With permission, I wish to make a statement on amendments to the Electoral Administration Bill. The Government intend to amend the Electoral Administration Bill, currently before the House of Lords, to make it compulsory for political parties to disclose any loans they receive. That is an issue that affects all political parties—[Laughter.] I hope that the Government, all the political parties of this House and the Electoral Commission will be able to work constructively together to find a solution that allows for transparency and fairness.

My intention is to achieve as great a transparency for loans made to political parties as applies to donations under the regime in the Political Parties, Elections and Referendums Act 2000. My right hon. and learned Friend the Secretary of State for Constitutional Affairs has today written to the leaders of all political parties represented at Westminster, and to the Electoral Commission, seeking their views on the elements of a reporting regime, including whether it should be retrospective. I have placed a copy of his letter in the Library of the House.

The Prime Minister has announced that Sir Hayden Phillips will conduct a review of the funding of the political parties. The terms of reference of the review were announced earlier today, and I have placed a copy in the Library.

I thank the Minister for her usual courtesy in giving me early sight of her short statement. I welcome the inquiry into the funding of political parties under Sir Hayden Phillips and the terms of reference to which she referred, a copy of which is in the Library. An inquiry was inevitable, given the revelations of the past few days, and we are happy to give our full co-operation to Sir Hayden. However, why is he undertaking the review and not the Electoral Commission? It seems inexplicable. The Government set up the commission to oversee such matters. The Minister knows that the commission has produced a report already on the funding of political parties and it has a credibility on the issue that, frankly speaking, no politician or civil servant is likely to match. Despite Sir Hayden's ability, surely the commission was the obvious choice.

Is the Minister able to shed any light on how it was possible for such large amounts of money to enter Labour coffers in loans without the full knowledge of Labour's leading figures? Perhaps it is understandable that the Deputy Prime Minister would not be told, but can it really be sustainable that the treasurer of the Labour party was not informed? Why were the fundraising activities—[Interruption.] I hear the words "purer than pure", but I do not think that we need to go back to those long-ago days. Why were the fundraising activities centred on 10 Downing street rather than Labour headquarters? Does not that raise concerns that civil servants may have been put into situations too close to politics, and not for the first time under this Government?

The only leading figure who knew what was happening was the Prime Minister. Does the Minister agree that he acted wrongly in not being open with his colleagues, his party and the country? His behaviour caused the crisis.

The Minister says that loans should be declared and she wants to change the Electoral Administration Bill—[Interruption.] I will treat that positively and co-operatively. However, that Bill was in the House for months and nothing would have been done if Jack Dromey had stayed silent.

Can the Minister explain why Sir Hayden is apparently to have so long—until the end of 2006—to report? Does not that mean that further changes to the law will have to wait for 18 months, given the timing of the Queen's Speech? Does she agree that the matter is urgent? Does she also agree that the review of party funding must include trade union donations, just as much as company and individual ones?

An important part of solving the crisis should be cross-party co-operation—sitting down together to work out a fair and transparent system of funding and how to take honours out of the funding of politics. The Minister knows that my right hon. Friend Mr. Cameron is writing today to the Prime Minister and to Sir Menzies Campbell suggesting such talks. Will the Government sit down with the Opposition and other parties to discuss the important proposals put forward by the Conservatives to clean up party political funding?

I would have hoped that the hon. Gentleman could come to the House in a slightly more conciliatory fashion, given that my statement specifically says that we want all parties to be involved in the discussions.

The hon. Gentleman asks why Sir Hayden Phillips has been asked to conduct the review. The hon. Gentleman, like many Members, knows that Sir Hayden is an extremely well-respected and experienced civil servant, who has dealt with all parties and who will certainly look at the issue with a view to helping all parties to come to a proper conclusion.

The hon. Gentleman asks why the issue had not been included in the Electoral Administration Bill, but when discussions about party funding took place in 2000 no one in the House suggested that loans should be part of the Bill. That Bill is currently going through the House of Lords and we can include amendments to it this very week, so when he asks for urgency in the matter I can tell him that no one is acting with more urgency than the Government.

The hon. Gentleman asks that trade union donations be taken into account. He might want to reflect on the fact that not only trade union donations but donations from all sorts of individuals and institutions should be taken into account. He will remember that the Government prevented donations from people living outside this country ever being part of our party political system.

Finally, the hon. Gentleman asks why the report would be at the end of 2006. If it is possible for that timetable to be brought forward, no doubt it will be. However, I hope that in the spirit of co-operation, which he remembered to mention towards the end of his questions, he will make sure—as we want to do—that every political party, the Electoral Commission and all the stakeholders involved have an opportunity to contribute properly, so that we reach a decision that will sit properly and benefit our democracy for the future—[Interruption.]

Several hon. Members:

rose—

Order. The House should recognise that it is probably under very close inspection from the public where this matter is concerned. We do our reputation no good if we trade insults from either side. Before further questions are put, I remind the House that the Minister is here in her departmental responsibility, answering for her Department and not for any political party.

From the Prime Minister's announcement of a general review of funding of political parties on Thursday to the Government's conversion to disclosure of loans to political parties on Monday is a welcome and, if I may say so, speedy direction of travel—even if Thursday's announcement was extremely late, given all the press that there has been in past years, hesitant, and made in undesirable circumstances.

I have four specific questions for the Minister, representing her Department. Does she and do her colleagues agree that loans are potentially much more significant in terms of influence on the political process than outright gifts, because people can renounce claiming them back or ask for them back, and therefore have much more influence during that process? Obviously, they need to be treated in the same way.

Do Ministers now agree that significant loans made in the past 10 years should all be disclosed? If that is not done, the public will not be able to judge what the link is between fees and funds on the one hand and favours on the other.Do Ministers now accept that in a modern, pluralist democracy, nobody should be able to buy their way into a seat in either of the Houses of Parliament? Do Ministers, from the Prime Minister downwards, agree that it is time that we converted the funding of political parties in Britain back to a system in which ordinary people influence and control political parties according to their interest and their commitment and not according to their wealth?

I welcome the hon. Gentleman to his new position dealing with constitutional affairs.

Some people would ask why loans should be regarded as more significant than donations—after all, a commercial loan has an interest rate attached to it, so some would argue that a donation would be a more influential form of funding. However, Sir Hayden's review will take account of all of those issues.

The hon. Gentleman asked about publicising loans made in the past 10 years. I cannot say at this stage whether there will be retrospectivity—if that is the correct word— in that respect, but I understand that the Labour party is today publicising all those people who have given it loans. I hope that his party and the others in the House will do the same.

Finally, on the hon. Gentleman's question about anyone being able to buy a seat in this House or any other, we would all deprecate any suggestion of that happening.

I welcome what my hon. Friend has said today and recognise the changes in relation to political donations that the Government have brought about—changes that the Tories refused to make prior to 1997. Is it not essential at long last to separate the giving of large donations to political parties and the award of peerages and knighthoods—a practice that we know has been going on for years? I believe that the public want a clear separation between the two, and I hope that our earlier reforms will be consolidated by further changes during this Parliament.

My hon. Friend is absolutely right: it is important that we separate the two and that the two are seen to be separate. In the past few days, we have learned that perception is always key in politics and that it is important to give the public the reassurance that everything done in this House and in the other place is done openly and with transparency. We are introducing amendments to ensure not only that that is the reality, but that that is the perception, as well.

I have great sympathy with the Minister because I assume that, prior to Jack Dromey blowing the whistle last week, she was kept in the dark, as was the treasurer, the Deputy Prime Minister and the chairman of the Labour party. The Minister says that we will have transparency in relation to loans. That is right, but should we not also consider limiting the level of loans and barring any Minister from giving any loans to any political party?

The question of a limit will be discussed during the review, and I hope that all hon. Members and political parties will play an active and constructive part in it. I have had discussions with various colleagues over the past few days about the funding of political parties, and there are almost as many views on the subject as there are Members of Parliament. I welcome the debate, I hope that it will be constructive, and I look forward to hearing from the hon. Gentleman.

Welcome though today's announcement is, does my hon. Friend agree that we need to go much further if we are to re-establish public confidence in the funding of political parties? Will Sir Hayden Phillips consider, among other things, imposing a far more drastic cap on what can be spent nationally by political parties, and imposing a very drastic cap on what can be donated by individuals? Could he look at whether small donations should be made tax deductible for the political party of one's choice, as that is the one form of funding of political parties that the public might support? I appreciate that some of those matters are for my hon. Friend's many superiors, but will she undertake to pass the word on?

I am grateful for my hon. Friend's remarks. I thought that we were a little more egalitarian in this party than to espouse the idea of having superiors but, nevertheless, I accept what he said. It might be helpful if I briefly tell the House that Sir Hayden's review will examine the case for state funding, including whether or not it should be enhanced in return for a cap on the size of donations. He will consider, too, the transparency of funding of political parties, so I hope that that covers some of the questions asked by my hon. Friend.

I remind the House that Sam Younger said in The Times:

"Political parties are important in a democracy. They need funds in order to organise themselves, develop policies and put themselves forward to the electorate."

It is a question of getting the balance right between state and private funding, and that is part of the debate.

Why did the Minister decide to make her statement today?

Because the Prime Minister and the Government thought that it was important, given that the Electoral Administration Bill is proceeding through the House, to take the opportunity to make a statement at this time.

Is my hon. Friend aware that, contrary to all the talk in the media, the sad fact is that over the past 20 years or more there has been a disinclination among the public either to join parties or to contribute to them? They then complain, wherever the money comes from. Can I suggest to my hon. Friend that the last people we want lectures from are the party of Ashcroft, Aitken and the rest? We do not need any lectures about a Swiss rollover by the Liberal Democrat— but if we did go further we could abolish the House of Lords and the honours lists so that there would not be very much left to buy.

My hon. Friend leads me very temptingly down a path that it is not appropriate for me to take, given the nature of the statement. It deals with the funding of political parties, so he is quite right to refer to other political parties. This is something in which we all have a stake, so we should all work on it together. As for the reform of the House of Lords, he will wish to know that we look forward to proceeding with change there very speedily indeed.

The Minister just said that perception is important in politics, so does she agree that the public perception of this sorry affair is that the Prime Minister has been caught red handed, selling peerages in return for party funding?

The Prime Minister, in his statement last week, took responsibility as the leader of the Labour party. I think that that was right and proper, and something that I would expect him to do.

I welcome the Minister's statement today. It is quite right that all political parties should declare any loans that they receive and it is right to review party political funding, but I would err on the side of caution in going down the road of state funding for political parties, which would go down like a lead balloon with the public. The way forward has been mentioned already—we should make the cap on spending at elections much lower than at present. I am sure that members of the public will not mind if they only receive one DVD instead of three. [Interruption.]

Of course, as my right hon. Friend the Leader of the House says, it might depend on whom those DVDs are from. However, I hear what my hon. Friend says about state funding. She reflects a view that, I suspect, is held quite widely. That is part of the reason why the debate about getting the balance right is important. As I have already said, a reference to the cap on funding is in the review.

I am of the view that most party political funding is wasted anyway on embarrassing and probably counter-productive advertising campaigns and dubious spin doctors, on the part of all the major parties. Was the hon. Lady, in her response to my right hon. Friend Mr. Forth, seriously trying to tell the House that the occasion of her statement today had nothing whatever to do with the scandal and revelations of the past few days? If so, I fear that she may be unnecessarily damaging her own credibility, as well as setting a very poor example of candour in the House. Does she accept that not to reveal a loan, as a financial relationship, is thoroughly disingenuous and misleading?

Obviously, the discussions that have been taking place over the past few days are ones to which we must all respond. It is not perhaps in the hon. Gentleman's best interest to try to say that this is something that affects only one political party—[Interruption]—or to imply that that is so. I hope that he agrees that it is necessary for us all to work together.

As I said earlier, it is important to re-engage the public in democracy. It is important that they see that we are transparent in the way that we are funded. There is a dichotomy: we do not want political parties to be funded by shady individuals from abroad; nor do people necessarily want to pay for them through their taxes. We must find a way that gets the balance of party political funding right—whether partly through the state or partly through private donations—but whichever way that is done, it must be transparent, and that is what we hope to achieve.

Has the Minister noticed that Sir Hayden has been honoured? Is there not a case for appointing a real person to conduct the review, rather than a member of the establishment, the glitterati, that magic circle that runs the country, whether it has a Labour or a Tory Government? Will she support an amendment to disqualify from getting a peerage anyone who makes a substantial loan or payment to a political party? That is what is necessary, and on that, with the greatest respect, the Prime Minister—she might find this hard to believe—is wrong.

I think that all political parties in the House that propose people for appointment as working peers would say that they put forward the names of people who have contributed greatly in public life, so I would not want to go down the road of banning every form of donation. I am sure that Sir Hayden will be more than delighted to hear my hon. Friend's views on what should be in the review.

The hon. Lady's statement is most welcome today, but it would have been even more welcome if it had been made before last week's revelations. She referred twice in her statement and once in an earlier response to the word "transparency". In the interests of transparency and gaining some ground back on the way in which the public consider politicians in general, can she tell the House whether there will be an investigation of recent events by the Labour party under the Honours (Prevention of Abuses) Act 1925?

There has been no abuse under the 1925 Act.

"We didn't publish the names, because that was not the law, and we've complied with the letter of the law, we've followed it absolutely."

That was said by Mr. Osborne on a broadcast made yesterday. Mr. Llwyd should be aware that the 2000 Act allowed for loans to be made in the way that they have been made. We are tabling an amendment to the Electoral Administration Bill to ensure that there is transparency.

I welcome the Minister's statement and her announcement that the Labour party is opening its books in respect of the loans and gifts made to it. Embarrassing as it may have been to Labour party members to discover that we were in receipt of loans, will my hon. Friend confirm that although Labour Members knew next to nothing about those loans, the House knows absolutely nothing about loans and gifts made to the Tory party during the same period? Will she confirm that the terms of Sir Hayden's inquiry will include a 10-year retrospective on loans as well as gifts, and that it will explore the terms of loans and whether they varied during the period of the loan? Will he make recommendations on the most effective way of severing any connection between financial assistance to political parties and the honours system?

My hon. Friend is right. It might be appropriate to remind the House that it was this Government who brought in the 2000 Act and set up the Electoral Commission. We have said that we want to make the system even more transparent. I know nothing about loans to the Tory party and it is not my place to make any comment on them from the Dispatch Box. Nevertheless, I can assure my hon. Friend that Sir Hayden's review will be able to examine funding right across the board and, if he comes to a conclusion about the retrospective nature of that funding, I am sure that he will bring it to the attention of the House.

Given that it is vital to dispel any notion that the funding of any political party secures access to the legislature, is it not the most important and urgent responsibility of the Government to bring forward proposals for a predominantly elected House of Lords, because that is the only credible and defensible basis upon which to constitute the upper House in the 21st century?

As I mentioned earlier, the reform of the House of Lords is a matter that we are studying closely. I hear what the hon. Gentleman says. I know that there are various views in the House. I may not entirely share his views in that respect. It is relatively new for the Conservative party to believe in a non-elected House—

Not for me. I have always believed that.

It may not be new for the hon. Gentleman, but that is a debate that we can continue.

Is my hon. Friend aware that we on the Labour Benches are entitled to be proud of the 2000 Act, which introduced a new procedure for donations? Acknowledging that there is a loophole that allows parties to receive commercial loans, does my hon. Friend accept that her statement—[Interruption.] Opposition Members might allow others to speak. I think that they are a little on the defensive. [Interruption.] Yes, I do. No one tried to amend the legislation before. Will my hon. Friend confirm that we are going for maximum transparency in respect of all loans and all donations to all political parties as soon as possible?

My right hon. Friend is right. When the Act was passed in 2000, no one in the House thought about the effect of loans. As my right hon. Friend the Secretary of State said earlier today, the system has not been cleaned up enough and we need to change it. That is why we are introducing the amendment to the Electoral Administration Bill. We have a proud record of trying to bring about greater transparency, and we shall continue to do so.

Does the Minister think that the British public should regard this Government and their Prime Minister as whiter than white? If not, what advice would she give to the Prime Minister about his future?

The Prime Minister, along with this Government, has made radical changes in this country. We have introduced the minimum wage, put more money than anyone else has done before into hospitals and schools, reduced unemployment and made the economy more sound. The record of this Government and Prime Minister is second to none, and I ask the hon. Gentleman to reflect on that before he goes any further.

I listened very carefully to the answers given to Simon Hughes and my hon. Friend Alan Simpson. Does the Minister accept that, in disclosing the nature of the loans given over the past 10 years, we need to know why the people making those loans thought it necessary to keep their names secret; what conditions were placed on them by the people making the loans; what interest rates were paid on them and whether those interest rates have varied during that period? If there is to be any confidence in the political system, it has got to be absolutely open and above board as to why people felt it necessary to keep their names secret while making any loan to any political party.

There are a variety of reasons why people wish to keep their names secret when they give loans or even donations to political parties. I think we are all pretty much aware of what they are. However, we feel that we need to go further than we went in the 2000 Act, which is why we are bringing forward the amendments. I hope that my hon. Friend will also contribute to the debate on how political parties should be funded. The bottom line, if I may put it that way, is that we make things as transparent as possible, so that people have confidence in the democratic process and so that political parties re-engage with the public in the way that we would all like.