Lords Sitting of 8 January 2004

Preamble
The House met at eleven of the clock: The DEPUTY SPEAKER (Lord Boston of Faversham) on the Woolsack.
Prayers—Read by the Lord Bishop of Southwark.

Prison Service: Race Relations
Baroness Howe of Idlicote Baroness Howe of Idlicote asked Her Majesty's Government:
What is their response to the Children's Society report Playing the Game on the experiences of young black men in custody.
The Minister of State, Home Office (Baroness Scotland of Asthal): My Lords, the Prison Service is fully committed to tackling all aspects of racism and is concerned by the findings of this report. It accepts fully that there are improvements still to be made in many areas of race relations practice. A comprehensive joint action plan to combat all aspects of racism has recently been agreed between the Prison Service and the CRE.
Baroness Howe of Idlicote: My Lords, I thank the noble Baroness for that encouraging reply. However, does she agree with me that, given that the 45 black young people interviewed were all preselected by the three institutions visited, is it not likely that the findings of that report are but a tip of a very unpleasant iceberg? Can the Minister give the House more detail about what the Government will do to protect young people in custody from intolerable racist treatment of this kind? Will she reassure your Lordships that young people will be better informed about their rights, about the existence of the race relations officer and about the process for making complaints without them being further victimised, and above all that police officers are regularly retrained on required behaviour?
Baroness Scotland of Asthal: My Lords, I say straight away that, as I said before, the research is very worrying. We do not know the basis upon which the young people were preselected. The research upon which the Children's Society's findings were based has not as yet been disclosed to the Prison Service. That is a matter of real importance. I certainly assure the noble Baroness that we have taken steps to ensure that prisoners are able to complain much more easily than has been the case hitherto. The forms are available. A box is placed at the end of a corridor. Prisoners take the forms, which are subsequently placed in sealed containers so that no one
248
can interfere with them. We take these incidents very seriously indeed and we vigorously pursue the issue of racism in our institutions.
Viscount Bridgeman: My Lords, will the Minister give the House specific guidance on what the Government are doing to make the Prison Service have regard to its anti-racism staff training?
Baroness Scotland of Asthal: My Lords, training has been a very important part of the Prison Service's work. There has been clear leadership on the matter. We have a very diverse workforce. Board members and area managers were trained jointly in June 2001. The existing training for the race relations liaison officers and the race relations management teams was overhauled in 2000 to make it more focused on management. Since October 2001, the initial training for all prison officers has included a minimum of four hours on race issues, made possible by removing previous training in drill. Training for all other staff has been developed using external expertise. Entry training for officers now has a dedicated module. There has been a total review and there is commitment. I reassure noble Lords that these matters were audited. The ratings demonstrate major improvements over time. From 2002 to date there is a 96 per cent acceptable or better scoring for the establishments, which is a major improvement from the position in 1996–97 when they scored 84 per cent.
Lord McNally: My Lords, although the Minister's expressions of confidence are reassuring, is not the brutal fact that this report is realism in counterpoint to the optimism of the Statement made two days ago on managing offenders? Is she really confident that there is not institutionalised racism in the Prison Service? Will the Minister give figures on the recruitment of' black prison officers? If we are to get to the root of the matter, officers from the ethnic communities must work in the new National Offender Management Service and voluntary organisations must participate so that this kind of charge cannot be levelled against the new service. Will she assure us that this is an "action this day" matter for Martin Narey and the new service?
Baroness Scotland of Asthal: My Lords, I reassure the noble Lord that it is very much part of the Government's objective to ensure that we have a more diverse workforce. The figures and the report are not the antidote to what we discussed two days ago; they go hand in hand. We must put in place both measures. We have had great success in improving diversity in our workforce with a robust recruitment programme backed by a series of outreach events. We have significantly bettered targets set by the Home Secretary. In 1998–99 the figure for ethnic minority staff was 3.2 per cent. The figure for 2001–02 was 4.9 per cent. There has been a massive improvement in relation to recruitment. I wish to make it clear that we think that more needs to be done. We are on our way but we can do better.
Lord Laming: My Lords, will the Minister give the House an assurance that taking these matters seriously—

249
I absolutely accept her statement in that regard includes following proper disciplinary procedures and making clear that managers have a responsibility to ensure that people who behave in this way are subject to disciplinary procedures?
Baroness Scotland of Asthal: My Lords, I absolutely accept that that is right.
The Lord Bishop of Southwark: My Lords, knowing that the reoffending rate is disproportionately high among young black people, does the Minister give her support to such initiatives as the resettlement programme to be launched by the Feltham chaplaincy next week? In such ways will the Minister encourage all those disturbed by the Children's Society report to get involved themselves with positive action for young black people?
Baroness Scotland of Asthal: My Lords, I wholeheartedly endorse that. The incidents of racism have been very disturbing and the resettlement issues incredibly important. We very much support such initiatives.
Lord Elton: My Lords, on Tuesday the Minister repeated a Statement announcing a single service to manage offenders. What proportion of adult black prisoners have previously been convicted and served custodial sentences? As juveniles are not covered by the new single service, how will the management of those children be made consonant with what is to follow when they are adults?
Baroness Scotland of Asthal: My Lords, the figures collated are not collated in a way that would enable us to give an answer on the first issue. We are making sure that we adopt a holistic approach to the management of offenders generally, be they minors or adults. The whole purpose of the changes that we are bringing about is to enable that synergy to take place. It is a challenging agenda, but one that we now believe that we have the tools to address, and there is the commitment to do it.

Royal Mail: Proposed Redundancies
11.14 a.m.
Lord Hoyle Lord Hoyle asked Her Majesty's Government:
What consultations took place between Royal Mail and the relevant trade unions before the reduction in managers was announced, which is to take place by March 2004.
The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Sainsbury of Turville): My Lords, the decision on whether to reduce the number of managers in Royal Mail is an operational matter for the board of the company. The proposed reduction in managerial jobs will be part of the 30,000 redundancies announced at the start of the
250
company's three-year renewal plan in 2002. Royal Mail is complying, and will continue to comply fully, with its obligations under Section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992 as regards consultation with the unions.
Lord Hoyle: My Lords, I thank my noble friend for that reply. Does he agree that for the Amicus communications association to be informed on 21 November that there would be a further review of managers, followed on 2 December with a verbal statement and on 11 December by a letter saying that there would be 3,000 redundancies in the region, does not comply with Section 188 and is not consultation? It is obvious that the partnership with Royal Mail is not working, so what will he do about it? May I suggest that he cuts the substantial funding from the DTI partnership fund to Royal Mail until the managers agree to introduce a genuine partnership with trade unions?
Lord Sainsbury of Turville: My Lords, the official announcement that there would be an overall reduction in managers' jobs of 3,000 was made on 12 December. It was not then possible to have the detailed consultations required under Section 188 of the Act, because obviously, at that point, one does not have the information necessary for the consultation under that Act, which has to be undertaken on a specific location and job basis. As that information has become available, it has been used to have those consultations, so some consultations have taken place already. The Act is being complied with in a proper way.
As for the partnership, I think that I am right in saying that it was the unions that withdrew from the partnership arrangements. It would be highly desirable for the two sides to come together again to drive forward the agenda.
Lord Clarke of Hampstead: My Lords, is my noble friend aware that the union that represents the largest number of people employed by Royal Mail was not consulted in any way on the decision to axe 3,000 managerial jobs? That decision will present very serious problems for staff below managerial level as they strive to maintain an efficient service. Will he address the problem of the lack of consultation with those people? I ought to declare an interest as a former postman, and a member of my union which has not been consulted at all on the issue.
Further, does my noble friend agree that such shabby treatment of loyal workers is not conducive to the improvement in industrial relations that everyone connected to the Post Office, especially on the industrial side, is trying to ensure? Will he make arrangements to see that the gaps created by the sackings or redundancies will be managed properly, so that the public service can be maintained properly?
Lord Sainsbury of Turville: My Lords, it has to be the job of Royal Mail's management itself to take decisions about balancing operational requirements against the needs of having more managers. No meaningful discussions can take place on that until one has a specific

251
list of jobs by particular areas. Until that is made, it is not possible to have serious operational discussions. As the information comes through, consultations are taking place. However, I totally agree that we must do everything that we can to encourage better industrial relations and a more partnership-based approach in Royal Mail.
Lord Razzall: My Lords, does the Minister accept that this Question, and a number of other Questions that noble Lords have asked in recent months, demonstrate the seriously unsatisfactory nature of the relationship between the Government and the Post Office, particularly Royal Mail? Does he not accept that it is not a satisfactory way to carry on for the Government to claim the credit whenever anything goes well with Royal Mail but, when it goes badly or there is a problem, for him to say that it is an operational matter for the management of Royal Mail?
Lord Sainsbury of Turville: My Lords, a more appropriate response would be for the noble Lord, having constantly asked the Government to give commercial freedom to the Post Office, not to ask the Government to intervene when it comes to issues of commercial freedom.
Baroness Wilcox: My Lords, it is a difficult time for Royal Mail, and a very difficult time for the unions. It is a big organisation and one for which I and many noble Lords have great affection, so it is very hard to see the organisation going through such a difficult time. I speak almost in sympathy with the Minister. Given that the Government are the major shareholder in the company, can he reassure us that it is being run properly and in a right and timely fashion?
Lord Sainsbury of Turville: My Lords, without giving an answer that covers the entire range of activities of the Royal Mail, and having considered this particular instance, it was regrettable that the Royal Mail did not tell the unions that it would make an announcement on a particular day; and it has already apologised for that. However, in every other way the matter has been handled perfectly properly.
Lord Hoyle: My Lords, why were the 3,000 redundancies not discussed with the unions? As the Royal Mail knew there would he 3,000, it must have known where they were to occur. That shows, once again, the deplorable state of industrial relations at the Post Office. I ask again, what is the Minister going to do about it?
Lord Sainsbury of Turville: My Lords, there were informal discussions between the management and the unions on a general basis before the announcement. I repeat, it is extremely difficult to have meaningful discussions about the impact of particular job losses until one has a firm view of what the job losses are and where they will take place. That information was not available at the time of the announcement on 12 December.

Household Energy Efficiency
11.20 a.m.
Lord Ezra Lord Ezra asked Her Majesty's Government:
What has been the outcome of the Treasury's two consultations, in July 2002 and August 2003, on economic instruments to improve household energy efficiency.
The Parliamentary Under-Secretary of State, Department for Culture, Media and Sport (Lord McIntosh of Haringey): My Lords, as set out in the recent Pre-Budget Report, the Government agree that there is a case for using economic instruments to promote energy efficiency. However, in the light of the European Union VAT negotiations and the review of corporation tax, the Government will give further detailed consideration to what such measures entail. A further announcement will be made around Budget 2004.
Lord Ezra: My Lords, I thank the noble Lord for that Answer, but are there not a number of recommendations emanating from those two consultations, to both of which I responded, that could have been adopted? In view of the importance that the Government attach to improving energy efficiency in the domestic sector, is it not surprising that such an apparently leisurely approach is being adopted?
Lord McIntosh of Haringey: My Lords, I resist the suggestion that there is a leisurely approach. There are important changes, economic instruments and initiatives which can be taken that are involved in the EU VAT negotiations and in the corporation tax review. But many other actions are being taken at the same time, as the noble Lord well knows because he is well versed in those matters. For example, that has not stopped us having reduced VAT rates for energy-saving materials. It has not stopped the Warm Front programme of £150 million a year that helps 400,000 households with the installation of heating. We have not been prevented providing money for the Carbon Trust and the Energy Saving Trust. I could go on. They are not matters on which we are taking a leisurely approach.
Lord Jenkin of Roding: My Lords, is it not clear that by far the most effective economic instrument to secure energy saving is a realistic price for the supply of energy? Would it not be much better if the Government, instead of seeking to keep electricity and gas prices down to protect the fuel poor, made increases in social security benefits to compensate those families who would find it difficult to pay an economic price for gas and electricity?
Lord McIntosh of Haringey: My Lords, I rather suspected that the noble Lord, Lord Jenkin, hankered after the old pool arrangements whereby there was an auction every day. Instead of the contract going to those who offered the lowest prices, it went to those who offered the highest. That was an extraordinary

253
way of conducting capitalism and I am astonished that the noble Lord should hanker after that, rather than the new electricity trading arrangements.
Lord Jenkin of Roding: My Lords, may I make it clear that I said nothing of the sort?
Lord McIntosh of Haringey: My Lords, what does "realistic" mean other than "higher"?
Baroness Gardner of Parkes: My Lords, as the Minister has raised various possible actions to save energy—taking the Question slightly wider than the economic issues—why are we reading in the newspapers this week that everyone will have to install a mixer tap to prevent people being scalded by the temperature of their hot water? Why are the Government not suggesting reducing the heat of the water to a point where it would not scald? Would that not save energy?
Lord McIntosh of Haringey: My Lords, I am not sure that even the most nannying government—this is not a nannying government—would send in inspectors to control the level at which householders have set their water temperature. That would be the implication of the suggestion.
Baroness Wilcox: My Lords, given that both the UK Business Council for Sustainable Energy and the National Home Energy Rating responded to the Government's consultation of August 2003 by suggesting that stamp duty rebates would be helpful in stimulating the general demand for energy efficiency, why did the Government rule out those proposals?
Lord McIntosh of Haringey: My Lords, that is exactly the kind of matter that the Chancellor will be considering in his Budget and I have given an undertaking that they will be referred to at the time of the Budget.
Lord Ezra: My Lords, reverting to the importance that the Government attach to savings in the domestic energy sector, would it not be desirable for them to plan a major campaign to stimulate users to save energy, rather than dribbling out incentives from time to time in various ways, issued by various government departments?
Lord McIntosh of Haringey: My Lords, I am not instinctively opposed to that suggestion. I am sure that there are ways in which we could co-ordinate our campaigns more effectively.
Lord Campbell of Alloway: My Lords, which department of state is in charge of energy efficiency? Is it the DTI, as it always was? If it is not, why?
Lord McIntosh of Haringey: My Lords, different aspects of energy efficiency are the responsibility of different departments. Energy generally is the
254
responsibility of the Department of Trade and Industry. The Question comes to me from the Treasury because of the tax implications.

Special Advisers: Civil Service Legislation
11.27 a.m.
Lord Sheldon Lord Sheldon asked Her Majesty's Government:
What measures they propose to take in a forthcoming Civil Service Bill concerning the exercise of executive powers by special advisers.
Lord Bassam of Brighton: My Lords, in their response to the ninth report of the Committee on Standards in Public Life, the Government committed themselves to publishing a draft Civil Service Bill for consultation, once they had received the Public Administration Select Committee's proposals. We now have its proposals and will give them very careful and detailed consideration. We will publish our draft Bill in due course.
Lord Sheldon: My Lords, I thank my noble friend for that reply and the promise of the draft Bill which we still await. But will he respond to the comments of Sir Nigel Wicks that there need to be proper boundaries between the roles of Ministers, civil servants and special advisers? He said that a special adviser should be a source of additional advice, not a replacement. Is the Minister aware that there is real concern that giving executive powers to special advisers is a serious step away from the political neutrality of the Civil Service, about which the Fulton committee on the Civil Service warned so many years ago?
Lord Bassam of Brighton: My Lords, we are well aware of the concerns of Sir Nigel Wicks, which have been expressed clearly. That is undoubtedly one of the issues on which we shall consult when the draft Bill is published. Sir Nigel Wicks was also very positive about the role of special advisers. I quote from the amendment to the code of conduct which the Government published:
"Special advisers must ensure that while they may comment on advice being prepared for ministers by officials, they do not suppress or supplant that advice".
The role of special advisers is well understood by the Government and, of course, we must respect the impartiality that civil servants bring to the nature of their advice to Ministers.
Lord McNally: My Lords, I listened carefully to the Minister's reply. "In due course" is Whitehall-speak for mañana, without the same sense of urgency. Is he aware that the idea of a Civil Service Act was first recommended by Northcote-Trevelyan in 1854; it was further recommended by Cook-Maclennan in 1997; and it is now recommended by the Public Administration Select Committee in 2004? Even with the Fabian influence on the Government, is not that taking the inevitability of gradualness too far? Why on

255
earth do this Government not bring forward a radical Civil Service Act for which they could take due credit? Instead, the Prime Minister is stuck in his bunker at No.10, surrounded by his policy wonks and refusing movement. However, everyone knows that, when he left office, the noble Lord, Lord Wilson, left a draft Civil Service Bill ready for the statute book. When will the Government return to their radical roots and give us a Civil Service Act?
Lord Bassam of Brighton: My Lords, this is a radical Government. As a former policy wonk, I am sure that when he was at No.10 the noble Lord had the opportunity to advise the Prime Minister of the day about the importance of having a Civil Service Act. Our process of advice to Ministers, which, as the noble Lord said, goes back to the Northcote-Trevelyan report of 1854, is very good. I believe your Lordships will agree that, in the 150 years that have passed since then, our Civil Service has provided some of the very best advice to Ministers.
Lord Marlesford: My Lords, returning to the Question asked by the noble Lord, Lord Sheldon, which surely has not been addressed at all, does the Minister agree that the role of the special adviser is to help Ministers to do what they want to do, often in the face of much intrinsic obstruction from civil servants, particularly in departments such as the Home Office? Does he recognise that it is for Parliament to stop Ministers doing what they should not do?
Lord Bassam of Brighton: My Lords, I cannot do other than agree with the noble Lord. Of course, he is right: that is exactly the role of special advisers. Civil servants respect that role and understand its importance. They understand, too, that special advisers give to Ministers a distinct quality of advice in order to cut through the sometimes mind-boggling bureaucracy.
Lord Clark of Windermere: My Lords, will the Minister confirm that governments from both sides of this House have used special advisers? Will he also confirm that, used correctly, they aid and assist the Minister in carrying out his work? Will he further confirm that many civil servants welcome the addition of special advisers in helping the department to progress its work?
Lord Bassam of Brighton: My Lords, the important point to remember is that, because of their special nature, special advisers offer a measure of political protection to civil servants. I believe that civil servants understand and respect that and rather value it.
Lord Cope of Berkeley: My Lords, we all agree that special advisers have an important and special role, but that role is not to supervise the Civil Service or to take executive decisions. That is what the provisions of the Civil Service Bill, to which we are referring, are all about. Has the order of, I believe, 7 May 1997, which gave executive power to special advisers in various circumstances, been rescinded yet?
Lord Bassam of Brighton: My Lords, my understanding is that only two or three special advisers are to have any executive powers. I believe that the noble Lord will recall that the Prime Minister accepted the recommendation of the independent review of government communications—the Phyllis review—that it was no longer necessary for the Director of Communications to have executive power. Therefore, only a tightly defined group of special advisers will benefit from that.
Lord MacGregor of Pulham Market: My Lords, I declare an interest as a former member of the Committee on Standards in Public Life, which drew up the last report and the one before that and which recommended just such a Bill. Is the Minister aware that we took substantial evidence not only from Sir Nigel Wicks but from a wide range of sources? They all recommended such a Bill, not least because of the problem of the blurring of responsibilities and powers between civil servants and special advisers, although that was not the only reason. Thus, does the Minister agree that this Bill should command widespread all-party support in both Houses? Will he therefore consider whether the Government should bring forward their draft Bill this Session in time for a Joint Committee of both Houses to consider it with a view to speedy implementation in the next Session?
Lord Bassam of Brighton: My Lords, I have certainly heard the noble Lord's view expressed, and it was expressed very forcefully in your Lordships' House. It is a matter that we are actively considering, but I do not believe that it is right for me, at the Dispatch Box, to give a timetable which could be misleading. We are considering the draft Bill very carefully and we shall also consider carefully how we may best consult on it. As the noble Lord rightly said, there are many wide-ranging views on this issue and those views need to be carefully judged and balanced.
Lord Alton of Liverpool: My Lords, does the Minister accept that the principle of a Select Committee bringing forward a draft Bill rather than simply a report is a very welcome development in itself? Does he also accept that at the heart of these recommendations is a shift away from the Government and back to Parliament in who will decide on the number of special advisers? Will he say whether that principle, enshrined in this week's recommendations, is one that the Government accept?
Lord Bassam of Brighton: My Lords, I cannot go so far as the noble Lord would like with regard to the second part of his question. I acknowledge that this is a very novel, if not unique, departure by the Select Committee and that is welcome. I believe that it certainly helps the Government to focus on the primary issues to be considered in bringing forward their own draft legislation.
Lord Peyton of Yeovil: My Lords, is the noble Lord aware that his comment that the role of the special

257
adviser is to cut through mind-boggling bureaucracy is one that is not calculated to allay the alarms and suspicions which are widely felt?
Lord Bassam of Brighton: My Lords, I am not always here to allay alarms and suspicions.

Business
11.35 a.m.
Lord Grocott: My Lords, I have two brief pieces of information. The first is to remind the House that today is the first time that we shall implement our new arrangements for Thursdays. There are two Second Readings today and the target time for the completion of business is 7 p.m. I simply advise everyone that Back-Bench speeches on those two Second Readings would need to last for around seven minutes in order to meet our target rising time.
The second announcement is that, with the agreement of the House, at a suitable moment after 3 p.m. a Statement will be repeated by my noble friend Lady Ashton on student support in higher education.

Assisted Dying for the Terminally III Bill [H.L.]
Lord Joffe: My Lords, I beg to introduce a Bill to enable a competent adult who is suffering unbearably as a result of a terminal illness to receive medical help to die at his own considered and persistent request, and to make provision for a person suffering from a terminal illness to receive pain relief medication. I beg to move that this Bill be now read a first time.
Moved, That the Bill be now read a first time. —(Lord Joffe.)
On Question, Bill read a first time, and ordered to be printed.

Gender Recognition Bill [H.L.]
Lord Evans of Temple Guiting: My Lords, on behalf of my noble and learned friend Lord Falconer of Thoroton, I beg to move the Motion standing in his name on the Order Paper.
Moved, That it be an instruction to the Grand Committee to which the Gender Recognition Bill has been committed that they consider the Bill in the following order:

Clause 1,

Schedule 1,

Clauses 2 to 4,

Schedule 2,

Clauses 5 to 10,

Schedule 3,

Clause 11,

Schedule 4,

Clauses 12 to 13,

258

Schedule 5,

Clause 14,

Schedule 6,

Clauses 15 to 28. —(Lord Evans of Temple Guiting.)

On Question, Motion agreed to.

Companies (Audit, Investigations and Community Enterprise) Bill [H.L.]
11.38 a.m.
Lord Sainsbury of Turville: My Lords, I beg to move that this Bill be now read a second time.
A recent book argued that the limited liability joint stock company was,
"the greatest single discovery of modern times".
Your Lordships will not be surprised to hear that, as Minister for Science and Innovation, I have other suggestions for that accolade. However, no one can deny the importance of the company in the modern economy. The company is more popular than ever, and this Government are committed to reforming current companies legislation. We are taking forward the work of the independent Company Law Review in order to remove unnecessary regulation in the current law, to simplify the law, particularly as it affects smaller firms, and to make the law as a whole more flexible for the needs of the 21st century. Meanwhile, the much smaller Bill before your Lordships will increase the variety of companies by creating the community interest company, as well as making some amendments to ensure better financial reporting and conduct by companies.
There are now nearly 1.8 million companies in Great Britain. Companies account for around 80 per cent of economic activity, measured by turnover, and provide some 60 per cent of employment. But today's large companies have a double significance. They are the source of most goods and services and of many jobs, but they are also where much of our savings are invested in the form of pension contributions, life assurance and unit trusts, as well as individual shareholdings.
The extent to which our economy depends on companies makes it essential that they are run effectively and honestly and that we can rely on their accounts and reports as a guide for investors and for those doing business with them. When a company fails, it may trigger a chain of collapse as other businesses—especially small undertakings—are brought down by a bad debt or the sudden loss of a key customer or supplier.
The spectacular collapses in the United States in recent years, most notably of Enron, WorldCom and accountants Andersens, sent shock waves through the business world. If the audited accounts of large and apparently profitable companies were little more than works of fiction, what else was waiting to be uncovered? The situation at Parmalat, where accounting fraud is again a central feature, shows that similar problems can happen in Europe. We cannot be certain that a comparable situation could not occur in this country, despite the differences in the business and regulatory

259
environments in Italy and the UK. In any event, Parmalat underlines the importance of the reforms—legislative and non-legislative—which we have made and are making in corporate governance, accounting and audit regulation.
We had already asked Derek Higgs to review the role of non-executive directors. He subsequently made important recommendations aimed at improving corporate governance, some of which were then reflected in changes to the Combined Code on Corporate Governance. But when the Enron and WorldCom scandals broke, confidence was shaken here almost as much as in the United States. The American reaction was to rush through the Sarbanes-Oxley Act. We thought it right in our circumstances to take a different approach.
Once the details of the Enron scandal started to become known, the Government set up the Co-ordinating Group on Audit and Accounting Issues to review the UK's arrangements for audit and accountancy regulation. The group was jointly chaired by the Financial Secretary to the Treasury and the then Minister for Competition, Consumers and Markets. Its membership comprised independent regulators such as the Accountancy Foundation, the Financial Services Authority and the Financial Reporting Council, and independent academic experts. It also discussed its proposals with representatives of the accountancy profession to ensure they were workable.
The group reported in January 2003. Some of its recommendations are reflected in the Bill we are considering today. Overall it concluded that we have,
"a sophisticated and effective system of oversight in this country. "
Some changes were needed, but I think it is fair to characterise these as adjustments, building on and strengthening a system which is basically sound. Many of those changes are now in place. The role of the audit committee has been strengthened through revisions to the combined code. Audit firms have introduced more frequent rotation of audit partners, and a longer "cooling-off" period before an auditor can be recruited by a client. Audit firms are providing greater transparency in their annual reports. The Financial Reporting Council has been restructured and strengthened, with the Auditing Practices Board as the standard setter fully independent of the audit profession; and the Auditing Practices Board has just published its first draft set of tough ethical standards on independence and objectivity for consultation.
One early recommendation from the co-ordinating group was that there should be a separate review of the regulatory regime of the accountancy and audit profession. That review started immediately and also reported in January last year. It found that the current regulatory regime worked well, but that it would be desirable to increase the perception of its independence from the accountancy profession. I shall explain shortly how the Bill achieves that. The review also recommended that the regulatory structure should be simplified. The Financial Reporting Council should assume the role and functions of the Accountancy Foundation, thus creating a single, independent regulator responsible for setting, monitoring and enforcing accounting and auditing
260
standards and overseeing the regulatory activities of the major accountancy bodies. This restructuring did not require legislation and is already largely in place.
In short, instead of a British Sarbanes-Oxley Act, we have had a period of tough and detailed analysis by the Government in partnership with business, institutional investors, independent regulators and the accountancy profession. That reflection has led to a package of targeted measures, few of them requiring legislation, aimed at ensuring that we have very high standards of financial reporting and independent audit. The first part of the Bill implements the final pieces of that package as well as measures to strengthen the company investigations regime and make it more effective in uncovering misconduct.
Clauses 1 and 2 will ensure that there are independently set standards for auditing, and independent arrangements for monitoring and investigating auditors and imposing disciplinary measures where necessary. The professional accountancy bodies that are recognised to supervise auditors will have to sign up to such standards and arrangements.
Clauses 3 to 5 enable the function of recognising the audit supervisory bodies to be delegated to an existing body. We expect that this will be the Public Oversight Board for Accountancy, which is part of the Financial Reporting Council. It is an expert independent body which also has responsibility for oversight of the major accountancy bodies. The Government believe that the combination of these two functions will improve the effectiveness of oversight of the supervisory bodies.
Clause 6 amends the existing provisions on the approval of overseas qualifications for auditors. It will provide greater flexibility to approve those overseas qualifications that are at an equivalent level to those in the UK. For example, where an overseas qualification is approved, it will be possible to recognise auditors who gained the qualification after the date when it reached equivalence with British standards but not those with earlier qualifications.
Clause 7 implements a recommendation of the Co-ordinating Group on Audit and Accounting Issues and provides a power to require larger companies to publish a breakdown of the non-audit services which they buy from their auditors. That will increase company transparency, and enable interested parties to judge whether the auditors could be subject to a conflict of interest through the different aspects of their work for a client.
Clauses 8 and 9 will help auditors to obtain all the information they need to carry out an effective audit. Clause 8 enables auditors to obtain relevant information from specified persons who hold it, while Clause 9 requires the directors' report to contain a statement about the disclosure of relevant information to the company's auditors.
Clauses 10 to 12 and Schedule 1 are concerned with the enforcement of accounting standards, which is a task carried out by the Financial Reporting Review Panel. Clause 10 makes technical changes to reflect the reorganisation of the Financial Reporting Council. Clause 11 enables the Inland Revenue to pass

261
information to the panel. Clause 12 enables the panel to require information from companies and their auditors where there is a question whether the accounts comply with the law.
Clause 13 extends the power to specify a body to issue standards for financial reporting purposes. That paves the way for a standard for the new operating and financial review which the Government hope to introduce later this year and on which we shall soon be consulting.
Clauses 14 and 15 enable a body—in practice the Financial Reporting Review Panel—to be empowered to review the interim accounts as well as annual accounts of those companies for which it already has responsibility. Clause 14 also allows the panel's remit to be extended, so that it may examine the accounts of issuers which are not Companies Act companies but are listed in the UK. This will enable the same body to examine all major accounts, and will ensure better coordination between company and financial services law.
Clauses 16 and 17 are concerned with funding arrangements for the Financial Reporting Council, including a power to levy listed companies and the accountancy profession, in case the current voluntary arrangements for tripartite funding with the Government should ever break down.
Clauses 18 to 21 strengthen the powers of the DTI's company investigators to obtain documents and information and give them powers to enter and remain on premises. They also provide statutory immunity from liability for breach of confidence for individuals and businesses volunteering information in specified circumstances.
Clause 22 and Schedule 2 deal with minor and consequential amendments relating to Part 1 of the Bill.
Part 2 is concerned with a different subject, namely community interest companies. These were recommended by the Strategy Unit report Private Action, Public Benefit, as a new, purpose-made vehicle for some social enterprises. That idea drew on earlier work by several people and groups, including Stephen Lloyd, Roger Warren Evans, the Charity Law Association and others. My noble friend Lady Thornton, who is chair of the Social Enterprise Coalition, expertly explained social enterprise in the debate on the Queen's Speech. I do not need to add anything to her speech, other than to say that consultation has confirmed a real demand for the community interest company as an additional form for social enterprises, an alternative to charities, industrial and provident societies and ordinary companies.
We believe that the creation of the community interest company will help those people—and I am pleased to say that there are many of them—who want to start, and work in, organisations which do business for the ultimate benefit of the community or part of it. The community interest company will be the right vehicle for many organisations which wish to trade and to supply goods or services for a social purpose, such as local regeneration or providing training within
262
a community. It will be clearly identified as a community interest company so that everyone who deals with it will be able to see instantly that it has social aims. It will be subject to regulation at the minimum level necessary to maintain confidence in the form and to ensure that it uses its assets and profits for the community interest.
Clauses 23 to 26 and Schedules 3 to 5 define the community interest company and the main elements of the regulatory structure. Clauses 27 to 32 and Schedule 6 deal with the key distinguishing features of this new type of company, including the power to cap dividends and interest, the community interest test, which will help to decide whether an organisation can become a community interest company, and the annual community interest report which such companies will make.
Clauses 33 to 37 deal with the ways of becoming a community interest company: by formation or conversion from an existing company, including a charitable company. There are special provisions for Scottish charities as charity law is a devolved matter.
Clauses 38 to 48 and Schedule 7 set out the regulator's powers to intervene to ensure companies operate properly in the community interest. There are some obvious similarities with the powers of the Charity Commission in England but the level of regulation is intended to be much lighter than for charities and the regulator will be under statutory constraints to ensure that this is so.
Clauses 49 to 53 deal with conversion from a community interest company. The only way to cease being a community interest company, apart from winding up, will be to convert to another form which has a similar "lock" on assets to ensure that the proceeds of the business cannot be diverted to private benefit. These clauses therefore provide for community interest companies to convert to charitable status. They also enable the future introduction of a mechanism to allow conversion to an industrial and provident society with a lock on assets. The Government plan to consult shortly on the introduction of such a lock for certain industrial and provident societies.
Clauses 54 to 60 are supplementary provisions, covering matters such as the relationship between the new regulator and the registrar of companies. These clauses also specify the information gateways between the regulator and other bodies.
The final four clauses of the Bill are largely technical provisions and Schedule 8 contains repeals.
The clauses on community interest companies will need to be supplemented by regulations setting out more of the detail, especially on matters which are likely to require amendment from time to time in the light of experience and changing circumstances. The Government will make available a preliminary draft of the main regulations before the Bill reaches its Committee stage so that the House can see more of the detail of the proposal. The Government will, of course, welcome the assistance of the social enterprise sector in improving the draft regulations before they are formally laid before both Houses for approval.

263
Finally. I should mention one matter which is not in the Bill, namely the issue of auditors' and directors' liability. It is no secret that some in the auditing profession have lobbied the Government to use the Bill to change the law to allow auditors to limit their liability to companies for negligent audits. However, the Government wish to hear a wide range of views on the related issues of auditor and director liability and therefore published a consultation document on this subject on 16 December. The consultation runs until 12 March and the Government will decide any further steps in the light of responses.
This is an important Bill, the product of much consultation and expert input. The provisions on financial reporting and investigations will support non-legislative action already taken and will help to maintain confidence in the financial integrity of companies. At the same time, the provisions on the community interest company constitute a useful addition to the forms available to social enterprise. I commend the Bill to the House.
Moved, That the Bill be now read a second time. —(Lord Sainsbury of Turville.)
11.54 a.m.
Lord Hodgson of Astley Abbotts: My Lords, I thank the Minister for his characteristically comprehensive introduction and for allowing us to have a brief meeting earlier this week for a preliminary canter over the ground.
I begin by declaring some interests. I am a non-executive director of Britain's largest regional brewer, a company listed on the Stock Exchange, and of a mutual building society; I am also a non-executive chairman of an engineering company listed on the alternative investment market and of three private investment companies. In several of those companies I serve variously on audit, compliance, remuneration and nomination committees.
On 27 November, the debate on the gracious Speech, which was devoted to the economy and industrial affairs, was opened by the Minister and closed by the noble Lord, Lord McIntosh of Haringey. The noble Lord, Lord McIntosh, teased noble Lords on this side of the House about what he saw as the small number of speeches which focussed on the macroeconomic position of the country by referring to this as, to use his phrase,
"the dog that did not bark". —[Official Report, 27/11/03; col.85.]
Today we have another dog that did not bark. Because what we are discussing here are but two small—very small—parts of what should be two major Bills that the Government have yet to bring forward regarding the reform of company law and the reform of charity law.
As regards company law, the Government have taken the easy course and focussed on a narrow part of the reforms in a way which, no doubt, they hope and believe will win them the plaudits of their Back-Benchers in the other place. Directors and auditors are always easy targets. But the Government are only too aware that company law as a whole urgently needs an
264
overhaul. We know this because the Secretary of State has told us so. In the preface to the paper Modernising Company Law published in July 2002, Patricia Hewitt wrote:
"When British company law was created in the 19th century, it was a source of competitive advantage. Now it has become a competitive disadvantage. The law has become encrusted with amendments and case law over generations. It has failed to adapt to meet the changing role of small enterprises, IT and international markets…So the law needs to change. It needs to modernise and reform. It needs to be fit for the 21st century and beyond".
If one leaves aside the ghastly, cliché-ridden style—if I have to listen to anyone else talking about "fit for the 21st century and beyond" I shall go mad—this is a fairly ringing endorsement of the need. It was written in July 2002 and we are now in January 2004. So where is this reform that the Secretary of State says is so urgently needed?
This strategic failure has a knock-on impact even on the narrow measures we are discussing today. The first impact is that these measures, if enacted, will increase the burden of responsibilities carried by company directors. If we are to attract men and women of quality to serve on company boards, they are entitled to seek protection by means of insurance. Yet not only is insurance increasingly expensive or simply unavailable, but Section 310 of the Companies Act 1985 is also unhelpfully drafted.
That section is also of relevance when considering the issue of auditor liability. As the Minister said in his opening comments, the DTI has issued a consultation paper on both director and auditor liability. I note that the closing date for consultations and submissions is 12 March. It would be helpful if the Minister could indicate more clearly than he was able to do in his opening remarks whether the Government have any intention of tacking on provisions as regards this issue at a later stage in the progress of the Bill—assuming the outcome of consultation is satisfactory.
The second impact of the failure to reform company law is the incomprehensibility of the legislation as a result of its successive layers of change and amendment. Reference to the Companies Acts 1985 and 1989 require one to crawl over a multitude of other texts, with cross-referencing and outdated sections littered everywhere. The Bill should have, as all Bills should have, a careful scrutiny in your Lordships' House. But it is extremely hard to unpeel the layers of legislation to find the real impact. The Minister, with his team of officials, may not find this too hard but we certainly do.
I hope that when the Minister winds up the debate he will be able to give us more definite news as to when the Government expect the good ship "Company Law Review" finally to reach harbour.
Before I turn to the specifics of the Government's proposals, I shall make a couple of important points that are an important background to our discussion of the first part of the Bill. The first is that all new regulation comes with a cost attached. The regulation may be entirely laudable, but there is a cost—a cost that has an impact, however marginal, on the

265
competitiveness of UK plc. It is important for us always to bear in mind that an accumulation of costs, each of which may individually be marginal, can result in an increase in total costs that is not marginal.
An example is the Licensing Act 2003, which your Lordships passed in the most recent Session. Ministers were inclined to downplay the costs of those new regulations, but I must tell the House that the brewery of which, as I said, I am a non-executive director is putting aside £1 million in the current financial year to cover the costs of the new Act.
I shall not re-run the arguments about the Act, but I draw your Lordships' attention to the practical results of our work in this House. For that £1 million does not come out of thin air: it must be paid for. It is paid for by shareholders in the form of reduced profits; by customers in the form of increased prices; or by staff in the form of loss of jobs, because efficiencies have to be made up in other ways. The effect on their business for UK companies, which are competing on an international stage with companies based overseas that do not have to bear those cost burdens, can be substantial.
The second general point is the need always to distinguish between fraud and risk. Fraud is unacceptable: it is theft that causes agony and heartache to employees, shareholders, suppliers and customers. It must be rooted out. But risk is another matter. Risk is an important part of the market economy by which new ideas, products and services come into being. Some succeed but, inevitably, many fail. A risk that does not work is not a fraud. Our economy will work better if there are what my business school professor used to call—I think that he was in turn citing Professor Schumpeter—"gales of creative destruction", however painful they may be in individual cases.
The issue of risk is addressed fairly and squarely in the combined code to which the Minister referred, and which I suspect we shall discuss at length in Committee. Section A.1.1, which addresses the role of the board, reads:
The board's role is to provide entrepreneurial leadership of the company within a framework of prudent and effective controls".
I emphasise the use of the word "entrepreneurial", which indicates and implies a preparedness to take risks. Accordingly, where the Government propose legislation that effectively targets fraud and malfeasance, of course they have our support, but if the proposals are no more than box-ticking exercises that inhibit entrepreneurial flair and increase the regulatory burden for UK plc, we shall be less happy.
So we shall measure the Government's proposals against four tests, the first of which is: are the proposals proportionate? The final report on the regulatory regime of the accountancy profession, published in January 2003, some of which the Minister quoted, but not all, states:
"The UK's existing regulatory system is widely acknowledged to be among the best in the world. During the course of our work, we found no evidence that the system was seriously flawed".
266
So we must be certain that the proposals meet real needs and are not just knee-jerk reactions to one-off events.
Secondly: are they balanced? For example, Section 447 of the Companies Act 1985 already gives considerable investigatory powers to the Secretary of State. Do those powers really need the enhancement that is found in Chapter 3? For example, how are we to prevent them being used in future for fishing expeditions and how do we ensure a proper level of confidentiality?
Thirdly: are the proposals clear and workable, from the point of view not just of the director, whether executive or non-executive—and that difference is itself an issue—and the auditor, but of more junior employees who are for the first time to be swept up in the provisions of Clause 8? Fourthly and finally: are they effective? For example, there is the issue of how to deal with overseas subsidiaries. I understand the serious issues involved in extra-territorial jurisdiction and in no way do I minimise them. But, as the Minister said, so far in this country we have had few Enron-type scandals. The case that probably came the closest was the collapse of Barings Bank. How did that come about? Not because of anything done in the UK but because of an overseas subsidiary—on that occasion, in Singapore.
The Minister referred to the well publicised problems with Parmalat in Italy that have emerged during the past few weeks, which on present evidence seem to revolve around money held in offshore banking centres. Is he convinced that the Bill will provide an adequate net to catch such cases?
It is no good creating a system so detailed that it becomes a box-ticking exercise in which directors have to commission reports on reports to protect themselves. Such a system corrodes trust and undermines the willingness of directors to take risks and exercise judgment. We need high quality, knowledgeable and experienced people as directors of companies. We may be reaching a position where people are discouraged from putting their names forward because the personal and financial risk and that to their reputation is too high.
Further, in their zeal to avoid conflicts of interest, the Government may create a situation where the only qualification for being a non-executive director of a company is to know nothing about it. In many—although not all—cases, conflicts of interest can be perfectly satisfactorily addressed by disclosure. In that way, one can use the expertise and knowledge of those with an interest in the success of the company to the best advantage of the whole.
This is not an issue for party-political point-scoring. I can conclude, summarising our concerns about this part of the Bill, by quoting from an article by Patience Wheatcroft which appeared in the Times on Thursday 27 November. She wrote:
"The same contradiction between the Government's claimed intention of reducing red tape and its unstoppable practical drive to add more control, regulation and cost at every turn is evident in its plans for company law. Expert and indefatigable efforts have been made by various inquiries over the years, including lengthy

267
and detailed recommendations from this Government's own commission, to simplify and modernise company law. Some widely agreed proposals date back decades.
Patricia Hewitt, the Trade and Industry Secretary, used to sound terribly keen on this modernising project. Yet it seems to have been relegated to an as yet unscheduled Part 2 of proposed legislative changes. Part 1, which takes precedence this year and may be the only part that reaches the statute hook, adds more burdens and controls …The emphasis of the Part I Companies Bill will be to strengthen regulatory powers, which seems unnecessary. It will force directors to make legal statements that they have not forgotten to disclose anything, which mainly increases potential punishments and will put off more potential non-executive directors. "
So, although we do not object in any way in principle to what the Government have in mind, we shall be tabling amendments to tease out the thinking behind the provisions to ensure that our tests of proportionality, balance, clarity, workability and effectiveness are met.
I turn now to the second part of the Bill, which concerns the establishment of community interest companies. In passing, I note that that, too, is a minor—some would say very minor—part of the Government's proposals to reform the law on charities. There is a sense of carts before horses. It would probably have been better and more effective to have a debate on CICs after the major debates that will undoubtedly take place on charity law reform. It is hard to believe that those debates will not throw up issues and concerns that will affect CICs. Sadly, by that time, the legal shape of CICs will be enshrined in statute and one hesitates to estimate how long it will be before parliamentary time can be found for any statutory changes that may be needed.
Accordingly, it would be helpful if the Government could outline their thinking on the likely scale of the CIC movement. In his opening remarks, the Minister referred to there being a "real demand", but presumably, in drawing up the legislation and preparing the financial numbers given in the Explanatory Notes, the Government made some estimate of the number of CICs that are likely to be set up during the next few years. Perhaps the Minister would care to share those figures with the House when he responds.
That having been said, we approve of legal structures that have the flexibility to respond to local conditions. So we are happy to give them a welcome in principle. However, we have areas of concern that we will want to discuss in Committee. First, will there be a level regulatory playing field for CICs and private limited companies? I had the pleasure of listening to the knowledgeable speech made by the noble Baroness, Lady Thornton, on CICs during the debate on the gracious Speech. She said that she hoped CICs would compete with limited companies—quite right, too. But that means that there must be no regulatory advantage or disadvantage to one side or the other.
Secondly, the new CICs will need the right regulatory. touch. Many will be set up by groups of people relatively unversed in company law and possibly also in commercial activity. They will need advice, particularly in the early years, before custom and practice have evolved. When I was involved in
268
setting up the original regulatory regime in the City, as a founder director of the Securities and Investments Board (SIB), one of the issues that most infuriated smaller firms was the SIB's inability to give helpful advice. When asked about a particular course of action, our only answer was to the effect of, "We cannot help you. We suggest that you go ahead, and if we don't like it we will test it in the courts". If a similar situation prevails here—from my reading of Clause 34, I think that it may well do—it will represent a considerable disincentive to the emergence and development of CICs.
The third issue is skeleton primary legislation, which has bedevilled our debates on many Bills in the past year. To have an informed debate about the proposals, we need to see more detail about what the Government propose. The Minister said that the Government intended to have draft regulations available by Committee stage. That is good news, for which I thank him and his officials. We look forward to having a chance to read those regulations, preferably some way ahead of Committee stage, so that we can get appropriate responses from external bodies affected.
In summary, we want the United Kingdom to be a good place to do business. That means striking the right balance between too much and too little regulation. We shall want to be sure that the proposals in the Bill achieve that difficult reconciliation. We are disappointed at the continuing delay in the overhaul of company law. That long-overdue change would certainly improve the United Kingdom's competitive position. We see many advantages in CICs but wonder, if the regulatory regime is kept as proposed, how many will emerge in the event. We look forward to giving those important issues a thorough airing in Committee.
12.12 p.m.
Lord Sharman: My Lords, I declare an interest as chairman of two companies listed on the London Stock Exchange. I am on the board of two other companies, in which I variously function as a member of the audit committee and the remuneration committee.
I generally welcome the fact that the Government are addressing the subject matter covered by the Bill. But I make no apologies for returning immediately to the subject matter raised by the noble Lord, Lord Hodgson: there is a major concern about where we are on the desperately needed overall reform of company law. The Government seem to be taking a "nibble" approach to the reform of company law. In the previous Session, we nibbled off a piece with the Enterprise Bill, which dealt with insolvency, bankruptcy and such matters. This time we are looking at audit regulation and creating a new type of company—another nibble, imposing yet further burdens on those concerned with the management of companies, their officials and offices.
The Bill contains 17 clauses on the reform of regulation, five clauses on improving company investigations and 37 clauses establishing community interest companies, and incidentally creating yet

269
another regulator. But it does nothing to help the beleaguered company director, who, as the noble Lord, Lord Hodgson, said, must dig his way through reams and layers of legislation enacted by way of amendments to previous legislation to find out what he should or should not be doing. That is all very well if you are learned in the law, but most company directors are not. That only provides for the future wellbeing of the legal profession—something that my colleagues may endorse but which I do not find necessarily good. It is critically important that we help our directors by modernising company law. We must reach that position very quickly. An enormous amount of work and consultation has been done on the matter, and the proposals should not sit waiting to be enacted.
My three comments on the Bill's contents almost certainly arise from the complexity of the layers of amendments to legislation. First, I simply cannot understand from reading the Bill how the standard-setting process will work. The Bill requires all sorts of people to become involved; it mandates them to do work. It mandates the institutes, where relevant, to participate. But who will set the standards; who will ensure that they get set; and who will be responsible for paying for that?
That leads to the second issue—costs. Very wide-ranging powers are being vested in the Financial Reporting Council and the Financial Reporting Review Panel. The information states that in 2006–07 we are looking at costs of some £12 million. My immediate reaction to that figure was that it was low. It might be useful to look at what the much-quoted Sarbanes-Oxley Act provided for in the United States. The Public Company Accounting Oversight Board in the United States, which was established by Sarbanes-Oxley, had a budget for 2003 of 68 million dollars, and for 2004 its budget is 103 million dollars; in 2003 it had 126 staff, and in 2004 it plans to have 284. Those are significant figures. I do not suggest for one moment that the Bill takes us to the position of Sarbanes-Oxley, but if we are not very careful, as in all such situations the costs will grow and grow. Will the Minister comment on the future funding of the costs? I understand that the existing informal arrangement is for one-third funding from government, one-third from the accounting profession and one-third from listed companies. Is it intended that that should be adhered to in future, or what provisions will there be for funding the costs?
The third issue on the content of the Bill regards the obligation that the Bill imposes on individuals to provide information to the Financial Reporting Review Panel and, in Clause 18, the Secretary of State. What appears to he missing is a reasonableness test. Perhaps the complexity of the legislation causes me to say it, but my reading is that there is no requirement for a reasonableness test in pursuing an allegation. Does that mean that the FRRP will pursue every allegation, whatever its foundation, or will it be obliged to take a test of reasonableness first? Otherwise, I foresee a situation in which boards of directors are inundated with requests for information
270
because of spurious allegations through all sorts of channels. If that arises, we will quickly ensure that the £12 million estimated costs will be on the low side indeed. Will the Minister, in his winding-up speech, say whether the reasonableness test will be there?
The Minister touched on the operating and financial review, on which I wish to ask him a question. He said that the Government intended to consult on that part of the annual report later this year. Can he tell us more about the timetable for that; when the likely imposition of the new requirement for company reporting will take place; and, most importantly, the degree to which the Government envisage that it will form part of an annual report that will be verified or attested to in some way? Here, again, we are looking at further burdens on boards of directors without necessarily helping them by simplification of company law.
There are a number of matters of detail within the Bill, in particular with regard to the establishment of community interest companies. We shall pursue them in Committee, but I shall not raise them now. In his opening remarks, the Minister referred to the public consultation that has been embarked on regarding director and auditor liability. He said that the consultation period ends on 12 March. I shall assume that in normal circumstances—from my perspective, it is highly unlikely that the consultation will come forward with a consensus or a clear answer—there will be time to include amendments in the latter stages of the Bill to reflect any changes that need to be made. But, more importantly, can the Minister confirm, or otherwise advise us, what would be a likely timetable to enact the results of the consultation on liability?
With regard to auditor liability, it was my understanding that the Department of Trade and Industry had embarked on a discussion with the major accounting firms regarding further transparency of their affairs. What progress has been made on that? In that context, perhaps I may explain that I am not just looking for information about the operating performance. It is very important that the market-place should understand the quality processes and internal disciplinary procedures under which these firms operate. I should be very interested to hear his comments on that.
In summary, the Bill tackles a number of issues that need to be addressed. They are a little piece of the total picture of company law reform that needs to take place. I welcome it for that. But I leave the question: what about the rest? How long does the British business community have to wait for a modern framework of company law, which it so desperately needs?
12.20 p.m.
Baroness Thornton: My Lords, I welcome the introduction of the Bill. I think that it is safe to say that this is a Bill in two parts. As one of the DTI Ministers said at a recent meeting, this Bill concerns saints and sinners. I intend to address my remarks to the more saintly part of the Bill—Part 2—that concerns the

271
establishment of a new type of company; namely, the community interest company. I should also like to declare an interest as the unpaid chairman of the Social Enterprise Coalition, the national voice of social enterprise representing all the major organisations that promote and develop social enterprises. I should like to thank my noble friend the Minister and others who have mentioned the work of this organisation.
We have before us a proposal that has already benefited from wide consultation. As has already been mentioned, the Bill needs to be seen in the wider context of both the reform to charity legislation and the updating of IPS legislation. So we have the DTI, the Treasury and the Home Office working in harmony—I hope and expect—to drive forward an agenda which will encourage the growth of enterprise co-operatives and community regeneration.
I believe that we can look forward to an interesting debate on both the principles and the detail of CICs when the Bill moves into Committee. I was very pleased to receive, in the past two days, briefings from both the CBI and the Local Government Association that welcome the introduction of the CIC. Interestingly, both organisations recognise the contribution that CICs might make. Perhaps I may say that the CBI has stated that it would be,
"for the benefit of the local community … such as in childcare provision, social housing, leisure and community transport".
Indeed, the CBI continues:
"This will be of interest to some member companies wishing to set up CICs for their corporate responsibility activities".
I think that that is a very interesting comment. Indeed, the Local Government Association states:
"This form of company could be a useful tool for local authorities, particularly in asset based economic regeneration and in developing the role of the voluntary and community sector in service delivery".
There appear to be three key features of the new company that distinguish it from either a charity or a traditional company form. First, CICs will have an asset lock. Secondly, they will be expected to work for a community. Thirdly, they will be expected to report on the work that they do for that community. For many people, the single most important feature of the CIC is a strong, transparent lock on assets and profits, along with the power to ensure that the lock is meaningful. That is intended to give people real reassurance about what CICs are set up to do.
At present, many social enterprises are set up as companies limited by guarantee, sometimes with a custom-made lock on assets in their constitution. That is not an easy process. Few lawyers are familiar with it and their advice can be very expensive. Often, it is a case of reinventing the wheel over and over again. From the work that has been carried out by the Social Enterprise Coalition and its members, I know that this is a major barrier faced by newly emerging social enterprises. It also creates real uncertainty among third parties, such as banks, funders and investors, about the status of this type of enterprise. So the asset lock not only will provide a lock for the assets but also is intended to give the new
272
company a brand, which would give confidence to third parties. During the course of the Bill, we will need to test whether the proposals, as outlined, will do the trick.
The second key principle of CICs is that they should serve community interests and should he transparent in what they do. Serving the community means that there will be a test before one can join the CIC "club". It is called the community interest test. The key issue will be to strike a balance between creating a slow, bureaucratic process and having a community interest test that is robust enough to protect the good name of the CIC. It is proposed that aspiring CICs should have to make some declarations when they apply. We will need to test whether the declarations, as outlined, will do the trick.
The real focus will be on community interest; it is what CICs are meant to do. In many ways, the test will be what they will do when they are up and running. If there is a genuine concern about whether a CIC is serving the community within the meaning of the Bill, the new CIC regulator will be able to take rapid action to address that—for instance, by safeguarding assets or removing directors. So CIC status is not something to be taken on lightly. Will the Bill ensure that the regulator will hold people to the promises that they make?
The third key principle is that CICs should be transparent. It is proposed in the Bill that CICs should report each year on what they are doing for their communities and that that should go on the public record. Again, it is vital that that does not just produce red tape. The report should be straightforward to produce and integrated with the current company reporting process. It should be able to give the public a feel for what CICs are doing to deliver on their aims. But it will also show how CICs are engaging with the people affected by what they do—that is, their "stakeholders"—and it will address concerns, such as directors' pay, which are sensitive not only in the wider world but also in the social enterprise context.
There are further questions. Will the sector that has been involved in bringing the Bill forward also be involved in the appointment of the regulator? We will need to examine how the proposed asset lock will work. What information should be included in a CIC's annual report? Where will the cap for the dividend payable on "investor" shares be set? The regulatory framework that will follow from the Bill will be very important. I am pleased to have the Minister's assurance that the consultation process will start immediately.
I believe that the Bill is the product of a successful consultation process. Certainly, the Social Enterprise Coalition has felt that that was the case. Also, all the way through the process we have stressed the importance of the reform of the industrial and provident societies' legislation, which must go in tandem with the creation of the CIC. In the same way that there needs to be a level playing field with traditional companies, so there should also be a level playing field with the industrial and provident societies, which cover co-operatives, housing co-operatives and other forms of social enterprise. It is

273
not acceptable that there should be a nice, new, cheap, easy-to-use vehicle in the shape of the CIC when the legislative and regulatory framework governing cooperatives and others is, at best, somewhat creaky. However, I hope that the Treasury will build on the work that my honourable friends Gareth Thomas, Mark Lazarowicz and Mark Todd have done in the past two years in their Private Member's Bills and that some proposals will come forward from the Treasury soon.
Our job, therefore, is to test and improve the new CIC in its passage through the House and, when the Bill is enacted, to add it to the family of different ways to set up social enterprises, co-operatives and community enterprises. The Government will then have the task of promoting that new form of company across government departments and industry. I would like some reassurance that resources will be made available to do that, because if the new law is not widely promoted, it will fail. I look forward to working with your Lordships on the Bill in due course.
12.30 p.m.
Lord Patten: My Lords, I am glad to follow the noble Baroness. She will forgive me if I do not follow her remarks on community enterprise for I intend to restrict mine to audit and company law issues. In so doing, I should remind your Lordships of my relevant interest as a company director as declared in the Register of Members' Interests. For the sake of completeness, I should perhaps declare also the interests of my wife. She is a company chairman who serves on the board of four public companies, two of which are in the FTSE 100. However, I assure your Lordships that her Ladyship and I operate a strict Chinese duvet policy as far as disclosure matters are concerned at home.
Perhaps I may join my noble friend Lord Hodgson, who made an excellent speech, and the noble Lord, Lord Sharman, in expressing my disappointment that the DTI has yet again failed to bring forward a proper company law reform measure in a seemly and timely way. It is not the first time that I have said that I find the DTI asleep on the job in such matters. It aestivates in the summer months and it hibernates in the winter months.
What do the Ministers in the DTI do all day long? Your Lordships should be told. The Minister should give a pledge that there will be a company law reform measure before the next general election. If he is not able to do that, it will clearly be a matter for the incoming Conservative government under the leadership of my right honourable friend Mr Michael Howard, who has extremely detailed experience of taking complex and complicated financial measures through the other place, going back to the 1980s. He and the rest of my noble and right honourable friends understand business in a way in which it is clear less and less, alack, this Government now do. They have produced a headline-grabbing measure.
As a backdrop to my remarks, I should join my noble friend Lord Hodgson in saying that capitalism and markets are a great force not only for material
274
good, but also for moral good, when properly conducted. I take as my touchstone the valedictory remarks of the Bishop of Hereford to this House during the debate on the gracious Speech on 27 November. The much-missed Bishop said,
"as far as capitalism is concerned, my opinion is that, if properly regulated, like hunting, it is morally all right". —[Official Report, 27/11/03; col.71.]
That is good enough spiritual guidance for me.
However, the question is: what kind of regulation is right and to what degree? In corporate life, as in any other part of public or private life, people sometimes do bad things to enrich themselves. That is part of human nature, but in market economies, accidents happen. Failure is a natural part of a market economy, whether that failure is innocent, bad luck, misjudgment or due to blatant corporate theft.
When scandals blow up, governments tend to respond by introducing legislation to make sure "this never happens again". There is scant chance of that. All too often, ill-thought-out regulations are introduced that do not prevent malfeasance happening again. Therefore, we need to test the Bill's proposals very carefully. My noble friend on the Front Bench set down four criteria. I have four slightly different ones: need, effectiveness, common sense and cost—but while always reaffirming the benefits of the market system.
As the Minister said, certain issues must be addressed. One has to go no further than the current issue of the Economist. Page 5 features a billboard not just of companies in trouble, but also of accountancy firms under some stress. Halfway down the page, we learn that KPMG has quit as auditors of Hollinger Incorporated. Further down, we read that Grant Thornton has claimed that it was the "victim" of a fraud, some time before it could possibly have conducted an internal investigation of what went on in its Italian partner. However, that is what it claimed. Those two stories offer the inelegant spectacle of two otherwise distinguished professional services firms publicly running for cover—of auditors running to the hills as fast as they can.
The noble Lord, Lord Sharman, referred to a strong feeling among many audit practitioners, some of whom I count among my friends, that they need to have their responsibilities and liabilities limited. I hope that my noble friend Lord Freeman, who comes from that background, will continue to regard me as a friend after I have finished my speech. The Minister referred to the consultation process on liability that was launched on 16 December. I advise the Government to approach liability reform with extreme caution. Why should auditors have that protection, while others in business, be they executive or non-executive, are perhaps denied it?
Related to that issue is the fact that 97 or 98 per cent of the top 350 companies in this country are audited by just four auditors. All of the top 100, and all bar eight of the next 250, are audited by the "big four". That is perilously close to 99 per cent. Some people see that as unhealthy or anti-competitive; others put it down to the excellence of the "big four"—they do contain many

275
great auditors, to whom I pay tribute. Others attribute it to fashion, or even to the fact that company finance directors think that they had better play safe and go to the "big four", because the "big four" have big pockets and if liabilities do arise, they stand some chance of having some of them met. However, capping liabilities would greatly diminish those firms that audit risk-takers. Risk is extremely important, as my noble friend pointed out. No risk, no profit. Auditors should not he allowed to become the cosy, cosseted species in the way in which some people are lobbying.
I end on a note of further disappointment that the DTI seems to be doing so little to promote better and more widespread ethical practices in this country. Sometimes, alas, there is a thin line between ethical or unethical behaviour, whether in business or in politics. When the rewards are big enough, no amount of ethics training or corporate ethics officers will deal with the issue. However, what makes the market system work is trust, and individuals and companies doing what they say they are going to do. Building an ethical code into a company's life helps to make sure that people pause and think, often about simple things. They may ask themselves: "Hang on. Would I like to tell my wife and children what I am about to do and why I am doing it?" Or "Just a moment, would I like to read about this action I am taking in my office in the media tomorrow?" One reputable US company of which I have personal experience has taken ethical training and ethical matters so seriously that everyone has ethics checks and training every year, not just for the shop-floor but also for the chairman, the chief executive and the whole of the board. In companies such as that, ethical considerations become part of the warp and weft of corporate life. It is not a matter for PR-conscious, corporate special interest areas such as corporate social responsibility or corporate environmental policy, worthy and important though they are.
I therefore conclude by urging on the Minister more encouragement of that approach. I mean "encouragement", but please, at all costs, not some new, government-inspired, Higgs-style report on ethics that is all about process and box-ticking rather than substance. Business has had quite enough of that, as it has had of over-regulation.
12.40 p.m.
Lord Phillips of Sudbury: My Lords, I am grateful to the Minister who, in opening this debate, paid tribute to Roger Warren Evans and Stephen Lloyd for having invented the concept of the community interest company, the CIC. The Bill before us follows substantially the skeleton form that they produced three years ago. It is not often that we are in the business of creating a new corporate vehicle and I think this could be the first entirely new corporate category since the 19th century.
So fascinating is the Bill that over the past 24 hours I have managed to miss one train and, on two other occasions, travelled past my intended station—including this morning. It is a riveting read. And a period of around seven minutes is not long enough to cover all I want to say at this stage of our consideration. I suspect that the
276
noble Baroness, Lady Thornton, and myself may be the only speakers to address Part 2, covering community interest companies.
Before turning to my main points, I want to say briefly that I believe that there should be a greater entitlement to information for members of such companies than is the case for normal companies, and that we should provide for that. Further, we should consider providing for a more open memberskp of such companies than is the case for traditional business entities. Again, no provision has been made for that. I should also be grateful if the Minister would consider making gifts from one CIC to another exempt from stamp duty because on distribution following a winding-up, surplus assets will have to he sent to another CIC or a charity rather than put in the pockets of the members. Will the Minister consider allowing capped interest paid by CICs to be treated as pre-tax charges, as is the case for industrial and provident societies? Finally, could capped dividends enjoy the same tax relief as that allowed under enterprise investment relief schemes?
The first and most important point I want to consider relates to the whole principle of preventing a CIC also being a charity. Clause 23(3) states that:
"A community interest company established for charitable purposes … is to be treated as not being a charity".
Complicated provisions set out in Clauses 36.37, 51 and 52 deal with this confusion this paradox, as I see it—together taking up some three-and-a-half pages of text. This is the first time in English history that a body established for exclusively charitable purposes, with a constitution entirely in accordance with the requirements of charity law and which operates exclusively as a charity, is to be prohibited from registering as such.
The existing law has always been simple. Whatever the form of the charity, the factor which determines whether it is or is not one is the substance—its activity and purposes. That is why in this country we have a wider range of charitable options than any other in the world, and it is why the other Anglo-Saxon jurisdictions have followed us. That is in stark contrast to the Napoleonic code countries where entitlement or status follows form. The freedom that this has given the charitable sector in this country, along with the unique protection afforded to the public, will be subverted if the clause is passed.
I think I understand the reasoning: I suspect that there is a desire to prevent what might be seen as confusion in the public mind over the nature of a CIC. However, I urge Ministers to look at this again, no matter how attractive that argument may be at first blush. If the prohibition stands then let us make no mistake: we will then have the bizarre state of affairs whereby the type of company most distant from that which the public conceives of as a "charity"—namely, a typical company limited by shares, which is the standard vehicle for a private benefit business—will continue to be permissible as a vehicle for charity, while a CIC—expressly a community interest entity

277
with controls on the distribution of its assets—cannot be used as a vehicle for a charity. That is extremely confusing.
What is more, we may get into an "Alice in Wonderland" situation whereby a CIC with charitable purposes—that is admitted as a prospect in Clause23—will not be able to be a charity, but none the less will be able to blazon abroad as much as it likes the fact that it has charitable purposes. I put it to noble Lords that that is daft.
Furthermore, if CICs are allowed to be charities, as are all other forms of company, trusts or unincorporated associations, they will also have to comply with charity law. They will not be able to pay directors and they will be subject to many other provisions that will inhibit their freedom of action.
Not only do I see no downside to continuing with the age-old system vis-à-vis charities, but there is a huge advantage in it. In time, I believe the CIC will prove to be a more popular vehicle for corporate charities than any of the existing forms, given the ethical match between a CIC and a charity. It should also considerably shorten and simplify this Bill. A number of noble Lords have already referred to its length and complexity.
My second main point concerns the absence from the protection provisions in the Bill of any control over remuneration. Part of the Government's case set out in paragraph 159 of the Explanatory Notes declares that they want to provide the public with,
"a clear assurance of non-profit-distribution status".
To allow the unlimited remuneration of the directors or employees of CICs would be to drive a coach and horses through any attempt at controlling the distribution of the assets of a CIC. That is because Clauses 27, 28 and 29 as drafted only inhibit levels of dividend payments and interest payments. They also control the distribution of assets on a winding-up, but they do nothing at all to constrain the remuneration, level of bonus payments or salaries of members of a CIC board. I urge the Government to deal with that.
Perhaps I may refer briefly to the discretionary power given to the regulator under the terms of Clause 27(3)(b) to,
"set different limits for different cases",
by which it means that the regulator will be able to say, "I am going to allow this particular CIC a capped interest rate of 10 per cent", while all other CICs are being allowed to pay only up to 5 per cent. Alternatively, he could consider different categories of CICs and put limits above and below the norm on the distribution of dividends and interest. That would be a first in English law and I see no reason at all why either the regulator or the Secretary of State should have such a power. What are his or her qualifications, and why should the state be able to favour one kind of activity over another? That is as invidious as it would be to allow the Registrar of Companies to set differential corporation tax rates between one type of business and another. I urge the Minister to review this point.
278
I want to toss out the thought that the regulator should be subservient to and part of the registry of company arrangements. Nothing in the Bill makes it necessary to create another free-standing bureaucracy. The Registrar of Companies has a good reputation and I believe that significant administrative and cost savings could be made if the Bill is reconsidered so that much, if not all, of the bureaucracy could be put into the companies registry.
Finally, I want to refer briefly to the definition of a "community interest company". I wonder whether we need to have one at all. The definition proposed in Clause 32(2) is astonishingly wide indeed, the whole Bill needs to be looked at because so much is expressed in bland and widespread terms; namely:
"A company satisfies the community interest test if a reasonable person might consider that its activities are being carried on for the benefit of the community".
That is very helpful! But since many of these companies will be new and will not have undertaken any activities—they will have merely a constitution—and in particular since this should concern not simply the type of business being conducted but the manner in which that is done, I suggest that we could do without such a definition.
Of one thing we can be sure: no one seeking to line their pockets will set out on the road of business or enterprise in the form of a CIC, because of the controls on dividends and interest and, I suggest, remuneration. Again, this would save a whole lot of hassle, bureaucracy, frustration and expense. What is wrong with that?
12.49 p.m.
Lord Brennan: My Lords, the Bill is a welcome step to strengthen corporate governance through reform of auditing and accounting procedures. I regret to say that I consider it to have been a necessary step. It was a little less than two years ago that we debated in this House, in the aftermath of Enron, the effect of such a collapse on the public interest—the public interest expressed in the investment of pensions and public funds into major enterprises. The year after that we debated the progress that had been made in this country after the Higgs, Smith and other reports. So now we debate the legislation, which is a consequence of these matters.
This legislation has the task of trying to reconcile private interest—commercial, capitalist—with public good. That balance is expressed in what meets the public interest. I commend the Bill as a sensible step to meet the concerns that affect the public interest, the need for trust and integrity of companies in this country.
I propose to deal with two central matters to do with auditing and accounting. The first is the supervision and regulation of such work. In the first few clauses of the Bill, the Government seek, through the means of regulatory and supervisory bodies, to establish proper standards. That involves, it seems to me, two requirements. The first is that the standards should be reliable. What I am about to say might sound—or

279
might have sounded—trite before Enron and Parmalat, but it now needs to be said. The standards should enable those investing to understand the balance sheet of a company and to assess the true extent of its liabilities. It is remarkable that in 2003, at the beginning of the 21st century, we should have to express such a need in such simple words. Only a year ago, Merrill Lynch advised investors not to invest in Parmalat because its finances were so opaque. How on earth can we allow such a state of affairs to persist?
Secondly, in reaching for reliable standards that involve transparency, surely we must identify, as a competent, innovative commercial society, the devious means by which companies can seek to avoid serving the public interest and achieve reliable standards that prevent that. Why should we discover, in 2000–2001, the vehicle of a specific purpose entity which hides the debt obligations of Enron as if it were some wholly unconceived attempt so to achieve an internal result for the benefit of the company, the directors who were involved as guilty parties, rather than the community in general?
The first issue is reliable standards; the second is international standards. It is inconceivable that we can balance American standards through the FASB and European standards through the IASB if they are different in such a way that will serve the public interest. I give two examples. The first is stock options, with which I had a fateful encounter years ago in trying to understand the Black-Scholes formula for valuing them. Stock options are a major aspect of company life—surely the existence of those options and their value as an expense should figure in a company's accounts. Not so in America, but it is the case here. On the contrary, in Europe we value derivatives at purchase price, often next to nothing, whereas in America they apply a market valuation.
I have chosen stock options and derivatives as examples because each—probably the latter more than the former—plays its part in the way in which those who are determined to make a wrongful profit from a company can achieve it. We must have international standards and guard against those risks.
My third point on supervision and regulation in terms of standards is that the grant that the Government give to bodies concerned with such standards should be properly spent. We want a results-based analysis. Is the system working? If not, how can we best change it?
Next, for my second main theme, I turn to the enforcement of accounting and reporting standards. On overseas subsidiaries, Clause 8(3), as I read it, gives a full power to a UK auditor to investigate a UK parent company's activities wherever it may be carrying them on, through whichever subsidiary. That is to be welcomed.
Secondly, in dealing with international finance and enforcement, surely auditors, as professional men and women, should exercise competent judgment. How can a cash-strapped conglomerate like Parmalat produce, if it is correct, a sheet of paper saying that in an offshore account of a company somewhere in a tax
280
haven there is a holding of several billion euros in cash without the auditor questioning it? It seems very difficult to understand. Moreover, how can so much money transfer itself from one part of an entity to another without explanation being demanded?
I close by inviting the Minister and, through him, the DTI, to consider the broader picture. None of these events could have occurred without the client/banker relationship existing, as it must have done, in Enron, Parmalat, and so on. When are we to expect standards from the banking system? It is difficult to understand how Citigroup, JP Morgan and Deutsche Bank could have failed to have had any questions to ask about the derivative deals they were carrying out for Parmalat to the tune of hundreds of millions of euros. I close.
Lord Freeman: My Lords, I am very grateful to the noble Lord for giving way before he sits down What about the credit rating agencies and their role in this?
Lord Brennan: My Lords, the noble Lord is in rightful anticipation of my two other institutions for checks. Financial advice to investors clearly should be the subject of standards, as should credit ratings. Standard&Poor's credit rating for Parmalat was good up to the beginning of December. All that picture is the financial picture; it is not just auditing and accounting.
As I have suggested before, I invite the Government to consider founding here in London, financed by accounting firms, City firms and/or the Government, a centre for financial standards and corporate governance. Its role would be to scrutinise the present regulatory state of affairs and determine whether change was needed, to educate the commercial world about proper standards and to promote, wherever necessary, reform.
I welcome the Bill. Two years after Enron, action has been taken by wide consultation, by balanced consideration of what is necessary and a piece of effective legislation. It is the stuff of effective government—we should have more of it.
12.59 p.m.
Lord Freeman: My Lords, it is a particular pleasure to follow the noble Lord, Lord Brennan. I agreed with both the thrust and the detail of what he had to say. Obviously, he speaks as a lawyer and not an auditor or an accountant, but his summary was excellent. He touched on the key point of why the legislation is welcome in principle—because it helps restore confidence and sets standards.
I declare an interest as an accountant, but my brief remarks today are my own. I do not speak for the profession, or for my firm, PricewaterhouseCoopers, of which I am still a consultant, or for any of the companies of which I am a director. I strongly agree with the comments of my noble friend Lord Hodgson, on the Front Bench. I shall not repeat any of his points except strongly to endorse them from the Back Benches.

281
This is a modest Bill, but its principles are correct. Detailed examination in Grand Committee, if that is where it goes, is extremely important. There is one very small point: I hope that, in future, when regulations are introduced, particularly for companies, they can be introduced simultaneously on fixed dates in the course of the year. That is a small point but, I understand, the Government are now working on such a reform.
I believe that your Lordships had hoped that in this Session we would debate a major company law reform Bill. The noble Lord, Lord Sharman, always uses his words very carefully, and I noted what he said—he said that such a Bill was desperately importantly needed. I find it very difficult to explain to my colleagues in the accounting profession, in the City and in business why we are going to spend weeks and weeks on a House of Lords reform Bill, when we are still not able to proceed with a company law reform Bill, although much of the legislation is in excellent shape in draft form.
I shall make three very brief points on the Bill, which I welcome. The simplification of the oversight procedure through the Financial Reporting Council and the Financial Reporting Review Panel is exactly right. The previous system was complicated, and the Bill makes progress in that regard. Secondly, the provisions on the duties of directors not to mislead auditors are correct and welcome. Finally, the devil will be in the detail of the provisions on community interest companies. Your Lordships will want to look not only to the Minister but also to the noble Baroness, Lady Thornton, to ensure that we do not end up with complicated legislation that is difficult to understand and over-regulated for those whom it is intended to benefit.
On the issue of liability of auditors and directors, my noble friend Lord Patten spoke in typically robust fashion, although he was a trifle unfair in his remarks on the accounting profession. He may have misunderstood what should happen and what should be the correct response from the profession to the consultation paper. No one is suggesting that one should not deal with auditors' and directors' liabilities simultaneously; I believe that to be right. No one is saying that either should avoid liability for their errors. The issue is the extent of the liability.
The Financial Times editorial of 7 January fell, if I may say so, into the same error, in misunderstanding the calculation of the liability, about which there is real concern in the profession. The liability is joint and several. When a company goes bust, one of the big four accounting firms will probably be sued first, because they are deemed to have the biggest pockets. Often the accounting firms end up as the only source of recompense for those who have lost money. That cannot be right. What surely is correct is that the liabilities of both auditors and directors should be proportionate—and, in my judgment, capped as well. Otherwise, even when the liability is proportionate, if the auditors or the board of directors are the only people who can afford to make recompense and there is no one else to share the blame, the amounts could be very considerable.
282
I believe that the noble Lord, Lord Sharman, has already referred to the fact that the European Union commissioner is considering placing responsibility on the auditor of the top holding company for the audit of all the subsidiaries within the group, irrespective of whether they have actually carried out the audit—for example, in countries abroad. That increases the responsibility and liability of the auditor.
The comments made about liability are clearly part of the consultation process, because the consultation will run until 12 March. I suggest for consideration that if the liability of directors and auditors is to be changed from the unlimited nature at present and should be both proportionate and capped, that the Minister by regulation asks the Financial Reporting Council to devise the methodology for capping. If that proceeds, I suggest that shareholders should approve the procedure in a general meeting. It would be perfectly possible for the Minister, at a later stage, when the Bill has gone to another place and has perhaps come back here, to propose a simple clause to remove the offending Clause 310 of the existing Companies Act. That clause could be repealed with very simple language, and the legislation would be enacted only when there was a proper methodology for introducing capping and proportionality. There is still time for that to be done.
I briefly turn to the question of non-executive directors. Part of the problem for the directors of smaller companies is that the cost of insurance against unlimited liability is now prohibitive. We are failing to deal with the problem of recruiting non-executive directors not only to large listed companies but also to smaller companies. That is an urgent matter, and I hope that the Government will deal with it.
1.7 p.m.
Lord Grantchester: My Lords, I congratulate my noble friend the Minister and the Government on introducing this timely update to corporate regulation. I speak merely as a layman and an investor, but also with some experience of sitting as a non-executive director on several audit committees, although at present I sit on only one—Dairy Farmers of Britain.
I find it interesting when I hear noble Lords talk about the dangers of being an auditor. Some people find auditing the least inspiring aspect of accounting. Indeed, I have heard auditors described as similar to those who go round at the end of a battle checking the dead and bayoneting the wounded. However, that is not to deny that it fulfils a very important role in safeguarding the integrity of business.
The Bill is part of the Government's strategy to help restore investor confidence in companies and financial markets following various recent high profile corporate failures, most notably Enron and WorldCom. A new failure, Parmalat, is unravelling as we speak. While purposeful fraud will always be with us, lessons can always be learnt and procedures tightened up, so that non-compliance will flag up potential wrongdoing. That process has been continuing since the cases of BCCI, Polly Peck, the Maxwell companies and Wickes, among others.

283
The legislative changes amend relevant provisions of the Companies Acts 1985 and 1989. They are intended to complement various recent non-legislative measures designed to strengthen corporate governance and audit practice. Part 1 is intended to strengthen the independence of the system of supervising auditors by placing new requirements on the recognised supervisory bodies; the enforcement of accounting and reporting requirements; the rights of auditors to information; and the company investigations regime.
The new requirements placed on the recognised supervisory bodies are that they must participate in independent arrangements for the setting of auditing standards to underpin professional integrity and independence and the setting of technical standards; the monitoring of audits of listed companies and certain other companies; and the investigation and taking of disciplinary action in certain cases.
Clause 2 seeks to ensure the independence of these arrangements by providing that the recognised supervisory bodies, for example, the Institute of Chartered Accountants in England and Wales, cannot be involved in the selection and appointment of those who carry out the standard setting, monitoring and disciplinary functions—that is, the Auditing Practices Board (APB) and the Accounting Standards Board (ASB). Most importantly, it also provides for transparency in the disciplinary arrangements by requiring that independent disciplinary hearings must be held in public. The practical effect of these clauses is to make the recognised supervisory bodies subject to a more independent regulatory regime in respect of the setting, monitoring and enforcement of auditing standards.
Part 2 makes provision for the establishment of a new corporate vehicle, the community interest company. This is intended to make it simpler to establish a business whose profits and assets are used for the benefit of the community. Social enterprises bring together the expertise and dedication of the voluntary sector with the flair and flexibility of the commercial world, and can be particularly relevant in the many activities where commerce and public service meet.
There are three major types of reason for accounts to be incorrect, which leads to investor lack of confidence. These are, first, quite obviously, error; secondly, deliberate fraud, on which I have already commented; and, thirdly, manipulation of accounts. It is to the third aspect that I shall address my remarks.
Manipulation of accounts includes the bending of accounting policies, the massaging of accounts, and the manipulation of profits—for example, capitalising brand values, the treatment of goodwill and so on. The work of the FRC in this area is crucial, so it is important that both its role and the extent of its reviews are going to be strengthened.
The main area of investor concern focuses on the potential compromising of the audit function brought on by a disproportionately high level of auxiliary non-audit services. Disclosure of fees for non-audit services, as opposed to fees for audit services, is a step in the right direction. However, it does not stop the problem. I do not suggest a complete block on auditors
284
carrying out non-audit services, as often it is the auditor who is best placed to give this other advice. It may be that some sort of cap is needed on these non-audit services. There is a need for the FRC, or the regulatory bodies, to look at the large level of non-audit fees in a set of accounts. No doubt an investigation could be triggered by a high level of such fees. The Bill seeks to address that issue somewhat. The FRC will he policing, to a greater extent than currently, inappropriate accounting policies and will have added powers.
Inappropriate accounting policies have been central to certain high profile corporate failures, notably Enron and Wickes. In both cases, a key issue was the organisation's policy on income recognition. The FRC has an increased role in monitoring the work of auditors, which must be a step in the right direction in this regard. This is bound to encourage auditors to check more carefully the compliance with basic and fundamental policies, such as income recognition.
Increasing the auditors' access to information, a matter with which the Bill assists, is also a step in the right direction. However, giving the auditors wider access may not stop a Maxwell recurring. Whistle-blowing should surely be made easier and more effective. It may be sensible for auditors to be required to have discussions with a certain number of employees each year. I note with dismay the treatment of whistle-blowers in the European Commission. I remind noble Lords that the EU auditors have refused to sign off the Commission accounts for the past nine years—surely a scandal that dwarfs the combination of all the most recent corporate failures put together.
Recognising the importance of the ASB and having it controlled by the FRC is also hugely beneficial. It should ensure that speedy and effective responses are made to large corporate failures, such as Enron, where the importance of income recognition accounting policies was heightened following the failure, causing auditors as a result to become more sensitive to the appropriateness of income recognition policies. Fast and effective responses to problems, and the plugging of holes, should occur under a stricter and more robust regime.
Also as a result of Enron and the lessons now learnt from it, warning lights are now triggered for auditors where there are large, complex group structures. Auditors now have to look hard behind the structure to understand the movement of transactions around the group and the reasons for those movements, to ensure that there is transparency in this regard.
Audit committees need to be more robust, to stop cases of executives bullying and controlling companies in a manipulative way. It is essential that auditors meet with the audit committee without the executives present and can have confidential discussions with it. It is also important that at these private meetings probing questions are asked of the auditors by the audit committee. The improvements to corporate governance brought about by Higgs and Smith have been steps in the right direction, though more are probably needed.

285
It may, for example, be sensible to have a list of questions for audit committees to ask their auditors because, in practice, it can be difficult for auditors to get their concerns across. Particularly where there are strong, dominant characters involved, auditors can find it inhibiting to initiate criticism. It is likely to be easier for them to address concerns in response to questions and in a more informative way. It can be difficult for them to get their concerns or suspicions across with no tangible basis without it sounding like a personal attack on management.
Examples of the sort of questions that would be useful are, "Do you feel the accounts department and its staff are suitably qualified and competent? Do you feel there are sufficient resources in the finance department? Do you have any concerns about bullying by management or executives? Have you had any indications from staff about bullying? Do you feel there has been a desire to manipulate the accounts in a particular direction?" That is particularly relevant if there are profit-related or share option schemes in place.
The mere existence of sample questions would better aid corporate governance, as management would be made aware that such questions are to be asked and that such issues are to be considered by the auditors and discussed with the audit committee.
Executives should not have anything to do with the appointment of auditors, but in practice they often manage to have an input. If, for example, an auditor is critical of management or of the chief executive and the audit is going to go out to tender in the short or medium term, the chances are that that auditor will not be reappointed. It is vital that the appointment of auditors is seen to be independent of the executives. It may be an idea for the auditors to have to include in their report reference to the extent of their private meetings with the audit committee each year.
The audit threshold is about to rise from £1 million to £5.6 million. I understand this change is due to come into force through a statutory instrument later this month and to be operative for company accounts for the year ending March 2004. My only reservation regarding the changes we are now contemplating is that raising audit thresholds is likely to be the most significant in removing the major deterrent against fraud and money laundering. That needs to be carefully considered in a strategy of raising investor confidence.
Creditors are one of the major users of audited accounts of companies with turnovers of less than £5.6 million, and arguably they are the ones who are likely to have concerns about the lack of an audit. Small and medium-sized companies are a growing part of the enterprise culture that we are seeking to improve. These company failures can impact on companies of all sizes due to the knock-on effect. Perhaps the £5.6 million threshold should be reconsidered and any future changes limited to the amount of increase in inflation.
286
While the audit threshold is not strictly relevant to the Bill, it is nevertheless part of the picture. Large companies can go under if a major debtor defaults—credit worthiness having often been assessed by reference to audited accounts. As a director of Dairy Farmers of Britain, I can confirm that checking customer accounts is a very important part of determining whether and to what extent Dairy Farmers of Britain will trade with small companies. I may not have to remind the House of the difficulties in the dairy sector in recent times, where there have been company failures, notably Lancashire Dairies, Amelca and United Milk.
The relevance of audited accounts is usually that third parties rely on them to confirm the accuracy of accounts and the strength of companies' balance sheets. Often the audit report will also give an indication of any going concern problems or other problems, which a simple review of the accounts might not otherwise reveal. Disclosure of financial information may not be complete if the accounts have not been subject to an audit, in that an audit, as well as looking at the accuracy of the figures, also looks at compliance with recent relevant legislation and accounting standards. It may be that certain important financial information is omitted from the company's accounts, either deliberately or through lack of knowledge for example security of borrowings, loans to directors or transactions with related parties. Such omissions should not exist where an audit takes place. I applaud the commendable changes being proposed in the Bill and the strengthening of existing measures to raise investor confidence. I welcome the support given to the Financial Reporting Council, and I wish the Bill a safe passage.
1.20 p.m.
Baroness Carnegy of Lour: My Lords, I will not follow the noble Lord, but I shall confine myself to just two brief, general points and ask the Minister two questions on Part 2 of the Bill. My noble friend on the Front Bench has already commented that this is a somewhat strange time to introduce Part 2. The community interest arrangements are closely linked with charity law. The Government, we understand, are planning shortly to bring Parliament's attention to the matter of charities again. It appears that they are perhaps putting the cart before the horse, entirely unnecessarily.
From the Scottish perspective, the Government's timing of Part 2 is even more peculiar, if not constitutionally wrong, I might suggest. Under the Scotland Act 1998, company law is a matter reserved to Westminster. As the Minister pointed out, Scots law for charities is devolved and is already different from charity law south of the border. It is absolutely right that this Bill, a company law Bill, should, as it does, include Scotland as well as the rest of the UK. At the same time, it happens that the Scottish Executive, like the Westminster Government, I think, hopes to change charity law in Scotland, and issued a consultation paper in May 2003, with a view to legislating. What do the Government do here at Westminster? For their own good reasons, they go ahead with this Bill, drafting it so that, provided the

287
Scots Parliament does what it is expected to do on charities, Part 2 can in these respects be brought into line in Scotland.
The relevant powers to achieve this are in Clause 23(3) and Clause 27(9). An explanation is given in paragraph 205 on page 48 of the Explanatory Notes. Unlike in England and Wales, any changes to Scots charity arrangements will be made by a different parliament from the parliament responsible for this Bill. That is self-evident. Who knows what the Scots Parliament will decide? Their current charities culture and system is a different starting point from that south of the border. There are no charity commissioners in Scotland. Decisions are made by the Revenue and the courts. The Scots Parliament may, I suggest, when the time comes, disagree with its Ministers. It has already been known to do that several times in its short life. It may wish to make charities decisions that render much-needed community interest companies inoperable in Scotland. What happens then? It is surely not Westminster's job to hem the Scots Parliament in on a devolved matter just because of bad timing on the United Kingdom Bill. One could say that the timing is not only inapposite; it may even be constitutionally wrong. That is my first point.
My second point is that the so-called social enterprise culture is particularly strong in Scotland. It forms an integral part of local economies and cultures. Since the early 1990s, much of the pioneering work being built on elsewhere has begun in Scotland. There is a long-standing desire north of the border for a statutory framework for the sector. In spite of all that, the Government seem to pay less attention than they should to Scots' needs. In Scotland, because of the lighter-touch charity law, most social enterprises are registered charities. As the law stands, those charities cannot change their status; they simply cannot apply under the Bill. Should they, as the Government intend, become legally able to apply, few, if any, could, in practice. afford to do so, as they depend on tax and rates relief to survive.
From my many years of experience chairing a quango that was a company limited by guarantee, I know that there is a deep belief in Scotland that social enterprise should be governed by voluntary unpaid boards and should involve stakeholders in a democratic way. Those characteristics are, as far as I can see, allowed for under the Bill, but, undoubtedly, they will not be the norm.
During the consultation on the Bill, those and other important points were made to the Government by the sister organisation of that chaired by the noble Baroness, Lady Thornton, the Scottish Social Enterprise Coalition. It seems to me that the coalition has been largely ignored by the Government, so I have some questions for the Minister. First, how do the Government justify the timing of the Bill, when its operation in Scotland depends on future legislation in the Scots Parliament being framed in a certain way? Is that somewhat bullying approach, in fact, unconstitutional? Secondly, why have the Government ignored the advice of the Scottish Social Enterprise Coalition, making it likelier that few, if any, existing social enterprises in Scotland will be able to avail themselves of the new arrangements?
288
I hope that the Minister will be able to answer those questions. If he feels that he cannot, will he, perhaps, write to me?
1.28 p.m.
Lord Razzall: My Lords, it is noticeable that virtually every speaker in the debate has begun by declaring an interest either as a director of a listed or unlisted company or as a chairman or member of an audit committee. I join those who have done so and declare my interest, as set out in the Register of Members' Interests. In passing, I must take up the reference made by the noble Lord, Lord Freeman, to House of Lords reform. It is a great shame that, in debates such as this, some Members of your Lordships' House who accept the honour and title associated with being a Member of the House and have significant high-profile business careers never seem to find the time to come and give us the benefit of their expertise. I want to record that, and I know from remarks that have been made from other Benches that several of your Lordships share that view.
In effect, as noble Lords will have understood and several have said, this is two separate Bills. Apart from the fact that they both come from the Department of Trade and Industry, they seem to bear no relation to each other. I suppose that that is a modern trend, as the Minister fights for his share of legislative time, and there has been a brilliant accretion of DTI Bills in recent years. However, I think we have to accept that the two Bills reflected in this one Bill have nothing whatever to do with each other.
I turn to the first Bill, as it were, which concerns audit and investigations. As my noble friend Lord Sharman indicated, noble Lords on these Benches broadly welcome that part of the Bill. I believe that the CBI said that no one could fail to support a robust system of company law and governance based on integrity, openness and transparency. I believe that all noble Lords share that objective. Indeed, at the weekend I wondered why that did not appear in the credo of the Leader of the Opposition, if not to the strains of a Batchelors' song. No one can doubt that action has to be taken to ensure that the scandals typified by Enron and WorldCom in the United States cannot be replicated here. To that extent no one could object to the Government taking the necessary steps.
The strength, however, of the United Kingdom system, not particularly the English system—I bow to the noble Baroness, Lady Carnegy, in this respect—is a combination of statute, common law and a voluntary code. The recent company law review recommended the continuation of that approach. I believe that all the different parties in your Lordships' House accept that that should continue to be the approach towards these matters. However, the company law review stated that that required the immediate modernisation of company law.
It is noticeable that speaker after speaker in the debate has tried to get the Government to say when we shall see the comprehensive reform of company law that we all wish to see and that industry and the public demand. I

289
have no doubt that when the Minister replies to the debate, he will not be able to give us a commitment on that. I have no doubt that he will say that the Government remain committed to reform of company law. However, the decision on when a comprehensive Bill will be brought forward is undoubtedly out of the Minister's hands and will, I suspect, be subject to the vagaries of electoral politics as his lords and masters consider the timing of the next election and decide whether the Bill can be introduced in that period of time. Nevertheless, the Minister should take on board the overwhelming view of your Lordships that we need a comprehensive reform of company law; and that we need that Bill soon.
There is clearly a danger of a piecemeal approach reacting to the scandals of the day or the fears of the day. An example of the continuation of that piecemeal approach to which a number of noble Lords referred is the current position on auditor and director liability. A consultation paper was issued in the autumn. We now have a Bill to deal with the audit and investigations element of company law reform. We do not know whether or not the Government will decide that they can tag on to the end of the Bill recommendations regarding auditor and director liability if the consultation period is completed before the Bill is passed and indicates a conclusive view regarding what the Government should do. That is an unsatisfactory state of affairs. If the Bill is passed without the question of auditor and director liability being dealt with, the Government will be faced with exactly the same problem in the next Queen's Speech; namely, whether there will be legislative time to deal with it. That cannot be a satisfactory way to run a railroad or even the Department of Trade and Industry.
As I indicated at the beginning of my speech, we, of course, support the Bill. We support its general aim and its general principles. In Committee we shall seek to check that the Government have the balance right between catching wrongdoers and imposing unreasonable burdens on business. Every clause needs to he looked at to check that that balance is right. Without going into the detail there are three particular areas on which I believe that we shall need to probe the Government.
First, in Clause 9 we shall need to probe whether or not the obligations of disclosure have a reasonable materiality test to avoid unnecessary burdens being imposed on perfectly honest businesses and businessmen. Secondly, in Clause 8 we shall need to probe how the mandatory disclosure requirements, particularly regarding subsidiaries, foreign subsidiaries and subsidiaries in the United States, can be squared with the obligations being imposed on directors. Thirdly, we shall need to probe the extensive provisions that permit Inland Revenue information to be made available to auditors and other bodies to check whether and to what extent appropriate protection is given to individuals regarding invasion of
290
their privacy. Those are three critical areas on which we shall want to test the boundaries of reasonableness as against the necessity to catch wrongdoers.
I turn to the second Bill, as it were, which concerns the community interest company. Again, noble Lords on all sides of the House welcome this part of the Bill. As my noble friend Lord Phillips indicated, we shall want to probe a number of areas in Committee, particularly the interrelationship between charitable law in its existing or potentially reformed state and the community interest company.
I should like to press the Minister on a substantial point. He will be aware that a number of local authorities responded to the consultation last summer in a very welcoming manner. A large number of local authorities have expressed an interest in using the CIC format to develop public services. Shall we pronounce it "kick"? The noble Baroness, Lady Thornton, used that pronunciation. Looking round the Chamber, I suspect, however, that we shall not continue to use that pronunciation. I am not sure how Hansard will record that. The Local Government Association specifically drew the attention of a number of noble Lords to Somerset County and Taunton Deane borough councils that think that the CIC format is a very good means of delivering a range of community based leisure and cultural services.
It appears that local government will regard the use of the CIC as a very essential part of their work in the community. The question that I should like to put to the Minister is, does he or does he not agree with the statement that I understand the Home Secretary made that, so far as he is concerned, the CIC will not be used in any way to provide services that are the responsibility of central government? If the Minister agrees with that statement, it appears that a big opportunity will be lost. In the National Health Service in particular, as the Government develop their proposals for devolution to community hospitals, CICs could play a major part in the development of those hospitals. I hope that the Minister will say whether I have misinterpreted the views of the Home Secretary, or, if I have not, that he does not share them.
1.39 p.m.
Lord Glentoran: My Lords, this has been a very good debate. I wish to make a few brief points. It is the Government's duty to ensure that company law creates an environment where risk taking and entrepreneurs can flourish and where public confidence can be maintained in the knowledge that fraud and malpractice will be detected, controlled and punished.
Before I continue, like other noble Lords I need to declare some interests that I believe are relevant. Until I retired I was a director and chief executive of a number of Redland plc companies, some offshore. I am in my 10th year as a member of the Millennium Commission and chair both its audit committee and finance committee. I am also currently a non-executive director of the National House-Building Council and sit on its finance and audit committee. The NHBC

291
comes within the remit of the FSA as an insurance company. In the past, I also served on the board of the Ocean Youth Club, a national sail-training charity. The noble Lord, Lord Sharman, was at one time chairman of that board.
That is a varied mix of businesses, with some commercial, some charitable and some for the public good. However, they have one thing in common; namely, that they all are or were in the risk business. In one way or another, a number of noble Lords have supported the cliché of no risk, no profit.
Some people might like to think that the Bill is a technical Bill, the business of lawyers and accountants. It is not. It will impact on everyone, as the Minister pointed out. It is a people's Bill. It will affect jobs, pensions, SMEs, big businesses and, perhaps most importantly, the competitiveness or not of UK plc. We think it doubtful whether, in its present form, Part 1 gets anywhere near achieving what we had hoped were its intended aims. That has been clearly supported by noble Lords around the House.
The second part of the Bill proposes the establishment of a new type of Companies Act company which would exist primarily for community interest purposes. We welcome that. When first reading about the proposal for the creation of CICs I was quite excited. I thought that their creation could add something very positive to the community sector, with more flexibility for small enterprises and local companies focusing on the public interest. However, the implications of CICs are significant, especially as they cannot be charities and would be subject to a more stringent level of oversight than normal companies.
In practice, as a result of the establishment of a regulator, the Bill is effectively establishing an entirely new sector of community and company activity. That was pointed out by the noble Lord, Lord Phillips of Sudbury. The aim of the Bill appears to be to produce a form of corporate body which occupies the space between a Companies Act company and a charity. It would presumably have greater financial freedom than a charity and could borrow money or sell shares. We applaud that concept if it can be made to happen. However, the role of the regulator and his ability to intervene in payments or to transfer assets leads us to wonder whether a bank, or indeed any creditor, would feel that sufficient security could be obtained against loan capital. We wonder whether that would inhibit the desire not only of lenders to fund CICs, but of contractors and suppliers to trade with them.
It is also questionable how popular shares in CICs would prove, as opposed to other ethical investments. The regulator's powers could, in certain circumstances, constitute a significant infringement of normal shareholders' rights. Shareholders could find directors removed, management changed and new directors appointed, all without their approval. The use of the powers is carefully circumscribed in the Bill, but they are none the less very significant.
292
We must also wonder about the role of directors of CICs. Some noble Lords have already talked about remuneration of directors. Their ability to carry out their fiduciary duties could be compromised by the regulator. The regulator is specifically empowered to intervene in transactions and disposals if he believes that the community interest test is not being met. What if, for example, a C1C can balance its books only by compromising its community activities? Would the regulator prevent directors from doing so? Would that be recognised in company law? If not, could they find themselves unable to manage the CIC as they believe necessary or to meet their fiduciary duties? Presumably, they would have no option but to resign.
It is therefore difficult to understand the incentives for establishing a CIC from the Bill. The structures do not seem to offer any particular advantages per se, and the level of oversight and potential interference is significant. However, that is not surprising, as the Bill establishes only the legal framework, and we have not yet seen any regulations. As other noble Lords including my noble friend Lord Hodgson have pointed out, we have been promised the regulations. It is vital that we have them before Committee, or the debate will be fairly meaningless.
The CIC would seem to be a vehicle tailor-made for the kind of private-public joint ventures which the NHS is keen to establish, and which local authorities look excited about developing, as the noble Lord, Lord Razzall, pointed out. One area of control which could be problematic for CICs is the eligibility restriction on political parties or political campaigning organisations. That is a very broad definition. What is a politically campaigning organisation? Depending on the political issues of the day, that could vary from Greenpeace to asylum seekers' rights and the Ramblers' Association.
Under the proposals, CICs would be Companies Act companies and therefore subject to the Companies House regime. However, additional levels of oversight would be applied. Indeed, the Bill proposes the establishment of not one but three new offices—the regulator, the official property holder and the appeals officer. We understand that CIC directors would be appointed in the usual way for Companies Act companies. However, another significant issue with regard to the directors of CICs is the ability of the regulator to appoint new ones and dismiss existing ones. Although those powers can be exercised by the regulator only if the company default condition is satisfied, that could occur if the CIC puts financial concerns before community ones. I referred to that idea earlier.
We support the basic concept of CICs, but feel that that good concept is at risk of being undermined by detail and possible over-regulation, a point made by my noble friend Lord Freeman. Would it not have been wiser to have waited for the long overdue revision of the whole of charity law before launching this excellent initiative? Other noble Lords have also made that point.

293
We have had a wide-ranging and interesting debate at Second Reading of this rather inadequate Bill. We on this side of the House agree with many noble Lords who have spoken that, as a whole, company law urgently needs reforming. As the Bill stands, however, it will not lead to the modernisation and reform that is required to make it fit for the 21st century and beyond, as called for by Patricia Hewitt in 2002, and mentioned by my noble friend Lord Hodgson. The Bill increases the regulatory burden on directors. The noble Lord, Lord Sharman, pointed out that there was little clarification of company law to help directors.
Although we support all necessary regulation where justified, we do not support onerous regulation for regulation's sake. My noble friend made clear the tests that we shall apply to the Bill, and the noble Lord, Lord Razzall, made some very clear comments on the tests that the Liberal Democrats will apply to it in Committee.
It has been stated that the UK's regulatory system is widely acknowledged to be among the best in the world. By the time that the Bill leaves your Lordships' House, we must have ensured that the balance is fair and just.
1.49 p.m.
Lord Sainsbury of Turville: My Lords, from what has been said today we can be certain that the Bill will be subject to a high level of detailed and expert scrutiny. The Bill has been the subject of extensive consultation with business, the accountancy profession and other interested parties. Yet today we have had a number of new perspectives and insights from speakers. Many interesting points have been raised. I shall try and deal with the key issues in taking the Bill forward.
The noble Lord, Lord Hodgson, instantly raised the question of the main Companies Bill as did the noble Lord, Lord Sharman. We are committed to such an important reform. We want to modernise and simplify UK company law to provide a flexible law with quicker and simpler processes for companies, reduce burdens particularly for smaller firms and start-ups and make the UK a good place to set up and run a business. We intend to publish a draft Bill for comment before we introduce it into Parliament.
However, there is an essential requirement to the main Companies Bill, which is that we obtain the right balance between giving companies stability, so that we do not put aside a whole raft of common law precedent while moving the law forward. That is a difficult balance to achieve. It is one that we are working on and we are committed to introducing the legislation as soon as possible. I do not think that anyone would want us to bring it in if it led to instability in that area.
Lord Patten: My Lords, I am grateful to the Minister for going that far. Would he reflect on the fact that company law reform has been pledged as forthcoming since 1998 by the DTI? Would he go
294
further and define when "as soon as possible" is to be? Will the draft Bill be published before the next general election?
Lord Sainsbury of Turville: My Lords, it was with great care that I said "as soon as possible". If we could say precisely when that would be, it would mean that we had removed all the uncertainty about how easy it is to establish the correct balance and I cannot say, at this point, that we have done so. Therefore, we do not wish to introduce the new law until we have that balance right because it would be no help to the financial or industrial communities if a great deal of uncertainty were raised.
The noble Lord, Lord Sharman, described our approach as being "liberal", which he went on to define as being fragmentary, disorganised and dilatory. That was not my normal definition of "liberal". What we have done in this first piece of legislation is to tackle the difficult regulatory issues and try to make them right, with a careful balance between cost and effectiveness.
In answer to the noble Lord, Lord Hodgson, work has begun on a draft charity Bill, which is due to be published in this Session. The Treasury has already initiated changes to the industrial and provident society form, resulting from the Private Members' Acts in the past two Sessions of Parliament.
The noble Lord, Lord Patten, gave us an interesting dose of ideology and then went on to demonstrate that we actually need not ideology, but careful legislation for proper controls. I would have thought that it was an area where we can all agree that the financial and industrial systems need to have careful and thoughtful regulation that is both cost-effective and effective if that sector is to grow and be profitable.
My noble friend Lord Brennan, in his thoughtful speech, explained why the legislation was required and why we should look wider. That is a point we take on board—as he said, this is the stuff of effective government. That is to give such careful legislation to control the situation. My noble friend also raised the question of international accounting standards. I very much welcome his comments on the need for those and I hope that the one positive consequence of the Parmalat affair will be a greater impetus to implement international standards. The Government are working hard in the EU for the adoption of international accounting standards.
The noble Lord, Lord Hodgson, also raised the question of auditors' powers and other burdens on directors that I referred to in my opening speech. The new requirements could give a disincentive to non-executive directors.
I do not accept that Clauses 8 and 9, which deal with the auditors' rights to information and the statements in directors' reports, are overly burdensome or should discourage anyone from becoming a director. It must be right to require directors to tell the truth to auditors and to ensure that directors focus on whether they have provided the relevant information to auditors. These clauses strengthen existing requirements and I cannot see that a requirement to give this information

295
would in any way be a burden which would discourage anyone one would want to have as a non-executive director.
The noble Lord, Lord Hodgson, also asked about the costs of the legislation and proposed four tests. They were that it should be proportionate, balanced, clear and workable, and effective. I accept all those criteria, but I point to a slight note of complacency in his comments. We cannot be certain that such a collapse cannot happen in this country. Any costs of the legislation, which are minor, must be set against the costs and loss of investment to individuals were there such a collapse. If the noble Lord was speaking in that context. I am happy, but to describe it as a cost without putting anything on the other side of the balance sheet is a mistake. We should not be complacent that we will never see this kind of collapse in this country.
Equally, I say to the noble Lord, Lord Glentoran, that I see nothing in the Bill which would in any way stop people being entrepreneurial or risk-taking. It is not about people setting up new businesses, taking risks and developing new products. It is about people manipulating balance sheets and financial statements in order to mislead other people. I do not see that as being what entrepreneurship or innovation is about.
Also in that context, the noble Lord, Lord Hodgson, asked how many CICs there were likely to be. I see no way in which that can be calculated in any meaningful sense. All we can say is that during the consultation a large number of people expressed an interest in setting up CICs and this will create a new option for people to do so.
The noble Lord, Lord Sharman, raised the important question of accounting firms and where we are on that. The commitment by the major accounting firms to increase the transparency of their own reporting was one of the most important parts of the final report of the Co-ordinating Group on Auditing and Accounting Issues. A number of firms have already produced the report and a number of others are about to do so. We will be writing to all auditors of listed companies to obtain confirmation of what they are doing and to encourage those firms which have so far been reluctant to agree to such reporting to change their minds.
The noble Lord, Lord Sharman, also asked what would be included in the reports. That is set out in the final report of the Co-ordinating Group on Audit and Accounting Issues. In summary, the report should cover financial information, such as that already required for limited liability partnerships; an operating and financial review; governance, including international relationships; the basis of partner remuneration; and arrangements for quality assurance.
The noble Lord, Lord Sharman, also asked who is responsible for the standard setting process. In practice, we expect that the recognised supervisory bodies will comply with the additional standard-setting requirement set out in Clause 1 by requiring
296
their registered auditors to follow standards set out under the aegis of the new Financial Reporting Council specifically by the Auditing Practices Board.
The noble Lord asked whether there will be reasonable tests by the Financial Reporting Review Panel when it receives allegations about accounts. Yes, it already conducts such tests. All complaints are considered by the chairman and deputy chairman of the panel who decide whether there is a prima facie case for the panel to pursue. Of course, it can pursue the powers in Clause 12 to obtain information only where there is or may be a question whether the accounts comply with the requirements of the Act.
The noble Lord, Lord Sharman, also asked about the likely timetable for the operating and financial review. As I said, in the early part of this year the Government will consult on the draft regulations to introduce the requirement for economically significant companies to prepare an operating and financial review. To some extent, the timing of the introduction of the OFR will depend on the results of that consultation.
Another major issue is that of auditor and director liability—a matter raised by a number of noble Lords and, in particular, by the noble Lord, Lord Freeman. The department recognises that issues relating to liability are of concern to many people in business, including auditors, directors, investors and users of accounts. This is a serious and difficult issue and one where we must ensure that, if we are to maintain high auditing standards, the question of auditors' liability does not get in the way of good audits taking place.
We have listened to those who are concerned about this matter. My honourable friend the Minister for Industry, who has responsibility in this area, has already met the president of the Institute of Chartered Accountants in England and Wales to discuss liability and she has also had a separate meeting with representatives of the "Big Four" auditors. My officials have also held a series of discussions with preparers of accounts, users of accounts and regulators, as well as with auditors.
The upshot of that is that on 16 December we launched a formal consultation on auditor and director liability. The consultation is necessary for a number of reasons, among them the concerns recently raised by the auditors in relation to their potential liability and those raised by Derek Higgs in relation to that of non-executive directors. The Company Law Review examined many of the issues but considered that more work needed to be done. There has also been a significant change in the audit market with the demise of Andersen.
Ministers will, of course, carefully consider the responses to the consultation and, as I indicated in my opening speech, will decide on any further steps in the light of those responses. In answer to the noble Lord, Lord Hodgson, I can confirm that if the consultation shows that there is a clear case for reform, and if the case for reform is urgent in that sense, the Government will seek to bring forward amendments to the Bill.

297
However, the first stage is to see whether there is any agreement on the case for reform, but I do not believe that that will he a very easy process.
The noble Lord, Lord Phillips of Sudbury, raised a number of important and detailed points which we shall need to consider as we go through the Bill. Perhaps I may deal with just one or two of the key issues that he raised. He asked about the need for the new regulator. Our intention is that, for the most part, CICs will need to interact only with Companies House. They will submit their registration documents and annual returns to Companies House, which will pass them on to the CIC regulator. In effect, a onestop-shop will operate, with CICs having direct contact with the regulator only when he exercises his supervisory powers.
The Government considered whether an existing body should take on that role. Companies House maintains the register of companies and carries out related functions but does not otherwise have a regulatory role. The Charity Commission has a regulatory role, but our consultation confirmed that there should be a clear differentiation between CICs and charities. The CIC regulations are also not intended to be as proactive as charity regulation, which must maintain the confidence of public donors and beneficiaries. However, the CIC regulator will be able to draw on the expertise of the Charity Commission when performing his functions.
The noble Lord, Lord Phillips, also raised the question of the lack of controls on the remuneration of CICs directors and employees. In drafting the Bill, the Government had to take into account the need to protect assets in the community interest while not unduly restricting the ability of companies to compete in the markets. We recognise that directors' remuneration is a key concern, especially for a sector with strong ties to the voluntary and community sector, where, of course, in many cases remuneration is the exception. However, we believe that CICs should be able to attract the best people available for the job, and we intend to ensure that all CICs report directors' remuneration in the annual community interest report. That report will be available to the public so that concerns can be raised and addressed.
The noble Lord, Lord Phillips, also raised the important and interesting issue of the regulator not being able to set different limits on dividends in different cases. Responses to the public consultation on CICs stressed the need for flexibility in the arrangements in order to cap dividend payments. Clause 27 is intended to provide that flexibility. I should emphasise that the Bill also requires the regulator to undertake appropriate consultation before setting those limits and to have regard to their likely impact. For example, it may be considered reasonable by the social enterprise sector for CICs operating in a particular sector to have a different limit.
The noble Lord, Lord Freeman, raised the question of the timing of subordinate regulation. I listened with interest to what he had to say on the timing of
298
subordinate legislation so that it comes into force on only a couple of days a year. My department is already adopting that approach for employment law and we shall be considering this matter carefully to see whether it is a model that we should use in other areas such as company law.
My noble friend Lady Thornton asked that resources be provided to promote CICs. I can say that the Government are committed to promoting social enterprise widely. Making those who benefit from it aware of CICs and of the other changes to legal forms that are planned and under way will be an important part of that work.
The noble Lord, Lord Grantchester, raised the question of the audit threshold bringing increased risks that are not in line with our intentions for the Bill. This proposal will reduce the burden on small companies and release a further 69,000 companies from statutory audit. However, it will not be a free-for-all. Shareholders will still be able to require the company to audit its accounts if they consider it necessary. Creditors, such as banks, may want to look closely at company accounts before lending money.
I thank the noble Baroness, Lady Carnegy of Lour, for putting forward the Scottish perspective. She asked how the Government justify the timing of the Bill in relation to Scotland. New companies in Scotland and other parts of the country will be able to take advantage of this form. The noble Baroness is correct in identifying that Scottish charities will not be able to convert to CICs. The Bill acknowledges that and provides scope to make changes if the Scottish Parliament decides that Scottish charities can cease to be charities. The Government do not intend to bully the Scottish Parliament in this action; they are merely building in flexibility in order to avoid a situation whereby the Government must introduce primary legislation if changes are made in Scotland.
In conclusion, I believe that today's debate augurs well for the progress of the Bill. I look forward to detailed debate in Committee. In spite of what has been said, I believe that it is very largely a technical Bill and not one which engenders controversy on party lines. Nevertheless, it is an important measure which will help to ensure that our company regulation and financial markets continue to be regarded as among the best in the world. That is a source of considerable competitive advantage to Britain. We have not achieved that position through what is often termed "a race to the bottom". On the contrary, in many respects, our standards of financial reporting and corporate governance are significantly higher than those of our competitors. However, we combine high standards with flexibility and a minimum of bureaucracy, which makes it easier to set up and run a company in Britain. In other words, the law broadly strikes the right balance between freedom and protection.
The amendments in the Bill will reinforce the controls designed to achieve full and honest reporting. They will help to ensure that those who seek to abuse the privileges of the company form can be exposed

299
and dealt with. They will encourage and assist the development of a social enterprise sector. But they impose minimal additional burdens on business. Many of the provisions on financial reporting will apply only to larger listed companies and the community interest form will be voluntary. No one will be forced to use it, but we believe that some businesses will judge that the extra regulation is justified by the clear status that the new form will confer.
The Bill has been developed through partnership between the Government and interested parties, and I hope that it can pass through this House in a similar spirit of partnership.
Lord Razzall: My Lords, before the Minister sits down, I am not sure that he answered my question on whether he agreed with the Home Secretary's remarks that the CIC form should not be used in relation to the provision of public services.
Lord Sainsbury of Turville: My Lords, the noble Lord is quite right: I did not. I thought I was running out of time so I would give the issue a miss. The noble Lord is quite right to direct me back to the matter.
The Government's view on community interest companies is that they should be developed to meet the needs of local communities and complement core government services in areas such as childcare provision, social housing, leisure and community transport. In public services, where non-core ancillary services may be provided by third parties, it will be possible to use CICs to provide such services.
However, our view is—and this includes both the Home Secretary and the rest of the Government—that CICs should not deliver essential public services in core sectors such as hospitals and schools.
Lord Phillips of Sudbury: My Lords, I begin by thanking the Minister for his extremely careful response to a great many points made. As he reasonably said, he did not have the opportunity to respond to all the questions asked of him. Will he have an opportunity to do so before the Committee stage of the Bill, or, indeed, will he have consultations?
Lord Sainsbury of Turville: My Lords, I am very happy to have consultations with the noble Lord, who is obviously a great expert on this area, at any time before Committee. Indeed, I shall read his speech with great care. If there are any general points of principle which I have not answered, I shall write to him. I suspect we shall consider most of the noble Lord's points in very great detail in Committee. I shall leave those for the Committee stage because I think that that is the appropriate way to deal with them. If the noble Lord has a desire for consultation, I shall be very happy to talk to him.
On Question, Bill read a second time and committed to a Grand Committee.

European Parliamentary and Local Elections (Pilots) Bill
2.12 p.m.
The Parliamentary Under-Secretary of State, Department for Constitutional Affairs (Lord Filkin): My Lords, I beg to move that this Bill now be read a second time.
An important part of the Government's programme has been our focus on democratic renewal. We have endeavoured to bring government closer to the citizen by listening to people and giving them more opportunities to influence the decisions that affect how they live their lives.
Through measures such as the development of national, regional and city government, as well as the modernisation of local government, we have sought to empower individuals and communities. Through the introduction of postal voting on demand, improved accessibility to voting for those with disabilities and the piloting of innovative voting methods, we have sought to make participation in the democratic process easier, more convenient and more in line with modern lifestyles.
This is all being done against a backdrop of decreasing democratic participation, one aspect of which is the reduction in the number of people turning out to vote. In the 1999 European parliamentary elections, just 24 per cent of those eligible to vote did so. That compares to a poor turnout even then of 36.2 per cent at the previous election in 1994.
In local elections turnout figures have fluctuated. But we have gone from a situation in the 1980s when turnout almost every year was more than 40 per cent nationally to a situation where turnout was 34.9 per cent last year and 32.8 per cent in 2002. Clearly. there is a problem.
It must surely be a fundamental responsibility of any government to attempt to address a situation where only between one-quarter and one-third of people are taking part in important elections. Doing so, however, is complicated and involves looking at the many and varied reasons for people not voting or not bothering to vote.
One part of our strategy has been the modernisation of the electoral system. The European Parliamentary and Local Elections (Pilots) Bill forms part of this wider programme. Pilots of innovative voting methods, including all-postal ballots and electronic voting, have taken place at a number of local elections over the past three years. The evidence so far is that postal voting has increased turnout by an average of around 15 per cent and, in some cases, turnout has doubled.
The Bill, if passed, will provide for the programme to be extended to a European parliamentary election for the first time, enabling piloting on a far greater scale than ever before.
Our programme of piloting began with the Representation of the People Act 2000. Both all-postal and electronic methods of voting were piloted successfully in 2000, 2002 and 2003, and a great deal of

301
experience has been built up. The independent Electoral Commission has evaluated every pilot scheme since 2002. Its surveys have shown that people have found new methods of voting to be convenient, quick and easy to use.
In the most recent pilot schemes, which took place last year, 61 local authorities took part. In the 33 all-postal ballots, the average turnout was 49 per cent. That again compares extremely favourably with turnout in the same local authority areas in the previous comparable elections, in which only 33 per cent of electors turned out to vote.
Although electronic voting pilots have not provided the same jump in turnout, they have also been extremely valuable. Electronic voting, where people can vote through a number of channels including the Internet, telephone, digital television or text messaging, is likely to increase in importance as more people become comfortable with the relevant technology. Electronic voting, therefore, can offer the electorate a choice as to how they cast their ballot. Across the 15 pilots held in May 2003, where electors could choose between using one of the e-voting channels and more traditional procedures, more than a fifth of voters chose to cast their vote electronically.
We have taken the view that an incremental approach to introducing all these new voting methods is the right and prudent course to take. We have learned much from the pilots that have already taken place and expect to learn more from the scaled-up pilots that the Bill will allow. This approach means that we must always take matters forward with a sense of caution and responsibility.
On electronic voting, although we were keen to hold a limited e-voting pilot this June, the Electoral Commission has recommended to us that no area is yet ready for this innovation at a regional level. As announced last month, we intend to follow the commission's advice and run all-postal schemes only.
We have said that our long-term aim is to hold a general election at which voting is available in a number of different ways, using both conventional and new technologies. Electronic voting therefore remains an important part of our future programme.
I turn to postal voting. It may be useful if I briefly explain the mechanics of how all-postal voting would work if used at elections in June. At all-postal elections, ballot papers will be delivered to an elector's home or a specified alternative address no later than one week before the close of poll, and usually between two or three weeks in advance.
To vote, an elector simply completes his ballot paper, places it in the envelope supplied and puts it in the post. To combat fraud, secrecy warnings will be included in voting literature and voters must sign a security statement in order to confirm their identity.
Alternatively, people can choose to go to a staffed delivery point. At these points, electors are able to deposit their ballot paper in person. A secure area where ballot papers may be completed in an environment similar to a polling station is also provided.
302
It is likely that we shall require at least one staffed delivery point to be provided in each principal local authority area, and that in each area at least one of these points will remain open until the close of poll.
When arguing the merits of all-postal voting, some say that the current system of polling stations and ballot boxes works perfectly well and that it is entirely easy and convenient. For many that may be true, but it is not the case for everyone for example, people with limited mobility or those who work long hours or unpredictable shift patterns. For those people it may not be easy or even possible simply to walk to the nearest polling station on election day. The same may be true for people who commute long distances to work or for those with care responsibilities.
I now turn to the Bill and briefly outline how the legislation is structured. Clause 1 provides a power for the Secretary of State to make an order requiring that the 2004 European parliamentary election should, in certain regions, be conducted as a pilot of innovative voting methods. The order will set out the regions chosen for piloting and, in broad terms, the method of voting to be used. So that there is proper opportunity for parliamentary scrutiny, this order is to be subject to the affirmative resolution procedure.
The Bill states that the order cannot be made unless the Electoral commission has first been consulted. The Government therefore wrote to the commission last September, asking it to recommend up to three regions suitable for holding an all-postal ballot, and additionally to advise which of those regions might be suitable for the piloting of electronic channels alongside the postal vote.
The commission conducted a public consultation and reported on 8 December. It recommended the north-east and east Midlands regions as suitable to hold all-postal pilots. It also stated:
"there are a number of other regions which could potentially be suitable for conducting an all-postal pilot scheme".
The Government are currently considering in more detail each of those further potential candidates. We hope to announce shortly whether or not we intend to proceed with any other region.
Although the order to be made under Clause 1 will provide the essential framework for where and how pilot schemes are to be run, the pilot order provided for by Clause 2 will set out the detailed mechanics of the scheme. We are engaging stakeholders in the process of developing the content of the pilot order. In particular, representatives from the pilot regions, the Electoral Commission, political parties and groups representing people with disabilities have been engaged. We are seeking to ascertain their views on the issues that arise from the pilots and to develop the policy and mechanics in a way that best meets the needs and practicalities for both electors and administrators.
Clause 2 also provides that a so-called marked register will be made available to political parties and candidates prior to the close of poll. In amending the Bill in another place to include that provision, we have been responsive to a request by all the main political parties. A marked register in this context means a list

303
of those electors who have returned an envelope purporting to contain a ballot paper, which political parties can cross-reference with the electoral register.
The purpose of providing that information is to facilitate the parties in their role of getting the vote out. While in a standard election, parties can use tellers to gain a picture of who has or has not voted and target resources as a result, with an all-postal vote that is not possible. Targeted campaigning helps the parties better to engage the public, which is in the interests of everyone who wants to live in a healthy democracy. Provision of a marked register is intended to aid that and is something on which the Electoral Commission will specifically report.
One issue often raised in relation to remote voting methods in general is that of security. In its extensive evaluation of the pilots held at the 2002 and 2003 local elections, the Electoral Commission found no evidence of an increase in fraudulent activity. Nevertheless, we consider that there is no room for complacency on the issue. The Bill therefore includes provisions extending two offences. Those are general measures that have been informed by the Electoral Commission's recommendations on the future of all-postal voting.
First, Clause 6 extends the power of arrest without a warrant for the offence of personation to activity outside a polling station—clearly helpful where remote voting is widely in use. Personation is the name given to the offence committed under Section 60 of the Representation of the People Act 1983 when someone votes as someone else but without the other person's consent. At this stage, that extension applies solely to regions where pilots are taking place in the 2004 European parliamentary and combined local government elections.
The second offence provision is contained in Clause 7. That clause provides that the magistrates' court is given a power to allow an extension of time up to a maximum of 24 months after the date of an offence for a prosecution to be commenced. The application must not he granted unless the court is satisfied that there are exceptional circumstances and that the investigation of the offence has been pursued with all reasonable diligence. Those additional measures will improve the security of postal voting and aid us in building confidence and trust in the new system.
An important part of our approach is to maximise the lessons learnt while minimising the risk. That is why London, where mayoral and Greater London Assembly elections are taking place, and the region to be combined with Gibraltar under the European Parliament (Representation) Act 2003—which the Electoral Commission has recommended to be the south-west—are excluded from holding pilots this year. It is also why, in pilot regions, by-elections for Westminster and other bodies will be prevented from taking place within a six-week period around the date of the European parliamentary election. It is felt that each of those exclusions is required to avoid unnecessary complexity.
304
The situation for local government by-elections in England and Wales is slightly different, in that they may be combined at the discretion of the returning officer. That will not add unduly to complexity, as local elections will already be taking place.
A key aspect of piloting is learning lessons, and in this the role of the Electoral Commission is vital. Its evaluation of previous schemes has helped shape and develop policy, and Clause 4 provides that that, will continue. The provisions of Clause 4 are modelled closely on the relevant section of the Representation of the People Act 2000. The main difference is that the Bill also provides for the assessment of the impact of marked registers, on which it will be essential for candidates and political parties to feed back their views and experiences so that proper evaluation may take place.
In conclusion, the Government have never pretended that the problems of low turnout can be solved simply by altering the way in which we cast our vote. Declining democratic participation matters enormously, but it is being experienced worldwide, with many and varied explanations for why that is. The key to our approach must always be to attempt to engage better with the public, to show that voting matters and makes a difference and that the participation of an individual can force real change.
However, it is also legitimate and important to consider whether the methods by which we cast a ballot are the best available. It is important that we measure our institutions and practice against the needs of people today. Where change is warranted, we should not shy away from acting.
Some say that the current system of polling stations and ballot boxes works perfectly well and that it is entirely easy and convenient. For many of us this is true, but it is not the case for everyone. The evidence is clear that all-postal pilots appear to lead to a significant increase in turnout, which is why it is important to make steady, progressive investigation of them.
I present to your Lordships a Bill with the purpose of seeking how best to engage the electorate and to investigate how we can improve participation in our democracy. I commend the Bill to the House.
Moved, That the Bill be now read a second time. —(Lord Filkin.)
2.26 p.m.
Baroness Hanham: My Lords, as the Minister accepted, the Bill is the latest of the Government's efforts to increase voter participation in elections. Various pilots have been undertaken in local government elections since 2000, including all-postal and e-voting. Voting hours and venues were increased for both local and general elections as a result of the Representation of the People Act 2000. The result so far seems to show that more electors vote if there is no option but to do so by postal ballot, but that neither e-voting nor extended voting hours and venues have much role to play in improving turnout figures.

305
Although the Bill does not specify the exact nature of the pilots to be undertaken, as the Minister said, the Electoral Commission was asked to consider a number of matters, including the possibility of putting two pilots on to a larger canvass: e-voting and all-postal. I thank the Minister for clarifying what Mr Leslie, the Minister in the other place, said, when he accepted the arguments of both the Conservatives and the Liberal Democrats, supported by the report from the Electoral Commission, that there was neither sufficient time to bring a large pilot forward for e-voting nor sufficient evidence of beneficial effect, and agreed that that aspect would not be taken further.
If the Government had decided to proceed with e-voting, I should have had to say that we would oppose it in Committee. Given that the Minister has, I believe, made clear today that they will not, we will probably be satisfied, although we will need to consider whether it would he better to state in the Bill that we will not pursue that option.
We accept that there is evidence that all-postal voting has had an impact—at least at local level, because that is where it has been tried so far—and that there is justification for trialling it on a larger plain, but we do so with considerable reservations. First, we should not jettison our tried and tested form of personal presentation at polling stations lightly. That has been the bedrock of our democratic election process for years and has stood the test of time and probity well.
Secondly, there is still no evidence that other methods of voting bring in to the system anyone who did not intend to vote in the first place. What it did was to make it easier for them to do so—a fact that in itself may be a good thing, but should not lead us to the delusion that any increase in numbers is demonstrating that recalcitrant voters are attracted to vote by changes in the method. We must understand that, whatever we do, people will not vote if they do not want to.
That is the nub of the problem. It is the basis of all the relevant legislation, including this Bill. As the Minister admitted, the problem has not yet been satisfactorily analysed or answered. But there is more than a little evidence that electors do not vote because they see no effect for themselves from doing so. The relevance of electing to office representatives with little ability to deal with the problems affecting the people may escape them. Disaffection with local politics has barely been touched on by the major reorganisation that took place introducing Cabinet members and ranks of councillors.
The Government's ability or unwillingness to control European laws and regulations that are beginning to make Parliament look effete does not encourage participation. There is perceived to be little evidence, particularly in European elections—which we are mainly talking about—of a direct relationship between the people and those seeking election. The closed-list system removes the vital link between the voter, the representative and a constituency, and reduces the choice to one of party rather than person. We spent a little time debating that matter last Monday.
306
One of the difficulties of the Bill, in seeking to ensure that the order is practical and proper, is that it addresses only the fact that there is to be an order after consultation with the Electoral Commission. That consultation has now taken place, so the Bill is slightly deficient already. The Bill gives details, but no timing, of the elections. I must therefore assume that the Bill is confined to, and will be completed by, the end of polling day of the last election, and that it takes into consideration only elections in 2004—the regional and local elections in June. I assume that that is the length of application and status of the Bill. As the Minister said, London is excluded from consideration as a pilot area, as is the south-west and Gibraltar, which has been tagged on.
There are, however, fundamental practical considerations to be addressed. The Bill will have to give us the opportunity to do so, as the only other possible opportunity will be when the order comes forward for affirmative consideration, at which stage it would be too late to make changes. The first consideration is the electoral regions to be included in the order, followed by the confidentiality, security and probity of any pilot scheme. We must consider an electoral region's ability to handle not only the European elections but also any local elections taking place within it.
On the first point, unlike the other place, where the Electoral Commission report was available only at the end of the debate, this House has the advantage of seeing it at this early stage. The Electoral Commission was asked by the Government to give its views on which three European electoral regions would be in a position to cope, not only with European elections but also with local elections involving voting for all those authorities within the area. Another consideration is how regions could deal, at what is now very short notice, with the innovatory procedures, when they get the official sanction to go ahead.
The Commission has recommended that there be just two regions: the East Midlands and the north-east. The East Midlands has a small number of local elections, and the north-east has considerable experience of such pilots. It was on that rationale that the Electoral Commission based its recommendations. However, the Minister has now confirmed what was said in the other place: the Government are still looking for a third region, and they do not accept that just two regions should take part—that is the only interpretation that I can make.
The Minister in the other place gave no further indication of which other region he might wish to promote. However, given the people who took part in the debate in the other place, there are suspicions, or at least a smidgen of an idea, that the region might be Scotland. But that proposal has already been rejected, not just by the Electoral Commission, but by Scottish local government and electoral officers themselves, for perfectly cogent reasons. The Minister has said that he is still considering the matter. I hope that the decision will be in the pipeline before we consider the Bill again—it cannot be taken until we deal with the legislation—and that there will be some indication

307
whether there will he three regions or two. I suspect that it will not be long before we go into Committee; if it is too far off, the Government will not get through their timetable.
There are concerns over the process. All postal voting is totally reliant upon the expertise of Royal Mail in delivering without error papers to all those entitled to receive them and to return them to the election office in good time, again without fail. We can all recall missed letters and strike action, which has meant no mail at all. Recently, in London, we had a strike for more than 10 days—practically an entire electoral period. What would be the fall-back position if that happened in any part of an electoral region, and what statutory responsibility would there be for setting up alternative methods of delivery that could be implemented at short notice?
There are also concerns about the method used for verification of voters, and about houses in multiple occupation and student hostels, to which votes may be delivered that are no longer relevant but that could be scooped up and misused. There are questions, too, about timing and the ability of political parties to make their views known to the electorate before they vote, in what I assume will still be a three-week campaign. Other concerns relate to the role and timing of election broadcasts and the necessity to provide practical, straightforward and non-partisan explanatory material to enable voters to know how to vote—the Minister did not mention that today. The need for provision of daily marked registers, which caused much concern and discussion in the other place, has now been accepted. I hope that they will be available daily; otherwise they will be of no use.
My final question relates to the security of the poll. When are envelopes to be opened? Will it be days in advance of the close of poll, as they come in, or on the day itself, as happens now? Who will be in attendance when they are opened? What are the arrangements for verification and identification of the voter, and how will that process be separated from the vote itself? How can people be assured that their ballot papers have been received—that is important in an all-postal vote rather than one where just a few people have postal votes? The problem of impersonation has been dealt with in the Bill, and has quite rightly become a matter of considerable sanction.
A further question is the practicality of providing a secret ballot for those with disabilities, who will have to rely on someone else to help them to either complete or read the forms, That has never been an easy issue, but I understand that the Disability Rights Commission has made recommendations on how postal voting could be handled, and that in previous pilots they have not been issued.
For generations we have voted in polling stations with the option of a postal vote, the availability of which has been increased over time to encompass all those who have requested it. This next step stops the option of having a discreet local station in which to go and place one's vote. That choice would be gone. I am not at all clear that it is replaced by the announcement
308
that there will be one delivery point in each ward. It might be fine for delivery, but will people be able to complete their postal vote there should they want to?
We must therefore be sure that the Bill is strong enough to ensure that problems do not arise, and that the received wisdom for completing a voting paper—sitting at home, in an office or wherever encourages greater voting—is borne out, and carried out in a way that does not enable a criticism of fraud to be levied at it.
This may be a small Bill; it is certainly not a perfect one. But it is one which will receive not only considerable scrutiny, but should also, as I said, include far more detail on the face of it than appears likely at present, rather than leaving all that to the orders that are implicit within the legislation. It will undoubtedly pave the way to the Government's ultimate goal of all-postal voting at a national election in the future.
It is, too, the first time that a national election will be held with different electoral regions voting in different ways. There must be the possibility that, ostensibly, the results could be skewed. We shall be moving amendments in Committee to deal with the matters that I have outlined today. My noble friend Lord Attlee and I look forward to the ensuing discussions.
2.41 p.m.
Lord Rennard: My Lords, my overall view of the Bill is that, at present and on balance, it may put forward as many problems for our democratic system as it puts forward solutions. It proposes a mechanism for changes to voting systems that are, I think, at least premature. Since those advocating changes also advocate safeguards, and those safeguards cannot all be in place in time for elections in June, I am not convinced that the changes should be made now. There are also significant other problems with experiments such as all-postal voting elections that I shall address.
But first, perhaps I may say that I believe that experimentation is important in voting methods. My party and I have generally supported the principle of pilot projects. It is particularly welcome to us that the Electoral Commission, whose establishment we so strongly supported, is able to put forward proposals independently of the Government and parties. But it is still for Parliament to approve changes. Wherever possible, changes to voting systems should carry greater consensus than simply the support of the governing party.
By combining this year's elections, a major electoral experiment has already been agreed for this year. It is one that my party and I wholly support, even though a significant number of colleagues in local government had strong views that it would not be in their interests to do so. Nevertheless, we supported the Local Government Act 2003, allowing the postponement of the local and the London elections from May to June. We thought that it would be far better to have one polling day for all the elections rather than to have two sets of elections five weeks apart, which is something

309
that undoubtedly contributed to the voter fatigue that resulted in the 24 per cent turnout in the European elections of 1999.
We would have supported a significant further level of experimentation had the Government shown willingness to learn some of the lessons from the unpopularity of the closed lists in the 1999 elections and decided to allow voters to have slightly more freedom in choosing, if they wanted, to rearrange the order of the lists presented to them by the parties in the European elections. Giving more power to the voter and less to the parties must be good for democracy and good for participation. But we did not see government willingness to consider what I believe would have been a very worthwhile experiment this time around.
Incidentally, it seems strange to me that we are dealing with an issue today that, perhaps, could have been dealt with earlier when we were considering the Bill on European elections extending representation in the European Parliament to the people of Gibraltar. It seems that there must have been somewhere in the process of government a last-minute change of mind about the issue of postal voting in 2004. I fear now that at this late stage we are in danger of acting in haste with insufficient time to prepare for experimental methods of election by 10 June, especially if the Government—as they may—seek to go further than the Electoral Commission has recommended and try to adopt postal voting in the third pilot region.
Indeed, in discussions with Ministers about the principle of the elections being combined on 10 June, I thought that it was clearly understood that the combining of the European, the local and the London elections this year would be the only departure from previous practice, and that the issue of all-postal voting in certain regions, as a further level of experimentation at the same time, would not be raised at all by the Government. I wonder whether the Minister might explain this apparent late change of mind.
On the general issue of experimentation in this year's elections, my own representation to the Electoral Commission argued for consideration to be given to a different area of experimentation altogether. The further experiment that I would like to see this year is weekend voting. Before we consider issues such as widespread extension of compulsory postal voting, we should have had a good opportunity to look at weekend voting. The elections in June would have been an ideal opportunity to do that.
Rather than opening polling stations between 7 a.m. and 10 p.m. on a Thursday—often causing disruption to many schools and, therefore, disruption to pupils' education—it would have been practical to find suitable venues to open during the day on a Saturday and Sunday giving a choice of polling day, and over a period of time, when many more people are free than on a week day.
I understand that returning officers and electoral officials were consulted but were not enthusiastic about issues such as storing ballot boxes securely on the Saturday night. But I do not believe that that
310
problem could not have been overcome. The interests of the voter should be paramount. That is the experiment that should be in this Bill.
Perhaps I may now turn to some of the problems with all-postal-vote elections or "compulsory postal voting", as I prefer to call it, as put forward in the Bill. Some of these problems need to be addressed before there is much more widespread all-postal voting. Some issues are fundamentally problematic. The trade-off between increased turnout and other problems with the democratic process may not be worth it. Of course, all-postal voting has generally raised turnout, but it has not always done so. The health of our democratic process cannot be judged by turnout alone.
One of my principal concerns with all-postal-vote elections is the lack of secrecy for many voters. The Secret Ballot Act 1872 was one of the most important democratic reforms in the history of this country. There is a danger that compulsory postal voting undermines it fatally. It may even be an issue under Article 3 of the European Convention on Human Rights, and this should be scrutinised carefully by the Joint Committee on Human Rights.
Of course, a voter can do what he or she likes in the privacy of the polling booth. Members of the same family may go to the polling station together, but they vote individually in conditions of secrecy. When the postal votes all arrive at home, there is no such guarantee. In my experience, I have often canvassed voters who have said, for example, that they vote for our party but that their husband does not know. It may be possible for them to keep that information from their husbands in future, but they may find themselves voting in another way altogether for the sake of a quiet life. The principle of a secret ballot would have been destroyed.
Concerns about privacy apply to all voters, but they have been raised by organisations representing disabled people. Thanks to changes introduced a few years ago, a blind person may he assisted in a polling station by a presiding officer on how to fill in their postal vote. But a blind person receiving a postal vote at home may not be able to vote without a visitor, a friend, a relative or someone filling in the ballot paper for them, and so undermining their right to secrecy.
Homes in multi-occupation are a particular problem, as raised by the noble Baroness. Lady Hanham. In areas where many students live, or in areas such as where the Brent East by-election recently took place, I have often delivered literature to houses with a huge number of residents—sometimes in double figures. How do we really know what happens when 10 postal votes are left in a communal hallway? It is often the case in those places that the 10 residents are a different 10 people from those on the electoral register to whom postal votes will have been sent.
There may be very few problems in many areas and there may have been few problems with the pilot schemes so far. However, what would have happened in a closely fought and important by-election such as that in Brent East last September if it had been an all-postal vote election? I canvassed large numbers of

311
households in that election, where many people told me that the person who was on the electoral register had moved away from the district. In an all-postal vote election, a postal vote would still have been delivered to the previous occupant.
A huge concern for me about the principle of all-postal vote elections is connected to the timing of the election campaign. Traditionally, parties and candidates, the media and all those involved in the election campaign, including the Royal Mail, who deliver to election addresses, know that their work should be completed by polling day. However, in an all-postal vote election, ballot papers are supposed to be delivered at least one week before polling day and usually two to three weeks in advance. Experience from pilot schemes suggests that most voters return their ballot papers almost immediately after receipt.
When are people best able to judge between the parties and election candidates? Surely it must be when they have the most information at their disposal and have been subject to the most intensive campaigning and debate between the parties and candidates. That time is on polling day and not two or three weeks before it.
There is no doubt that many election results would have been different if voting had taken place a week or two earlier. Perhaps the 1992 election might have been a totally different story and Neil Kinnock might have become Prime Minister if the ballot had taken place a week or two earlier. Perhaps some would have welcomed that and others regretted it, but the results of elections will change if one changes the time at which people cast their votes. It is unhealthy to change the time at which people cast their votes to a period that is two or three weeks before the normal polling day and before the parties have been subject to proper campaigning scrutiny. We will reach a situation where people will have voted before the media have covered the election issues, before the parties have delivered their literature, before the election broadcasts have been transmitted and before there has been a proper and democratic discussion of the issues. Is that wise for the health of a democracy?
There are also many logistical difficulties with the all-postal vote process. Above all, we may reach a point where politicians avoid the detailed scrutiny of an election campaign by having voters cast their votes at such an early point.
Political parties and agents are often familiar with the failures of the Royal Mail to deliver election addresses by polling day. That failure was widespread in the 1999 European elections, when the Royal Mail was given for the first time the task of delivering perhaps two or three million election addresses across entire regions. It will be asked to carry out a similar task in this process. How can we be sure of its capacity to deliver postal votes in time for them to be completed, posted back and counted?
Let us look at some of the lessons from the pilot schemes. Last year, hundreds of voters in Stockport were disenfranchised by a failure to deliver their postal votes. In Liverpool at the last general election, a
312
wildcat postal strike meant that many postal voters were simply unable to return their votes. In one ward in the Metropolitan Borough of Dudley last May, 52 postal votes were delivered only on polling day itself and a further 58 were delivered after the election was over. There is no proper redress in our system for those voters or for affected candidates. Last month, the candidate who lost that election by a mere 40 votes failed in his legal action to have the election result overturned and re-run on the grounds that the returning officer had done enough by giving the postal votes to the Royal Mail. The fact that they had not been delivered to the voters could not change the result of the election. In a by-election in the Hill Rise ward of Islington last October, industrial action was taking place in the Royal Mail and a large proportion of postal voters was disenfranchised. Concern was expressed at the time and assurances were given by the Royal Mail that special measures would apply to make sure that postal votes were returned in time to be counted. However, one in three postal votes was returned to the returning officer after polling day and too late to be counted.
I ask noble Lords to imagine a national election where one-third of the votes was not counted. It would make the conduct of the 2000 US election in Florida seem like a model of perfection, with its hanging chads and all its other problems, if it became known that so many votes in our system were not counted because of a postal problem. We have witnessed recent industrial action within the Royal Mail and we know that an election that uses postal votes may be a tempting target for some people.
Of course, there are some answers to some of those problems. A declaration of identity, with a witness signature, to accompany a postal vote may not an infallible means of avoiding fraud, but it is a necessary minimum safeguard and acts as a significant deterrent to fraud. That is one change that could be made to the Bill. There should be no all-postal vote experimental elections in June without that as a minimum safeguard.
In the longer run, the Electoral Commission is right to argue for individual registration of voters, to be accompanied by a signature of that voter, thereby enabling at least a cursory check to be made that a postal vote has been returned by the person to whom it was dispatched.
More use of postal voting should mean a change in our system to allow more days after the normal polling day for postal ballots to be returned and counted. It was not until the scandal of the theft of the US presidential election in 2000 erupted that many voters there became aware that absentee ballots were still supposed to be counted several days after polling day and usually after what is called the "result" is known.
In Australia, for example, absent votes can be counted up to two weeks after polling day. The votes cast at a polling station are counted and declared immediately. The postal votes are then counted as they come in, each day, for a two-week period thereafter

313
and the results published on a website. The final outcome in a close election may not be known for two weeks.
For election junkies such as me, it is quite fascinating to watch the changing results. I remember seeing an Australian politician destroy her career by denouncing her electorate and her party for voting her out, only to find that the postal voters actually made the difference and that she had been elected by a small margin.
That system may of course leave a short period of uncertainty about the final outcome of the election. However, more importantly, it helps overcome the fundamental problem of people having either to vote before they have experienced the campaign or to vote so late that their vote is not counted.
Postal votes should not be dispatched until seven days before polling day at the earliest. There should then be a week for them to be counted afterwards. We should also have systems that ensure that postal voters do not lose out on the last week of campaigning. There should be a facility for election candidates to have a sample of their literature included in the postal vote mailing.
I have expressed strong reservations about the extension of all-postal voting or "compulsory postal voting". I have suggested some measures that may mitigate the problems, only some of which could be in place by June. The Bill must therefore be amended to provide for what safeguards can reasonably be provided in postal ballots, such as a declaration of identity and a witness signature.
The Government should also indicate that they will go no further than the Electoral Commission has suggested in having the two proposed all-postal pilots in the northern and east Midlands regions. I welcome their acceptance of the Electoral Commission's view that experimentation with Internet, text and telephone voting is not appropriate at this stage. The evidence so far is that there are problems with the secrecy and reliability of those methods, but no compensating benefits in the form of increased turn-outs.
In conclusion, the fundamental problems that we are seeking to address lie rather with ourselves as politicians and our political system than with particular voting technologies. We should not lose sight of that.
3 p.m.
Baroness Gould of Potternewton: My Lords, it gives me great pleasure to follow the noble Lord, Lord Rennard, with whom I have worked in the past. I have enormous respect for his experience, but I do have certain very fundamental differences from him in respect of this Bill. I do not intend to go into those today, but I am sure that we shall be able to debate them in Committee.
First I declare an interest as chair of the HS Chapman Society, an organisation that provides a non-partisan forum for election junkies such as myself and the noble Lord, Lord Rennard, electoral practitioners from all parties, electoral administrators,
314
party solicitors, the Electoral Commission and anyone interested in the UK's electoral systems and practices. The society has a particular interest in increasing democratic participation and the legislation designed to bring that about.
As has already been said, this Bill marks a further stage in the scaling-up process of introducing innovative election methods, some of which many people scoffed at when we first introduced them in 2000. No one would argue that changing voting methods is a panacea for increasing the level of voting. The noble Baroness, Lady Hanham, referred to the reasons why many people no longer vote and she was right to point out that they are complicated and not simply about how you go to the polling station.
The reasons for the fall in voting turnout were identified by the Electoral Commission as: circumstances on election day that prevent people from going to the polls; distrust of politicians; the inability to distinguish between the parties; and the belief that a vote will not make any difference. However, the commission's investigation also showed that, when presented with the chance to exercise a right to vote from home, more people took up that opportunity. That is something which we must take very seriously.
A 16 per cent increase in the ballot may not be a triumph for democracy, but it proves the validity of the process of change and cannot be ignored. Therefore it is right that we now build on the experience we have already gained and continue to develop it, as proposed in the Bill.
We should look closely at the position in New Zealand, which offers a proven example. New Zealand has developed all-postal voting at local elections, a process built on since 1965. However, in 1992 one council reverted to polling station voting. Turnout fell from 46 per cent to 26 per cent, but rose back to 45 per cent at the next all-postal vote election.
In Committee in the other place it was suggested that, rather than select specific pilot areas, a pilot postal ballot should be conducted nationally. I consider that a flawed argument. Political climates change over time and the only comparison which could be made with a national pilot would be with a national election held at some other time. That would be absolutely the wrong way to make a comparison. The only true comparison and valid means of testing the system is to compare the turnout in adjacent areas with one region having a postal ballot and the other using the traditional method of voting at polling stations. Such an incremental approach would help to build up electoral confidence in the system, which is extremely important.
I think that the Government want to respond positively to the demand made in the other place for a marked polling register. Such polling progress information is of value not only to political party campaigning and to electors by eliminating unnecessary calls on those who have already voted and helping each party target its canvassing activity—which may again help to increase turnout—but it is also a useful tool for returning officers by assisting in the prevention of double counting and fraud, a point to which I shall return.

315
I refer now to the issue raised by the noble Lord, Lord Rennard, about the canvassing practices of political parties and the effect of early voting by post. It is up to political parties to re-examine how they conduct their electoral campaigns so that they fit in with the system rather than the system having to fit in with them.
Returning to the marked register, concerns have been expressed about voter privacy, but there has been a long tradition in this country of number takers outside polling stations identifying electors after they have voted. I stress the word "after" voting. Although it has sometimes happened, it is illegal to interfere with electors on their way into a polling station. The same principle would apply here. There will be no identification of how the elector voted, merely that they have returned their ballot paper envelope.
The Electoral Administrators Association, of which I am a member, is generally in support of this legislation but is concerned that the necessary resources must be provided to cover the administration and cost of distribution of the marked register. It is an extra job that will require further resources and staff. My honourable friend Chris Leslie gave an assurance in another place that extra resources would be made available, but in order to reassure electoral returning officers, I should be grateful if my noble friend on the Front Bench could confirm that extra moneys will be made available to cover the costs of the pilots.
The noble Lord, Lord Rennard, also talked about people being disenfranchised. I think that one of the largest contributors to disenfranchisement is the fact that people do not register to vote in the first place. It has been suggested that we should wait for individual registration before bringing in these additional pilot studies. I have discussed this matter with electoral returning officers, whose view is that the two issues should be tackled quite separately. They see no reason for delaying the Bill until we have individual registration. EROs have also expressed the view that it would take a considerable time successfully to implant in the minds of the electors the concept of individual registration. Therefore it would not be appropriate to introduce it at this point.
A further concession rightly made by the Government is that to enable ballot papers to be delivered to a specific polling place on the main polling day—a "staffed delivery point". I must admit that I have a problem with that phrase. People understand the concept of polling stations and so to overcome that minor problem perhaps we should have two lines, one for the polling station and one for the delivery point. However, I hope that it will be stressed to electoral returning officers that care must be taken in determining the site of these delivery points, that they must be accessible and should be well publicised.
I hope also that there will be some flexibility as regards numbers, so that we shall not be restricted to the present suggestion of one in each local government area. Account must be taken of the geography of each local area, as well as the type of population. If it is an area with a high proportion of elderly people, then that should be taken into consideration.
316
The most contentious issue has already been identified by previous speakers; that is, the possible increase in the opportunity for fraud, impersonation and malpractice. Every effort has to be made to reduce the opportunity for these and the question is whether the Bill achieves that. I believe that we should welcome Clauses 6 and 7 which lengthen the time limit for the prosecution of malpractice to a maximum of 24 months and extend the offence of impersonation to outside the polling station. It is also encouraging to note that other measures will be taken through the piloting order and secondary legislation. I hope that, if necessary, further widespread consultation will be undertaken to make absolutely certain that maximum security is achieved for our elections.
I was also pleased to read what the Minister had to say on 4 November last year in Standing Committee B. The Government, through the Electoral Commission, do take action positively to test whether systems are prone to malpractice and fraud by means of spot checking whether people on the marked register have actually voted and by checking the signatures on declarations of identity.
I do not always agree with the Electoral Commission. although like the noble Lord, Lord Rennard, I fought very hard for its establishment. However, credit must be given to it for the many measures which have been taken and will continue to be taken to alleviate the possibility of fraud and to improve the facilities for reporting allegations of election offences. It must continue to be stressed that there will be severe penalties for taking such action.
The potential for fraud exists in any system. It is not a new problem resulting from postal voting. Those of us who were involved in the elections at the time will remember the scandalous misuse of the proxy vote in the late 1980s and 1990s. We must look at such examples so that we find ways of making sure that such misuse does not happen again.
Until now, there has never been a process for ensuring that people presenting themselves at a polling station are who they say they are. I was saying to my noble friend Lady Gibson that I was not certain whether I could tell this little story, but maybe I can, because it is so very old. I was standing in a local government by-election many years ago when one of my supporters came to me at the end of the day and said, "I'm sorry you didn't win because I voted for you nine times". So I know from practical experience that this has happened in the past.
A MORI poll conducted for the Electoral Commission showed some concern by electors but, in the main, voters in the pilot areas generally had positive things to say about the trials that had taken place last May. Nearly 90 per cent of electors agreed that all-postal votes made the whole process easier to use and more convenient. Importantly, they also felt that it allowed voters not to worry about missing polling day. We all know how often someone says, "Oh gosh, was it last Thursday? I'd forgotten". So I hope that that problem will be solved.
The Polls Apart report by Scope noted that postal voting appealed to the majority of disabled people who completed the survey. Some 91 per cent of those who

317
responded found it very easy and 84 per cent found postal voting very convenient. Only 4 per cent did not find it convenient.
I close with two quotes from focus groups that were conducted by MORI. The first is:
"My wife she never votes, I always do. But she did this time with a postal vote".
The second is:
"I think that if it is going to increase turnout even just slightly so that more people are being represented, then it can be a good thing".
If the electors are reassured that postal voting is a secure method to use—and I believe that every effort is made to ensure that—then more people will respond positively, and we will see an increased participation rate at elections. Ultimately, we have to transform our electoral process so that people feel the value of going out to vote, widen access and modernise democracy.

Student Support in Higher Education
3.13 p.m.
The Parliamentary Under-Secretary of State, Department for Education and Skills (Baroness Ashton of Upholland): My Lords, with the leave of the House, I shall now repeat a Statement made in another place by my right honourable friend the Secretary of State for Education and Skills. The Statement is as follows:
"Today the Government will introduce a Bill to reform higher education. Before we do so, I wish to make a Statement about the related matter of student support.
"Change in higher education is necessary because the barriers to access to university need to be lowered. The measures I am announcing today mean that disadvantaged students will get financial support to study what they want where they want.
"Universities need more investment. Vice-Chancellors will tell you that these proposals generate hundreds of millions of pounds of new money for them to spend on improving the quality of teaching and compete with the best universities in the world.
"We need to move towards treating students as financially independent from the age of 18.
"I believe that there is a broad consensus that universities need more resources and that it is reasonable for students to make some contribution, after they have graduated, to those resources. Where there has not been consensus is about the fairest way to raise this new funding, so that access from the poorest communities is promoted and not undermined. The Government have listened carefully to the concerns which have been raised and have discussed the matter widely. These concerns very much inform the proposals I make today.
"Our original proposals were set out in the White Paper I presented to the House on 22 January last year. We will remove up-front fees for full-time
318
undergraduates, so that higher education is free at the point of entry. We will provide loans with a zero real rate of interest, paid back through the tax system at a rate dependent upon earnings, beginning at a threshold of £15,000 per year rather than the current £10,000. We will introduce the new higher education grant from September this year.
"We will establish the new Office for Fair Access to ensure that universities support students from the poorest backgrounds. The focus of OFFA's work will be those universities with the poorest track record in widening participation. No university will be able to put up its fee without OFFA's agreement. OFFA will not concern itself with admissions.
"Universities will be able to set fees from zero to £3,000. We will maintain the £3,000 cap in real terms, through the next Parliament.
"Today I add the following commitments to meet concerns which have been expressed by some colleagues. First, on variable fees, I accept that some colleagues have genuine concerns about their impact upon our university system. Therefore, the Government will establish an independent review, working with OFFA, to report to this House, based upon the first three years of their operation.
"Moreover, our legislation will require that any proposal to raise the fee cap in real terms is subject to affirmative resolution. There will be the opportunity for a debate on the Floor of both Houses so that every Member can vote upon such a proposal, dependent on discussions through the usual channels. However, I have to make it clear that we do not agree that a substantially higher fixed fee would be the way to raise additional resources. It would be deeply damaging. We would be denying universities the freedom to incentivise industrial, vocational, scientific, technical, engineering and sandwich courses, or foundation degrees, which are vital for the economic future of this country.
"Secondly, I want to emphasise the Government's strong commitment to promoting access to higher education by part-time and mature students. We will provide, from September 2004, improved fee support and a grant for part-time students. I welcome the changes recently announced by HEFCE to support part-time and foundation degree courses. My honourable friend the Minister for Higher Education and the Funding Council will consult on how the funding system might further support the development of part-time study in higher education.
"Thirdly, for full-time undergraduates entering higher education from 2006, we will write off any student loan repayment which is still outstanding after 25 years. On average, we expect graduates to repay their loans in 13 years, but those who have taken on family responsibilities or are on low incomes could need more time. This gives rise to real concern, and I think that a 25-year limit is fair.
"Fourthly, from September 2006, maintenance loans will be raised to the median level of students' basic living costs, as reported by the student income

319
and expenditure survey. This increase will be modest for most students but it will be significant for those studying away from home in London. This principle will ensure that students have enough money to meet their basic living costs.
"I should emphasise that this student loan is free of real interest. Repayments will be based upon money earned, not money owed. It is much better for students to be able to borrow on these terms than at commercial rates.
"Over tune, although this cannot be afforded at this stage, the Government's aspiration is to move to a position where the loan is no longer means tested and is available in full to all full-time undergraduates, so that students will be treated as financially independent from the age of 18.
"My fifth and final intention is to ensure that every student from a poor economic background has enough resources to meet even the highest course fee without incurring additional debt. This £3,000 package is achieved by maintaining fee remission at around £1, 200; by raising the new higher education grant from the £1,000 which I originally proposed to £1, 500 a year for new students from 2006; and by, through OFFA, requiring universities to offer bursaries for students from the poorest backgrounds so that the full fee cost of the course will be covered, which means, for example, a minimum bursary of £300 for a course whose fee is £3,000.
"The effect of this commitment is that no student from a poor background will be worse off as a result of our proposals, whichever university they attend and whatever the fee charged for the course.
"Moreover, this commitment will align the level of the HE grant with that of the education maintenance allowance for 16 to 18 year-olds. Around 30 per cent of students will receive a full grant and a further 10 per cent a partial grant.
"A major advantage of this approach is that those modern universities which have strong records in recruiting students from poorer backgrounds will be able to use at least 90 per cent of any increased income from fees to improve course quality, rather than the about 70 per cent which was implied in some earlier discussions. These universities have made, and are making, a first-class contribution to this country's higher education and economy and I want to encourage, and not discourage, that commitment.
"On the bursaries, I have invited Universities UK to work with universities and ourselves to develop model bursary schemes to provide a clear offer to students.
"In addition I accept in principle the argument of some of my honourable friends that there is a very strong case for combining the HE grant and fee remission in order to give students greater choice up front about how they use the financial support they receive from Government. This would be a further move towards financial independence at 18.
320
"However, this approach raises real policy, financial and practical issues. We are examining them in detail and if they can be resolved we will adopt this approach.
"From the outset I have emphasised that our changes, which mainly come into effect from 2006, will not adversely affect the level of public funding for teaching and research.
"My proposals provide universities with resources they urgently need; they improve access by abolishing up-front fees and re-establishing student grants; and they raise the threshold from which repayment begins from £10,000 to £15,000. Moreover they move us towards the day when students become financially independent at 18.
"The abolition of up-front fees, the HE grants and bursaries, the raising of the interest-free loan, the higher repayment threshold, and the 25-year write-off of debt, mean that students will have the money that they need while they learn, and can afford to contribute when they earn.
"And universities get the sustainable funding stream they need to deliver world-class higher education. This is a coherent package to be taken as a whole or not at all. If not supported by this House, none of these benefits will arise. It is not a pick and mix menu.
"I commend these proposals to the House".
My Lords, that concludes the Statement.
3.22 p.m.
Baroness Seccombe: My Lords, I thank the Minister for repeating the Statement made earlier in another place. However, it causes me great concern to see the haphazard way in which the Government are approaching the funding of our higher education institutions. The Statement that we have just heard is the culmination of days of arm-twisting and negotiations, which has resulted in a hotchpotch of concessions and damage limitation by the Government. That is not the way to make policy.
The measures introduced by this Government are nothing short of a disaster for our universities. They are having their independence stripped away with the introduction of the access tsar. That will dictate to universities that admissions should no longer be based on the ability to learn. It will hold back funding from those institutions that select applicants according to their potential as opposed to their postcode. It is a travesty that our universities are being blackmailed in such a way, and we on these Benches are wholly opposed.
Furthermore, the Bill introduced in another place today can provide no cast-iron guarantee that per-student government funding to universities will increase at all in real terms following the implementation of these measures. I am sure that the Minister will say that I am wrong on that issue, but there is a clear precedent that suggests otherwise. When this Government introduced tuition fees in 1998, a great deal of the income earned by the

321
universities was later clawed back by the Treasury. Perhaps the Minister can tell the House why it will be any different this time.
We are told that the top-up fees will be capped at £3,000, but I am afraid that, given the Government's decision to have 50 per cent of 18 year-olds attending university, the sums do not add up. Could the Minister say whether the two commitments are compatible? Can the Minister also confirm that variable fees are an unamendable principle in the package?
The Statement repeated by the Minister this afternoon concedes that universities need more resources. That is said to be a fundamental objective of the Higher Education Bill, but even while the Bill is in the process of being printed, any possibility of it being financially viable is undermined by the concessions announced in this Statement.
The Government need to take a fresh look at how to find a solution to the funding needs of higher education. Pushing on regardless down this road would be a grave error for all parties concerned. Students will have to pay a lot more to go to universities now. Much was said in the Statement about 18 year-olds becoming financially independent. The way I see it, precisely the opposite will happen if they are the verge of accumulating £30,000 worth of debt. Taxpayers' money will be wasted by creating this highly bureaucratic system. Perhaps most worrying of all is that the independence of universities is at risk.
In conclusion, is it not the truth of the matter that this will not provide extra resources to universities and will cost taxpayers more?
3.26 p.m.
Baroness Sharp of Guildford: My Lords, I thank the Minister for repeating the Statement. It is not often that a Bill is published with a full Statement of this type. However, on this occasion, the White Paper that preceded it and which was published more than a year ago, has been changed very substantially through time. On top of that, the negotiations on the change have taken place in the past few days as much as in the past few months. Therefore, until today, we did not quite know what was going to come forward in the package, so it is interesting to see precisely what has come through.
It is somewhat sanctimonious for us to preach to the Benches opposite about broken promises. It is up to them to decide how economical with the truth their Government are being when, having promised not to introduce top-up fees in their manifesto, they then have a Bill that does precisely that.
There is also a certain irony in the current situation. We may cast our minds back to the general election campaign in 2001. One feature of that campaign was the desertion of the student body from its traditional support for a Labour government. When students were asked about it, the main issue was fees—in this case, the Dearing fee that had been introduced—and maintenance grants. In particular, the switchover from maintenance grants to loans was very unpopular.
322
Immediately after the general election, the Prime Minister set in train an inquiry to discover how best to cope with the problem of student dislike of the loans system. The Government wanted to come up with a better way and, in particular, some form of grant to help with the maintenance costs—the hotel costs—of students. This package has come out of that process but, ironically, far from relieving the problem of debts that the students disliked, the package increases the problem.
There are some genuine worries about the package that is being proposed. In spite of the comments by the Secretary of State yesterday on the absurdity of the idea that fees might be allowed to rise to the £10,000 or £15,000 mark in the Russell group universities, the fact remains that the expectation is that variable fees, when they are introduced, will be the thin edge of the wedge. The £3,000 fee, variable as it may be, far from providing a sustainable source of funding for universities, does anything but.
There is a wholesale expectation that we shall see much greater variability introduced later. Yes, the matter is going to come before a vote of both Houses—but, in spite of that, there will be pressure, just as there was with the Dearing fee. We were promised that the Dearing fee would be all we saw—but now what are we seeing? Now the fee is going to be £3,000. We are being promised that, before anything else is done, we shall consider the matter again. This issue will come back because, if the universities are to have the resources that they want to have, fees in Russell group universities will approach the £10,000 mark. If we see some of the universities with fees at that level—Oxbridge, the leading London colleges, Bristol and so forth—then there is a genuine fear that many students—not those from Guildford or Westminster, but those from Moss Side and those from St Paul's in Bristol—will perceive those universities as beyond their ken. They will not even bother to apply. This two-tier system is a very real problem.
I shall put forward some other worries that we have. First, how much new money is coming forward to the universities as a result of these fees? How much genuinely new money are the universities going to get from this? If all universities charged the £3,000 fee, it would raise about £1.5 billion. As we know, however, by no means will all universities charge that amount. How much new money do the Government reckon will come to the universities from this? They need £2 billion a year to be sustainable, but this is nowhere near that amount. If we are lucky, we shall see £500 million coming into universities from the present proposals. How much are the extra concessions costing? What will be the cost of the extra maintenance grant and the deferment of payment? The Institute for Fiscal Studies calculates that the deferment of payment over 25 years will cost £250 million. So how much new money is coming forward?
Secondly, what is the cost not just of these concessions but of the total package? We are looking at £500 million coming into the universities. Is the House aware that as we are moving from up-front payment to post-graduation payment, which we

323
welcome, the Treasury will have to pay the loans to universities if they are to receive any money at all? The Treasury sold on the first tranche of loans to the private sector at a 50 per cent discount. In other words, it is costing us, the taxpayers, £500 million in order to provide every £1 billion of loans. Those figures are provided by the Institute for Fiscal Studies. In its own calculations, the institute reckons that the cost of providing £1 billion-worth of loans is £400 million. So we are having to pay out almost £500 million to provide the same amount to universities. Is that really sensible economics? What are the precise costs?
Maintenance grants are the third issue. We were told in the White Paper that maintenance grants are for maintenance—for hotel costs. Now they are not for maintenance but to help pay tuition costs. That is a straight switch-over from what was proposed in the White Paper, a point to which the Statement alludes. We are continuing this concept of an educational maintenance grant for students from low-income families. The grant is now £30 per week for those who are post-16 and in a low-income family. The concept is now being carried forward to university level. Although I am delighted to see it, the grant is not for maintenance but to help pay the extra tuition costs. We are counting it as part of the package. Those students are being told, "You will not have to pay it because you come from a low-income family and we are knocking it off". But will they receive any help at all with maintenance?
Filially, I should like to ask about part-time students and those from the Open University. I believe I am right in saying that while concessions are being made in loans and grants for part-time students, no help is being provided to those who have to pay fees. Part-time university students, particularly students at the Open University, will have to pay fees. The Open University is not receiving help for part-time courses equivalent to the help being offered for full-time courses. If we want to open up participation in higher education. we have to realise that those who will participate are looking for the opportunity not only to study part-time, but to work, earn and learn all at the same time. That is the great opening and the area in which we are currently so lacking. We want to open up opportunities for such students, but these proposals are not the way to encourage them. I hope that the Government will look at this again.
3.35 p.m.
Baroness Ashton of Upholland: My Lords, I am grateful to the noble Baronesses, Lady Seccombe and Lady Sharp, for some if not all of their comments. I say to the noble Baroness, Lady Sharp, that what she describes as a hotch-potch I describe as serious debate. This is a very difficult and I dare say controversial subject. It is very important that the Government continue the dialogue and discussion with all interested parties, not least universities themselves, to ensure that we get the proposals right. I believe that we have reached a conclusion that addresses the concerns that have been raised with us.
324
I say to the noble Baroness, Lady Seccombe, that this is about the independence of universities. As the Statement makes clear, and as I have often made clear in your Lordships' House, OFFA's role is not about admissions—a matter properly within the jurisdiction of universities. We are very clear that they must retain their independence. However, we are looking at ways of ensuring that our students who can apply to university do so. That means working closely with our school system and involving our universities in the type of outreach work that noble Lords have from time to time joined me in praising in your Lordships' House.
There is a very strong commitment across the Cabinet, not least by the Chancellor, to ensure that we fund and support universities. I think that noble Lords should be aware of that important point.
I believe that there is a real compatibility between wanting to provide the opportunity of a higher education to about 50 per cent of those aged 18 to 30 and wanting to ensure that our universities are viable. We want high-quality courses for all those attending university, and we want universities to be well funded. We need to move towards that as quickly as possible. This is about recognising our place in the global economy. It is about recognising our people's need to receive the high-quality education they deserve.
I think that in talking about "a bureaucratic system", the noble Baroness, Lady Seccombe, has underestimated the way in which we are introducing OFFA. It will not be bureaucratic. Further information will be published today as a result of publication of the regulatory impact assessment Bill. I shall also make available details on resources. It is important that we link this very closely with the work of HEFCE, while ensuring that we have a clear and definable objective in working with universities to help our students receive the high-quality education I described.
Both noble Baronesses asked about the sum we think will be raised. Our estimates are based on 75 per cent of courses being at the £3,000 level—a figure which I think fits perfectly with the £1 billion figure cited by the noble Baroness, Lady Sharp. That is important new money which will go to universities. It is not about having to compete against other priorities—another issue which we have discussed in your Lordships' House.
The noble Baroness, Lady Sharp, talks about our manifesto commitment. My right honourable friend has frequently addressed that issue. I would refer noble Lords who have not heard enough about that to the article written this weekend by my right honourable friend the Home Secretary in which he describes the circumstances in which that commitment was made. We have been very open and clear about what we are doing. I do not believe that anyone is under any illusion about why we have reached our conclusions or the rightness of those conclusions for the development of our universities.
The noble Baronesses talked about increasing debt. It is important that we are clear about what we are describing. The package we are putting forward will ensure that 30 per cent of students do not pay and that another 10 per cent do not pay all the fees. This is not

325
debt in the traditional sense as noble Lords and I understand the concept. It is about paying according to means and only when one is able to pay back. For those who choose to have a low income because of the work they do or who choose to have a different lifestyle, after 25 years the debt will not have to be repaid at all.
It is important, because the principle that we stand behind is that students should contribute to their university education. We are not in the position that we were in 30 years ago. This is about recognising those who benefit: the Government; the economy; our businesses; our industry and our individuals should make those contributions. We have done this in a way that ensures that we protect our poorest students and encourages them to go on to university.
Often, our debate is about those universities that are described as elite universities—I find that phrase difficult, but noble Lords will know which universities I am referring to—and their role in this. Some of them have exemplary records of working with students. We have noted before in your Lordships' House that Cambridge University is proposing a bursary scheme that, on top of this package, would give £4,000 to each student from a poor background. These are important moves forward, which I am grateful to universities for considering.
The noble Baroness, Lady Sharp of Guildford, talked about our move from maintenance grants to fees and loans. It is partly that we are trying to think about the totality of student debt. There has been some interesting work by Members of another place in looking at what we mean by the "totality". We have tried to think more about what we can offer students and enable them to think about the package that they will be receiving and the package that they will be repaying. I make no apologies for that, because it is important.
The noble Baroness, Lady Sharp of Guildford, asked about the increase to universities. Just to complete the answer to her question about how much would be coming in, it is about a 30 per cent increase, on average, per student for those universities that will charge that, which is an important part of that. I am not able to give her the definitive answer on our dialogue with the Open University about part-time students, which has been going on. I will write to her on that.
3.41 p.m.
The Lord Bishop of Portsmouth: My Lords, we on these Benches broadly support this strategy, although we have questions. Whipping bishops is about as difficult as herding cats. We have questions, but we support the strategy broadly given the present situation, which is far from ideal. I speak from a perspective of having been a university chaplain in the early 1980s. The Government have listened to many of the concerns. Obviously there has been a great deal of bargaining, but that is part of the real world that we are all in because we are dealing with money. Higher
326
education needs resourcing, and this is perhaps, for some of us, the least worst option, next to reintroducing a further income tax.
Noble Lords will want to take part further in this question session, so I simply want to put four questions to the Minister. What about those who will just miss qualifying for extra help? That grey area has been addressed, but—though noble Lords who know me will realise that I am innumerate and cannot add up—I am concerned about those grey areas. I heard on the radio this morning a prominent person gently chiding the front page reportage of one of our prominent newspapers, which led me to believe that that newspaper clearly has as much difficulty handling higher education as it does with issues and appointments in the Church of England. I wonder whether this issue of communication is deep seated. I have raised this before. It can be described as "debt aversion". That does not appear in the Statement, but there is quite a mountain to climb on communication. I wonder whether the Government realise just how high that mountain is.
Will the Government really keep a watchful eye on the pressure to remove that £3,000 cap? I noticed in the Statement that there was a kind of hidden fear, which reminds me of what we call in the trade, "argument weak, thump pulpit". I would not for a moment suggest that the Minister thumps the pulpit, nor would I suggest that any of her arguments are weak, but I wonder whether there is an inner scepticism there that some of us have picked up. That will mean that fees might move beyond the ability of poorer people to pay.
My final question is not about the Statement, but I believe that it is important. The Statement is about financing and resourcing, but we want to say firmly that the Bill must say something about what education is for, not just what it does. There is an ideal in higher education, but, if we assume it, we will easily slip into taking it for granted. I ask the Minister to give that matter her active consideration. I know that she has done so already, because we have talked about it.
Baroness Ashton of Upholland: My Lords, I am grateful to the right reverend Prelate for his comments on the Bill. I am also grateful to him for the discussions that he has had with me and with my right honourable friend the Secretary of State and for his careful deliberation of the issues.
The right reverend Prelate is right to raise the issue of what happens at the margins. We know that, under our proposals, 30 per cent of students will be directly assisted with the total amount that we have proposed and that a further 10 per cent will be assisted partially. The right reverend Prelate could then ask me about the person at 41 per cent. That is part of the reason why we wish to review how the system works after three years. We will be mindful of that.
My right honourable friend is keen to consider the issue of how we recognise people as becoming independent at 18. In part, that is because of evidence, of which noble Lords will be aware—albeit that some of it is anecdotal—that some young people are unable

327
to persuade their family to support them with the upfront fees and with other things. They will need to be able to receive that income independently.
I agree that communication is critical. My right honourable friend plans, as soon as the Bill receives Royal Assent, to do a lot more work on communication that would not be appropriate until the Bill has passed into law. We recognise that there is a mountain to climb, not least because of some of the words that are bandied around about debt and so on. Young people must recognise what the system is. It is not the same as buying a car with a loan. If someone buys a car but does not have enough money to pay back the loan, the car will be taken away. Our system is not like that; people will pay as long as their income allows. It is a very different proposition, and we must communicate that. I hope that, during the passage of the Bill, we will do that. We must deal with misinformation.
I am not shaking about the pressure to remove the cap. my right honourable friend has said that the matter will be dealt with by affirmative resolution of both Houses. That is about as good a guarantee as possible, if the debates that we have had so far are anything to go by.
I am aware of the right reverend Prelate's desire that we should think about what education is for, as well as what it does. There is some overlap, but we should not lose our recognition of the intrinsic value of education.
Lord Renton: My Lords, is it the Government's policy that the students who are shown by their examination results to be the best educated should be given priority of application to become undergraduates at universities? That is my first question, and I have a second. The noble Baroness will no doubt recollect that, early in the Statement, there was a reference to an independent body. What would that independent body consist of? What power would it have to recommend changes to what the Government have put forward?
Baroness Ashton of Upholland: My Lords, the categoric answer to the noble Lord's first question is "yes". We also know that when universities are oversubscribed with students who have very good qualifications, they look beyond that. That is for them to do.
Some of our students get the kind of qualifications that could lead to university but do not go. The challenge for all of us is to ensure that students who are capable of getting to university go to university and that they enjoy and relish the experience and gain from it. The universities must play their part in reaching out to them. Some universities have been felt to be out of the reach of people in some schools and in some parts of the country. They must recognise their role in helping to ensure that students realise that they are not out of reach. The biggest part of the job is getting the best school system for all children, so that we can ensure that they get the right results. That is the responsibility of government.
328
I am not sure that I quite understand what the noble Lord, Lord Renton, was looking for with his second question. We plan to review, and, as the details become clear, I will, of course, notify your Lordships. OFFA will be independent and will work closely with the Higher Education Funding Council. We work closely with independent bodies such as Universities UK. If I have not clarified that, I shall discuss it with the noble Lord and place a copy of my reply in the Library.
Baroness Blackstone: My Lords, I very much welcome the changes that the Government have made since the White Paper was published and believe that they will lead to an improved Higher Education Bill. However, does my noble friend agree that we need not only world-class universities but also a world-class system of higher education? That means that we need high-quality courses in all of our higher education institutions not just in some of them. If we are to achieve that, the gap between what universities are able to raise under this new package and what they have to pay out should not be too great.
If the Minister accepts that, will she give a commitment that between today and Second Reading of the Bill in another place further modelling will be done—perhaps it has already been done—to demonstrate the differential impact of this package on different kinds of universities? That would show us what its impact will be and how it will affect in particular the modern universities that will have the problem of a larger number of students needing bursary support and the likelihood that the amount that they can raise through variable fees will be considerably less than some of the research universities. If the Minister could reassure us on that point, and say that work could be done and published in the near future, that would be enormously helpful and would perhaps provide people who are particularly concerned about the effects of variable fees with the information that they might need.
Baroness Ashton of Upholland: My Lords. I could not agree more that this matter is about high-quality courses and a world-class system. Ensuring that universities have adequate funding to achieve that is absolutely critical and at the heart of the matter. It is all well and good for students to go to universities but the courses must be of the quality that we would expect.
I am not able at this moment to commit my right honourable friend to publish material on the matter we are discussing but we are considering the impact of the bursary schemes with Universities UK. We are undertaking modelling and discussing the matter with individual universities. I shall come back to the noble Baroness with the correct answer to that matter.
Lord Naseby: My Lords, is the noble Baroness aware that for those of us who went to university in the 1950s, basically free of charge apart from the county maintenance grant, the step that the Government propose today is essentially a retrograde one? Furthermore, it is for us as politicians very difficult to keep track of the latest bribe that is offered to the Labour

329
Back-Benchers in the other place. Given that scenario, the request of the noble Baroness, Lady Blackstone, for modelling to be undertaken of what is and is not on offer is of some substance. Therefore, I suggest to the Minister that it is not adequate to say that she is unable to fulfil that request. How can anyone outside evaluate what is being proposed unless we know the substance of what is actually being offered and, furthermore, are given a guarantee that there will not be further salami slicing of additional incentives to those in another place to support the package?
Baroness Ashton of Upholland: My Lords, in reminiscing about his time at university, the noble Lord will recognise that the number of students attending university in the 1950s and 1960s was considerably lower than now. I believe that the figure was of the order of about 7 per cent. The figure is now of the order of about 43 per cent with an aspiration of 50 per cent university attendance. I make no apology for wanting to see all those capable of obtaining a higher education, contributing to our economy and gaining from the inherent value of education being able to do so. One has to live in the world in which we live. That means that if we are to provide high quality university education to a high number of people, we have to fund it in a different way from that which pertained in the 1950s.
It is also very important to recognise that we seek to ensure that we have a fair and equal system that allows all those capable of obtaining a university education to do so. I shall not apologise for that. I do not consider that this is a matter of bribing Labour Back-Benchers. It is about ensuring that we have a package that works for our students. They are the focus of this department and of this Government. We seek to ensure that our students go to university, obtain a high-quality education and follow high-quality courses from high-quality institutions in a way that is fair and just. We seek to ensure that they also play their part in contributing to the quality of education that they receive.
As I said to my noble friend, I believe that we have done a huge amount of work on modelling. However, I am not at liberty to say what I can and cannot put in the public domain. Much of that modelling was carried out by the department or through Universities UK and so on. Much of it involved discussions with individual universities. Those discussions and that modelling continue. I have given a commitment regarding a review within three years to examine in detail the impact of all these policies.
Baroness Lockwood: My Lords, I very much welcome the Statement repeated by my noble friend today. I congratulate the Government on the general thrust of the Bill and in particular on the measures set out for student support and the emphasis on access. However, I still have one concern that is similar to the concern of my noble friend Lady Blackstone. As the Statement indicates, all universities need extra resources. I am afraid that the variable fee element
330
means that some universities will be able to benefit considerably from the variable fee while others will be less able to do so. Some modelling, as suggested by my noble friend Lady Blackstone, would be helpful.
When the Government look at the general disbursement of funding to the universities, will they look again at the element of funding that goes to teaching and to research to make sure that all universities are in a position to benefit from the premium to be paid on these two elements? I think that it is a fact—I am sure that my noble friend the Minister would agree—that if we are to maintain a world-class research system in our universities, we need to have a constant feed-in element to the so-called "top" universities. That very often comes from some of the universities that will not gain much benefit from the top-up fees but nevertheless do a lot in terms of training and preparing some of our best researchers and scientists.
Baroness Ashton of Upholland: My Lords, I believe that I have already paid tribute to the work of many of the new universities in terms of the high-quality, world-class education that they provide for young people not only from this country but also from overseas. Each university will make its own decisions about the opportunities to set fees between £0 and £3,000 that the Bill will give them. They will make those decisions based on a whole range of factors including how they consider that will benefit their university. A number of the new universities were concerned that the high numbers of students from lower socio-economic groupings would leave them with less income. That in part has influenced the package that noble Lords see today which will allow a minimum of 90 per cent of any new moneys to be fed into the new universities to ensure that they are able to develop as they wish. As we have said, we have ensured within the package that students from lower socioeconomic backgrounds will not have to find the relevant moneys. That should have, and will have, an impact on how universities think about the way in which they develop.
The noble Baroness made important points about research which I shall not attempt to deal with now. However, I take the point that it is important that we recognise in all we do that the funding of research and teaching is continued and is highly valued.
Baroness Howe of Idlicote: My Lords, I am one of those who welcome the Government's proposal as a step in the right direction towards greater independence for universities. That does not perhaps apply to the setting up of OFFA, but no doubt there will be plenty of opportunities to consider that in detail. Are the Government, through tax incentives, contemplating any way in which they could make it easier for companies to donate to universities regarding bursaries? There will clearly be a need for more money. One way in which the Government could facilitate greater funds into universities would be in that direction.

331
My other very quick point is on incentives for part-time education, a subject raised by the noble Baroness, Lady Sharp. Part-time education and e-learning will be very important. We need to encourage on an equal basis the same funds for universities for it. There are incentives for the students in the Statement, but I am talking about the universities.
Baroness Ashton of Upholland: My Lords, I am grateful for the noble Baroness's comments. She has raised the issue of companies in the House before. We are looking at it already; we have a task force to do so. During the passage of the Bill and our debates, I hope to provide more information on how that work is going. It is an important factor in our debate, in terms of the potential to recognise the benefits that industry receives from graduates and the opportunities that it has to work more closely with universities, which we would wish to see.
In the Statement, I reiterated that my right honourable friend the Minister for Higher Education was working with the funding council in consulting on how the funding system might further support the development of part-time study in higher education. I will, of course, pass on the noble Baroness's comments to him and ensure that they are part and parcel of the work done.
Baroness Warwick of Undercliffe: My Lords, in welcoming the Minister's Statement, I declare an interest as chief executive of Universities UK, which, as she said, has been closely involved in the development of the Higher Education Bill. I want to welcome very much the way in which the Minister and her colleagues have engaged with Members of this House and the other place, as well as representatives of the higher-education sector. From what she said, they have clearly listened to our concerns. The scheme proposed will, in my view, prove an important step towards addressing the financial crisis in all our universities.
The scheme will not resolve the universities' problems overnight, and nor will graduate contributions. Sustained and increased public funding will continue to be necessary. However, the package of measures that the Minister has set out will enable universities to improve the quality of what they are offering students, without leaving the poorest students any worse off than they are under the current system. It is progressive and fair.
I have a question about the Office for Fair Access, or OFFA. It is vital that universities retain responsibility for their own admission decisions. I believe that the House will share some of my concerns on the matter in relation to the position of OFFA. Will the Minister guarantee that the plans for OFFA will not in any way open the admissions process to political interference?
Baroness Ashton of Upholland: My Lords, I can say to the noble Baroness unequivocally that we would not
332
wish to see that happen under any circumstances. Universities remain responsible for their own admissions, and so they should be.
Lord Puttnam: My Lords—
Lord Rix: My Lords—
The Minister of State, Foreign and Commonwealth Office (Baroness Symons of Vernham Dean): My Lords, I am afraid that we have come to the end of the official time for questions. Perhaps we ought to remember that the briefer the questions, the more people are able to join in.

European Parliamentary and Local Elections (Pilots) Bill
Second Reading debate resumed.
4.4 p.m.
Lord Norton of Louth: My Lords, when the House began to fill up at three o'clock, I began to think that a great many of its Members were actually interested in what I was going to say on the Bill. It is very encouraging to see so many noble Lords still present. I want to make one general observation and to raise two specific, but I think very important, points. In so doing, I will reinforce some of what has been said already in the debate, especially by the noble Lord, Lord Rennard.
My opening observation is basic but fundamental. Voting is at the heart of the democratic process. The Bill provides for the use of innovative voting techniques in elections to a legislature—in this case the European Parliament—for the first time. As the Explanatory Notes state, at paragraph 6:
"Ministers intend to continue the programme of pilot voting as part of a programme working towards a multi-channelled, e-enabled general election some time after 2006. Piloting at next year's European Parliamentary elections would represent a scaling up from previous schemes and would be a further step towards this goal".
It is a point also made by the noble Lord, Lord Filkin, his very helpful letter to the Constitution Committee.
In drawing attention to that, I am not passing judgment on the merits of what is proposed, but rather calling attention to the fact that it constitutes the initial step on the path towards a general election in which voters do not necessarily go to the polling booths in the traditional manner. That final goal will constitute a fundamental change to our electoral arrangements.
As I say, I am not arguing against that. If a new method, such as all-postal voting, is employed that has the effect of increasing voter turnout, there is clearly a case for it. Indeed, if more electors vote, in terms of democratic values it would be difficult to argue against all-postal voting. I might also add that there is a case for welcoming it on political grounds. Some research findings suggest that my own party will benefit from all-postal voting. Before the Minister rushes to withdraw the Bill, I should point out that other

333
research suggests that the effects will be neutral. An even higher voter turnout in British parliamentary elections would also help take some of the wind out of the sails of those who argue for a new electoral system.
Before we take the steps proposed by the Bill, we need to look carefully at the detail, as several noble Lords have mentioned. The first of my two points concerns a provision embodied in the Bill, while the second is concerned with what is not in the Bill and picks up very much on the point made by the noble Lord, Lord Rennard.
The noble Lord, Lord Filkin, very briefly touched on my first point when he opened the debate. It concerns Clause 8 and the schedule, which precludes by-elections from being held within three weeks before or after the combined European Parliament and local government elections. The Constitution Committee, which I chair, has drawn attention to that provision, as it fulfils the committee's "two Ps" test: that is, it raises an issue of principle affecting a principal part of the constitution.
The committee reaches no judgment on the matter; that is for the House. What it notes is the fact that electors are by statute denied the opportunity to elect a parliamentary representative—other than to the European Parliament—in a six-week period, should a vacancy occur. I quote from our report, at paragraph 14:
"So far as we are aware, there is no direct precedent for the imposition of such a restriction, which could cause the electorate in the affected constituency to be without a representative in Parliament for longer than would otherwise be the case. This may be perceived as setting a precedent with constitutional implications".
My personal view is that there needs to be a compelling case for such a provision which limits the rights of electors. One argument for the provision, as advanced by the Minister in the other place, Christopher Leslie, is that it avoids additional complexity. The noble Lord, Lord Filkin, referred to it today as "unnecessary" complexity. I do not necessarily regard that as a compelling reason. It may be inconvenient but, as long as it is administratively feasible, a by-election should not be excluded during that time period.
Another reason advanced by Mr Leslie is that there would be insurmountable complexity if a Westminster by-election were to be held at the same time as the pilot elections. He did not elaborate so I am not sure if the complexity would be insurmountable because electors would be confused—voting by post for MEPs and councillors and going to the polling booths to elect an MP—or because returning officers would not be able to cope, given the resource implications. We need to know which it is, I suppose it could be both, and provided with a fuller and persuasive justification. The clause requires very careful probing.
I turn to the second point—one of omission—and I do so purely in a personal capacity. There have been exchanges in the other place and some Questions tabled about electoral fraud. My noble friend Lady Hanham and the noble Baroness, Lady Gould, have addressed it. I recently tabled a Question about security of the vote in elections held by all-postal ballots. The noble Lord, Lord Filkin, replied, making clear that the Government
334
took the issue seriously and outlined the provisions of the Bill dealing with the offence of personation. I have no complaint about the Answer, nor with Clauses 6 and 7—quite the reverse, I very much welcome them. My concern is with a different aspect: that of the secrecy of the ballot, which was raised by the noble Lord, Lord Rennard. I agree strongly with his comments.
The purpose of the Parliamentary and Municipal Elections Act 1872, better known as the "Ballot Act", was to ensure that when one voted, whatever promises may have been made to others, no one knew for certain how a person had voted. It was a crucial means of getting rid of bribery and undue influence. Indeed, I quote from Robert Blackburn, in The Electoral System in Britain, at page 103:
"The Ballot Act did away with the traditional, open method of voting, and instead introduced the modem system whereby no-one except the voting citizen him or herself need know how he or she in fact voted. As a direct and immediate result, intimidation and fear of reprisals were radically undermined".
Section 66(3) of the Representation of the People Act 1983 provides that no person shall interfere with a voter when recording his vote. The problem with postal voting is that we cannot guarantee the secrecy of the ballot. Like the noble Lord, Lord Rennard, I refer here not to the secrecy in respect of receipt by the returning officer but secrecy in the casting of the ballot. Lack of secrecy may give rise to vote buying, though I suspect the biggest problem is likely to be that of undue influence being exerted in properties where there is multiple occupancy. For example, parents putting pressure on sons and daughters of voting age or the owner of a care home encouraging residents to vote for a particular party. The polling booth guarantees secrecy. The sitting room does not.
As the Explanatory Notes record, what is proposed raises a problem in respect of the European Convention on Human Rights—again noted by the noble Lord, Lord Rennard—which embodies the principle of,
"free elections at reasonable intervals by secret ballot".
The Explanatory Notes go on to say, at paragraph 24:
"The effect of the innovative voting systems on the secrecy, security and accessibility of the ballot is something on which the piloting scheme is designed to generate evidence, in order that decisions on the wider use of these or other systems can be proportionate and soundly based".
I would like to know what means will be employed to determine the effect of all-postal voting on the secrecy of the ballot. What mechanisms will the Electoral Commission employ in order to test for any undue influence of the sort that I have mentioned? To what extent has that been thought through?
I also wonder why secrecy is to be addressed as a "consequence" of this pilot scheme. I appreciate that it is a pilot, but, given the ECHR concerns, should not the issue have been anticipated and some provisions included, the pilot elections serving to test the robustness of those provisions? Certainly, in respect of disabled voters, proposals have been put forward by the Disability Rights Commission. What is being done, for example, to ensure that visually impaired

335
voters are sent tactile voting forms? Implementing such proposals, I would have thought, would help make the Bill more convention-proof.
Those are the principal points I wish to raise. I do have some concerns about subsections (4) and (5) of Clause 2. As the Explanatory Notes concede, providing "polling progress information" to the political parties may cause concern under the ECHR, not least in respect of privacy. I appreciate that the provision of the information will be helpful to the parties and save them no end of time. I am not surprised that the Minister said that all the parties support that particular provision.
However, under existing arrangements, citizens are under no obligation to tell a canvasser whether they have voted or, if outside a polling booth, who they are. Under this provision, one does not have that option. I can understand the argument that voting should be deemed a civic duty and therefore the fact that one has done one's duty should be a matter of public record. None the less, I have some concerns on privacy grounds.
From my earlier comments, the Minister will have realised that I am not unsympathetic to the Bill. However, it is a Bill of some constitutional significance. I think we would be failing in our duty if we did not give it the most careful scrutiny. I believe that some things can be achieved before the Bill completes its passage. I consider it essential that we see a copy of the order as soon as possible. In the mean time, I look forward to the Minister's response to the concerns that I have raised.
4 p.m.
Lord Greaves: My Lords, this is the second time in a week that I have had the privilege of directly following the noble Lord, Lord Norton of Louth. On this occasion I agree with a great deal more of what he said than I did last Monday. Whether that makes me some form of Conservative, I am not sure. People can make a judgment on that.
I do not accuse the Government of deliberately seeking a system which will lead to fraud, corruption and intimidation. However, I believe that they are walking blindfold, with earplugs in their ears, towards such a system. I believe that it is our job in this House at least to flag up some of the problems which universal postal voting has in store.
In expectation of this Bill, I made a speech on this subject in the debate on the Queen's Speech at col.250 of the Official Report for 2 December 2003. I shall not repeat what I said then, except to say, once again, that turnout may mean different things to different people. The number of ballot papers returned may not necessarily equal the number of people who fill in those ballot papers.
Whatever the Electoral Commission and the Government believe, a great deal of evidence suggests that, in all-postal voting for elections, a significant number of votes are filled in by people who are different from those to whom the votes were addressed. Much such activity is not malicious and it
336
is not deliberately fraudulent; nevertheless, it is wrong. There is much evidence of people voting on behalf of their husbands, their children or postal voters who are away. There is evidence of people taking ballot papers and filling them in at the bus stop and so on. Yet, in his introduction, the Minister quoted the Electoral Commission as saying that there is no evidence of an increase in fraudulent activity.
The problem is that no one has checked systematically to see whether there is such evidence; there is simply a reliance on people to complain. No one has carried out a proper survey to find out how much of the increased turnout in many elections is real and how much is simply due to all the ballot papers from a particular household being sent back by one or two people in that household.
I give an additional example of a friend of mine—Councillor David Roberts-Jones in Stockport—who stood in a by-election in Stockport some 14 or 15 months ago. He reports:
"I spoke to a nice old lady, who said she had already voted for me by post. I then asked her about her husband. She burst into tears and told me he had passed away two months previously. I apologised profusely. 'Don't worry', she said, 'You weren't to know, and anyway he's voted for you too'".
That happens all the time.
Until now, postal voting has accounted for a small proportion of the number of votes cast. Anyone who has been involved in elections knows that that type of thing goes on, but it has not been a significant factor. The problem with all-postal voting is that the scale of the problem will suddenly increase dramatically.
For many years, we have all known of the minor scandal that has occurred in, although by no means all, many old people's care homes. I remember canvassing in the Brecon and Radnorshire by-election nearly 20 years ago for the person who is now my noble friend Lord Livsey of Talgarth. I came across an old people's home in the middle of the countryside. The person with whom I spoke was not the owner but she was employed to look after the old people. She said, "There is no point coming here. Mrs so-and-so makes sure they always vote Conservative". I asked, "All of them?". She replied, "Yes, they all vote Conservative, but don't worry, me and my husband are voting for your man".
That type of activity has always occurred. A few years ago, I made inquiries of a friend of mine who was a care assistant at an old people's county home in my ward. I asked her the best way to arrange to spend half an hour there in order to chat to the residents. She said, "It's a waste of time. None of them will even recognise you now". Therefore, I did not go. A few days later, she said, "The postal votes came but don't worry, they all voted for you". This happens all the time. It has occurred on a small scale and many care home organisations have tried to clean up the practice a little. Nevertheless, it has happened. However, the current scale of the operation leads me to believe that the incidence of fraudulent voting may he large. Certainly much anecdotal evidence suggests that that is the case.

337
All postal voting is wide open to scams. A recent case in Hackney came to court. It was one of the few ones that ever reached court. People were punished. I believe that Liberal Democrat and Conservative councillors were involved. So it is not just the Labour Party that does this kind of thing. I am not making political points. In that case, they had registered a significant number of voters at houses where no one lived and had then applied for postal votes. It is very easy. One does not have to apply for the postal votes, all one needs is the registration. That is why the Electoral Commission has suggested that individual registration and a much tighter registration system is necessary before we can consider moving to all-postal voting. There is useful experience of that in Northern Ireland. In my view, it would be entirely wrong to have all-postal voting in elections of this scale without individual registration.
Noble Lords have already explained the problem with houses in multiple occupation, student houses and student colleges. There is huge potential for misuse of piles of votes coming through the letter box on to the table inside the door. Who will do what with them? Unscrupulous people will simply hoover them up and send them back. There is no way, so far as I can see, that that can be prevented.
There are many details in the Bill, such as declarations of identity, marked registers and so on that we shall discuss in Committee. I believe that the fundamental problem without individual registration is that all-postal voting is a recipe for fraud and corruption. There are political parties in this country—we were talking about the British National Party yesterday—which do not seem to have discovered postal voting and how to organise it. After the last general election the BNP's organiser in Burnley was put in prison for forging the nomination paper. If that party is prepared to do that, what will it do with postal voting once it decides what to do with it? I think I could make a great deal of money explaining how to rig the system. Of course I shall not.
The noble Lord referred to the Ballot Act. In it there are three fundamental principles: first, one votes in person; secondly, one votes in secret; and, thirdly, as a result of those two items, one is protected from bribery and intimidation. The noble Lord, Lord Norton, put his finger on the issue—that secret voting is not something that is offered to people as an option, it is made compulsory for people because it is only by making secret voting compulsory that one can stop other people intimidating and bribing them. Even if people want to show how they have filled in their ballot to other people, that is illegal and must remain so. It is a fundamental part of the system.
My view is that the safeguards of the secret ballot do not need to be relaxed at this stage. The evidence is that more people are finding ways, particularly through postal voting—but not only through postal voting—to corrupt the system and to defraud the rest of the electorate of a true election result. It needs strengthening now and not weakening. I believe that the system, as set out in the Bill, will sooner or later lead to fraud and
338
corruption in our electoral system on a large scale. Perhaps that will not occur in these pilots, but eventually if the Government move to a comprehensive all-postal voting system we shall undermine the very basis of our democracy.
4.23 p.m.
Baroness Gibson of Market Rasen: My Lords, I am very pleased to be making a short intervention on what I think is an extremely interesting Bill, especially for those of us who have taken an active part in parliamentary and local elections and their processes from a tender age.
I first helped to run a political committee room in Lincolnshire in the late 1950s. I have continued to help up to the last election—now in Greenwich and Woolwich—and I have no doubt that I shall continue into the future.
It is slightly ironic that in many parts of the world a democratic process—that is, a freedom to vote for the party of one's choice—has been only a dream for so many people for so long. When in such countries people get an opportunity to vote, they will put up with any inconvenience to participate. Will any of us forget those long lines of black South Africans standing in very hot sun in order to vote for the first time in their lives? Some of those people were quite elderly. It was a very moving sight. And yet today, we, who have had for so very many years the right to vote, have to worry now about the low turn-out at elections and what it means for our democracy.
I welcome the Bill and its pilot proposals, which I hope will pave the way for future innovative methods of voting, a number of which have been mentioned already. The main aim of the Bill is to encourage people to vote and to allow the use of different methods of attracting voters.
When I think of the different places in which I have cast my vote over the years, I get a picture in my mind of drab and draughty village or civic halls, schoolrooms, church outhouses, which are usually quite bare, or even, in rural areas, the front room of a helpful villager. Most were not particularly welcoming environments. So, in an era when comfort is part and parcel of most people's lives, anything that can be done to make voting more attractive must be done.
The Bill allows participating regions to consider different initiatives to pave the way for an updated voting system. One obvious place to start is the provision of facilities for voting in places where people normally congregate—supermarkets and chain stores, for example. We should try voting over two or more days. This happens in a number of other countries and it may be particularly helpful in rural areas.
Unlike the noble Lord, Lord Greaves, I like the idea of everyone voting by post. I believe it would prove to be popular. It is easy to understand and gives everyone a chance to vote without too much effort and at a time of their convenience.
I understand the worries expressed in relation to fraud, but please let us not believe or pretend that misdemeanours have not occurred in the past. I speak

339
here as a past Labour Party organiser. Misdemeanours are not new. I shall mention only two of the milder forms of naughtiness.
Like others, I am sure, I remember the days when a doctor had to sign to certify that a person was unable to attend a polling station in person and therefore should be eligible for a postal vote. Some of the doctors' signatures on the postal vote application forms were, to say the least, suspect. For one thing, they were legible—and most doctors' signatures are not legible. I shall say no more on that particular area.
As regards proxy voters, how many have cast a vote in line with the wishes of the person they were asked to represent? Not all by any means. So it is not a new phenomenon we are faced with in ensuring that in any future legislation safeguards against misdemeanours are well in place.
Finally, I end in the same vein in which I started my short contribution. I welcome the provision in the Bill that allows information relating to voting to be available to political parties prior to the close of the polls. Like other active Members of the House, I cannot count the number of cold and rainy evenings that I have spent knocking on doors urging people to go to vote before the polls closed. Those in the houses in question became particularly angry if they had already voted, and especially if they were watching their favourite television programmes. Over the years I have been threatened by dogs, received a barrage of verbal abuse, and on one occasion I was even threatened with a gun. I am pleased to inform your Lordships that I was younger then and could run faster than I can today.
The main aims of the proposals in the Bill are to encourage more people to use their democratic right to vote. I, for one, sincerely hope that it will succeed and that we can learn from it, build upon it and improve the number of our citizens who vote accordingly.
4.29 p.m.
Lord Goodhart: My Lords, we in my party opposed the Bill in the other place. We did so for a number of reasons: partly because we believe that in elections held across the nation as a whole—such as the European parliamentary elections—all constituencies should vote on the same basis. We did so also, and perhaps more importantly, because we believe that it is premature to introduce all-postal voting even on a pilot basis. As my noble friends Lord Rennard and Lord Greaves pointed out, the safeguards against abuse simply do not exist at present, even if it is assumed that they can be provided.
Of course, it would not be appropriate to oppose the Bill unconditionally in your Lordships' House. That would be inconsistent with the practice of this House, which is to seek to improve Bills rather than to reject them, but this Bill certainly needs improvement.
We accept that if pilots are to be held in 2004, the north-east and east midlands regions are indeed the appropriate ones. We also believe that there should not be a third region. Two is enough and the region
340
that may be the runner-up—Scotland—is one of great size where there are obvious difficulties with postal deliveries to some of its more remote inhabitants.
We welcome the Government's assurance that they will not introduce any other voting methods, such as e-voting, following the Electoral Commission's report, which stated that the technical and security problems for e-voting have not yet been solved. The safeguards are simply not in place; nor was there any evidence that e-mail voting significantly increases turnout. Indeed, it is doubtful whether we should in any case use a voting system that is available only to those who have home access to the Internet, which in most regions is less than 50 per cent of the electorate and in others not much more. That is entirely different from the telephone, for example, which has a much higher access ratio.
There is evidence that all-postal voting significantly increases turnout. It is the only method so far tried that has succeeded in doing that. I can think of some other methods. I hesitate to suggest that all television companies should be required to air their most boring programmes all through election day, but that might have some effect.
As the noble Lord, Lord Norton of Louth, pointed out, there is serious concern about the secrecy of the ballot, which was an historic battle won by Gladstone's government in 1872. That is an issue of great importance. There is a real risk of pressure from within a voter's household: parents putting pressure on children, husbands putting pressure on wives or the other way round.
In some circumstances, there may be pressure from outside the household to vote in a particular way and therefore to show someone a completed form before it is returned. That practice is not unknown among Labour MPs, who have in the past been required to show ballot forms for party elections to their Whips before returning them. That may be a hypothetical risk in Great Britain, but it is plainly not in Northern Ireland. Frankly, it would be unthinkable to have all-postal voting there, but who can say that what happens in Northern Ireland now could never happen in any other part of the United Kingdom?
There is the risk, especially in houses in multiple occupation, of people getting hold of and completing voting forms meant for other people. Again, that is a real risk and I wonder whether the Government intend to take any steps to find out whether there has been such abuse. Of course, measures could be taken to reduce that risk—especially registration on an individual basis, not on that of the household, with a signed registration form from each elector.
The noble Baroness, Lady Gould of Potternewton, referred to Clauses 6 and 7. They are welcome, but they do not go nearly far enough to deal with the problems, particularly in houses in multiple occupation. We accept that it is impossible to change the registration system before next June's election. But will the Government accept the Electoral Commission's view that pilots should not be rolled out on a permanent basis until the safeguards—in particular, an individual registration system—are in place?

341
My noble friend Lord Rennard drew attention to the problem of the late return of postal votes. It is plainly right that postal voters should be entitled to vote by post on polling day. I suggest therefore that, whether or not it is desirable to extend the counting of postal votes for a further period, any postal votes received on the day after polling day, which must therefore have been posted on polling day, should necessarily be counted in all postal-only elections. That might delay counting, but there would be no problem in the European elections, in which votes cast on Thursday are not counted until the following Sunday. That change in the system would cause no problems on this occasion. It may be possible and desirable to delay counting of local election votes until Friday afternoon, Saturday or even Sunday. Are the Government prepared to consider allowing postal votes received on 11 June to be included in the count for EU and local elections this year?
There have been complaints from the Disability Rights Commission and the RNIB. All-postal voting makes it easier for some people with mobility problems to vote, as they do not have to make a special application for a postal vote or arrange for someone to assist them in getting to the polling station. But some disabled people, especially those with a visual impairment, will suffer from the lack of assistance available in polling stations. The Disability Rights Commission complains about the lack of a right to require a ballot to be issued in Braille or with a voting template. Are the Government prepared to act on those complaints either for the pilots or before the more general roll-out following them?
The Government say that a staffed delivery point at which ballots can be handed in will be made available in each local authority district. But the Local Government Association and the Electoral Commission say that there should be a delivery point in each local authority ward, not just in each local authority district. One point for a whole district would be inadequate even in an urban area and would be totally useless in a large rural district. The noble Baroness, Lady Gould, supported the call for accessible and publicised delivery points. Will the Government accept that there should be one delivery point per ward as an interim step, at any rate, unless and until it becomes apparent that there is no significant need for it?
The noble Lord, Lord Louth, and the Constitution Committee in its report have drawn attention to the fact that the Bill excludes the possibility of Westminster by-elections for a six-week period. The reference to a six-week period is an underestimate; it should be seven weeks—three weeks before 10 June, on the 10 June and for three weeks after that date. Assuming that elections are held, as customary, on a Thursday, that would exclude the three Thursdays before 10 June and the three Thursdays after it, as well as 10 June itself. That means that the last date on which a by-election could be held before 10 June would be 13 May, after which the next date would be 8 July. I can see that a by-election—particularly, perhaps, if it is held before the European election—might distort
342
the result of a pilot scheme by reducing the turnout. But excluding all dates between 13 May and 8 July is too long. I wonder whether the period should not be reduced by a week at each end.
My next point is that the Bill has not yet gone to the Delegated Powers and Regulatory Reform Committee. Clause 10 proposes that the order under Clause 1 should use the affirmative resolution procedure. The order under Clause 1 is the order that identifies the pilot regions. That, of course, is correct. That is a very important order and it should use the affirmative resolution procedure. An order under Clause 2—the pilot order that implements the main order—will also include some very important provisions, but, as the Bill is now drafted, it will require no parliamentary procedure at all. Therefore, should the Bill not require at least the negative resolution procedure before an order under Clause 2 can be implemented?
Finally, I turn to a point raised by the Local Government Association. Will the Government undertake to pay all additional costs that are incurred in local authorities in the pilot areas? As I said, this is not a Bill with which we are happy. We will not, in your Lordships' House, set out to wreck it. But we think that there are important and significant changes that should be made: we shall do what we can to ensure that those changes are made.
4.41 p.m.
Earl Attlee: My Lords, I, too, am grateful to the Minister for his usual clear and lucid introduction. I have an interest to declare: I have lived in the East Midlands region since July 1993. Both Bills pilot alternative voting methods in order to increase voter turnout. Noble Lords will be very interested to hear that despite my obvious interest in current affairs and politics, and despite having canvassed during general elections in adjacent constituencies, I do not have the foggiest idea who my MEP is, what his or her party is or what he or she has been doing in Europe.
If I do not know, it is not surprising that the electors do not know or do not care. Has the Minister done any research on what proportion of the electorate knows who their MEP is? The noble Lord, Lord Rennard, talked about the effects of the infamous closed list. I think that he is entirely right. We cannot expect the Minister to answer all our questions or points when he responds, but will he undertake to write to us in response to all the questions identified, as such, by a question mark in Hansard?
I listened with interest to the speech made by the noble Lord, Lord Rennard. Of course, he is not an election junkie; he is a genuine expert. During later stages of the Bill, his experience, wisdom and counsel will be of great benefit. I just wish that we had someone of his skill in our party. He identified a number of difficulties with all-postal voting—in particular, the lack of secrecy.
I disagree with the argument put forward by the noble Baroness, Lady Gould. She pointed out the role of the tellers at the polling station. However, in that

343
situation, voters do not need to give information to anyone who is not an election official, as pointed out by my noble friend Lord Norton of Louth.
The noble Lord, Lord Rennard, also made interesting observations about the situation inside a family. I can see very severe difficulties possibly arising; we may not actually see them, but they may occur. The noble Lord also talked about the problem of voting too early in the campaign to make an informed decision.
The noble Baroness, Lady Gould, raised a number of interesting points. She touched on the issue of possible fraud, about which she appears relaxed. But I think that the purpose of the pilot is to determine whether there is a problem with fraud. I agree with the negative view that she takes of a national pilot. Apart from it being a contradiction in terms, it would make it much more difficult for the Electoral Commission to study the results of the pilots. She was also relaxed about the problem of personation. She pointed out that there is no identity check at the polling station. She is right. However, at a polling station, there is a real risk of detection of personation.
Baroness Could of Potternewton: My Lords, I am sorry to interrupt the noble Earl. I am not relaxed about any of those points as he suggests. I am certainly not relaxed about personation. My point was that personation has continued. The Bill is likely to prevent it occurring in the way in which it has occurred in the past. I am certainly not relaxed about it.
Earl Attlee: My Lords, when I selected that word, I wondered whether I would come unstuck. I entirely agree with the contribution of the noble Baroness.
In a home in multiple occupation, there is a risk of immature youngsters thinking it merely being a bit naughty to post all the votes on the carpet. There is a real danger that they could find themselves in serious difficulties.
I assure my noble friend Lord Norton of Louth that we are all interested in his views. He raised the problem of the prohibition of by-elections for a six-week period. I believe that the noble Lord, Lord Goodhart, touched on that problem too. My noble friend Lady Hanham and I will have to consider that matter with great care.
The noble Lord, Lord Greaves, also was concerned about fraud. Perhaps we should consider putting a greater duty on the Electoral Commission to investigate whether any fraud has taken place and providing it with the necessary tools to do that. The noble Baroness, Lady Gibson, made some interesting suggestions based on her practical experience of elections. Of course, I am a complete newcomer to the business. I am not sure what returning officers would feel about keeping polling booths open for two days, but I take it that she is referring to a conventional election rather than to a postal one.
It is quite clear that there is only just enough time for the authorities to make the necessary arrangements to implement the Bill. The Electoral Commission's report of December 2003 indicated that firm decisions were
344
needed by mid-December. We on these Benches will he as helpful as possible, while properly scrutinising the Bill as my noble friend Lady Hanham has indicated. We therefore intend to help the Minister by tabling amendments in Committee that would specify the north-east and east Midlands regions in the Bill. As the Bill may be considered in Grand Committee, we could not force a Division, but the Government can remove any uncertainties for the authorities by accepting our amendments or by tabling their own.
More controversially, we should also consider excluding other regions, as recommended in the Electoral Commission's report. I am sure that all noble Lords have found the report to be good reading and very useful. My noble friend Lady Hanham touched on the issue of using Scotland as a pilot region. The report refers to the risks identified by the regional returning officer for Scotland. They are cumulative and centre on: the legislative timetable; the general lack of experience in Scotland of all-postal ballots; the lack of time available for forward planning; the recent busy electoral history in Scotland; issues relating to the security of the ballot; possible problems of delivery and return of ballot papers; the very significant staffing implications of an all-postal ballot; concerns about the ability of suppliers to deliver effectively; lack of time to test critical computer systems—although we do not mean e-voting—and resources to plan for and deliver the election. Those risks were identified by the returning officers, who would have to implement an all-postal ballot in Scotland.
On Scotland, the report concludes,
"and in the light of the unanimous views of the returning officers, the Commission does not feel able to recommend that Scotland is suitable to undertake a pilot scheme in 2004".
Considerable uncertainty and nugatory effort could be avoided if Ministers were to accept our suggestions now.
E-voting makes voting and counting easier, but it does not increase turn-out, for reasons identified by all noble Lords and in various reports. We oppose e-voting for now. The Minister in another place indicated that no e-voting will take place in 2004 and we wish to see that confirmed in the Bill. That is not merely because our confidence in Ministers' assurances at the Dispatch Box has been shattered as a result of recent events, but also because it would remove any uncertainties and lingering thought in industry that there might be e-polling. As a result, entrepreneurs would not waste their efforts and resources.
Much concern has been expressed about the secrecy of postal voting systems. This applies both to casting and counting. As suggested by my noble friend, we will need to look very carefully at the arrangements for opening postal votes, the possibility of using two envelopes to separate the ID from the ballot paper and, of course, the scrutineering arrangements.
My noble friend Lord Norton of Louth was extremely concerned about the security of voting, as were other noble Lords. He said that:
"The polling booth guarantees secrecy. The sitting room does not".

345
The Minister will tell us that the detailed arrangements are to be covered in two orders. These orders must be in draft form now; they must exist. If they are not ready, I suggest that the Minister should withdraw the Bill now because there will be insufficient time to make the necessary arrangements.
If noble Lords were able to consider the draft orders before Committee, many of our amendments would be unnecessary because we would know the answers. We would know that the Minister had already covered various points. Seeing the orders would be extremely helpful because we do not want to waste time, we want to get on with the Bill.
As observed by the noble Lord, Lord Goodhart, the Bill provides for two orders, one subject to affirmative resolution and one to negative resolution. It may have been appropriate to have two orders when the Bill was originally drafted, but presumably both of the orders will be tabled almost immediately after the Bill receives Royal Assent. This Bill provides for a "one off" event, the pilots, and will not recur. I cannot understand why there is not one, all-encompassing affirmative order.
The Minister may say that he needs a negative instrument facility to correct and amend any possible errors that might arise. But if he finds that an error has been made in the order, we will regard that as a serious matter since the time-scales are so short. There is no margin for error and if anything goes wrong it will be extremely difficult to make the pilots a success. So we would certainly ensure that any negative amending order was fully debated on the Floor of the House. Conversely, if the Minister takes the single affirmative order route, I am confident that the House would be sympathetic to the need for speed in the unlikely event of an error arising.
I, too, received the interesting brief from the Disability Rights Commission. At the very least, I know that all noble Lords will seek to ensure that the Bill does not make matters worse for the disabled. However, I think that we should be able to make some improvements. The pilots provide a good opportunity to trial improvements, provided—this is the big caveat—that there is no chance that those improvements might distort the data to be captured from the trial and analysed by the Electoral Commission. In view of the relatively low numbers, that is unlikely to be a problem.
In conclusion, I look forward to working with the Minister on this important, if simple, Bill. Deliberations at later stages will be far more straightforward if the Minister lets us see the draft orders that must be available now. If they are not, then I suggest that the Minister is in deep difficulties already.
4.53 p.m.
Lord Filkin: My Lords, in rising to respond to what has been a good debate I should like to thank all noble Lords who have taken part in it in such a thoughtful and reflective manner. That will do us proud as we move towards our consideration in Committee. As I normally do, I undertake to write to all Members whose questions I fail to answer either from want of
346
time or wit so that there will be an opportunity to consider those before we get to Committee. However, I will not go as far as the noble Earl, Lord Attlee, adventurously sought to suggest; that is, to respond to every comment with a question mark set out in Hansard. I would be trapped into answering rhetorical questions, which would burden us both.
I turn first to the point raised by the noble Baroness, Lady Hanham. Yes, the Bill applies only to the European Union and local government elections to be held on 10 June. She also mentioned the report of the Electoral Commission and was quite right to say that the commission made positive recommendations about the two regions which we have already announced. It then set out a hierarchy of other regions where it had varying levels of doubt. So positive recommendations were made about two regions and the issue was left open with doubts on others. I shall say no more on that at this point because we shall consider it further in Committee. However, I wanted to avoid leaving the impression that the commission had made positive recommendations for every region, because that was not the case.
The noble Baroness also raised the issue of Royal Mail capacity. She is absolutely right—that is a crucial issue. There have been considerable discussions with the Royal Mail. Adam Crozier, the chief executive, has affirmed to us that its contribution to a postal election is the highest priority the Post Office has, apart from the delivery of money to the post offices themselves. One will understand, therefore, what a high priority that is. So it is aware of the importance of this to its reputation and already has a strong central team in place.
The planning process has gone as far as considering what would happen were there to be local postal strikes and how the Royal Mail could be sure that it still fulfilled its obligations to democracy, which is what it is doing in this case. We will no doubt come back to that issue in Committee but, just as an opener, I wanted to make it clear that an important issue was concerned. We had had discussions with the Royal Mail and it is taking the matter very seriously.
The noble Baroness, Lady Hanham, raised important issues about the Disability Rights Commission. We have met representatives from a range of disability organisations which have, quite rightly, expressed concerns about using only one channel. Provisions are made within the pilot orders for accessibility of delivery points and the equipment that must be provided to assist disabled voters. We will be looking to address the concerns expressed by these organisations in consultation with them during the development of the pilot order. I hope to be able to say more on that in Committee.
On the important, if complex and technical, issue of envelopes in one-piece mail, as I would not pretend to be a world expert in this matter, we will debate it in Committee. It is an important issue. Electoral administrators and suppliers have extensive experience of producing secure and effective forms of ballot papers and enveloping systems, and we intend to work closely

347
with the administrators in the regions, the Electoral Commission and others to ensure that secure formats and systems are used in these pilots. Again, we will be learning from our experience on the three previous rounds of pilots.
The noble Lord, Lord Rennard, gave, not unexpectedly, a thoughtful contribution to the initial stages of the Bill. He suggested that the Bill was premature. Let me say one or two words about why I ask him at least to keep an open mind. This is a significant change in electoral arrangements. We should proceed with caution, but the evidence of the scale of improvement in the voting would mean that we would be wrong not to continue progressive experimentations in the way we are doing. By that I mean that the increase is not 15 or 16 per cent on 60 per cent, but 15 or 16 per cent on 35 per cent or so. Proportionately, it is a very significant increase in the turnout response, and we hope it will be sustained.
I do not think the best way of proceeding is to wait until the utopian position when we know the answer to every single question about fraud, security and secrecy, which have been quite rightly raised in this debate. Doing so would probably mean that we would never move at all. The way in which we are moving, which I think is right, is step by step, with a process of research and evaluation at each step. We are using the processes of piloting to address the questions raised in debates such as this and using the Electoral Commission and other mechanisms to do so.
In other words, not being able to give a perfect answer to every question at this stage is not a reason for not moving forward but is a reason for marking those concerns and trying to use the process of progressive, incremental piloting, the mechanism by which we seek to rebut or address concerns and issues. I will say no more on that at this point, but that is why I think the proportionate and progressive approach we have adopted on the Bill on piloting to date is right in principle, rather than waiting until we have a perfect and total system. Having said that, I have noted the points made by the noble Lord, Lord Rennard, and others, to which we will come back subsequently.
The noble Lord made a point about the difference between a postal voting timetable and the campaign timetable. That is a point for reflection, but our electorate are grown-up and mature and can use their own judgment about when they want to vote. I can conceive of situations in which people will know in which direction they want to vote, as there are life-long Conservative, Lib Dem and Labour voters, who will vote without thinking. Others may not do so, and they have the opportunity to delay their vote right until the end, when they have heard and, one hopes, benefited from the election material and the debate in local or national media.
People also have the opportunity to vote on the day itself. That touches on, without totally addressing, the point raised by noble Lords. They can vote on the day itself by going to the particular local delivery point—or whatever ghastly term we have invented—to put their vote in the box. They could also go to that place
348
and vote there and then put it in the time-honoured box. People have a choice, and they can make their judgments about when they believe it appropriate to vote.
There is not a self-evident or simple answer to the problem of HMOs. We are fully aware of the issue, which is most important for registration officers, the Government and the Electoral Commission. We may be able to say more in Committee, or it may be one of the issues of which there must be very serious evaluation afterwards, to see whether exceptional measures are required in such circumstances.
The noble Lord, Lord Rennard, raised the question of being surprised at there being a combination of the EU and local government elections, with the piloting process happening at the same time. I would have to look back into the history, but I trust that there was no misapprehension in that regard. However, that process is important because it gives us the Ability to test two things at once. First, there is the application of an innovative voting method of all-postal voting at a regional level, which has never been done before. I nod with due obeisance to the noble Lord, Lord Norton of Louth, for recognising that this is an election to a legislature. He made that point clearly and well, and I respect it. Secondly, we are looking at piloting for two elections at the same time—or two or more. Two measures are being dealt with in a novel way, which is potentially important to evaluate. There is much to be learned from the set of pilots that we propose.
The noble Lords, Lord Rennard and Lord Goodhart, if I recollect correctly, raised the issue of secrecy. It is clearly a fundamental issue, and I would be foolish frivolously to say that there is no conceivable situation in which there could not be a problem. One can conceive of the possibility of pressure, although it may not be extensive. Certainly, under Clause 4, the Electoral Commission will be required to report on the elections, and in doing so we shall expect it to consider issues of secrecy. Any such issues would normally be considered by the commission, and it is a particularly important issue.
We have also been working with the electoral administrators to ensure that literature and systems are used that provide for secrecy, and that people are reminded of the importance of secrecy. Time will not allow me to say more, but I mark the importance of that matter.
A number of noble Lords spoke on the issues of fraud and security. Again, I cannot do justice to all the points made, for reasons of time, but I shall do my best to come back with written responses. However, I shall give a quick menu of some of the issues that we are considering. No final decisions have been taken, but the menu will give noble Lords a flavour of the issues that we are reflecting on. Among these are the facility for people to report instances of fraud or coercion by telephone; security statements that require a voter's signature, which will be mandated, as I indicated before; comparing signatures on security statements with signatures on file; checks with a sample of people marked as having returned a ballot paper to check that

349
they did send in a paper; inclusion of secrecy warnings on voting and proxy voting literature; repeated warnings as to the penalty for fraud; extending the scope of the secrecy rules to cover all postal provisions; and so on. We shall return to those issues in more detail.
I note the interesting point on weekend voting made by the noble Lord, Lord Rennard. Although it is a point, he will not be surprised to hear me say that I do not think we are likely to introduce it at this point. No doubt, however, we will reflect on it.
The noble Baroness, Lady Gould, asked whether extra money will be available. The short answer is "Yes". The Government will cover the additional costs that result from holding the elections on a pilot basis. As one would expect, however, local authorities will be expected to pay the costs that they would have incurred if the elections had been held on the traditional basis. That is the normal agreement with local authorities on new burdens, as the noble Baroness, Lady Hanham, knows better than I do.
I thought that the noble Lord, Lord Norton, made a very measured and thoughtful contribution. I thank him and the committee for marking up these important constitutional points for us. I think that, in a sense, I have already referred obliquely both to the issue of secrecy and to the legislative point.
I have not yet referred to the exclusion of Westminster elections, to which I shall return in more detail. However, the central point, as I think the noble Lord inferred, is the concern about complexity and confusion. We will reflect on whether it is possible to reduce the period of exclusion in the light of concerns that registration officers might have if, late in the process, they suddenly found that they had another election on top. That is part of the problem—no one knows when there will he a by-election, whereas people can plan for the elections that will be legitimated as a product of the Bill.
Visually-impaired voters are part of the issues on disability that we will come back to in more detail.
The point about marked registers was extremely interesting. I know of some people who have been reluctant to give their names outside polling booths—maybe they are cussed people, or not. The point is that going to a polling station is effectively a public act. It does not mean that you will necessarily be seen, but you will have been seen to go in there. It is true that no one knows whether you actually voted or not, or whether you spoiled your ballot paper, but it is a fact that you have been seen. So it is not a private act, even though, quite rightly, your vote is private.
I thank the noble Lord, Lord Greaves, for the tone of his speech. It was reflective and deeply concerned about some of the issues. I respect that he is deeply concerned about some of the issues. I think the best way to identify these issues is to have pilots. A point that I do take, and on which I shall reflect, is whether a system of identifying problems that relies fundamentally on complaints is sufficient. I think that
350
that is a good point. I do not think that that is exactly the position, because the Electoral Commission has a duty to look proactively as well.
However, I think that we must look particularly at the kinds of concerns that are unlikely to manifest themselves through complaints and see whether there are identification mechanisms for addressing them. This is not a process of having an academic debate about the extent of fraud; it is to try, through the pilots, to find ways of reducing fraud so that we all have more confidence about taking innovative voting methods that work forward into the future. I take that strongly, and I take the challenges in relation to the ballot Act as well.
I thank the noble Baroness, Lady Gibson, as ever, for her thoughtful, enjoyable if slightly frightening and open candour about some election processes. The noble Lord, Lord Goodhart, also urged that the television companies should be encouraged to put on boring programmes. I hope not; I do not think they need any encouragement.
Lord Greaves: My Lords, perhaps they could be encouraged to put the Parliamentary Channel on all channels that day.
Lord Filkin: My Lords, I have even met people who have watched it, which surprises me.
The point about the entitlement to vote on polling day is interesting and we will reflect on it. In a sense, I gave an answer already. They can vote on polling day. It requires them to walk down the road and vote in the place that exists as a consequence.
I must turn to the noble Earl, Lord Attlee, and I apologise to other Lords for racing past. I note his warning about putting the two regions in the Bill. I mark the point that the Electoral Commission was not excluding consideration of other regions: it was only making a positive recommendation about two, while leaving some questions open—perhaps the next three or four—with a number at the bottom where it was clearly saying "no". There were three broad categories and gradations within those categories.
I hope that the noble Earl does not move an amendment on e-polling. I make it clear, and I give the statement from the Dispatch Box, that this Bill does not allow e-polling. It will not be done, but he will take his own counsel on that. I hear, as ever, the encouragement to get the draft orders in place. Although I would not want to raise his hopes excessively on that, we will give as much information as we can as soon as we can—I make that promise.
I look forward to working on this Bill with other Members, both on the Front Benches and Back Benches. We are dealing with important measures upon which we ought to seek as much cross-party unity as we can, because they affect our democracy. I look forward to the Committee stage.
On Question, Bill read a second time and committed to a Grand Committee.

European Border Guard (EUC Report)
5.11 p.m.
Baroness Harris of Richmond Baroness Harris of Richmond rose to ask Her Majesty's Government, further to the report from the Select Committee on the European Union, Proposals for a European Border Guard (29th Report, Session 2002–03, HL Paper 133), what legal controls and parliamentary oversight they believe should apply to new European Union structures for co-ordinating border management and to joint operations between the member states.
The noble Baroness said: My Lords, I am glad to have the opportunity to introduce this short debate on the European Union Select Committee's report on proposals for a European border guard. The debate is particularly timely because the European Commission has recently brought forward a proposal for a new agency to co-ordinate operational co-operation at the European Union's external borders. It gives the House an opportunity to look at this proposal alongside our report.
Before addressing the substance of the report, I would like to pay tribute to all the members of the subcommittee who have worked so hard on this and other recent inquiries, particularly those who have recently left the committee under the rotation rule. I am delighted that so many members of the sub-committee are participating in the debate this afternoon. I also pay great tribute to Professor Jorg Monar, our specialist adviser. Professor Monar has helped us with several previous inquiries, and we were again deeply indebted to him for his wise advice and unrivalled knowledge of the European scene. I also wish to thank our excellent clerk Tony Rawsthorne, who with Valsamis Mitselegas, our legal assistant, gave us the usual efficient, helpful and valuable advice. We are enormously indebted to them.
I make no apologies for inviting the House to debate this report. As it says, frontiers are not only hugely symbolic, they are also of great practical significance, as the place at which checks on a person's admissibility to a country or territory are made. For the European Union, and particularly its Schengen members, effective control of the external border is of paramount importance in view of the abolition of internal frontiers between the Schengen member states. Once a person is admitted to one member state, there is no physical obstacle to his or her moving on to any other. It is self-evident that the strength of the external frontier is only as strong as its weakest link.
Every Schengen member state has an intense interest in ensuring a uniform level of control with no significant weak points. The addition of 10 new member states on I May will mean that the external border is not only greatly increased in length, but pushed much further eastwards. Although controls at the borders between the existing Schengen territories and the new member states will not be abolished overnight—there will he a transitional period of some years—the new member states are all required to adopt the full Schengen acquis and work towards implementing it.
In addressing the terms of the Question, I will focus on three main areas: the idea of a European border guard; the Commission's proposals for a new agency; and the United Kingdom's role in external border cooperation. What exactly would a European border guard consist of? I have to say that we received several different answers to that question. For some it seemed to be no more than the co-ordination of operational co-operation between member states. We were sceptical of that view. Whatever else it might he, a European border guard would surely be a body with some personnel and the responsibility for supporting and overseeing the border control authorities of member states. That is certainly how others saw it.
It is clear from our visit to the German Ministry of the Interior that it favoured a Council body in Brussels that had the power to direct national border authorities. The Commission itself was guarded about its ultimate objective and the Commission's director-general for justice and home affairs assured us that it would be a unit in support of national border guards and not a supra-national body replacing them. It seems clear from other Commission documents, however, that its ultimate aim is some sort of supranational force. One of these refers to the creation of a European corps of border guards, which could hardly be anything other than that. For our part we were strongly of the opinion that the case for a central command structure based in Brussels, let alone a fully fledged multi-national force, had not been made. It would be a major extension of Community competence at the expense of national sovereignty. There is no reason to believe that a centrally managed body would be more effective than the member states acting in concert and there would be legal difficulties to be resolved relating to border guards exercising powers outside their own jurisdiction.
I am pleased, if not entirely surprised, that the Government take the same view. Perhaps I may take this opportunity to thank the Minister for the Government's detailed and generally helpful response to our report. Although we were opposed to the creation of a European border guard, we strongly endorsed the need for effective co-operation between the member states to provide a more uniform level of security at external borders. As I have already explained, the security of the Schengen area is largely dependent on the effectiveness of the controls at the external border. Even for non-Schengen members like the United Kingdom and Ireland, pressure on their borders is reduced if these controls are enhanced. We were heartened to see the extent of current co-operation and of the United Kingdom's participation in it.
A measure designed to improve co-ordination in this area is the draft Council regulation establishing a European agency for the management of operational co-operation of the external borders—that is rather a mouthful, I am afraid—which the Commission brought forward last November. The agency's task will consist of promoting operational co-operation in such areas as the training of national border guards, the provision of technical and operational assistance, carrying out risk assessments and research and co-ordinating the removal of illegal immigrants.
The Government submitted their views on that proposal in the form of an explanatory memorandum in the usual way and my committee examined the draft regulation in the light of that. There is no doubt that there is a need to pull together the many strands of existing operational co-operation that have grown up piecemeal. We believe that in general the proposal represents a sound basis for doing so. Moreover, despite our suspicions of the Commission's long-term intentions in this area, to which I referred earlier, we are satisfied that the proposal does not represent the first step on a slippery slope to a fully fledged European border guard. The Commission has given an unequivocal assurance that the agency's activities will he purely supplementary to those of the national services of the member states and that it will not carry out actual controls of the external frontier.
There remain some points of detail that require clarification. In particular, it will be important to ensure that the agency does not have exclusive responsibility for joint operations. Also, the Government have some concerns about the structure and financing of the agency. We will continue to keep the document under scrutiny until the issues have been satisfactorily resolved.
One advantage of an agency of the kind proposed would be in terms of accountability. In undertaking the border guard inquiry, and while supporting the cooperation already going on between member states, we were struck by how little scrutiny there was of them. That concern is reflected in the terms of the Question.
We pointed out that the existing co-ordination mechanism—the common unit—was not established by law. Its tasks and powers were not defined, and its activities were subject neither to scrutiny by the European Parliament or national parliaments, nor to judicial control. The proposed agency would, on the face of it, provide a much better basis for scrutiny of the activities than the present ad hoc arrangements. I hope that the Minister will indicate what form of parliamentary scrutiny of the agency's activities she foresees and whether, more generally, the Government are satisfied that it will be properly accountable.
The most immediate issue for the United Kingdom is not the substance of the proposal, but the question of the United Kingdom's participation or non-participation in the agency's work. As drafted, the regulation excludes the United Kingdom and Ireland from participating in it, on the basis that it is a Schengen-building measure and is caught by the protocol to the Amsterdam Treaty, which exempts the United Kingdom and Ireland from participation in the frontier aspects of Schengen.
That is an unwelcome development. It is important that the United Kingdom should continue to engage closely with its partners in operational co-operation against illegal immigration. I assume that the Government will wish to participate, although they have not yet made their intentions clear in that respect. I hope that the Minister can confirm the Government's position when she replies.
We believe that, under the Treaty of Amsterdam, the United Kingdom and Ireland can choose to participate, and that the Government should make use of that possibility. That brings me to a more general point about the United Kingdom's opt-out from the Schengen agreement, and the retention of its borders with other member states. It is one that will be familiar to those who have followed the work of my subcommittee. On this occasion, however, I shall not question that opt-out as such, if only because I know how strongly committed the Government are to it.
I must again draw attention to the inconsistency that the committee identified of seeking to participate fully in action to strengthen controls at the external borders while maintaining the Schengen opt-out. The Government cannot have it both ways. By maintaining the United Kingdom's internal border controls, the Government are saying, in effect, "We do not trust the ability of the controls at the external border to protect us from illegal immigration and security risks". The reasons for that policy—they are related to the United Kingdom's island geography—are well known. But, given the Schengen opt-out, was it really appropriate for the Prime Minister to lecture his colleagues at the European Council in Seville on the need to improve external border controls?
I have to say that, as my committee has observed on several occasions, such difficulties are inevitable given the United Kingdom's awkward position, half-in and half-out of Schengen. They highlight the continuing tension between the United Kingdom's advocacy of action to improve external border controls, and its opt-out from the external border elements of Schengen. The Commission's decision to exclude the United Kingdom from participation in the new border agency is unwelcome, but hardly surprising given that the United Kingdom does not operate the EU external border regime.
I realise, as I said earlier, that there is no immediate prospect of the United Kingdom becoming a full member of Schengen, but I would be interested to hear from the Minister whether the Government have any plans to align their border control procedures more closely with Schengen's. It would help the United Kingdom to co-operate more closely with its partners if it operated the same procedures at its external borders, as we suggested in our report. For example, it could adopt the Schengen common manual, even if it maintained its frontier controls with other member states.
I look forward to hearing the Minister's response to that and other points that I have raised, and to the views of other speakers.
5.25 p.m.
Baroness Gibson of Market Rasen: My Lords, I am very pleased to be taking part in this debate as a member of Sub-Committee F, and I, too, thank those who have helped us so efficiently and with such good humour. I pay tribute to the noble Baroness. Lady Harris of Richmond. She is an excellent chair. She shows great patience and tolerance with what can be, on occasions, a somewhat volatile committee.

355
The effective management of the external borders of the EU is naturally a matter of concern to all member states, increasingly so as the EU becomes larger. Border control is obviously not the only way to make countries safe, but any laxity in that area must increase the risk of illegal immigration and must also increase the possibility of cross-border crime. The noble Baroness, Lady Harris, outlined the key points in our report and I know that other committee members and colleagues today will speak to the report and about those who gave oral evidence to us. I shall concentrate on a slightly different matter. I shall draw attention to some of the relevant points raised in the written evidence that was presented to us. Sometimes such points can be hidden away in a report of this kind. Written evidence is important to us as committee members, in particular because it provides supportive background to our considerations. Sometimes it gives information about issues in other geographical areas beyond the EU, but such knowledge is helpful.
I shall concentrate on two particular written submissions that are on pages 93 and 96 of the report. The first is the written memo from the National Criminal Intelligence Service. Sub-Committee F has worked with the NCIS on other investigations and has much respect for its work and for the information it provides. Like the NCIS, we recognise that organised crime is international in character and, as such, operates in and through many jurisdictions. Law enforcement is not structured in the same way in each EU country. Therefore, the role of Europol, which the NCIS raises, is crucial. Europol plays a key role in overcoming obstacles and a central part in addressing serious criminality affecting all member states.
Among the most worrying crimes we have discussed with the NCIS in the past, for example, is the crime of smuggling across borders women and children who are then used for prostitution purposes. Usually those unfortunates have been promised better jobs, better education—indeed Utopia. What they receive is degradation, fear, humiliation and even death.
In the NCIS written evidence the relationship between two European countries is highlighted: Portugal and the Ukraine. Here we come to helpful information from beyond the direct EU borders. Currently the NCIS tells us that a large criminal group of Ukrainians is facilitating illegal immigration into Portugal. I have a particular interest in that issue because, having visited the Ukraine last year, I found the Ukrainians warm and welcoming and very positive about increasing their links with European countries. The Ukrainian Government are doing a great deal to build up such links and to attract people to their country. Tourism is an important part of their new economy. They need crackdowns on anything which is threatening links and co-operation between their country and those in the EU.
The second written memo to which I draw attention is that of the R ail Freight Group. I declare an interest as a member of that group, the aim of which is to increase the volume of freight carried by rail in Europe. The group raises issues which inter-relate with
356
other reports that Sub-Committee F has undertaken and which highlight problems in relation to European borders.
In recent years, rail freight has had a very difficult time because of the problem of illegal immigrants trying to board freight trains—and often succeeding—and travelling through the Channel Tunnel. The Rail Freight Group considers it to be the duty of all member states, governments and the European Commission to reduce the number of illegal immigrants smuggling themselves on to trains and lorries. However, the group is very clear that it does not believe that transport operators should be regarded as the equivalent of border guards or the police. Therefore, the group believes that there is no substitute for proper border controls operated by the national governments so that rail freight operators can carry out their businesses unimpeded.
I hope that by those two brief illustrations I have shown that written submissions do provide important background information to our work and should not be overlooked in the overall debate surrounding the safeguarding of member states' borders.
5.30 p.m.
Lord Wright of Richmond: My Lords, it has been a genuine privilege to have served, even as a volatile Cross-Bencher, on Sub-Committee F under the chairmanship of the noble Baroness, Lady Harris of Richmond, during our inquiry into proposals for better co-ordination in external border management and joint operations between member states, including the accession states due to become full members of the European Union this year.
I do not propose to repeat the points made by the noble Baronesses, Lady Harris and Lady Gibson, other than to commend to your Lordships what I believe to have been a useful and well balanced report. It will, I hope, have had a positive effect in steering our European colleagues towards more practical and effective policies and controls in the management of our external borders.
At the same time, I echo remarks previously made by the noble Lord, Lord Grenfell, about other reports from his Select Committee in expressing my personal regret that it has taken just over six months for our report to be debated in this House, even if the delay has fortuitously given us the opportunity to consider the agency proposal, to which the noble Baroness, Lady Harris, referred. Delays of this kind surely reduce the effectiveness of parliamentary oversight, to which the Question refers.
However, I want to draw one or two points to your Lordships' attention this evening. First, I welcome, as our report does, the greatly increased level of practical co-operation between the member states on external border issues and particularly the United Kingdom's active participation in them, in spite of our continued and, to my mind, regrettable non-participation in the main elements of Schengen.
My second point is to draw attention to the memorable visit which our sub-committee made to the German/Polish border in March last year and which is

357
referred to in paragraph 54 of our report. Not only did that visit impress all of us as a remarkable example of co-operation and exchange, which had overcome the predictable political and historical sensitivities surrounding that border; it also underlined the very real problems of achieving effective co-operation between border authorities speaking two different languages and, in many cases, having real difficulty in oral communication.
In that context, I want to emphasise the importance of the pioneering work being done by Dr Edward Johnson of Wolfson College, Cambridge, with which my noble friend Lord Quirk has been personally associated. It may be of interest to your Lordships that this work was first brought to my personal attention by someone who will be well known to many Members of this House—Baron Hermann von Richthofen, the former German Ambassador in London, who has been closely involved in a project to devise a common language—or police speak—to facilitate co-operation between different border authorities.
My final point—I want to keep this very brief—is to reiterate the importance of continuing close British involvement and co-operation in the management of external border controls by our Schengen partners—a problem which will, of course, gain even more importance as enlargement comes into effect in a few months' time.
5.34 p.m.
Lord Corbett of Castle Vale: My Lords, it is a pleasure to follow my committee colleagues who have spoken earlier in the debate. I join them in commending the chairmanship of the noble Baroness, Lady Harris of Richmond, the work of our Clerk and adviser, all those who took the trouble to give both written and oral evidence to us, and those who helped us on our brief and hectic travels.
I echo the point made by the noble Lord, Lord Wright of Richmond, about the unhappy delay before the report could be discussed by your Lordships. I do not think that it meets the purposes for which these committees exist and I hope that there are people listening who can do something about it.
The establishment of an armed elite multinational force, trained to common standards and kitted out in a common uniform—even if this is one version of what a European border guard might look like—has some superficial attractions.
Now that there are no internal borders in the EU—with the sensible exception for mainly geographic reasons of the UK and Ireland—the notion of a force, standing shoulder to shoulder around the external land borders and coastal waters of the EU might attract praise even from the Daily Mail. But it did not from us.
There are, I think, three main arguments against the idea. First, as the noble Baroness, Lady Harris of Richmond, said, it would erode national sovereignty. I am not too concerned about that in principle—there are circumstances in which it is right to pool sovereignty and
358
we have done that over the past 50 years or more—but it would erode national sovereignty for unproven and, I believe, unlikely gain.
Secondly, it may encourage some member states to become less vigilant on the need to counter terrorism, cross-border organised crime and people smuggling, on the grounds that someone else is going to do it, so we need not bother.
Thirdly, we know from our work at ports of entry by both Customs and Excise and the Immigration Service that legions of uniformed officers do not bring success. Although the extra officers and new equipment provided during the past five years have been welcomed, are important and have made a difference, what brings results is the collection and analysis of intelligence. Only a tiny proportion of those millions of people entering the UK at out ports of entry pose any threat. Focussed and careful intelligence stands a better chance of obstructing and detecting these people than any amount of random checks.
I have to say that—although I speak only for myself—whatever the other arguments, the UK public would find it unacceptable if they thought that a government were trying to walk away from what I regard as their legitimate security responsibilities and handing them over to other bodies.
The committee agreed on the need for effective cross-border multinational co-operation focussed on areas of common concern. It is highly pleasing to note that the UK has been at the forefront of so many of these projects. It is unfortunate that this has received so little publicity. But, as ever, the bad news has got its boots on before the positive facts have got out of bed.
I want to mention a few of these valuable projects. The UK has devised and is leading a project based at Dover to pool expertise in detection technology with other member states. The aim is to deploy a joint mobile team using the latest detection technology at selected weak spots on the EU external border. Nine nations are involved. The United Kingdom, unhappily, has a deal of experience of how people traffickers are modernising vehicles in a bid to avoid detection and improve concealment. We were able to see some of that at Dover port. Sharing these technologies should enable better detection along earlier parts of the route to the UK and other EU states.
The United Kingdom has taken the lead in operation Deniz which focuses on sea-borne illegal immigration from the eastern Mediterranean and is aimed at detecting movement by ship or boat of clandestine migrants, largely from Turkey.
The UK has joined a Finnish-led project involving 10 nations to introduce a model for the analysis and prioritising of risk. This is an essential part of any future joint action to better control the EU's external borders. The committee believes that co-operative efforts such as these and trying to agree and implement common standards is the better way forward.
In a world where the UNHCR is concerned with protecting 20 million refugees—I stress, 20 million refugees—Nye also need surrounding policies on development assistance, legal immigration routes and a

359
UN-led, long-term campaign to overcome hunger, water shortage, disease and illiteracy. While we insist upon the right to protect our borders we neither can nor should try to shut ourselves away from the world's problems, because they affect us all.
5.40 p.m.
Lord Dubs: My Lords, I join in the thanks to those who have helped the committee and to the noble Baroness, Lady Harris, for the way in which she steered our work, kept us in order and encouraged us in what we have done.
Virtually all the key points have been made already and I shall be very brief. When a proposal is put forward that has significant implications in terms of national sovereignty and whether or not civil liberties will be breached, the onus is on those who make the suggestion to justify so doing. That justification has not been forthcoming. It is not up to us to prove why it is not a good idea; it is up to them to prove it is a worthy idea at all.
For example, there is no clarity as to what will be the legal basis of a European border guard corps. There is no indication of what accountability there would be. Above all, there is no indication of whether or not it would improve on the effectiveness of the existing system. Indeed, there are many reasons for believing that the new system would be less effective.
We are dealing with what would be potentially a very powerful body. Perhaps I may give a brief indication. These people would have the power to check the identity papers, travel documents and visas of persons crossing an external border, legally or illegally. They would be able to question foreigners on the reasons for their stay in the common area of freedom of movement or why they have crossed the external border outside the official crossing points. They would be able to go on board a civilian ship or boat in the territorial waters of a member state to question the captain as to his route and to verify the identity of passengers. They would have to notify a person that he or she had been admitted or refused entry to the common area. They would have the power to apprehend a person and to hand that person over to the competent national authorities and to take such other measures as necessary.
These powers, which were listed clearly in the evidence given by Statewatch, are very strong indeed. We should not hand over those powers to a supranational body unless we are absolutely clear that there is a need to do so and that the powers will be exercised properly in relation to data protection rights and human rights legislation and be properly accountable to democratic bodies. None of this has happened.
However, we do have a good basis for international co-operation. Indeed, the committee, as my noble friend Lord Corbett indicated, saw good evidence of international co-operation taking place. We had the evidence of a person from Finland, who indicated what good co-operation there was across the Finnish/Russian border. We saw the co-operation between Germany and
360
Poland. Such co-operation can be helped and improved upon. Indeed, our report suggests that that is the way ahead.
But there has to be a great deal of co-operation to enable this to work effectively. Within a country there needs to be co-operation between the people at the external borders and the people at the airports, who have another kind of border control. There needs to be co-operation between immigration and customs where these are separate bodies, as they are under the UK system. There needs to be co-operation between the people at the borders and the police of a country because of people trafficking and other illegal activities, as well as co-operation across a border from one country to another. I believe that all of this can happen. It can happen by improving the basis of cooperation. It would not necessarily he enhanced by having a corps of European border guards.
Finally, it is important to consider financial burden-sharing. If we consider the eastern geography of Europe now that we will shortly be joined by the latest bunch of accession countries, we can see that whereas the German border will no longer be external for much of its length—except possibly on the northern sea coast—the Polish border with countries to its east will be extremely long. It is only right that countries such as Poland, which will bear a great deal of the existing brunt of border controls, should be helped financially by the EU as a whole, because it will be acting to protect the borders of the EU. There are other examples—not only from among the accession countries, although they will play an important part.
I hope that the people in Brussels will listen and say, "We will not go ahead with this". If they want to go ahead, I want them to advance arguments more persuasive than those that we have heard. In the mean time, the report points the way forward clearly and suggests that co-operation, rather than a corps of border guards, is the way forward for all European countries.
5.46 p.m.
Lord Wallace of Saltaire: My Lords, I suppose that I should declare some sort of interest as a former chairman of the sub-committee and as someone who realised as soon as the noble Baroness, Lady Harris, joined the committee, that she was clearly a potential chairman. As we would expect, this is an excellent report. I agree strongly with the balance of its conclusions.
We recognise from where the proposals come. The German Government are often in favour of stronger central control in this area. The German Government were in favour of a European federal bureau of investigation. From Chancellor Kohl's first speech on it in 1988, they have been in favour of a stronger Europol. There is a tendency within the German Government to assume that if everything is centralised under proper control, other people will do things in the proper, German fashion. There is also a bias within the Commission towards greater centralisation and supra-nationalism.

361
What emerges clearly from the report is that the case for that has not been made and that there are real advantages in local forces and local knowledge. We need Polish-Ukranian co-operation for the Polish border guards; as the Finns remarked in their evidence to the committee, Finnish-Russian co-operation also rests on detailed local knowledge. There are also tremendous problems, as I can recall Polish border guards telling an earlier delegation from the subcommittee, with paying people rates that are too high for the local economy. So a whole host of issues suggest that the proposal is premature.
However, the case for closer co-ordination, shared training, better exchange of information, common practices and a common manual is clear and has been well made in the report. The argument for a legal base, as set out in paragraphs 59 to 60, is also strong.
As the noble Lord, Lord Wright of Richmond, reminded us, the British approach to integration is always to stress the practical, but it has also often been to avoid the question of accountability. It is important that, as we move towards a co-ordinating unit, we ensure that it is accountable. Part of the problem with the third pillar is that it has been dominated by policemen, who love co-operating with each other but do not like other people to interfere with what they are doing. We need to ensure that mechanisms of accountability exist that can at least attempt to keep up with what they are doing.
We all recognise that this is an important and sensitive area for the United Kingdom. Indeed, our Prime Minister wrote to the Spanish Prime Minister just before the European Council that it is,
"one of the most pressing issues of our time, which is the issue of immigration and asylum and how we make the external borders of Europe more secure".
If that is the case, the British Government must ensure that they are making the most constructive contribution, not just demanding that others do more.
British ambivalence towards Schengen continues. There is even hypocrisy about the extent to which the British Government participate in Schengen. Having declared that they are opting out, they have opted back into most aspects of Schengen except border checks. That demonstrates one of the most unfortunate aspects of our Government: fear of admitting to the Daily Mail what they are doing, thus a willingness to pretend that immigration is all the fault of the French, that we are the only country in Europe threatened by immigrants and that therefore we stand alone against the dreadful Continent.
It is also increasingly difficult to justify Britain's reluctance to distinguish between internal arrivals in Britain, from within the EU, and those across its external border, particularly in airports and, I suspect, across our sea border. Previously, when the matter has been raised, the Government have always said that it would be too difficult and costly to make that distinction, and that they would have to re-model airport arrangements. The Government certainly ought to be planning for a distinction in terminal five between arrivals from outside
362
the EU and those from inside it. Our aim should be to operate as closely as possible with our Schengen partners, including bilateral co-operation with our neighbours on the other side of the Channel.
Rather more co-operation goes on with the French, Belgian and Dutch forces of law and order than is admitted to the press. Nevertheless, I found the evidence given by German border guards about how closely they co-operate with their French colleagues on the open Franco-German border a useful reminder that weakening your internal border controls does not mean abolishing your border checks. It would be better if the British Government were willing to talk more openly about how far they are co-operating with their colleagues.
There is a need for the Government to be more honest. First, they should admit that border controls cannot stop everyone getting through, so other measures need to be taken. Secondly, they should admit that Britain is not the only target of immigrants within the European Union. The noble Baroness, Lady Gibson of Market Rasen, remarked on the Portuguese experience, with Ukrainians and Moldovans in very large numbers. The Netherlands has also suffered from a rapid rise in the number of asylum-seekers and people trafficked into the country, as has Italy and, astonishingly, Greece. Over 10 per cent of Greece's population is from outside the country, which has been a real transformation over the past 10 years. We are not alone. Thirdly, they should admit that Her Majesty's Government already co-operate very closely with Schengen and that that is not a matter of national sovereignty. My noble friend Lord Roper has pointed out that when the Norwegians are leading one of the inquiries we should not be too concerned about centralisation and integration. If the Norwegians can do it, surely we can be a little more positive.
I suspect that the committee should also revisit the question of the UK's external border. The House of Commons Home Affairs Committee had some very interesting things to say about co-ordination among UK border forces. I notice reference to Customs-cutters different from the coastguard. We are very good in Dover, but I suspect that we are very bad in small ports. The reduction in the British Coastguard over the years has meant that yachts coming in and out of small harbours in the south-east and south-west of England can easily smuggle people and drugs from outside Europe. We need to look at how we handle our external borders more strongly.
The case for common funding is clearly very strong. The poorer new members that will handle the green eastern border deserve support. That is the sort of thing for which the EU budget should be used, rather than support for farmers in France, Britain and elsewhere. Her Majesty's Government should therefore argue for that.
There is a real difference between the green border on the east and the blue border to the south. In many ways the blue border is the most difficult one. The Royal Navy and others have already taken part in exercises in the Mediterranean on those attempting to enter the European Union illegally by sea.

363
The push factor from the south is, in the long run, much stronger. After all, the population of the Ukraine and Moldova is going down. The population of Libya, Egypt and Morocco continues to rise radically and rapidly. The push factor, as well as the pull factor, is one with which we have to be concerned. Therefore, the link between this issue and the broader issues of common foreign and security policy has to be recognised and ought to be given more attention and recognition by Her Majesty's Government.
When we look at the countries from which people have been trafficked—Sri Lanka, Ukraine, Moldova and Kashmir—we are talking about countries which have severe internal conflicts. It is not surprising that people want to get out and are willing to pay to get out if they have to. The case for a more effective common foreign and security policy is therefore strengthened by the problems that we face from the pressure to enter the European Union by desperate people from outside.
The pace of change is remarked on in this report. The pressures that we face from those outside to enter into the European Union will not lessen—that is, from desperate migrants, desperate asylum seekers and, of course, a few terrorists. I therefore suspect that this sub-committee will need to return to this issue—perhaps under a new chairman—again and again.
5.56 p.m.
Viscount Bridgeman: My Lords, I, too, am most grateful to the noble Baroness, Lady Harris of Richmond, for initiating this debate. The House must be also grateful for so many of the members of the committee taking the trouble to take part. Perhaps I may state from the outset that my party is satisfied with the present opt-out status of the United Kingdom secured at the Amsterdam summit. The UK is one of only two island states in the EU and advantage has rightly been taken of its geographical situation.
There are a number of reasons why we are unwilling at present to have a total association with a Schengentype union, of which I do not need to remind your Lordships today. To begin with, we are a particular focus for immigrants, whether asylum seekers or others, and we have a particular interest therefore in ensuring that the borders are as watertight as possible.
To take that analogy further, some borders are distinctly porous. Italy, through no fault of its own, with its long coastline has a particular problem, but there are others where the entry arrangements are not at all clear. The noble Lord, Lord Wright, drew attention to the Polish/German issue. The committee raised another point. We are told that the German border guard estimates that 50 per cent of illegal immigrants had entered from another Schengen country. Noble Lords should bear in mind that this is the existing relatively small group and not the Union as it will be as it is proposed to be enlarged. This debate rightly has addressed the problem, largely independently, about whether or not the United Kingdom is fully involved.
I am pleased to note that while new applicant states will be required to sign up to the full Schengen acquis, border controls between them and the existing
364
member states will remain until the Schengen Ministers are satisfied that adequate controls at the external borders are in place.
The report makes clear that the old-fashioned formal sense of border control now has to be strengthened both before arrival in the form of visa regimes and carrier liability, and after entry in the form, primarily, of the identity card system. That leads to the other complication for the United Kingdom; namely, that at present we are one of a small minority of states in the European Union where there is no statutory requirement for identity cards. Until that matter is sorted out, it is a bar to full Schengen participation. Those problems will be magnified as the borders of the EU are pushed steadily eastwards. We must remember that Romania and Bulgaria, for example, have applied for admission in 2007.
Since the tone of this debate has been one of constructiveness, let us turn to the matter of smoothing out what one might call the "porosity" of eliminating, as far as possible, those parts of the external borders where illegal entry is something of a "soft touch". Clearly, some form of common control and, indeed, common accountability is almost a prerequisite.
The latest council plan is a more realistic version than its predecessors, placing less emphasis on common legislation and financing, and referring only in what the committee described as "rather vague terms" to a later possible decision on the setting up of a European corps of border guards, which would support, but not replace, national border police forces.
That is a sensible and measured approach as far as it goes, but it is important to note that a number of the proposed measures are subject to precise deadlines. I refer in particular to the envisaged creation within five years of common units at sensitive land and sea borders, which sounds suspiciously like the first move towards border guards. I was pleased to note that the noble Baroness, Lady Harris, shares my approval of that measured approach. Such an approach adopts a sensible pace and I hope that the United Kingdom, from its special position, can observe it in its own time.
I do not have to reiterate my party's views on the draft constitutional treaty. Suffice it to say that any pressures from the Union to attack the current opt-out by the United Kingdom will of course be strongly resisted.
There are a number of initiatives under SCIFA-plus in which the United Kingdom is a participant. The noble Lord, Lord Corbett, has drawn attention to one or two of them. The UK also participates in Ulysses and Triton, which implements sea border controls in the Mediterranean, as well as in Rio IV, which is a Finnish initiative to improve border controls in designated parts of candidate countries. Will the Minister assure us that those initiatives will not form part of a creeping acceptance of Schengen by the back door?
The noble Baroness, Lady Harris, drew attention to the findings of the committee and primarily to the growing anomaly of maintaining internal controls while taking part in negotiations about external controls. She

365
also raised the whole question of the financial burden on the United Kingdom of keeping its internal controls. The committee noted that the Government had slightly underestimated the cost of that, while bearing their share of the cost of the external controls. The noble Baroness referred thirdly to the difference in status between the United Kingdom's immigration service and the more structured police forces of the border guards of member states of the European Union.
I support the measured approach that the report clearly endorses, despite the United Kingdom's exclusion from the latest initiative of the European Union. That is a disappointment, but despite that, we should proceed at a measured pace.
6.3 p.m.
The Minister of State, Home Office (Baroness Scotland of Asthal): My Lords, I warmly welcome the tone of the debate and I thank the noble Baroness, Lady Harris, for initiating it. It is timely. I know that the usual channels may have been a little slower than some would have liked in finding a spot, but I agree with the noble Baroness that the timing is felicitous as it enables us to widen debate in an appropriate way.
I commend the assessment of the noble Lord, Lord Wright, who described the report as being useful and well balanced. Indeed it is. I hope that I shall be able to offer certain reassurances in response to the concerns that noble Lords have outlined. I also commend the whole committee on the tireless way in which it has undertaken its work. I am pleased that so many of its members are present this evening.
The United Kingdom supports the move to improve co-operation at the EU's external border. An effectively managed frontier is in the interests of all member states. As the noble Baroness, Lady Harris, made plain, that can have a significant impact on reducing the numbers of illegal immigrants who arrive in the UK.
I reassure my noble friends Lord Dubs and Lord Corbett and the noble Lord, Lord Wallace of Saltaire, that we firmly believe that borders are best maintained by national border services, but that integrated work at EU level can deliver significant benefits. That is why my right honourable friend the Prime Minister proposed accelerated work at Seville and why we have actively participated in this area.
Therefore we do support the border agency, both in terms of what it is and what it should do. As the noble Baroness, Lady Harris, made plain, it does not pave the way for an EU border guard and as it will replace the Common Unit, it will not be an additional layer of bureaucracy.
The noble Lord, Lord Wallace of Saltaire, was right to say that accountability is extremely important. The EU border agency will provide a more accountable framework for operational co-operation within EU Council structures. It will also provide a more strategic and intelligence-led approach to the management of the EU's external border and will assist in the spread of
366
best practice. A single structure will enable intelligence and decision-making functions to work together more closely.
The United Kingdom has participated in around three-quarters of recent operational activities at the EU's external borders. We fully support projects which are intelligence-led, cost-effective and aim to strengthen vulnerable points on the EU border. We have contributed resources in the form of technical equipment, new technology and staff, and our intelligence capability and expertise is highly respected.
We want to continue that high level of operational co-operation with our EU partners in the framework of the agency. However, we do not agree with the interpretation of the UK's position as outlined in the agency proposal. Our participation is a matter for negotiation and ongoing discussion with other member states. The border agency's work is, of course, partly linked to the United Kingdom's position on Schengen. I know that I will give pleasure to my noble friends and to the noble Viscount, Lord Bridgeman, when I say that our position has not changed, and I hope that I will not cause too much disappointment for the noble Baroness, Lady Harris, and the noble Lord, Lord Wallace of Saltaire.
The Government are committed to active and effective co-operation where this does not prejudice our national frontier controls, which are a fundamental component of our immigration policy. We will continue to seek to maximise mutual operational co-operation in combating illegal immigration. The immigration liaison officers network, the mutual recognition of expulsion decisions and joint returns are all examples of measures to combat illegal immigration in which we have been able to participate effectively.
However, there are other elements of border management work in which it is not appropriate for us to participate. For example, it would be inappropriate for us to adopt the Common Manual in the United Kingdom, although I know that is something which the noble Baroness, Lady Harris, has indicated that she would very much welcome. The reason for that is that the Common Manual sets out guidance on the rules and procedures which apply to Schengen borders. The UK does not operate Schengen external border rules and use of the Common Manual would be inconsistent with our policies.
Perhaps I may turn specifically to the Question tabled by the noble Baroness, Lady Harris, which asks what legal controls and parliamentary oversight the Government believe should apply specifically to new European Union structures for co-ordinating border management and to joint operations between member states.
The EU border agency is a new structure for coordinating border management and joint operations between the member states and that proposal is rightly subject to domestic parliamentary scrutiny. The Government believe that the agency must have a clear line of accountability, reporting within the existing EU

367
Council structure and informing the European Parliament of its activities. In carrying out its tasks, it should follow the strategic direction set by the Council.
The agency will be able to recommend joint operations and will consider member state proposals. However, it will not be able to insist on an operation taking place without the consent of all states involved. I hope that I can reassure the noble Viscount, Lord Bridgeman, by saying that operations will take place, as at present, in line with both national and international law. The relevant national law of the territory in which the operation is being carried out will apply. Under national laws, there are sanctions and penalties in place for those who exceed their powers in the execution of their duties. All officers are also fully accountable to their own national service. International law has been and will be strictly adhered to, as was demonstrated in Operation Ulysses, which the noble Lord mentioned in his remarks, when participants complied with international maritime law while on the high seas. I can reassure noble Lords that this is not a slippery slope; it is a very clear direction.
Additionally, specific rules are clearly set out before each operation takes place, and participating officers are made aware of the national law with which they must comply. The arrangement works well and there is no need for separate legislation.
We have now come to the end of the first phase of developing integrated management of the EU's borders. During this time, we have been carrying out joint operations at external borders. It has been a learning experience, and some operations have been more successful than others. But the indications are that the projects and joint operations have been worth while. This is not just in terms of building relations with our EU partners and near neighbours but also in delivering real, practical results. I assure my noble friend Lord Corbett that the Government will not walk away from their responsibility.
368
In addition to the initiative about which my noble friend has spoken, another example is the two parts of the UK-led Project IMMPACT, which achieved widespread international recognition for its efforts. The United Kingdom made significant resource commitments to the project, which aimed to stem flows of irregular migrants through the western Balkans into the EU. During the first 12-month phase, which ran until September 2002, the number of potential irregular migrants passing through Sarajevo airport en route to the EU was reduced by 95 per cent in comparison with the first eight months of the year.
The second part of the project, which took place in the latter half of 2003, built on this success by establishing a consistent regional approach for border management in both Serbia and Montenegro. The six-month joint EU project delivered specialist immigration training to more than 1, 400 officers through 100 training sessions. This has laid the foundations for greater trust and effective working relations. So the agency will add value by providing a more co-ordinated focus for such joint operations. It will also take on the important function of evaluating the operations. Projects and operations are not the only way in which we co-operate with our EU partners on border management issues.
My noble friend Lady Gibson of Market Rasen gave us a very practical explanation of why these measures are so important and outlined the sort of issues that we must bear in mind. Other important work, such as sharing intelligence and joint risk analysis, will also be co-ordinated by the agency.
We look forward to being able to continue to work effectively with our EU partners in tackling illegal immigration, because it is in our mutual interests to do so. If the tone, nature and content of what has almost been a unifying debate is anything to go by, I think it augurs very well for the way in which we will work together in the future.
House adjourned at thirteen minutes past six o'clock.