that point. It was an oversight on my part. Under the present arrangements it is made clear that it is for the foundation trust, in making its application, to decide what is an appropriate group of partnership organisations.
Baroness Noakes: So we shall have yet more flexibility laid on top of an entirely vague set of proposals for the board of governors. The flaw in Schedule 1 dealing with the board of governors is not dealt with by this amendment; it goes much wider. I am sure that we shall return to the matter at a later stage. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 40 not moved.]
Baroness Andrews: This may be a convenient moment for the Committee to adjourn until after Starred Questions. I therefore beg to move that the House do now resume.
Moved accordingly, and, on Question, Motion agreed to.
House resumed.
Baroness Andrews: My Lords, I beg to move that the House do now adjourn during pleasure until 3 p.m.
Moved accordingly, and, on Question, Motion agreed to.
[The Sitting was suspended from 1.32 p.m. to 3 p.m.]

Religious Education in Schools
Lord Dormand of Easington Lord Dormand of Easington asked Her Majesty's Government:
How their decision to set up a faith communities liaison group will affect the teaching of religious education in schools.
Lord Bassam of Brighton: My Lords, a high-level steering group is taking forward the review of the
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Government's interface with the faith communities. The review, which was a manifesto commitment, is time- limited. Its objective is to consider the most effective means of bringing the perspectives of faith communities, where relevant, into policy-making and delivery. The review is not concerned with specific policy issues such as the teaching of religious education in schools.
Lord Dormand of Easington: My Lords, have the Government changed, or do they have it mind to change, the financing of church schools? I am not clear from what my noble friend said whether that aspect will be considered.
Can the Minister confirm that the capital costs for a new school or the expansion of an existing church school would allow LEAs or schools to apply for a fixed-rate incentive of £400,000, payable on approval of the proposals? Is my noble friend aware that millions of people who do not have any religious faith, or have a very thin religious faith, will be strongly opposed to such massive sums being used for this purpose?
Lord Bassam of Brighton: My Lords, we have a long tradition of church schools in this country. As far as I am aware, there is no intention of changing the funding base of their existence within the school system. My noble friend asked a number of supplementary questions; which go somewhat wider than the original Question. If I cannot cover any particular issue, I am sure that my noble friend Lady Ashton will be happy to provide more detail to the noble Lord on those points.
Lord Taverne: My Lords, is there not a big difference between treating children as Muslim children, Protestant children and Catholic children, as opposed to treating them as the children of Muslim, Catholic or Protestant parents? Is not the fundamental objection to religious schools that the two definitions are confused and the Government are supporting the first and not the second?
Lord Bassam of Brighton: My Lords, I do not agree. As I said, it has long been a tradition that we support faith schools within our system, and I do not see a great pressure to change that. Surely we are here to reflect the breadth of our society, and that is what the Government are trying to do.
Baroness Blatch: My Lords, it may come as a shock to the Minister, but I wholeheartedly support him. My government when it was in office, other governments before them and this Government, supported personally by the Prime Minister, have welcomed the contribution that church schools make in our country and, indeed, are encouraging more of them. Church schools provided the first free education in this country. Long may they continue.
Lord Bassam of Brighton: My Lords, I do not believe the noble Baroness asked a question, but I am inclined to agree with her.
Lord Hylton: My Lords, can the Minister confirm, first, that the liaison group recognises that religious faith can contribute to good community relations; and, secondly, that religious motives sometimes fuel terrorism? Will the Government therefore encourage inter-faith dialogue to develop, and to include the extremes wherever possible, for the sake of peace both at home and abroad?
Lord Bassam of Brighton: My Lords, I am grateful to the noble Lord for his question. It reflects what is happening in the wider community. Faiths make a tremendous contribution to the health and well-being of active communities and play an important part in them. The Government's policy is to work with all faiths. We are grateful, in particular, to organisations such as the Inter Faith Network and for the important work that other representatives from the Christian, Muslim, Hindu, Sikh, Jewish and Buddhist faith communities contribute to the way in which the Government work to develop and strengthen our communities. The noble Lord's comments about extremes and extremists are broadly understood and supported by the Government.
The Lord Bishop of Worcester: My Lords, I am sure that the Minister is aware that the late Lord Runcie, a former Archbishop of Canterbury, remarked that when he served on the border commission for Yugoslavia after the war he was surprised even then that no one thought it necessary to have anyone on it who understood about religion. Does he agree that a society in which people are not deeply rooted in their own traditions but also have a deep awareness of the traditions of others in relation to faith, is a society which—as we now know about Yugoslavia and our own country— is storing up a great deal of trouble for itself? Does he therefore accept that many of us are delighted that the Government are prepared both to support religious education in schools and to engage all religious communities in policy-making and discussion in relation to regeneration, which is such an important matter for all communities of faith?
Lord Bassam of Brighton: My Lords, the right reverend Prelate speaks with greater wisdom on these matters than I ever could. I entirely agree. It is important not only to teach religious education but to foster and develop a greater understanding of religions and faiths and the important role that they play in our lives and communities. It is a telling fact that in the 2001 national census some 76.8 per cent of the population attributed themselves to a faith. That says a great deal about our society and the way in which it works.
Lord Mackie of Benshie: My Lords, does the noble Lord agree that the Government are storing up a great deal of trouble for themselves if we are to support schools where there are a great many very peculiar religions? Some of the people who have agreed with him should arouse suspicion in his mind. Would it not be far better to follow the example of France, where
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facilities are available after school hours for the religious denominations to teach, but the schools are kept for teaching the children the basics of education?
Lord Bassam of Brighton: My Lords, the noble Lord is entitled to his view—I am sure that it is shared by many—but we have a school system which draws in faiths and the teaching of different religions, and we do have faith schools. I do not see that there is any great pressure to depart from that principle. In fact, there seems to be a great deal of support for that approach in your Lordships' House today.
Lord Renton: My Lords, as the United Kingdom has been for hundreds of years basically a Christian country, and as broadcasting now plays such an important part in the lives of all its people, will the Government give every encouragement to liaison with the broadcasting authorities in order that religion is given its proper place in broadcasting?
Lord Bassam of Brighton: My Lords, the advice I am receiving is that the Communications Act, which recently passed through Parliament, does exactly that.

Stakeholder Pensions
3.8 p.m.
Lord Higgins Lord Higgins asked Her Majesty's Government:
Whether they consider stakeholder pensions to be a success.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Hollis of Heigham): My Lords, more than 1.5 million stakeholder pensions have been sold since their introduction in April 2001—more than half a million in the last 12 months for which figures are available—and we estimate that two-thirds of those have been to people with incomes below £20,000 a year. This is an encouraging start—it is early days—and a sign of confidence in the product.
Lord Higgins: My Lords, I thank the noble Baroness for that reply, although I had thought she might realise that, far from being a success, stakeholder pensions are a real disappointment. Of the 350,000 or so schemes which companies were forced to set up, something like three-quarters of them, as I understand it, have no money at all in them. So far as concerns the target audience for stakeholder pensions—those on modest incomes—the figures that the noble Baroness has given are not very good.
More important now, however, should not the stakeholder pensions and those selling them give something of a health warning to indicate the extent to which one needs a large pension fund if the whole of the

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income is not to be means-tested away on retirement? Estimates of how much one would need in such a fund to avoid that vary from about £84,000 to £142,000. Is it very likely that many people on moderate incomes will accumulate a fund of that size and, if not, are they likely to get nothing back in return for their investment?
Baroness Hollis of Heigham: My Lords, I am not sure whether I can answer all those questions in the time permitted. The noble Lord talked first about empty schemes. He will know that those schemes are empty where the employer does not contribute—in such cases, only 13 per cent of employers contribute to stakeholder schemes. Where employers contribute, there is a 70 per cent take-up by employees; where they do not, the take-up is 13 per cent. So I hope the noble Lord will join me in encouraging employers to make a reality of stakeholder schemes.
The noble Lord's second point dealt with whether such contributions from people with modest incomes will produce a worthwhile pension. Obviously, your Lordships may have a very different perspective on this from many of the people I come into contact with who have modest incomes, but even a small contribution, rolled up over time, can make a worthwhile difference.
I was doing some sums this morning. I calculate that someone with an income of £20,000 who contributes just £20 a week—4 per cent of their earnings—produces a stakeholder in retirement of about £100 a week which, taken together with a state pension, means that they would have a replacement income in retirement of around or above 50 per cent. That is not bad for someone on a modest income.
Baroness Turner of Camden: My Lords, is my noble friend aware, in view of what she said about the importance of an employer contribution to stakeholder, that one of the reasons why I think there has not been a substantial take-up in the way the Government expected is because there has been not very much in the way of employer contributions? Is she aware that unions are campaigning for employers to make a compulsory contribution to occupational schemes in the belief that only in that way will occupational schemes be saved for a future generation? If compulsion is not acceptable to the Government, could they not do a great deal more to encourage employers to make contributions via the tax scheme?
Baroness Hollis of Heigham: My Lords, my noble friend is right to focus on the issue of employer contributions. It is something for something, to coin a phrase. The Green Paper deals with informed choice, but the wider issue of whether employers should be compelled to make a contribution is still in the marketplace. One of the jobs of the Pension Commission, chaired by Adair Turner, on which John Hills and Jeannie Drake also sit, is to encourage
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best practice—for example, people should only opt out of schemes rather than having to opt in —and see whether similar practice can be spread across the industry.
If that does not work and if, as a result, we do not get the take-up of pensions, part of the Pension Commission's remit is to review again the issue of compulsion.
Lord Oakeshott of Seagrove Bay: My Lords, on this critical point of employer contributions, has the noble Baroness noted the conclusions of the Association of British Insurers that:
"The scale of the wasted effort and cost which employers have put in is staggering".
Employers have had to set up 2.5 million "dead letter boxes", as I call them—schemes with not a penny paid in. When will the Government and the so-called Official Opposition recognise that people are not fools? They will not pay into stakeholder pension schemes unless they know that employers have to match their contributions up to a sensible level.
Baroness Hollis of Heigham: My Lords, on the noble Lord's first point, I do not think the job is as onerous on employers as he suggests. There are 48 schemes in the market-place—all the employer has to do is draw that to the attention of his employees. It is not an onerous responsibility. However, I agree with the noble Lord about pensions being sold in the workplace, especially to women. They are sold by the employer to the employee. I am sure the whole House would wish employers to make contributions to schemes, whether stakeholders, money purchase or final salary. In that way, we would get a contribution from employees as well.
Lord Jenkin of Roding: My Lords, as a Member of Her Majesty's Official Opposition sitting on these Benches, perhaps I may ask the Minister the same question that I asked when the subject last came up. What representations have the Government had from the pensions industry about the inadequacy of the 1 per cent cost limit? Is not this one of the real reasons why the growth of stakeholder pensions has been so much slower than originally hoped?
Baroness Hollis of Heigham: My Lords, there is a continuing debate about the level of charges. Ruth Kelly has made it clear that she will take quite a lot of persuasion to raise the levy, but it is not absolutely ruled out. One should not overlook the value for money that stakeholders have brought compared to personal pensions. By forcing down charges, pound for pound, the average stakeholder pension is worth 10 per cent more on retirement than the same money put into a private pension plan at the moment, given average charges. That 10 per cent increase on modest pensions is worth the having, and that reflects the fact that there is a 1 per cent cap on charges. Too often in the past, very substantial portions of low-income savings have gone in upfront charges and not to the person in retirement.

Economic Growth Targets
3.15 p.m.
Lord Roberts of Conwy Lord Roberts of Conwy asked Her Majesty's Government:
Whether the economy is meeting the Chancellor's growth targets for 2003 and 2004; and, if not, what will be the effect on public finances.
The Parliamentary Under-Secretary of State, Department for Culture, Media and Sport (Lord McIntosh of Haringey): My Lords, estimates of growth in gross domestic product for the first two quarters of 2003 are fully consistent with the Budget forecast range of 2 to 2.5 per cent growth for 2003 as a whole.
Lord Roberts of Conwy: My Lords, could the noble Lord tell us just how much of the growth increases in the first and second quarters was attributable to the new method of calculation? In other words, could we have both sets of figures?
Secondly, does the noble Lord agree that the Government should redouble their efforts to reduce bureaucratic costs in the public sector because they are taking far too much of the government increase in spending on public services?
Lord McIntosh of Haringey: My Lords, the components of the increase are much more complex than I can explain in the course of a Starred Question. But if I can send anything to the noble Lord, Lord Roberts, I will certainly do so.
On the noble Lord's second point, I am afraid that the so-called public sector inflation is a phoney figure—it cannot be given any more dignity than that. The Government consumption deflator is the ratio of current price government consumption to constant price government consumption, and it does not mean anything—it often works in the opposite direction. For example, if you take the ratio of inmates in custody to gaol officers, the measurement is prisoner nights in custody. You could, of course, increase so-called public sector inflation by increasing the number of prisoners per gaoler, but I suggest that the noble Lord, Lord Roberts, and the House would not think that desirable.
Lord Newby: My Lords, will the Minister accept that the real problem with public finances is that even if the Government reach their growth target, current projections are that income from taxation will be some £10 billion less than the Government projected because their projections were based on a wholly exceptional period during which City bonuses meant that any increase in growth led to a higher than usual level of tax revenues? Therefore, even if the Government hit their growth target, they will be faced with substantially larger borrowing requirements than they set out at the time of the Budget.
Lord McIntosh of Haringey: My Lords, I was happy to answer the question of the noble Lord, Lord Roberts,
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because it was a factual question about figures which have been published. The noble Lord, Lord Newby, knows perfectly well that I do not speculate on these figures in between—indeed, I do not speculate on them at all. The Government do not give a running commentary on macro-economic statistics. We will do that in the Budget Report and the Pre-Budget Report later this year.

Postal Workers: Industrial Action in London
3.19 p.m.
Baroness Miller of Hendon Baroness Miller of Hendon asked Her Majesty's Government:
Whether they will take action to avert a second strike by postal workers.
Lord Davies of Oldham: My Lords, no one will benefit from a further strike by postal workers in London. It will disrupt services to consumers and businesses who rely on Royal Mail's services. Resolution of the dispute is a matter for the management of Royal Mail and the Communication Workers Union.
Baroness Miller of Hendon: My Lords, I thank the Minister for his reply although I suspect that it might cause problems for people who live in London and for businesses who were hoping for something a little more positive. Will the Minister confirm that in the national postal ballot postal workers turned down the idea of a strike, but that in a sense there was a different ballot of London postal workers who thought otherwise? Is there anything that the Government can do when faced with such a situation? Why are Her Majesty's Government spending so much time trying to force through legislation regarding the fire-fighters when the post is in such a mess? The post is, after all, a public service for people who live in our capital city.
Lord Davies of Oldham: My Lords, noble Lords will recognise that the fire service is an emergency service and that it is very different from the postal service. The legislation that we are taking through the House seeks to encourage the development of proper industrial relations in the fire service. Of course I recognise that the decision by the Communication Workers Union to strike over the London allowance will cause some disruption to the service although the impact of the first day of the dispute which occurred last week was not as extensive as some might have feared. As I am sure the noble Baroness knows, there was a vote against a national strike, but London postal workers voted in favour of strike action regarding the London allowance.
Lord Clarke of Hampstead: My Lords, I declare my interest as a former postman and a current member of the Communication Workers Union. Is my noble friend aware that the postal workers' dispute over

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London weighting is not just about a sum of money but rather the outdated boundaries that apply to inner and outer London vis-à-vis national pay rates? Is my noble friend aware that both parties believe that the time has come for a review? The CWU in particular wants to find a formula to avoid disputes arising in the future.
I say to the noble Baroness, Lady Miller of Hendon, who tabled the Question, that the postal worker who delivers her mail will receive as a London allowance in the outer London area the princely sum of £39 a week. Will my noble friend the Minister consider for a moment other allowances a little nearer to home and compare them with the £39 these people receive for getting up at the crack of dawn six days a week? It is not good enough for the Government to stand back and say that it is a matter between the two parties. The only shareholder in Royal Mail and the Post Office is the Government. When the Postal Services Act went through this House it was made clear that the Government would remain—I say this in parenthesis at the moment—the sole shareholder. Does my noble friend agree that rather than washing his hands of this debate he would do well to get on the phone and tell the two sides—one of which today repeated its willingness to meet the employers—to get some sense into the situation?
Lord Davies of Oldham: My Lords, I recognise my noble friend's deep interest in and long experience of the industry. Of course I recognise that the dispute is about more than just the London allowance but we expect that to be the subject of proper negotiation between management and the unions. After all, both management and the unions supported and, in fact, asked for, the Post Office to be a commercial operation from which the Government would stand back. That is exactly what we propose to do.
The national issues have gone a long way towards being resolved. I believe my noble friend will recognise that there has been an improvement in industrial relations in the Post Office in recent years, not least through the efforts and constructive work of my noble friend Lord Sawyer. I say in the spirit of the final point that my noble friend Lord Clarke made that it is for management and unions to meet together to resolve the issue.
Lord Newby: My Lords, are there any circumstances in which, should strikes continue in London, the Secretary of State might use the reserve powers in legislation to provide alternative methods for the delivery of the post in London?
Lord Davies of Oldham: My Lords, the Secretary of State has reserve powers to suspend the monopoly of Royal Mail in circumstances of dire emergency, but we are nowhere near that stage yet and I am confident that we shall not remotely approach it. However, it is necessary for the two sides to resolve the outstanding issues.
Lord Clinton-Davis: My Lords, does my noble friend understand that this is a time when heads should be
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banged together? It is vitally important for the Government to ensure that the management and the unions talk because talk between now and the threatened strike is absolutely vital.
Lord Davies of Oldham: My Lords, I agree with the point that my noble friend made. I am sure that the whole House agrees that the potential disruption to the very vital service which the Post Office provides would be a massive inconvenience to all people in London. Of course, the impact would be felt beyond the capital city. My noble friend is absolutely right to say that it is very important that the two sides get together to discuss the issue as rapidly as possible.
Lord Swinfen: My Lords, does the Minister agree that short questions and short answers, like short letters, are much to be desired and much easier to deliver?
Lord Davies of Oldham: Yes, my Lords.

Health and Social Care (Community Health and Standards) Bill
3.26 p.m.
House again in Committee on Schedule 1.
Baroness Noakes Baroness Noakes moved Amendment No. 41:
Page 110, line 8, leave out "corporation" and insert "board of governors"
The noble Baroness said: I rise to move Amendment No. 41 and also speak to Amendments Nos. 42 and 49. These amendments touch upon the position of the chairman of the board of governors and the overlap between the two boards. There are some complex issues here and I fear that 1 shall need several minutes of the Committee's time to explain them.
I start with the meatiest of the amendments, Amendment No. 41, which seeks to amend paragraph 11 of Schedule 1. Paragraph 11 currently refers to a person being a chairman of the public benefit corporation. My amendment would refer to the person being a chairman of the board of governors. I say in passing how refreshing it is to see that the word "chairman", rather than the politically correct nonsense of "chair", is used in this Bill.
Amendment No. 49 is in part a probing amendment. I do not understand how a corporation can have a chairman. Surely a person chairs a board or a committee or something like that. There seems to be a presumption in Schedule 1 that the chairman of the corporation automatically chairs the board of governors but I cannot see that that is actually specified. The powers of the corporation are exercisable by the board of directors— that is what paragraph 14 tells us—so I can see that if there is a chairman of the corporation he would expect to be chairman of the place where the powers are exercised: that is, the board of directors. However, I cannot see any natural presumption about the board of

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governors—which we discussed this morning—which has no defined powers, other than that of appointment, in this Bill.
The plot thickens when we look at the Government's guide to developing governance arrangements which was issued last month. It came as a complete surprise to me that section 2.1 stated that,
"the board of governors and the board of directors will share the same Chair".
That has also come as a surprise to a number of people from the NHS to whom I have spoken. I do not understand how that can be read from the Bill. Furthermore, I believe that it is wrong in principle if the same person chairs the body that has the powers of the corporation and chairs the body that is supposed to advise the first body or, in some senses, sit in judgment on it. Their functions are supposed to be different, although we did not get to the bottom of that issue in our debate earlier. A single appointment would make the chairman both judge and jury or, worse, both prosecuting counsel and defence counsel.
That brings me to Amendment No. 49, which provides that a non-executive member of the board of directors may not be a member or the chairman of the board of governors. In our view, not only is it wrong to have a joint chairman, but there should be no overlap between the two. Paragraph 5.2 of the guide to developing governance arrangements states:
"The Department of Health does not expect non-executive directors also to be governors".
However, as the guide notes, the legislation does not preclude that. Why on earth is that the case? Can the Minister give any circumstances in which it might be appropriate? Does he not agree that the independence of a non-executive director could be fatally flawed by his acting also as a governor?
The amendment is probing, as I do not believe that the Bill adequately reflects a proper and balanced approach to governance. Amendments Nos. 41 and 49 would go part of the way to dealing with the issues, but the Bill almost certainly needs much more extensive changes if it is to make sense.
Amendment No. 42 is not probing but designed to fill a lacuna in the Bill. Paragraph 13 of Schedule 1 lists all the factors for which the constitution must make provision. The glaring omission is that it says nothing about the election of the chairman of the board of governors. Paragraph 16 states:
"It is for the board of governors at a general meeting to appoint or remove the chairman",
but that clearly refers to the chairman of the board of directors, not of the board of governors. The Minister may well say that they are the same person, but it is nonsense to say that a board of governors chaired by Mr X can appoint him to be chairman of the board of directors, and that that automatically makes him chairman of the board of governors. It is not merely nonsense, but circular nonsense.
Amendment No. 42 will ensure that a foundation trust has proper procedures for the election of the chairman of the board of governors. That will ensure that a properly constituted board of governors exists with its own chairman.
I hope that the Minister will also shed some light on how the processes will ensure that an appropriate, skilled and experienced chairman of the board of governors will be chosen. The Minister in another place said on 15th May in Committee that:
"Applications for NHS foundation trust status must include constitutions that contain a process to ensure that appointees are suitable, appropriately qualified and vetted".—[Official Report, Commons Standing Committee E, 15/5/03; col. 176.]
Will the Minister show me where in Schedule 1 or the rest of the Bill we can find a requirement for those processes? In particular, what power does the regulator have after the first board has been appointed? What will the processes contain? If we do not have clear processes, how can the regulator ensure that chairmen are appointed in an appropriate way? I have also searched the much-vaunted governance guide and found absolutely no guidance on that vital topic.
As we discussed this morning, the Government have not thought through the governance arrangements. They are illogical, confusing and incomplete. I shall listen carefully to what the Minister has to say, but I shall take a lot of convincing that the schedule does not need significant alteration. I beg to move.
3.30 p.m.
Lord Hunt of Kings Heath: I am glad that the noble Baroness has allowed us, once again, to debate governance and the relationship between the board of directors and the board of governors. However, I am concerned that if we were to accept the amendments, either now or if she returned to the matter on Report, we would have a totally different membership in terms of the non-execs on the board of directors from that on the board of governors, including the chair.
The noble Baroness does not share my view but she will know that I am concerned that there is potential for conflict in the construction that we now have, in which the board of governors is essentially an advisory council privileged to make comments on the running of the organisation but with no involvement whatever in its running. Anyone who has put themselves forward for election and been elected will believe themselves to have the legitimacy to make decisions— greater legitimacy, I would suggest, than appointed non-executives. That is what elections do to people— they make them feel legitimate.
If under the amendments one completely separates the board of directors, who are appointed, from the governors, a majority of whom are elected, instead of making the governance arrangements more straightforward one is setting up a conflict between the two. I would be grateful if the noble Baroness would comment on my worry.
Lord Warner: I listened with great interest to the points made by the noble Baroness. She has a tendency

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to say that we have not thought matters through because she has in mind a totally different model for the public organisations under discussion. I shall not go over the ground that I rehearsed this morning, when I tried to help the Committee by setting out the Government's views on the board of governors and how it related to the board of directors.
The noble Baroness slightly let the cat out of the bag when she started using the analogy of the legal system, which is essentially adversarial. She talked about judges, juries, prosecuting counsels and so on. That is fundamentally not the model that we propose in the Bill for the running of National Health Service foundation trusts. We propose a model that is essentially co-operative, but with separate roles between the more advisory functions and the day-to-day executive functions. I do not want to go over that ground again, but that is clearly the model set out in the Bill, with certain checks and balances between those performing the different roles. That is fundamentally a different model from one in which there is a prosecuting counsel, a judge, a jury and an adversarial way of doing business.
I have no problem with the adversarial nature of the criminal justice system, but it is not what we are running in the Bill. We are trying to get people to work in partnership, and the Bill provides for that. We need to clear that out of the way, because a different world view is coming to me from the Opposition about what we are trying to achieve. That is leading to some of the confusion about how we approach the issues.
Before dealing with the amendments, I should tell the noble Baroness that I have far more sympathy with my noble friend's position than with hers. Amendment No. 41 goes for the idea of a separate chair for the board of governors. We have that tripartite structure in the foundation trusts. As I said, they are constituted deliberately with a membership base, a board of governors and a management board, with each having a distinct and complementary role. I agree that it is important that there are clear lines of management, accountability and responsibility for those three parts, but good communication links between them are equally important.
In the Government's view, it is important that the chair of the NHS foundation trust presides over both boards, because that will provide a key link between the governors and directors, who will need to work closely in the stewardship and governance of the trust. We discussed the point fully earlier and I do not want to go over the ground again.
The Government have also recognised that many people out there have the skills to provide the linkage between the board of governors and the board of directors. We pay a great deal of regard to the experience of the noble Baroness, Lady Hanham, in that area. She is an excellent example of why one believes that there are people who can bring together these two parts of the foundation trust co-operatively and sensibly. We do not therefore accept the arguments in Amendment No. 41 for a separate chair for the board of governors.
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Amendment No. 42 makes provision for the appointment of the board of governors. The intention of the Bill is to give freedom to NHS foundation trusts. I am sorry to repeat the mantra of freedom and flexibility, but that is what the Bill is all about. It is about getting away from Whitehall and Westminster over-control of local arrangements. The Bill gives the foundation trusts the ability to determine how they organise themselves best to meet local circumstances and needs. The principle is not "Whitehall and Westminster know best", but that arrangements should be agreed locally with patients, public and staff involvement. For that reason, Schedule 1 sets out only minimum requirements relating to the boards of governors.
Amendment No. 42 would require the constitution to include provision about the election of the chair and in our view that is unnecessary. The Bill already includes provision for the appointment of a person to chair both the board of governors and the board of directors under paragraph 16(1) of Schedule 1. It states:
"It is for the board of governors at a general meeting to appoint or remove the chair".
In conjunction with that, Clause 6 requires every NHS foundation trust to have a constitution that sets out how the board of directors and the board of governors should be elected. We clearly stated in paragraph 2(3)(1) of the guide to NHS foundation trusts that we expect the board of governors will be responsible for appointing the chair of the NHS foundation trust. This is not a muddle. We have been clear about it for a considerable time.
The noble Baroness, Lady Noakes, asked about some of the processes and their adequacy. Appointment of the chair, as with non-executive director appointments, will normally follow open advertisement among the members of the NHS foundation trusts. Eligibility will be based on assessment against specified criteria, which will be for each NHS foundation trust to determine. As opposed to the current one-size-fits-all model, foundation trust governors will have flexibility in the appointments system to take account of local needs and circumstances; for example, in specifying certain skills of expertise.
Applications for NHS foundation trust status will need to include proposed constitutions, including processes and procedures, to ensure that the appointees are suitable and appropriately qualified and vetted. We are not just leaving this to chance. There is a process for ensuring that these things have been thought through. The independent regulator is expected to issue guidance on this and other issues related to the role of the chair and non-executive directors, similar to that issued by the Office of the Commissioner for Public Appointments. We believe that there is a thought-through process and we do not believe it is necessary to prescribe all this in primary legislation.
On Amendment No. 49, which proposes that governors cannot be non-executive directors, I have already explained the importance of having the chair

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presiding over both boards. The amendment would mean that the chair of the board of governors could not be the chair of the NHS foundation trust and it is unacceptable to the Government on that basis.
I have sympathy with the noble Baroness's point of view, but, other than the chair, we would not normally expect a governor also to be a non-executive director. Individual foundation trusts could make a provision for this if necessary; for example, if they felt a stronger link between the board of governors and the management board, provided that they have the appropriate skills. The key is whether the person has the skills for the job, and not being arbitrary about ruling people in and out in the way the amendment suggests. Their appointment, as for all appointments of non-executives, should follow best practice in terms of open and fair competition.
I have tried to explain the Government's position. We do not believe that these amendments are well-framed, appropriate or necessary.
3.45 p.m.
Baroness Greengross: I have a problem with this. If a group heavily represented on a board of governors is, for example, anxious that mental health should be a priority for the trust—the strategic direction of the trust—and if the executive board does not agree to that, how is that sorted out in terms of accountability? Which side will win? I am sorry if that is an obvious question, but I remain uncertain about where day-to-day management and strategic direction ends and where the boundaries lie.
Lord Warner: That example has overtones—not as bad as those expressed by the noble Baroness, Lady Noakes, which were adversarial—of competition and dispute. We are trying to produce a model which brings together partnership and co-operation.
We hope that the chair—who is the chair of the board of governors and the board of directors—will bring those bodies to a degree of harmony and dialogue to ensure that on the example the noble Baroness, Lady Greengross, gave there is a full and frank discussion; positions are explained and discussed; and there is an agreeable outcome to all sides. That is the kind of co-operative National Health Service we are trying to achieve through these changes.
I will not repeat the speech I made this morning about the roles of boards of governors and boards of directors, but it is clear from the Bill that the day-to-day administration of the foundation trusts will be in the hands of the boards of directors. Clearly, the boards of governors have an important role in shaping the future direction of the trust.
Baroness Noakes: I thank the Minister for his response. The noble Lord, Lord Hunt of Kings Heath, said that people elected governors would then have a belief in their legitimacy. He added that if we did not deal with that in the constitutional arrangements, there would be conflict. It is a great shame that such
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people may be elected with a misguided belief in what they are there to do. There is a danger that people will believe that being elected a governor of an NHS trust will give them powers. That is a fundamental problem with Schedule 1, and many more amendments than those we have before us today are required to correct that.
Secondly, I see no conflict between a supervisory or advisory body and an operational body. One should see it more in terms of there being constructive tension between the two because they have different roles. If the board of governors is there to advise, it should concentrate on doing so and leave the board of directors to do its job of running the trust. The more we try to mix the two, the more there will be a recipe for misunderstanding and confusion. Having individuals represented on both bodies will only make that worse.
It is all very well to have idealistic views of the co-operation that will be achieved by having cross membership, but experience in all kinds of organisations is that it is not necessarily achieved. I continue to believe that the arrangements for appointments are ill-thought-out. We have the circularity that the chairman of the board of directors will, hey presto, be the chairman of the board of governors without a requirement for any specific process.
I welcome the Minister's comment that there will be the kind of open processes to which we are accustomed in public-sector appointments generally, although I am not sure that local amendment to them sounded as robust as I had hoped.
I will not pursue these issues today but I will read carefully what the Minister has said. I continue to believe that this area of the Bill will not serve the interests of creating foundation trusts which are in any sense a successful part of the NHS. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 42 not moved.]
Lord Clement-Jones Lord Clement-Jones moved Amendment No. 43:
Page 110, line 18, at end insert "including failure to subscribe to the core values of the trust"
The noble Lord said: This debate will in a sense be a continuation of the debate that we started this morning. It relates to the potential discontinuance of membership, and the circumstances in which that may take place, of a public benefit corporation, under paragraphs 5(2) and 7(2). There are and will be circumstances in which mental health trusts will no doubt qualify to apply for foundation trust status, if these provisions are passed.
There is some concern among mental health service providers that the board of governors is vulnerable to entry by hostile forces. I know that the Minister does not like to think of these matters as being in any sense confrontational, but Nimbyism is particularly rife in planning for mental health services. Mental health service providers, such as the Sainsbury Centre for Mental Health, are concerned that campaigns could be mounted to prevent mental health services from being

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extended or provided, or whatever may be the local case. They could take a hold over local boards in significant numbers.
As we discussed this morning, there is no failsafe to prevent that from happening. Provisions can be made, under the constitution, but there is no failsafe. The amendment is a proposed safeguard that may assist foundation trusts to remove from the board of governors individuals or groups of people whose activities frustrate the development of improved services of the kind that I mentioned. There may be other services that arouse Nimby-type reactions, for all the wrong reasons, which may be covered in that way.
There is a difficulty, in that boards of governors are meant to be representative of the community. If the majority will of the community wants to frustrate developments in a foundation trust, the foundation trust will need to reflect that. On the other hand, if a vocal minority, which does not really represent the community, is frustrating a perfectly sensible strategy of the foundation trust, the formulation referring to "core values" hits the right balance. This is about values and wanting to do the best for patients and, in this context, mental health service users. I beg to move.
Lord Warner: I do not think that we can do other than to have sympathy with some of the arguments that the noble Lord, Lord Clement-Jones, put forward. However, I remind the Chamber that we have had a debate about the flexibility provided by paragraph 7(2), which allows foundation trusts to make conditions for removal of governors. That might include the removal of governors who fail to turn up to meetings or to engage with their membership, or otherwise act in a way that is totally inconsistent with the aims and values of the organisation.
We have not tried to specify all those circumstances, other than the normal provisions that are made for public bodies, because we do not believe that any of us is clever enough to specify a form of words that will cover the whole range of circumstances that could occur locally. None of us is trying to thwart genuine protest about a particular form of development where there are strong local or individual feelings about a particular direction. Those issues have to be thrashed out locally; there has to be debate and discussion; there has to be full dialogue, and the decision has to take into account what is appropriate in the local circumstances.
The difficulty with the amendment is that, in legal terms, a power to remove a governor for failure to adhere to "core values" would be highly ambiguous. I suggest to the noble Lord that it might be open to considerable abuse. If I dare suggest so, his core values may not be exactly the same as my core values. Similarly, around the Chamber there may be a lot of different core values by which we all live happily and contentedly.
The proposal could be open to the kind of abuse that I am sure he would not want to see. Such a power could be used to remove a person for a very large number of pretty dubious reasons, although I am sure that that is
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not his intention. While we understand the spirit in which the amendment is moved, and are sympathetic, we do not believe that the amendment helps Our view is that we should stick with the kind of flexibility that is in the Bill as currently drafted.
Lord Clement-Jones: I thank the Minister for his reply As a lawyer, I am aware of the possibility of dubious interpretations of legislation, and perish the thought that that should ever occur.
The Minister fairly put the case. His arguments are reasonably plausible in respect of this particular amendment, but I am not wholly convinced that the complete absence from the Bill of the circumstances in which removal can take place is definitive. There is room for general wording and more guidance in the primary legislation for the constitution of foundation trusts. The point is a difficult one, I agree, but company law legislation provides for many circumstances in which removal can take place. Even though these are new organisations, I do not believe that it is beyond the wit to introduce a broad measure, which would be similar but would not be open to abuse. We shall keep trying. However, in the meantime, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Baroness Noakes Baroness Noakes moved Amendment No. 44:
Page 110, line 19, leave out sub-paragraph (2).
The noble Baroness said: This is a probing amendment, which would delete paragraph 13(2), which says that the constitution of foundation trusts,
"may make further provision about the board".
I have a simple question for the Minister. Will he explain what extra matters relating to the board might need to be dealt with in the constitution? Why cannot they be dealt with in Schedule 1? I am sure that he will tell us again about the need for flexibility, but will he please say what kind of flexibility might be needed? I beg to move.
Lord Warner: I can never resist the opportunity to tell the House that the Bill is about flexibility and freedoms, as the noble Baroness said. The amendment would prevent foundation trusts from including further provision in their constitution about boards of governors. We are aiming for flexibility to develop arrangements to suit local circumstances. NHS foundation trusts clearly need to be able to determine the details of their particular governance arrangements.
I shall try to help the noble Baroness by giving her some examples. Foundation trusts may wish to assign specific functions to the board, such as patient and public involvement activities. They may wish to allow for co-optees with expert knowledge to sit on the board or to provide for committees of governors to advise the management board on particular matters. A good example might be the kind of issue that we discussed under the previous amendment. There may be a very contentious issue whose resolution can be helped by a group of the boards of governors going out, talking to the public, talking to users and bringing together a

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formulation helpful to the board of directors. We do not want to be too prescriptive to prevent those matters from being arranged under local constitutions. I hope that helps the noble Baroness.
Baroness Noakes: I thank the Minister for that reply. It helps me greatly because it enables me to see that he does not really know what this is all about. What he just described was the use of the constitution to solve an ad hoc issue relating to the emergence of special interest groups and directors dealing with a particular matter. That is not what a constitutional issue is.
It is clear that we shall not make much progress on matters that are supposed to be left to flexibility, although doubtless we shall try to do so again this afternoon. We shall consider this matter further before we reach the Report stage. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
4 p.m.
Lord Clement-Jones Lord Clement-Jones moved Amendment No. 45:
Page 110, line 27, after "directors," insert "along with healthcare professionals which should include the director of nursing,"
The noble Lord said: We now come to the particulars of the composition of the board of directors, which is dealt with in paragraphs 14 to 16 of Schedule 1. As we heard today in some detail, the board of directors will be the governing body of the foundation trust and will also be responsible for its day-to-day management. Effectively, all the powers of the trust will be exercised through the board of directors.
From what we can see in the schedule, the board will comprise executive directors, including a chief executive and finance director, as well as non-executive directors appointed by the board of governors. However, the rubric in the schedule does not provide for the inclusion of clinical representatives. No reference is made to the medical director, the director of nursing or, indeed, other professionals involved. Particularly in view of the fact that clinical governance is such an important aspect of any foundation trust, it is absolutely vital that the clinical staff are very closely linked to the board and, indeed, in many cases, that they sit on it if they are of sufficient seniority.
I believe that both Amendment No. 45 and the amendment of the noble Baroness, Lady Finlay, are inspired by the Royal College of Nursing, which is concerned to ensure not only that its own people—the director of nursing and so on—are members of the board, but that other health professionals are included as well.
At present, wide discretionary powers exist to determine the remainder of the composition of the board. No doubt the Minister will repeat the word "flexibility" several times in his response. However, I believe it is very important—particularly since, in a sense, if this is the managing board then it is the board
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responsible for risk management, and that includes clinical governance—that clinicians should be on that board. I believe that a very good case can be made for that, and I look forward to hearing what the Minister has to say. I beg to move.
Baroness Emerton: In the absence of my noble friend Lady Finlay, I rise to speak on her and my own behalf on Amendment No. 46, which relates to the inclusion on the board of a clinician, a nurse and professions allied to medicine.
I am very aware of the comments made during the first day of Committee and, indeed, this morning about minimum requirements and maximum flexibility. That raises considerable concerns in certain directions. Flexibility is good in many instances, but I believe that there are many examples where flexibility can be detrimental and have a negative effect. I want to give an illustration of that which concerns nursing but it also has a medical aspect as well.
In January 2002, the Department of Health published a report entitled, Shifting the Balance of Power: The Next Steps. It sought to put patients and staff at the centre of the NHS by giving greater authority and decision-making powers to patients and front-line staff. The report recognised that the commitment and engagement of nurses were essential to the delivery of the NHS Plan in improving health and healthcare.
A visible senior nurse with the credible strategic experience and skills required of a modern leader would provide that experience at every level of the NHS to ensure that the contribution of front-line nurses was optimised and a high quality of service delivered. It was envisaged that the strategic health authority would have a senior lead nurse in the team linking to the chief nursing officer at the Department of Health. That was in line with the statement of the World Health Organisation's ministerial conference of 2000, which endorsed nursing and midwifery contributions to decision-making at all levels of policy development and implementation. Therefore, it followed that nurses would be essential in ensuring that strategic health authorities performed their functions successfully.
However, where it has been left to the discretion of individual strategic health authorities to determine whether or not to establish an executive nurse director, my noble friend Lady Finlay has met with a mixed response. To begin with, very few nurses have been appointed to strategic health authorities. I believe that that illustrates the difficulty of flexibility when it is left, in this case, to the foundation hospital to decide whether it is necessary to include a nurse. The same applies to clinicians.
I remind the Committee that 80 per cent of patient care is delivered by nurses. They play a very important part within the healthcare team, both in facilitating patient recovery and, in so doing, in improving the efficiency of the service by reducing the length of stay and subsequent bed-blocking.

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The professional development of nursing has led rapidly to an increase in specialist nurses in departments which carry out various procedures. However, alongside the delivery of specialist treatments, the basic care of patients still needs to be met. That includes nutrition, fluid balance, hygiene and comfort. When one considers that the average length of stay in hospital is increased by 11 days due to hospital-acquired infections, it can be seen that nurses play an important part in the policies and procedures that cover the control of infections. Because of their close inter-reaction with patients and families, as well as with the local community, nurses are highly skilled in interpreting people's needs and expectations of care.
For many years, the United Kingdom has been the envy of many other countries in that an executive nurse has been included in the management team at government level—the chief nursing officer—and every level of management. It seems incredible that an executive nurse could not be included in the list of directors, as well as a doctor and a representative of the professions allied to medicine. As the noble Lord, Lord Clement-Jones, said, clinical governance plays a very important role, and we are talking about a health service.
I hope that the Minister will be able to take on board the amendment. The Royal College of Nursing, which has 360,000 members, is committed to the NHS and its founding principles, and is a major contributor to the development of nursing practice and standards, thoroughly supports the amendment. I ask the Minister to give it his consideration.
Baroness Cumberlege: I too support the amendment. As the noble Baroness, Lady Emerton, has said, the phrase that has echoed through this Committee stage is "minimum requirements and maximum flexibility". I understand why the Minister and the Department of Health want to keep it that way.
In some ways I feel that the Bill is being presented to us like an impressionist painting: we are being invited to admire it at a distance and, without peering too closely, agree its power and beauty. That is not good enough. In Committee we have to examine the techniques; we have to look at the brush strokes; we have to see the composition; and we need to know the detail. The NHS is not an art form; it is very practical. It employs practical people who do practical things. They give injections; they administer drugs; they peer inside people; they cut them open and sew them up again, hopefully successfully. The care that they take in doing those things is enormous and they always seek to do things better. As the noble Lord, Lord Clement-Jones, and the noble Baroness, Lady Emerton, have said, they embrace clinical governance in a way that would surprise some of us. The leaders in clinical governance at all levels are doctors, nurses and practitioners in the health service.
Recently my brother was a medical director of a first wave trust. I visited him and we talked a lot. I admired the way in which he worked with his colleagues. Not only was he a consultant radiologist, but he was also a manager. The way in which he called his colleagues to
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account was courageous and very necessary. My point is that he could say things that managers could not say because he knew the business inside out as well as knowing his patients inside out.
As the noble Baroness, Lady Emerton, has said, 80 per cent of the care is given by nurses. They are in an equally good, or perhaps strong, position. Increasingly nurses are on the ascendancy, which is terrific. Their knowledge of the organisation is often wider than that of surgeons and physicians because they tend to move around the hospital and do not always stick to the same specialties. As the noble Baroness has said, they take on matters such as infection control which embrace the whole organisation. They have a different view of how a hospital is working, and allied health professionals are equally important.
The Government were very prescriptive in the arrangements that they drew up for primary care trusts, saying that there had to be a GP and a community nurse on primary care trust boards—that was very clearly defined—and on professional executive committees. So the Government went down to the detail of saying who was to sit on a committee of the board of a primary care trust.
I hope that the Minister will consider some of the arguments that have been made by Members of the Committee today and not be shy in acceding to what I believe is a very reasonable request. This may hurt, but we know that the public believe professionals more than they believe politicians. With the proposals that are put forward for governance in the Bill, we are likely to have party-political appointees serving on boards of directors in a way that will be disruptive. One way to try to mitigate that would be to put on the boards the health professionals who understand the business.
Baroness Noakes: It is a pleasure to welcome the noble Baroness, Lady Emerton, to the Committee. She has considerable experience of the NHS and of nursing and was a chairman of an NHS trust for a considerable period of time. If the Minister will not listen to these Benches perhaps he will listen to her words of wisdom.
Our Amendment No. 47 is in this group. It is similar to the other two amendments, but less prescriptive. It does not require a director of nursing, as Amendment No. 45 does, nor does it require representatives of the three clinical groups, as does Amendment No. 46. It requires that one of the executive directors should be,
"a person practising as a clinician in the corporation".
That person could be a doctor, a nurse or a member of one of the allied health professions.
I believe that it is right not to be over-prescriptive about the composition of the executive component of the boards. The boards should comprise a blend of skills and experience and they will want to ensure that the best executive talent within the organisation is able to sit on the boards without having too many restrictive titles. That is certainly the experience of the private sector and I believe that it has also been the experience of NHS trusts since they were first set up.

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Like the Minister, I value flexibility, but I cannot comprehend a circumstance in which a foundation trust would have no practising clinician on the board, which is why our amendment talks about one such member. Often a board will have two, but we have plumped for a minimum of one. Perhaps I can explain this to the Minister. In days gone by I had to argue the case, quite forcefully, for the finance director to be an essential NHS trust board member. I am exceptionally glad to see that that has survived today. The reason was that 13 years ago not all chief executives valued the role of finance. I would not accuse any current chief executive of not valuing the role of clinicians, but I do not believe that that should be left to chance. It should be clear in the legislation that there are roles for clinicians at the top table, which is why we have tabled our amendment.
4.15 p.m.
Lord Turnberg: I too support these amendments. I express an interest as a clinician who worked in the NHS for many years. We have heard much about morale in the health service. "Morale has never been lower" is a constant refrain. I suspect that the major reason why morale is often low is that clinicians feel that they are not heard; they are not part of the system; they are ignored; and they are not involved in the way in which the service is provided. They are at the end, at the cutting edge, and deliver the care, but they have the sense that they have no control or influence.
It is important to try to improve the morale of clinicians. We need to improve the morale of our staff, but that alone will not be enough because there is an enormous amount of expertise, knowledge and ability among the clinical staff—the nurses, doctors and other healthcare workers. They are in day-to-day contact with the patients so they must have some idea of what the patients want and need. Of course, they should not be in the majority; they should not have the final say— many people should have a say—but they cannot be excluded. However, nurses, doctors and other healthcare workers should be there, so I strongly support the amendment.
Lord Blackwell: I support the spirit of these amendments for practical reasons concerned with the efficiency of governance of these institutions. As set out currently in the Bill, there are two explicit layers of governance—the board of governors and the board of directors. In reality there will be a third level of governance which is the continuing close involvement that the central executive, the Treasury and the various regulators will have.
If a board of directors does not include the key medical directors, the reality is that there would be a fourth layer of governance because there would then have to be an executive group—executive board—that would discuss matters and take the real decisions. A potentially disastrous situation could exist in which a paper being prepared and discussed in an executive committee one week is discussed by the board of directors the next week, by the board of governors the
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following week and then by the regulators. The poor chief executive would spend all his time redrafting, editing and discussing the same paper up and down the chain.
If the board of directors is where real decisions are taken, it is essential, as far as possible, that it includes enough of the real medical practitioners effectively to be the executive group that does not have to be duplicated within the hospital. Often a board of directors in a company will be accompanied by an executive group, but there will not be a board of governors over the top of that—only those two layers. For efficiency we need to avoid having yet another layer of governance within the management processes.
Lord Hunt of Chesterton: Although I am not a medical doctor, I intervene to say that there are many organisations which find that a professional representative on their board is very important. The Met Office has a chief scientist, the GCHQ has a chief mathematician, Rolls-Royce has a chief technical director and British Airways I understand has a pilot—thank goodness. So I think that these thoughts are very important. Managers and finance directors are very important. Great strength and comfort is given to everyone using an organisation to see the professional abilities reflected. Therefore, I support the amendment.
Lord Warner: I cannot tell the Committee how much pleasure it gave me to hear the noble Baroness, Lady Cumberlege, compare our scheme of governance and this legislation to an impressionist painting, when one thinks of the pleasure and value of such paintings. So I take great comfort from that analogy as a result of today's debate.
I have a good deal of sympathy with the arguments made by the noble Baroness, my noble friend Lord Turnberg and others about the role of doctors and, indeed, nurses. Over many years I have listened to the wisdom of the noble Baroness, Lady Emerton, and I listened very carefully to what she had to say today. There is certainly no intention on the part of the Government to diminish in any way whatever the contribution that, in particular, nurses make to the NHS. Indeed, perhaps I may confess that as a very young civil servant I was heavily involved in the Salmon committee and in the writing of its report on the senior structure of nurses. That is where nurses came of age as managers and were recognised as managers in the NHS. So we are not in any way trying to diminish their contribution.
Having expressed my sympathy, I must express some doubts about whether these amendments quite do the trick intended. The amendments are not the same. They cannot all be accepted because they would produce different outcomes. So I shall try and suggest a possible way forward which may help deal with the fact that they do not achieve the same objectives.
We have specified that there should be appointed a chairman, a chief executive, and a director of finance. I am grateful for the recognition of the noble Baroness, Lady Noakes, on the finance issue. However, this does

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not mean that a foundation trust will be established without input on the board. The primary purpose of these organisations is the provision of healthcare. It would be extraordinary if that were not reflected in the constitutions of the board when NHS foundation trust applications are put forward.
The process is that constitutions will be drawn up in response to consultation. The Secretary of State will then examine proposals put forward by applicants, which should include information on the size and composition of the board of directors. I can categorically assure the Committee that no application will be supported by the Secretary of State without clear proposals for robust, clinical leadership at board level, covering medical, nursing and other professionals.
I hope that kind of reassurance will enable noble Lords to reflect further on the issue and not to pursue the amendments today. I also hope that by putting this issue clearly on the record, it will reassure the various professional interests outside this Chamber who have expressed their concerns, which I understand and with which I have a good deal of sympathy. However, I think we may end up with constitutions, which produce a more favourable outcome than some of these amendments might actually produce, if we let that process take place and leave the Secretary of State to reject or accept matters on the basis of their ability to convince him that there are robust, clinical leadership arrangements in the constitution at board level covering healthcare professionals.
Baroness Carnegy of Lour: Before the Minister sits down, perhaps I could ask him whether he agrees with me about something. It has been gradually dawning on me that this board of directors—and since I listened to my noble friend Lady Cumberlege I realise it more clearly—will have politically motivated people upon it. It is very likely that some governors will put on people who they hope will govern for some particular group or other. It may be politics with a big "P" or with a little "p"—often with a little "p". That kind of body is very far from the committee of the Met Office, which wants to have a professional this or that upon it. The nursing profession, and indeed the doctors, have to think about how in a specific situation they are going to be in the strongest position with the board of directors.
Quite often in the education service professionals prefer always to be present, always advising and putting in their input, but not having actually to engage with what may turn into a somewhat political discussion over some aspects of what the directors have to do when managing the hospital trust. So there is another model. If I was organising this, I should want to ask a trust whether they would prefer not necessarily to ask for particular people as members, but to have people present who could have an input without engaging in political discussion. Very often people who have come from the outside world into a trust pay more attention to it than do the professionals. So there is another model. Does the Minister agree that that might be how it could be done,
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or does he not want to enter into that discussion? I think that it is a very important point, but perhaps he does not wish to discuss it.
Lord Warner: I am not sure that I want to trade models with the noble Baroness at this particular point in the Committee. All I would say again is that we want to ensure that there is robust, clinical leadership represented on the board. I do not quite accept her view that it is a foregone conclusion that there will be many politically motivated people on boards of governors. We all have different views and those boards of governors will reflect a wide spectrum of views. That is what one gets in a healthy democracy.
Lord Clement-Jones: Once again, I think that the noble Baroness, Lady Cumberlege, may have put her finger on the issue. In the last NHS reform Bill, I think we had the character of Mrs Arbuthnot as a running theme in the same way as the former Minister had his own mantra. I think that we now have this strong picture of the Minister standing before his canvas, slapping on the paint and wearing his smock. I do not know whether he is Degas or Renoir or what his favourite subject is, but we shall see.
We have had a wealth of experience in this short debate which has been extremely valuable and interesting. I was very interested in the actual experiences put forward by the noble Baroness, Lady Emerton, by the noble Lord, Lord Turnberg, and, in particular, by the noble Baroness, Lady Cumberlege. I thought that what the noble Lord, Lord Blackwell, had to say about four tiers was extremely interesting because there will be a management board unless the clinical side is on the board of directors. So we will have this nightmare of tiered layers of management and governance rising up to departmental level.
However—and perhaps this is unusual for these debates—I was very heartened by the Minister's response. He was robust in the way he responded to this issue, even though he does not accept the case for inclusion in the primary legislation. I think that the insistence that no application can be accepted unless— and I think I am quoting him—"robust, clinical leadership is represented on the board" is a very good step. Of course I should like to see that in the schedule in some shape or form. But the response to the concerns expressed is very good. I think we can build on it. So I beg leave to withdraw Amendment No. 45.
Amendment, by leave, withdrawn.
[Amendments Nos. 46 and 47 not moved.]
Baroness Noakes Baroness Noakes moved Amendment No. 48:
Page 110, line 29, at end insert—
"( ) A majority of the board is to comprise the directors referred to in sub-paragraph (1)(b)."
The noble Baroness said: The amendment adds a new sub-paragraph to Paragraph 15. That would ensure that the board of directors would contain a majority of non-executive directors. At present,

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Paragraph 15 merely states that there are to be executive and non-executive directors—there is no reference to numbers or proportions.
At paragraph 2.39 of the Government's A Guide to Foundation Trusts issued last year, it was stated that non-executives, including the chairman, would amount to at least one third of the positions on the management board, now termed the board of directors. The Bill is silent on the matter, as is A Guide to Developing Governance Arrangements. That is a little odd, because the Government are ignoring their own views on governance elsewhere.
Governance in the private sector has been placed under the magnifying glass during the past year at the Government's behest. They asked Mr Derek Higgs to carry out a review of corporate governance and have subsequently backed his findings. In respect of companies, Mr Higgs's review has now been reflected in The Combined Code on Corporate Governance issued by the Financial Reporting Council this summer. Indeed, A Guide to Developing Governance Arrangements praised the Higgs report and said that it represented useful guidance.
The NHS Confederation, which probably knows more about NHS boards than any other organisation, endorses the amendment. It believes that there should be a majority of non-executive directors on the board.
At least half the boards of listed companies in the private sector will have to comprise independent non-executive directors. Mr Higgs said in his report:
"I agree that a board is significantly strengthened by having a strong group of non-executive directors with no other connection with the company. These individuals bring objectivity".
The Government's ideas about governance within foundation trusts may be based not on objectivity but instead on some rather shakier notions.
The Minister has today supported conflicts of interest arising through boards of governors and boards of directors. Ms Blears, the Minister who handled the issue in another place, said in another place that non-executives were,
"partners in the enterprise".—[Official Report, Commons Standing Committee E; 15/5/03; col. 182.],
whatever that means. She saw them as workhorses, handling complaints or doing other tasks in the trust. She had no concept of independence, objectivity, dispassionate judgment or the contribution of external perspective. Is that what the Government really want in NHS foundation trusts? If so, they are flying in the face of received wisdom and have embarked on a dangerous path that we do not support. I beg to move.
4.30 p.m.
Lord Lipsey: In most cases, I can support the general case that the noble Baroness makes for a majority of non-executives. However, she and I have been battling on the same side to say what a poor means we have in the Bill of choosing non-executive directors. They will be elected by the board of governors by a system which, as she demonstrated this morning, could have been specifically designed to ensure the maximum
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chance that quite a few of them are fascists, extremists or represent single-issue pressure groups. In those circumstances, we should be much better off if they did not constitute a majority than if they did.
Lord Blaekwell: The amendment exposes a confusion in the currently proposed role for the board of directors answering to the board of governors, which I hope the Minister will explain. If the board of directors were truly supposed to be the managing board of the hospital and the board of governors were in effect the place where non-executives should sit, I could have sympathy with the view that we would want a majority of executives on it, with a few non-executives to bring outside influence, but that it remained essentially an executive role. But in that case, our previous discussion would have been pertinent: one would have expected it to include the primary medical heads.
On the other hand, if it is supposed to be largely a governance rather than a management board, the argument made by my noble friend Lady Noakes must surely apply: it must surely contain a majority of non-executives if it is to play an analogous role to the board of a company. However, I am then left wondering what the board of governors is doing as another layer above it. It is either one or the other and I should be grateful to the Minister if he would explain that, so that we can take a proper view on whether the majority of the board should comprise executives or non-executives.
Lord Warner: I shall resist the temptation again to go over the ground of the role of the boards of governors and directors. In response to some of the points made, and given that the word "flexibility" did not pass my lips when discussing the previous amendment, we are providing flexibility here so that we do not try to lay down one size to fit all.
Perhaps I may remind the Committee of our debate on the previous amendment. We are not being prescriptive about the number of people from clinical backgrounds who will be on the board of directors. It will be for local people who are applying for foundation trust status to make a proposition that fits their needs; it will be for the Secretary of State to agree or disagree with that proposition, taking account of the categorical assurances that I gave on the previous amendment.

If non-executive directors are always to outnumber the board of directors, we will have always to provide for that. It is worth bearing in mind that the Higgs proposals arose from concern about management in private sector companies, not public sector organisations. Some commentators have commented unkindly about the processes by which non-executives get selected in some private companies. So I am not sure that we want to push the analogy with Higgs quite so far as did the noble Baroness. I make no slanderous remarks about any particular companies, but I merely echo some points made by some commentators in that debate.
The Bill does not exclude any specific requirements about the balance between executives and non-executives on the board of directors. That is entirely deliberate. We consider it important that foundation

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trusts should be able to implement the most appropriate balance within the new model of governance being set up. That means that nothing in the provisions prevents them having a majority of non-executives on the board of management, if that fits their needs.
We have touched several times during our debates on the question of a review. I am sure that the regulator will want to issue guidance on that in due course. We accept the need to review the governance arrangements in the light of the experience of the first wave of trusts. We are not in a position to say categorically that in all circumstances, we want non-executive directors to outnumber executive directors on the boards of directors for foundation trusts. I suggest that we leave things as they are rather than pursue the amendment.
Baroness Noakes: I thank the Minister for that reply and thank other Members of the Committee for speaking. I was not surprised to hear the return of our friend "flexibility" on the amendment. The noble Lord, Lord Lipsey, made the extremely important point that if we were to have political non-executive members, we would not want them to be in a majority. I fully subscribe to that. Under the next amendment, we shall consider how non-executives are chosen—to deal with the points that I think that he had in mind.
My noble friend Lord Blackwell again raised the confusion that is at the heart of Schedule 1. There is so much flexibility that we do not know what kind of organisation is intended. Doubtless those out in the field do not know either. The point about having guidance, which we want included in the schedule, is that people know with which norms they should be complying. That is what happens in the commercial sector and it is generally regarded as valuable.
That is why the NHS Confederation supports the amendment. It understands that it is helpful to the NHS to have clear guidelines. What we find accumulating in the Bill gives absolutely no help. I cannot think of anything more retrograde than this whole series of flexibilities. We could end up with organisations that bore almost no relation to each other.
Today is not the day to pursue that. I shall read carefully what the Minister has said, but I suspect that we shall return to the issue. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 49 not moved.]
Baroness Noakes Baroness Noakes moved Amendment No. 50:
Page 110, line 37, at end insert—

"(1) The board of directors shall establish a nominations committee with the function of recommending the appointment or removal of the chairman and non-executive directors.

(2) The nominations committee shall ensure that selection
procedures used to arrive at recommendations for the

appointment of the chairman and non-executive directors are in
accordance with best practice for such appointments.

(3) The nominations committee shall make its recommendations
to the board of governors."

The noble Baroness said: I shall speak also to Amendments Nos. 52 and 59, which concern governance arrangements in foundation trusts. They pick up a point raised by the noble Lord, Lord Lipsey, in our previous debate.
Amendment No. 50 would insert a new paragraph after paragraph 15 of Schedule 1 to set up a nominations committee for the appointment of non-executive directors and the chairman of the board of directors.
The scheme under the Bill is that the board of governors will appoint or remove the chairman and non-executive directors. That is fine up to a point, but it does not deal with how those individuals will be chosen. In the commercial world it is now accepted practice for a nominations committee of the board to make recommendations for new non-executive appointments and for the appointment of the chairman. That practice is also followed in several parts of the public and not-for-profit sectors. It is now set out in the combined code that I referred to following Mr Higgs's review.
In the private sector the nominations committee makes its recommendations to the board, which then recommends appointments to the shareholders. But, mindful of the Government's experiment with two-tier governance, we have drafted Amendment No. 52 to have the recommendations made directly to the governors rather than the board, as they make the formal decisions.
I am quite clear that the best place to carry out the process is at the level of the board of directors. Under Higgs, for example, the nominations committee must evaluate what kind of person is needed. The combined code states:
"the nominations committee should evaluate the balance of skills, knowledge and experience on the board and in the light of this evaluation prepare a description of the role and capabilities required for a particular appointment".
That exercise needs to be carried out on the basis of an intimate knowledge of the trust, the directors and the detailed workings of the board of directors. It cannot sensibly be carried out at one remove; for example, by the board of governors.
Sub-paragraph (2) of the amendment would require best practice to be followed in the selection procedures. They certainly change over time, but the important point is that objective processes are in place to select the right people for the foundation trust. Those are the sorts of processes that NHS trusts use at present for the selection of their non-executives. There is a danger in the Government's proposals that non-executives will be selected by boards of governors, not for their contribution to the corporate agenda of the foundation trust, but because of their acceptability to whatever factions are developing within the board of governors.
In another place, Ms Blears, the Minister then responsible for this part of the Bill, told Standing Committee E that the governors,
"exercise influence in the day to day management through their powers to appoint the chair and non-executive directors of the NHS foundation trust".
She added:
"The structure is representative and democratic, with the members electing the governors, who in turn elect the directors".—[Official Report, Commons Standing Committee E, 15/5/03; col. 183.]
That is a very dangerous approach to the management of the complex organisations seeking foundation trust status. Directors, especially non-executive directors, should be selected for what they bring to the party and not for their political acceptability in these micro-political communities that the Bill will create.
I shall deal briefly with Amendment No. 59. It builds on the welcome requirement in paragraph 17 to have a remuneration committee. In the corporate sector it has been a requirement for some time for that committee to make a report each year in the annual report. Indeed, the DTI has recently significantly increased the information requirements of the items to be included in that report. Our amendment does not go anything like as far as that. But reporting publicly is an essential component of contemporary corporate governance. I hope that the Government will embrace it for foundation trusts. I beg to move.
4.45 p.m.
Lord Warner: I have followed the noble Baroness's arguments. I wish to put on record that we are not setting up NHS foundation trusts by reference to Higgs. Higgs is a set of propositions that relate to private companies as a result of problems that arose in a number of private companies. Their proposals have not even been accepted by large numbers of chairmen and chief executives in private companies.
We are not trying to design the arrangements appropriate for NHS foundation trusts simply by reference to the Higgs proposals. We may want to take account of good thinking in those proposals, as we take account of good thinking in other organisations. I do not think that we are trying to see that as the benchmark by which we judge whether the governance arrangements in NHS foundation trusts are the most appropriate.
The principle behind the amendments is to set up effectively two committees to advise on the appointment of chairs and non-executive directors, and to appoint a remuneration committee to report to the board of governors. I shall not cover all the ground again. We do not believe that it is necessary to specify that. We have set out what would be the processes for making those appointments. It will be an open and transparent process. We expect the independent regulator to issue guidance on that and other issues related to the role of the chair and non-executive directors and their appointment, similar to that issued by the Office of the Commissioner for Public Appointments.
I have already explained that the governance arrangements for foundation trusts are designed as a minimum framework within which those trusts have flexibility to tailor their own arrangements. If they want to have a nominations committee, there is
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nothing to stop them having one, but we do not think that that kind of thing should be prescribed in the primary legislation.
We agree with the principle of Amendment No. 59 that the committee responsible for determining the remuneration and terms and conditions of executive directors must keep the board of governors informed about its activities. But the committee should do that as a matter of course. We do not believe that it is necessary to put the amendment in primary legislation.
Baroness Noakes: I thank the Minister for his reply. I am extremely surprised at his denigration of what has been happening in the corporate sector, trying to blame it on problems in corporate boardrooms. He described the Higgs report as not accepted by chairmen. It is now part of the combined code issued by the Financial Reporting Council and is therefore obligatory for companies. In my many years' experience of working across the public and private sector divide, ideas were transferred between the sectors regularly. In areas such as the appointment of executives, the difference between the two sectors has never been particularly great. Ideas have been transferred across the sectors.
The Minister seems to be saying that we are developing a new silo called NHS foundation trusts. In the world that will exist within the NHS foundation trust silo, all the developments that go on outside will be completely irrelevant, as the rules are being designed solely for foundation trusts.
Lord Warner: That is the exact opposite of what I have been saying consistently throughout the Committee stage. I have been saying that we are using references and experience from a variety of organisations, and we are allowing people who are setting up new NHS foundation trusts to do just that. Without in any way denigrating the appropriateness of the Higgs proposals for the private sector, I was trying to make clear that they are not the be-all and end-all as a benchmark for judging the appropriateness of the governance arrangements in NHS foundation trusts.
Baroness Noakes: The Minister protests too much about the Higgs report. The NHS Confederation, which does know a lot about NHS organisation, thinks that the Higgs report is rather a good starting point for considering the Government's arrangements for NHS trusts. The Minister is virtually ignoring it because he is developing rules that are just for NHS foundation trusts in this silo where flexibility reigns over thinking anything through. There is no point in pursuing this matter further today, but we will return to it later. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Baroness Noakes Baroness Noakes moved Amendment No. 51:
Page 110, line 38, leave out "at a general meeting"
The noble Baroness said: I shall also speak to Amendments Nos. 56 and 57 in this group. These are probing amendments largely designed to find out what

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general meetings are in the context of the public benefit corporations in Schedule 1. There is only one reference to a general meeting other than in the context of the appointment provisions in paragraph 26, to which these amendments relate. Nowhere does the schedule explain what a general meeting is and how it is different from ordinary and presumably non-general meetings of the board of governors. Will the Minister explain those differences? What business will be conducted at general meetings? Who will attend both the non-general and the general meetings? Will the Minister explain the significance of the meeting being a general meeting?
We know what a general meeting of a company is in the private sector—the meeting of the company's members. However, it is clear that members are not part of a general meeting of a board of governors, although they will of course be entitled to attend. Will the Minister also explain how often these general meetings will take place? That is particularly important in the context of the appointment of directors because the general meeting has to appoint or remove both executive and non-executive directors, including the chief executive. What happens if the chief executive resigns or dies—or, more likely, if one of the executive members of the board moves on to pastures new? How long does the board of directors have to wait for the general meeting to take place for the vacancy to be filled?
Under company law in the private sector—the framework rejected by the Minister—the board of directors can fill casual vacancies with the following annual general meeting confirming the appointments. I can see no process in Schedule 1 that would give that flexibility. Indeed, as drafted, the appointment provisions are the very antithesis of flexibility.
Finally, will the Minister explain why the provisions of paragraph 16(1), 16(4), and 17(1) are constructed differently? Paragraph 16(1) refers to the approval of three-quarters of the members of the board. Paragraph 16 (4) refers to the majority of the board voting, and paragraph 17(1) refers to the board of governors deciding. Will voting take place in paragraph 16(1) and 17(1) decisions? How will it be known what the board has decided under paragraph 17(1)? No percentage is specified, so does it require all the governors to agree?
Those may seem technical questions, but we will need certainty to go forward, especially in the delicate area of the appointment of directors. These are probing amendments and I look forward to the Minister's explanations. I beg to move.
Lord Hunt of Kings Heath: I have considerable sympathy with the amendment and I hope that my noble friend will consider it between Committee and Report. There will be a real problem for the chairs of the foundation trusts who have to organise approvals or removals of the chief executive or executive directors under paragraph 16 (4), as specified. As I
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understand it, it can be done only with the approval of the majority of the board of governors voting at a general meeting. I fully accept, as noble Lords would expect me to do, that the board of governors has a role in this area, but it should have the flexibility to decide how it is to be discharged—if it is able to delegate the matter to two or three members of the board of governors or whether there has to be a full meeting, for example.
Imagine that there is a meeting cycle. We know that some chairs attend a board of governors meeting once a quarter. Even if the board met once every two months it would not fit in to the kind of decisions that must be made in relation to executive and non-executive directors. Removing the words "at a general meeting" would give much more flexibility to the board of governors to decide how to make decisions successfully. I do not think that the provision is very practical as it is currently constructed.
Lord Warner: In view of the opinions expressed, I would like to read and carefully consider the points that have been made. I will be in touch with the noble Baroness, Lady Noakes, and noble Lords before the next stage.
Baroness Noakes: What joy. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 52 not moved.]
Lord Clement-Jones Lord Clement-Jones moved Amendment No. 53:
Page 110, line 42, leave out "non-executive directors" and insert "board of governors"
The noble Lord said: In view of what the Minister said about the last amendment, it may be that this amendment, which was designed to simplify the process similarly, is not worthy of consideration for too long. However, the motives behind it are very similar to the motives in the last set of amendments. This is really the other side of the coin. It is strange that the non-executives have the right to remove the chief executive under the schedule as presently drafted, but must have the approval of the board of governors at a general meeting—or not at a general meeting. Why does one not go straight to the original electoral college—the board of governors? Why are they not the people to take the decision?
I know that the Minister is resolutely refusing to trade models, but I think that this is within the model that he proposes. It is not really putting an alternative. It would be better to go straight to the board of governors. They should have the power of appointment and dismissal of the chief executive in the circumstances. After all, the board of governors has a broader range of interests and representation than the board of non-executives who are, after all, potentially smaller in number and have been drawn from members appointed by the board of governors. It would seem entirely logical for the board of governors to have that power. I beg to move.
Baroness Cumberlege: I find it hard to support this amendment. We have heard this afternoon and in the course of this Committee that the board of governors could number 50 or more people. To give 50 or more people the power of decision to appoint or fire a chief executive is extremely difficult and I am not quite sure that that process would work. Taking a decision to ease somebody out of a job, as I know to my cost, is extremely difficult. Getting the mechanics to work is difficult. Therefore, to put the board of governors in that position is not very practical.
Lord Hunt of Kings Heath: I speak to my Amendment No. 54. In the light of my noble friend's comments, I hesitate to mention the Higgs report yet again. I fully accept what he says, but we should remember why Higgs was set up in the first place and the problems in certain private companies that led to it. However, on the other hand, it does contain some good. I also acknowledge that not all chairs of private sector companies have particularly welcomed Higgs, but it has elements of good practice.
Paragraph 16(4) of Schedule 1 specifies how hard it is for the chief executive to appoint or remove executive directors. That is not good practice. I do not think that the power to appoint the executive directors should reside solely in the chief executive. That is not, as I understand it, current practice in the NHS. It has always been a corporate decision, involving, probably, the chair and the non-executive directors. From my discussions with applicant foundation trusts, particularly the chairs of those trusts, I sense that there is a general view that the responsibility should be discharged collectively by the chief executive, the chair and the non-executive directors. That is good corporate governance.
Amendment No. 54 would establish the fact that the responsibility should rest with a committee consisting of the chair, the chief executive and the other non-executive directors. Of course, the chief executive will have a critical role to play in that appointment, but it should be a corporate responsibility.
5 p.m.
Baroness Noakes: I shall speak to Amendment No. 55, but, before I do, I shall echo the words of my noble friend Lady Cumberlege, who did not agree with Amendment No. 53, moved by the noble Lord, Lord Clement-Jones. I can see no direct role for the board in the appointment of the chief executive. The appointment should properly be put formally to it for approval but should originate with the trust. That is one of the few bits of the Bill that the Government have got right.
The suggestion made by the noble Lord, Lord Hunt of Kings Heath, is attractive, but it may be onerous. It would require all the non-executives to be a part of the committee. It may be more practical to require only
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some or to have a provision that not all the non-executives need to be involved in the selection process.
With the noble Lord, Lord Hunt of Kings Heath, we believe that the chief executive should never have an unfettered hand to appoint any member of the management board. He can appoint his management team below board level, but he should not be able to foist members on the rest of the board. The scheme in the Bill is a bit odd: it has non-executives parachuted in by the governors and executives parachuted in by the chief executive. If there was ever a recipe for a dysfunctional board, that is it.
Lord Warner: Amendment No. 53 is not appropriate. It is not for the board of governors to make the appointment in the way proposed.
Amendment No. 55 is also unacceptable. It would provide for the board of directors to appoint the executive directors on the recommendation of the chief executive. That would not be appropriate and would mean that the executive directors would be involved in their own appointment. Earlier in the day, the Government were accused of circularity; the amendment seems to have a certain circularity itself.
Amendment No. 54, tabled by the noble Lord, Lord Hunt of Kings Heath, provides a better answer to some of the concerns that have been expressed. It is not as impractical as was suggested by the noble Baroness, Lady Noakes. In this day and age, we have the fax and the telephone, and it is possible for people to communicate with each other without necessarily always having to assemble, even if they are part of a committee.
We have listened to the concerns that the noble Lord, Lord Hunt of Kings Heath, has tried to address with his amendment. As we said, we are always willing to listen to reasonable arguments. The noble Lord's argument that the appointment of the executive directors would benefit, if the chair and non-executive directors were also involved is a good one. That arrangement provides greater independent involvement in the process but does so in a way that is consistent with the structure devised for NHS foundation trusts. We therefore propose to accept Amendment No. 54.
Lord Clement-Jones: I was hoping that the noble Lord, Lord Hunt of Kings Heath, would again stand up and thank the Minister. Clearly, there is no gratitude in politics.
The ability of the noble Lord, Lord Hunt of Kings Heath, to read the mind of the Department of Health continues to astonish me. The Minister has been magnanimous in his flexibility. I am sorry that my model did not find favour with the assembled company, but the Minister has, at least, shown that he understands that there are problems with parts of the schedule, so we continue to make some progress. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Hunt of Kings Heath Lord Hunt of Kings Heath moved Amendment No. 54:
Page 110. line 43. leave out sub-paragraph (3) and insert—
"(3) It is for a committee consisting of the chairman, the chief executive and the other non-executive directors to appoint or remove the executive directors."
On Question, amendment agreed to.
The Deputy Chairman of Committees (Baroness Pitkeathley): As Amendment No. 54 has been agreed to, I cannot call Amendment No. 55, for reasons of pre-emption.
[Amendments Nos. 56 and 57 not moved.]
Lord Hunt of Kings Heath Lord Hunt of Kings Heath moved Amendment No. 58:
Page 111, line 8, at end insert "but the constitution may make provision for those matters to be decided pending the establishment of such a committee"
The noble Lord said: I am on a roll, so I hope that I will have equal luck with this set of amendments.
I am concerned about the transitional arrangements relating to the board of directors when a trust moves from NHS trust status to NHS foundation trust status. I know that some noble Lords do not necessarily share my view of the role of the board of governors, but, whatever one's view of the role of the board, we would, I think, agree that, when an NHS organisation changes its status, it is vital that there be stability in its leadership.
My reading of the Bill is that, in essence, the arrangements for the appointment of the executive directors and the non-exeeutive directors, including the chair and the chief executive, kick in during the transition between the current status and foundation trust status. In theory, therefore, there could, with a new board of governors, be a complete change in the non-executive directors on the board of directors, who, in turn, might decide to appoint a whole new team of executive directors, including the chief executive. That would be risky.
The reason why the first-wave foundation trusts are in the first wave is that they are the best led NHS organisations. I know that the noble Lord, Lord Clement-Jones, for one, has some concerns about the way in which one qualifies to be at the forefront of the movement. He is not particularly keen on performance ratings and the like. However, anyone considering the characters who lead the first-wave foundation trust applicants would surely conclude that some of our best people lead those organisations. It would be foolish to ask them to subject themselves to a process in which they had to be reappointed subject to the consideration of the new board of governors.
I propose that there should be transitional arrangements in which, essentially, the non-executive directors on the current NHS trust will, if they so wish, go forward to serve as the first non-executive directors on the foundation trust. They should serve out their term of office. For example, if their term of office was due to end less than 12 months after the foundation trust came into being, they would be able to serve that period.
The beauty of the arrangement is that, first, it ensures stability. It also means that the non-execulive directors will retire over time, rather than in one fell swoop. That will allow the board of governors to get to grips with the appointments process and will mean that it would not be an "all in, all out" situation.
The same thing must apply with regard to the chief executive. Again, we are talking about some of our best chief executives, so it must make sense for them to go forward again, if they so wish, to lead the new organisations. The amendments would ensure that that happened.
In the fullness of time, the governing bodies will be able to take up the responsibilities. However, given all the work involved in transferring from an NHS trust to an NHS foundation trust, stability in the leadership of the organisations is essential. I beg to move.
Baroness Noakes: The purpose of Amendment No. 137 is much the same as that of the amendment proposed by the noble Lord, Lord Hunt, but it takes a slightly different route involving the regulator before he authorises a foundation trust. Like the noble Lord, Lord Hunt, we have been made aware of significant concerns among potential applicants for NHS foundation trust status. If my noble friend Lady Hanham were able to be here she would express that point extremely forcefully. We have no problems with the amendments tabled by the noble Lord, Lord Hunt, and support them. It is called backing a favourite. The important point is that the issue is properly addressed in the Bill.
Lord Clement-Jones: I agree with the sentiments expressed, which have also been expressed to me and my colleagues by applicants. It is a crazy situation which, privately, is admitted by many members of the Government party. In theory, potentially it would be possible for there to be a complete clean-out from some of the most successful hospital trusts in the country. Potentially, chief executives and non-executives could be vulnerable immediately after achieving the aim of becoming foundation trust hospitals. This is a matter that needs to be addressed. The amendments tabled by the noble Lord, Lord Hunt, are elegant and should be carefully considered.
Lord Warner: We recognise the importance of ensuring operational continuity during the transition to NHS foundation trust status. The senior management teams of trusts that are eligible to apply for foundation status have delivered high-performing organisations by definition. We have listened to the concerns expressed about the need to ensure organisational stability among those applying for foundation trust status during the transition to the new governance arrangements. That is why we propose to accept Amendments Nos. 58, 61, 120 and 121, tabled by my noble friend Lord Hunt.
I share the description made the noble Lord, Lord Clement-Jones. The amendments are elegant and they will facilitate the transition from NHS trust

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to NHS foundation trust status by allowing time for the board of governors to properly get to grips with its role before being required to make or approve appointments to the management board. They will also provide for the continuity of the executive component of the board. That is the best way forward to ensure organisational stability and to ensure that NHS foundation trusts benefit from the proven ability of the current board of these high-performing organisations.
Lord Hunt of Kings Heath: I thank my noble friend and other noble Lords for their backing. This will bring a great deal of support to first-wave applicants, which I hope will give them confidence to take forward their applications with a great deal of enthusiasm.
On Question, amendment agreed to.
[Amendment No. 59 not moved.]
Baroness Noakes Baroness Noakes moved Amendment No. 60:
Page 111, line 8, at end insert—
"The chief executive shall be the Accounting Officer of the corporation."
The noble Baroness said: Amendment No. 60, which inserts a new paragraph after paragraph 17 of Schedule 1, is a probing amendment designed to ascertain the accountability arrangements for NHS foundation trusts. As I understand the current position, chief executives of NHS trusts are accountable officers for their trusts, reporting to the permanent secretary of the Department of Health, who is the department's accounting officer. That means that trust chief executives are accountable, alongside the department's accounting officer, directly to Parliament for their use of public money.
I hope that the Minister will explain the accountability arrangements for foundation trusts and, in particular, explain how they will be accountable to Parliament. My amendment to make them an accounting officer is to probe that accountability. If the Minister believes that our amendment is not necessary, I hope that he will explain what underpins the accountability arrangements for foundation trusts. I beg to move.
Lord Warner: We agree that the chief executive of an NHS foundation trust is its accounting officer. This amendment is not necessary. Advice to this effect has been included in the guide to governance arrangements that is being distributed to all applicant trusts. The regulator would expect this to happen, as would the Secretary of State, in considering applications. This amendment is not necessary because it is well established that these will be the arrangements.
Baroness Noakes: I thank the Minister for that reply. Could he confirm that all that is required is for the department to write this in the guide to governance arrangements, thus making someone an accounting officer for parliamentary accountability purposes? I am a little confused. Perhaps he could clarify that.
5.15 p.m.
Lord Warner: The point is that we have given that guidance to applicants. We would expect it to be reflected in their application. Indeed, the regulator would be looking out for that, as would the Secretary of State. This would have to be provided for in their application.
Baroness Carnegy of Lour: I have always understood an accounting officer to be a legal appointment. Should not the Bill say so? Need the Government be so resistant to this rather good idea?
Lord Warner: We do not think that this is necessary. We have made arrangements to ensure that the arrangements are put into effect.
Baroness Noakes: Perhaps the Minister will take this issue away and look at it again. It is my understanding that this cannot be done by the simple publication of a guide by the department or, by the inclusion in an application to be a foundation trust, that a person can nominate himself to be an accounting officer. The creation of the accountability link between an individual and Parliament is established by other more formal means. I hope that the Minister will take this issue away and look at it again because I am not convinced that the answer has the ring of truth to it. In the mean time, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Hunt of Kings Heath Lord Hunt of Kings Heath moved Amendment No. 61:

Page 111, line 8, at end insert—
"Initial directors of former NHS trusts

17A (1) This paragraph applies, where the application for authorisation is made under section 4, to the exercise of the powers mentioned in paragraph 16 to appoint the initial non-executive directors and the initial chief executive.

(2) The power to appoint the initial chairman of the corporation is to be exercised by appointing the chairman of the NHS trust, if he wishes to be appointed.

(3) The power to appoint the other initial non-executive directors of the corporation is to be exercised, so far as possible, by appointing any of the non-executive directors of the NHS trust (other than the chairman) who wish to be appointed.

(4) A person appointed in accordance with sub-paragraph (2) or (3) is to be appointed for the unexpired period of his term of office as chairman or (as the case may be) non-executive director of the NHS trust; but if, on any such appointment, that period is
less than 12 months, he is to be appointed for 12 months.

(5) The power to appoint the initial chief executive of the corporation is to be exercised by appointing the chief officer of the NHS trust, if he wishes to be appointed.

(6) Paragraph 16(4) does not apply to the appointment of any executive director of the NHS trust as an initial executive director of the corporation."

On Question, amendment agreed to.
Lord Clement-Jones Lord Clement-Jones moved Amendment No. 62:
Page 111, line 13, at end insert "and their interests"
The noble Lord said: This is very straightforward. I beg to move Amendment No. 62 and I shall not move Amendment No. 63, which is already covered by the schedule. On looking at the provisions in paragraph 18, I do not understand why there is no register of interests of members of the board of governors. It speaks about the constituency to which each belongs, but there is no provision for a register of interests of the members of the board of governors. That seems illogical as they are in positions of considerable importance in the trust. It is clear that the directors have a register of interests, under paragraph 18(l)(d). I shall be interested to hear the justification for not having a register of interests when these members make up another tier of governance for the trust concerned.
Baroness Noakes: I shall speak to Amendments Nos. 64 and 65 in the group. The effect of Amendment No. 64 is the same as that proposed in the amendments just spoken to by the noble Lord, Lord Clement-Jones; that is, that a register of interests would be required additionally for boards of governors. In another place, the Government conceded that registers of interests would be required for boards of directors. Personally, I do not understand why they did not concede at that stage that they would be required for boards of governors. That seems to be a well accepted part of the Government's arrangements for all public sector bodies.
Amendment No. 65 takes this point further and specifies what should be included in the register of interests. It requires that the registers include financial interests, which is commonplace, and political affiliations within the previous five years. I hope that the Minister will agree that this disclosure of interests is essential in the interests of accountability, probity and openness, particularly in the context of foundation trusts which might be open to entryism, which we have discussed previously. Can the Minister ever envisage a register that would not include those items? If not, the amendment is a useful addition to the Bill.
Lord Warner: Discussions occurred in another place about the provision of a register of interests of members of boards of governors. We considered the arguments carefully. We do not agree that similar legislative provision is required for the board of governors as for the board of directors.
We have had an exhaustive debate about the role of boards of governors and the boards of directors. As the Bill makes clear, it is the board of directors which exercises the executive powers of an NHS foundation trust because the directors are responsible for the day-to-day management of the trust. There is much greater scope for conflicts of interest to arise for the directors than is the case for the governors, in particular in relation to pecuniary matters.
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However, we would expect governors to declare their interests where relevant when speaking at meetings and, indeed, there is nothing to debar individual NHS foundation trusts including provisions in their constitution relating to this. But we do not think it necessary to specify in legislation declarations of interest for boards of governors.
Turning to Amendment No. 65, I have explained already that the Bill now includes a requirement for foundation trusts to have a register of directors' interests and to include provisions on conflicts of interest in their constitution. We do not think it necessary to specify in primary legislation what constitutes an interest and thus what should be held on the register. Any relevant financial or political interest would necessarily have to be included on the part of the board of directors but, as I have said, we do not think it necessary to prescribe in primary legislation a register of governors' interests in the way proposed.
Lord Clement-Jones: That is a disappointing reply. Throughout our discussions on this part of the Bill the Minister has sought to minimise the role of the board of governors. Indeed, it appears that its role is shrinking by the minute even as we discuss the issue in Committee. That is in itself extremely disappointing when one considers the livelier and much better governance model that would be available if the role of the board of governors was expanded.
The Minister has said more or less that, because the board is not very important, governors do not have to declare their interests, but if they feel like doing so when they come along to a public meeting, that is all well and good. If the trust wishes to include such a requirement in its constitution, that too is fine. I do not believe that that is good enough.
From a practical view—and there may be some movement on this as time goes on—because boards of governors will represent public opinion in the area, they have the potential to play a powerful role, even if they are not specified formally in the schedule. Like it or not, they will have a considerable influence on the direction of foundation trusts. In those circumstances, it is very important for governors' interests to be transparent. After all, it is the public who will have elected them and thus should know what are those interests.
It is only common sense to adopt such a provision and it is disappointing to see such a laissez-faire approach to interests at a time when declarations of interest are treated as a matter of considerable importance by public bodies. I think that this is a retrograde step and we shall certainly reserve our position.
Lord Hunt of Kings Heath: Would the noble Lord give way briefly? Perhaps it is churlish of me to return to the whole issue of boards of governors, given that my noble friend has just accepted my amendments and that we have discussed their role a number of times today, but I think that the noble Lord, Lord Clement-Jones, is right. If it is not considered important for

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declarations of interest to be made by governors, that is yet one more visible sign that the board is not a board of governors; it is much less than that.
I wonder in all seriousness whether we ought to consider changing the name. I say that because it is quite clear that the governors are not there to govern. They are there to give a view. I am very concerned that people will be elected to that body with a false perspective. Before it is too late, ought we not to reconsider in the interval between the Committee and Report stages, how to set out a more realistic assessment of what this body is there to do?
We are in danger of storing up trouble for the future. I know that noble Lords disagree with me about what the role of the board of governors should be, but I think that we are all agreed that it should be made abundantly clear to everyone taking part exactly what the board is there to do. If we are not careful, we are at real risk of ending up with an extremely uncomfortable and unworkable governance structure.
Lord Warner: While I stand by what I said in my original response, I can see the force of the arguments put by my noble friend Lord Hunt and the noble Lord, Lord Clement-Jones, about perceptions. It is certainly not our purpose to diminish the role of the board of governors.
In the light of those particular arguments, I should like to take this issue away and reflect a little further on it. I shall see whether we can respond appropriately before the Bill is considered on Report.
Lord Clement-Jones: That is most helpful, as was the intervention of the noble Lord, Lord Hunt. The noble Lord and I tend to have a similar vision of the way in which the board of governors and the board of directors are to interact, but one does not have to share that vision in order to be absolutely certain about the need to know exactly where each individual member of the board of governors is coming from in terms of their interests.
I am very pleased with the Minister's response and I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 63, 64 and 65 not moved.]
The Deputy Chairman of Committees: If Amendment No. 66 is agreed to, I shall not be able to call Amendments Nos. 67 to 70 inclusive by reason of pre-emption.
Lord Clement-Jones Lord Clement-Jones moved Amendment No. 66:
Page 111, line 36, leave out paragraph 21 and insert—
"A public benefit organisation shall be audited by an auditor appointed by the Audit Commission."
The noble Lord said: Given that the noble Baroness, Lady Noakes, is sitting so close by, it is with some trepidation that I enter into the realms of public finance. Although my amendment may appear minor,
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it is highly significant and certainly one that accords strongly with a number of different reports on public finance which have recently been produced.
I start at the Statistics Commission, whose reports I am sure the Minister reads with great regularity. In July of this year that office announced that foundation trusts would be provisionally classified in the public sector as central government bodies. A provisional classification is good enough for our purposes. That is a significant statement from the audit point of view.
That classification will bring in its train the fact that the principles of public audit should apply to the auditing of foundation trusts. Those principles are clearly set out in a number of documents and are interpreted in different ways, but the first principle is that public sector auditors should be independent of the organisations being audited. The second principle refers to the scope of public audit, covering the audit of financial statements, regularity, propriety and value for money. The third principle concerns the ability of public auditors to make their audits available to the public and to democratically elected representatives. Those principles are clear. Further, an extremely comprehensive report has been produced by my noble friend Lord Sharman on the whole area of the review board and accountability to central government.
This suggested addition for a requirement to have auditors approved by the Audit Commission is intended to bring foundation hospitals four-square within the principles of public audit. Under the terms of the Bill as drafted, it seems that currently foundation trusts will fall outside those principles. I do not know whether the Department of Health gave much thought to the way in which foundation hospital accounting structures were to be established, but Members on these Benches feel that there is a flaw here which could easily be corrected by ensuring that the auditors of foundation hospitals are approved by the Audit Commission. That body is extremely used to dealing with this area. If it did not undertake the audit itself, it would certainly be in the right position to recommend the appropriate auditors for the foundation hospitals. I beg to move.
5.30 p.m.
Baroness Noakes: I shall speak to Amendments Nos. 67, 68 and 69, which are in this group. It may be easier for the Committee if I first speak to Amendment No. 68, because it follows on naturally from the amendment just moved by the noble Lord, Lord Clement-Jones.
That amendment would place the appointment of the auditor in the hands of the Audit Commission. I can see that it is a logical amendment which, in effect, preserves the current audit arrangements for NHS trusts. However, we prefer the Government's basic approach to place the decision in the hands of the foundation trusts, thereby making them much more like the university sector. The appointment will of course be made by the board of governors rather than the board of directors, thereby achieving independence of appointment, which is one of the principles of public audit to which the noble Lord, Lord Clement-Jones, referred.

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While we like flexibility and freedom of appointment, we do not like the drafting of paragraph 21(3) at all. First, it does not confine the appointment to people who are properly qualified to carry out audits. It refers to persons with specified qualifications from various accounting bodies listed in the Audit Commission Act 1998. This means that I could be appointed an auditor of a foundation trust. I am a member of the Institute of Chartered Accountants in England and Wales and would thus qualify as a foundation trust auditor even though I am not approved by the Institute of Chartered Accountants to act as an auditor under the Companies Act. Our formulation, which refers to persons eligible for appointment under Section 25 of the Companies Act 1989, gets around this problem by ensuring that only properly qualified accountants can qualify. Therefore I did not need to declare an interest when I started to speak to the amendment because I am trying to do myself out of a job.
We agree with the Liberal Democrats to the extent that the Audit Commission is a possible appointee, but we also see a possibility for appointing the National Audit Office, the skills of which are highly regarded the world over. The NAO will, in any event, have access to foundation trusts, so it could be logical and efficient for a foundation trust to have the possibility of selecting the NAO as its auditor.
Amendment No. 67 would expand paragraph 21(2) so that it is clear that an auditor should be appointed every year. This is in line with the position under the Companies Act, although I know that that will not impress the Minister. At present, it would appear that the auditor is appointed sine die, which cannot be right. There should be some kind of formal process to evaluate the auditor's appointment, and we suggest that annually is the correct interval. The amendment also makes provision for a vacancy arising so that a new auditor can be appointed if an auditor resigns. This does happen, whether through disagreements or through mergers of accounting firms.
Amendment No. 69 would delete paragraph 21(3)(b), which allows the regulator to approve other bodies of accountants to provide auditors. This is nonsensical. How is the regulator to have the competence to determine whether a new body of accountants can provide adequate auditors? The Department of Trade and Industry currently holds this role for auditors appointed under the Companies Act. I am sure that, if asked, it would tell the Department of Health that this is a highly complex area. For example, it usually takes several years to approve foreign qualifications, even from countries such as the US, as being capable of meeting the standards required under UK legislation. Our formulation in Amendment No. 69, combined with Amendment No. 68, would in effect leave the task to the DTI. Sub-paragraph (b) is not only unnecessary, but a minefield for the department.
Lord Warner: I am sure that the House would be saddened if the considerable financial skills of the noble Baroness, Lady Noakes, were unavailable to
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NHS foundation trusts. Certainly I would not wish to say or do anything to prevent those skills becoming available.
Amendment No. 66 overlaps to some extent with some of the other amendments. In line with the devolution of responsibility and accountability, and with the greater freedoms for NHS foundation trusts that we have discussed, the Bill provides for those trusts —like universities and further education bodies—to appoint their own auditors. I am grateful for the support given to that position by the noble Baroness, Lady Noakes.
The Government are absolutely clear that this principle should be adhered to and they do not consider that it is incompatible with robust audit regimes. Paragraph 21(3) provides for reputable sources of auditors for NHS foundation trusts, and I shall come back to that issue later. However, I understand that the amendments are, to some extent, motivated by a concern that audit regimes should be robust. I am certainly willing to consider further whether there are additional requirements we might specify to ensure that an NHS foundation trust appoints an appropriate person or body as auditor, and to come back on Report with any appropriate amendment.
At this stage, I would not rule out more involvement of the Audit Commission, but I would not rule it in either. I certainly have doubts about any suggestion that NAO involvement is appropriate given its responsibilities, in effect, to stand above this. There is a potential conflict of interest in that area.
I emphasise again—I want to be very clear about this—that it is for the NHS foundation trusts to make the decisions on which specific auditors they choose, however the boundaries may be set for the source from which they make that choice. We are absolutely clear about that.
On Amendment No. 67, if auditors fail to exercise their function satisfactorily, there must be a mechanism for removing them from post. From experience in public bodies I know this to be essential. The board of governors is responsible for the appointment of the auditor and should therefore be responsible for the removal of the auditor. The amendment to paragraph 21(2) is unacceptable as it would take away the power to remove an auditor who is not up to the job.
The suggested new sub-paragraph (3) appears to be aimed at ensuring that a trust does not operate without an auditor. As such, we believe that it is unnecessary. Sub-paragraph (1) makes it clear that an NHS foundation trust must have an auditor, and foundation trusts will therefore need to have arrangements to ensure that a new auditor is appointed on removal of the existing auditor. This can be achieved by requiring the auditor to give notice at an interval long enough for a new appointment to be arranged.
The audit provisions which are of concern to the noble Baroness, Lady Noakes, and are the subject of Amendments Nos. 68 and 69, have been modelled in

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part on the provision of the Audit Commission Act 1998, reflecting the fact that they are public sector bodies. Auditors from the private sector appointed to audit public bodies under the Audit Commission Act must be members of the bodies listed in that Act or another body approved by the Secretary of State.
Similarly, auditors appointed by an NHS foundation trust must be members of the bodies listed in that Act, or another body approved by the independent regulator. The independent regulator can take advice on audit-approved bodies, taking account of who the DTI, for the Companies Act, and the Audit Commission, for public bodies, have advice on.
Our advice is that applying the Companies Act provisions on auditor qualifications might weaken the safeguards we have put in place for audit of NHS foundation trusts. I am advised that the Companies Act provisions require auditors to be members of a "recognised supervisory body", but the independent regulator can ensure that any recognised supervisory body is appropriate before allowing its members to audit NHS foundation trusts, using the sources of advice that I have described.
That is our current position, so we would not favour Amendments Nos. 68 and 69. But, as I said, we will be looking again at the provisions, and I will check this area again before I come back on Report.
Baroness Noakes: Before the noble Lord, Lord Clement-Jones, decides what to do with his amendment, I should like to raise two points with the Minister. I should say first that I am grateful to him for taking these issues away.
The Minister said that if the NAO were appointed, there would be a conflict of interest. I cannot see how the NAO could have a conflict of interest if it were auditing an NHS trust. I think the Comptroller and Auditor-General might find that a rather strange statement.
Secondly, the Minister talked about the advice he had received that the regulator could approve recognised supervisory bodies. Recognised supervisory bodies are set up and approved by the Department of Trade and Industry. There is a long and complex process around that, with lots of checks and balances and oversight. I suggest that the noble Lord might get his officials to research that in a little more detail when he comes back unless he has further information now.
Lord Warner: I am certainly not going to engage in a debate on the latter point with the noble Baroness, as she knows much more about it than I do, but I will take the point away and seek further advice.
If the NAO were to audit NHS foundation trusts, we believe that there would be the possibility of a potential conflict of interest. Under paragraph 22(3) of Schedule 1, the Comptroller and Auditor-General will have rights of access to NHS foundation trust accounts after audit and can report to Parliament on
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these accounts in the auditor's report. It would seem pretty odd if the NAO audited a trust and then had a right to report on its accounts to Parliament.
Baroness Noakes: I suggest to the Minister that that is not a conflict of interest. If the Comptroller and Auditor-General or NAO were appointed, the latter section to which he referred might need modification, but I do not believe that there would be a conflict of interest.
Lord Clement-Jones: In contrast to the noble Baroness, Lady Noakes, I will not get any more technical. The Minister has replied in terms that I understood. The crucial factor is the way that foundation trusts are classified as central government bodies. We must find a way of making sure that the audit process is robust. I thank the Minister for his assurance that he will take that away and think about it, although he is giving no undertakings that the Audit Commission will have further involvement. It is a view well shared in the House that there is considerable confidence in the Audit Commission, and that would be a sensible way forward. In the mean time, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 67 to 69 not moved.]
Baroness Noakes Baroness Noakes moved Amendment No. 70:
Page 112, leave out line 5 and insert "act as an audit committee with the following functions—

(a)to monitor the integrity of the accounts of the corporation, including reviewing significant financial reporting judgements;

(b)to review the corporation's internal control system and risk management systems;

(c)to monitor and review the effectiveness of the corporation's internal audit functions; and

(d)to monitor the exercise of the auditor's functions, including monitoring and reviewing the auditor's independence, objectivity and effectiveness."

The noble Baroness said: Amendment No. 70 would amend paragraph 22(4) of Schedule 1, which sets up a committee of the board of directors to monitor the exercise of the auditor's functions. That sounds like an audit committee, a requirement for which has existed in the private sector for well over a decade and also in the public sector, particularly for NHS bodies.
The Minister will not be interested in this, but in recent times the combined code on corporate governance has reflected amendments from a review not by Mr Higgs but by Sir Robert Smith on the work and tasks undertaken by audit committees.
I said a moment ago that paragraph 22(4) had included something that sounded like an audit committee, and that is what paragraph 27 of the Explanatory Notes refers to. But I regret to say that whoever has drafted this sub-paragraph has no idea what an audit committee is.
The wording of Amendment No. 70 follows fairly closely the main requirements of the latest combined code—although I have shortened it a bit and it is not very different from what existed before. However, the

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whole point about audit committees is that they do not simply sit on top of the external auditors; they consider all the issues related to financial reporting, internal control and risk and they oversee the internal audit function. Internal control, for example, is not a function of the external auditors, who will look only at key aspects of internal financial controls related to the financial statements.
Audit committees in the private sector have very heavy workloads. As the chairman or a member of several, I bear the scars. Paragraph 22(4) does not begin to cover the ground that a foundation trust audit committee should encompass. I hope that the Government will look again at this. I beg to move.
5.45 p.m.
Lord Blackwell: I support my noble friend's amendment. Clearly audit committees in the private sector are governed by the combined code. If we are told that the combined code is not relevant to these NHS trusts, there needs to be an equivalent code setting out what the audit committee should encompass.
My noble friend has covered the major points but I believe that the Minister should consider one other— the particular function in public organisations of the chief accounting officer. Although this point has puzzled me in regard to all public sector organisations, I make it in this context with regard to these specific organisations. Ultimately, it is the chief accounting officer who submits the report on the appropriateness and integrity of the accounts. As far as I can see, in most public sector organisations, the audit committee, however it is constituted, has no formal role in approving the report of the chief accounting officer. So it can do lots of monitoring and reviewing, but it has no formal locus on the report that is submitted. I therefore wonder whether in considering this amendment, the Minister will also consider that there needs to be a paragraph (e),
"to review and approve the report of the chief accounting officer".
Lord Warner: NHS foundation trusts will be expected to apply best practice in corporate governance, taking account of recommendations and best practice in both the public and private sector. For example, the Audit Commission has examined the role of non-executives and the Financial Reporting Council has, as the noble Baroness said, revised the combined code of corporate governance in the light of the Higgs report. We accept that good practice has to be appropriately used by foundation trusts. The Secretary of State in approving applications, and the independent regulator in authorising applications, will be able to ensure that each applicant has developed appropriate governance proposals as set out in the constitution. So that is our position. I do not want there to be any misunderstanding about that or to give any suggestion that we do not approve of extremely good audit practice by foundation trusts.
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I accept that the proposals set out in Amendment No. 70 reflect the combined code and the recommendations by Sir Robert Smith on audit committees. We have no quarrel with that at all. As such, we expect that NHS foundation trusts will provide for their audit committee to have similar functions. However, we have doubts about whether it is appropriate to specify those in legislation. As I understand it, they are not specified in legislation for companies. There needs to be flexibility to take account of the fact that, as we have seen in recent years, best practice advice will change with time and with different types of organisation and should not be enshrined in primary legislation. We do not think that that is much different from the present arrangements in current NHS bodies. In the light of those assurance, I hope that the noble Baroness will be willing to withdraw the amendment.
Baroness Noakes: I thank the Minister. However, I think that he has missed the point that I was trying to make. Paragraph 21(4) states:
"The corporation is to establish a committee of non-executive directors to monitor the exercise of the auditor's functions".
That is very narrow. If that said something like, "to monitor the internal financial controls and audit related thereto", there might not be so much of a difference between us. However, that is the narrowest description of an audit committee that I have seen. The description does not seem to lead either applicant trusts, the regulator or the Secretary of State to examine the right issues. If it should not be so prescriptive as to follow current guidance, perhaps we should say something like, "to establish an audit committee in line with best practice". However, this formulation is wrong. I hope that the Minister will re-examine the issue. I am sure that we will return to it. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Earl Howe Earl Howe moved Amendment No. 71:
Page 112, line 8, leave out "with the approval of the Treasury"
The noble Earl said: In moving Amendment No. 71, I wish to speak also to Amendments Nos. 73 and 74. It is important that we touch at least briefly on the provisions in Schedule 1 which deal with the content and format of a foundation trust's annual accounts.
We see here in the clearest possible terms one of the fault lines in the oft repeated claim that the regulator will be independent of government. One might think that the way in which a foundation trust prepares its annual accounts should be up to it, subject to appropriate directions from the regulator, but not a bit of it. The regulator cannot specify anything to do with the methods and principles according to which the accounts are prepared or the information that appears in the accounts or the form in which they are kept and presented without the prior approval of the Treasury.
I am sure the Minister will say that that is all part and parcel of ensuring proper accountability for public money in public sector bodies. I have no problem with the concept of proper accountability but if the rhetoric were really true that the regulator is to be truly

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independent there is an easy way to preserve proper financial accountability, and that is to give him a general duty to ensure that the accounts of each foundation trust reflect the principles required by the Treasury for the purposes of financial transparency.
Clause 3 defines the regulator's general duties. It is a short step from those general duties to the kind of duties that I have just described. But that is not the approach that we have here. The Treasury has to have, apparently, a direct role written on the face of the Bill relating to the minutiae of the accounting process. That is one example—a small one perhaps—of the way in which Ministers will continue to exert control over foundation trusts. In my humble view it is wholly avoidable. I beg to move.
Lord Clement-Jones: I speak to Amendment No. 75. This has two key elements. Like the amendment of the noble Earl, Lord Howe, it relates to the way in which foundation trust accounts are drawn up and presented. First, the intention is to ensure that the annual accounts of an NHS foundation trust state explicitly the amount of income arising in the relevant year from private charges and, more importantly, the percentage that that represents of the trust's total income.
A second requirement in that context is that there should be a specific audited statement confirming that that is not higher than the relevant percentage in the base year. That enshrines in the annual accounts easily referenced information relating to the NHS foundation trusts' compliance with the provisions of Clause 15(2) of the Bill. We shall no doubt debate the precise terms of Clause 15(2). Changes were made in Committee but the power under Clause 15 restricting,
"the provision, for purposes other than those of the health service in England, of goods and services by an NHS foundation trust"—
effectively the provision of private health services—is the subject matter of the proposed new paragraph (3A) in Amendment No. 75.
The measure seeks to ensure that within six months of the relevant financial year end the annual accounts are published by a foundation trust with a copy posted to each member of its public constituency without charge and that copies are available to members of the public on payment of a reasonable fee. Further, it contains a proposal that foundation trusts should open up their accounts before they are finalised. That would provide a proper mechanism for local scrutiny and financial accountability. That requirement reflects an obligation of local authorities. They are required to open up their accounts before they are finalised; that is, publish a draft statement, make supporting papers available and have the auditor available for questioning. However, as local authorities are obliged to meet transparency requirements under the Audit Commission Act and related regulations, there seems
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no reason in principle why foundation trusts should not be subject to a similar regime. If the desire is that the public should have oversight of a locally devolved NHS structure, they should be given the mechanism that they will need to exercise that effectively. I very much hope that the Minister will look favourably on that provision.
Baroness Finlay of Llandaff: I speak with some trepidation because I am not an accountant, but I am concerned with issues about audit. What provision is there for ensuring that the risk assessment has been adequate in relation to indemnity? How will indemnity issues for the foundation trusts be handled? It may not be the relevant point to ask such a question—if the Minister felt that that were the case I would accept it— but the issue has concerned me throughout some of the debates.
Lord Warner: I am happy to write to the noble Baroness, Lady Finlay, about those issues.
There may be some misunderstanding on Amendments Nos. 71,73 and 74. It is certainly not our intention to re-establish excessive controls. The reason for the present wording is slightly more mundane than the noble Baroness may think. Each year from 2004–05, the Treasury will prepare whole of government accounts, which include information on public bodies and bodies wholly or substantially funded from public money. Those accounts will form an important source of information on how public funds are used. As NHS foundation trusts have a principal purpose of providing NHS services, the great majority of their funding will be from the public purse, and it is right that the Treasury intends to include their expenditure in the whole of government accounts.
It follows from that that it is important that the form and content of NHS foundation trust accounts, as directed by the independent regulator, are consistent with the Treasury's requirements. That facilitates parliamentary and public scrutiny of how public funds are used. The Treasury accounting requirements reflect UK generally accepted accounting practice— the rules followed by private sector companies—to the extent that is meaningful and appropriate in the public sector context. We are not simply trying to go back to controlling any dropping of bedpans, but ensuring that the accounts are in the right format for the Treasury to deliver its commitment on publishing whole of government accounts.
Our views on Amendment No. 75 are not quite the same as those of the noble Lord, Lord Clement-Jones, as he may or may not be surprised to learn. We believe that the amendment is unnecessary and would place NHS foundation trusts and their auditors under a complex and burdensome set of requirements without delivering any additional benefit. The Bill already provides for information to be made available to the public, including on private patient activity. It provides for independent scrutiny of the accounts and

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the auditor's reports, and for monitoring compliance with the private patient cap. I shall say a little more about each of those in more detail.
Lord Clement-Jones: The Minister has moved on, but I assume that he will direct us specifically to the place in the Bill where the obligation to report on private income arises.
Lord Warner: I am about to go through some more detailed exposition.
I shall deal first with information to be made public. I can well understand the desire to ensure that information on accounts is made public, but that is already covered under a number of different provisions in the Bill. The annual accounts of the NHS foundation trust must be tabled at a general meeting of the board of governors, which must be open to the public. In addition, paragraph 20(1)(d) of Schedule 1 and Clause 10(2)(c) jointly provide that the annual accounts are to be publicly available for inspection and copying. Under paragraph 20(3) of Schedule 1, members cannot be charged for copies of the accounts, although others may be charged a reasonable fee. So we believe that there is adequate provision for making the accounts widely available to the public.
It will be for the independent regulator to monitor compliance with the private patient cap. Paragraphs 22 and 21 of Schedule 1 provide for the independent regulator, with HM Treasury approval, to determine the form of accounts. I have discussed that. The accounts will therefore include information that the regulator requires to monitor compliance with the private patient healthcare cap in Clause 15. As accounts are publicly available, the public will also have access to that information.
There is already provision for independent scrutiny of the accounts and the auditor's report. The independent regulator will be responsible for defining and ensuring compliance with the private patient healthcare cap in Clause 15. Under Schedule 1, paragraph 22(3), the National Audit Office can examine the accounts and the auditor's report. They are also sent to Parliament and to the independent regulator under Schedule 1, paragraph 23(4). An additional requirement for the public to examine draft accounts and auditor's reports, and to interrogate the auditor, adds nothing but bureaucracy.
We agree that accounts should be prepared and audited as soon as possible. However, the Bill already includes powers for the independent regulator to prescribe timetables for the preparation and audit of the accounts in setting terms to the authorisation or accounting and audit requirements. In our view, it would be inappropriate to prescribe any arbitrary timescale within which the accounts must be prepared and audited and we would leave this to the regulator.
6 p.m.
Lord Clement-Jones: I shall read carefully what the Minister had to say. Paragraphs 22 and 23 are magical—they encompass a massive amount of detail
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which I cannot see enshrined in their wording. We shall read as much between the lines of those paragraphs as we can and perhaps return to the matter at a future date.
Earl Howe: 1 am grateful to the Minister for his explanation. We have heard a great deal about flexibility in the Bill, but this appears to be a case of extreme inflexibility. I would have thought that there the Bill could be less prescriptive. If all the Treasury requires is certain information, the regulator could specify that that information should be provided. An appropriate duty could then be written in to ensure that he does so. It is not necessary to have multiple provisions on the face of the Bill, allowing the Treasury to dictate the form and content of the accounts in detail.
Nevertheless, there are ways and means of arriving at the same objective. This is not a make or break issue. I am pleased that I raised it and I am grateful to the Minister. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Baroness Noakes Baroness Noakes moved Amendment No. 72:
Page 112, line 14, leave out sub-paragraph (4).
The noble Baroness said: Sub-paragraph (4), paragraph 22 of Schedule 1 provides that the regulator can tell the auditor what standards, procedures and techniques he should use. That is undesirable because it would duplicate standards that already exist for use in both the public and private sectors. Furthermore, I do not believe that the regulator would have the competence to execute the task.
There already exists an Auditing Practices Board currently owned by the Independent Accountancy Foundation and soon to be taken under the wing of the Financial Reporting Council. It sets auditing standards for auditors and is made up of a chairman and 12 highly experienced accountants. It includes non-voting membership from the Department of Trade and Industry. It covers all auditing, including that of public-sector entities. Will the Minister explain why the Department of Health feels it is necessary for its regulator to specify auditing standards? Will he explain how the regulator will acquire sufficient competence to carry out the task? I beg to move.
Lord Warner: The Bill specifies that it is for the regulator to determine what standards, techniques and procedures should be specified for audit. We expect that the independent regulator will follow best practice in setting the audit requirements, and that he will consult widely before doing so. Nothing in this legislation prevents the regulator from getting to the end point that the noble Baroness would like him to get to. We are placing an obligation on the regulator as the person who agrees the authorisations for NHS foundation trusts to determine the standards, techniques and procedures required for audit. Again, the regulator will have access to all the kinds of bodies

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that the noble Baroness mentioned. We are absolutely confident that he will have regard to that in specifying his requirements.
Baroness Noakes: I thank the Minister for that reply, which was not a surprising one. I am detecting that, alongside flexibility, which is one of the themes of the Bill, we have another theme—wheel reinvention in the Department of Health. The department seems to want to do everything itself or through its own appointed agents, including those things that no other body in this country, in any circumstance, would dream of trying to do on its own. I find that extraordinary, and we may return to the matter. I beg leave to withdraw.
Amendment, by leave, withdrawn.
[Amendments Nos. 73 to 75 not moved.]
Baroness Noakes Baroness Noakes moved Amendment No. 76:
Page 112, line 28. leave out "any" and insert "the"
The noble Baroness said: In speaking to the amendment, I shall also speak to the similar amendment, Amendment No. 82.
Under paragraph 23(4)(a), there is a requirement for foundation trusts to lay copies of their annual accounts before Parliament each year. That is accompanied by any audit report thereon, which implies that there might not be an audit report on the accounts. Our amendment is very simple, as it replaces "any" with "the", so that when the body submits an annual report, which it must, the report must be accompanied by the annual audited accounts. I hope that the Minister regards the amendment as simply technical, and that there would not be any circumstances in which the Government would allow foundation trusts to lay unaudited financial statements before Parliament. That is an unthinkable proposition in terms of annual accounts in the private sector and, I believe, in the public sector.
In the private sector, there are strict timetables that require things to be done within certain times, with the effect of concentrating the minds of those preparing and auditing accounts on getting to the end of the process, even if it is proving troublesome. It may be that the Bill would be improved by the addition of time-scales. However, in the mean time, I hope that the Government agree that audited accounts must be laid under paragraph 23 and presented to the board of governors under Clause 26.1 beg to move.
Lord Warner: There may be a misunderstanding here. Auditors will be assessing whether NHS foundation trusts are complying with the Clause 38 "value for money duty"', as well as auditing the annual accounts. They will also be required to consider reporting on any concerns that may arise as they audit the accounts, because it is generally in the public interest to do so. Such a report can be made immediately and can therefore be made separately from the report on the annual accounts.
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It is appropriate that the public interest reports are also made available to Parliament and the boards of governors That is why we believe that Amendments Nos. 76 and 82 are misplaced, as they will not take account of the fact that there are other reports
Baroness Noakes: I thank the Minister for that explanation. I now partly understand where he is coming from—that is, if there is more than one audit report, it should be included. However, I do not believe that it deals with the point that I raised, which was whether there could be a possibility of including unaudited financial statements—that is, the basic audit report on the accounts. As drafted, it appears that the annual report could be submitted without audited accounts. In order to achieve the effect of those being submitted with any other audit reports that happen to exist when the audit report is submitted, I suggest to the Minister that his officials may wish to reconsider the drafting before he comes back on Report. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Earl Howe Earl Howe moved Amendment No. 77:
Page 112, line 38, at end insert—
"( ) The report shall contain a breakdown of the costs incurred by the public benefit corporation running elections and managing the membership. "
The noble Earl: said In moving Amendment No. 77, I shall speak simultaneously to Amendments Nos. 79, 80 and 81. One problem that I have with NHS hospitals running elections and membership lists is that, as I believe I said before, it is a distraction from their core task of looking after sick and injured patients. It is also likely to be an expensive distraction. The Minister will no doubt say to me that one cannot have democracy without paying for it. That is true, but the question which that statement begs is whether in this instance, the game is worth the candle.
Let us set aside for the moment the larger question of whether enfranchisement of the public and staff will really offer empowerment and let us consider the cost to the hospital. The Government have gone to great pains not to lay down a precise blueprint for each hospital's constitution. They are helpfully offering suggestions, but the fact remains that each trust will be responsible for deciding its own constitution and then instructing lawyers accordingly. There will be no escape from very sizeable legal fees, replicated many times over.
Hospitals have no experience of running elections or of maintaining and servicing a constantly changing list of members. Not only will this system require a whole new set of skills; it will require management time. The business of elections can no doubt be sub-contracted out. However, there is no getting away from it—the hospital management will retain the ultimate responsibility for ensuring that the Government's system is being properly run, that members are notified of meetings and that regular bulletins are sent out to members, and so on.
The research commissioned by my party suggests that that activity will cost each and every foundation trust at least £250,000 a year. That is probably a conservative figure in more senses than one. A few days ago, I was speaking to a chief executive of a major teaching hospital—a foundation trust applicant, I hasten to say. He told me that his hospital was working on a figure of £400,000 a year. That sum does not include the cost of his own time, nor, I emphasise, the intangible opportunity cost of taking him away from his main responsibilities of running the hospital. It is all money that is taken away from the care of patients.
The Government are likely to get their way in introducing this electoral system for foundation trusts. But, if that is so, the very least that is needed is for people to know how much money is being devoted to that system. Without that kind of transparency, we shall find the costs of elections mushrooming disproportionately. The figures should feature as standard in every foundation trust's annual report. That is what my Amendment No. 77 proposes.
I move on to Amendment No. 79, which deals with a rather different, and more straightforward, issue. Paragraph 23 of Schedule 1 states that foundation trusts must prepare annual accounts in respect of each financial year; in other words, the year to 31st March. Paragraph 6 of Schedule 2 tells us that the regulator must prepare a report for the Secretary of State on how he has exercised his functions during the previous financial year. The financial year is the basis for both the annual accounts of each foundation trust and the regulator's annual report. Then we read in paragraph 24(3)(c) of Schedule 1 that the reports to be produced by each foundation trust must cover whatever period the regulator decides they should cover. It is not clear to me why provision is made for the annual report to cover a different period from that of the accounts. That is not normal practice. Nor is it clear to me why, for his own purposes, the regulator needs that kind of discretion. The period that his report to Parliament has to cover is, as I have pointed out, the financial year and no other period.
In another place the Minister said that the provision in Schedule 1 paragraph 24(3) was,
"an attempt to give some discretion to the regulator to consider circumstances".—[Official Report, Commons; Standing Cttee E, 20/5/03; col. 201.]
I genuinely do not understand what such circumstances could be nor why leeway of that kind might be helpful to the trust or to the regulator. I should be glad if the Minister could tell me whether I have missed something.
On the basis that the Minister is not minded to meet the point that I have just made for whatever reason, Amendment No. 80 is designed to tighten up what appears to be rather woolly wording in paragraph 25(1) which states that,
"A public benefit corporation is to give information as to its forward planning in respect of each financial year to the regulator".
To be consistent with what has gone immediately before, it seems to me that mention of "each financial year" should be deleted and "a period of time to be
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determined by the regulator's discretion" should be inserted. Without that we could have a situation in which the annual report covers a period that is different from that of the financial year, but forward planning information covers the financial year. That would make little sense. There is also no indication of what information is covered by the provision. It is for the regulator to specify it rather than for foundation trusts to intuit it in some magical way and the Bill should say so. I beg to move.
6.15 p.m.
Lord Clement-Jones: This group contains a rich mix of amendments. They do not appear to have a strong relationship with each other. I want to speak to Amendments Nos. 78, 83 and 107. There has been no hint about the piloting of foundation hospitals— no prior consultation took place—and that is an underlying reason for the strong opposition, not only on Opposition Benches but also on Government Benches, to the effect on local health economies of NHS foundation trusts.
This provision is designed to establish the areas of evaluation that should be built into the review and reporting cycle of foundation trusts and, through the wider status of these documents, promote discussion by members of the foundation trusts and the wider community that support the trusts. That would enable far wider scrutiny at local level across a range of organisations and services. Of course, it would provide material for local authority oversight and scrutiny of healthcare provision and, in fulfilling his duties, it would enable the regulator to have access to information about the effect on the local healthcare economy, which would enable him or her to question and to comment on the effects of the NHS foundation trusts on healthcare and the healthcare economy in his or her area. Generally I believe that the provision of that information would increase the accountability of the role of the regulator through the parliamentary system.
These documents would have considerable benefits. This matter goes to the heart of the concerns that many people have expressed about the impact of foundation hospitals. It is a straightforward way of enabling much greater transparency of the impact of foundation trusts and I hope that this approach commends itself to the Minister.
Baroness Finlay of Llandaff: I support this group of amendments, particularly the amendments outlined by the noble Lord, Lord Clement-Jones. The functioning of a health economy in an area always demands a relatively delicate balance.
The networks for provision of services are reliant on partnership agreements between current trusts. One hopes that foundation trusts would continue to sign up to such partnership agreements; to work with other providers of healthcare to ensure that there was stability of provision; and to provide this seamlessness which people fear may be threatened by the advent of foundation trusts.

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The difficulty with healthcare is that new technologies and techniques emerge, some of which can be extremely expensive. Changes in delivery of healthcare can dramatically alter the way that facilities are used. We have seen that rapid changes, such as keyhole surgery, have altered the face of surgery and increased short-stay surgery. There is also the example of day surgery. So changes that a foundation trust undertakes will have an impact on other providers in the area.
My concern, and the reason that I have added my name to the amendments, is to ensure that such developments occur for the benefit of patient care. Furthermore, in the process of a development, or a planned decrease in services by a foundation trust, consideration must be given to the impact on the whole. My other concern is that this involves public money. If a large amount of money is being used, for example on the electoral processes, that inevitably will divert finance away from clinical care and may in itself destabilise the delivery of services. Therefore, there must be complete openness and transparency about how health economies are being handled.
Baroness Greengross: I also support the amendment. I am worried about balance in a local area of the work of the foundation trust and the work of other perhaps badly funded local hospitals. Somewhere, and I am not sure that this is the right place, the word "equitable"— or "equitability", 1 think it has been called—needs to be inserted, so that groups of people who are perhaps quite expensive and difficult to care for are not left out. That is particularly relevant to mental health patients, elderly patients and others with chronic illnesses, who may, if the word does not appear anywhere, be neglected in this exercise.
There is the balance of groups of patients and there is the balance of funding, which will come up again later. The capping arrangements mean that more money will go to the foundation trust because it is doing its job very well and will take money away from the poor hospital down the road. If we could get that word inserted here so that the whole annual evaluation looks at the local community and at whether everyone who needs access to healthcare is getting it, then we could measure whether the foundation trust is of benefit to the whole community. I feel it is very important that that is part of this arrangement.
The Lord Bishop of Worcester: Amendment No. 78, like the later Amendment No. 143, would allow the concept of the foundation trust to be regarded as the experiment which it undoubtedly is. Being fairly agnostic about the value of the Government's new policy on this matter, it seems to me that it would be much better to create a culture in our society where massive structural change is evaluated and undertaken gradually. Therefore, those points in the Bill and the amendments about those points seem to be very much worth taking seriously.
After all, the alternative is to suppose—as I am sure that the Minister would not want to—that the whole process of foundation trusts comes to be regarded as a
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great mistake. Obviously, the Minister's and the Government's hope is that that will not happen, but were it to happen, a massive lurch of unscrambling would be required for which there is no provision; whereas, if we had built in a culture of examination and reflection, that would surely be to everyone's benefit. Would not the Government find that their proposals had far greater support if they were undertaken in that spirit? So I hope that the Government will consider those amendments, which seem to lay the foundation of a careful evaluation.
I speak in the context of a diocese that has been through the massive controversy surrounding change in medical provision in the form of Kidderminster Hospital, which will be well known to Members of the Committee. I was never persuaded that the policy carried out was a mistake; but I was certainly persuaded that the culture of enactment that allowed for so little public scrutiny, examination and reflection had a major effect on making the project unacceptable—even to the electoral embarrassment of the Government. So the amendments are well worth serious consideration.
Baroness Cumberlege: I, too, support this group of amendments. They refer to issues raised earlier, when we discussed the balance of the health economy. I do not want to go into all that again, because time is getting on, but I support what the noble Baroness, Lady Finlay, and the right reverend Prelate said.
The health service is very complicated; moving one piece of it greatly affects other parts in the local economy. The primary care trusts are now getting under way and there are the new government proposals—which I support—for patient choice, under which patients will be offered up to five providers of healthcare when the GP decides to refer them. All those things will change the face of the health service considerably and may introduce a degree of instability that we have not yet experienced.
I am all for excitement and change—it is good to be pioneering new things—but the right reverend Prelate is absolutely right that we must be absolutely certain what their impact will be. Reporting mechanisms are a modest way to try to assess that.
Lord Hunt of Kings Heath: I fear that I am not in sympathy with the amendment tabled by the noble Lord, Lord Clement-Jones. It would be a drag on each foundation trust to have to go through the motions of writing up a report on that basis, especially as it is ill conceived. From some comments made by Members of the Committee, there appears to be an assumption that foundation trusts will somehow enjoy more favourable financial benefits than non-foundation trusts.
I can see no way in which that will happen. The financial benefits that will accrue through the choice mechanism will apply to all trusts that can offer more services to the public. I do not see how foundation trusts will gain financially over non-foundation trusts. The key advantage has nothing to do with finance— for me, it never has; it has to do with governance. That is why I am so concerned about how the policy has started to develop. The whole point of foundation trusts was to get out of micro-management, because

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those organisations were to be rooted in the local community rather than being agents of the Secretary of State.
I know that there have been arguments about finance and access to capital but that was never an issue that I found especially attractive. We should not think that foundation trusts are about access to more finance, because that is unsustainable and is clearly not going to happen. I worry that if we accepted the amendment tabled by the noble Lord, Lord Clement-Jones, a report would have to be made to the regulator. Surely we are looking for light-touch regulation. We are not looking for a regulator to replace the Secretary of State. The noble Lord wants each foundation trust to report to the regulator annually. That is an open invitation for the regulator to get involved in the minutiae of a foundation trust's activities. We have safeguards. The Bill provides a duty of co-operation, a commissioning process and CHAI. For goodness sake, let us not weigh down the new foundation trusts by having to engage in the bureaucracy of writing a completely unnecessary report.
I have more sympathy with the noble Earl's amendment. I am sure that the breakdown of the costs will be open to public scrutiny. But the noble Earl draws attention to the issue of the costs of the election and membership management. I have always believed that it will cost money. The noble Earl's estimates seem about right. They are certainly the sort of figures that I have heard from prospective trusts. Some foundation trusts have talked about thousands of members, which we would encourage, but there will be a cost for each member. That is inevitable because members will want to engage in communication and meetings, and the elections themselves will cost a great deal.
The noble Earl asked whether it was worth the candle. It was always the intention to create strong community-based organisations. That, for me, would be worth the candle. If, however, the boards of governors are simply to be souped-up patients forums to advise, one must ask about the cost-benefit analysis. The answer to that question must come on Report. The Government need to listen to the debate and come forward with a much more definitive view on what the organisations are about. It is to be hoped that they will confirm that the organisations are to be community-based with a governance structure that allows the community not to advise, but to be part of the decision-making process.
6.30 p.m.
Lord Warner: Before responding to the amendments in detail, I shall comment on costs and support for applicants for NHS foundation trust status. I have already tried to bring out, particularly in our debate on Amendment No. 35, the extent to which support such as the government sourcebook was being developed to help people as they trod the path towards foundation trust status.
It is worth bearing in mind that applicants have already received £100,000 in direct financial support and an additional £75,000 will be made available shortly for the next stage of work. We have given categorical assurances that NHS clinical services are
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not to be adversely affected by the resources for this trust application. It is often forgotten that, as people move towards foundation trust status, they will adapt their own mechanisms for relating to the public. There will be some scope for adapting current processes, and therefore current costs, as the new arrangements come on stream.
In response to the right reverend Prelate, we are doing nothing to suggest that we do not wish to operate on the basis of reflection and thoughtful learning from experience. I am sure that the regulator will take account of the experience of first-wave trusts in the guidance that he gives for future waves of applications. I indicated a willingness to review the governance arrangements in respect of the experience of this first wave. It is not necessarily to this Government's advantage to dwell too long on the Kidderminster election, but if there had been a board of governors in place in Kidderminster we may not have got into that situation and there may have been a happier outcome for all concerned. It is not that such situations do not arise, but a question of whether the new governance arrangements make the handling of those situations easier for local communities.
On Amendment No. 77 moved by the noble Earl, Lord Howe, we agree in principle that the costs of the elections and managing membership should be clear, but the annual reports of each NHS foundation trust, which will be laid before Parliament, will clearly set out those costs. We do not, therefore, believe that the amendment is necessary.
We believe that Amendment No. 79, which would require annual reports to relate to a financial year, is also unnecessary. Of course it is sensible for the annual reports to be prepared over the period of the financial year. However, the regulator has the discretion to ensure that that is the case under paragraph 24(3)(c) of Schedule 1. It is conceivable in the future that a new wave trust has a part year set of arrangements. That is not impossible, so we want to give the regulator some discretion to behave sensibly.
On Amendments Nos. 80 and 81, which would provide for the regulator specifying the content and time period of forward business plans, I have sympathy with the principle that the regulator should he able to specify what information he requires in NHS foundation trusts' forward business plans, but do not think that needs to be set out in legislation. The regulator could already specify his information requirements either by issuing guidance on the content of plans or through requirements in terms of authorisation.
On the time period that forward business plans are to cover, the current legislation ensures that each foundation trust prepares a plan for each financial year which must be drawn up in consultation with the board of governors and which must be made publicly available. That is a minimum requirement to ensure that governors are involved in the annual planning process and that there is accountability to the public. It does not preclude the preparation of plans covering a longer time period for strategic purposes. Indeed, as

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part of the application process, applicants for foundation trust status will be required to prepare and consult on a "service development strategy" setting out their vision and plans for the next five years. We intend that regulations on consultation made under Clause 6(4) will require consultation on an applicant's forward plans. In the mean time, guidance on what should be included in the service development strategy was set out in the guide to the preparatory phase that was distributed to all foundation trust applicants.
We believe that foundation trusts are likely to continue preparing strategic plans to cover mid to long-term strategy development. It would be reasonable for these plans to be drawn up in consultation with the board of governors. Therefore, we do not believe that those particular amendments are necessary.
On Amendments Nos. 78, 83 and 107, which relate to the local health economy and about which several noble Lords have expressed concern, I will briefly take noble Lords through the arguments, which have been touched on in previous discussions. The creation of trusts will support the development of NHS services in the local health economies. My noble friend Lord Hunt brought out some of those points. Foundation trusts will exist to provide and develop healthcare services for NHS patients in a way that is consistent with NHS values. More than 95 per cent of their income will continue to come from NHS commissioning. They are not an island, but are part of that local economy. As my noble friend said, they will be under a statutory duty to work in partnership with other local NHS organisations and social services to deliver integrated packages of care, centred on the needs of patients.
Foundation trusts will be expected to use new freedoms in a way that fits with key NHS principles and does not undermine the ability of other providers in the local health economy to meet their NHS obligations.
Under Clause 3, the regulator will be required to exercise his functions in a manner that is consistent with the Secretary of State's general duties, including the duty to promote and provide a comprehensive health service and to provide clinical facilities to universities with medical or dental schools. CHAI will be able to carry out reviews and inspections of all NHS organisations, including foundation trusts. It will be an independent source of information on healthcare provision across the NHS, including information on the quality and effectiveness of healthcare, availability and access to healthcare and economy and efficiency. CHAI will build up a rich volume of knowledge that will be available to everybody.
Moreover, any review that a trust carried out on another organisation, something that is touched on in one of the amendments, would be unlikely to be welcomed by that organisation. Nor is the NHS foundation trust well placed to carry out such a review. Its reports would not be seen as independent, and their efforts would be better expended in furthering co-operation. The review idea does not seem to be well conceived.
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Strategic health authorities have been touched on. I have described them as the local headquarters of the NHS. They will continue to have a significant role in shaping the overall development of services in their area, backed by the commissioning decisions of primary care trusts.
Against that background, Amendments Nos. 78, 83 and 87 are disproportionate. Creating NHS foundation trusts will not destabilise the local health economy. The amendments are ill conceived: foundation trusts would not be best placed to carry out a review of other NHS organisations. Finally, the amendments are unnecessary because CHAI will carry out reviews of healthcare for all NHS organisations.
Baroness Cumberlege: I want to raise a point with the Minister. I was interested in what he said about Kidderminster. One of the things that we are trying to do in Committee is anticipate how people will react to a different system. Does the Minister agree that the board of governors will actually be a board of supporters? They will be people who act as advocate for their particular foundation trust hospital. That is their purpose; they will focus on that hospital. If it makes sense for the local economy that part of that hospital—a maternity department, say—should be closed or should be merged with another hospital well outside the district, the governors will not be true advocates of the move. They will say, "We want our maternity department in our foundation hospital".
I cannot see how the Minister can think that, in such a case—it runs parallel to the Kidderminster situation—in the new world that we are entering, such conflicts will be better managed, given the new shape of the NHS local economy. They will not be. The changes will introduce further conflict by creating supporters with a narrow focus. In the past, we have tried to think of a health economy in wider terms. That has been the role of the strategic health authorities. The Minister says that the strategic health authorities will still be there, but, under the Bill, those authorities will not manage the performance of foundation hospitals. They are being cut out of the situation.
It is important that we think about the new world and about how people will react and behave. Everyone on the Committee cares deeply about the National Health Service, and we are anxious that it should retain its credibility, that people should trust it and that it should offer the services that are needed.
I think that the noble Baroness, Lady Finlay of Llandaff, made the point that medicine is changing so fast. There are tremendously different practices, and research is coming out that will totally change the face of healthcare in the future. We need a mechanism to make changes quickly in order to meet changing scientific developments. The system that we have now will do the reverse. It will try to maintain the status quo because the board of governors will want to see its hospital as it is now and will not want to see anything taken away from it.
6.45 p.m.
Lord Hunt of Kings Heath: That is the point I have been trying to make. If the boards of governors are not given real responsibility, as the noble Baroness suggested, they will become supporters for the status quo. That is the problem of not giving them corporate responsibility. The more responsibility given to boards of governors, the more responsible they will be. The problem of not giving them any responsibility is that they will be tempted to indulge in the very practices suggested by the noble Baroness. I suspect that we do not agree on the solution to the problem, but that there is a problem I have no doubt.
Baroness Cumberlege: The noble Lord, Lord Hunt, is right. We do not agree; we disagree.
Lord Warner: I do not want to prolong the debate other than to say that I agree with many of the aspirations of the noble Baroness. On the point that she raised as regards a Kidderminster situation, I do not think that a membership organisation producing boards of governors of the kind envisaged in the Bill will handle those situations in quite the same way. They will produce better early warning systems for executive directors of such a trust and will enable a dialogue to take place with the public in a more facilitated way.
The Lord Bishop of Worcester: I begin to have some regrets about introducing Kidderminster into the discussion. But having committed the error—if error it was—it would be a good idea, not necessarily in this debate, for someone to carry out a case study looking at what might have been if such a structure had been imposed. When the Minister made his very positive remarks about how it might have been, I could only shudder with rather vivid memories of what it was actually like.
I am happy to be shown to be wrong. The noble Lord, Lord Hunt, would probably be well equipped to show me that I was wrong. But I wish that I could feel we were in a realm that was less hypothetical and that someone had looked at the steps and had determined what would have occurred. If we are getting to a situation whereby people will be empowered to defend their particular institution, which can be very laudable, it makes me wonder what will happen to the organisation of the health provision of a whole county.
Lord Clement-Jones: It is interesting that this group of amendments has elicited such eloquent speeches from the right reverend Prelate, the noble Lord, Lord Hunt, and the noble Baroness, Lady Cumberlege. In their own ways, each has demonstrated the frailty of the provisions in the Bill and provided the fuel to show why these amendments are needed. The Minister's response is not unexpected. It was extremely helpful that he explained in some detail which other bodies had responsibilities.
As regards strategic health authorities, the noble Baroness, Lady Cumberlege, put her finger on it. They will be disconnected from foundation trusts. They will not have performance management responsibilities.
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We have an amendment coming up which tries to solve the CHAI/regulator relationship. It is interesting that the Minister made great play of the fact that strategic health authorities will have the role. But they will need information and will need to know what impact the foundation trusts will have on local health economies. By one means or another, whether the foundation trusts do the work themselves or whether CHAI does the work, it will need to know whether the foundation trusts are generally operating according to the objectives of the NHS.
In principle, where to put the duty to produce the information and the report is not the vital aspect here. What is most important is that the report should be made. This is a straightforward way for the Government to settle a great many of the concerns about the impact of foundation trusts. As the right reverend Prelate pointed out—I am sorry, I have lost the thread of my argument.
It is also interesting to note that the Government clearly perceive foundation trusts as providing a cure for the Kidderminster hospital fiasco. The Minister has revealed a little more than perhaps he might have done, but now we know why the Government are so passionate about foundation hospitals.
I recognise the mantra of light-touch regulation, spoken by the noble Lord, Lord Hunt, from days gone by. Of course we should have light-touch regulation and fewer regulators, but all regulators will need access to information of this kind. It will allay many of the fears people have expressed about the impact of foundation trusts and I hope very much that the Minister will reconsider his view. Of course foundation trusts are not islands. We do not believe they should be and we agree with the Minister in that respect. However, these reports are not the great bureaucratic mountain that the Minister has alleged.
Earl Howe: I am glad that we have had a meeting of minds on Amendment No. 77 relating to the costs of elections and I am grateful to the Minister for what he had to say.
I am not quite so reassured on Amendment No. 79. I queried why there is a need for the discretion of the regulator on the question of what period the report should cover. The Minister sought to explain that by saying that there could be a part year involved and that that was why the provision has been included in the schedule. However, in paragraph 23(5) part years in the definition of a financial year are already allowed for. The paragraph states:
"In this paragraph and paragraph 25 'financial year' means—

(a)the period beginning with the date on which the corporation is authorised under section 6 and ending with the next 31st March, and

(b)each successive period of twelve months beginning with 1st April".

To me that suggests that discretion is not needed on the period covered by the report because it is already provided for. If the accounts cover less than a year, then the report should cover that same period. I am still in the dark. It is a small point, but I am not completely satisfied.

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I do not know whether it is significant that paragraph 24 refers to "annual reports" rather than reports covering each financial year. However, if I have barked up the wrong tree, no doubt the Minister will correct me in writing. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 78 to 83 not moved.]
Schedule 1, as amended, agreed to.
Clause 2 [Independent Regulator of NHS Foundation Trusts]:
Earl Howe Earl Howe moved Amendment No. 84:
Page 1, line 11, leave out "officer" and insert "office"
The noble Earl said: I shall speak also to Amendment No. 88. The amendments are simple in appearance but quite profound in their significance. I am suggesting that the word "officer" in Clause 2 should be changed to "office" and that, instead of the regulator being a person, the office of regulator should constitute up to five persons, including a chairman, all of them appointed by the NHS Appointments Commission.
I should make clear that this is not some idle flight of fancy. I have taken my cue directly from the Better Regulation Task Force chaired by the noble Lord, Lord Haskins, whose work was most ably highlighted by my honourable friend in another place, Andrew Lansley, when the Bill was debated there. When the report of the task force was published in the summer of 2001 it contained a number of important conclusions, one of which was on the issue of statutory regulators. It stated:
"Our final question proved the easiest: there was widespread agreement that regulators should be run by properly appointed boards".
It also concluded:
"Regulatory regimes should be consistent and predictable. There is a trend away from individual regulators to a board structure—we support this development".
The Government's response, published last year, accepted the recommendations in broad terms. Indeed, both Ofwat and Ofgem have moved to having a board structure, a change which Ministers have welcomed. Ofcom is to be the same.
The change implies, of course, that there are disadvantages in having an individual as a regulator. The reason is that with an individual, if one is not careful, regulation can start to revolve around a personality and the subjective judgment of the individual rather than around a consistent and logical pattern of decision making. When a regulator is a board, it is inherently more likely to avoid inconsistency and arbitrary judgment, and what it does will be more transparent because all decisions are arrived at by open discussion.
These matters are important because, when we create a regulator, there is surely one aim that we should maintain consistently—that is, that the regulator should at all times command public confidence as well as the confidence of the bodies and persons being regulated. I
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do not say that this cannot happen with an individual regulator, but it is more difficult. I am sure that we can cite a number of examples in the privatised utilities where tension between the regulator and those who are regulated has been exacerbated by personalities.
The presence of non-executive directors on the boards of regulators strengthens those bodies on the basis that they are appointed for their expertise. This, too, was the view of the task force. We can see that, as membership of the board changes—as it will—the corporate knowledge and corporate memory of the board among the board members who remain will be important for ensuring consistency of decision making.
I hope that those points will resonate with the Minister. I beg to move.
Lord Clement-Jones: I strongly support the amendment of the noble Earl, Lord Howe, and shall speak to our Amendment No. 89.
The noble Earl has put the matter extremely cogently, drawing on the Haskins report and the Government's response. He also referred to the current changing practice among regulators in fields outside of health. As the noble Earl said, Ofcom is a classic example—and there was no controversy about that when the Communications Bill passed through the House. The Competition Commission is another model, as are Ofgem and Ofwat, to which the noble Earl also referred.
I have had dealings with a large number of different regulators over a period of time. The new system recommended by the Haskins report—and accepted in principle by the Government—of having boards comprising the regulator is vastly preferable. As the noble Earl said, there is the danger of the cult of personality. When the water regulator changed as an individual, it had a major impact on investment decisions and whether the water companies could change their pricing. Single individuals can have a huge impact on the bodies, businesses and organisations they regulate. There is a very strong case for the Department of Health to consider best practice outside the health field.
Even among the existing regulators there is something of a cult of the personality. When a new chairman of a regulatory body is appointed, interviews take place with him and he sets his own stamp on the body. I am thinking of the recent changeover of the chair of CHAI. The two chairs were very different in style; there were interviews galore in the Health Service Journal about the different approaches. For the bodies being regulated or audited in those circumstances, that is not particularly helpful, much as one may value both the previous and the current chair of the body concerned. That is a classic example in the health field.
I hope that the Minister will consider this and will agree that adopting best practice in the field is the way forward.
Baroness Finlay of Llandaff: I support this amendment and the spirit behind it. I should like to speak from the perspective of the professions which

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are to deliver the changes. The professions are screaming out for continuity in the backdrop against which they provide services.
The danger of the cult of the personality has been very well explained. I urge the Government, in the name of continuity and consistency over decision-making, to look very carefully at the proposal in this amendment.
Lord Warner: It is hard to deny the force in some of the arguments put by the noble Earl and other noble Lords. We have been listening carefully to the arguments in another place and elsewhere supporting the establishment of the office of the independent regulator with a board structure rather than a single office-holder. We are awaiting the publication of a report by the Better Regulation Task Force examining the role of regulators who have a wide hybrid role, with economic and other functions. That is due to be published shortly.
If the task force recommends that a board structure might be appropriate for this group of regulators, we are minded to accept this and would bring forward suitable amendments to the Bill on Report to take account of those recommendations. I am happy to give the assurance that we would also consider the proposals in these amendments in parallel with any recommendations of the task force in determining which amendments to bring forward on Report. But I do not want to pre-empt the Better Regulation Task Force report by giving any indication today of what the Government might or might not include in any amendments that we bring forward on Report.
Lord Clement-Jones: Could the Minister give an idea of when the Better Regulation Task Force report might be forthcoming? After all, we are galloping through the Bill, and it would be extremely helpful if the report were available at least after the Committee stage and before Report.
Lord Warner: The noble Lord might have been riding on some rather slow horses if he describes this as galloping. That may explain why he may not have won much money on the Grand National.
As for when the report will be available, the best answer I can give is sooner rather than later. It is not for me to give a date. Let me put it this way: I will be quite surprised if we finish the Committee stage before the report is published.
Earl Howe: I take more than a crumb of comfort from what the Minister has said, even though he has not been able to commit himself. I am grateful to other noble Lords who have weighed in behind my amendments. I suppose that, in the time-honoured words, we shall just have to wait and see. If, for any reason, the Government need nudging on this issue, we shall not hesitate to do so on Report. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Clement-Jones Lord Clement-Jones moved Amendment No. 85:
Page 1, line 11, leave out "officer" and insert "office within the Commission for Healthcare Audit and Inspection,"
The noble Lord said: The motive for wanting the regulator to be under the umbrella of CHAI derives almost entirely from the desire to simplify our current health regulatory system. I was recently at a fringe meeting at my party's conference and made what I thought was the fairly moderate statement that more than 20 bodies are entitled to inspect NHS hospitals. The particular regulator involved said, "No, more than 40 can do that". A phenomenal number of bodies are entitled to inspect NHS hospitals. It is quite interesting to note that a new body seems to be set up whenever there is a problem. Only in very recent times, we have had the National Patient Safety Agency, the National Clinical Assessment Authority and so on.
The Bill sets up a potentially very powerful regulatory body. However, there are many ways in which the role of this regulator conflicts with that of CHAI. If the roles do not conflict, there will certainly be considerable overlap. The noble Lord. Lord Hunt, pointed out earlier that we have all these regulators. He is right. We have too many regulators. The Minister referred to CHAI's duties in terms of the performance and impact of foundation trusts. That was designed to reassure us that all was going to be well and we did not need any further provisions in the Bill. However, that is going to cut across the new independent regulator as set out in the Bill.
I believe that there is a very strong case for simplifying the system. I wish that we could go much further than simply this amendment. There are many reasons for telescoping quite a number of the new bodies, putting them under CHAI and some of the other bodies and consolidating the whole system. At the moment it is vastly over-egged. Consequently, hospital managers spend an awful lot of their time looking at the nature of inspection and audit in a very unhelpful way rather than at how best to deliver the best outcomes for patients. I believe that the burden of regulation is far too great, not because of individual trusts' duties but because of the sheer number of regulators. I beg to move.
Lord Hunt of Kings Heath: I wonder whether the noble Lord, Lord Clement-Jones, could perhaps answer one or two questions about his amendment. He says that he will put the regulator under CHAI, but surely he sees the tremendous risk that the regulator will then engage and indulge himself or herself in all the activities with which CHAI is concerned. There is a real risk here that we will replace micro-management by government department and Minister with micro-management by regulator unless we ensure—and I know that the noble Lord mocks me for saying there should be light-touch regulation—that the regulator limits his intervention to those issues where the public interest clearly suggests that a foundation trust is seriously going off the rails. The last thing we want is for the regulator to intervene in all the minutiae with which a foundation trust is concerned.

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As we know, CHAI's reports already cover a huge amount of activity. The risk must be that that will influence the regulator to intervene rather more than I suspect he would if he were truly independent and outwith the CHAI mechanism. I just wonder whether the noble Lord could perhaps reflect on that.
Lord Clement-Jones: I can certainly reflect on that. There may well be a risk, but the issue is a practical one. The regulator will need quite a lot of the information that CHAI will produce in order to assess what he needs to do in performance of his duties under Clause 3. He will need that information from CHAI. Therefore, duplicating the gathering of that information seems to me entirely unnecessary if the regulator is part of CHAI, as is envisaged.
The question of light touch is a cultural issue. I hope that CHAI, and the regulator as part of CHAI, will adopt a light touch. I do not think that one can legislate for that. Earlier I mentioned the way in which different chairmen of what was CHI adopted a different approach to inspection and audit. I do not envisage the dangers occurring to which the noble Lord, Lord Hunt, referred; the practical arguments still remain.
Baroness Noakes: I hope that the noble Lord, Lord Hunt, will help the Committee by indicating where in the Bill there is reference to light-touch regulation. Where is there any kind of guarantee on that? I am aware that that is what the noble Lord, Lord Hunt, desires but, as I read the Bill, there is nothing in it to stop the regulator acting in a heavy-handed manner. If that is important, perhaps it is another issue that we should consider in more detail.
Lord Hunt of Kings Heath: There is no doubt that within the construct of the Bill the person or board who is appointed will have enormous discretion on how they carry out their task. The noble Lord, Lord Clement-Jones, suggests that Clause 3 means that the regulator will require an enormous amount of information to determine whether each foundation trust is operating in accordance with the general principles that the Secretary of State is charged with under the Health Act. I believe that the person who is appointed as regulator will decide whether he wishes to be inundated with information or whether he will operate under a reporting by exception basis. I hope that the regulator will choose the latter option and that he will intervene where he must but will exercise caution on responding to every minor issue, complaint or representation that is made to him. Unless the regulator operates in that way, it will be very difficult for foundation trusts to take advantage of the new governance arrangements.
Lord Warner: The remarks of my noble friend Lord Hunt are very much to the point. The role of independent regulator is distinct from that of CHAI. They are required to co-operate with one another under Clause 54. That does not in any way prevent them
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sharing information. Indeed, the requirement to co-operate should avoid a situation in which they duplicate information collection. However, they have quite separate functions that must be exercised in an independent and separate way.
CHAI's functions relate primarily to the inspection and review of healthcare. It has wide powers—we shall debate some of those—to develop and implement policy for carrying out reviews and providing advice to healthcare bodies on healthcare improvement. But CHAI's executive powers of intervention are very much limited to decisions about registration of private providers.
On the other hand, the NHS foundation trust regulator's remit is to set and apply the statutory regime for foundation trusts. He has extensive powers but can use them only in defined circumstances—setting terms of authorisation and intervening on failure—with wide powers of discretion in how he applies those powers. He has a limited role in setting and determining policy as the aims he is to achieve are set out in the Bill.
The NHS foundation trust regulator is like a referee whereas CHAI seems to me to be very clearly a reviewer and investigator. Amalgamating those two roles does not seem to make much sense. We believe that they need to remain separate.
I should correct something that I said this morning. I am told that at around 11.30, in discussions on the governance arrangements, I said that in one case well over 1,000 people came forward just to be governors. Clearly, either I was not awake or I got carried away. I intended to say that well over 1,000 people came forward expressing an interest in being members. I apologise, and I wish to put the correction on record.
7.15 p.m.
Lord Clement-Jones: I thank the Minister for that reply. The Department of Health has given birth to a new baby, and I understand that it is very keen to keep it alive and bouncing with its role as set out in the Bill. However, I shall make a prediction. We have had great debates on a number of NHS reform Bills when the Government either did not include certain services to be regulated by CHI, or considered that there should be another regulator, the NCSC, for independent acute healthcare. We on these Benches argued strenuously for the logic of having a single regulator. Finally, after four years, we find ourselves with that single regulator coming about for acute healthcare.
The department will find itself extremely frustrated in having the role of regulator on one hand and CHAI on the other eventually. The Minister makes some case for the separation of the two in terms of their functions but, in terms of the data that they will need, the contact that they will have, and how they will operate, it will be increasingly obvious that there needs to be one body. If foundation hospitals come about, I shall look forward with great interest to the development of regulation on the subject. In the meantime, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Earl Howe Earl Howe moved Amendment No. 86:
Page 1, line 13, leave out "Secretary of State" and insert "Special Health Authority designated under section (Appointment of the independent regulator and appointments to the CHAI and the CSCI)"
The noble Earl said: I shall speak also to Amendments Nos. 90, 92, 94, 98, 100, 101, 102 and 467. One main feature of the regulator is independence, as the Bill trumpets, yet the Bill also vests the power of appointing the regulator with the Secretary of State. If the regulator were to remain an individual, at some indeterminate time in future—not now—it would be possible to imagine a political placeman being appointed rather than someone with unbiased expertise for the role. We need to avoid that possibility at all costs.
To the extent that the responsibilities of the regulator are shared around a broad table, that risk diminishes. However, the risk would be dramatically reduced if the board or individual were to be appointed by an independent body—the NHS Appointments Commission. My suggestion is that the commission's role should be written into the Bill and, incidentally, that the commission should also be responsible for appointing the chairman and members of CHAI and CSCI respectively. That is a debate for another occasion, however. I beg to move.
Lord Clement-Jones: I shall speak to Amendment No. 87. Very similar provisions apply. The regulator should be appointed by the NHS Appointments Commission. I am sure that in practice that is the case, but it should be enshrined in primary legislation. It makes sense and is a reassurance if we are to have a single regulator, and indeed if we were to have an office of regulators the same would apply. I very much hope the Minister will consider adding the provision to the Bill.
Lord Warner: Putting the matter in context, Clause 183 will enable the Secretary of State to delegate responsibility to the NHS Appointments Commission for all or part of his duties to appoint members to public bodies that have functions relating to health, social care or the regulation of professions associated with health or social care, including CHAI and CSCI. We will debate that provision at some later stage. In addition, Clause 183 and Schedule 12 permit the appointment of lay members of health professional regulatory bodies. That clause and schedule indicate the way, broadly speaking, the Government are moving in such appointments.
Under Section 16D of the 1977 Act, the Secretary of State currently has the power to direct a special health authority to undertake any of his functions relating to the health service that he specifies in directions. Under the terms of this power, the NHS Appointments Commission has already been directed to make public appointments to a number of national bodies which have functions relating to the health service. However, the current power does not extend to appointments to bodies whose functions extend beyond the health service. That is why we are making the change.
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Against that background, we do not believe that public appointments are automatically delegated to the NHS Appointments Commission. The Government believe it is sensible to delegate specific appointment-making powers on a case-by-case basis. It is possible that in some cases Ministers, not only in this Government but in future governments—if one can even contemplate that prospect—may wish to delegate the initial selection and sifting processes, but not the final appointment. Or Ministers may wish to retain direct responsibility for certain appointments, or in some cases take back responsibility for appointments that have previously been delegated.
Notwithstanding those arguments, the Government believe that the vast majority of national appoiniments for which the department is responsible will be delegated to the NHS Appointments Commission, with only a small proportion of appointments being made directly by the Secretary of State.
The Government intend that the Secretary of State will appoint the independent regulator for NHS foundation trusts on first establishment. It is of course possible in the context I have outlined that he may in future consider delegating appointments of the regulator to the NHS Appointments Commission.
The position regarding CHAI and CSCI has already been made clear and no doubt we shall return to those issues at another time. We do not believe that at this time the Secretary of State wishes to delegate the appointment of the regulator to the NHS Appointments Commission. He still has the responsibility for determining the terms of the office of that regulator, including remuneration and other allowances and pension. We believe that for the moment these functions should belong to the Secretary of State, as the regulator will be paid for using public funds for which the Secretary of State is ultimately accountable. In those circumstances, we do not believe that it would be appropriate to transfer the appointment process to the NHS Appointments Commission.
Furthermore, we do not believe that a fixed term of appointment should be specified in primary legislation. The Secretary of State over time will need to take account of the background and demands of the post at the time when an appointment needs to be made and consider an appropriate period of appointment based on an anticipated work programme. That applies in particular in the years after first establishment of NHS foundation trusts when the demands on the independent regulator may change as a number of these trusts increase. We would prefer not to specify a particular time in legislation now.
Lord Clement-Jones: I know that we are anxious to move the business on, but I must express my disappointment in the fact that the Secretary of State will keep his hands on the appointment of the regulator, despite the fact that the NHS Appointments Commission will make quite a lot of other appointments. No doubt that will help us determine our approach to the clause stand part debate, which we all look forward to.
Earl Howe: I share the noble Lord's disappointment. A power to delegate is not sufficient safeguard against

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the sort of situation to which I referred earlier. It could have very damaging consequences. A power to delegate is not a requirement to delegate—the two are very different. I feel sure that we will return to this issue. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 87 to 89 not moved.]
Baroness Andrews: I beg to move that the House do now resume.
Moved accordingly, and, on Question, Motion agreed to.
House resumed.

Employers' Liability Insurance
7.26 p.m.
Lord Harrison Lord Harrison rose to ask Her Majesty's Government what measures they will take to alleviate the recent rise in employers' liability insurance, required for small and medium-sized enterprises by insurance companies.
The noble Lord said: My Lords, I am very pleased to introduce this short debate on employers' compulsory liability insurance and to highlight the devastation that the recent steep rise in premiums has had on small businesses throughout the land.
At the spring meeting of the All-Party Group on Small Business, we heard some dreadful stories of otherwise viable small businesses going to the wall because of the exorbitant hikes in insurance premiums visited on them, often at short notice and with slender explanation or justification.
A scaffolding firm in southern England, employing seven people with a turnover of £300,000 went out of business after sustaining a 500 per cent hike in ELI and public liability premiums. In the previous decade, the company had made no insurance claims; its employees regularly attended CITB-accredited courses and were trained in first aid and in health and safety; moreover, the firm boasted a clean health and safety audit. All that was to no avail. An exemplary small business was gunned down by the enemy aircraft fire of explosive insurance premiums.
A second firm in Cornwall ran a successful care home, with nine staff and a turnover of £300,000. That firm had also had no claims since the start of its business some eight years before. It, too, was exemplary in putting its employees through relevant NVQ courses and health and safety training. It, too, was torpedoed below the water line by a rise in premiums from £2,000 to £6,000. As a consequence, it was forced to close down for two weeks until it could find alternative insurance, embarrassing the firm as well as the local social services, which depended on it.
The insurance industry insists that the huge rise in premiums is attributable to persistent underwriting losses amounting to £1 billion in the past three years; compensation inflation which has scaled double
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digit rises in the past decade; catastrophic events such as 9/11; and a collapse in investment returns. Those reasons are hardly the fault of the small businesses that seek the insurance. Indeed, were I being impish, I might ask the insurance companies whether they were properly and sufficiently insured.
To that list may be added other factors feeding the rise in premiums: lack of capacity in the UK insurance market due to poor investment conditions; poor underwriting; lack of recognition of quality risk-management procedures; the abandonment of the limits of indemnity in employers' liability cover; the fact that some traders, such as roofers, lack the opportunity to wrap up ELI in, say. their property insurance; and the loss of mutuality from the UK insurance market.
However, I am heartened that the insurance industry is beginning to address some of the problems thrown up by the hike in premiums and to offer solutions. Let us take the example of renewal periods. The firms that I cited earlier were imperilled by the failure to be given sufficient notice of impending premium hikes. The small firms' associations suggest that a month is the minimum period needed. The insurance companies, in the form of the ABI, are advising their members that three weeks should be an advisory minimum. Do the Government agree, and should that be statutory?
Secondly, small firms regret that their premiums are fixed without reference to proper risk assessments for individual firms. Happily, the insurance industry is now engaged with various trade organisations to fashion a more sophisticated method of analysing risk for determining final premiums.
Thirdly, small firms complain that insufficient credit is given to their excellent no-claims records and the maintenance of good health and safety and environmental standards. Will the Government strengthen the need for such assessments, thereby encouraging best business practices, as well as cheaper premiums?
Fourthly, do the Government agree with the view expressed by the insurance industry that Britain is poor at rehabilitation—that is, at getting people back to work quickly after they have sustained a workplace injury?
Finally, are the Government sympathetic to the insurance industry's desire to separate long-tail from short-tail occupational disease problems? If they are, how might such a long-term contingency be funded?
Perhaps I may now float some other suggestions which might help. Can the Government do more to improve investment in the insurance and reinsurance industries so that capacity is increased, competition sharpened and premiums reduced? What can the Government do to encourage compulsory but non-selective arrangements for insurance among affinity groups—typically trade or small firms' associations— so that premiums are lowered and burdens shared?
What can the Government do to encourage new mutual insurers, perhaps with some government pump-priming, to assist authorisation by the FSA of effective reinsurance programmes? Could that same arrangement apply to new captive insurers, including

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government themselves through an appropriate independent government body, helping SMEs to gain insurance while laying off claims to the major reinsurers? It would be a kind of small firms insurance company analogous to the current student loans company.
Can the Government influence major UK liability insurers to explore more deeply the opportunities arising from co-insurance arrangements? Can the Government help to promote low-cost risk management? Can we, for example, encourage the use of local authority and government health and safety officers to certificate firms' potential insurance risks? Such experts are already working at the coal-face by inspecting relevant premises. Finally, can the Government encourage—even legislate—to ensure the existence of no-claims discounts, which, to my utter astonishment. I understand to be almost wholly absent from the insurance market?
I now turn to the small businesses themselves, whose representative organisations must shoulder the responsibility of ensuring that their members do, indeed, take out sufficient insurance to protect their businesses. It is alarming that some 1 per cent of firms fail to take out any kind of ELI. Worryingly a report in yesterday's Financial Times suggested that UK firms have purchased an average of 19 per cent lower limits of cover in the past 12 months because of the hike in their premiums for general insurance.
As an aside, can the Minister explain why the percentage of payroll paid by British firms for employer liability insurance is significantly and surprisingly lower than that paid by our EU partners? Britain's 0.2 per cent plays France's 2.25 per cent, for example. That looks like a competitive advantage. Is that right? It would be helpful to know. These statistics were provided by the Association of Personal Injury Lawyers which, in turn, I asked to justify the fact that some 40 per cent of compensation monies go to the lawyers rather than to the claimants. That seems to be an unjustifiable imbalance.
While I am on terrain legal, I ask the Government to comment on the role of the courts which, of course, have been instrumental in fostering inflated double-digit claim settlements. Has their role featured in the Government's recent survey of employment liability insurance? I know that the Government reached some interim conclusions in June of this year—they also published an agenda for action—but can my noble friend say when the surveys will be completed and indicate the tenor of their final thinking? Finally, will the Government expand on the business impact of their plans for the recovery of NHS costs for accidents in the workplace and for corporate manslaughter?
We have a Government wholly committed to small businesses and an insurance industry that wants to be so. Proper insurance is the social right of all workers and the bedrock of the healthiest of small firms. We can and must all work together to tame the unguided missile of exploding insurance premiums that has recently, and so unwarrantably, grounded too many of Britain's finest small firms.
7.37 p.m.
Baroness Byford: My Lords, business insurance is normally well outside my remit. As a result I have spent some years in blissful ignorance of its importance and of the difficulties facing industry today. However, recently, like the noble Lord. Lord Harrison, I have begun to hear tales of small firms going under because they could not find the money to pay a hugely increased premium for statutory cover. Most rural firms are small to medium-sized businesses and I was concerned to realise that some of them appear to be in serious difficulty over paying for cover. Also insurance costs form a part of the increased burden on agriculture and from time to time people have muttered to me about it, but as the weeks go by the muttering is becoming stronger.
I am grateful to the noble Lord, Lord Harrison, for supplying an incentive to find out about this subject and to express our thoughts tonight. Insurance companies calculate each firm's premium against its wage bill modified or increased by accident records from previous years. Companies in high risk activities pay more than the rest. The National Federation of Roofing Contractors has searched its survey data for me and the results show a rise in premiums for an average two-man firm from £595 in 2001 to £1,600 in 2002 and to £2,050 in 2003. That is a 250 per cent increase in two years for very small firms. It has calculated the increase across all firms in the federation as 255 per cent, and rates are set to rise even further.
The Association of British Insurers has emphasised that investigations by both the Office of Fair Trading and the Department for Work and Pensions have cleared the insurance industry of wrongdoing. The rise in charges is due to a number of factors, any one of which would have been unsettling but, coming together, they have proved literally irresistible. Rising claims and pay-outs have averaged £1.47 for every £1.00 paid in premium. Levels of compensation payments granted by the courts have increased. The September 11th and other disasters, natural as well as manmade, have caused these increases and steep falls in income from investments.
As the problems have mounted, the numbers of investigations have begun. If small businesses, particularly those with a higher than average accident or health risk, are to survive these studies must yield practical results, supported where necessary by government.
Farmers are constantly urged to diversify. Agriculture, sadly, has a high accident rating. It also has a poor health record when one considers zoonoses and chemicals such as organophosphate. In many cases diversification takes the form of concentration on particular activities—such as, in farming, using tractors with a variety of heavy implements, hedging and ditching, tree felling and lopping, contract milking and sheep rearing. Too often these are done by one person working alone.
The Association of British Insurers is looking into the possibility of funding insurance against occupational disease separately from employers' and public liability. Is

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the Minister in a position to assure us that the Government will consider sympathetically any such proposals?
One of the worst statistics given to me is that 40 per cent—more than one-third—of the cost of claims goes on legal expenses. The noble Lord has just referred to that. I wish I understood how that can be, but perhaps the Minister will reassure the House that any legislative changes found necessary to reduce this factor will be speedily introduced to a timetable which we can all agree.
I understand that work is under way to develop a system of injury compensation that does not deter the claimant from the active pursuit of rehabilitation. It is surely a nonsense that claims should be deferred until it is considered that the results of the injury cannot be wholly cured. How much better it would be to settle a claim for the occurrence of the injury; to encourage rehabilitation, perhaps by paying some of the expenses; and to resort to court only if total recovery has been proved an impossibility after a full course of the correct remedial treatment. Will the Minister confirm that the Government will look favourably on such a proposal?
I turn briefly to another issue which is not directly related. It is a hugely important issue. It is yet another cost on the horizon for small and medium-sized businesses; namely, the Environmental Liability Directive. UK legislation already requires businesses to adopt a responsible approach to their potential environmental risks, but the proposed directive will require a stricter responsibility. It is argued that the directive must contain a reasonable and damageable framework that is quantifiable and insurable. The present proposal would expose businesses to unlimited liability claims for damage to the biodiversity that is difficult to define and which is not quantifiable. Smaller businesses risk facing disproportionate and ruinous claims against which they may be unable to insure themselves. Insurability is a prerequisite for any form of liability.
I do not apologise for raising that issue tonight because the directive is likely to hit us before the end of the year. That is on top of the problems that the noble Lord, Lord Harrison, has so clearly defined tonight.
I am sure that noble Lords taking part in tonight's debate are strong supporters of small and medium-sized businesses. We should be seeking to ensure that as light a touch as possible is imposed—the noble Lord, Lord Harrison, rightly used the words "devastating effect"—in particular on those who are going from a one-man business to taking on others. It is a huge leap. They have to cope with additional regulation, extra taxation and time-consuming costs.
The noble Lord, Lord Harrison, has given us the opportunity to highlight some of these difficulties which face small and medium-sized businesses, for which I thank him.
7.44 p.m.
Lord Haskel: My Lords, I, too, congratulate my noble friend on initiating this timely debate. The difficulty about employers' liability is not simply a matter of the insurance market not working; nor is it purely a matter of concern to those employing people or running a business. No, the problem with employers' liability insurance is yet another manifestation of how far away we are from developing a civil society: a society in which there is a fair balance between rights and responsibilities.
The slogan at the Labour Party conference last week was,
"A Fair Future for All".
Surely, that was about creating a fair society that believes in social justice. The Tories agree. Noble Lords opposite will have noticed that the slogan at their party conference was,
"A Fair Deal for Everybody".
Building social capital from fairness, as Professor Putnam and others have put it, is obviously high on the political agenda.
So what on earth has employers' liability insurance got to do with all that? It is quite simple. To his list of causes, my noble friend Lord Harrison could have added the flourishing compensation culture as one of the main reasons for the increase in liability insurance premiums. That culture emphasises the cult of the individual; rights, rather than responsibilities; and anyone who wants to show restraint is told that they are foolish because everyone is at it.
Of course we all strongly support the principles of access to justice and fair compensation for injured parties. Yet a fair society requires people to show restraint. A fair society requires us to show concern for each other, community spirit, common values, tolerance and respect. That is what social capital is all about. But all that seems to be forgotten where employers' liability is concerned.
It is this absence of individual responsibility that stimulates the blame culture, with the result that every accident or misfortune becomes a claim and society is the loser. At a fringe meeting at the Labour Party conference, Mr David Hooker, a senior executive at Norwich Union, made that point and told us that £10 billion per year is paid in compensation. We are all paying, because that is equivalent to £1,000 per household. He also said that 40 per cent of that goes on legal costs. It seems that the blame culture and the adversarial nature of our legal system are feeding off each other to create a less fair society.
In his speech to the party conference, when talking about the exploitation of asylum seekers, the Prime Minister spoke about the legal aid gravy train. Is there another legal gravy train that exploits people who have had accidents or misfortunes? Judging by the advertisements in the press, on radio and on television seeking people who have had accidents or misfortunes at work, there could well be. However, the agreement announced yesterday between solicitors and insurance companies on fees relating to road traffic accidents could be a sign that some good sense is emerging.

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But what is that to do with the Government? We are not a nanny state. No Government can be the insurer of last resort. Surely it is up to people to run their businesses and organisations properly so that accidents do not happen. It is up to them to work with insurance companies and the Health and Safety Executive to provide decent standards so that misfortunes do not occur.
Of course, conscientious and responsible employers should be rewarded with lower premiums. I am delighted that work is going on to achieve that directly with employers and through their trade organisations. Rightly, work is being done to reduce losses by speeding up the way claims are settled so that those who have suffered accidents can be rehabilitated far more quickly than at present. I agree with my noble friend and the noble Baroness, Lady Byford, that quick rehabilitation could be a way of reducing premiums. In the same way that employment tribunals have speeded up and cut the costs of disputes relating to employment, so perhaps compensation tribunals can do the same for employers' liability claims.
I am delighted that the Better Regulation Task Force is reviewing the compensation culture. In doing so, I hope that it will review the whole business of admitting liability. Saying sorry comes naturally to most of us. Aggressive lawyers and their sometimes unqualified intermediaries have made employers very nervous of saying sorry and showing concern when accidents happen in case that is interpreted as admitting liability. It does not and it should not. Although often apologies and concern are all that is required, employers are nervous of showing it, and lawyers advise against it.
I agree with my noble friend Lord Harrison that the long-tail disease risk is a difficult problem. A solution must be found incorporating a cut-off date or a separate fund. Industry will then be able to move forward.
So is employers' liability insurance a matter for the Government, or is it best left to the insurance companies, employers and the Health and Safety Executive? I think it is a matter for the Government, not because they should take financial risks, but because, as I tried to show in my opening remarks, the issue stands in the way of a fairer civil society. More litigation means less mutual trust. Accidents and misfortunes occur, and a fair society requires employers and employees to take responsibility for them, yet at the same time to show restraint. After all, the Government have an anti-social behaviour policy that is about the same thing: a fair civil society. In fact, we are currently working on the Committee stage of the Anti-social Behaviour Bill in your Lordships' House. We are trying to achieve the balance between intrusion into private life, regulation and personal liberty. We are legislating because we all agree that anti-social behaviour reduces the social capital on which our society depends.
The blame culture manifested by the difficulties relating to employers' liability is a more sophisticated form of anti-social behaviour. After all, it is part of our
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progressive agenda to move towards a fairer society where we balance our rights with responsibilities and duties. So I hope that the Minister will tell us what the Government intend to do. Do they see it as. people abusing their rights or justifiably exercising their rights?
7.53 p.m.
Lord Hunt of Wirral: I, too, congratulate the noble Lord, Lord Harrison, on securing the opportunity to debate the subject of employers' liability insurance, particularly in the context of the vital sector of small and medium-sized enterprises.
I wish to follow the lead of the noble Lord, Lord Haskel, and to point out, after his very careful and considered speech, that he is right. We must not see the perceived employers' liability crisis in isolation. I see it as he does; that is to say, as part of a more sinister threat, namely the compensation culture.
We have already debated the employers' liability marketplace. Reference has been made to the detailed report of the Office of Fair Trading, which found that premiums had risen substantially in 2002 at an average of 50 per cent for employers' liability, 30 to 40 per cent for public liability and 30 to 60 per cent for professional indemnity. They reported that there were also wide variations in the increases observed, with some premiums rising by over 200 per cent. That is very much in line with what my noble friend Lady Byford said. But, as my noble friend pointed out, both that report and the one by the Department for Work and Pensions concluded that the evidence was of market adjustment rather than of market failure.
Employers' liability, therefore, must be viewed—as the noble Lord, Lord Haskel, pointed out—not alone, but in the broader context of how we award damages and compensate those who have been injured. Here I commend the work of the Association of British Insurers and the International Underwriting Association, which have conducted ground-breaking research, not the least of which is the bodily injuries study. That study recognised the problems that have arisen as a result of the double digit rise in the total cost of compensation over a lengthy period of years.
The noble Lord, Lord Harrison, pointed out, very fairly—and how well briefed he was on the subject— that there have been persistent underwriting losses of nearly £1 billion in the past three years. That, allied with the double digit compensation inflation and a collapse in investment returns, has resulted in the situation that we are now debating. However, I add one rider: if we compare the UK with other jurisdictions in the developed world, we still have one of the lowest costs of workplace compensation as a percentage of payroll.
How right the noble Lord, Lord Haskel, was to point out the environment around which we are now speaking; for example, the abolition of civil legal aid and the introduction of conditional fee agreements, in which the insurer has to pay not only the success fee but the insurance premium. The insurers therefore

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have to pay the costs of the claims that they win as well as those that they lose. I pointed that out to the noble and learned Lord the former Lord Chancellor when we debated the introduction of conditional fee agreements, and now we are sadly seeing the results— 40 per cent of compensation, as has been pointed out, is paid out in claimants' costs. Those outrageous advertisements on television saying, "Where there's blame there's a claim" and "It won't cost you a penny", have cost the individual claimants, consumers generally and the country dear. The Courts Bill is now going through the House, which may result in increasing costs.
As one of the leading insurers has pointed out to me:
"The extent of capital allocation required for product classes which are very capital intensive commerce—such as EL—will certainly come into particular focus as a result of the UK market's approach to economic (risk-based) capital requirements due to be adopted by carriers in 2005".
For all sorts of reasons, therefore, the picture that lies ahead is a serious one and it is going to get worse.
What can be done? I have the honour of being chairman of the Case Management Society for the United Kingdom and a trustee of the British Occupational Health Research Foundation. We certainly believe that rehabilitation is part of the answer in tackling this problem. Please can greater encouragement be given to early and prompt rehabilitation and assistance programmes? We may need legislation on that. Any such initiatives have to be led by the employer with government support and, if needs be, new legislation to encourage greater use of rehabilitation by the injured parties and their advisers. Such schemes will have to be closely linked with any entitlement to social security benefits.
Other countries in continental Europe have a far less adversarial compensation system and those injured get early and prompt rehabilitation and treatment. Surely that is what we want to see in this country.
I have also just chaired the annual conference of the Institute of Risk Management. Reference has already been made to the fact that we must do something about the rising cost of injuries at work and in the workplace and of sickness at work. As the TUC has pointed out on many occasions, the bill is enormous. Risk management presents us with part of the answer. One of the UK's leading general insurance brokers said that we needed to ensure that when insurance companies considered cover for individual companies, they took into account the extent of the risk management procedures in that company. They said:
"There should be a new focus on risk management. Independently measured and approved standards should be introduced, giving insurers evidence that an insured organisation works to minimum standards".
That, of course, as was pointed out, must mean something.
However, I am concerned that some companies have not taken out employers' liability insurance cover. It is compulsory, and there is a criminal offence. However, that is not sufficient. Failure to take out appropriate EL cover can incur a fine of up to £2,500,
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but there is no civil duty on the company or its directors, with the result that an injured employee has no remedy against the directors personally if they fail to take out employers' liability insurance. I hope that the Minister will agree to explore that.
We must consider employers' liability insurance not in isolation but in the broad context of our compensation culture. As the noble Lord, Lord Haskel, pointed out, we now have David Arculus's Better Regulation Task Force examining the compensation culture. It started its review last week. I hope that that report, together with the second report from the Department for Work and Pensions, which is due out in November, will enable us to bring order and clarity to the chaos. I believe that I speak for all noble Lords when I say that that must be done.
8.2 p.m.
Lord Laird: My Lords, I join other noble Lords in thanking the noble Lord, Lord Harrison, for initiating the debate. He has done us a service.
Small and medium-sized enterprises represent nothing less than the mainstay of Northern Ireland's economy. The Federation of Small Businesses has estimated that 99 per cent of businesses operating in Northern Ireland fall into the SME category. They provide 79 per cent of the Province's employment and account for 75 per cent of turnover. The central importance of SMEs to sustaining and further developing Northern Ireland's economic activity can be in no doubt.
It is, therefore, particularly alarming that those businesses, which are at the heart of Northern Ireland's economy, should be faced with crippling hikes not only in employers' liability insurance but in public liability insurance. The effect should not be underestimated. The increases represent a major threat to the survival of many small and medium-sized businesses and a major threat to Northern Ireland's overall economic performance.
The Ulster Unionist Party has endeavoured to raise the issue with the Government at every available opportunity. My colleagues in another place have worked tirelessly to put the issue firmly on the Westminster agenda and raise awareness of the particular difficulties for SMEs in Northern Ireland. We have all received much correspondence from businessmen who are extremely concerned that they will not be able to meet soaring insurance costs.
It is estimated that, in the past year, over a quarter of businesses in Northern Ireland had to meet an increase to their premiums of more than 100 per cent, with some businesses even having to cope with a massive 500 per cent increase. For example, Intermatic Manufacturing Limited in Larne saw its employers' liability insurance increase from £3,500 to a staggering £17,500 in the past couple of years. Another small business not only had to cope with a rise from £278 in 2001 to £1,550 this year, but also is now struggling to get a realistic quote for public liability insurance.
Such increases are not only extremely cumbersome in the short term, but are completely unsustainable in the long term. No SME will be able to cope with a huge

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rise in premiums without having to offset the payments in other ways. There exists a real fear that unless the issue is addressed urgently employers will lay off workers, put a freeze on recruitment or even stop trading altogether. If the ongoing crisis of increasing business insurance costs is not halted soon, it will be only a matter of time before there is an adverse effect on employment prospects, with firms reducing investment, for example, in such essential services as staff training.
I welcome the Government's review of the employers' liability compulsory insurance scheme, particularly the interim report's proposal for an agenda for action. However, noble Lords should be aware that this is not an issue that can be left aside while we await further reports, reviews and recommendations. Immediate action is required. The particular difficulties which Northern Ireland businesses face in terms of obtaining affordable insurance must be urgently addressed. If not, many of our small and medium-sized businesses will face an extremely bleak and uncertain future.
Reasons often quoted to explain the increase in business premiums are global price increases, as a result of the aftermath of September 11th 2001, and, particularly in Northern Ireland, the higher level of compensation payments awarded against employers by the courts. The Government could certainly do more to address the growing compensation culture and the negative impact that this has had on many businesses. Future costs awarded by the courts in compensation cases must be more reasonable.
I call on the Government to reform the out-dated employers' liability legislation as a major step in the right direction. I could also suggest that another reason for the huge increase in premiums might be the monopoly that a small number of large, international companies now have on the insurance industry. With virtually no competition, these companies can charge more or less what they wish. What measures are the Government prepared to take to address this system of monopoly and to ensure that Northern Ireland's businesses are offered a more competitive insurance industry?
The insurance industry itself will have to take more responsibility—if only to protect its own market base—to ensure that business premiums are realistically affordable in Northern Ireland. While a voluntary code of practice exists, and most insurance agencies adhere to it, I also ask that the Government strengthen this by promoting and enforcing a more rigid code that must be followed by all in the insurance industry at all times.
I would also like to take this opportunity to raise a further issue of concern to Northern Ireland's small and medium-sized businesses, which is undoubtedly in breach of the insurance agencies' voluntary code of practice. The police service in Northern Ireland have noted a marked increase in the practice of "grossing up", with some companies adding as much as £18,000 to an insurance premium in the name of handling costs. Perhaps the Government could make a
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statement on what measures are in place to halt this malpractice? Are any changes to relevant legislation being planned to address the issue? I urge the Government to meet with representatives from the PSNI to discuss the extent to which "grossing up" has become a part of Northern Ireland's insurance industry.
Northern Ireland's economy has undoubtedly blossomed over the past five years, benefiting from a devolved Assembly and Executive, a significant decrease in violence and a welcome increase in optimism. Of course we all recognise that significant challenges still lie ahead before we can achieve stable, long-term prosperity and emerge as a true competitor in the global market. Crippling insurance premiums, however, are clearly an unnecessary barrier to our success and one which the Government can and must help to alleviate.
8.10 p.m.
Baroness Maddock: My Lords, I, too, congratulate the noble Lord, Lord Harrison, on securing this debate. We have had an interesting discussion, with noble Lords approaching the matter from slightly different directions. First, I declare an interest as a vice-president of the National Home Improvement Council, which will be reflected in some of my later comments.
In his opening speech, the noble Lord, Lord Harrison, set out graphically many of the problems facing businesses and went on to suggest some interesting ideas. I was particularly interested in his suggestion that no-claims discounts should be offered in this area. I heard a story about a roofing contractor who complained bitterly about his premium going up. When he spoke to the insurers, explaining that he had not had an accident for many years, the insurers responded by saying, "Well, in that case you are about due for one, aren't you?". That highlights some of the problems people face with insurers. The noble Lord also raised an issue referred to by many noble Lords: the amount of money in claims that ends up being paid over in legal costs. That is something about which we are all very concerned.
The noble Baroness, Lady Byford, reminded noble Lords that these problems are equally difficult in the countryside, referring to an area she often discusses in this House. The noble Lord, Lord Haskel, gave a much more philosophical presentation. He reminded us about issues surrounding social justice and how we all want to see a fair and civil society. The noble Lord, Lord Hunt, continued that theme, referring to the blame culture and the wider related issues. The noble Lord, Lord Laird, reminded us of the position in Northern Ireland, and the particular importance of small businesses to that economy.
In my role as a vice-president of the National Home Improvement Council, I have been fully informed about many of the matters that have been raised in this debate. I refer in particular to reputable trade bodies in the construction sector, especially the National Specialist Contractors Council, covering 28 specialist trade associations, including high-risk trades such as

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scaffolding and roofing. As spokesman for housing on the Liberal Democrat Benches, I am concerned about the situation that was outlined in the debate. Housing output is at an all-time low and we cannot afford to see businesses going to the wall when we are so short of skilled workers in the construction industry.
At the start of the present employers' liability insurance crisis in June last year, the insurance industry was quick to transfer the blame for spiralling premium costs on to the construction industry's health and safety record. That generalisation took no account of the many specialist companies which have done their best to maintain and improve their high standards of health and safety and risk management.
I refer in particular to the National Federation of Roofing Contractors, mentioned earlier in the debate. The members of that association cover 45 per cent of the United Kingdom's roof contracting industry in terms of market turnover. By September of last year, the federation had carried out a detailed survey of accident records among its members. It showed that only 3,600 working days had been lost due to injury and industrial illness out of a total of almost 2.5 million days generated by the workforce for the year 2001–02. Only two fatalities were recorded by federation members, compared with a total of 37 recorded that year by the Health and Safety Executive. I understand that the federation's accident survey for 2002–03, although not yet complete, will record a similar pattern of comparative competence.
The Department of Trade and Industry, the Office of Fair Trading and the Department for Work and Pensions have each produced reports looking at liability insurance. The latter's review report was published on 3rd June and gives one strong, underlying impression: that the insurance industry— and here I disagree with some noble Lords who have spoken in the debate—has not been without fault in the management of employers' liability insurance since it became compulsory in 1969. This point is supported by the Association of Personal Injury Lawyers, which, in a fact sheet of recent date, stated:
"It should not be forgotten that many of the problems with the Employer's Liability Insurance market are of the insurance industry's own making. It is now widely accepted that Employer's Liability Insurance was mismanaged by the insurance industry. It was sold as a loss leader and any shortfall was offset by the then buoyant stock market"
And, of course, matters have been made worse by September 1lth, floods and the other issues raised by noble Lords today.
Faced by the consequences of these actions, the insurance industry has sought since June 2002 to recoup its losses through the whole market, but it has been its individual and separate policies towards vital high-risk trades within the construction industry that have generated the worst hardships. Again I cite the evidence of the National Federation of Roofing Contractors, which was recognised on page 6 of the Department of Work and Pensions review report. In the year 2001–02, the average premium rises for employers' liability compulsory insurance for its
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members was 161 per cent—other noble Lords have also referred to other large rises—but many were greater, much greater, particularly for those involved with felt roofing for flat roofs and the removal of old asbestos roofs. I understand that the federation will shortly produce a new survey for the year 2002–03 which will show a similar picture.
If we look at the issue in money terms, the 800 trade members of the National Federation of Roofing Contractors spent £9 million on insurance in 2001; in 2002 they spent £17 million; but in 2003 they will have to find £27 million. This should be compared with the real risk ratio discovered during research carried out on behalf of the reinsurance market relating to these same contractors.
The Department of Work and Pensions review report of 3rd June set out an agenda for further work, with a second report promised this autumn. The agenda includes further research on the separation of long-tail illness claims from accident claims—an issue which has been pursued further this evening—and a better service from the insurance industry to its clients to give them more notice of reinsurance. In some situations, people have had no time to shop around for better rates because they have been notified so closely to the renewal date.
Autumn is with us now and, as I and others have indicated today, high-risk trade will continue to be hard hit by premium rises. I hope the Government will be able to assure the House that consultation, parallel activities by other bodies and more direct action on their part will have succeeded in stabilising employers' liability compulsory insurance premium rises on behalf of our sorely pressed but much needed high-risk construction specialists.
It would be very helpful if the Government were to ensure that all the contractors they use have employers' liability compulsory insurance in place. All main contractors should satisfy themselves that their sub-contractors have the appropriate insurance.
Baroness Hollis of Heigham: My Lords, has the noble Baroness any evidence to the contrary?
Baroness Maddock: My Lords, I have been lobbied by people working in this area and one of the issues they have raised with me is whether the Government could ensure that that happens. I do not know whether they have any evidence, but I suggest that they would not raise the issue with me if they did not. I shall certainly ask them and let the Minister know. I hope that it is not the case. If the Government were to insist on such insurance they can say to everyone, "Look, we are doing this and ensuring that this happens". It would be quite difficult to leave the issue for the Health and Safety Executive to deal with.
I hope that the Minister will able to answer the points that I have raised and I look forward to hearing what she has to say in relation to points raised by other noble Lords.
8.20 p.m.
Baroness Miller of Hendon: My Lords, I begin by declaring an interest. I am a former member of the board and a former patron of the Small Business Bureau and my husband occasionally drafts its responses to consultation papers from the DTI and its agencies. I believe that that declaration is relevant to this important debate, which we should be most grateful to the noble Lord, Lord Harrison, for initiating because of the devastating effect that the current situation with regard to employers' liability insurance is having, particularly on small and medium enterprises.
It is worth noting that the chairman of the Federation of Small Businesses recently said:
"Small firms are facing another round of huge premium increases that will force some out of business".
The noble Lord, Lord Harrison, mentioned that. The chairman continued:
"The ongoing crisis is having an adverse impact on employment prospects and firms are reducing investment in crucial areas such as staff training".
The report in the Small Business News by the FSB indicates that a quarter of employers have found it difficult, or even impossible, to find employers' liability insurance at any price. Faced with the alternatives of paying prohibitively high premiums or closing down, 8 per cent of those surveyed by the FSB are illegally trading without compulsory cover. One in five of the small firms surveyed has laid off employees or put a freeze on recruitment as a result of escalating premiums.
The figures of the Department for Work and Pensions state that Zurich Insurance, the Association of British Insurers and the British Insurance Brokers Association say that the average increase in EL premiums across all types of risk over 2002 was between 40 and 60 per cent. Norwich Union has estimated its own average increase in EL to be slightly lower, at 30 to 45 per cent.
No matter what source one consults, however, there seems to be unanimity about the reasons, as the noble Lord, Lord Haskel, my noble friend Lord Hunt and various other noble Lords have said, such as the compensation culture. There is another reason, which my noble friend Lady Byford mentioned. First and foremost, as the National Federation of Roofing Contractors—an inherently physically dangerous trade—has forcefully told me, is the failure to distinguish between industrial accidents and industrial diseases.
It is relatively easy for actuaries to forecast the risks of industrial accidents. There is a long historical fact base on which they can rely. However, some industrial diseases are impossible to forecast. I am not just talking about physical diseases that only emerge many years after exposure to working environments that had hitherto been considered to be safe according to what was best practice at the time. I mean, for example, illnesses such as work-related stress which has in recent times been the subject of much litigation.
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It is interesting that the courts are taking a firm line. Not only is the onus of proof firmly on the claimants but, to be culpable, the employer must positively be aware of the susceptibility of the employee to the problem. But it is not enough for an employer—or, rather, his insurers—to win a dubious claim, even one for a physical injury, such as a trip or a fall, or where the employee was wholly or largely to blame for his misfortune. That is because of the huge cost of successfully defending such a claim against a litigant who is being financed by a "no win no fee" lawyer, or who is seduced into making a claim he would previously never have considered by the sort of ambulance-chasing adverts which we see every day on the television or hear on the radio. Indeed, my noble friend Lord Hunt of Wirral mentioned them and called them something terrible.
The fact is that the insurance companies find it easier to settle even untenable claims and pay a sort of Danegeld to the lawyers and their clients rather than stand up and fight, which is too expensive. After all, the insurers simply pass on the cost to their policyholders in the form of ever-increasing premiums.
The compensation culture, which we are rapidly importing from the United States of America— although so far without the monstrous damages that the American juries see fit to award—is a major cause of the insurance crisis. Many noble Lords have mentioned this, including the noble Lord, Lord Laird, my noble friend Lord Hunt, and the noble Lord, Lord Haskel.
Let me add another cause which I have not seen mentioned in any of the financial articles I have read or the many briefs I have seen on this subject, although the National Federation of Roofing Contractors has done extraordinarily well at briefing all of us and has therefore had many mentions today.
The law does not compel insurers to provide employers' liability insurance. So with mergers and takeovers resulting in an ever-decreasing number of insurers, their market monopoly—as the noble Lord, Lord Laird, mentioned—coupled with the fact that employers are required by law to buy cover or go out of business, enables insurers to name their own price whether related to the risk or not.
One example is the Law Society's ill-fated professional negligence insurance scheme, under which solicitors were required to hold insurance and to hold it with just one firm. Ultimately a rebellion among solicitors resulted in the scheme being wound down and won them the right to go to the market and buy cover which took into account their individual claims records—another point that all speakers have mentioned. Insurers often do not look at a company's claims history. However, there is a lesson to be learned from that debacle.
There is a strong case for there to be an insurer of last resort to which SMEs can go to obtain cover in respect of industrial diseases—and I am not talking about accident cover—at a reasonable cost.

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The National Federation of Roofing Contractors discovered as a result of a survey of its members in which nearly half responded that their members' insurance premiums had increased on average by 161 per cent for employers' liability insurance, 121 percent for public liability and 71 per cent for professional indemnity insurance. That trade association's response was to negotiate its own co-operative insurance scheme with the insurance industry which, it is hoped, will result in smaller, risk-related premiums for businesses participating in the scheme. "Risk related" in this case means that 12½ per cent of the industry will, they hope, benefit from the fact that, in the past five years, they have paid £9 million in premiums but suffered only £2 million in claims.
In June, the Minister for Work recognised the serious problems to which I referred at the beginning of my remarks. He published a report on the Government's review of compulsory employers' liability insurance. Having laboured for a year, the Government have produced a veritable mouse. What do the Government propose to do? To scrutinise the market? To seek raised service standards? To work with the insurance companies towards fairer risk-related premiums? To reform enforcement against insurance dodgers? To focus on legal costs? To make rehabilitation play a more important role in the compensation system—an issue which many noble Lords have mentioned today? One small ray of light in the report was the recognition that the Government have to engage with insurers to separate long-term occupational disease risks from accident risks, as I mentioned at the beginning.
I can only hope that in her reply to the powerful speech of the noble Lord, Lord Harrison, the Minister will put some flesh on all this government waffle— although the noble Baroness, Lady Hollis, never uses waffle—and announce some practical measures that will prevent small businesses, which are often described as the engine of new employment, from being slowly strangled by regulation and red tape—as my noble friend Lady Byford said—even in an area such as compulsory employers' insurance, which all sides of the House recognise is an essential protection for employees.
8.24 p.m.
Baroness Hollis of Heigham: My Lords, I join all the other speakers in congratulating my noble friend on securing this very timely, well-informed and fascinating debate. I especially thank noble Lords who notified me of their concerns in advance. That is most helpful. I cannot hope to answer all the questions in the time allowed. However, I shall scrutinise the debate subsequently, and I hope that noble Lords will allow me to respond in writing.
Before I talk about the undoubted difficulties that have been shared on the Floor of the House tonight, it is worth reminding ourselves of the reason for compulsory employers' liability insurance. It provides an essential safeguard for all workers, ensuring access
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to compensation in the event of an accident or injury at work. The costs of employers' liability stem from the costs of preventable accidents and unsafe working practices—cases where at least partial negligence on the part of the employer has been accepted or established. If no one is at fault or no claim is made, the state will compensate.
It may be appropriate here to respond to the comment of the noble Baroness, Lady Maddock, which took me by surprise. She said that she had reason to believe that the Government were defaulting on that responsibility in terms of their own contracts. I give the commitment that the noble Baroness asked for. We are working with the Office of Government Commerce to renew our guidance to public sector procurement officers to say exactly what the noble Baroness, Lady Maddock, proposed. Our best understanding is that what she suggested is not the case now. We shall reinforce our guidance. If the noble Baroness has any other evidence to the contrary, I should like to see it as she is quite right that such a situation would be intolerable.
Employers' liability is therefore underpinned by two principles: that the victims of negligence should receive fair compensation for their loss; and that those responsible should fund that compensation—a polluter pays principle. Employers' liability spreads that risk across business and the insurance market. In comparison with almost any overseas workers' compensation scheme it has proved sound and cost efficient for over 30 years. However, over the past year in particular—perhaps over the past 18 months— many businesses have been hard hit by significant price increases in the employers' liability insurance market. The noble Baroness, Lady Byford, identified some tonight. We are committed to playing our part in helping business in this area.
We have been leading a review on employers' liability and we have been working in close partnership with other concerned government departments including the Treasury, the Department of Trade and Industry and the Department for Constitutional Affairs. The department has also been working in close co-operation with the Office of Fair Trading, the Financial Services Authority and our partners outside government—insurers, brokers and business representatives—all of whom are equally anxious to find shared solutions.
The first stage of the review found that there was no general market failure. There was no pricing collusion and there was sufficient capital to meet market needs. However, we also found that there had been a significant cyclical change in the insurance market and in insurers' pricing policies. This was accelerated and exacerbated by a number of external factors. Our analysis is shared by the OFT and the FSA. Two indicators may illustrate that. The first is to examine past premium prices. Throughout the last cycle of the insurance market insurers sold employers' liability as a loss leader—as has been mentioned by several noble Lords tonight—part of a package of other profitable insurance products. Over this period—since the early 1990s—premiums fell by 37 per cent in real terms compared with wages.

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Last year that trend reversed suddenly. The collapse in (he stock market and spiralling re-insurance costs combined with steady increases in compensation payments and legal costs—all mentioned by your Lordships tonight—rendered such pricing "cross-subsidy" unsustainable. Prices rose dramatically. Hindsight suggests that insurers priced short-sightedly in a highly competitive market. They subsidised premiums in a way that proved unsustainable when external factors changed. After many years of cheap cover, companies were suddenly faced with playing "catch-up" in a very short period of time and in an unexpected and uncomfortable way.
I emphasise again—as the noble Lord, Lord Hunt of Wirral, said—that it is still the case that even now the cost to small and medium-sized businesses in this country of employers' liability is still considerably lower than for our European counterparts. My understanding is that on a rough and ready basis EL might nowadays add about £150 to the cost of employing someone on £20,000 a year. In Germany the relevant figure would be not £150 but £450; in France the figure might be £750 and it might be £900 in Italy. It is worth bearing those comparisons in mind.
Having said that, as noble Lords have emphasised tonight, one problem has been the distribution of those increases, which have not fallen evenly across all sectors. Price increases have been concentrated on a limited number of companies. Nearly half of all companies had no price increase or one of less than 20 per cent. However, between 5 per cent and 12 per cent of businesses—we have heard from roofing contractors, agriculture and so on—saw premiums at least double and often increase by several hundred per cent. Those were overwhelmingly small and medium-sized enterprises, mostly in sectors traditionally associated with high accident risks.
Despite the statement by the noble Baroness, Lady Miller, I do not think that there is any evidence that cover is not available. The question is not whether cover is available, but at what price that cover comes. Although there has been no general market failure, we recognise the problem. Our aims, therefore, are: to help those businesses worst affected; to ensure that we have made the changes necessary to prevent a future market failure during the next insurance cycle; and to structure that insurance in a way which helps prevent the accidents in the first place.
My first message is the most difficult. There are no quick fixes here. Short-term action is being taken to ease problems of late renewal notices, the distribution of premium increases, and access to the market. However, at its heart the problem is one of structural pricing. Significant alleviation of that pricing problem in the short term would require price subsidy, which is exactly the approach from the market that created the problems in the first place, and is not an experiment we would wish to see repeated.
At the heart of the problem is an uncomfortable truth. All the evidence suggests that the premiums now levied by insurers are not over-inflated. They reflect the true economic cost of the accidents that continue
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to dog UK business. However, our report identified a number of areas in which action could be taken to ease the transition through the current hard phase of the insurance cycle. Even more importantly, it identified the more deep-rooted issues through which we could deliver serious and sustainable improvements.
The noble Baroness rightly challenged me on what we sought to do, so I shall very briefly mention our aims. We seek to work with insurers to make premiums more risk-based, as noble Lords have called for this evening, rewarding firms with good health and safety practices. Better provision of information by business will also help companies to gain access to the market.
I want to put in some provisos, however. Insurers cannot inspect all small firms, any more than can the HSE without increasing the cost and therefore the premium that has to be laid on to the companies themselves. Nor is it easy to go down the route of having some tidy connection with a no-claims record, because with a small firm one cannot get a statistically significant risk analysis on that basis. If one employs two, three or four people and one person has a fatality or serious accident, that would completely distort one's record. Statistics cannot be worked with like that.
Many small and medium-sized businesses have been rightly concerned about the book rate issue, and therefore there is no incentive for those firms to improve their health and safety records and so reduce the claims. Let us take roofing, an area that has received some of the sharpest rises. The National Federation of Roofing Contractors is working with the DTI quality-assured national warrant scheme, which we hope will lead to a reduction in premiums of up to 30 per cent. That would give a subset of the book rate based around a trade association where its members meet assured quality standards. That may be a sensible and helpful way forward.
We are actively pursuing the issue of renewal notice periods with the insurance industry. We welcome the joint guidance by the ABI and the British Insurance Brokers Association. Also, we are searching for creative solutions to tackle the legal costs of processing claims. As noble Lords have rightly said, those are up by 40 per cent. We also seek, as urged by my noble friend Lord Haskel and the noble Lord, Lord Hunt, to see whether we can in some cases step outside the confrontational legal process to resolve the most straightforward claims in a simple and rapid way. As the noble Lord, Lord Laird, requested, we are also looking at the disclosure of information by professional advisers. That may also be helpful in this respect.
I was pressed on whether we could assess the case for separating accident risk from long-term industrial diseases. I understand the problem, but we should not forget that we cannot ask, nor should we ask, government to be the insurer of last resort for long-term diseases. Does any noble Lord tell me that firms would seriously engage in reducing their workers' exposure to asbestos if they believed that ultimately

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government would pick up the bill for it? A real issue of moral hazard is involved, which no noble Lord has mentioned. It means that government cannot and morally should not go down that route. That is not to say that we should not work with the industry on other aspects, but I want to make it clear that we should not engage in policy practice which subverts the need for employers to improve their health and safety practice at work.
We are also introducing a range of proposals to improve enforcement and to police the cowboy companies mentioned. Critically, we need to change the culture of rehabilitation. As many noble Lords said— and the noble Lord, Lord Hunt, has much more experience of this than I—compared with Europe we have a good record in health and safety, but we have a poor record in terms of rehabilitation. It is important to note the evidence; for example, the Zurich rehabilitation scheme has cut compensation costs by 7 to 10 per cent and ABI believes that even greater savings are to be made.
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The number of claims in employment liability has fallen by 16 per cent over three years. However, the cost of those claims has risen in double-digit figures. At the core is the need to use health and safety to analyse risk management to improve standards at work on the one hand, while on the other engaging in rehabilitation. If we can do that, together with working with trade associations so that they can be rewarded for their best practices, we may begin together to address some of the problems.
No one has a magic bullet but I hope that our aims are clear. They are to help business; to prevent a future market failure; and to structure this insurance in a way that prevents the accidents in the first place. We are working with our stakeholders, insurers, brokers, trade associations, businesses and unions in that direction.
It has been a busy summer. When we publish a further report in the autumn, we are determined that not only will it describe a serious programme of work that is being undertaken collectively, but it will also be a shared statement of action and intent from government and stakeholders alike.
House adjourned at sixteen minutes before nine o'clock.