Westminster Hall Sitting of 27 November 2002

Preamble
[SIR ALAN HASELHURST in the Chair]

Equitable Life
Motion made, and Question proposed, That the sitting be now adjourned.—[Mr. Jim Murphy.]
9.30 am
Dr. Vincent Cable: I am grateful for the opportunity to introduce this debate on Equitable Life. Today's debate is the third on the subject, but I make no apologies for returning to it. The company has about 800,000 policyholders, many of whom have suffered severe loss—and many of them are my constituents. I return to the subject not simply to rehearse the old arguments but because there are good reasons to believe that the society's position is deteriorating badly and that the future of the society may be in doubt. I am not financially qualified to judge whether that is the case, but those who read the financial pages of the national newspapers will know that there is a great deal of speculation about the society's basic solvency.
I welcome the fact that the Financial Secretary to the Treasury is here. When she had her well deserved promotion a few months ago, she took this portfolio with her. I do not know whether that was an act of gallantry on her part, or whether her colleagues believed that she was the only person who understood financial services matters, but I am glad that we have a Minister here who understands what Equitable Life is about.
Mr. Stephen O'Brien: None of the other Ministers wanted to touch it.
Dr. Cable: That is a plausible explanation.
Because we have debated the subject before, I do not need to rehearse its history. Much of the information is available in the report of the Select Committee on the Treasury and the Baird report as it applies to the work of the Financial Services Authority. It will be useful to start by chronicling the key episode that led to the crisis three years ago—the House of Lords ruling and the realisation that the society had liabilities to its guaranteed annuity holders of £1.5 billion for which it had put aside only £50 million, later raised to £200 million. The society was hopelessly ill-prepared.
It quickly became apparent that it was not simply a stroke of bad luck but that it involved an extreme degree of negligence and mismanagement. Much of the subsequent debate, including today's debate, revolved around who was responsible. The current management rather graphically summed up the problem a few days ago, when the chief executive said that Equitable Life was a high-risk company operating in a high-risk manner but that no one seemed to have noticed. It certainly was not noticed by the management, who led it into that crisis. Nor was it noticed by the auditors Ernst and Young, who cheerfully signed off accounts that bore a passing resemblance to Alice in Wonderland.
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It does not appear to have been noticed either by the regulators—the Department of Trade and Industry until the beginning of 1999, then the Treasury and lastly the Financial Services Authority.
The reason for returning to the subject is that the position has deteriorated. That is partly because financial markets generally have deteriorated. There has been a fall at the stock exchange, and all those who have investments in money purchase schemes or endowments will be painfully aware of the cuts in terminal bonuses. However, the position in Equitable Life is significantly worse than in other societies. Its with-profits fund has lost about half its value. It is not only that people have lost their bonuses; they are locked into the society through exit penalties.
Within the last few weeks, we have heard several indications that the position is even worse than was hitherto realised. The first major indication, which came at the time of the interim statement, was the big cut in the payments made to about 50,000 of the society's annuitants. That is especially significant because annuitants, unlike other policyholders, cannot leave. They are trapped in the society. They face a situation in which they will lose up to 30 per cent. of their pensions, and many of them are pensioners in their 70s. A pensioner who received £500 a month on an Equitable annuity may in future take home only £375, which shows what a big cut there could be in people's income.
On top of that, there has been growing speculation about the basic solvency of the company. I talked to the management of the present company after the changes in December 2000 when it was closed to new entrants and the current rescue operation was under way. I was told that insolvency was hard to achieve in an insurance company, unlike in manufacturing companies. It is rather difficult to get into a position where one's liabilities are fundamentally greater than one's assets, because insurance companies have the option—in this case, the company has already taken it—of cutting bonus payments more or less indefinitely. In addition, they can resort to the measures that Equitable Life has already taken, such as moving most of their assets from equities into securities.
None the less, it was argued explicitly in The Sunday Times a few weeks ago, although Equitable Life subsequently disowned the article, that the company had breached its capital adequacy ratios as set down by the FSA—the 4 per cent. margin over solvency—at least once. The society has denied that, but it acknowledges that its insolvency margin is "uncomfortably thin". That is a matter of concern in itself but it is compounded by the fact that a great deal of risk still hangs over the company. Risk on liabilities results from the fact that there are many—about 800,000, but that number could rise—claims on the company from mis-selling. There are also risks on the asset side, partly because the company still has equities, but also because of what might happen this afternoon when the Chancellor speaks.
Most of us expect that the Chancellor will tell us that the Budget position is nothing like as healthy as it was and that there will be substantial additional Government borrowing. If the Government borrow heavily in the gilts market, bond yields are likely to rise and gilt prices will fall. The portfolio that Equitable Life has assumed, now heavily laden with bonds, will deteriorate in value, which will pile an asset risk on the

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other risks run by the company. The policyholders are confronted with an openly discussed and debated possibility of insolvency, perhaps leading to the company's going into administration.
We benefit from having recent comments from the Financial Services Authority as to what administration might mean in the case of Equitable Life, and they are pretty grim. To some extent the territory is uncharted, but it could be exceedingly messy. There is enormous uncertainty about it, but there could be large legal fees. The prospect is very grim for policyholders. At least theoretically, they are protected by an insurance policy protection scheme run by the industry, but that is pretty minimal and would strip away most, if not all, of the bonuses that they have acquired. Annuitants would find that they were no longer paid. Life cover would cease. Savings contracts would be terminated. Those people with savings in Equitable Life would almost certainly lose most of them. That is clearly a fate to be avoided.
I now come to the two questions of what should be done and who is responsible for the mess. Is it possible, even at this late stage, to contemplate rescuing Equitable Life—that is, heading off the risk of insolvency. When, 18 months ago, I raised the possibility of a lifeboat operation to rescue Equitable Life, the industry and, I think, Ministers contemptuously dismissed it as something that was beyond consideration. I think that the situation is now sufficiently serious for serious people in the City to consider that option, although I do not know whether they will do it. However, we should think about the issues involved in that and whether it should be openly advocated.
The reasons why there is a wider interest in saving Equitable Life and not treating the case as that of an unfortunate company without implications for others are as follows. The industry's reputation has been terribly damaged by Equitable Life. It was the oldest and most venerated company in the industry. Many people put their money into Equitable Life, not as a high-risk, speculative investment, but because it was considered fundamentally sound. Those people have been terribly disappointed, and people's confidence in investment products, particularly pensions, has generally been undermined by Equitable Life.
Richard Ottaway: The hon. Gentleman has spent the last 10 minutes talking about the grim outlook. I draw his attention to matters that relate to the Government and to how they can get involved. The industry was regulated, the Department of Trade and Industry and the Treasury were involved, and there was guidance from the Treasury saying that the Equitable was conducting itself acceptably. Despite that, however, in three days the House of Lords reached the conclusion that its practice was not acceptable. If the Government, as a regulatory authority, take such a stance, surely they have some degree of responsibility in the matter.
Dr. Cable: I am coming to that point. The purpose of the Penrose inquiry is to investigate such matters, but the hon. Gentleman's key point must be right. In the period up to 1999, when it was clear that inflation rates
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were falling and that many of the assumptions on which guaranteed annuities were based were being undermined, at no point, it would appear, did the regulators advise Equitable Life that it had to make much greater provision for those guaranteed annuities. Prima facie, serious negligence was involved.
From the industry point of view, there is clearly an interest in preventing Equitable Life from going bust. There is probably also an interest from the Government's standpoint. I believe that we shall get the response to the Pickering report in a few days' time. The Government's pension policy hinges on millions of people being able to provide for themselves. From experiences in our constituencies, we know that hundreds of thousands of people are losing their defined benefit final salary schemes. In many cases, their only option is to go for a money purchase scheme like the Equitable Life products, which have been terribly undermined. Any coherent attempt by the Government to plan a savings strategy for the future has to confront the loss of confidence that the episode under discussion has entailed.
When I first raised the issue of a lifeboat operation, the City and insurance industry response was, "Why should we bail out one of our competitors?" Equitable Life is of course no longer a competitor, because it is not taking new policyholders. There was also concern that there were large black holes in the company. Most of those have been identified, however, if not finally plugged. Also, there have been precedents. Some 15 years ago, a company called Iala was bought by the insurance industry as a way of heading off an insolvency situation.
I am not necessarily suggesting that the Government bail out the company. Having chastised the Secretary of State for Trade and Industry for finding £660 million for British Energy, I am not about to suggest that the Financial Secretary do the same thing for the insurance industry. None the less, I think that the Government have a responsibility to orchestrate an attempt by the industry to provide what would probably be very limited amounts of lines of credit or guarantees, in order to prevent the insolvency ratios from being breached. I hope that the Minister will respond a bit more constructively than she has in the past.
I now come to the issue of the responsibility of the Treasury and other Departments in this matter. The hon. Member for Croydon, South (Richard Ottaway) has made the point that, prima facie, during the long periods in which the economic basis of annuities was being undermined by lower inflation, the regulator failed in its duty—it did not recognise that a risk arose from guaranteed annuities and it allowed the company to continue to sell unguaranteed annuities without giving a clear warning about the risk that that entailed for the company.
The Government's response was to set up the Penrose inquiry. Some of us welcomed that at the time, but everybody concerned has been disillusioned by the exercise.
Mrs. Annette L. Brooke: Does my hon. Friend agree that the reasons for the delays to date should be clearly published and that, for the future, deadlines and milestones should be

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imposed? If those are missed, the reasons for that, too, should be published so that those who are suffering as a result of the debacle know what is going on.
Dr. Cable: My colleague makes a good point. It is unfortunate that deadlines and milestones were not included when the inquiry was established. I understand that Lord Penrose is still deeply immersed in his work. He has been given 500,000 pages to read by Equitable Life. I have no doubt that he is a speed reader, but people who have talked to him believe that he might well take at least another year to complete the work. That is hopeless from the point of view of the policyholders. What is emerging is an epic PhD thesis, not a snappy investigation into the fundamental causes of the problem, as far as the Government are concerned.
Will the Minister clarify where Penrose is leading? When the inquiry was launched she received credit for producing a rabbit from a hat, but it is becoming a nightmare. It is not producing results within any reasonable time frame. It is not even independent— although it is being conducted in an independent way, when material comes back to the Minister, she is not obliged to publish it. Will she at least give us some indication that an interim report will be published as soon as possible?
The other agency involved in the matter is the Financial Services Authority. Its record as a regulator has already been exhumed by the Baird report. I was intrigued by a reference to it in a recent press statement, which said:
"The City watchdog has announced it is backing troubled insurer Equitable Life and will not be asking for the firm to be wound up."
What is meant by the FSA backing Equitable Life? Presumably it is not backing it with money, so what backing is it giving? It is a regulator and has ongoing responsibility. What is it doing in that role?
My last point concerns the parliamentary ombudsman. Her function is not the direct responsibility of the Minister, but it provides hope to many constituents. What is happening? Some 250 cases have been referred to her office, probably by all of us here. One of them has been being investigated as a test case for the best part of a year and we are not yet close to seeing a resolution to that inquiry.
I am in correspondence with the Minister about whether the ombudsman's inquiries are being retarded or undermined by the delays in the Penrose inquiry. However, we seem to be at cross-purposes: the Minister asserts, rightly, that the investigation now being undertaken by the ombudsman into a case relating to mismanagement in the period 1999–2000 is not being impeded—it is not clear why it is delayed, but it is not due to the delay in Penrose. My point is more fundamental. The ombudsman cannot pursue the many cases before her without understanding the whole pre-1999 period, and it is clear that the delays to the Penrose report are seriously obstructing investigations.
Mr. Mark Field: I entirely endorse what the hon. Gentleman says. My understanding is, however, that the ombudsman's
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inquiries have been stayed pending the resolution, in any form, of the Penrose inquiry. What does the hon. Gentleman say about that?
Dr. Cable: I think that I have partly answered the point. The fact that the Penrose report is not available is a serious impediment to the progress in the bulk of the ombudsman's inquiries.
Richard Ottaway: Let me take up the excellent point made by my hon. Friend the Member for Cities of London and Westminster (Mr. Field). Is not the important point that the ombudsman reports to Parliament, while Penrose reports to the Government? If the reports that we have heard are true, it would be utterly inappropriate for the ombudsman to hold back from reporting to Parliament while she waited for a report to be made to the Government.
Dr. Cable: Well, it would certainly be very unfortunate for those of our constituents who are waiting for her report. Perhaps the best way of answering the hon. Gentleman is simply to quote what the previous ombudsman said a few weeks ago. He was very explicit:
"As far as events before 1 January 1999 are concerned, the position remains that the Ombudsman intends to await the outcome of Lord Penrose's Inquiry before deciding whether intervention would be useful."
That is very clear, and the implication is that the ombudsman can do absolutely nothing for at least a year and possibly longer.
To conclude, I want to draw further on the former ombudsman's statement, because it raises issues for which the Minister is accountable and for which she will have to answer. Before he retired, Sir Michael Buckley was under attack for not acting more expeditiously on the cases that we are discussing. In a press notice, he was quoted as saying:
"I do not agree with the critics. It seems to me plainly inefficient, and potentially unfair, to have two simultaneous but separate investigations covering much the same ground and taking evidence from much the same sources."
The press notice continued:
"The Ombudsman added that he had drawn the attention of the Select Committee on Public Administration to what he saw as the root cause of the problem".
I shall read the next sentence carefully because the Minister must answer the point that it raises. The press notice added that the then ombudsman identified the root cause as
"the failure of the authorities to establish at the outset a single inquiry with terms of reference covering all aspects of the Equitable Life affair."
It is clear that he meant the Treasury and the Minister when he referred to "the authorities". I hope that the Minister will give an effective response to that strong rebuke, because the ombudsman acts on our behalf and that of our constituents.
9.52 am
Mr. Mark Lazarowicz: I congratulate the hon. Member for Twickenham (Dr. Cable) on securing the debate. The subject is of deep concern to many constituents who have contacted me over the past year.

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I must declare an interest, although it is fairly marginal. I have a term life policy with Equitable Life that has only a couple of years left to run. The irony is that I probably would not have had to declare it a year ago, when the issue was the with-profits fund. Now, however, the problem extends from the fund's viability and the interests of fund policyholders to the viability of the whole company. I now have an at least theoretical interest in the issue, which demonstrates how the problem has grown from one that could have been managed, albeit with difficulty, to one with much wider ramifications. The extension of the problem demonstrates the seriousness of the situation and the need for action even at what might be described as the eleventh hour.
I shall make only a brief contribution. I agree with most of the comments made by the hon. Member for Twickenham. The failure of the regulatory agencies to take action at an early stage has created a crisis. If the governmental and non-governmental bodies that have a role in regulating the financial services industry had taken a more proactive role earlier in the crisis, it would have been easier to manage; now it will be much harder.
I endorse the view that although a rescue package of some sort may now be much harder to put together, there is a strong case for such a package and for the agencies involved, including the Government, to take an active role in putting it together. That rescue package, or lifeboat, is needed now. We cannot simply wait for the conclusion of the Penrose inquiry. I agree with the hon. Member for Twickenham that it may take several months for that inquiry to come to a conclusion. In the meantime, the possibility of insolvency becomes greater, and not only will policyholders lose out but there will be a knock-on effect on the pensions and savings industry as a whole. The entire culture that encourages people to save and invest in their pensions will be seriously jeopardised. The hundreds of thousands of people who work in the financial services industry will also be affected. Many of them live in my constituency, where the industry is the biggest private sector employer.
For all those reasons, I ask the Minister to assure us that the Government will take a proactive role in resolving the crisis, even at this late stage, and to encourage the establishment of some form of rescue package, as the hon. Member for Twickenham suggested.
9.56 am
Mr. Mark Field: I congratulate the hon. Member for Twickenham (Dr. Cable) on securing this important debate, the third that we have had on the matter. Next to me sits my hon. Friend the Member for Christchurch (Mr. Chope), who introduced a debate on the subject this year. I fear that we shall need to debate the matter again in the months and years ahead.
Pensions are a highly technical matter, but the problems surrounding Equitable Life and other pension schemes are human. The hon. Member for Edinburgh, North and Leith (Mr. Lazarowicz) rightly pointed out that a significant number of jobs are at stake in his constituency. My constituency contains the City of
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London, where the pensions and insurance industry has an important part to play. All hon. Members must have received letters on the subject of Equitable Life, which may not exactly have filled our mailbags but have come in a drip-drip approach over the past year or so. Several of my constituents are in desperate straits. That especially applies to elderly folk, from whom I have received a great number of impassioned pleas regarding the uncertainty about Equitable Life.
Like the hon. Member for Twickenham, I was especially concerned by recent announcements. We seem to have reached a crossroads. The fact that existing rather than simply future pensioners find that there are cuts of 30 per cent. in their annuities shows that we have reached a fateful point in the history of Equitable Life. It comes as no surprise that the business pages of last weekend's newspapers talked about the stampede to the exit in Equitable Life. I shall return to the issue of confidence in a moment.
Last June, shortly after my election, I wrote an article in the national press, saying that the real fear was that the crisis in Equitable Life might be the first of many similar high-profile crises in the sector. Some issues may be specific to Equitable Life, but I fear that they may not be quite as unusual as we have been led to believe. The problem has all the ingredients for a major collapse in confidence in the savings industry.
The sorry tale of what happened in Equitable Life has been well documented, but I know that my hon. Friend the Member for Eddisbury (Mr. O'Brien) will go into some detail later, but before the Financial Services Authority took over responsibility for insurance industry regulation in January 1999, those duties rested with the Treasury and, before that time, with the DTI.
During the crucial period to the end of 1998, Equitable Life advertised and sold annuities without adequate reserves and without informing new savers of the vast pre-existing liabilities. That continued after January 1999, under the auspices, by that stage, of the FSA, until December 2000, when the House of Lords decided that Equitable was obliged to honour its guaranteed annuities in full. I have great sympathy with the Financial Secretary given the situation in which she and the Government find themselves, but they cannot wash their hands of responsibility for the fate of many of those with-profits policyholders who are now trapped.
The way forward is to end the obfuscation and delay that have been integral to the developments of the past 16 months, since the launch of the Penrose inquiry. The Treasury must now be open and honest about its role in the Equitable crisis. I have submitted many of the 253 outstanding ombudsman inquiry notifications, all of which have been stayed since August last year and the launch of the inquiry. I hope that the Financial Secretary will be able to suggest a timetable today. Her protestations in the national newspapers earlier in the year, when she said that Lord Penrose's investigations should be conducted in the due course of time, will fail to inspire confidence, and that will have an effect well beyond the issue of Equitable Life. That is one of the main concerns: the problems in the pensions industry as a whole are crucial to the way in which we proceed. The issue goes beyond the issues that relate specifically to Equitable.

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Several of my constituents who are with-profits annuitants put their case succinctly. First, the Government have forced pensioners to take out annuities by the age of 75, which is yet another reason why the Conservatives are keen to end the strict rule. Secondly, Equitable Life annuitants were unaware, in taking out their policies before December 1998, that there was any potential problem. Thirdly, to save the company, those very annuitants, who are often relying on relatively small incomes to enable them to live happily in retirement, voted for the compromise agreement a year or so ago, thus depriving themselves of any right to sue for mis-selling. Yet those same annuitants are now unable to transfer to another provider, and their income is therefore reduced dramatically—perhaps even terminally. Many of them are worried sick. Realistically, they will be unable to build another pot of capital for their retirement. The sheer uncertainty over what is to come in the months and years ahead is the killer.
There is clearly a crisis of confidence in the entire pensions industry. I do not necessarily blame the present Government more than others for that, although, if I dare talk in such terms, £5 billion raids in 1997 clearly did not help. However, the issue should be beyond party politics. What message will the Government now put out to young folk who might want to save for the future? Most people of my generation, and the Financial Secretary's—she is at least two or three years younger than I am—take the view that there is little point in buying shares, given the depressed stock market, or investing at this stage in any sort of pension. In London the property market is overheated, and that is where most young and middle-aged folk are putting much of their money. There is a real reason for the Government to try to restore confidence.
The Government must grasp the nettle and take responsibility in relation to Equitable. There is little doubt that they will have to pick up the pieces in the end anyway, so why not do so now instead of delaying? The hon. Member for Twickenham rightly used as an analogy the secondary banking crisis in 1974, which required the Treasury to lead the way with a lifeboat-type rescue. My fear is that failure to act now will do great damage to the whole pensions and insurance sector, and that that damage could take a decade or more to rectify. There is little doubt that the Financial Services Authority lacks the authority shown by the Bank of England, for example, in its work almost three decades ago during the secondary banking crisis to which I referred. The Government now need to act in the national interest, because the problem extends well beyond the business of insurance and pensions, to ensure that we get the matter right.
10.5 am
Annabelle Ewing: I, too, congratulate the hon. Member for Twickenham (Dr. Cable) on securing this important debate. The number of hon. Members attending the debate shows the importance that we attach to the debacle that is the Equitable Life saga. I want to declare an interest, although I am not entirely sure whether I am any longer required to do so, because I did have an Equitable Life pension plan, but I recently transferred its dwindling value to another pension fund.
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Many of my constituents, however, remain policyholders with Equitable Life. Their bonuses have been eliminated, their policies have been substantially reduced in value and they are facing an extremely uncertain retirement. The key fact that my constituents want to know is whether there was a regulatory failure. If there was, that would constitute a failure by the Government, because the DTI was the previous regulator, followed by the Treasury, and now the regulator is the FSA. Furthermore, if there was a regulatory failure, are my constituents entitled to compensation as a result?
My constituents are also extremely unhappy about the way in which the investigation is being carried out. As the hon. Member for Twickenham mentioned, the inquiry by the parliamentary ombudsman into the complaints that have been raised has been put on hold pending the outcome of the inquiry set up by Lord Penrose. My constituents are dismayed by the continuing delay in the reporting of that inquiry, and I hope that the Minister will shed some light this morning on what on earth is happening. Will the Minister give us a ballpark estimate of when we may expect the inquiry to report? I understand that the report will be submitted to the Treasury, but will she also say whether the full report will be made public? Equitable Life policyholders have a direct interest in knowing whether they will be able to see and consider the report, when they have had to wait for so many years for any action to be taken.
I should also like to comment on the remit of the parliamentary ombudsman. I do not want to revisit history and cover the background to the decision regarding the period from January 1999 to December 2000, but I understand that there have recently been calls for the Government to consider whether the remit is too narrowly drawn, in the light of the regulatory history of Equitable Life.
I should also like to say something about the role of the prudential regulator. A regulator is not subject to some sort of best efforts standard. A regulator in the financial services industry is subject to various legal requirements. Have those legal requirements been met? It is not totally clear on what basis Equitable Life has been authorised, in terms of how the EC law regime applies to it. Either it falls within direct EC single-market financial services directives or it falls within the general EC treaty regime. In either case there are implications for the United Kingdom Government as regulator. Will the Minister tell us her understanding of the implications for Equitable Life of EC financial services law? I suspect that that angle has been overlooked, and therein lie potential remedies for policyholders who feel that the Government, as prime regulator, have not properly protected their interests.
As to recent developments, I wonder how long Equitable Life will be allowed to continue to trade when it is failing to meet the solvency requirements that are legally incumbent upon it. Presumably, the fact that it can continue to trade although it is not currently meeting some solvency requirements means that it has a transitional exceptional derogation from the general rules. However, by definition, a transitional exceptional derogation cannot go on ad infinitum. What will the Financial Services Authority be required to do should Equitable Life continue to be in breach of the solvency rules applicable to it in the medium to longer term?

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The situation is getting worse daily and is deeply damaging to the reputation of UK-authorised financial institutions, including, as the hon. Member for Edinburgh, North and Leith (Mr. Lazarowicz) said, the excellent Scottish-based institutions in major cities in Scotland. It is in no one's interests for this debacle to drag on and on and for the Government to allow it do so. I hope that the Minister will reply to the questions that I and other hon. Members have asked in the debate because our constituents want answers to those questions.
With respect to Government policy, I wonder how the Government handling of this matter squares with their stated objective of encouraging people to plan for their retirement. Is there not a danger that the longer the situation drags on, the less attractive it will be to take out a pension? That cannot be in the Government's interests as it would defeat their approach to pensions policy.
10.12 am
Mr. Christopher Chope: It is a pleasure to follow the hon. Member for Perth (Annabelle Ewing). I hope that the Minister will give an unequivocal answer to her key question: when the Penrose report is eventually published, will it be published in full? If the Government were to give such an assurance, it would allay some of the concerns of a public who are increasingly sceptical on the issue. A subsidiary point about an interim report was made by the hon. Member for Twickenham (Dr. Cable), whom I congratulate on raising the matter again. Penrose has taken a lot longer than the Minister expected. I remind her that last year she said:
"I expect Lord Penrose to report as soon as he thinks that he is able to, which I hope will be some time next year."—[Official Report, Westminster Hall, 17 October 2001; Vol. 372, c. 258WH.]
That refers to 2002. We now know that the report will be much delayed—beyond this year—and I hope that in light of the Minister's earlier hopes she will say that it would be sensible and prudent to have an interim report from Lord Penrose. That would enable people who are waiting for the outcome of the report to know the present position.
I want to comment on the ombudsman's report because it was a great relief that the ombudsman, having initially decided that he was not going to start an investigation until after Penrose, relented in October 2001 and said that he would start an investigation into the two years 1999 and 2000. We are much concerned by the delay in the publication of that report and hon. Members have had correspondence with the ombudsman about the reasons for that delay. On 24 October I received a letter from the deputy parliamentary ombudsman stating that the investigative fieldwork—the examination of papers, interviews with officials and so on—had been completed but he still had to analyse the information obtained to establish precisely what took place, as opposed to what should have taken place, and then translate the result into findings for the ombudsman's report. He said that the change of ombudsman from Sir Michael Buckley to Ann Abraham might cause some delay. I wrote to Ann
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Abraham to congratulate her on her appointment and to ask her to update me on progress, but I have yet to receive a substantive answer. Let us hope for an early resolution of this part of the inquiry. A clear finding from the ombudsman would encourage the Government to respond positively to recommendations, which would then free up the ombudsman and her staff to start the inquiry into the wider period of regulatory failure.
I drew the ombudsman's attention to another matter—the more than anecdotal evidence that Treasury and other officials had blocked the inquiry's progress. I felt that Members should know the response of the deputy parliamentary ombudsman to those allegations, but he wrote:
"It also would not be helpful for me to comment on rumours related to the other matters you raised."
That is hardly the rejection of the rumours that might have been expected from the deputy parliamentary ombudsman. Are the rumours wholly unfounded? We are worried that the Treasury never wanted the ombudsman to start an investigation parallel with Penrose and has blocked the progress of the inquiry.
Another important issue is the role of the Select Committee on the Treasury, which has an important part to play. An inquiry was started, but then stalled to wait for the outcome of Lord Penrose's report. I tabled early-day motion 1053, which was signed by well over 100 colleagues from all political parties. Published on 21 March 2002, it drew attention to fears that Penrose would take much longer and that the report would drag on into next year. I argued that that was why the Treasury Committee, with its considerable powers, should immediately resume its investigation into regulatory failure.
The Chairman of the Treasury Committee tabled an amendment to the early-day motion, stating that his Committee
"would be concerned if Lord Penrose was unable to complete his report in 2002; and notes that the Treasury Committee decided in January 2002 to continue its inquiry when Lord Penrose has reported."
We now know that Lord Penrose will not report in 2002 and that the Treasury Committee Chairman is worried about it, so I hope that that Committee will immediately resume its investigation into this matter. It has tremendous power to call witnesses and it should not sit back, waiting another year before Penrose produces the report. The Minister will doubtless encourage the Treasury Committee to reopen its inquiry and will cooperate with it in respect of any decisions that it takes.
In today's press—I am looking at page 56 of Money Mail—an article states:
"While policyholders suffer death by a thousand cuts, the Government and regulators both shrug their shoulders in a 'Not me, guy' fashion … Equitable policyholders are right to be angry with a Government that splurges money on any politically correct cause, yet refuses even to consider engineering a rescue package for them … Equitable's policyholders are victims of mismanagement, lies, mis-selling, misinformation, financial manipulation and downright incompetence. It's time the Government and the Financial Services Authority organised a rescue."
I could not have put it better myself.
10.19 am
Dr. Richard Taylor: Like other hon. Members, I am grateful to the hon. Member for Twickenham (Dr. Cable) for giving us a chance to debate this subject. From the figures, each hon. Member can expect about one per 1,000 of their constituents to be affected; certainly, we have all received several letters. I am also glad that the hon. Member for Cities of London and Westminster (Mr. Field) said that the subject was complicated. To a mere retired doctor, it is almost unfathomable. I have therefore come to listen and learn, to ask questions and to stress those that have already been asked by constituents who are annuitants—the elderly, the desperate and the hopeless who have hardly dared write to me because they cannot see a way through.
I want particularly to refer to a retired chartered accountant whom I know well. He has been a respected member of his profession, and has been involved in looking after people's financial affairs and giving them advice. He chose Equitable Life as it was the market leader at the time. His gross pension, which is his main income, has dropped from £14,547 by £3,000. Other people have lost similar amounts. The problem is huge, and the ordinary person is short of weapons to fight it.
Please do not think that I am criticising the parliamentary ombudsman, Mr. Deputy Speaker, but the cases that I have tried to refer to him, which have covered several different issues, often fall outside his remit because of certain restrictions. In this case, he is allowed to examine only cases that fall between 1 January 1999 and 8 December 2000.
Enough has been said about the Penrose report, so I shall wait to hear the Minister's comments on it. There was some confusion in a recent House of Lords Question Time about that report and its influence on the ombudsman.
I shall ask a few specific questions, some of which have been asked before but need re-emphasis. What redress has the ordinary annuitant against the company and the Financial Services Authority, which, in the words of one of my constituents, must have been asleep at the wheel? Are such annuitants like the unfortunate employees of a large engineering firm in my constituency that recently went into receivership? The members of the pension fund will find themselves right at the bottom of the list of those who receive payment if the company is wound up. Small points that rankle tremendously are the bonuses that the executives received earlier this year and the generous pay-off for the finance director, who recently resigned.
Yesterday, The Guardian referred to the fact that Norwich Union had held talks with the Inland Revenue about the potential transfer of individuals to its books. I quote:
"But Norwich Union said yesterday that although technically possible, any transfer would only be beneficial to policyholders if there were a change in revenue rules to allow it to offer better terms to Equitable's annuitants."
I hope that the Minister can tell us that hope exists there. Can the Government give any other hope to the annuitants?
10.23 am
Norman Lamb: I add my congratulations to my hon. Friend the Member for Twickenham (Dr. Cable) on securing the debate. He presented a clear and lucid analysis of the key issues that have caused so much concern to so many people.
Before I continue, like the hon. Member for Perth (Annabelle Ewing) I should declare an interest. I, too, have just completed the transfer of a pension policy from Equitable Life—
Mr. Deputy Speaker (Mr. John McWilliam): Order. I doubt very much that more than one or two Members of Parliament would, because of their dealings with Equitable Life, have to declare an interest in it.
Norman Lamb: Thank you, Mr. Deputy Speaker. I was going on to say that in a sense I have suffered the same dilemma as many others over the past two years. I have been one of the fortunate ones, however, in that I do not have all my eggs in one basket. The scale of my loss has not been as great as for many others. However, as the hon. Member for Wyre Forest (Dr. Taylor) pointed out, those who put all their eggs in that one basket face disaster. We must keep in the forefront of our minds the extent of the distress and hardship that has been caused to so many people as the scandal has unfolded.
Anxiety is now being increased by speculation about insolvency. The company continues to stress that it remains solvent and that at present it does not appear likely to become insolvent. However, that could change. If the with-profits fund shrinks further, the company's room for manoeuvre could disappear and we would then be in uncharted waters. There is great uncertainty as to how the liquidation of a life company the size of Equitable Life would work, and there is no reason to believe that insolvency would in any sense lead to stability.
The case of the life company Oak Life may be instructive. It had just 5,000 policyholders, compared with Equitable Life's 800,000. It went into liquidation in 1993. Almost 10 years later the liquidation continues, and 600 policyholders have still not received their policies. When their compensation eventually arrives, it will be based on policy values frozen way back in 1993. That is a deeply unattractive scenario.
Perhaps the most immediate and serious problem would be for those annuitants currently in receipt of payments. The liquidators could stop all payments until it could be determined who was entitled to what share of the assets. That would spell disaster for many pensioners who rely absolutely on such payments.
Clearly, if Equitable's board decides at some stage to go into administration, the consequences would also be deeply damaging for policyholders. There would obviously be competing claims on the fund, and the administrator would have to be careful to avoid paying out too much to, for example, annuitants. The costs of administration would be vast. The company estimated them at some £100 million, which inevitably would come out of policyholders' funds.
At present, some independent financial advisers appear to be indulging in some fairly disreputable activities, thereby increasing and exploiting the anxieties

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of policyholders. They seek to pull policyholders away from Equitable Life by tactics such as using papers that appear to come from Equitable Life. Such activities must be investigated. There is no reason why IFAs should not seek to persuade people to invest in particular products, but it is important that they do so in a reputable way.
I am conscious that there are several current and potential legal actions; for example, actions by Equitable Life against former directors and against its former auditors, Ernst and Young. Both routes appear to have considerable merit, given the clear warning bells ringing loudly in the late 1990s. As my hon. Friend the Member for Twickenham said in a debate in October last year, there is a massive question mark over the clean bill of health given to the company by Ernst and Young in 1999 after so much discussion in the City during the previous financial year.
Indeed, the storm clouds had been gathering for a considerable time. There was a growing body of evidence that the whole structure was unsustainable. Interest rates had been falling, and it was clear that the assumptions on which the guaranteed annuities were based were unsustainable. In 1994, Michael Heseltine—now Lord Heseltine—when President of the Board of Trade and Secretary of State for Trade and Industry, was responsible for the actions, or inaction, of the regulators, who failed to notice from annual returns the differential final bonus policy for guaranteed annuities, which was concealed from policyholders and led directly to the present mess. The potential culpability goes back a long way.
Then there are the 2,500 complaints submitted to the financial services ombudsman, mainly from former policyholders who withdrew before the introduction of the compromise scheme earlier this year. Those complaints allege mis-selling. If the ombudsman finds Equitable Life liable for mis-selling in the lead test cases that he is investigating, he must award full compensation—not partial compensation as part of any compromise deal—for the loss suffered. The consequences of that for the other affected group—those who remain with Equitable Life, including those receiving payments from annuities in retirement—could be very serious. As we have heard, those annuitants have already lost about 30 per cent. of their income. That is the awful reality for everyone caught up in this mess. If one group benefits, another loses out massively.
That brings me to the role of the regulator—initially the Department of Trade and Industry, then the Financial Services Authority—and what the Government are doing in the face of the crisis. One is left with a sense of staggering inertia and complacency. The Baird report on the role of the FSA was flawed from the start because it lacked independence. Even so, its criticism of the FSA, together with concerns about its role as regards split capital trusts, hardly provides reassurance about its ability to regulate the industry in future.
The analysis of the earlier period before the FSA took over from the DTI was left to the Penrose inquiry. It had been hoped that the report would be ready for publication this summer—two or three months ago— but nothing has emerged and nothing is expected until
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well into next year. We have heard that it could take at least another year. That is disastrous and completely unacceptable for those left in a state of anxiety awaiting the outcome. The Government cannot stand by, doing nothing, while we wait for the inquiry to report. It is imperative that urgent progress be made. As was suggested this morning, there should be an interim report. That should be published as soon as possible, and the Government should be responsible for setting a timetable to ensure that we get news of the outcome quickly.
I join other hon. Members in pressing the Minister on the confusion surrounding the parliamentary ombudsman's investigation. In March 2002, the then parliamentary ombudsman, Michael Buckley, stated in a letter to Members:
"I have made it clear that I intend to await the outcome of the independent inquiry set up under the Chairmanship of Lord Penrose … before deciding whether I might usefully consider other aspects of this matter, including events before January, 1999."
I appreciate that the core remit of the parliamentary ombudsman's investigation might not be delayed by the Penrose inquiry, but it is unacceptable that other matters that are properly to be considered by the ombudsman will be stayed for possibly more than another year. The Minister has indicated that she does not believe that the investigation by the parliamentary ombudsman has been delayed owing to the Penrose inquiry. We need clarity as to the precise situation, and I should be grateful if she would explain what further steps she proposes to take to expedite matters.
Finally, I want to raise concerns about the state of the insurance and pensions industry in general. Although Equitable may be the worst example, many companies have out-of-date management structures, inadequate computer systems and a reliance on actuarial assessments that have not been independently assessed. Does the Minister share those concerns about the state of the industry in general and the confidence, or lack of it, that that inspires in many ordinary people who simply want to protect their position for their future retirement? Does she consider that a broader inquiry into the industry is needed, given the extent to which people rely on the companies for security in old age? I believe that that is absolutely essential to re-establish confidence in the industry.
10.34 am
Mr. Stephen O'Brien: I shall leave my declaration of interests under the blanket declaration that you mentioned earlier, Mr. Deputy Speaker.
I congratulate the hon. Member for Twickenham (Dr. Cable) on securing this exceptionally timely and important debate. It builds on previous debates, but as these matters, of desperate concern to all our constituents, have deteriorated, I am glad that the hon. Gentleman could secure this debate now.
We have heard a good selection of speeches and points today from Members on both sides of the Chamber, reflecting the deep anxiety of constituents across the United Kingdom. This debate is timely not only because our constituents have rightly appealed to us in their time of concern, but because it is right and fair to pay proper tribute to the Equitable action groups

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now under the E7 banner. I had the opportunity to meet those groups when they came to Westminster to continue making their case, which they did very palpably, on 29 October. They have always been serious and compelling, and it is only right that we all work together to fight for the justice of their cause. I salute them and, in particular, Paul Braithwaite, who has shown such leadership.
There is no need to take the House's time by rehearsing the background facts. All hon. Members are very familiar with the consequences of the affair, and the misery visited on policyholders and affected people in all our constituencies. It is right, however, to start by saying that for almost all Equitable members, policy values and annuities have been cut by about one third and that the society's solvency is today in doubt. Annuitants are especially hard hit because, under Equitable's internal rules, common across the industry, they cannot transfer to another pension provider. Other policyholders can transfer, but at the cost of a significant exit fee.
Who is responsible? In my view, the old board and its advising actuaries were reckless and misguided. I understand that legal action against the former directors is being considered but unless they were well insured, there may be nothing worthwhile to gain there. It can be claimed that, over many years, the accounts gave no indication of the scale of the contingent liabilities. The current board has instigated legal action against the accountants, but that will no doubt be contested over a very long period—far too long for the suffering Equitable policyholders. As the hon. Member for Wyre Forest (Dr. Taylor) just mentioned, Mr. Bellringer's departure on Monday with an extraordinarily large and insensitive pay-off after only six months in the job of finance director hardly inspires confidence.
I turn to the responsibility of the regulators. Until 1999, the prudential supervision of the Equitable was exercised directly by the DTI and the Treasury. They are open to a charge of maladministration. First, they allowed the society to sell unguaranteed policies without ring-fencing the funding of GAR policies and without disclosing that those prior guaranteed policies existed and represented huge contingent liabilities.
Secondly, as evidenced by the letter issued by Martin Roberts, director of insurance at the Treasury on 18 December 1998, which was on its website until July 2000, those Departments endorsed the society's attempt to redress the balance to cover the under-reserved costs of GAR policies by paying differential bonuses. That was later ruled illegal by the House of Lords. Thirdly, they allowed the society to trade with totally inadequate reserves and to claim throughout that it was selling a low-risk product coupled with prudent management and the benefits of mutuality. All Members of this House must feel that the shades of Maxwell come to mind. The issue of negligence must be examined urgently. That is not currently being properly investigated—certainly not with the necessary urgency.
The Government have not only encouraged saving in personal pension schemes, but required those schemes to be converted into annuities from which there was and is no escape. Yet the Government are now standing by while pensioners have their current and future incomes slashed.
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Since 1999 regulation has been in the hands of the FSA. One might have thought that when the scale of the collapse became apparent, the Government would have mobilised resources from the industry to underwrite the Equitable for a period to stem the flow of funds and to rebuild reserves in an orderly way. After all, if the society becomes insolvent, the industry will meet the cost of whatever compensation is awarded, and the damage to the savings industry and the Government's plans will be enormous. That is the sort of response that the Bank of England and, notably, the present Governor, no less, employed successfully during the secondary banking crisis in 1974 under Denis Healey's Chancellorship. At the very least, the Government should now devise and publish a contingency plan in the event that Equitable becomes insolvent, and I urge the Minister to give a clear answer on that today.
What needs to be done now? First, I urge the Treasury Committee—I am pleased to see the Chairman in his place—to reactivate its inquiry into Equitable.
Mr. John McFall: For the record, the Select Committee has acted unanimously on every decision that it has taken on this matter. We accepted that Lord Penrose was inquiring into the matter, but two weeks ago I raised the matter in the Committee and we decided to write to the Treasury, the FSA, Lord Penrose and others to assess the situation. We shall then look at the matter again and take it forward.
Mr. Stephen O'Brien: I am most grateful to the Chairman of the Treasury Committee and I am sure that all those with a concern in the matter heard what he had to say. We wish him well in his determinations following the responses, or absence of satisfactory responses, that he receives. Given the importance of the Select Committee's work and its powers to command evidence and people to appear before it, it has a real opportunity to advance the cause if that is the right course to take.
I return to what needs to be done. Policyholders and annuitants believe, rightly, that they have been victims of mis-selling and are looking for redress, either through industry support or compensation, especially from the regulators, or both. So far, it is right and fair to say that no one has exercised any leadership to deal with the situation. Given the flight of funds, coupled with today's more litigious environment, the opportunity may already have been lost to mobilise support, a point that has been mentioned by the hon. Member for Twickenham and others. Today we have the added difficulty, compared with 1974. of the fact that an increasing proportion of the relevant parts of the industry is in non-UK domestic ownership. We want mobilisation of that support, if it is still possible, in restoring Equitable to an even keel and salvaging confidence in the UK savings industry generally. If that is not done, it is likely to prove a big mistake because any other solution would be messy, long drawn out and costly.
What is certainly needed is a proper inquiry into the actions of the regulators, but there has been little progress, especially by the Government. The FSA set up an internal audit of its activities after it took over responsibility in 1999. The resulting Baird report was highly critical of the FSA's inactivity but acknowledged that most of the damage had already been done before it came on the scene. The die had been cast.

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In August 2001 the Treasury appointed Lord Penrose with the following terms of reference:
"To inquire into the circumstances leading to the current situation … taking account of relevant life market background; to identify any lessons to be learnt for the conduct, administration and regulation of life assurance business; and to give a report thereon to Treasury Ministers."
That is a huge remit.
Looking at other necessary key action, I and other hon. Members wanted the matter to be examined by the parliamentary ombudsman. After considerable, admirable and persistent effort by colleagues in the former shadow Treasury team—my hon. Friends the Members for Croydon, South (Richard Ottaway), for Christchurch (Mr. Chope) and for Hertsmere (Mr. Clappison)—I am delighted that their efforts, coupled with those of many other hon. Members on the Opposition Benches and 253 MP referrals from throughout the House, persuaded the parliamentary ombudsman to undertake an inquiry into the limited area covered by the Baird report. The then parliamentary ombudsman refused to look more widely at charges of maladministration by earlier regulators—the DTI and the Treasury—on the grounds that that would be a wasteful duplication of effort, pending the outcome of Lord Penrose's inquiry. That is a depressingly subordinate position to take. It effectively relegates the interests of Parliament and Equitable policyholders to those of the Government. Lord Penrose has been appointed, and given terms of reference, by the Government. He reports to Treasury Ministers, whose Department is one of the regulators under scrutiny. Who has the incentive to internalise this matter? Surely not the regulators for the relevant applicable time: the Treasury and the Department of Trade and Industry.
Lord Penrose has no powers to compel witnesses to attend or give evidence. His report may or may not be published, in part or in full, and the Government are free to accept or reject his recommendations. His inquiry will take, we all believe, at least another year and perhaps years. We can all urge speed as much as we like and the Minister's refrain will be, "The inquiry is independent. It's up to Lord Penrose." That is not good enough. Today's victims need the Penrose inquiry quickly. At the very least, they need the interim report that has been properly called for during the debate.
The new parliamentary ombudsman—she has just taken up her role and I wish her well—is an Officer of the House and reports to Parliament, independent of Government. Her remit is narrow: the inquiry is into allegations of maladministration and is intended to pinpoint responsibility. Parliament can ensure that her report is published and that she receives co-operation from witnesses. Of course, there will be some overlap with the Penrose inquiry, but there is no reason why the Government's wide-ranging inquiry should take precedence over, and necessarily compromise, Parliament's own inquiry. The new ombudsman has fresh eyes and has an opportunity to accelerate her inquiry, to extend it back to the period before 1999 and to publish before Lord Penrose. I urge her to do that and to have the matter at the top of her in-tray.
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It is now well over two years since the House of Lords' decision pulled the rug from under the Equitable. Policyholders and annuitants, many of them elderly and vulnerable, have suffered a series of hammer blows through no fault of their own and when they were doing the right thing. The regulators certainly have much to answer for, yet the upshot of the action so far has been to kick the whole subject into the long grass. There is widespread suspicion that the Treasury is playing for a goal beyond the next general election. This is a shameful episode and a continuing major injustice, which the Treasury is allowing to drift. On behalf of the policyholders and the annuitants, I say that, at this woefully late stage, it is time for the Government to get a grip. Will the Treasury Minister with responsibility for this area now commit herself to doing that today?
10.47 am
The Financial Secretary to the Treasury (Ruth Kelly): I add my congratulations to the hon. Member for Twickenham (Dr. Cable) on securing this important debate. I know of his long-standing interest in these issues on behalf of his constituents and I congratulate him on that.
I will attempt to give as many answers as I can to the individual points that have been raised. First, I should like to express my personal sympathies for those policyholders at Equitable Life who have been affected by difficulties in the society and, in particular, for the 50,000 men and women who have worked hard to save for their retirement and who put their faith in Equitable Life and recently received news that their with-profit annuities would also be the subject of cuts. As a Member of Parliament, I am certainly not alone in receiving many letters on this subject—that is aside from being the Minister with responsibility for this area. I understand the concerns, and even anger, of policyholders at the current state of affairs. I add my congratulations to the action groups on their sterling efforts to draw attention to the issues.
As many hon. Members have recognised, the difficulties at Equitable Life stem at least in part from the guaranteed annuity rates that it, along with other life insurers, offered to with-profit policyholders between the late 1950s and 1988. As the hon. Member for North Norfolk (Norman Lamb) lucidly pointed out, the problems arising from those guarantees began to have a material effect in the early 1990s, when, for the first time, movements in interest rates meant that the guaranteed annuity rates were higher than the rates available in the market. In response, Equitable cut the terminal bonuses given to those members who opted for higher annuity rates. In effect, in order to achieve what it saw as fairness between all its members, Equitable gave those members who opted for a guaranteed rate annuity a smaller pot with which to purchase an annuity. Those members who opted for an annuity at the lower, open-market rate had a larger pot. The result of that policy was that savers with similar funds received the same income regardless of whether they had purchased a guarantee.
The society agreed to take to court a test case, in which policyholders argued that the guarantee entitled them to both a terminal bonus at the same level as other members and an annuity at the guaranteed rate. In July 2000, the House of Lords finally ruled in favour of their claim, and in doing so ruled against both the society's

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previous policy and any ring-fencing of the liability among the guaranteed annuity option policyholders as proposed by the Court of Appeal.
The financial consequence of that decision exposed the society to unquantified costs for which it had not made provision. The Equitable put itself up for sale, but it was unable to find a buyer and closed to new business in December 2000. A compromise between policyholders was agreed earlier this year. Non-GAR policyholders agreed not to sue over mis-selling in return for GAR policyholders' giving up their guarantees. However, policyholders who had already left can still sue the society, and the Equitable faces considerable claims for compensation. The society is a mutual and has no source of funds other than its policyholders. As the hon. Member for Twickenham has outlined, companies of that kind are currently operating in very difficult market conditions.
I now want to address the points that have been raised about trust in the pensions industry and the possibility of a lifeboat being organised. This Government have done more than any other Government to try to put in place a framework to establish a basis for trust in the financial services industry. On coming to power in the late 1990s, the Government established the inquiry into the mis-selling of pensions, which has refunded £11 billion to policyholders. We set up the Financial Services Authority, which brought together nine separate sectoral regulators. For the first time, it includes a single ombudsman scheme and a single financial services compensation scheme, which is easy for people to use in gaining compensation in the event of insolvency. We are currently working on proposals to extend advice on financial services products to the mass market. We will be developing those proposals and plan to encourage people to save for their pensions, but Members will have to wait for the details in the pensions Green Paper later this year.
On the specific subject of a lifeboat, I understand the point made by the hon. Member for Twickenham on the general situation in the life insurance and pensions industry. In his view, a lifeboat would be desirable, but the key point is that the financial services compensation scheme already provides for 90 per cent. of policy values to be paid out in the event of the insolvency of a life insurance company. There is the possibility of the industry choosing to come together before a life insurance company reaches insolvency in order to take advantage of those provisions and provide a lifeboat, if it deems it to be appropriate in a given situation.
Annabelle Ewing: Is there a ceiling on compensation provided by the scheme? Is there a ceiling on the amount per payment?
Ruth Kelly: No. Compensation is 100 per cent. of the first small amount and 90 per cent. of any subsequent amount up to whatever total is required. The industry could come together and decide that a lifeboat was needed. In fact, the Equitable and other life insurance companies are closely monitored by the FSA, particularly in these difficult times. The hon. Member for Twickenham asked what the FSA was doing to help; it is working extremely closely with the Equitable to help it to quantify any liabilities that it has for mis-selling and decide on future courses of action. If the FSA thought
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it appropriate, it would approach the industry for those sorts of talks. That is where the responsibility for that sort of action lies.
Mr. Mark Field: May I reiterate my concern that the FSA does not have the authority within the City to take lifeboat action, if lifeboat action were deemed to be the right thing to do? The Bank of England, and therefore the Government, needs to take a more important role in the matter. The FSA's role, and its credibility within the City, is insufficient to take action of that sort.
Ruth Kelly: I might have agreed with the hon. Gentleman if he were referring to the period before the full independence of the FSA. However, the fact of the matter is that the FSA is the only authority with a detailed knowledge of the solvency position of the Equitable, and it is monitoring events intimately. Other than the industry itself, which can take its own view, it is the only authority in a position to come up with and proactively pursue such a course of action if it thought it advisable. At present, the FSA believes that Equitable Life is a solvent going concern; I hope that that view will remain.
I turn now to Penrose and the ombudsman. We understand the concerns of policyholders, hon. Members and the general public about the state of affairs at Equitable, which was why we set up the independent inquiry. Lord Penrose's terms of reference are:
"To inquire into the circumstances leading to the current situation of the Equitable Life Assurance Society, taking account of relevant life market background; to identify any lessons to be learnt for the conduct, administration and regulation of life assurance business; and to give a report thereon to Treasury Ministers."
The terms of reference have deliberately been drawn wide in order to allow thorough consideration of the root causes of the problem. I wish to stress, however, that Lord Penrose is operating entirely independently of the Government. He is a senior Scottish commercial judge. He has an accountancy background and he was the ideal candidate to lead the inquiry. We listened clearly to his views when asking him to undertake such an inquiry. He thought that it was much better for him immediately to read the background of Equitable without the artificial restrictions that a deadline would impose, for example.
Lord Penrose said that he would produce his findings as quickly as possible and that they would be consistent with a thorough and authoritative account of the events of Equitable Life. He assures us that that is still the case. I look forward to reading the results of his inquiry. The idea of imposing an artificial deadline for the first time would be counter-productive.
Mr. Mark Field: What about an interim report?
Ruth Kelly: I was about to touch on that point. The idea of imposing a deadline and saying, "Yes, come up

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with an interim report within the next few months," would be counter-productive, given that Lord Penrose is intent on producing his full report as quickly as possible.
Dr. Cable: Given that the Minister has underlined the independence of Lord Penrose, will she give us an assurance that the authoritative report will be published in full?
Ruth Kelly: I am glad that the hon. Gentleman asked me that question. It is my presumption and that of Lord Penrose that the report will be published in full. However, I must point out to hon. Members that we cannot break the law if certain legal confidentiality restrictions emerge when the final version of the report is shown to our lawyers. I presume that it will be published in full. It will be made clear to people whether that is the case. They can decide whether the report is fully independent or whether some passages have been removed.
The ombudsman is also entirely independent of the Government. It is for her to decide which of the complaints that are referred to her within her jurisdiction she wishes to investigate. The Treasury and the FSA are co-operating fully with the ombudsman. We have not received any complaint that we are not so operating. It has been suggested that her investigation has been delayed until after Lord Penrose has reported. That is not the case. Indeed, the ombudsman made that clear in a press notice on 29 October, which stated that the current investigation's
"finalisation does not depend on the conclusion of Lord Penrose's Inquiry".
The ombudsman has said that no decision will be taken on whether to undertake a further investigation into the period prior to 1 January 1999 until after Lord Penrose has reported. There is no bar to prevent the ombudsman from deciding to conduct a more widespread inquiry that goes further back into the history of events: that is totally within her remit. Lord Penrose's remit is wider than the ombudsman's. That is why we asked him to look at the actions of Equitable during the period. Our main concern is that, during this course of affairs, we learn every lesson possible for future regulation.
Mr. Deputy Speaker: Order. Time is up. Will hon. Members who are not staying for the next debate please leave quickly and quietly?

European Constitution
11 am
Mr. Graham Allen: Good morning, Mr. Deputy Speaker. This morning I raise the important issue of the European constitution. If we are not careful, history will pass this Parliament by. In less than two years' time, there will be a European constitution and we will either surf that wave or be drowned by it. The European constitution will change for ever the power and status of Parliament as well as the way in which our citizens are governed.
I am glad that hon. Members on both sides of the House have helped to secure this debate on the outline of the European constitution. Five hon. Members requested it with the agreement that we would share the time if one of us were lucky. I send the apologies of the hon. Member for North Norfolk (Norman Lamb) who is attending a Select Committee and those of the hon. Member for Moray (Angus Robertson) who is—appropriately—involved in a sitting of the European Scrutiny Committee.
I am glad to welcome the right hon. Member for Wokingham (Mr. Redwood). His view on the subject may be very different from mine, but I respect it just as I respect his often equally impenetrable spin bowling for the House of Commons cricket team.
The fifth person who co-operated in securing the debate is my hon. Friend the Member for Dundee, West (Mr. Ross). It is a pleasure and a privilege for me to participate in a debate with him: I regard him as my mentor in Parliament. All my mistakes are my own, but my hon. Friend has been a great friend and support to me over many years.
As usual, I shall try to make my remarks as non-partisan as possible. There is a surprising amount of common ground between what may at first sight appear to be disparate views on the European question, and there may be consensus about the way in which the European constitution should be framed. It will happen, so let us concede that, deal with the reality and make the constitution as effective as possible for British and European democracy.
A great many problems must be tackled in relation to the balance between the executive and legislative arms in Britain and Europe. Currently, some members of the Executives meet, often in Brussels, and carve things up between them. They decide what they want to do and the elected and legislative arms are an afterthought, as is so often the case with European scrutiny in this Parliament. That is a fundamental problem. Perhaps hon. Members have something to bring to the party—our sense of democracy and of involving our people and legislatures rather than decisions merely being left to people who know better because they happen to be in the Government of the day.
Why should we be so concerned about what is in the constitution? It will preserve and entrench the power currently vested in our European institutions and will decide how we participate effectively in future decisions that affect us all. It should also enable us to call to account those who make the decisions and, above all, to change those decisions, if we wish, democratically by voting in elections. I am examining the matter not purely

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as a question of Executive power with Presidents and Prime Ministers getting together and working late into the night to cook up a deal that suits them, but as a question of democratic power and how we can involve a wider range of people so that the European project interests and excites people in the UK and throughout Europe.
It is not a matter of not trusting our Prime Ministers or Presidents. In the old communist days in East Germany, when there were riots the Government issued a statement saying that the people had forfeited the Government's confidence—in other words that the people should have somehow tried harder to understand the Executive's difficulties. We should look at things the other way round and ensure that the peoples and electorates of Europe participate in an exciting and potentially ground-breaking project to push Europe further toward consolidating gains that have been made.
There is also a question of defining relationships. Nation states—I say this with an eye to my Conservative colleagues—should be clearly defined in the constitution. If we did that, we could eliminate the fear of federalism that is promoted, especially by centre and centre-right parties in this country, by use of the F-word, as it is called. If we defined what federalism is and what it is not, we could eliminate some of the fear in British politics.
We could place insurmountable roadblocks in the way of the minority who want a superstate by defining the role of the nation state. That minority frightens people, and people at large should he reassured that that is not the concept of Europe in which we want to participate. None of us should fear clarity in a constitution. Clarity will prevent the executive creep that we have at present. The phrase "ever-closer union" implies dynamism and that certain people can decide the direction in which we go, although we might not be consulted. Replacing that executive creep with the concept of a contract between individual nations and a clear, transparent set of rules that bind the nations together would represent real progress.
I hope that we can agree that the European constitution should entrench the doctrine of subsidiarity. That depressing piece of eurobabble conceals one of the most beautiful concepts in democracy: the fundamentally important principle that power should be exercised at the level of democracy that is closest to the people. If my hon. Friend the Minister for Europe, whose brilliance in words and print is known to all of us, came up with a different word from subsidiarity, it would no doubt be emblazoned on his grave, but many of us would appreciate it. A beautiful concept hides behind that horrible word, and that concept should be at the head and heart of the new European constitution.
Subsidiarity is often thought of as protecting the rights of national Governments and Parliaments against those of European institutions, but it should also protect the rights of our devolved assemblies, regional assemblies and local government. Although subsidiarity is part of the treaties of the European Union, they have been completely ineffective and inadequate at enforcing the concept. A lower authority has never used subsidiarity to challenge successfully the power or decision of a higher authority in the EU. Several of us
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will continue to doubt the efficacy of subsidiarity, as it is currently defined, until that happens. In a European constitution, we will require that subsidiarity can be used effectively at many institutional levels in the European Community. The new constitution must bring the concept of subsidiarity to life; otherwise, it will be worthless. The first draft by ex-President Giscard d'Estaing may be an improvement on present treaties but I am afraid that it still falls far short of the clarity and precision that would allow the European courts to arrest and reverse any drift of power from local to regional, from regional to national, or from national to European.
The exercise of framing the European constitution has been likened to that of framing the American constitution several centuries ago by the founding fathers. However, I fear that we have a little further to go before we are in the same league as Jefferson, Hamilton, Madison and Washington. None the less, we should not stop trying. The Americans, of course, had an advantage: they created their constitution before they created a common currency and before they committed themselves to expansion into new territories—I am comparing that with the enlargement of the European Union—whereas the Europeans created a common currency, then decided to expand their territory, and only then, as an afterthought, decided to create a constitution.
We in Europe have an Executive-led, top-down process. Perhaps it had to be that way. We could not start in the same way as the United States of America, and I am not suggesting that, before we start with a clean sheet, we should eliminate all indigenous peoples, as was done in America. In the USA, there was a grass-roots movement. The constitution was a response to Executive over-mightiness rather than a product of Executive over-mightiness. It was an attempt to ensure that the Executive did not dominate and that the legislature and the people had a voice that was taken into account. Only they could create that Executive. The Americans did things the right way round; perhaps we will struggle. However, we can get there, despite the fact that we are doing things differently. The Americans knew that they needed a constitution to secure the will of their people behind the changes that were necessary not only to run a common currency and take in new states, but to provide an agreed system for resolving conflicts of interest between states and local and national interests.
There is one way in which we should draw on the American experience and try to replicate it. When the Americans were drafting their constitution, it was without question the most exciting time in American politics and probably global politics. It provoked a nationwide debate—led by a Briton, Thomas Paine—that engaged almost every American citizen with a vote. I have to admit that, in the pubs and clubs of Nottingham, North, people rarely debate the core competencies of the respective authorities. If you mentioned subsidiarity in Nottingham, most people would think that it was something nasty, related to previous coalmining, that might damage their house.

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I look again to the qualities of my hon. Friend the Minister: we must seek to excite people and involve them in this process. The Minister is well qualified, as is the Secretary of State for Wales and the Foreign Secretary. When they choose to be, all three are powerful advocates. We must not allow this debate to he dry and sterile, dealt with in eurospeak somewhere in Brussels. We should also involve this Parliament. I pay tribute to my hon. Friend the Member for Birmingham, Edgbaston (Ms Stuart) and to the right hon. Member for Wells (Mr. Heathcoat-Amory) who have represented the House so well in the European Convention. However, they were selected by the Executive and not by the House, and, although they have done an extremely good job so far, that cannot be the full extent of parliamentary involvement. Parliament must come along with and understand the process. Should it have to give anything up, Parliament must agree to what it is to give up. We need to think very carefully about how the process is managed, otherwise, if Parliament or the public feel that something is being imposed on them, they will reject and resent it. That would be wholly unnecessary.
I hope that we could perhaps use pre-legislative scrutiny, which is coming into fashion in the House—that is very welcome. We could hold sessions to debate the issue while allowing people to view our debates online and to e-mail their comments, which could be filtered through to hon. Members. Instead of having 40 or 50 eminent founding fathers as the United States constitution had, we could have several million founding fathers and mothers of a British input into a European constitution. That is a great prize indeed. I hope that my hon. Friend the Minister will take away that idea and other ideas about how we might involve Parliament and the wider public.
With regard to the American constitution, the founding fathers decided to make their constitution memorable and portable: something that would fit into the hearts, brains and pockets of every American schoolchild. The founding fathers wrote their constitution in clear, uplifting, elegant language to inspire loyalty and sacrifice among their citizens. They created a constitution that people have been prepared to die for. I would be delighted if we in this place were able to contribute to making a European constitution of that nature.
I am afraid that the draft outline that was prepared by ex-President Giscard d'Estaing has all the inspiration of the EU sheep meat directive, with which I know all hon. Members are familiar. The draft outline is dense, opaque and full of eurolocutions that have already brought high levels of stress to readers and listeners throughout Europe. Some will blame the translators for the tortured language, but that is unfair. That document loses a lot in the original.
My right hon. Friend the Secretary of State for Wales has a way with words, but his touch must have deserted him, or perhaps he was absent, when the Convention drafted article 14:
"this structure shall ensure the consistency and continuity of the policies and activities carried out in order to attain the Union's objectives—activities both in the areas of competence allocated
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wholly or partly to the Union and in those areas in which competence belongs to the Member States and is jointly exercised by them"
—and that is one of the highlights.
Mr. Deputy Speaker (Mr. John McWilliam): Order. Standing Orders require that a Chairman understands what is said and they also deal with the language that hon. Members use. I am having trouble.
Mr. Allen: Mr. Deputy Speaker, you make the point far more eloquently than I do. One thing that I hope my hon. Friend the Minister will take away from the debate is—seriously—the need to look for a poet. We need someone like Madison who, after 40 or 50 people had decided what was needed at the heart of the constitution, was sent away to write it. The founding fathers said, "James, go away and write the draft"—and he did—
Mr. Richard Spring: What about Alistair Campbell?
Mr. Allen: I am already hearing suggestions about who that individual might be. None the less, in all seriousness, I hope that my hon. Friend will find someone somewhere in Europe who can put together with coherence, elegance and inspiration some of the things that are currently being talked about.
I have to compare the language of the draft constitution with the preamble to the United States constitution:
"We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America."
Those are words that ring down the centuries.
The Minister for Europe (Mr. Denis MacShane): The preamble of the American constitution is written in beautiful English, but if my hon. Friend delves deeper into its articles he will find exactly the lawyers' gobbledegook that was put into it in order to protect government from attacks by its citizens via the courts. All constitutions must, at some stage, have the precision and complex clarity that the constitutional lawyers always insist on. I invite him to read further; if he does so, he will find that a lot of that poetry disappears.
Mr. Allen: I will resist the temptation to read further. Although the functions are defined, the language in which that is done might be thought of in terms of the mists of history. However, as my hon. Friend the Minister is a highly literate person who is very well read, I hope that he will agree that even the worst parts of the American constitution read better than the best parts of the eurobabble draft that Giscard d'Estaing has put together.

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I wish to make another point about the elegance of language and the American Declaration of Independence. We are going to sign a declaration of dependence. There is nothing wrong with that, and I hope that in doing sa—in subsuming some of our powers within a broader European context—we might consider a form of words such as:
"We hold these truths to be self-evident:
That all men are created equal; that they are endowed by their Creator with certain unalienable rights; that among these are life, liberty, and the pursuit of happiness; that, to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed".
If we employ words not only of that beauty, but of that precision, there would not be a European citizen—regardless of whether they were a president or a pauper—who could mistake the intent that the people in Brussels and elsewhere derive their just powers from the consent of the governed. I hope that that sentiment will be expressed in the constitution.
Democracy, subsidiarity and inspiration—rather than process—should be the guiding principles of the European constitution. The first draft has been started and it is going in the right direction, but it has not gone far enough to meet the needs of the peoples of Europe. There is now a great risk that the European constitution will become more fudged, obscure and remote from its citizens, as member states seek forms of words to resolve their differences.
What is to be done? When you want a job to be done, you must do it yourself. In my spare time, I have written a 20-article constitution that is two and a half pages long; I will leave it with my hon. Friend at the end of the debate. It sets out the principles of subsidiarity, democracy and human rights. I tried to imagine how the founding fathers in America might have undertaken their task, and my draft deliberately mimics their language, and directly borrows several of their provisions. I hope that the Europeans will not be too vain to deny themselves the benefit of American constitution making, the results of which have endured successfully for more than 200 years. My hon. Friend the Minister has a copy of those fundamental articles, and they can also be found on the YouGov website, which has a growing and creative list of comments from respondents.
I mention my own modest effort because it illustrates what our Parliament could collectively do—all our citizens could participate in that through e-democracy. The House could generate that debate and thereby excite and involve young people who want to have a stake in our future and say what they want our institutions to look like and how our powers should be exercised in our society. This House should not monopolise the process of constitution making, but it should at least have a stake in that process, and then involve all our citizens in it.
My hon. Friend the Minister is making great efforts to involve the regions, academics, business people, trade unionists, students and many other people, but the Government must go one step further. They must get the British Parliament involved in a serious way—rather than in a nominal way by selecting the people who will represent us at the European Convention, or by having a bit of scrutiny at the European level, or even by having a debate on the Floor of the House on Monday.
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However, it is commendable that that debate is taking place, and I pay tribute to my hon. Friend the Minister for having pressed for and achieved it.
Those are welcome steps, but they are only small steps; they do not involve Parliament and people as of right in their own constitution making. We must get this right, or people will turn against the whole concept of the European constitution, which would be totally unnecessary. We must start to see our Parliament and our people as partners in the political process, rather than as threats to it.
Once we have reached the conclusion of a process of national consensus, I hope that the European constitution will be put to a referendum in Britain. If the process has been conducted properly, it will sail through, because we will all have bought into it and put in the safeguards and roadblocks necessary to reassure those who—possibly with good reason in certain circumstances—are sceptical. I think of the right hon. Member for Wokingham. They need to be reassured, just as other people need to be inspired by the European vision. Their views are as valid as those of any pro-European and they need to be taken into account in the process of constitution making. Otherwise, a referendum, which I believe is essential, will fail. Were we to have a referendum today, a European constitution would not be accepted. I should like us to reach a position in which we have convinced people that a European constitution will not only be accepted but will have the support of all hon. Members.
Mr. Andrew Tyrie: Is reassurance needed because people believe that a constitution will slowly suck us into a position in which one day people wake up and find that their country has gone? Does the hon. Gentleman think that it might be a step in the right direction to add an exit clause to the constitution? That would provide reassurance. Most treaties, NATO, the European Council and the Council of Europe have exit clauses.
Mr. Allen: I very much agree. Having said that we have to learn from other constitution makers, not least the Americans, we should also learn from the experience of the United States during the civil war. Although I hope that we shall never repeat the difficulties of the last century, when European nations were at war, that is why I have included an exit clause in my draft. It cannot be done casually; it has to be worked on carefully. I know that the hon. Member for Chichester (Mr. Tyrie) takes great care to think such matters through, as do his Conservative colleagues. If we cannot reassure open minded, thoughtful colleagues in all parties about the true intent of a European constitution, we should not have one, because it is designed to help them just as much as to further a concept of the European project.
I shall conclude my remarks, Mr. Deputy Speaker, as I know that my hon. Friend the Member for Dundee, West wishes to catch your eye, as does the right hon. Member for Wokingham, who assisted me in convening the debate. I hope that they will be successful. Governments should not regard debate and scrutiny as a threat, but as an opportunity to strengthen the British contribution to the European Union.
We do not want to arrive late again, being churlish and criticising at the edge because a Franco-German alliance has already sorted something out. We should

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get in there now and put some British constitutional sense into the drafting. Above all, we should make common cause with the peoples of Europe, whose interest in democracy and human rights and in clear inspirational language is as important as ours. If we do that, we will carry not only the majority in the House, who should be partners in the process, but a majority in the country. We will have a constitution that suits not only our nation, but all European peoples, the awful tragedies that afflicted our continent in the last century will not be repeated and in future we shall be able to live together in peace.
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Mr. John Redwood: I congratulate the hon. Member for Nottingham, North (Mr. Allen) on having secured the debate and on the spirit in which he made his contribution. He was exaggerating in his flattery of my spin bowling. I have never claimed to be a great bowler. I see that I share the problem with some who play for the England team, although they have achieved more in cricket than I have.
I wish to be a voice for democracy—for making decisions in the United Kingdom that make sense for the people whom we represent. I particularly enjoyed the passages in the hon. Gentleman's speech that stressed the need to carry people with us on this massive journey, to explain matters in language that they understand and to ensure that the politicians acting on their behalf do not over-reach or go further than people want, and that they surrender powers to a European Government only when that makes sense and can be sold to the British people as just.
I also enjoyed the fact that the hon. Gentleman introduced executive creep—an interesting character—into the debate. I am particularly worried about this character because it is working away in Brussels day by day. Often, I wake up to discover that Brussels has taken decisions on our behalf, yet we knew little or nothing about them and may not have agreed to them. Our Government may have been alert but lost the argument, or the decision may have gone through because the Commission, which is a very active executive body, with a lot of work to do, was in a hurry and did not carry all elected politicians with it. Equally, our Ministers have many other roles to perform.
Successive Prime Ministers of different persuasions have told us very similar things about Europe, and there is a surprising continuity in our debates with our partners in Brussels. Prime Ministers tell us that Europe is coming our way. They therefore accept that it was not in line with what we wanted when they took office, although they add that, thanks to their negotiating skills, it is definitely coming our way. That is not a party political point; the same thing has happened under Conservative and Labour Prime Ministers.
My worry is that Europe is far from coming our way. What is our way? Again, there is surprising continuity. Prime Ministers right, left and centre nearly always say that they want a Europe of nations and that the most important decisions must be taken in the United Kingdom through a democratic process. They are happy to co-operate with our partners in several
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respects and to pool sovereignty in other, very modest ways. They want free trade, friendship and, where possible, agreement, but they want the big, life-and-death decisions about military and economic affairs to be taken in Britain.
The draft constitution makes it clear, however, that Europe is far from coming our way. Indeed, many of the big decisions are sliding under European control. It is our duty in the House to expose that process and to cross-examine the Executive, who represent our interests, to find out how they will resist it. How will they deliver the Europe of nations that they say they want? How can they go on claiming that we have a Europe of nations when a group of dedicated men and women are settling on a constitution that goes a long way towards creating a united states of Europe? Indeed, one of the Convention's suggested titles for the EU is the United States of Europe. The phrase is credible, and a united states of Europe would be much more centralised and have a much more powerful Government than the free-trade friendly Europe that is corning our way, according to the euro myth in Britain.
The second argument that we hear from successive Prime Ministers is that our sovereignty is not at risk. What is sovereignty? It sounds like a rather abstract concept. Does it really matter? Of course it does. Sovereignty is the right to make our own decisions, to be boss of our own house and decide how we paint the front door, when we shut it and when we open it. If we are not careful, we will discover that all too many decisions that affect our daily lives are no longer made by a democratically elected Government in Britain, as we had thought.
As a British democrat, I would far rather live under an elected Labour Government, with a majority in the House of Commons, in the belief that I could criticise them, push them, influence them and, one day, I hope, get rid of them. That would be preferable to living under an unelected or indirectly elected Government in Brussels, whom I could scarcely ever influence, get at, cross-examine or throw out of office. Losing our sovereignty is that fundamental, It means that instead of being able to use our vote and our voice to influence those who govern us or to remove them when things go wrong, we are left almost powerless and are governed by people whom we scarcely know, can rarely influence and cannot throw out if they make a mess.
The third argument—in some ways it contradicts the idea that our sovereignty is never at risk—is that pooling sovereignty is "good for you". That is based on people confusing sovereignty with power. It is self-evidently true that if 12 or 15 countries are put together and governed as one, that unit will be more powerful than any of the individual participants that predated it. However, that is not the same as pooled sovereignty, with individual countries being more powerful because they have joined a union. Each country has only one fifteenth of the influence, or a slightly higher proportion for larger countries, on the decisions of the much bigger grouping.
I would compare that to having a bank account with the neighbours. It would give someone more spending power if he and his neighbours had a single bank account. If he were clever at influencing it, it might even give him more direct power. However, people do not do that because they could not guarantee that they could

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spend the money in the account when they wanted to. They could not guarantee that they would be able to get their hands on their neighbours' money, or that the neighbour could not gel his hands on their money.
Even though people like their neighbours, want to cooperate with them and go to drinks parties with them, they do not have bank accounts with them. Ultimately, people know that that would be confusing power with sovereignty. When it comes to people's own affairs, they would rather be sovereign than potentially more powerful.
Mr. Ernie Ross: The right hon. Gentleman is wrong about that. The growth of credit unions in this country shows that ordinary people are putting their money together. I am sure that there is a growth of credit unions in his area. Debates on the need to support such unions take place in the House all the time.
Mr. Redwood: The hon. Gentleman makes my case for me. People volunteer to join a credit union, can leave it at any time, and always have access to their own contribution. I am happy with that kind of Europe. If everything is done by unanimity—if this great House of Commons can decide whether or not it wants to enter into an arrangement, and in future can decide that it no longer wants to continue with such an arrangement—that is wonderful.
I want a Europe of nations in which we co-operate. That means many more decisions taken by unanimity and, I accept, that we would do fewer things and make fewer decisions together. On many occasions, the British view will be different from that of France and Germany, and why should that not be so? The credit union is a perfect analogy. By working together with unanimous agreement on occasions, we will have more power in the world as a whole. We want to do that, but we should not be forced to do it against our will. No hon. Member would join a credit union if it reserved the right to take his money and not give it back.
Mr. Kelvin Hopkins: I am following the right hon. Gentleman's argument with great interest. Does he agree that the best example of a powerful group of nations in which sovereignty was not voluntarily pooled was the Soviet Union? The first thing that happened after the break-up of the Soviet Union was that the countries established their own sovereignty, with their own currencies.
Mr. Redwood: That is a powerful point. If a common currency was so good, would not those countries have kept the rouble? They could not wait to get out of it because they associated it with tyranny. I do not say that the tyranny of the EU will be as massive as that of the Soviet Union, but if we surrender the right of veto, we surrender the right to make our own decisions and have control over our own affairs, and we will come to rue the day. The British people will not thank us for it. At some point in future, an issue will become massive—who knows what it will be? The British people will say to their elected representatives, "How dare you give away our power to sort this matter out? Why did this happen? Why did it take place by stealth? Why weren't we told at the time? Why didn't we have a referendum?"
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How right the hon. Member for Nottingham, North was to say that if the Government want to sign away more of our powers in the future constitution—I fear that they do—they should at least have the decency to put the matter not only to the House of Commons to debate and vote, but to the people at large. Too much power has been given away already without their express permission. It is high time that we had a full national debate on the issue, so that we could see where strength of opinion lay. Then we would see whether the Minister was right about what people wanted. He might get his endorsement, and I as a good democrat might have to admit that I had lost the case. However, if I am right—I suspect that I am and that most people are with me—[Interruption.]
Mr. Deputy Speaker: Order. Hon. Members must not squabble across the Chamber while the right hon. Member is making his speech.
Mr. Redwood: I am grateful for your protection, Mr. Deputy Speaker. If, as I suspect, I am right, we will have our three weeks in court during the referendum campaign and we will have settled the issue and reconnected the views of the British people to the views of the elected Government.
Mr. MacShane: The right hon. Gentleman's argument is not with me. The draft constitution was drafted by my hon. Friend the Member for Nottingham, North (Mr. Allen)—he is the one who wants a constitution. The right hon. Gentleman should address his remarks to—
Mr. Redwood: Much as I admire the hon. Member for Nottingham, North as a fine democrat in the House, my argument is with the Government because it is they who will sign the real constitution for Europe. I have not heard the Government say that they would veto a single thing in the draft constitution and I have not said that the Government will take their bat away and refuse to play the game. My view is that the Government want to get us into the constitution by stealth. They will then say that the constitution is perfect for us, having played no real part in influencing, fashioning and shaping it. Then they will say that there is no need to put it to the British people because the Government judge that it does not represent much of a change. I think that it will represent a substantial further change.
I want briefly to raise a series of issues that arise under the constitution—
Mr. Allen: I intervene to help the right hon. Member for Wokingham and my hon. Friend the Minister. Reference was made to my European constitution and I am flattered that it has even impinged on my hon. Friend's busy schedule. It may assist the Committee if I quote from article 2, which states:
"Membership of the European Union shall be reserved to nations which guarantee and provide for all their citizens the rights established in this constitution and the European Convention on Human Rights, and whose Governments are chosen in free and fair elections."
On secession, which I hope will never be on the agenda but must be there as a safeguard, it states:

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"A nation may secede from the Union only at the wish of its people, expressed in an election or referendum held for that purpose."
So there is a way out, although I hope that it will never be necessary. It is there just in case. I hope that the right hon. Gentleman will continue in the constructive vein in which he made his points because he sometimes makes the intellectual mistake of some colleagues who are opposed in principle to the European Union and who imagine that everything in the garden is lovely at the moment and that the British Parliament is sovereign and can deal with these matters. Subsidiarity will help him to make—
Mr. Deputy Speaker: Order. Interventions are supposed to be just that. The hon. Gentleman's intervention is turning into a speech.
Mr. Redwood: Thank you, Mr. Deputy Speaker. I must crack on as other hon. Members wish to speak.
I have some questions for the Minister. Have the Government signed up to the idea of five overarching, educational targets? When they do so, will not that mean that we are circumscribed in the education policy that we can follow in the United Kingdom, because our spending priorities and educational priorities will have to be geared to those five targets? Is that another sphere that will move from British national control to European control? Is it true that we have been requested by the European Union to denounce the open-skies agreement that this country successfully negotiated with the United States? I have confirmation in written answers that the EU is not yet empowered to negotiate a Europe-wide open-skies agreement on behalf of all 15 member states, but I have been advised by people who follow the matter carefully that the EU thinks that our open-skies agreement as a separate nation was wrong and is beginning to make moves to get us to rescind it? Why do we have to go through this process? Is not that a power too far for the European Union?
Many of the architects of the new constitution believe that the next big advance to be made by the EU, following in its view the successful introduction of the euro for most member states, is to have more common taxation. It wishes to have common rates of business taxation and to create VAT as the first truly Europe-wide tax collected by Europe and distributed from the European Government back to the member states on a formula of Europe's choosing rather than our own. Proposals for other independent EU taxes are also well advanced. How far will the process go? Will the Minister give an assurance that the Government will veto every proposal that wishes to take away the sovereign right of the House of Commons over taxation and give it in part to influences and control from Brussels?
The European Union is well advanced in wishing to take over what was the third pillar--home affairs and criminal justice. The 32 offences under the European arrest warrant represent a significant advance towards an EU criminal jurisdiction. Will the Minister give us an assurance that we will resist the imploding of the third pillar into EU competence—the takeover by the EU of important parts of our criminal justice system? Or are
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we to say that the House of Commons and House of Lords are no longer capable of making important decisions about criminal justice in Britain?
Mr. Allen: Does the right hon. Gentleman accept that if we define subsidiarity accurately in a European constitution, and it is justiciable, the very examples that he has just given would be illegal? In addition, were a euro state to seek such competences, we could take it to court, either as a nation state, or as a region or as a local government unit? That would be our strongest defence in retaining the integrity of all those subsidiary bodies.
Mr. Redwood: I have some sympathy, but I do not think that I am in favour of subsidiarity. I want to look at it the other way up and ask what powers we, as a sovereign nation, are prepared to entrust for the time being to the European Union. I would be happy to clarify and define those powers, but I would want unanimity. I would like us to propose that qualified majority voting should be rescinded. I see no need for Europe to go on legislating at the current pace. The argument for QMV is that it speeds up legislation, but Britain should now want to slow the pace down. The most obvious way of doing that would be to say, "Let us go back to a system where, if all members do not want a piece of legislation, it will not be rushed through—we will wait until we can get our ducks in a row."
Mr. Tyrie: Will my right hon. Friend give way?
Mr. Redwood: I really must not, because other hon. Members wish to speak.
Do the Government plan to repatriate our much-maligned and damaged fishing grounds? The only solution is for the British fishing industry to take them back under British control and to have our own regime, so that we can try to nurse our stocks back to former levels. We will have to impose limits, but fishing should benefit the British fishing industry. Have we not been too generous? It is particularly unfair that there is no common fishery in the Mediterranean sea but that there is in the North sea. Why do we not harmonise and standardise by bringing policy for the North sea into line with that for the Mediterranean, and reassert our claim to our own territorial waters? I would trust the Government to manage it better than the EU—no greater praise could I possibly lavish on the Government—although, of course, I am sure that a Conservative Government could do it even better, but we will have to wait a while for that opportunity.
All parties agree that the common agricultural policy should be reformed. All seem to agree with the proposition, which I strongly support, that the common agricultural policy is an affront to the developing world and is not good for consumers or even for farmers in Britain. It achieves the triple whammy of doing damage to our legitimate competitors overseas, doing damage to our farming interests through its regulatory powers and doing damage to our customers by overcharging. It should be possible to design something better. Will the Minister assure us that the Government intend to do that? That should form an important part of negotiations on the convention. Will the Minister agree to veto any further moves towards a common defence

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system and a European army? Will he agree that we need unanimity on decisions over common foreign and security policy?
What should the UK do? In the negotiations, we should put forward a positive and forward-looking set of proposals that give reality to the fine words of a Europe of nations. We should say that we want true devolution of power. We would give Europe only those things that we think would make sense. We should base decisions on unanimity, not on qualified majority voting. We should strengthen the democratic checks on the exercise of EU government power. We should slow down the legislative process and open up that process to the press and public. We should be the voice of democracy and ensure that power is exercised where it truly belongs: in countries where people relate to that authority and feel part of that democratic system. Of course, we will need a referendum on such mighty issues, but will the Government not just talk the talk, but walk the walk, by proposing a constitution that creates a proper, open, democratic and fair Europe of nations?
11.49 am
Mr. Ernie Ross: First, I pay tribute to my very good friend, my hon. Friend the Member for Nottingham, North (Mr. Allen). We have known each other for more than 24 years. Let me tell my hon. Friend the Minister to "watch this space". When the former Member for Kilmarnock and Loudoun and I were seeking to redefine the parliamentary Labour party, my hon. Friend the Member for Nottingham, North was our secret agent. We were two lone, small voices, with that large person behind us. We bought the parliamentary Labour party to its current point. It now has a constitution and standing orders. The sort of meeting that is taking place right now—and that we are missing—did not take place before we forced it on to the agenda. My hon. Friend has a very good track record on such matters. I would not simply put the proposed constitution on one side; I would look at it very seriously. I am sure that it will contain elements that my hon. Friend the Minister will want to use some time in the future.
It is always difficult—even frightening—to enter a debate on something such as article 14. I agree with the right hon. Member for Wokingham (Mr. Redwood) that we need to explain ourselves better. I would certainly recommend to everyone the tour undertaken by my right hon. Friends the Foreign Secretary and the Secretary of State for Wales, who was then Minister for Europe. They went round the country explaining what the European Union was about and what they were hoping to achieve. I would ask everyone from Scotland to read the speech that the Foreign Secretary made in Edinburgh on 27 August. It is a powerful speech and gives good reasons why the people in Scotland—polls demonstrate that they are not afraid of Europe—should want to be involved in the European Union. It reflected the fact that as Scots we are proud of our nation. However, that does not make us insular or inward looking. We have always had the advantage of feeling that, as a small country, we need to express ourselves on a wider stage. Whether that is in the Government or in Europe, we have never been afraid to take on those challenges and to look at where Scotland should go. That should not be understood in a narrow,
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nationalistic or xenophobic sense. The feeling is integrationist, in that we see the benefits of Scotland in Europe. We see the benefits of Scotland in Britain. That is why we argued for a Scottish Parliament in the United Kingdom.
However, we need to reassure the public. Even in Scotland, many members of the public want to know what Europe is about. They want to hear our agenda and to know that the dramatic decline in Britain's standing in Europe that was witnessed during the Labour party's 18 years in opposition has been reversed. As the Prime Minister said, we are now
"a leading partner in shaping the Europe of the future, not following reluctantly the shape moulded by others."
That is important.
If the right hon. Member for Wokingham genuinely wants to take part in the debate, he should join us in going round the country, saying how he thinks that there are difficulties and problems. He says that he is doing that, and I do not doubt it, though I do not hear people in Scotland saying, "We had John Redwood up last week. That's us opposed to Europe." That just does not happen. However, they do say, "We had the Foreign Secretary up, and we agree with a lot of what he said. We see the purpose and reason behind it, and we see it's in Scotland's interest." The Foreign Secretary demonstrated that we have used our own experience in the way in which we have tackled inflation and created jobs. The Labour Government have been good for Scotland.
Mr. Hopkins: My hon. Friend is quite right. The Government have achieved great things economically. Does that not stand in great contrast to the terrible problems that Germany now faces as a result of the eurozone, which the Governor of the Bank of England has today highlighted?
Mr. Ross: The target is to create 20 million new jobs throughout Europe. In the first couple of years, we have not done as well as we should, but that does not mean that we should give in and become more protectionist. It simply means that we must argue our agenda for lighter regulation within the economy to help to create those jobs. That is what the Foreign Secretary said in Edinburgh. We need to argue that our model is a good one, which we could not do under the last Conservative Government because they only wanted the table. We can argue our case, saying "Here is our experience, learn from our experience because it is not a bad one." Of course, we have made mistakes and there have been moments when people did not agree with our policy. However, we can now look back and see that we have created 300,000 jobs.
Mr. Redwood: The present Government are no more at the table on eurozone matters than were the last Conservative Government. Does the hon. Gentleman think that that is a huge mistake? Would he urge his Front Bench to hold a referendum immediately to solve the problem?
Mr. Ross: Obviously not. The Government have laid down clearly the conditions under which we would hold a referendum on the euro. We are not stupid—we know

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that there is work to do and at least we admit that. At least we are at the table with our partners, setting objectives and telling them about the experiences that we have had, which they could learn from and use in their countries.
None the less, the right hon. Member for Wokingham raised concerns that also concern us. The common agricultural policy is probably the issue that causes people most concern. At the recent world summit, with reference to our programme of sustainable development throughout the world, we had to accept that the common agricultural policy was a problem. Interim reform proposals were in the pipeline, and I wonder how far they have progressed and where they are. Are we any closer to those interim proposals, which would help us to do what we want to do in the world?
I part company with my hon. Friend the Member for Nottingham, North, good friend that he is, on the word subsidiarity. He thinks that we need to find a new word, but that is always dangerous. I remember the first time that the word was used in Scotland. A member of the Scottish National party challenged one of my colleagues, on a television programme, to tell people what it meant. My Labour party colleague did not have a clue, and he stumbled and trawled around in trying to find out what it meant. That is not surprising, however, as the word was not generally understood then. I believe that it was first used in the Catholic Church. The religious persuasion of our candidate in Govan is not important, but he had clearly never heard of it. I might have heard of it at that time, but I did not really understand what it meant. It certainly floored my colleague on the television programme, and he never really recovered.
So, we have subsidiarity, and we now understand what it means. The Government have launched the most radical overhaul of our constitution since the Reform Act 1832. Unlike the right hon. Member for Wokingham, who voted against the Regional Assemblies (Preparation) Bill last night, we have given Scotland a Parliament, and Northern Ireland and Wales an Assembly each. We are preparing to give people in English regions assemblies as well, if they wish it.
Mr. Allen: It seems that however consensual one tries to be, there will always be colleagues who stretch the elastic to get back to their partisan positions. Subsidiarity is not an especially appropriate word, as it is confusing and people often do not know what it means—they would have to be in the know to know what it meant. Perhaps the word democracy would be sufficient, but it has been so abused over the years that I shall leave it in the capable hands of my literate hon. Friend the Minister for Europe to provide something that will sparkle and excite the British people.
Mr. Ross: I was about to ask a specific question. In his Edinburgh speech, the Foreign Secretary drew attention to the need for a mechanism to ensure that subsidiarity works, but have we yet found that mechanism? He said that
"the lack of an enforcement mechanism for subsidiarity has meant that the principle can be ignored."
I do wonder whether we have found the mechanism.
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When I tried the marvellous exercise of weeding through all this stuff, I just gave up. I realised that if I started to read through it all, I would miss the whole point. Surely a few simple points could be made. Currently, EU treaties are long, complicated, confused and overlapping, but we need clear and concise treaties to clarify what the EU is, what it does and how it does it. That would help to bridge the gap of understanding between Europe and its citizens. A better organised European Union would then be in a better position to deliver practical benefits.
Unlike my hon. Friend, I welcome the draft text. At least we have something to work with and to provide the basis for debate over the next six months. We must build the text up. I do not want to get into name changes. We do not need a united states of Europe or a federal superstate. Let us stick with what we have—dual citizenships—and try to keep it as simple as we can. The Minister should watch this space because whatever my hon. Friend the Member for Nottingham, North says will happen on day one is likely to arrive on day 10.
12.1 pm
Mr. Kelvin Hopkins: I am grateful for the opportunity to speak. I shall be brief because other hon. Members want to contribute to the debate.
I congratulate my hon. Friend the Member for Nottingham, North (Mr. Allen) on securing the debate and I applaud his democratic sentiments. I share them entirely, but I am unsure whether the European Union shares them. I also applaud the statement made many times by the former Minister for Europe, now Secretary of State for Wales, that the British Government support an association of independent democratic states in the EU—precisely what I support. I agree strongly with my hon. Friend the Member for Nottingham, North that if we cannot achieve a democratic constitution for Europe, we should not have a constitution at all. The detail is important.
Parliament was founded—long before it was democratic—to keep control of spending. It was all about the barons trying to control the King's spending. If Governments do not have control over their economies, they are undemocratic and illegitimate. That is the problem with the European Union. We have already' seen the problems that have arisen when sovereignty over economic matters has been taken away from members of the eurozone—not yet, one hopes not at all, from our own democratic Parliament.
The European Central Bank—appointed for eight years and outside political control—currently controls interest rates. It was set up at the insistence of the Germans, who have recently tried to press that bank to bring down interest rates, which are too high for their economy. However, they are too low for the Spanish and Irish economies, which causes serious problems. The growth and stability pact represents another attempt to shift power away from democratic Governments towards an agreement that will, through the Commission, automatically control the fiscal stance of member states. Once again, it is a move away from democracy. Some democracy is maintained through the Council of Ministers. I support a strong Council because it allows democratic Governments a major say about what happens in Europe, and I base most of my hope there for the time being.

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What of the European Parliament? Today I read a report by a Liberal Democrat MEP, suggesting that the legitimacy of the European Parliament needs to be questioned. Indeed, during the most recent European election when we had for the first time the list system of proportional representation, which I deeply oppose, there was in my constituency an 18 per cent. turnout for a Parliament that is supposed to have a major role in democratic government.
I have seen the European Parliament in operation and believe that it is a farce. There are no thriving, live debates in which hon. Members can intervene on each other and debate the issues in depth. Instead there are three-minute statements by hundreds of Members of the European Parliament from all over Europe who get views and small globules of information on the record but have no real power. The democratic institutions of the European Union are deeply flawed.
I am being signalled that I should conclude my remarks. I have made most of the major points. This very day, Germany is in economic crisis. It wants to reduce interest rates to relax its fiscal policy, but it cannot do so—it has been told to do the opposite. As I mentioned earlier, the Governor of the Bank of England said in The Times today that Germany's problems arise from its membership of the eurozone. As long as we have the eurozone and members still joining it, the democratic legitimacy of the European Union will he in question. I suggest that the looser association of member states that should be the future of the European Union will result eventually in the abandonment of the euro and economic and monetary union, and in much more relaxed economic management so that democratic governments can control their economies.
12.6 pm
Mr. Michael Moore: I congratulate, as others have, the hon. Member for Nottingham, North (Mr. Allen) on securing the debate, along with a consortium of other hon. Members who are interested in the issue. Clearly, he has not lost his whipping ability of recent time. I also commend him on his recent accolade by The Spectator as Back-Bencher of the year. I am sure that he was pleased to receive it and that it is not an embarrassment to him.
We have heard a range of views. Much of the analysis can be shared among and within parties, although perhaps at times aspirations are different. The hon. Member for Luton, North (Mr. Hopkins) specifically agreed with the proposition that any constitution that is put in place must be democratic. I absolutely endorse that view although I also point out that not having a constitution does not necessarily lead to democracy. What we have at present is certainly open to legitimate challenge on the lack of democracy across the EU and its institutions.
The central themes that we are discussing are founded on the basis that the EU is often remote, bossy and unaccountable and that the democratic settlement between the EU and its citizens is deficient. As we contemplate enlargement in the next couple of years, it is vitally important that we address such issues. The future of the European Convention is very significant in that respect. I hope that we will have an opportunity to
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debate the issues at length in the Chamber before long, because we have had no opportunity since the last discussion before the Seville summit earlier in the year.
It is clear that the Convention's work is gathering momentum and is being taken seriously. Any doubts about that are dispelled by the fact that the German and French Foreign Ministers have become delegates to the convention. I wonder whether our Foreign Secretary has any plans to follow suit. Britain certainly must not miss another opportunity, in the grand British tradition within Europe.
A constitution is undoubtedly necessary because at present we have a series of complex treaties with truckloads of supporting legislation. It is surely questionable whether the experts understand all the documentation, and there is no question of ordinary people doing so. I believe that the Convention's first draft is worth while but rather thin on detail. What we must hope for when it finalises its work is a clear statement of what the European Union is and how its various institutions and member states fit together. That must be the first stage of reconnecting the EU with its citizens. Recognising the rights of EU citizens will be important, too, and in that respect we would support the incorporation of the charter of fundamental rights into the constitution.
Apart from setting out those rights, the most important challenge will be to clarify the competencies of the EU as opposed to member states. There has been a debate about the elegance of the word subsidiarity, but no question about the need for the principle to be at the heart of the EU's activities. Decisions affecting the lives of citizens throughout Europe must be made at the most appropriate level. Lip service is paid to that principle, but too little scrutiny occurs and too much goes by default. There must be not only a clear restatement of subsidiarity, but adequate scrutiny of the reality by Parliaments at national and European levels.
We may not disagree on the nature of the road map to a new European constitution, but we must be absolutely clear that the constitution-building process is a great opportunity for us, not the worrying threat that some portray it to be.
12.10 pm
Mr. Richard Spring: I warmly congratulate the hon. Member for Nottingham, North (Mr. Allen) on his highly original, interesting and well-prepared speech. I thank my right hon. Friend the Member for Wokingham (Mr. Redwood) for making some excellent points that reflected great originality. Several good speeches were made, but I particularly applaud the hon. Member for Dundee, West (Mr. Ross) for his work over a number of years as chairman of the Westminster Foundation for Democracy.
Valéry Giscard d'Estaing's draft constitutional treaty is the result of a considerable amount of hard work and effort by several distinguished European politicians. It is thoughtful and imaginative, but in many ways fundamentally misses the point. The main challenge in Europe is how to address the democratic deficit, and we minimise that challenge at our peril. Europe stands on the brink of a new era. Within the next two years, substantial enlargement will take place. To make the European Union viable for the long term, its structures

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must reflect a decentralised and more flexible union that is much quicker to respond to people's wishes and to respect their national differences. All hon. Members would accept that there is a dangerous disconnection between the peoples of Europe and the architecture and institutions of the European Union. Re-engaging people with that process must be at the heart of whatever we do.
That will require a revision of the treaties, but it does not require a new constitution that, for the first time, would explicitly give the EU an autonomous authority of its own, thus changing the very basis of the structure of relationships that has existed between its members. It was frankly absurd for the Foreign Secretary to compare a European constitution with that of a golf club. A constitution would vastly increase the authority of European Union institutions. He called for a simpler statement of principles, but, as we know, constitutions have a great ability to snowball, gathering more importance over time. Accountability and democracy must be the standards by which we judge any new treaty. Although I am pleased that under article 8 any new competency that is not conferred on the EU by member states remains with member states, the principles of subsidiarity and proportionality must lie at the heart of our thinking. In considering the architecture of the European Union, it is important that national Parliaments play the key role. However imperfect, they are the expression of a country's democratic will, and to override that with a supranational written constitution would be to go in entirely the wrong direction.
There needs to be a clarification of the EU's powers, including a clear set of competencies. That would certainly make the EU more accountable and comprehensible, but I do not believe that a treaty of competencies needs to be reinforced on a constitutional treaty basis.
The EU's proper direction is clear: it must be more accountable, involve national Parliaments and clarify its rules. It does not need a supranational structure, which is the implication of many articles in the draft constitution. As my right hon. Friend the Member for Wokingham pointed out, there are also provisions for joint citizenship and the abolition of the EU's three-pillar structure. Could anything more absurd be conceived than having our foreign policy governed by qualified majority voting? That would certainly increase the unelected Commission's authority over justice and home affairs, and make the Union more distant and less democratic.
The draft constitution anticipates the incorporation of the charter of fundamental rights, which would represent a vast increase of the EU's competencies and of judge-led law. Nothing alienates people in this country from the institutions of the European Union more than judge-led law, and the incorporation of the charter in any constitution would see a massive extension of that, exacerbating the question of the democratic deficit.
Since the EU's inception and during its evolution, much has been accomplished, and much of that has been wholly desirable and good for the people of Europe. We are now at a crossroads. We must re-engage people and find an architecture to do that. The idea of a supranational authority in the form of a written
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constitution, which is constantly tested by judges and to which is attached a charter of fundamental rights, is entirely wrong. The urgency is I o bring Europe back to the people and give them a sense of ownership, not create a centralised authority, which would become a bean feast for judges and endanger the precious relationship between acceptability and accountability that links the peoples of Europe with the institutions of the European Union.
12.16 pm
The Minister for Europe (Mr. Denis MacShane): This has been an enjoyable debate and I join in congratulating my hon. Friend the Member for Nottingham, North (Mr. Allen)—a very good friend, mentor and adviser over many years—on securing the debate. He pooled his independent sovereignty as an MP with other right hon. and hon. Members to command an hour and a half of debating time. On Monday, we will return to this matter in a major debate on the Convention.
Yesterday, the Lords Scrutiny Committee asked me some of the questions that have been raised today. I should love to find another word for subsidiarity, and I promise my hon. Friend that I shall open the Foreign Office thesaurus to find one, but it may be difficult. I invite him to read the Bill of Rights, which is the closest that we have to a constitution. There, he will find language, beyond its rather flowery opening, that is as deeply impenetrable as only an English constitutional lawyer can produce.
Before we drifted back into the dreary swamp of Conservative euro-hostility, which slightly diminished the rarefied quality of the debate, we had been exploring interesting conceptual ideas. A couple of nights ago in the House, I faced 40 or 50 giggling, hysterical Opposition Members chortling about the plight of Gibraltar. I am glad to say that today's debate is being conducted in a more serious and mature fashion.
Several hon. Members referred to the American constitution, which was drawn up by 52 men meeting in secret, which is not a privilege—if that is the right word—that we can grant ourselves in the 21st century. I note that no hon. Lady Members have taken part in this debate, and I am constantly worried that when we set about our business of putting Europe together in a better way we are ignoring the half of Europe's population that is not male.
There is a theory that Britain does not have a constitution. With next Monday's debate in mind, I commend "The English Constitution" by Walter Bagehot to hon. Members. He specifically understood the nature of the British constitution, and he contrasted it—I put this point to my hon. Friend the Member for Nottingham, North, who is, like me, a great friend and fan of things American—with the American constitution. Mr. Bagehot wrote:
"You have got a Congress elected for one fixed period, going out perhaps by fixed instalments, which cannot be accelerated or retarded—you have a President chosen for a fixed period, and immovable during that period: all the arrangements are for stated times. There is no elastic element, everything is rigid, specified, dated. Come what may, you can quicken nothing, and can retard nothing."
Of course, the American constitution did not protect the United States from its dreadful civil war.

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Speaking personally and as a Minister, I think that whatever arrangement we come to in Europe, a European constitution should not be static, fixed or immovable. It has to be elastic and able to change because Europe is an organic process and there is no ultimate European finality.
Mr. Redwood: Will the Minister confirm that the British Government will either negotiate out or veto any proposal that would give the EU power over taxation, criminal justice or the way in which we run our Army?
Mr. MacShane: In the brief time available, I should like to discuss the general issue of a constitution. It is well known that the British Government, along with a number of other Governments, do not favour qualified majority voting and wish to keep the unanimity principle on matters of taxation; of course, that also applies to common foreign and security policies. I shall go on to some of the points that the right hon. Gentleman made in his very interesting speech. He is a distinguished intellectual and a quondam fellow of All Souls.
Mr. Allen: Before my hon. Friend the Minister moves on to further points raised by the right hon. Member for Wokingham, I want to make two points. First, does he accept that a constitution is not static? A constitution is subject to endless interpretation, as the American constitution, the French constitution and others have been. A constitution like a boxing ring in that it provides a framework in which political, social or judicial conflicts can be played out. The American constitution both permitted and abolished slavery; it moves with the times. Secondly, will he consider starting a competition to find a better word for subsidiarity? We have got to get over to people that subsidiarity is a great boost for democracy, and not a problem for democracy.
Mr. MacShane: I entirely agree with my hon. Friend, and if he wants to join with me in launching such a competition I would be delighted. He is of course right that constitutions are living things, and judges interpret them all the time. The concluding comment from the Opposition spokesman, the hon. Member for West Suffolk (Mr. Spring), however, was that we are against judge-led law. I am sorry, but the Supreme Court of the United States is the essence of judge-led interpretive law, and any constitutional arrangements will require checks and balances.
In the short time available to me, I cannot go into all the comments that hon. Members have made. Returning briefly to the right hon. Member for Wokingham, he denounced the notion of sharing sovereignty, but we share it in NATO, the World Trade Organisation and, above all, the United Nations. When the UN orders Britain to do something, we do it and oppose those in breach of UN orders. The right hon. Gentleman's vision was, I have to say, Hobbesian—all against all, each in his individual garden. My hon. Friend the Member for Dundee, West (Mr. Ross) was right in his comments about people acting together, pooling their rights and their money.
The biggest derogations of national sovereignty in the European Union were those imposed by the Government of which the right hon. Gentleman was a
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member. The single market was the moment when the harmonisation of directives occurred and pages of new laws exploded into being, which was at the demand of the Confederation of British Industry and British business—and rightly so. We have just obtained the end of national sovereignty over control of energy markets—and rightly so. I want to see similar progress on financial services. Another hon. Member referred to a commitment to educational targets. Those were inserted in the voluntary Lisbon programme, as it is called, for accelerating economic reform in Europe. That was intended precisely to deal with the problems faced by Germany. It would be strange for us now to resile from targets that every British business man then supported.
My hon. Friend the Member for Luton, North (Mr. Hopkins), with whom I have exchanged many a friendly word on these and other matters, should look a little at history. The 4 million unemployed in Germany were inherited from the conservative Government of Chancellor Kohl. Interest rates in the eurozone are 1 percentage point lower than ours. There is no great desire in Germany, a country that I know well, for Japanese-level interest rates, which have not helped move the Japanese economy forward. There is a need to break through the structures of vested interests, many of which are on the business side as well as on the employers side and the church side, or connected with subsidiarity—the vested interest of some regional governments that will not accept a compromise with the wider national interests of the German nation. However, if people want to know who was responsible for the disaster in Germany, they should look at its previous right-wing Government. Electing a right-wing conservative Government is always a disaster for any European country.
My hon. Friend the Member for Dundee, West was absolutely right to say that people want to know. They want facts not fiction, but all they ever hear from the Conservative party—we heard it again this morning and we shall hear it again next Monday—are fictions about Europe. I am happy to paint the European Union, warts and all.
It was very clear from the closing remarks of the hon. Member for West Suffolk and the tone of the remarks of the right hon. Member for Wokingham that they do not want a certain kind of European constitution. They do not want the type suggested by my hon. Friend the Member for Nottingham, North; they do not want a Bill of Rights; they do not want the excellent proposals that my right hon. Friend the Foreign Secretary set out in his article in The Economist entitled "A Constitution for Europe", which had a marvellous image of him as Thomas Jefferson Straw. They do not want any constitution at all, because they are fundamentally opposed to Europe. That is the real division on which this country will have to make a decision at the next election. The party that stands against the interests of the British people in Europe will be defeated again and again and again.
Of course I support reform of the common agricultural policy. So does the Socialist Worker. So does the Daily Mail. So does every bishop. So does every Tory—well, at least every Labour Member. However, the reason that we have this common agricultural policy, with its common fisheries policy, is that we were

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not there in shaping it. The Conservatives want to ensure that we are out of Europe, not in there making it effective.
I think that the hon. Member for Tweeddale, Ettrick and Lauderdale (Mr. Moore) was discussing the dignified elements of a putative constitution. I want a constitution that is effective and efficient. Europe does not need more pretty words. We want a Europe that delivers for its people and that is what the Government and, I hope, my hon. Friend the Member for Nottingham, North will work towards during the next few months.

Mr. Peter Bleach
12.30 pm
Sir Teddy Taylor: I am glad to have the opportunity to raise a matter this morning. These Adjournment debates provide a unique opportunity for hon. Members to raise matters about which they feel strongly. We enjoy that, but I am always sympathetic to Ministers, because I know that Foreign Office Ministers are extremely busy and have to work morning, afternoon and evening, so it must be a problem for them to have to come to these debates. However, in Parliament it is important that if we feel strongly about a matter, we should have the opportunity of raising it and seeking guidance from Ministers.
I want to discuss the case of Mr. Peter Bleach. I apologise to the Minister for the massive volume of correspondence I have sent to the Foreign Office and the many questions I have asked about him. The reason is simply that I believe that a great injustice has been done, and I am seriously concerned and alarmed about the health and security problems which Peter is having in prison in Calcutta. My object in raising the matter in this debate is to try to persuade the Minister and his Department to do all they can to secure Mr. Bleach's release.
In fairness, I would like to express my gratitude for the way in which Ministers have endeavoured to assist so far. As I was writing this short speech yesterday, a letter was delivered to me from the Prime Minister—I am sure that the Minister has seen it—saying that he has written to the Prime Minister of India, Mr. Vajpayee, raising his concerns about Mr. Bleach's poor health and continued detention. He added that he had also asked Mr. Vajpayee to intervene and recommend that Mr. Bleach be released in the near future.
That is not the only initiative that has been taken, and I should mention that the Foreign Secretary raised the case with the Indian Deputy Prime Minister on 22 August. I was also advised that another Foreign Office Minister—I believe that it was the Under-Secretary of State for Foreign and Commonwealth Affairs, the hon. Member for North Warwickshire (Mr. O'Brien)—had discussed the matter with the Indian Foreign Secretary on 16 October. To that extent, I cannot complain about Government inaction. They seem to have gone out of their way to try to persuade the Indian Government that there is an injustice and something needs to be done. It is rather unusual for the Prime Minister to take so much trouble over the case of one individual in prison, and I am very grateful that he has done so.
In short, the Government have taken a major initiative to secure the release of Mr. Bleach, but sadly, the Government of India—who, in fairness, I must say I have always found to be more responsive and responsible than most foreign Governments—have so far declined to respond. I hope that the Prime Minister's latest initiative will persuade them to respond meaningfully, but in view of the seriousness of Mr. Bleach's health problem, I thought it right to raise the case today.
My first point is that Peter Bleach is a person with a record of high standards. When he was living in Southend, I always found him to be a person of honesty and integrity. When he advised me of the complex and

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difficult security operations in which he was involved, he always talked about events in terms of the benefits that they would bring to the community. When he was engaged in a security matter involving pharmaceutical companies in Cyprus, he received a commendation from the police for putting his life at risk to bring criminals to justice. It is only fair to say that Mr. Bleach has been involved in many such interesting events. He has always tried to play fair and straight and to tell things as they are.
I emphasise that Mr. Bleach has advised me time and time again that everything he did in relation to the dropping of arms in Bengal, from the first approach that he received, was notified to the authorities. To protect himself during the preparations for the arms drop, he prudently recorded every word said to him on the telephone by officials. However, as I reported to the House on 2 March 1999, his home and that of a disabled lady in London were raided, and all but one of the tapes disappeared. One of the raids involved 10 constables. Over many years, I have tried to find out the reason why the constables seized the tapes and the evidence was removed. I have never been given a proper explanation. However, it happened: there is no denying that. I do not want to bore the Chamber with the many complaints that have been made about the unusual events of which the raids are just a part, or with details of the unusual activities of Sergeant Etlock. The Minister is well aware that I have given full details of the evidence that that gentleman gave, and the ways in which it seemed to be adjusted.
It would save a lot of time if the Government would simply confirm that officials were advised by Mr. Bleach of the issues relating to the arms drop and it would help even more if they would confirm that the Government of India were advised, too. Mr. Bleach was advised not to get involved. That is the usual practice in such matters. However, the plain fact is that someone who tries to do something of this order and gives all the information about all the events to the Government is rather different from someone who seeks to do the same thing in a secret or malicious way.
Another significant issue relates to the seizure of Mr. Bleach and his five colleagues from Latvia after the Indian air force obliged them to bring down their plane following the arms drop. The Indian authorities carried out that seizure with their usual efficiency, and Peter and his colleagues were seized as they came down the steps of the plane. However, there was one astonishing omission: Mr. Kim Davey—also known by his proper name of Mr. Niels Nielsen—who is a citizen of Denmark, and was the acknowledged and clear leader and organiser of the venture, was permitted to walk away from the plane. He succeeded in travelling out of India and back to Denmark. Of course, I would fully understand someone escaping if they were coming out of a train or a lorry, but when it is case of a plane coming down in an airfield, it is difficult to comprehend how one of the passengers could escape being seized. I have tried to find out from the Indian Government why that happened. Why was that person permitted to get away, particularly as he was the leader of the outfit? I have never been given any explanation at all. The matter seems to get more and more mysterious.
Mr. Davey is alleged to have stayed in Denmark and to have protection there. I have been advised that Interpol has been looking for him. I have also been
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advised that he has been travelling around quite a bit—he has been particularly active in Sudan—and that he was quite recently in London at Smith's hotel, where he was allegedly in the company of some rather official and well dressed people who are often seen at that excellent establishment. It was there that he allegedly sought to persuade one of my constituents, who resides in Great Wakering and whose details I would be glad to give to the Minister, to engage in some interesting work in Bosnia.
Obviously, I do not expect the Minister to comment on these unusual events, but I would like him to say whether the Government regard Mr. Kim Davey as a person who should be seized and questioned by the authorities, and whether approaches have been made to the Danish Government. The issue is of some significance. It seems unusual that although everyone says that they want to seize this gentleman, nothing seems to happen and he travels around doing rather interesting things.
I would also be grateful if the Minister would raise with the authorities in India the clear injustice of their having agreed to the release of the group of Latvians who were on the plane, although they were all charged with the same offence as Peter Bleach and were all given the same sentence as him. That seems unfair and unjust. There were a number of people on that plane: Mr. Kim Davey, who somehow walked away, even though he was in charge of the whole operation, the Latvians and Peter Bleach. When Mr. Putin, the President of Russia, made representations, the Indian authorities gladly released the Latvians, but Peter Bleach is still in prison.
Will the Minister comment on Peter Bleach's health? I have received many letters from Peter, which I can show the Minister. Peter told me that he had contracted tuberculosis, and that that serious disease had had a severe impact on his health. It is sometimes possible to receive a host of reports from a foreign jail that are misleading and contradictory. However, I know that the high commission staff have kept in close touch. Is the situation serious and have the Government of India been fully advised of the situation? I get the impression from Peter that he is a seriously ill man and that the matter deserves attention. The facts are crucial, and if the Minister can tell us whether Peter Bleach is an ill man, that will help.
I also want advice from the Minister about the alarming reports that I have received from Mr. Bleach, and several of his friends who visited him, about his being viciously attacked and injured in the prison. I know that things are rather difficult in India, but I get the impression that its prisons are pretty well managed compared with those of other countries in the area. None the less, there seems to have been a nasty incident in this specific case. It should be relatively easy to establish whether the reports are true. Mr. Bleach is in the high security block of the jail in Calcutta. There is a group of single cells in the block, numbered 1 to 23. Peter is in cell No. 11, which is in the exact middle of the row. The cells on either side are occupied by people who are accused of the American Centre attack. It is alleged that Mr. Bleach was assaulted seriously in an especially vicious attack at the beginning of this month. Has the Foreign Office heard about the problem, and can it secure any assurances for the future?

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I believe that the case of Peter Bleach is a great tragedy. If he were simply a rascal who had conspired with others to create strife and suffering by arms dropping, I would have no sympathy for him whatever. However, his case is totally different, for the reasons that I have explained to the Foreign Office time and time again. I am sure that the Minister is aware of all the circumstances. I thank the Minister and Foreign Office for their endeavours, but I ask them to keep up their pressure and to try to persuade the Indian authorities to put right a great injustice.
If the Foreign Office pursues a case too rigorously or too toughly, I know that that can sometimes interfere with relationships between the two countries involved. The Minister is aware that India has been a special case over the years. It has preserved democracy as other nations have not. It has managed to keep such issues as theft and corruption down to a minimum, while other countries appear to be full of such problems. India is a country that has high standards, good education and high principles.
I understand the Indian point of view—that India wants to do something about a person who has been accused of a crime. However. I believe that there has been an injustice in this case. There was an injustice in the original claim, it is an injustice that Peter is kept there although the others were released, and it is an injustice that a person who is suffering severe illness seems to be neglected, and has apparently been attacked in prison in unusual circumstances.
I apologise again to the Foreign Office for the fact that I seem to be harping on this issue time and time again. I am well aware that it has tried hard and put its resources behind the operation. I simply say that the cause is good. I hope that the Foreign Office will keep at it, and manage to persuade the Government of India to put right a grave injustice. I am glad to have had the opportunity to raise the issue. I was told that I had been allocated 15 minutes, but I have used only 14 of them, so I am pleased to give the Minister the bonus of an extra minute for what I hope will be his good reply.
12.44 pm
The Parliamentary Under-Secretary of State for Foreign and Commonwealth Affairs (Mr. Bill Rammell): I congratulate the hon. Member for Rochford and Southend, East (Sir Teddy Taylor) on securing this debate on the case of Peter Bleach, who has been imprisoned in India since 1995. I also congratulate him on the assiduousness with which he has pursued this case. We share a historical county boundary, and although it is no longer a local government boundary, I know the way in which the hon. Gentleman normally pursues issues of constituency concern. I pay tribute to him for that.
For the record, I should say that my hon. Friend the Member for Scarborough and Whitby (Lawrie Quinn) has also made strong representations to me about this case and expressed his concerns, as Mr. Bleach's mother resides in his constituency. In response to those representations, and to the comments of the hon. Member for Rochford and Southend, East, I shall set out in detail the actions that we have taken thus far.
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As the hon. Gentleman made clear, Peter Bleach was arrested for his involvement in an illegal arms drop over the Purulia district of West Bengal in India in December 1995. As a result, he was arrested on 22 December, along with five Latvians—who subsequently became Russian citizens—after the Indian authorities had forced their plane to land in Bombay. Peter Bleach has consistently alleged that the principal organiser of the arms drop, Kim Davey, managed to evade arrest. The hon. Gentleman referred to that in some detail.
Mr. Bleach was convicted, along with his five Russian co-accused, on 31 January 2000. He was convicted of conspiracy to commit offences against the state of India and offences under the Explosives Act, the Explosive Substances Act and the Arms Act. All six individuals—the five Russians and Mr. Bleach—were given the same sentence of life imprisonment. All six lodged appeals against their conviction in February 2000. Subsequently, the Indian President authorised the release of the Russian nationals in July 2000 following diplomatic pressure from the Russian Government. Since the release of the Russians, we have made strong representations to the Indian Government, questioning what we believe to be the discriminatory treatment of Mr. Bleach. We believe that he should have been released, on the grounds of fair and equal treatment with his Russian co-accused. In court each case was presented and dealt with in exactly the same way, and the charges were the same. I therefore feel that there is a very strong case, based on the need for fair and equal treatment, that Mr. Bleach should be treated in exactly the same way as the five Russians.
Having said that, I would like to make it clear that we are not contesting Mr. Bleach's conviction. However, we believe that we have a duty to ensure that he is not being discriminated against. We are also worried, as the hon. Gentleman is, about Mr. Bleach's health. He was diagnosed in February as having tuberculosis. He is very ill, and I understand that he is at risk of developing the drug-resistant strain of the disease, which has the potential to kill him. We have raised our concerns about Mr. Bleach's health with the Indian Government, asking them to take it into account when considering his case.
The hon. Gentleman acknowledged that we have been extremely active in Mr. Bleach's case. Over the past 18 months we have raised it repeatedly with the Indian Government. It has been raised at every available opportunity at the highest levels—by my right hon. Friends the Prime Minister and the Foreign Secretary, and by my ministerial colleague the Under-Secretary of State for Foreign and Commonwealth Affairs, my hon. Friend the Member for North Warwickshire (Mr. O'Brien). Unfortunately, my hon. Friend cannot be here today, but he would have wanted me to make his involvement clear. Since January, the case has been raised with Indian Ministers on no fewer than 10 separate occasions.
Let me give hon. Members some details about those representations. My right hon. Friend the Foreign Secretary has raised the case four times this year with the Indian Government. He raised our concerns about Mr. Bleach—including concerns about his poor health—with the Indian Deputy Prime Minister, Mr. Advani, on 17 February and 29 May. He also wrote to Mr. Advani on 8 July and, when he visited India on 19 July, he raised

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the case with Foreign Minister Sinha. Most recently, he raised the case again with Mr. Advani on 22 August. In addition, the Prime Minister has raised Mr. Bleach's case with the Indian Government twice this year. He raised it with Deputy Prime Minister Advani during a visit to India in January 2002 and, most recently, on 4 November he wrote to Prime Minister Vajpayee reiterating our real concern about Mr. Bleach's ill health, and his continued detention, and asking for his release in the near future. In addition to those ministerial representations, our high commission in New Delhi has frequently raised the matter with the Indian Government.
Despite all those efforts, and although we have been working hard on Mr. Bleach's case, the Indian Government have given no indication that they will release him. They have given a number of reasons for their stance; one is that his release will undermine their case against the alleged ringleader of the arms drop, Kim Davey. We understand that the Indian Government are currently trying to extradite Mr. Davey from Denmark, but that the Danish Government have thus far refused that request. We have, however, made it clear to the Indian Government that the investigation of Kim Davey does not affect our strong argument that Mr. Bleach is being discriminated against. The key, fundamental point is that equal judgment by the court must necessarily imply equal treatment for Mr. Bleach and his Russian co-accused. That is the point that we have been making from the beginning of the process, and we will continue to make it.
As I listened carefully to the hon. Gentleman's speech, I was also interested to hear that he thought that one of his constituents had met Mr. Davey recently in a hotel in the United Kingdom. We have looked into that matter. Interpol in London has advised us that it has received no indication that Mr. Davey is in the United Kingdom. The hon. Gentleman's constituent should report the incident to the police and request that the information be forwarded to the Interpol bureau in London. That body will notify the appropriate United Kingdom department that deals with extradition matters. For the record, we have not made approaches to the Danish Government concerning the extradition of Kim Davey. That is clearly a matter for the Danish and Indian Governments.
Mr. Bleach has also been pursuing his discrimination case with the Indian courts. He filed a discrimination petition with the Calcutta high court on 5 October 2001, which was dismissed on 20 September 2001. However, his appeal against his conviction and the legality of the charges against him, which began in September 2001, continues. Our deputy high commission in Calcutta has sent representatives to the court hearings and we are monitoring those court hearings and developments very closely indeed.
Mr. Bleach is representing himself at his appeal. I should make it clear that we offered him the services of a British lawyer from our pro bono panel of lawyers to assist him, as is our normal practice. We put prisoners in touch with such lawyers if we have concerns about their access to legal advice, or if there are particular human rights concerns about their cases. Mr. Bleach, however, decided not to accept our offer. That is why he is pursuing his own case. I take this opportunity to comment on the circumstances surrounding the raid on
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Mr. Bleach's home in the United Kingdom, to which the hon. Gentleman has referred. I say simply and firmly that we have investigated that matter and the raids were carried out strictly in accordance with United Kingdom law.
We are aware of Mr. Bleach's concerns about the evidence that was provided by a North Yorkshire police officer during his trial. My right hon. Friend the Foreign Secretary, in his former capacity as Home Secretary, met the hon. Gentleman to discuss this and other allegations against North Yorkshire police. As Foreign Secretary he wrote to the hon. Gentleman on 5 December 2001 concerning the matter. The actions of the police officers during the course of their duties is, as I am sure that the hon. Gentleman is aware, the operational responsibility of the chief officer of the force concerned. North Yorkshire police and the officer concerned have been aware for some time about the allegations that have been made by Mr. Bleach and they completely refute them. For the record, Mr. Bleach has been advised on several occasions that he can make a complaint if he is unhappy with the conduct of police officers, and he has been notified of the procedures for so doing. That course is also open to the hon. Gentleman. However, no such formal complaint has been received, and we have yet to see any evidence of wrongdoing by the North Yorkshire police.
The hon. Gentleman also asked whether Mr. Bleach advised officials of issues relating to the arms drop. I can confirm that he provided details to North Yorkshire police about the arms drop during interviews on three separate occasions—on 14 September, 22 September and 8 December 1995. On 22 September and 8 December the police strongly advised Mr. Bleach to withdraw from the deal and not to go to India. The information given by Mr. Bleach was passed on to the Indian authorities on three separate occasions—10 November, 17 November and 15 December 1995.
We remain very concerned about Mr. Bleach's health. Our deputy high commission in Calcutta is providing full consular support to Mr. Bleach and is doing all that it can to ensure that prison authorities meet his welfare requirements. On learning that his health had deteriorated in February this year, it arranged for an independent doctor to visit him. The tests recommended by the doctor confirmed that Mr. Bleach was suffering from tuberculosis, and as a result, consular staff in Calcutta have visited him more regularly since February—usually twice a month—to monitor his condition. They have also arranged for further visits by an independent doctor.
Consular staff in London have sought advice on Mr. Bleach's treatment from a tuberculosis specialist in the United Kingdom. They have discussed the doctor's recommendations with the prison authorities and have done their utmost to try to ensure that Mr. Bleach receives the medication that he needs. In addition to regular visits by consular staff in Calcutta, Mr. Bleach has also been visited by our high commissioner to India on 3 September this year.
Mr. Bleach has, understandably, become increasingly frustrated about his continued detention, and went on hunger strike for approximately 36 hours in August. We were also concerned to learn at the beginning of October that he had decided to stop taking his medication in protest at the Indian authorities' handling of his case.

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Unfortunately, our efforts to persuade him to resume his medication have failed. However, we continue to monitor his welfare carefully, and Mr. Bleach has been visited three times this month, most recently by our deputy high commissioner in Calcutta on 21 November.
A consular representative from our high commission in Calcutta was concerned to learn during a visit on 8 November that, as the hon. Gentleman mentioned, other inmates had tried to attack Mr. Bleach, and that he had not received his fruit and vegetable ration. The representative immediately reported the problem to the superintendent of the prison, in the presence of Mr. Bleach, and the superintendent said that he would investigate the matter and guarantee Mr. Bleach's safety.
Mr. Bleach contacted our deputy high commission in Calcutta on 14 November to request a further urgent consular visit, and a representative visited him that afternoon. Mr. Bleach reported that the prisoners who had tried to attack him had been put in charge of his yard, and he feared that his life was at risk. We naturally took his concerns seriously. Our deputy high commissioner visited the prison and met the superintendent to discuss the matter again on 21 November. He also handed him a letter expressing our concern about Mr. Bleach's safety, and the non-receipt of some of his food rations. Our deputy high commissioner visited Mr. Bleach the same day to check on his welfare and keep him informed of our actions in his case. He also subsequently raised the matter with the West Bengal Chief Secretary.
We will continue to do all that we can to help Mr. Bleach and are in close contact with his family in the UK. We will also raise our concerns about his health with the Indian Government, and ask for his release on the grounds of fair and equal treatment with the Russian co-accused. As a result of the Prime Minister's letter of 4 November to Prime Minister Vajpayee, we hope that Mr. Bleach will be released in the near future. Finally, I again pay tribute to the way in which the hon. Gentleman has put forward his concerns.

Reusable Carrier Bags
1 pm
Mr. Tom Harris: Thank you, Mr. Benton, for giving me the opportunity to speak in this debate. I have spoken before in Adjournment debates in Westminster Hall, but this is the first time I have spoken on a subject of my own choosing.
I approached this subject with an open mind—which is, I accept, unusual for a politician. It presents a challenge to any Government who are genuinely concerned about the environment, particularly as it is estimated that as many as 10 billion plastic carrier bags are used every year by consumers in this country. I am sure that we can all agree about one thing—that it is important to encourage consumers to reuse those bags.
The key question is: how do we do that? Since the beginning of April 2002, the Irish Government have pursued the very radical—and, in some quarters, very popular—policy of imposing a 15 cent tax, which is 9p in real money, on every plastic carrier bag issued by the supermarkets. That tax cannot be absorbed by the supermarkets; it must be passed on to the consumer, or there would be no point in levying it in the first place. The United Kingdom Government have suggested that they might consider imposing a similar tax.
In response to a question posed by my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz), who is present today, my right hon. Friend the Minister for the Environment described the 90 per cent. reduction in the usage of plastic carrier bags in Ireland as quite daunting, although he went on to say that there might be other 'ways to reduce the consumption of plastic carrier bags. Five days later, my hon. Friend the Economic Secretary to the Treasury said:
"The Government currently have no plans to introduce a plastic bag tax."—[Official Report, 22 October 2002; Vol. 391, c. 212W.]
The purpose of this debate is to give the Government the opportunity to clarify their position. I do not expect the Minister to say today that they will or will not impose such a tax, but I hope that they will use this opportunity to explain where we are now, and whether we are considering imposing one. Depending on one's point of view, today might be either a good day or a bad day to raise this issue, as my right hon. Friend the Chancellor will be making his pre-Budget statement in the Chamber later, and he might address this subject.
I approach the issue from the point of view of someone who is concerned about jobs not only in my constituency but throughout the United Kingdom. Last week at business questions I raised a matter concerning a company in my constituency called Simpak. Its managing director, Neil Young, first brought this matter to my attention. In this country, private industry is never slow in coming forward to express reservations or to imply that there might be job losses in response to almost any regulation or taxation proposed by any Government, but we must take industry's view seriously, or at least listen to it in the first place.
Simpak manufactures paper bags but imports large quantities of plastic bags from Asia—which is where the vast majority of plastic bags used in this country are made. The threat is credible; Simpak's concern that a

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significant decrease in the use of plastic bags on the same scale as in Ireland could result in a loss of jobs in my constituency is credible.
Mr. Mark Lazarowicz: I am grateful to my hon. Friend for giving way, and also to the Minister for allowing me to intervene. Given his constituency interest, I recognise my hon. Friend's sincerity in relation to such issues; I also understand why manufacturers involved in the production of plastic carrier bags do not believe that a ban would be a good idea. Does my hon. Friend accept that the problem is based not only on the amount of plastic used in the production of bags, but on how the bags are disposed of, and the contribution that such action can make to combating litter and the throwaway society? Given the public support for the early-day motion that I tabled in our previous Session, does he not think that the industry, rather than simply opposing the innovation of carrier bag tax, should look for a way of diversifying its production?
Mr. Harris: I accept that my hon. Friend's views are genuine, and I agree with many of them. He has been a strong supporter of the measure for a long time, and I shall deal with some of his arguments. We must consider whether the sacrifice that may have to be made in terms of the number of jobs throughout the country would be justified by what I consider to be the dubious environmental advantages. I have taken a peculiar—some would say unhealthy—interest in the litter on the streets of my constituency. Far from there being large quantities of used plastic carrier bags, the main culprits are discarded cans that once contained lemonade, and plastic and polystyrene food containers. It is estimated that only 1 per cent. of the litter dropped on the streets of the United Kingdom, and only 1 per cent. of landfill, is taken up by plastic carrier bags. That is because many people already reuse plastic carrier bags. A National Opinion Poll survey in October 2000 found that four out of five consumers already regularly reused the carrier bags that they were given free at supermarkets.
One consequence of the new tax in Ireland is a 90 per cent. reduction in the use of plastic carrier bags, but there has also been a 300 per cent. increase in the number of black plastic bin liners sold in shops. Such bin liners are rarely reused, as the smaller carrier bags are. Furthermore—and we must learn from what has happened—there has been a massive shift in Ireland away from plastic carrier bags to paper carrier bags. Environmentalists will welcome that, because paper bags degrade far more quickly than plastic carrier bags.
However, the environmental disadvantage of that practice is that a paper carrier bag is six times the weight of a modern plastic carrier bag. It also takes up 10 times the storage space of a plastic carrier bag, which has consequences for the transporting of paper bags. In other words, for the number of plastic bags that could be transported in one lorry, it would take 10 lorries to transport the same number of paper bags. I hope that the Government will take that serious point into account when considering the way ahead.
We are politicians and we must be careful not to raise expectations. If only 1 per cent. of landfill and I per cent. of street litter is plastic carrier bags, even a decrease of 100 per cent. in the number of plastic bags used would
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result in a mere 1 per cent. decrease in landfill and a 1 per cent. decrease in litter. Is such a negligible improvement in the environment worth the opprobrium that we would surely suffer from consumers and electors if the tax were to go ahead?
We should acknowledge the hard work done by the industry in recognising that it has environmental responsibilities. The best example of that hard work is the fact that a plastic carrier bag today uses 70 per cent. less plastic than it did 20 years ago. The industry should be congratulated on that achievement, not penalised for it.
As with all consumer taxes, my main anxiety is that a plastic carrier bag tax would be regressive. When I go to the supermarket with my wife to do the monthly shopping, we use as many plastic carrier bags as we need to carry our shopping to the car park. If the tax were introduced, I suspect that my habits would not change, and nor would the behaviour of many other people who are lucky enough to earn a good income. However, such a tax would affect the poorest people in my constituency, who are already living at or below the poverty line. Supermarkets are already planned around the car culture, and the proposed measure would only help to penalise people who do not own a car and already suffer from supermarkets' lack of accessibility.
I shall finish by making what some would consider a cynical point, but one that I consider realistic. All politicians want their political party to benefit and prosper electorally. I accept that taxes are unavoidable, but introducing the proposed tax would hand our opponents a ready-made, custom-built manifesto commitment to abolish the tax. Such a commitment would be popular among the millions of swing voters that the Labour party has been courting assiduously in the last 10 years, and our opponents would seize upon it. The tax would probably be the most unpopular since the poll tax, and we do not have to think back too far to remember the consequences of that tax for the Conservative Government.
I am not one of those Labour Members of Parliament who instinctively welcome all taxes and think that we should raise them left, right and centre; I believe that if we can abolish or reduce a tax we should do so. We only have to think about what happened in 1997 to see the consequences for the Conservative Government of raising taxes that the electorate were not convinced were justified. I approached the matter with an open mind, but the more I learn about the subject, the more I am convinced that imposing the tax would mean the worst of both worlds. We would reap a negligible benefit to the environment, and the unpopularity of imposing an unfair tax on the people whom we were elected to represent.
1.13 pm
Mr. John MacDougall: I begin by congratulating my hon. Friend the Member for Glasgow, Cathcart (Mr. Harris) on securing the debate. We all agree that meaningful and effective steps must be taken to improve the environment. We are required to work within the terms of European directives or pay the penalty for not doing so. I therefore understand the Government's position in taking steps on environmental issues where they can make a significant

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difference, and they have been successful in doing so. I have an open mind, and my right hon. Friend the Minister's argument may well convince me. However, at present I share some of my hon. Friend's concerns.
I had not given a great deal of attention to the subject until I had read some of the relevant documentation. Certain questions remain unanswered—for example, how effective a tax of this nature would be in making a significant change to environmental pollution. My information is that only about 2 per cent. of all the oil consumed in Europe is used for plastic film, and plastic carriers represent a small part of that percentage. The vast bulk of oil—nearly 85 per cent.—is burned as fuel in cars and lorries, or for power and heating. A carrier bag tax will make no real difference to global oil consumption. Such questions need to be answered if anyone is to be convinced that such a tax will make a significant difference.
My hon. Friend outlined some of the issues regarding the purpose of carrier bags. We all take for granted the plastic bags that we are given by the supermarkets every weekend. I do not know what the reaction would be if they were not available, nor how the public would be expected to cope without them. They are a part of people's way of life now, and such a change would lead to questions about why that practice had changed. Any increase in tax would therefore have to be weighed against the benefit to the public, and a clear argument would have to be presented to justify such a measure.
In general, I believe that if taxation is to make a difference it should be as little as possible, yet effective; in this case, it should be applied across industry, so that no particular industry is unfairly targeted. Industries that cause pollution should pay the penalty for that pollution; either a tax should be imposed across the board, or it should relate to the scale of the pollution. We should resist taxation unless it can be shown that polluting industries would make a significant contribution; in that case, taxation would be easily justified, and I am sure that the public would be on board.
I remain to be convinced that putting a tax on carrier bags will be seen as effective. The Minister may have an effective argument against me; he may say that I am wrong and that my fears will not be realised. I hope that he will consider the points raised by my hon. Friend, and I hope that he can reassure me that if taxation is to be applied, it will be done for credible reasons. If not, perhaps the matter should be reconsidered—if it is not too late. No one knows whether my right hon. Friend the Chancellor of the Exchequer will make a contribution to this debate this afternoon; we wait with bated breath, but other issues may figure higher on his agenda. I do not want to take time unnecessarily, so I shall let the matter rest there.
1.18 pm
The Minister for the Environment (Mr. Michael Meacher): The three contributions by my hon. Friends the Members for Glasgow, Cathcart (Mr. Harris), for Edinburgh, North and Leith (Mr. Lazarowicz) and for Central Fife (Mr. MacDougall) were well made. Before such new measures are introduced, there should be a
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proper public debate and a general understanding of the rationale behind them. As a result of a leak, information was passed to the media, which ran with the story in a particular way. That is a classic example of a hare being started when the information was largely inaccurate. That is not the best way to conduct a public debate. I am therefore grateful for the opportunity to respond to this debate.
As my hon. Friend the Member for Central Fife said, it is somewhat ironic that this debate is being held only a few hours before my right hon. Friend the Chancellor of the Exchequer presents his pre-Budget report. I cannot disclose any of its contents that might be relevant to the debate, but clearly, we shall look both to that and to the strategy unit's waste report, which are both highly relevant.
What I can talk about is why this has become an issue. I receive many letters about packaging, which is probably the issue that most concerns the public in terms of the unnecessary frivolous waste of resources. The Government are taking action to reduce the tonnage that retailers use in packaging by introducing certain measures that will give them incentives to do so. However, in 2001 there were 1.7 million tonnes of plastic packaging in the waste stream—an increase from 1.6 million tonnes in 2000. The figure is slowly rising. Point one is that the proposal would be a way of reducing the use of a form of packaging that many members of the public find unacceptable.
The second point concerns sheer quantity. Research conducted in September 2000 indicated that UK consumers used about 8 billion plastic carrier bags per year—an average of about 134 bags per person. That is a huge number, and it is difficult to justify the use of all of them. My hon. Friend the Member for Glasgow, Cathcart made a reasoned case from the sceptical side. He suggested that the amount going to landfill might be no more than 1 per cent. and asked what happened to the other 99 per cent.
It is true that if we assume a 20 per cent. replacement of conventional plastic packaging with bioplastics—one solution is to replace non-biodegradable bags with biodegradable ones—the estimated landfill space saving due to the degradation of plastic will be less than 1 per cent. of the volume taken up by municipal sustainable waste each year. Of course we have to take account of the other 99 per cent.—and we are doing so with strict landfill targets, the increase in statutory recycling targets and trading permits in the Bill that we are introducing this year. However, even the 1 per cent. that goes to landfill could still, if all plastic bags ended up there, be about 68,000 tonnes—not an insignificant quantity.
Litter is the issue that concerns most members of the public. The perceived plastic bag disposal problem is based on the view that most go to landfill. Litter is the more obvious issue because discarded bags are very visual, and very unsightly when they blow about in hedgerows or on the street, as they do in my constituency—and, I am sure, everywhere else.
My hon. Friend the Member for Glasgow, Cathcart raised a couple of points that I shall try to deal with immediately. I was puzzled by his saying that the measure could be unpopular. I entirely agree that nothing should be done without a much better public understanding of the rationale behind it. However, if the

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measure is as popular in Ireland as it appears to be, and has led to an enormous reduction—about 95 per cent.—in the use of plastic bags, I find it difficult to understand why it should be so unpopular in England. We are not exactly the same as the Irish, but I should have thought that there would be a similar reaction here. My hon. Friend also said that there could well be, as has happened in Ireland, a 300 per cent. increase in the number of bin liners. I am sure that there would be a substantial increase in their use. That is a fair point, but I would suggest that those bin liners would actually be used for transporting waste, whereas the litter issue with so many plastic bags is that although once they are brought home they might be used as bin liners, many find their way to other destinations, where they blow about in the street looking unsightly.
Mr. Harris: I am grateful to my right hon. Friend for giving way to me, and giving me a second bite at the cherry. Is he not perhaps confusing popularity with acceptance? Despite the non-payment campaigns, 90 per cent. of people paid the poll tax, but that did not mean that it was popular. I have no doubt that the tax in Ireland has been successful, but whether it is popular is another matter.
Mr. Meacher: Of course I understand that. No one likes paying taxes, and there is no such thing as a popular tax; that is a bit of an oxymoron. To take up the point about acceptability, however, there could be a good reason for us to pay a tax, and it could help us to achieve objectives with which we all agree. That is perhaps as far as I would press the point.
There are alternatives, and the Government want to consider them all before proceeding. We are assessing the extent of the problems created by plastic bags, as well as the possibility of a tax, although my hon. Friends know that tax is a matter for my right hon. Friend the Chancellor, not for me. The results of our work will be considered alongside the report of the Government's strategy unit, which will be published shortly.
I would be the first to recognise that there are disadvantages to a plastic bag tax, and there is the issue of increased unemployment. Some of my hon. Friends may have plastic bag manufacturers in or near their constituencies, and that is a significant issue. A tax could lead to companies going out of business, although my experience suggests that they are good at finding ways to adjust, provided that they have a sufficient transition period. I also understand the point about there being no conventional plastic manufacturers in Ireland. That is significant.
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Several food retailers have introduced "bags for life" schemes, and we are probably all familiar with them from doing our shopping. They all follow the same basic pattern. A charge is made for a strong and durable plastic bag, which is replaced each time it wears out. It takes a long time for the bags to wear out, but when they do, the plastic from them is recycled. Some supermarket schemes have had considerable success; for commercial reasons, I probably should not name the supermarkets involved, although I think that they are familiar to us all. However, those schemes have yet to take off in a major way across the whole retail sector.
I readily admit that retailers see "bags for life". schemes as a better way forward than a tax. Although they recognise the schemes' overall lack of success, they have, through the British Retail Consortium, shown an interest in introducing a well publicised, voluntary national "bags for life" scheme, as advocated by the curator of the Science Museum. Such a scheme would involve putting a national logo and strapline on all bags, which would be customised for all supermarket chains and types of retail outlet, and designed to be as environmentally friendly as possible. Advocates of that approach take the view that what is missing at present is a properly promoted and co-ordinated scheme to cover all retailers throughout the country. They also recognise that it is crucial to motivate consumers if we are to encourage the reuse of bags. Once again, it is important that we carry the public with us.
There is no doubt that a tax-based policy moves consumer behaviour in the right direction. However, it may also encourage consumers to reuse bags for the negative reason of avoiding tax, and it would be much better if they were incentivised for the right reasons. If consumers are to have positive reasons for changing their behaviour, we must raise awareness and convince them of the environmental benefits of reducing waste and recycling used bags.
Finally, the Wales Environmental Trust and Asda have set up a project to encourage the reuse of plastic carrier bags. Its objective is to find an effective means of reducing the number of single-trip plastic supermarket carrier bags used in Wales. It tries to answer two questions in a two-part project over 10 weeks. The first question is whether the attitudes of the general public on the reuse of supermarket carrier bags can change without the introduction of a tax or some other charge, and the second is what is the best reusable option to provide for consumers. For a trial period of six weeks, single-trip carrier bags will be removed from all Asda stores in Wales, and bags for life will be issued free in their place. That is the type of measure that we will consider before we take a final decision.

Local Authority Funding (South-East)
1.30 pm
Chris Grayling: I am grateful to the Minister for attending to take part in the debate. I am a Surrey Member of Parliament, but the concerns that I want to raise are shared by Members across the south-east of England. That is why I gave the debate its specific title. Across the political spectrum, we are all profoundly anxious about the implications for our local services of the planned funding review that the Government are undertaking. About 10 days ago, the leaders of Surrey, Kent and Hampshire county councils held a press conference to raise their concerns about the potential impact on the services that they offer.
All 11 Members of Parliament, irrespective of party, who represent the constituencies in Surrey are today sending a joint letter to the Prime Minister, urging him to pay attention to the risks inherent in the Government's proposed funding changes. I want to take advantage of this opportunity to set out some of our concerns. I will speak briefly, so that my hon. Friend the Member for Fareham (Mr. Hoban) can raise issues on behalf of his county, Hampshire.
The fundamental issue in the south-east is that we are under pressure in a variety of ways. In the past generation, there has been a huge migration of economic activity and population into the south-east—a trend that is continuing relentlessly year by year. Public services across the different counties in the area are already significantly overstretched, for various reasons. We have a substantial elderly population. Parts of Kent face a significant influx of asylum seekers, who need support within the communities to which they move.
Our police force is under pressure as a result of the increase of resources in London, especially the higher rates of pay offered there. There has been a migration of experienced officers into London and other areas. Our social services face a distinct shortage of care home beds. Against that background, all our public services operate in an environment in which the cost of maintaining them is rising relentlessly.
Mr. Julian Brazier: I am grateful to my hon. Friend for giving way so early in his speech. Does he not think it disgraceful that in care homes in my patch in Kent—and, I imagine, in his as well—an elderly person can have two and a half times as much local authority funding as the person in the neighbouring bed? The amount paid depends on whether the person comes from the privileged boroughs of London or from our constituencies.
Chris Grayling: My hon. Friend makes a good point. The Minister must be aware that the shortage of beds that has resulted throughout the south-east—in London and outside—as homes have disappeared means that London boroughs with deeper wallets are taking up care home places further out. That means that there is less choice available to the social services departments that try to meet the needs of our constituents. There is a shortage not only of care home places but of carers. People in my constituencies are blocking hospital beds
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simply because the people are not there to deliver the home-based services that the hospitals and social services believe they require.
Against that backdrop, the review threatens at least to engender a drip-by-drip bleed of finance from our services over the next few years. Several scenarios have been suggested. At worst, my county could lose £60 million in funding. I accept that the Government have said that there will be a floor at zero per cent., so there may not be cash cuts in funding, but even if there are increases, if those increases are significantly below inflation, over several years the consequences for services will be devastating. That is because local authority services do not simply operate according to inflation. For example, there are teachers' pay settlements that are higher than inflation and need fully funding. There are increased pension costs and above-inflation increases in care home costs. There is a whole raft of additional pressures that require additional resources, especially for housing for those who are homeless in our areas, because affordable housing is not available for all those who need it. Such pressures make it almost impossible for local authorities to do their job properly. If they lose significant funding over the next few years, even in a drip-by-drip way, our services will become poorer. The consequences will be damaging both for our region and for the nation as a whole.
My area generates a significant contribution in tax revenues to support the things that the Government are doing in the rest of the country. If we undermine the ability of the south-east to function as an effective economic unit, and we do not have good public services in the parts of the country that create the most wealth, we shall lose business, investment and good people, not to other parts of the country but to continental Europe. If the south-east loses, the country loses. I urge the Minister to take that into account as he and his colleagues work on the review in the weeks ahead.
The policing situation is of particular concern. I refer to the proposed changes in police funding in Surrey, which has recently been a weak receiver of funds. In terms of the funding from central Government, Surrey's police budget has been reduced by 14 per cent. in real terms over the past five years. That funding has had to be made up by increases well above inflation in the police precept.
The force is already underfunded, and it now faces further cuts as a result of Government reviews. Review options vary from Surrey losing a bit to Surrey losing a lot, at a time when the force cannot afford to lose anything at all. The Minister may not be aware of the fact, but varying pay structures in the public sector mean that police in London receive £6,000 a year more than those in Surrey. That structure is repeated in teaching and many other public services, but nowhere is it more acute than in policing.
Mr. Mark Oaten: In addition to the problem of the difference in salary, is the Minister aware that the Metropolitan police offer incentives such as paying police officers for travelling from many of the home counties into London?
Chris Grayling: The hon. Gentleman makes a good point, and there are further benefits on top of that, such

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as pension rights and fringe benefits, which make the case for moving to London all the more compelling. As a result, forces outside London are often staffed by newly qualified officers. Forces have lost the bulk of their experienced officers, who have moved a short distance up the road to earn significantly more money—and who can blame them? Consequently, we cannot deliver the effective policing that we would want.
The chief constable of Surrey has said publicly that his force is in crisis because of the tendency that I have just described, and that he is not confident that Surrey police forces will be retained in their current form if funding changes are made according to the formulae that the Government have proposed. That is a profound worry in a busy part of the country, which may have less crime than London but is none the less vulnerable to increases in criminality. Policing is needed there, not only for major inquiries such as the tragic Milly Dowler case, but for additional security at Heathrow and Gatwick, and for the M25.
Our schools are the greatest concern, however. One of the infant school heads in my constituency has written a very spontaneous letter, which says:
"Surrey schools are among the best in the country and the loss of funding could have a disastrous effect on standards and morale. You will be aware of the difficulties we face in recruiting and retaining staff, especially teachers. Much of this is due to the high cost of housing and a large increase in Council Tax would make an already difficult situation worse."
There's the rub, because council tax increases—if, indeed, we must have them in Surrey and other parts of the south-east—disproportionately affect those on low and fixed incomes, such as pensioners who have been retired for a long time and who do not have above-inflation pay increases to enable them to pay above-inflation council tax increases. Teachers and other public servants struggling to buy their first houses in the south-east cannot afford significant increases in their council tax.
If the Government cut away funding from Surrey and other counties in the south-east so they have to maintain statutory services through big increases in council tax, ultimately we shall lose more of the people who find it a struggle to get by in the south-east, and our public services will deteriorate still further. The Minister must take into account circumstances in the south-east before he takes steps that will do lasting damage not just to the region but to the economy and the rest of the nation.
1.40 pm
Mr. Mark Hoban: I congratulate my hon. Friend the Member for Epsom and Ewell (Chris Grayling) on securing the debate, and I concur with many of the points that he made. I shall focus on the impact on Hampshire in particular. Hampshire county council has estimated that in a worst-case scenario it would lose £80 million, which is equivalent to 9 per cent. of its budget. That would lead to a 32.6 per cent. council tax increase, equivalent to an increase of £170 for band D. Even with a mid-point change Hampshire would lose £35 million, which equates to a £98 increase in band D council tax.
Of course, that is only one aspect of the changes facing council tax payers in Hampshire. Changes in police authority funding will affect them too, and in
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Fareham there is particular concern that the merging of the rate support grant and the non-domestic business rate will lead to a loss of funding; in Fareham that will be about £75,000. When the Minister's colleague gave a seminar before this parliamentary Session, he said that an announcement would be made very shortly about that funding change. I hope that the Minister will suggest when that announcement will be made, and what might be in it.
A 9 per cent. cut in the budget for Hampshire county council would be equivalent to losing 900 teachers—that is, two teachers from every school. That would add to the pressure being placed on schools by the increasing demands made of them by central Government. Social services budgets are already under pressure, and that is already causing beds to be blocked in Hampshire. On one day earlier this month, 60 patients were waiting to be discharged from hospital, with nowhere to go. A 10 per cent. cut in funding for the elderly would lead to a loss of 400 places in residential homes. That would reinforce the pressure that hospitals are under from the closure of nursing home places and the lack of domiciliary care.
It is clear to me from talking to county councillors that the cuts in services that would arise from the shift in funding that the Government have been talking about would hit the most vulnerable people the hardest. Even if a transitional arrangement softened the blow in year one, the cuts would work their way through the system.
My hon. Friend referred to council tax increases. Earlier in the month the Government announced the uprating of pensions for married couples by £160 a year. A 32 per cent. increase in council tax in Hampshire would wipe that out straight away. I have had many letters from constituents—as, I am sure, have many other hon. Members. Mr. and Mrs. Bradshaw, who live in central Fareham, wrote to me:
"As pensioners living in a small two bedroomed bungalow, we already pay £820 per annum in council tax and we dread any excessive increase in the future."
They are not alone in that. People on low and fixed incomes fear the effect of the increase in council tax on their income.
Even if the cuts are mitigated by transitional arrangements, even a 15 per cent. cut in funding this year could lead to a £2 a week increase in council tax, which works out at £100 a year—almost two thirds of the Government's uprating in the married couples allowance. Will the Minister think again?
The shift in spending will affect many people in Hampshire—the elderly, children who are reliant on services provided by the county council, schools, old people's homes and children's homes. Council tax increases will also impinge on the incomes of the elderly and others on low or fixed incomes. The consultation period is ending and time is running out for people in Hampshire. Please Minister, think again about the impact on the most vulnerable people in the community, whether they are in Hampshire, Surrey or Kent.
1.45 pm
The Parliamentary Under-Secretary of State, Office of the Deputy Prime Minister (Mr. Christopher Leslie): I join in congratulating the hon. Member for Epsom and Ewell (Chris Grayling) on calling today's debate on an

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important matter, about which he spoke with passion and conviction. I appreciate that local authority funding, though sometimes quite technical, is the foundation on which many public services are built. It is a matter of concern to his constituents, as it is to all Members in this House, but I can assure the hon. Gentleman that we are assessing all the relevant points carefully before we take final decisions for the next financial year. I am aware that the hon. Gentleman, like the other Members who spoke, is particularly concerned about the high cost of services in the south-east, and I acknowledge the strong feelings on that subject.
At this stage, it would be useful to examine the important formula grant review process, which is about fundamentally examining the formulae according to which we distribute grants to local councils throughout the country. We want a fair distribution of grant; that is our overriding priority in responding to the widespread consultation exercise. The review is also about how best to deal with a fixed pot of money; any changes will mean that some gain more than others. In total, however, more money is available for local authorities overall, with the 2002 spending review providing good increases in council grants for the next three years. That builds on the grant increases—real increases of about 20 per cent., compared with a 7 per cent. reduction in the last three years of the previous Administration—that we have found since we came to office.
The hon. Gentleman worries about the south-east losing out; that is obviously his prime consideration in calling for the debate. Some council leaders in the southeast have made wild claims that funding will be taken away from their authority and given to others purely on the basis of geographical location. That is simply not true. There is no question of shifting resources according to crude political geography. It would be stretching the powers of Machiavelli to discern any such motivation. We want a grant distribution system that takes account of each authority's circumstances and puts the money where it is most needed. We are trying to balance all the different pressures, which is never easy. Evidence and representations have been coming in, including submissions from councils in the south-east, as we move towards taking the final decisions.
The hon. Member for Fareham (Mr. Hoban) talked about Hampshire council losing significant amounts of grant. Some authorities have spent time speculating that the grant review will mean large cuts. To dispel that myth, let me make it absolutely clear that we have already guaranteed that on a like-for-like basis, no authority will receive less money in the next settlement than they received this year. Counties in the south-east will not get less grant from the Government next year. The figure of 9 per cent. is wrong; it is not on the cards. The hon. Gentleman's speculation about 32 per cent. increases in council tax is no part of our plans, either.
Mr. Hoban: County councillors are concerned about that. Even assuming, as the Minister has, a zero per cent. floor and no reduction of grant in cash terms, that would
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still translate into a £2 a week increase in council tax, largely because of other funding pressures placed on Hampshire county council by the Government.
Mr. Leslie: I appreciate the fact that the hon. Gentleman has neatly moved me on in my argument about our guarantee of no cuts on a like-for-like basis. Obviously we hope to do much better than that, but at this stage, when we are calculating all the formulae and seeing how they pan out, it is the baseline on which we hope and intend to build. We have talked about the concept of floors and ceilings, which will ensure that a level of protection is part of the new system, and that will feature in the local government financial settlement for at least two years. The system is intended to damp the effects of the introduction of any new methodology by smoothing any volatility caused by data changes.
Fears about council tax increases have been raised, but those concerns are premature. In the spending review for the next three years, we have provided increases in funds, which local authorities will be able to use to ensure that they can improve the delivery of key services while setting reasonable tax levels. Of course, decisions on levels of council tax are for local authorities to take. Local authorities are responsible to council tax payers, and they should be talking to them about the level of council tax that they will bear, and where the money is spent.
Chris Grayling: The Minister made a point about operating by formulae, but he needs to understand the background provided by the Government's statement that one of the criteria being used in the review is the ability to increase the tax take. In areas where the tax take is already high—in Surrey it is 45 per cent., compared with a national average of 25 per cent.—there are concerns that the Government sees those areas as milch cows.
Mr. Leslie: I think that the hon. Gentleman is alluding to a part of the equation called resource equalisation. It is a technical term that does not mean cuts in grants for local authorities—in the south-east or anywhere else. We have already guaranteed that no authority will lose out on a like-for-like basis, and resource equalisation is already part of the current system. Resource equalisation involves looking at a council's relative ability to raise resources from council tax, by examining the tax base, and it is right and fair that it remain part of the new system. The question is the extent to which we take the ability to raise council tax into account. Resource equalisation is another part of the system on which we are consulting, and our decision on it will be made alongside other decisions. I can reassure the hon. Gentleman that the no grant loss guarantee applies to that area of the formula in the same way as it applies to others.
Mr. Oaten: Can the Minister confirm that the consultation and the proposed new formula will take the most recent census data into account?
Mr. Leslie: The Government certainly want to use the most up-to-date evidence on need that we have. We have to make sure that the census information is incorporated, and that the floors and ceilings

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arrangements will apply if there are significant changes, because obviously there will be peaks and troughs in crude formula applications, which, if they were taken on their own, could mean significant changes for authorities. One has to bear in mind that the floors and ceilings will kick in after some of those factors have occurred.
Mr. Nick Hawkins: I am grateful to the Minister, and I must apologise for my earlier absence, which was due to a shadow ministerial commitment. I heard him talking about counties not losing out on a like-for-like basis, but I am always a little suspicious when such conditions are attached. Precisely, does that mean that next year each county in the south-east will have the same amount of cash as it has had this year, but uprated for inflation: yes or no?
Mr. Leslie: The hon. Gentleman is almost there. Every county will have the same level of cash for the coming year as for this year. When I say "on a like-for-like basis", I am talking about the composition of an authority, its size and whether new functions have been added to it. Of course, if an authority suddenly found that it had acquired a social services function, for example, the amount of grant would change. However, if a council's structure and services remain the same, it will get that level of cash increase. That is the minimum guarantee that we are giving for now, but we hope to do much better. So far, we have been able to make sure that we give a real-terms increase for education, which is the largest part of most councils' budgets. The spending review envelope will prove to give significant sums to councils as a whole.
I know that Members are concerned about area cost adjustment. There have been several research programmes and projects to examine that over the years. It affects the south-east considerably. In the studies that have taken place, about 21 variant models of area cost adjustment have been devised, and authorities have not agreed on the merits of each option. There is much strong feeling about the matter. The vast majority of people recognise that pay costs should be recognised in the system. We agree, but the question is how much weighting there should be. The options in the consultation document suggest redesigning and trying to remove something of the existing cliff-edge effect. All I can say now is that we are carefully considering the responses to the consultation.
On education, a very significant issue, I shall give a broader description of where we stand at present. The options for the education formula reflect the fact that for the next three years, the spending review will include significantly more investment. We want a clearer fairer system justified by the educational needs of children and based on more up-to-date evidence of costs and need. Any formula must include an element to allow for deprivation, and for enhancement in areas where schools need to pay more to recruit and retain staff. I appreciate the extra costs faced by authorities in London and the south-east, including Surrey, because of the higher costs of recruiting and retaining staff there. It costs more to live in London and the south-east, and earnings differentials there are higher.
The options set out in the consultation paper are based on evidence that suggests that authorities with significant deprivation and additional staff costs need to
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spend significantly more to achieve the same results for their children. The four options reflect the scope for different judgments to be made about weighting.
The hon. Member for Epsom and Ewell mentioned his concerns about the police. The aim of the police formula review is to develop a more robust mechanism for the fairer and simpler distribution of grant to ensure that it addresses policing needs in all parts of England. We are aware of differing pressures on policing, especially between rural and metropolitan areas, and of the need to allocate resources as fairly as possible to address varying needs in different areas. There has been a genuine consultation process and the responses are being taken into account. That has taken place against the background of a substantial increase in police resources. By 2005–06, the total provision for policing will be about £1.5 billion higher than in this financial year.
Chris Grayling: Not in Surrey.
Mr. Leslie: Nationally, significant funds will come through from the spending review and filter through to local authorities.
This financial year has seen education spending rise by 8.8 per cent., personal social services spending rise by 3.6 per cent. in real terms, and total police funding increase by 6.1 per cent. During the next three years, local authorities will benefit. Under the spending review, social services funding will increase by a further 6 per cent. in real terms on average, education funding will increase by 6 per cent. and policing funding, as I said before, will also rise.
In Surrey, whereas under the previous Administration the standard spending assessment grant went up by only 2.7 per cent. on average, this Administration have managed to increase the standard spending assessment by 4.8 per cent. As for social services, children's grant has increased by 12.8 per cent. this financial year, and carers grant by 21 per cent. Education spending has increased by £121 million—almost 39 per cent.—over five years, with the capital expenditure allocation rising this year to £38 million. An extra £24 million has so far been allocated for next year.
We have consulted at length on the formula grant review. The no cuts guarantee is there, on a like-for-like basis. I urge hon. Members to wait for and listen to the announcement before speculating and scaring too many people about the future. We want a more transparent formula. We know that we must try to strike the right balance between the competing arguments, and the involvement of not only councillors but Members of Parliament in the debate on the new formula is extremely important. My principle is to give local authorities a decent grant, which matters for the improvement of public services, and I hear the arguments that hon. Members on both sides of the House are making on the subject.
Question put and agreed to.
Adjourned accordingly at one minute to Two o'clock.