Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

I beg to move amendment No. 212, in schedule 13, page 197, line 11, at end insert

‘Licensing rules must provide that, in determining whether the requirements of sub-paragraph 1 are met, the burden of proof rests on the person who wishes to hold the restricted interest.’.

The amendment is designed to make it clear that the onus of demonstrating fitness to own rests on the applicant, rather than it being for the licensing authority to demonstrate that a person was not fit and proper before it could withhold approval. The effectiveness of fitness-to-own provisions is a crucial element of the public protections that need to be in place before external ownership of ABS firms can safely be permitted. It is essential to avoid the spectre of law firms being owned by criminal elements.

The Bill already allows licensing authorities specifically to consider whether or not those who hold more than a small interest in a prospective ABS firm are fit and proper persons. The intention appears to be that it should be for the applicant to demonstrate fitness to own, rather than the applicant being entitled to be approved unless the licensing authority can demonstrate that they are not fit to own. The intention of the provision in paragraph 14 under which licensing authorities may require non-authorised persons to provide it with such documents and information as it may require appears to be designed to achieve that.

However, it is important that there should be no doubt about the matter. Merely demonstrating an absence of criminal convictions might not be sufficient to entitle an applicant to become an approved person. For example, the possession of unexplained wealth could give rise to reasonable suspicions about the integrity of an applicant. It is important that the licensing authority should be able to refuse approval in those circumstances unless it received a convincing explanation of the source of the wealth. The onus should not be on the licensing authority to prove that the unexplained wealth was ill-gotten before it could refuse to approve the applicant. The amendment is intended to put beyond doubt the fact that the onus of proof should rest with the applicant.

Simon Hughes (Party President, Cross-Portfolio and Non-Portfolio Responsibilities; North Southwark & Bermondsey, Liberal Democrat)

I strongly support the amendment, which is why I have put my name to it. I give as my reason an example from a slightly different context. When Labour came to office, the London borough of Southwark was still run by the Labour party. At that stage, the education service was not fit for purpose. The Labour Government intervened and directed the borough to contract out its education service. The borough  contracted it out to an engineering firm called WS Atkins, although, to my knowledge, the firm had no previous experience of running anything to do with education. The Government said that that would be better for the borough. Arguably, the service could not have become any worse, but, in fact, it turned out to be no better, if not worse, because WS Atkins did not have the competence to run the service.

When my colleagues won a large number of seats on the council five years ago, they formed the first ever non-Labour administration. In four years the authority did so well on education that even the Government had to concede that it was fit to run the service again. The service was handed back to it and WS Atkins was shown the door. The services in the borough are now run by the borough, as they should be.

I hope that the parallel is obvious. An application was made to do a job, but no one assessed whether the applicant was fit for purpose. The amendment would require that someone who was seeking the ability to be licensed to own a business in the context of these business structures should have to give reasons why they were fit to do that job. It should not be sufficient for the authority to have to look around for reasons why a person was not fit. Such a person should argue why they have a credible reputation and financial probity and why they are suitable, and outline their experience of that part of the country and the likely issues that will come up.

It is absolutely right that the burden should shift. There would be a huge work load on the licensing authority if it had to go through the process of monitoring all the checks and balances and ensuring that it won the argument. The amendment is right for both practical reasons and reasons of principle. I hope that the Minister will be persuaded to encourage her colleagues to support it.

Bridget Prentice (Parliamentary Under-Secretary, Ministry of Justice; Lewisham East, Labour)

In all respects, I agree absolutely with the principle behind the amendment. The hon. Gentlemen are absolutely right about the operation of the approval requirements for investors. A key touchstone of part 5 of the Bill is the principle that non-lawyers should be permitted to invest in law firms only if they can demonstrate that they meet the standards set by schedule 13 and licensing authorities. The alternative would be to require licensing authorities to assume that all prospective investors were fit and proper unless they found evidence to indicate otherwise. I do not think that that is satisfactory and I get the impression that members of the Committee agree with me because that is not a reliable enough safeguard. However, we differ about whether further provision is needed to achieve that. The proposal as drafted ensures that that is already in the Bill.

The test for approval means that when an investor wishes to acquire a restricted interest of whatever kind, the licensing authority must be satisfied that the proposed acquisition will not compromise the regulatory objectives or the ability of ABS firms and the individuals in them to comply with the regulatory arrangements. That is the first test.

In addition, the licensing authority must be satisfied that the individual or firm in question is fit and proper to hold that interest by having regard, among other  things, to that person’s associates, his or her probity and financial position, and any record of previous disqualification from an ABS firm. All that must be taken into account. If those requirements are not fulfilled, the authority may refuse to approve the proposed interest, or attach conditions to it. If it is in any doubt about whether a person meets the approval requirements, it can require further information from that person.

It is for the applicant to prove to the licensing authority that all those standards are met. If the authority is not certain that that is the case, it is under no obligation whatever to approve the interest. Indeed, I would go so far as to say that the authority would not be fulfilling its statutory duty if it granted its approval in a case where a person’s fitness was in doubt.

David Burrowes (Enfield, Southgate, Conservative)

In response to the Joint Committee, the Minister indicated that the Government could deal with concerns about putting provisions on fitness to own in the Bill by way of secondary legislation, or by leaving it to the Legal Services Board. Is it possible that this could be addressed through secondary legislation?

Bridget Prentice (Parliamentary Under-Secretary, Ministry of Justice; Lewisham East, Labour)

I am certainly happy to look at whether that should be an aspect of the secondary legislation. Paragraph 6 of the schedule probably covers everything that Opposition Members are rightly concerned about. On that basis, I ask the hon. Member for Huntingdon to withdraw the amendment, but I will take on board what hon. Members have said.

Simon Hughes (Party President, Cross-Portfolio and Non-Portfolio Responsibilities; North Southwark & Bermondsey, Liberal Democrat)

The Minister said very assertively that it was absolutely clear that the burden was on the applicant. She cited in general terms paragraph 6 of the schedule. However, my copy of paragraph 6 of the schedule does not appear to be nearly as clear as the Minister implies. Seriously, can she point to the measure—either in the clauses or the schedule—that says what she is claiming? I have read the paragraph again, and I do not see that it makes clear the point that we are trying to clarify.

Bridget Prentice (Parliamentary Under-Secretary, Ministry of Justice; Lewisham East, Labour)

Paragraph 6(3) of the schedule says:

“In determining whether it is satisfied of the matters mentioned in sub-paragraph (1)(a) to (c), the licensing authority must in particular have regard to”

the issues that have been raised. That makes it clear that those issues have to be taken into account and that licensing authorities would be breaking their statutory duty if they did not deal with the matter properly.

Simon Hughes (Party President, Cross-Portfolio and Non-Portfolio Responsibilities; North Southwark & Bermondsey, Liberal Democrat)

I accept that, but the measure does not say who has the job of providing the information and making the case. I am sure that the Minister follows me. Paragraph 6(3) says simply that an authority has to look at those issues, but does not say that the burden is unequivocally on the applicant to satisfy the authority about those issues. That is my concern, which the hon. Member for Huntingdon might wish to pick up.

Bridget Prentice (Parliamentary Under-Secretary, Ministry of Justice; Lewisham East, Labour)

I accept what the hon. Gentleman is saying. I will hang on to that issue and come back to him on it.

Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

I am pleased that we have had this debate. We would certainly like to emphasise that the matter is important, as the Minister accepts. The position is that the existing Bill caters adequately—