Report (2nd Day)

Small Business, Enterprise and Employment Bill – in the House of Lords at 3:11 pm on 9 March 2015.

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Relevant documents: 11th, 13th and 19th Reports from the Delegated Powers Committee.

Schedule 1: The Pubs Code Adjudicator

Amendment 33A

Moved by Baroness Neville-Rolfe

33A: Schedule 1, page 150, line 6, leave out from “arrangements” to end of line 7 and insert “for persons to be seconded to the Adjudicator to serve as members of the Adjudicator’s staff.”

Photo of Baroness Neville-Rolfe Baroness Neville-Rolfe The Parliamentary Under-Secretary of State for Business, Innovation and Skills 3:13, 9 March 2015

My Lords, we come to several sets of amendments on pubs, a subject that has been much debated in this House and in the other place. We need to set the scene for today’s debate, which I think falls more naturally under the heading of the next grouping of amendments on market rent only. I suggest we proceed on that basis if noble Lords are content and treat this group of government amendments as the relatively technical group that it is.

For the first time, tied tenants will have a statutory code they can rely on, with an independent adjudicator to enforce it, with real sanctions at its disposal. There seems to be agreement in both Houses that a statutory Pubs Code and an adjudicator should be established. In setting up the Pubs Code Adjudicator, we have generally followed the Groceries Code Adjudicator model. This included specifying in this Bill:

“The Adjudicator may make arrangements with the Secretary of State or any other public authority for staff to be seconded to the Adjudicator”.

However, the GCA has experienced significant difficulties in securing staff on secondment from within the public sector. There is no single reason for this, but both the niche nature of the GCA and the ongoing pressures on departmental staffing levels are factors. We are keen to avoid the Pubs Code Adjudicator encountering similar problems. Amendments 33A and 33B to Schedule 1 therefore enable the adjudicator also to take secondees from the private sector. This will provide much needed flexibility for the adjudicator to find suitable staff from a wider pool—for example RICS-qualified surveyors to advise on rent assessments. We considered whether the adjudicator should have the ability to employ staff directly. However, we concluded that allowing secondments from the private sector would provide the flexibility needed without imposing employer responsibilities on the adjudicator.

Amendment 33C ensures that the adjudicator’s secondment policies are approved by the Secretary of State. This will enable the Secretary of State to specify that remuneration and the terms and conditions of persons on secondment to the adjudicator are in line with the department’s secondments policy. The amendment also provides that a person seconded to the adjudicator remains an employee of the employer he or she was seconded from.

Finally, Amendments 33E and 33F ensure that the staff of the adjudicator are subject to the House of Commons Disqualification Act 1975, in common with staff of government departments. I beg to move.

Photo of Lord Mendelsohn Lord Mendelsohn Labour

My Lords, we are happy to support these government amendments and are grateful to the Minister for the way in which she has dealt with this matter. We believe that our debate on the more substantive issues in the next group of amendments will cut to the heart of many of the important issues.

We support these technical amendments and are encouraged that the Government have learnt lessons from the introduction of the Groceries Code Adjudicator, which will be applied to ensure that the Pubs Code Adjudicator works effectively from the beginning. The only point we would make is that secondees should be drawn not just from the private sector but from a range of different areas so that they will provide the necessary experience to make the adjudicator’s work as effective as possible. Indeed, even within the context of the private sector they should be drawn from a range of disciplines. Apart from that point, on which we would be grateful for clarification from the Minister, we are happy to support these amendments.

Photo of Baroness Neville-Rolfe Baroness Neville-Rolfe The Parliamentary Under-Secretary of State for Business, Innovation and Skills

My Lords, I am happy to clarify that we will take secondees from the best place possible, which could include—the noble Lord is probably referring to this—another Government, a non-profit organisation or some other source. This is to give us the flexibility to find the right people.

Amendment 33A agreed.

Amendments 33B and 33C

Moved by Baroness Neville-Rolfe

33B: Schedule 1, page 150, line 8, at end insert “to the person with whom the arrangements are made, or directly to seconded staff (or both).”

33C: Schedule 1, page 150, line 8, at end insert—

“( ) A period of secondment to the Adjudicator does not affect the continuity of a person’s employment with the employer from whose service he or she is seconded (and a person employed in the civil service of the State continues to be so employed during any period of secondment to the Adjudicator).

( ) Before making arrangements under sub-paragraph (1), the Adjudicator must obtain the approval of the Secretary of State as to the Adjudicator’s policies on—

(a) the number of staff to be seconded;

(b) payments to be made to or in respect of seconded staff;

(c) the terms and conditions on which staff are to be seconded.”

Amendments 33B and 33C agreed.

Amendment 33D

Moved by Baroness Neville-Rolfe

33D: Schedule 1, page 152, line 14, after first “rent” insert “only”

Photo of Baroness Neville-Rolfe Baroness Neville-Rolfe The Parliamentary Under-Secretary of State for Business, Innovation and Skills

My Lords, in the light of the concerns raised about our government amendments in Committee, I committed to further engagement with noble Lords and wider stakeholders, with a view to returning with further amendments on Report. My ministerial colleagues, officials and I have since had extensive discussions with noble Lords, honourable Members in the other place, and pub company and tenant stakeholders. I am grateful for the constructive engagement of noble Lords opposite, including the noble Lords, Lord Stevenson, Lord Mendelsohn, Lord Whitty, Lord Snape and Lord Berkeley, as well as my noble friends, including my noble friends Lord Hodgson, Lord Borwick, Lord Younger, Lord Stoneham and Lord Ridley, who joined us last week.

I should say before I turn to my amendments that the problems we are trying to address in the pubs industry have a long history. The difficulties that arise from the imbalance in bargaining power between tied tenants and their pub-owning companies have been well documented. The measures in the Bill are designed to ensure fairness for tied tenants of large pub-owning businesses and to respond. They are a proportionate and targeted response, and represent a significant step for the sector.

Incorporating the “market rent only” option into the Bill in the limited time available to us, while also ensuring that it will work in practice, has not been easy. But we have made good progress, which has enabled us to bring forward these amendments. We believe they will make for a better Bill and more closely reflect the wishes of the other place. The principle of market rent only is that at certain trigger points a tied tenant should have the right to move to a free-of-tie agreement and pay a market rent for the property. A market rent will generally be higher than a tied rent, because a free-of-tie tenant is free to purchase all drinks and other products and services from wherever he or she wishes, rather than from the pub-owning company. The only exception to this is insurance, where it is common practice in any commercial lease for this to be arranged by the landlord and charged to the tenant.

I was clear at Second Reading that the Government accept the will of the other place that there should be a market rent only option. Our work since has been to ensure that it delivers the protections for those tied tenants without potential unintended consequences. The questions that have arisen and the discussions that have taken place are over exactly how the market rent only option should work in practice. I am pleased to say that we have now reached a position where the Fair Pint campaign and CAMRA are content with our amendments. I also met my honourable friend Greg Mulholland last week and he is supportive of the approach we are proposing. I should like to say we discussed it over a pint, but actually I had a scotch, supporting another of our important industries. I pay tribute to his dedication to this cause, his relentless campaigning for the rights of tied tenants and his willingness to move forward.

I am also pleased to say that, although some differences remain, at a recent meeting that Jo Swinson and I hosted with stakeholders from all sides, pub companies, too, seemed to recognise that much progress had been made. Two of the issues most keenly debated in our discussions since Committee have been how to ensure that investment in tied pubs continues, which is important for the industry, and whether the pub franchise agreements should be covered by the code.

We have made good progress here, too. I can announce that Government will be using existing powers in Clause 42 to set out in secondary legislation how tenants and pub companies can agree the waiver of two MRO triggers in exchange for significant investment in a pub. We will also use powers in Clause 71 to exempt genuine franchise agreements from the market rent only clauses of the Bill. I am conscious that noble Lords have tabled amendments relating to these issues. If noble Lords are content, I will turn to the detail of the Government’s proposals in these areas when we debate those amendments.

I now turn to Amendments 33AC to 33AF, which deal with the process of agreeing a rent after the MRO trigger is engaged. Those amendments provide that the Pubs Code must specify a reasonable period in the market rent only process for both stages of that process. The first stage is where a tenant and their pub company try to agree a rent; this was over a 21-day period in the original MRO clause laid in the other place. The second stage involves the settling of a market rent by the independent assessor. The other amendments in this group, Amendments 33AA, 33AB, 33AD and 33AE, clarify that the term “market rent” applies only to a rent set in the second stage by an independent assessor.

The market rent only clause introduced in the other place established the principle that, when MRO is triggered on a brewer’s pub, the brewery should retain their route to market as long as tenants can buy the brewer’s beer from any source. This route-to-market principle was accepted by all sides. Amendment 33AS clarifies the requirements that may be placed on pubs in terms of stocking requirements after MRO has been triggered. The Bill as drafted already allows brewers to place conditions around the stocking of their own brands of beer and of cider in terms of volume and range. The amendment confirms that brewers may also protect their route to market by allowing some restrictions on the sales of competitors’ products. Brewers will not be able to require that their market rent only pubs sell only their products; they will need to satisfy themselves that they are compliant with competition law.

Turning to Amendment 33AV, there was concern in Committee about removing the sale of title and administration triggers for market rent only, which were in the original Commons amendment. Noble Lords were worried that this would leave tenants at risk if their pub was sold or if their pub company went into administration. What has become clear through our various discussions is that it is not a pub sale or administration itself that is of concern; rather, it is the potential for a pub sale—whether as part of an administration or the normal course of business—to result in adverse consequences for the tenant. The sale of a pub to another of the large pub companies is not a problem as the code will still apply. The concern is therefore the potential loss of protection for tenants if their pub is sold to a company that is outside the scope of the Pubs Code—for example, if Fuller’s or Young’s buy a pub from Punch Taverns.

The Government are addressing this concern through Amendment 33AV, which extends the protections of the code—apart from the market rent only option—to tenants whose pub is sold by a “code company” to a company outside the statutory code. The protection will last until the next rent assessment and will mean that the tenants concerned will be able to refer any code breaches during that period to the adjudicator.

As soon as the purchasing pub company presents the tenant with new terms, the deal it offers will have to be fair and comply with the code. The tenant will have the right to refer these terms, including the rent, to the adjudicator if he thinks that the code has been breached. If a breach is found, the adjudicator has wide powers of redress. The tenant will also have the option to request a parallel rent assessment—a provision we have brought back since Committee, as I will explain—if agreement is not reached.

If the purchasing company does not change the tenant’s terms when the sale is made, the protection of the code remains until there is a new rent assessment or when the lease agreements expire, whichever comes first. In that period, if there is an event outside the tenant’s control that affects his ability to trade, or a significant price increase, this would trigger a rent assessment, which must comply with the code. The tenant could also request a parallel rent assessment in these circumstances. These provisions preserve tenants’ rights to a fair tied rent after sale.

Noble Lords will remember that, in the other place, there was concern about overburdening family brewers through our provisions. We agree and therefore we do not propose to include market rent only in the continuation of protections when a pub is sold. Nor would the adjudicator have investigatory powers relating to those companies. This is because the investigation function is designed to uncover systemic breaches of the code. It would not be right to include in that power companies that are obliged to follow the code only because some of the pubs they own used to belong to a “code company” and which are covered by the code only in respect of those pubs.

The details of how the code extension will work will be set out in secondary legislation following a consultation. The regulations will be subject to the affirmative procedure. To deter avoidance and ensure fairness, we are also continuing code protections—excluding the market rent only option—until the next rent review for the tied tenants of pubs owned by a code company which, by selling a number of its other pubs, falls below the threshold of 500 tied pubs. These tenants, too, would have continuing rights and expectations regarding their existing lease, as well as the protections they should have under the statutory code, and they should not lose their protections because of events beyond their control.

During our consultations since Committee, a number of further points have been made about the definitions and terminology used in Part 4. I turn now to a number of amendments that we are making as a result of those representations.

Amendments 33D, 33N, 33P, 33S, 33T, 33V, 33Z to 33AB, 33AG to 33AN, 33AQ, 33AAA and 33AAB change the references in the Bill from “market rent option” to “market rent only option” to give reassurance that the intention is that a tenant who exercises market rent only should pay a market rent only for the pub and not for other services.

Amendment 33G clarifies the comparator for the “no worse off” principle in Clause 42 but does not change the substance of the clause.

Amendments 33Q, 33R and 33X change the definition of “market rent” to bring it in line with the industry guidance prepared by the RICS.

Amendment 33U provides that all MRO triggers “must”, rather than “may”, be set out in the code. It is right to clarify “must” for the introduction of MRO triggers, as it clarifies for Members of the other place that we will honour the intent of the original MRO clause. This has the effect of constraining the flexibility of these powers but we think that this is an acceptable compromise to give clarity on this important point. We are aware of the potential for unintended consequences for the tenant where a pubco might feel constrained from voluntarily offering a rent reduction as a result of a tenant’s personal circumstances for fear of triggering a right to MRO. We will explore whether there is a need to improve the drafting to avoid such consequences.

I am aware that my noble friend Lord Stoneham has tabled a similar amendment with regard to the parallel rent assessment. With his leave, I will discuss that in more detail when we reach his other amendments.

Finally, I come to the parallel rent assessment itself. Following the introduction of market rent only in the other place, the Government sought to restrict the scope of this assessment so that it applied only to prospective tenants, as they will not have the right to market rent only. This was an attempt on our part to reduce bureaucracy and increase simplicity. However, it is clear from discussions since Committee that tenant stakeholders actually like the parallel rent assessment and feel strongly that it should be retained for existing tenants. There are tenants who have no wish to exercise market rent only but who want to ensure that they have a fair tied deal. They would far prefer to gain this reassurance by requesting a parallel rent assessment, rather than by starting the market rent only process. There are also arguments that the transparency of the PRA may help a tied tenant to decide whether market rent only is for them.

Therefore, Amendment 33J seeks to reinstate the parallel rent assessment. We will consult on how best to streamline this with the market rent only provisions so that, as far as possible, the processes are integrated to help both pub companies and their tenants and to minimise bureaucracy. I know this is something that my noble friend Lord Hodgson is very keen to ensure.

I hope that the House will recognise the Government’s commitment to producing legislation that is effective in addressing problems in this important industry and workable in practice. We have tried hard to find common ground between all the stakeholders and to respect the view of the other place. We are confident that the amendments we have produced do indeed do that. I hope that noble Lords will feel able to support them and I beg to move.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Conservative 3:30, 9 March 2015

My Lords, in this group I have tabled Amendment 33L in response to government Amendment 33J, to which my noble friend was kind enough to refer in her opening remarks. It tackles the reintroduction of parallel rent assessments, which were abandoned, or removed from the Bill, at an earlier stage. Before I go any further, I need to remind the House, as I have previously, that I was until January a year ago a non-executive director of one of the companies affected by this Bill. It was one of the integrated pub companies: we operated five breweries and about 2,000 pubs, of which about 500 were managed and about 1,500 were tied in various forms.

That having been said, I regret that this Government, my Government, should have allowed themselves to be carried along on a tide primarily fuelled by emotion and with insufficient attention to the underlying hard economic realities of the pub trade. The trade faces acute pressures as a result of fundamental changes in our society and in our way of life. I fear that the changes we are proposing to endorse today may well increase those acute pressures rather than reduce them. However, I recognise the settled will of the other place and this House about the introduction of a market rent only policy. I also recognise another acute pressure; namely, that faced by my noble friend on the Front Bench in trying to square the circle. I would like to place on record my thanks to her and her long-suffering team of officials for the time and effort that they have taken.

I begin my remarks from a point on which I hope all parties can agree. We want to find a way to keep as many pubs as possible open and the challenge is how to achieve that. The answer must be to agree policies which balance, on the one hand, tenants’ rights and, on the other hand, the need to provide a degree of certainty about the future to the pub owner, the brewer and the pub investor, and to do so while incurring a minimum degree of bureaucracy, paperwork and administrative cost. I recognise the steps that the Government have taken in introducing amendments to the Bill today. In this group, for example, government Amendment 33AV, while far from ideal, at least recognises the need to provide for an aftermarket in pubs. I trust that the Government will resist the blandishments of the noble Lord, Lord Whitty, in a few moments when he speaks to his Amendments 33AW, 33AX and 33AY. I have to warn the Government that there may be unintended consequences even from that change.

CAMRA and others claim that there is a wave of money wanting to pour into the pub trade if and when the tie is removed. As I explained in Committee, that is far from the truth. Even if it were true, this amendment will not reassure individuals or companies wishing to buy pubs from big companies. Big companies own the bulk of the pubs and therefore usually will be the seller. Those individuals seeking to buy will try to avoid taking on a property carrying with it the uncertainties of the Pubs Code and the adjudicator, and the way in which he may operate. When looking to sell a pub, the pubcos may well be left with no option but to look more readily at alternative non-pub uses for their assets.

I am afraid that I am forced to the conclusion that the Bill does not provide the appropriate balance between the parties. I have tabled just three amendments, which would redress that balance and give an appropriate degree of certainty to pub owners and their investors. The first of these, Amendment 33L, is in response to the Government’s proposal in Amendment 33J to reintroduce parallel rent assessments.

Parallel rent assessments were introduced voluntarily by the pubcos as a means of reassuring tenants that, by providing an assessment of what a free-of-tie rent would be, they were being fairly treated. It was not the case that the pubcos got any credit for doing this. These PRAs were not popular with the Royal Institution of Chartered Surveyors, first because of the challenge of finding comparable properties—imagine trying to find a comparable property for a small village pub—and secondly, and no less significantly, the challenge of how to value the back-up provided by the pubcos to the tenant, known in the trade by the rather unattractive name of SCORFA, special commercial or financial advantages, which vary a great deal from company to company and pub to pub.

When the open market rent option was introduced, it was right that the PRAs were abandoned. After all, tenants could now apply for a market rent option as of right. However, for reasons that are quite obscure, other than riding the wave of emotion, the Government are reintroducing parallel rent assessments through Amendment 33J. I hope the Government will accept—I think from her comments in her introductory remarks my noble friend does accept—that to have two separate and different valuation methods to procedures cannot be a good way of providing clarity to tenants, certainty to the pub companies or even a level playing field for the adjudicator. Nor should we forget the administrative costs of having two entirely separate procedures. This trade is insufficiently profitable and its profitability is probably still falling. Let us not establish duplicate procedures which will still further reduce that already inadequate return.

Amendment 33L proposes one procedure. If a tenant asks for a parallel rent assessment—I accept that the Government wish to bring that back—the procedure to be followed should be the same as the first step in the market rent only procedure. At the end of the assessment the tenant can decide whether to stay as he or she is or to proceed with the MRO option. What should not happen in the latter case is to go back to square one and start again with an entirely separate procedure which, in due time, the tenant may or may not wish to accept either.

When my noble friend comes to wind up, could she confirm on the record that the rent assessment trigger for MRO relates only to rent assessments carried out in formal rent reviews and renewals of existing agreements? I am sure this is the case, but concern has been expressed in the industry that the MRO assessment trigger is wider than that. If my noble friend wants to cut down duplicative administrative costs for the pub industry, she will accept my amendment, which does nothing more than require that PRA and MRO evaluation procedures follow the same steps.

Photo of Lord Whitty Lord Whitty Labour 3:45, 9 March 2015

My Lords, I too have some amendments in this group. The House may be surprised, but I agree with the first remarks of the noble Lord,

Lord Hodgson, that we have seen a clear response from the Government to the anxieties on this section. While there was some concern that the Government had come up with a whole new clause to the Bill rather than the one that was passed in the Commons, and a fear that the Government were under some pressure to dilute the effectiveness of the amendment carried in the Commons, the Minister and her officials, in the amendments they are proposing, have seriously recognised that danger and have responded admirably in general to fulfilling the intent of the Commons’ Motion while making it less subject to doubt or indirect unforeseen consequences.

It is quite a complicated amendment in the first place, and the additional amendments which, under pressure, the Government have added today make it more complicated. Nevertheless, it is a basis on which we can all move forward. Certainly most of the campaigning groups in the area recognise that this is a huge step. There are, however, three anxieties which these and my later amendments address in part.

The first is that by leaving quite a lot of this to secondary legislation, it is probably inevitable that the actual right to the MRO will not come into force until about a year later. That is a disappointment. Nevertheless, I understand the reasons for it. I also have some problems about the threshold, which I shall come to in a later group. In this group, my main anxiety and that of other noble Lords and those who have met the Minister is that one of the triggers for the MRO, which was clearly required under the Greg Mulholland proposition and relates to the point of the MRO still being available after sale, is greatly reduced as a result of the government amendments. I agree with some of the amendments tabled in this area by the noble Lord, Lord Stoneham, as I do with some of the others.

I am sorry about the complication here, but my Amendments 33AW, 33AX and 33AY are themselves amendments to the fairly long government Amendment 33AV. They deal with a situation where the pub is sold in the course of a rent agreement to an owner who is not covered by the code. All the protections in the lease seem to move over, but the right to the MRO does not. The Government have addressed this in part by ensuring that the restructuring of companies will not be a way around the provision. In other words, the large pub companies cannot break themselves up so that they fall under the threshold. However, it is still the case that if a non-large brewer or pubco takes on a tied pub, while all the other protections in the code will apply the MRO option will not.

The Government have said that the option will apply for the duration of the lease, but that is not much comfort to those who are nearing the end of their lease. My first two amendments therefore deal with giving a bit more certainty to people who are faced with the sale of their pub, generally speaking over their heads, when they are not at the end of their lease. In other words, they suggest that there should be a 10-year period. I am not absolutely wedded to 10 years, but there should be a period during which whoever is the new owner, this one aspect of the rights of the tenant should be carried over with the lease in the same way as all other rights are carried over. The two amendments assume a period of

10 years. As I say, if the Government want to come up with a slightly different formulation, I will be happy to consider it.

The final amendment, Amendment 33AY, relates to the drafting of government Amendment 33AV, which seems to drive a coach and horses through the interaction of proposed new subsections (2A) and (2E). They would both restrict the availability of the MRO post sale to a non-qualifying company and dilute the role of the adjudicator in relation to the new circumstances. There may be a more subtle way of doing this, and the Government may say that there already is one, but I cannot see it in their amendment. A tenant who has the lease and by the clear will of the House of Commons now has the right to an MRO ought to continue to have that right under a new owner for a period of time and to have the right to enforce the MRO option by right of access to the adjudicator. Taken together, my three amendments would do that.

The Government may have a better way of doing this, and if they do we would like to hear about it either now or at Third Reading. Indeed, I remind the Minister that the point of sale issue was one of the great many contentions put forward by Greg Mulholland in the Commons and was clearly one of the triggers which the House of Commons voted for. If that is pulled away, the will of the Commons will not be fully represented in that respect. I repeat that I pay tribute to the Minister and her officials for respecting the other aspects of the Commons amendment. I would be interested in what the Minister has to say on this point, but I think that my amendments would actually help the situation.

Photo of Lord Stoneham of Droxford Lord Stoneham of Droxford Liberal Democrat

My Lords, I congratulate the Government on making significant moves with these amendments to deal with some of the problems that we identified in Committee. Obviously, one of our major concerns is that a lot is still to be decided by secondary legislation. We have to make sure that as far as possible we are precise at this stage about what that legislation is going to seek to do.

I accept all the points that the noble Lord, Lord Whitty, made about the point of sale issue. I would like to see stronger safeguards, but I also recognise the move that the Government have made, which I give them credit for, in ensuring that even though sale is not a full trigger point, the amendment will enable certain protections to still be in place, particularly that of the code.

I would also like to hear my noble friend spell out the timescale, because I share some of the concerns of the noble Lord, Lord Whitty, that we need some clarity on the timescale, although I suspect that 10 years is probably a little optimistic. I support the government amendments and ask for clarification on the point of sale issue.

Photo of Lord Berkeley Lord Berkeley Labour

My Lords, I support everything that my noble friend Lord Whitty said, but my main reason for rising is to challenge the noble Lord, Lord Hodgson. He said that there is a wave of money wishing to flood into the market—I hope I have got that right—but that the investors are not planning to do so at the moment.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Conservative

I said that CAMRA claims that there is a wave of money. I said that there is not; the briefing that CAMRA sent us claims that there is a wave of money and that if you remove the tie, people will start to put money into pubs.

Photo of Lord Berkeley Lord Berkeley Labour

I am grateful for that clarification. I do not know whether the noble Lord is aware that a dozen or so tenants of Punch and Enterprise Inns have gone public today, listing all the defects that have not been corrected by their owners—including unsafe gas appliances, leaking roofs, unsafe fire exits and so on —with the companies claiming that they have done the work and having put up the rents to some extraordinary degree to cover that when they have not actually done it. It confirms that something is seriously wrong and needs to be put right.

Photo of Viscount Ridley Viscount Ridley Conservative

My Lords, I declare an interest in that I own two properties that are operated as pubs but they are not beer-tied pubs. I congratulate my noble friend on guiding us through the complexities of these amendments. I have to say, I found the topic of mitochondrial heteroplasmy two weeks ago much easier to understand.

On the whole, I subscribe to the revolutionary idea that people should be free to come up with any commercial arrangements between consenting adults that they wish to, but I certainly recognise that there is a clear wish in this House and the other place for some version of a pub code and a market rent only option. I welcome the Government’s sensible and measured approach to bringing all sides together in this but, as my noble friend Lord Hodgson said, the key question is whether this will keep pubs open.

The industry is clearly warning us that the Bill, unamended, could cost a lot of money—maybe £20 million a year—and could result in the closure of hundreds of pubs. This is confirmed by an independent study by London Economics. It may be wrong and it may be crying wolf, but if it is not, the Bill will have done precisely the opposite of what we all want: it will have closed pubs and thereby damaged communities. It behoves us to tread carefully.

The Government have listened carefully to all sides of this debate and made, as the Minister said, a proportionate and targeted response. They have made important changes to the MRO which will make it more workable, less open to legal challenge and fairer to all stakeholders, while maintaining its spirit. Without the government amendments, there is a risk that we would see less investment. It is a simple fact that many beer-tied pubs have received significant investments. Without the safeguards, the MRO would create uncertainty that deterred investment. We would thereby also lose a low-cost entry into the sector: tenants without the capital to invest in a free-of-tie pub would not necessarily come forward at the same rate—we have heard something on that already. It is crucial that if tenants want to go to an MRO and find investment outside they can do so, but if they want to defer MRO to the next rent review in exchange for investment they should be able to do that, too.

The one law that we keep passing in this House is the law of unintended consequences. Can my noble friend give the House some reassurance that these complicated amendments will minimise the risk of widespread pub closures?

Photo of Lord Snape Lord Snape Labour

My Lords, I join noble Lords on both sides in welcoming the government amendments and particularly the amendment proposed by my noble friend Lord Whitty—I cannot say the same about the amendment proposed by the noble Lord, Lord Hodgson, but that will not surprise him given our discussions during the passage of the Bill.

As I understand my noble friend’s amendment, he seeks to ensure that if a pub is to be sold, a tied tenant can take action to ensure that the tie terms are not used by a future owner to restrict choice of products or unreasonably increase tied product prices. I think that that would be the effect of the Government not accepting the amendment. I would be grateful for the Minister’s comments.

I have some concern about the emasculation of the adjudicator as far as any code protection is concerned and the events which I have just outlined taking place. I wonder why the Government have decided in the way that they have as far as the adjudicator’s powers and duties are concerned.

The noble Lord, Lord Hodgson, as ever, warned us all of the consequences of what we are doing, as did the noble Viscount. I appreciate the view expressed on the law of unintended consequences—it has happened on lots of other occasions, particularly in the pub business. Nowhere did it operate in greater detail than in the case of the Conservative Government’s beer orders back in the 1990s. I thought that they were a good idea at the time, but the law of unintended consequences meant that, instead of brewers owning pubs, pubcos owned them. If we could turn the clock back, I think that we would prefer to rely on the charity of the brewers, although that might in itself be a fairly inexact term, rather than rely on the pubcos.

The noble Lord, Lord Hodgson, told us again that the pubcos would look elsewhere for investment if some of the provisions of the Bill were to go forward. I have to say that the pubcos have been looking for alternative investment for very many years. If one looks at the investment that they have made in their pubs compared to the money that they have taken out from the sale of their properties—I could give the House the figures—one sees that far more has been taken out in the form of sale of buildings by pubcos than has ever been invested. Indeed, I could give the noble Lord a list of deeply unhappy tenants who have been promised and have expected investment in their property from the pubcos which has either turned out to be pretty shoddy or has never materialised. If the noble Lord is going to try to frighten us all during the remaining stages of this Bill, he will have to do a bit better than he has done so far.

I would be interested to hear the Minister’s view about the noble Lord’s Amendment 33L. I hope that she will reject it as the ploy that it is it on behalf of the pubcos to, if not maintain the status quo, undermine the decisions taken by the other place, which, by and large, have been welcomed by both sides of your Lordships’ House.

Photo of Lord Mendelsohn Lord Mendelsohn Labour 4:00, 9 March 2015

My Lords, I shall speak to Amendment 33Y and cover some other issues. I congratulate the noble Baroness on her helpful approach to this. A great deal of work has been conducted and the Government are to be congratulated on the spirit in which they have worked to try, consistent with their word, to replicate the amendment passed in the Commons. They have done some very good work. The officials, of whom I have seen rather more than I expected, have worked diligently to do that, and I am encouraged and pleased to be able to say that we have made a great deal of progress. I think that the amendment meets the objectives of the Commons, which is to support all participants in the industry while recognising that we have challenges in the history of relations between the pubcos and the tenants which also need to be addressed.

I am not a pessimist regarding the concerns of some noble Lords about the commercial interests that will be affected by this. I have read the London Economics report—I was not convinced by it, but I have read it. I think that the impact of supermarket prices, for example, has been far more significant than other factors, so we have to put this into context. Our opportunity through the amendments and the Bill is not just to make those changes but to create a framework that will work for the industry and the development of the sector. That is an important objective for us to keep in mind.

This large series of amendments covers a lot of ground and a number of issues which lie at the heart of what was agreed in the other place on the issue of the market rent only option. As I said, the noble Baroness and her team have worked diligently in the face of time and other constraints to deal with them. In the particular circumstances of this part of the Bill, it is inevitable that our debate today has been rather more like Committee than Report, and it may be helpful to the Government if I explain that I think that the right thing to happen now is for a very limited range of issues to be given further consideration—a process in which we are happy to participate—and brought back for final decision at Third Reading. The noble Baroness stated in her introduction that she was happy to say that there is a great deal of support for some of the government amendments from CAMRA, Fair Pint, and others. In their briefings, they expressed their support for the amendments tabled by the noble Lord, Lord Stoneham and my noble friend Lord Whitty and others standing in our names. There is a great deal of support for the amendments, which need to come together in some fashion to provide a coherent Bill.

We believe that the Government have made excellent progress on some matters, which we are pleased to support. I will outline those shortly. However, we still have profound reservations and are strongly opposed to some of the amendments before your Lordships’ House today. We are keen to ensure that they are dealt with through further discussion at this stage, and strongly recommend that they be finalised in time for Third Reading—and certainly before they go back to the other House. As I said, we are keen to work constructively with the Government, as we have done to date.

In that context, I particularly support the point made by the noble Lord, Lord Stoneham, that much of what we are now considering will be in secondary legislation. At this stage and at this time, as we move towards Third Reading, we need a lot more clarity on some things to know what is meant by the amendments, because that is where the direction of secondary legislation will go. It is worth being as expansive as we can in those circumstances.

We are happy to support a number of the government amendments: for example, making the minor but vital drafting changes to “market rent only option” and the “no worse off” principle, although I should be grateful if the Minister can confirm, as a tidying up exercise, that if the Government have missed a change, they will bring it forward at Third Reading. We are happy to support the reinstatement of the parallel rent assessment for existing tenants—which means by implication that we are resolutely opposed to Amendment 33L.

We are very pleased to see one particular drafting change. I note that despite being told constantly of the legal impossibility of changing a “may” to a “must” in discussion on the Bill, we have one in government Amendment 33U. I had previously said that I might not mention that but I cannot resist. We understand that this drafting change is also there to express properly the Government’s commitment to this, which is very welcome.

We are also pleased to support the definition of market rent being brought in line with the guidance by the Royal Institution of Chartered Surveyors, and are content with the changes to the market rent only option procedure. We also hope keenly that the Minister will make a few comments on timings.

We have some questions in relation to the protections of the brewers’ routes to market. In general, we are happy to ensure that there are some protections. Our Amendment 33AR seeks clarification in the Bill that this route to market will allow some restrictions on the sales of competitors’ products, although not a complete ban. As now, brewing companies will have to look at their individual circumstances and ensure that they comply with all aspects of competition law. We will probe this to see what “some restrictions” means and are keen to seek some assurances on a number of points. Will the Government confirm that their provisions mean that tenants can be sure that they are no worse off than a free-of-tie tenant, because they will have access to free-of-tie pricing for all the alcohol that they sell? Will the Government assure the House that the stocking restrictions mean that brewers could require that their beer or cider is sold in their pubs, but not that products made by other specific brewers are purchased? We would also be grateful if the Government can confirm that tenants could purchase the required products from any supplier, and therefore access free-of-tie prices.

We are also keen to have the Government’s clarification as to how this will work. Tenants are not prevented from selling beer and cider from other brewers. The stocking requirement can restrict these sales but cannot provide exclusivity for the brewer. It would be interesting to understand how this will work. Any restrictions could be tested by the adjudicator as being reasonable or unreasonable but it would be very useful to get some better understanding of how the Government see this operating, since it covers placement, category, offers and marketing. If the stocking requirement was drawn too tightly, it could be deemed to be a tie in and of itself. We hope that the Government will acknowledge this possibility and confirm that it must comply with competition law.

As an example of what has been considered reasonable or unreasonable in the eyes of industry, and what it considers that it might look like, it has been suggested to us that the starting point would be what products are sold in the pub prior to a market rent only option. A stocking requirement which restricted the choice significantly post-MRO would likely be unreasonable. We would like to have the Government’s observations on this point.

We accept that there has to be a balance and agree with the aim of the amendment: to ensure that the stocking requirement is meaningful. However, we also believe that there should be protections to ensure flexibility for the licensee to be able to vary their businesses to deal with the varied, and usually local, factors that they may need to address to ensure that theirs is a viable business—albeit those may be national trends about prices in supermarkets, other leisure facilities and substitutional activities. We believe that this leaves a lot of flexibility for the adjudicator and while we accept that the amendment allows for tenants to choose which wine, spirits, soft drinks, food and other services can be provided for all aspects of their pub, and who the providers can be, we are keen to ensure that nothing in the Bill allows for the asymmetries of power and information to be enshrined in legislation which in and of itself is designed to support small businesses and deal with those asymmetries. Together with the pub companies and tenants, we are keen to make sure that the balance of judgments is reasonable.

I look forward to the Minister’s reply and hope that she can address the issues in detail. We are of course happy to have further discussions on this between now and Third Reading. In the circumstances that she is unable to provide sufficient clarity of the tramlines on which this should operate, I am happy to address it again at Third Reading.

However, we are strongly opposed to the Government’s decision to weaken and water down the amendment from the Commons by eliminating the market rent only option on the sale of title or in administration. We are grateful to the Government for their discussions on this but are yet to be satisfied that there is any substance to the arguments that they presented to us. I am sure that threats of being taken to the European Court of Human Rights by the pub companies have exercised the Government, who have sensibly sought legal advice, but we strongly believe that either or both the legal advice and the client’s examination of that advice are wrong or flawed.

We have sought to deal with this question before coming to the Floor of the House; indeed, we asked for the advice that the Government had sought from counsel, which is experienced in competition, European and public law, to be published so that this could be dealt with. Our consultations with learned counsel and experts in these areas, and indeed in property law litigation including the European dimension, led us to vastly different conclusions. I know that the Minister has had a very distinguished career in business, and there is a crucial element when taking the advice of lawyers: beyond briefing them—indeed, in some cases I have heard of occasions when you can tell them what you want to hear—there is also a role for a client to examine the advice that is given and to challenge it. It is of course a choice for Ministers to decide what level of risk there is, but in this case Ministers seem to have chosen a threshold so low that we cannot fathom why, in our view, they have been as timid as they have.

The Government have said to us that they are restricted in publishing the legal advice that they received because it is privileged. The claim to privilege is quite odd, as all legal privilege can be waived. What are they worried about in relation to any such waiver? Not the advice falling into the public domain and hence fortifying any challenge, as it is already equally in the public domain that they believe there would be a basis for any such challenge. It is our view that this matter can be resolved in discussion, not on the Floor of any Chamber, if they would allow a full and open legal debate.

I hope that noble Lords will forgive me if I quickly outline why we do not accept the Government’s legal arguments on these provisions—if they were retained—fettering rights, causing improper pre-emptions, being challenged on the grounds of affecting value or, in the Government’s view, being uniquely placed for certain destruction under the weight of the ECHR. First, let us not forget that the MRO option is at market rent—by definition—so Clause 43(10) imposes on the parties only a method of determining rent that affects supply and demand for those premises. Infringements of property rights occur when you depart from the free workings of supply and demand, not when you insist on them. Therefore, the more numerous the points at which this can be insisted upon—point of sale rather than just point of entry—the better.

Secondly, without a sale triggering the MRO option, the option could be gamed as there is no benefit during the currency of the existing lease term, and this could become an avoidance tactic to ensure that delays in some cases could lead to tenants being the subject of improper pressures.

Thirdly, the point of sale of the reversion—the landlord’s interest—is a natural point to introduce MRO because the purchaser of the reversion, the new landlord, will be deemed to know the new law and hence that its purchase triggers the MRO option. The new landlord will know the effect of their purchase and be under no illusions as to where they stand.

Fourthly, there are many statutes that infringe property rights, some of them doing much more than simply adjusting the terms of the lease, as this proposes. Some actually confiscate property rights, such as the Leasehold Reform Act 1967, which gives tenants of houses the right to “enfranchise”—that is, buy the freehold off the owner against their will—and the Landlord and Tenant Act 1987, which gives owners of flats a right of first refusal to buy the freehold on any sale by the freehold owner. If this proposal raises human rights or other fundamental issues, so would most of the lease-related legislation on the statute book already.

Fifthly, there is enormous scope for safeguards, flexibility and evolution by the MRO option being overseen by the provisions of the Pubs Code, as reviewed every couple of years, and with the adjudicator’s retained rights to resolve disputes about MRO. This machinery has the ability to limit unfairness to landlords in individual cases because of the swifter introduction of the MRO option.

Sixthly, recent legislation has shown the need for, and has included, wider, more catch-all anti-avoidance provisions. The most effective is in the Landlord and Tenant (Covenants) Act 1995, enforcing the release of original tenant liability on assignment of the leasehold term, which, in Section 24, prohibits anything that seeks to avoid or frustrate the Act. The experience is that the wider the anti-avoidance net, the more it will catch. Making MRO triggered by sale strikes down in one go attempts by landlords to sell to get below the threshold applying to large pubcos.

We have been presented with other partial legal arguments, which I think are useful to set out our understanding and complete rebuttal. There is an argument that the pub company is not free to dispose of its property as the MRO trigger binds the new owner. There is no real limitation—it can still sell or choose not to. It is no different from restrictions on the freedom to dispose of freeholds of blocks of flats under the Landlord and Tenant Act 1987 and other such measures. There is also a variety of other restrictions placed by means of legislation in other areas that have a similar effect and have not been struck down or even significantly challenged.

Additionally, there is an argument that the MRO trigger results in preferential treatment for this class of commercial tenant. It does not give preferential treatment; it simply removes discriminatory, anti-competitive treatment. All these clauses and, indeed, much of this Bill are about this. I am rather pleased that this counsel has not pronounced on most of the rest of the Bill, because obviously that would undermine other provisions.

In addition, there is an argument that it affects the value of the property and would be likely to cause a significant decrease, but that is not necessarily the case. Market rent will usually exceed the rent under a tie and hence offset any loss caused by the removal of the tie—which is, in any event, the object of the legislation. As it is, a variety of decisions are made which have an effect on the value of property, from planning to care home regulations. I believe that this sort of argument has frequently been given short shrift by noble and learned Lords, among many others, over the years.

The final argument is that ECHR challenges would provide certain grounds for defeat. I do not believe that this is the case. There is no greater risk than with much property-related legislation that regulates relations between landlord and tenant. As I outlined before, there are a number of statutes that relate to this. These challenges—not that I have been able to identify many— have not been successful. Learned counsel we have consulted does not agree with the case law justifications that have been mooted. I believe that one case in the UK on the grounds for a landlord to have a right to vacant possession has been cited. Two other cases on blight and rental values and pre-emptive rights relating to situations in other countries, which came before the court for judgment 21 and 25 years ago, are in my view and that of counsel not sufficient to strengthen the Government’s argument. Our view is that similar UK law is robust and has never been struck down. It is not generally challenged, and there are reasons for that. Adopting a transfer of title trigger is entirely proportionate and has legal precedent.

The Government need to consider their position on this one and come back to the House with a much clearer and greater explanation of their position. We are happy to allow further legal debate if they are willing to publish the advice, but we say this with a practical consideration, too. The legal arguments we have been presented with have been very widespread, so the cost to us of securing formal opinions from leading counsel across the areas of contention has been pretty vast. In many ways, this seems to replicate much of the Government’s intention in the Bill to equalise the information and resource asymmetry between a small business and big business. While I do not always wish to refer to the Opposition Benches as a small business, in this case, it would certainly be very helpful for us to have the publication of that advice as it would help us clarify and make our contribution much more precise and meaningful when coming back to the Government.

The Government’s position on this needs much greater detailed scrutiny. I do not believe that the Bill as it stands on these issues would be consistent—with any justification—with the intentions of the Commons amendment. We should not allow the Bill back without addressing this flaw. It would be deeply flawed if we sent it back to the Commons in the knowledge that it should be, and would be likely to be, challenged.

Photo of Baroness Neville-Rolfe Baroness Neville-Rolfe The Parliamentary Under-Secretary of State for Business, Innovation and Skills 4:15, 9 March 2015

My Lords, I thank noble Lords for their contribution to this important debate within this Chamber and outside it. I especially thank my noble friend Lord Hodgson for his broader comments about the industry and his warnings about investment in the industry, which of course warms all our hearts, and my noble friend Lord Ridley for similar comments. Clearly, we are seeking to create certainty on the basis of the new system that Parliament will, I hope, pass in a very few days’ time. One would hope that that would lead to more investment in the industry and fewer closures. The planned consultation on the subordinate legislation will give us an important opportunity to look again at these important issues.

Before I answer the various points, I should also thank the noble Lords, Lord Whitty and Lord Stoneham, and all noble Lords for their acknowledgement and empathy and the thanks that they have accorded to my excellent team, who have worked long and hard on all this. I also thank the noble Lords, Lord Berkeley and Lord Snape, in particular for the pivotal role that they played in our discussions in Committee.

On Amendment 33L, I emphasise to my noble friend that the parallel rent assessment and the market rent only are different tools. PRA is a comparative illustration of the likely tenant profit in a tied and free-of-tie scenario for their pub; it has at its heart a projected profit and loss account for both scenarios. MRO, on the other hand, is about the market rent for the pub: in other words, what it would fetch as a pub on the open market. That starts from a different premise from a PRA. In addition, apart from being technically different, we have decided to reinstate PRA for existing tenants for a specific reason: because some tenants who do not wish to be free of tie would prefer the PRA, as they consider it a less confrontational way to secure a fair tied deal.

None the less, my noble friend will know that I am always keen to minimise bureaucracy, and as I said earlier it is our intention to streamline and integrate the two processes as far as possible, but we need to do the detailed work and process mapping to understand where and how the processes dovetail. This will benefit from further formal consultation, which will inform how we set this out in secondary legislation. I look forward to input from other noble Lords, including my noble friend, on our consultation.

My noble friend Lord Hodgson also felt that PRA was complicated and expensive. Pub companies are generally experts on the costs of running their own pubs under different models and their trading history. Therefore the extra complication and expense will be limited. As I have said, my officials will work with stakeholders on all sides when finalising the code to ensure the optimum streamlining.

My noble friend also asked about the rent assessment trigger for MRO. As I said in my opening remarks, we are aware that we need to ensure that the MRO triggers for rent assessments and renewals do not cover, for example, a predetermined rent increase, or a rent reduction to help a tenant through a difficult time. We will look at whether the drafting of the Bill needs to be improved to avoid such consequences.

Amendments 33AW, 33AX and 33AY from the noble Lord, Lord Whitty, would amend the Government’s own Amendment 33AV, which relates to the extension of code protections. I thank him again for his constructive contributions to our debate. As I said earlier, the Government will provide the continuation of protections when and where it matters. After a sale from a code to a non-code company, when the purchasing company offers new terms those must be prepared in line with the statutory code. This includes the transparency and rent negotiation provisions, and these changes will ensure that we have preserved the tenant’s right to a fair tied rent.

If the terms do not change, the tenant will not be in a worse situation but will have the right to a rent review under the code if local economic circumstances change and impact on their trade or if there is a significant price increase. If the purchasing company breaches the code, the tenant can refer the dispute to the adjudicator, who has ample powers of redress under the Arbitration Act, including the power to set a fair rent. It is appropriate and proportionate to ensure that the code protections apply until the first occasion when the tenant negotiates a new deal with the purchasing company, because this is when any disadvantage from the sale first presents itself and can be remedied through negotiation between parties.

In setting the threshold of 500 tied pubs for the code, the Government respected the wishes of the other place not to overburden smaller regional and family brewers. Therefore if we are to require that they are to be subject to the code in certain circumstances, this must be in a targeted and proportionate manner.

The noble Lord, Lord Whitty, would like to provide code protections for a longer, 10-year period. While I can accept that in one sense it is attractive to protect the tenant for a longer and fixed period, we need to have evidence for the period we would choose. Bearing in mind the concern of the other place not to overburden family brewers, the Government consider that it is proportionate to continue with the code protections until the first rent assessment and that after that the tenant is on the same footing as existing tenants of the purchasing company. Independent Family Brewers of Britain has committed to continuing the industry’s self-regulation system for its members, with access to a dispute resolution system.

Finally, I also do not consider that the noble Lord’s Amendment 33AY meets the test of proportionality. It would mean that despite not being subject to the code, a family brewer buying a code pub would be required to provide the market rent only option for that pub. This would potentially deny the family brewer the right to exercise their chosen model and discourage them from buying pubs from code companies for continued use as pubs. In addition, after taking advice from government lawyers and from external counsel—a highly respected competition, public law and European specialist—it is the Government’s view that it would be a disproportionate infringement of the property rights of pub-owning companies for the market rent only protection to continue in the case of a sale. Frankly, I do not agree with the noble Lord, Lord Mendelsohn, having seen the advice, and it is not normal practice to publish such advice because of loss of legal privilege.

The uncertainty created by the possibility of MRO would negatively impact on the property’s sale value. We have therefore sought a more proportionate way of protecting the tenant’s interests, which I have already set out. Achieving a proportionate balance between the interests of tenants and pub-owning companies is important to successfully defend any legal challenge.

The noble Lord, Lord Mendelsohn, referred to the Landlord and Tenant Act 1987, whose purpose was to protect the co-tenants of a block of flats in the event of a sale by the landlord. The Act allows tenants to be collectively offered the purchase of the residential property before the landlord can offer it for sale on the open market. Business tenants, and so pub tenants, are excluded from such protections, as the purpose of Parliament was to protect residential tenants of a multi-occupier property. This is not analogous with the case of pub tenants. Furthermore, we do not think that this protection is appropriate in relation to pub premises, as pub tenants are not constrained from making an offer for the property should the pub company wish to sell it.

The noble Lord’s amendment would also mean that the investigatory powers of the adjudicator, and its related enforcement powers, would be included in the code extension. These powers have a specific function, which is to investigate systemic breaches of the code. It would not, therefore, be reasonable to apply them to family brewers who are covered by the code only by virtue of pubs they have purchased from code companies.

The noble Lord, Lord Snape, expressed a fear that the adjudicator would be emasculated—I think that was his word—in cases of the code being extended to tenants when their pub is sold. I assure him that the adjudicator is not being emasculated. He will be able to arbitrate on any alleged code breaches, including setting a fair tied rent, if necessary. The only powers that the adjudicator will not have after a pub is sold are the power to investigate a purchasing company and to impose such sanctions afterwards. That seems to me to give the right balance.

I share the noble Lord’s wish to extend protections to give a fair deal for the tenant where his pub is sold to a new company. This we have done in the amendments that we have proposed today, and this includes the ability to turn to the adjudicator for arbitration if they have a problem in doing so. That will be an important guarantee of tenants’ rights. The noble Lord has been very persistent and very constructive, and I hope in the circumstances that he will not press his amendments and that my noble friend Lord Stoneham will also feel content with my explanation.

The noble Lord, Lord Mendelsohn, asked how the stocking requirement would work. Under Clause 43(5), the Secretary of State may set out in the code terms that are required to be in a lease for it to be MRO compliant, including any terms that would be considered unreasonable. For example, if the requirement has the effect of reintroducing a product tie-in, the lease will not be MRO compliant. We will consider this in detail when we come to implement these provisions in the code. Of course, Clause 62(3) gives the adjudicator the power to set out guidance in relation to any matters regarding the Pubs Code, including the application of its provisions as well as steps that pub-owning businesses must take to comply with the code.

The noble Lord, Lord Whitty, asked about the MRO implementation time. I think he asked about timing, but I will clarify it anyway. I answered the point about the 10 years, but I add for the record that MRO must be included in the Pubs Code, which must be implemented within 12 months of the Bill coming into force. The Bill comes into force two months after Royal Assent, so the code, with MRO, will be in place within 14 months of Royal Assent.

I hope noble Lords will agree that much progress has been made since Committee. I very much hope that I have covered noble Lords’ principal questions on this extremely complex area. We have had constructive engagement from all sides, for which I am grateful. The best way of thanking my team would be to agree these government amendments. Although I am sure there are places where noble Lords would prefer us to go further, and some where they would prefer us to go less far, the resulting package of government amendments meets the concerns of the supporters of the original MRO clause, including my honourable friend Greg Mulholland, CAMRA and Fair Pint, whose energy and determination have made this legislative reform possible. We are keen to bring this to a conclusion.

Photo of Lord Mendelsohn Lord Mendelsohn Labour 4:30, 9 March 2015

Will the Minister confirm that we may return to matters contained in Amendments 33AS, 33AW, 33AX and 33AY at Third Reading?

Photo of Baroness Neville-Rolfe Baroness Neville-Rolfe The Parliamentary Under-Secretary of State for Business, Innovation and Skills

My Lords, I was about to make the point that there are concerns on both sides. If the noble Lord wishes to press these amendments, we should test the opinion of the House.

Amendment 33D agreed.

Amendments 33E and 33F

Moved by Baroness Neville-Rolfe

33E: Schedule 1, page 153, line 7, leave out “place” and insert “places”

33F: Schedule 1, page 153, line 7, at end insert—

“Member of staff of the Pubs Code Adjudicator.”

Amendments 33E and 33F agreed.

Clause 42: The Pubs Code

Amendment 33G

Moved by Baroness Neville-Rolfe

33G: Clause 42, page 38, line 29, leave out “as a result of” and insert “than they would be if they were not subject to”

Amendment 33G agreed.

Amendment 33H

Moved by Lord Stoneham of Droxford

33H: Clause 42, page 39, line 7, leave out “may” and insert “must”

Photo of Lord Stoneham of Droxford Lord Stoneham of Droxford Liberal Democrat

My Lords, I do not want to detain the House too long on these amendments and have a long argument on the respective merits of “may” and “must”, as I understand there are certain legislative interpretations of that. However, as I said earlier, we are concerned that a lot remains to be decided in the secondary legislation. Therefore, we want to be as firm as we can about what the primary legislation lays down. If the Minister can confirm that “may” means “must”, I understand that there will be no problem. All I seek is clarity and to leave the draftsmen to draft what is appropriate in the circumstances in legislative speak, hoping that “may” equals “must” in a layman’s understanding.

However, Amendment 33AR is a more substantial and significant amendment as it seeks to align and clarify the definition of “tie”. Clause 68(5) defines “tie”, saying:

“Condition D … is subject to a contractual obligation that some or all of the alcohol to be sold at the premises”, et cetera. Amendment 33AR seeks to widen that by inserting,

“product or service tie supplied or provided by”, as other ties exist in pubs. We want to align this definition with the definition in Clause 43(4)(a)(ii), which states,

“does not contain any product or service tie other than one in respect of insurance in connection with the tied pub”.

We are seeking to clarify the definition of a tied pub. I beg to move.

Photo of Lord Mendelsohn Lord Mendelsohn Labour

My Lords, I rise briefly in support of the amendments tabled by the noble Lord, Lord Stoneham, who has been an assiduous follower of the Bill. These are important, tidying-up amendments that help correct and clarify some key measures in the Bill. In particular, Amendment 33AR is an essential requirement to make sure that there is consistency in the Bill. I hope that either the amendment will be accepted or the Government will agree to bring it back at Third Reading.

Photo of Baroness Neville-Rolfe Baroness Neville-Rolfe The Parliamentary Under-Secretary of State for Business, Innovation and Skills

My Lords, I am afraid that I cannot agree to this amendment. I explained why we could agree to “must” elsewhere in the Bill but we are unable to agree to this amendment for reasons that I have also explained.

Photo of Lord Stoneham of Droxford Lord Stoneham of Droxford Liberal Democrat

In that case, is my noble friend going to talk about Amendment 33AR? I will probably have to accept what she says about the other amendments, but I should like a definitive response on Amendment 33AR.

Photo of Baroness Neville-Rolfe Baroness Neville-Rolfe The Parliamentary Under-Secretary of State for Business, Innovation and Skills

My Lords, I apologise for the confusion. There are a lot of different amendments here and perhaps I may have noble Lords’ patience. Perhaps the noble Lord could clarify to which amendments in which groups he seeks a response, because there are two or three different ones that relate to “must” and “may”. I explained where I was happy to accept “must”. If he is asking me to accept it in other places, there are reasons that I can go through.

My apologies to the House; we have moved on more rapidly than I could possibly have believed. I thank the noble Lord, Lord Stoneham, for his amendments. Perhaps I may now explain that Amendments 33H and 33K would change two references to “may” in Clause 42. This would turn the powers in the Pubs Code to require pub companies to provide parallel rent assessments and turn the adjudicator functions in relation to PRAs into a duty. We have made a commitment to this House to introduce PRA. This commitment, together with the duty on the Secretary of State to produce the Pubs Code in Clause 42(1), means that the Government must deliver on these provisions in the secondary legislation one year after these provisions come into force, as I explained a minute ago. There can be no doubt that we will introduce these provisions.

We had similar debates on a number of topics in Committee. As I set out then, it is standard legislative drafting to refer to provisions that “may” be set out in secondary legislation to preserve some flexibility. If we were to change these “mays” into “musts”, we would need to be aware of the possibility of overly restricting and restraining the use of these powers. For example, we have said that the adjudicator “may”, in the interests of fairness and administrative effectiveness, choose not to charge fees to smaller pub companies that have bought only one pub formerly owned by a pub company. These amendments would remove such flexibility and I hope my noble friend will recognise the undesirability of that. I can assure him that the Government will include all the provisions set out in the Bill in the statutory code, which will be made by secondary legislation and subject to parliamentary scrutiny by the affirmative procedure.

With noble Lords’ permission, I shall comment on Amendments 33AJ, 33AL and 33AP. Where the Bill provides that the Secretary of State “may” by regulations give the adjudicator functions in relation to dispute resolution and determining rent for market rent only, it is clear that the Government must set out these functions for the adjudicator in secondary legislation. Clause 42(1) sets out a clear duty on the Government to introduce the statutory code within 12 months of the Bill coming into force—14 months from Royal Assent, as I have said—and to establish an adjudicator to enforce the code. The code must include the market rent only option and the adjudicator must therefore be able to enforce the market rent only option.

I turn now to Amendment 33AR. The definition of a tied pub set out in Clause 68 determines the scope of the regime and deliberately focuses on the alcohol tie, rather than other product and service ties. This is because it is in the abuse of the combination of the alcohol tie and property rent that we have evidence of problems in the relationship between tenants and pub-owning companies. This has been documented in the evidence we received to the Government’s consultation, in the continued correspondence the department receives from tied tenants, and in the multiple reports into the sector carried out by the BIS Select Committee. These reports and the evidence we have received point to problems with the alcohol tie.

The requirements for a market rent only-compliant agreement set out in the Bill specify that an agreement made once the tenant has opted for MRO must not include any alcohol, product or service ties. This is to ensure, when a tenant opts for MRO, that he or she is offered a genuinely free-of-tie agreement. However, it does not follow that all pubs with any kind of tie should be brought into the scope of the code at the outset. Amending the definition of a tied pub in the way proposed is a different prospect, as this changes the scope and application of the measures as whole. For example, this would mean that a pub with no alcohol tie but with a service tie of some description would be covered by the legislation. This would bring into scope a pub that is contracted to a pub-owning company for something like cleaning services, but is in all other respects free of tie and able to purchase beer and other products from any source. This is not the sort of pub where we have evidence of a problem, and I believe we must avoid inadvertently capturing free-of-tie pubs and creating greater uncertainty in the regime. Focusing these measures on those pubs that are tied for their beer and alcohol will ensure that we target that part of the market where we have evidence of a problem.

I hope that my noble friend Lord Stoneham has found my explanation reassuring. I know it is all very complex, but on the basis of my full explanation, which I think has explained why the Bill says “may” and “must” on different occasions, I hope that he will feel reassured and able to withdraw his amendment.

Photo of Lord Berkeley Lord Berkeley Labour

My Lords, could the noble Baroness clarify—I, too, feel that it is a bit complicated—that the first five amendments in this group from the noble Lord, Lord Stoneham, which replace “may” with “must”, will in fact be done in secondary legislation? Even if she does not accepting these amendments, will their spirit and meaning be in the secondary legislation?

Photo of Lord Berkeley Lord Berkeley Labour

I am not a noble friend.

Photo of Baroness Neville-Rolfe Baroness Neville-Rolfe The Parliamentary Under-Secretary of State for Business, Innovation and Skills

I am sorry; I think he is a friend on this occasion. The noble Lord, Lord Berkeley—I will have to go back to Lords school shortly. As I explained in my long reply, it is standard legislative drafting to refer to provisions that “may” be set out in secondary legislation. In practice, we will do all the things that I have described. Therefore, I feel that these “musts” are not needed.

Photo of Lord Stoneham of Droxford Lord Stoneham of Droxford Liberal Democrat

I thank my noble friend for the reassurance that we will do these things. On my last amendment, Amendment 33AR, which I will be happy to withdraw, all I ask, in the final phases of looking through, is that the clauses I mentioned, Clause 68(5) and Clause 43(4)(a)(ii), coincide with each other.

Amendment 33H withdrawn.

Amendment 33J

Moved by Baroness Neville-Rolfe

33J: Clause 42, page 39, line 8, leave out “falling within section 70(1)(b)”

Amendment 33J agreed.

Amendments 33K and 33L not moved.

Amendment 33M

Moved by Lord Mendelsohn

33M: After Clause 42, insert the following new Clause—

“Investment agreements

(1) The Secretary of State shall establish regulations and guidance for cases where the extension of the rent assessment for pub tenants beyond usual terms is granted in return for a sum of investment from the pub company.

(2) These regulations and guidance shall include, but are not limited to, the following—

(a) the definition and amount of investment;

(b) the maximum deferral period of MRO in return for investment to be five years;

(c) the deferral period for MRO to begin after investment sums are fully expended;

(d) the buyout of agreement provisions whereby a tenant can opt for MRO;

(e) the tenant’s option to allow for alternative and blended finance to maintain MRO;

(f) an investment agreement will be a trigger event for MRO;

(g) an investment agreement will trigger the Parallel Rent Assessment; and

(h) clarification that an agreement of investment means no opt out of the Landlord and Tenants Act 1954.

(3) Any investment agreement must recognise the different nature and size of pubs and relevant investment requirements.”

Photo of Lord Mendelsohn Lord Mendelsohn Labour 4:45, 9 March 2015

My Lords, Amendment 33M makes provision that the Secretary of State may, through secondary legislation, create an opt-out for an MRO in return for a sum of investment. The amendment tries to outline important provisions and considerations and to ask the Government to be clear on what that means. It also asks that they implement safeguards to ensure that the MRO is not watered down. Our belief is that if the investment offer is fair, reasonable and attractive to a tenant, there will be little or no risk of the tenant taking up the MRO at that time. The MRO trigger would be there to ensure that pub companies made reasonable investment offers and were not just bullying or cajoling tenants into signing away rights cheaply.

My reasons for tabling the amendment are twofold. First, we do not fully accept the Government’s argument concerning Clauses 42 and 43 on the Pubs Code. We think that the legislation is insufficient and would be very interested to hear the Minister’s view on this. Secondly, this measure has the capacity to undermine the Commons amendment. We do not feel that it is appropriate to accept the measure without a detailed indication of what it entails and without some markers on the face of the Bill.

There are many horror stories in relation to this, as in relation to the operation of how pub companies deal with the provision of a sale. Indeed, I heard this morning from a tenant about how all their rights were bullied out of them and how they were moved dramatically from a position of reasonable success and security, with the pub company using the provision in a dispute over a sale. Many Members of this House will have heard stories from a variety of sources about issues concerning investment. We are concerned to make sure that these are dealt with adequately, and that the problems that led to this part of the Bill and to the issues that arose in the other place are dealt with properly.

We are also very keen to make sure that the industry, in and of itself, has the capacity to continue to develop and invest, finding a way to work with its tenants productively, sensibly and creatively so as to grow, commercialising the sector to full effect. Therefore, we are looking to the Government to provide a clear view on how they will deal with this. We accept that much of this will be dealt with in secondary legislation, as with other things, but because of the nature of some of these provisions, and the speed at which they have been made, we will be very keen to have some idea of what the Government see the regulations and guidance as including and how they will be framed.

We would be very grateful for some clarification on the following: the definition and amount of investment; what the Government consider to be the maximum deferral period of MRO in return for investment, and their view on whether it should be capped at five years; the stage at which the deferral for an MRO will begin— that is, will it be after the sums are agreed or when they are all fully expended?—the buyout of agreement provisions, whereby a tenant can opt for MRO; the tenant’s option to allow for alternative and blended finance to maintain MRO and how this will operate with investment agreements; and the ability for an investment agreement to trigger the parallel rent assessment. We would also like to have a strong reassurance about how the investment agreement will be a trigger event for the MRO. We would like clarification that an agreement of investment will mean that there is no opt-out of the Landlord and Tenant Act 1954, and an assurance that the investment agreement will recognise the different nature and size of pubs and relevant investment requirements. There is a considerable difference between a large pub in, say, the centre of London and one in a remote village, and it needs to be recognised that a one-size-fits-all model does not work.

There are other considerations, such as who commissions the work, to what standard, who signs it off and is responsible for overruns, the examination of the current condition of properties and other matters. These are not the only relevant factors. We have also received correspondence on problems between pub companies and tenants, and on how these mechanisms have specifically been used. We believe that it is in everyone’s interests to have a working mechanism that allows for investment and makes that investment work. We feel that more clarity now will ensure that problems can be avoided in the future.

I hope that the noble Baroness the Minister will be happy to consider these matters in full. Given their sensitive nature, we will be happy to return to them at Third Reading following this debate on the substantive points. I beg to move.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Conservative

My Lords, I have Amendment 33W in this group. The noble Lord, Lord Mendelsohn, has done us all a favour by tabling Amendment 33M, which has the great virtue of ensuring a reference in the Bill to the importance of investment in the sector. There are aspects of his amendment which would be operationally and definitionally problematic, which I will come to in a minute or two, but there is a germ of a good idea and I hope that we may be able to persevere with this over the next few days. By contrast, I find the Government’s position less satisfactory, in that, as I understand it, there is to be no reference to the importance of investment in the sector anywhere in the Bill. It will all be left to the consultation process, with all the attendant uncertainties which all sides of the House have referred to during the debates this afternoon.

The Government have made a practical argument that the pubcos could achieve certainty by offering tenants a new agreement at the same time as the offer of investment. In the explanatory note that the Government circulated last week, there is a suggestion that the Bill does not prevent pub companies from issuing a tenant with a new lease alongside the offer of investment. Sadly, most tenants will not be attracted by this because of the problems of stamp duty. A lessee on a 15-year lease with a rent, say, of £50,000 will pay stamp duty of around £5,000 at the outset. If they are in year two or year three of the lease, and the pub company has to grant them a new agreement in order to make an investment with a five-year payback, they will have to write off the £5,000 they have already paid, pay another £5,000 in stamp duty for the new lease and then pay all the legal costs associated with it, which are estimated at around £1,500. Not surprisingly, this is not a particularly attractive option for the lessee. In essence, the Government’s position now is to force small businesses who want to take advantage of pub company investment to pay additional tax to do so. That is surely contrary to the aim of the Bill, which is to increase access to finance for small companies.

I think all noble Lords agree that investment in pubs is urgently needed if the trade is to prosper, because pubs are having to reinvent themselves to meet new competitive conditions, with a greater emphasis on food, facilities for families and so on. These investments are what bankers called “messy lends”, because they tend to be a mixture of: land works, for example extending the car park; construction—increasing the footprint of the pub; internal fittings, such as enlarged kitchen facilities; and general work such as new signage, new fixtures and fittings, and general decoration. A banker will have some doubt as to the ultimate value of that investment if it is unsuccessful. They are not always therefore very attractive to third-party lenders, but they are attractive to integrated pubcos, because their own estate is an important route to market for their own beer, often accounting for up to 25% or 30% of their production. It needs to be made clear that there is no requirement for a tenant to accept the pub owner’s money. If he or she can find funds elsewhere, on better terms, so be it, although the fact is that an integrated brewer usually is able to offer the best terms.

I referred to the need for pubs to reinvent themselves as a result of changes in society. That brings me to the downside of the amendment of the noble Lord, Lord Mendelsohn, as currently drafted. He referred to the vast range and diversity of investment needs, but I fear that parts of his amendment represent a straitjacket. What is a “rent assessment” in relation to MRO in the introductory section of his amendment? Reinventing yourself as a gastropub in a prosperous London suburb is a vastly different proposition from reinventing yourselves as a value-conscious family-friendly pub in Middlesbrough, but both are important if we are to maintain the pub trade in all its glory and all its diversity.

I argue that the maximum deferral period of five years, as proposed in subsection (2)(b) of Amendment 33M in the name of the noble Lord, Lord Mendelsohn, is not appropriate to appear in the Bill. Secondly, the proposed buyout provisions under subsection (2)(d) are likely to act as a disincentive to investment. Thirdly, for reasons that were clear from my previous amendment, I am anxious to pull MRO and PRA together, whereas the noble Lord has separated them under paragraphs (f) and (g) of his amendment.

My Amendment 33W does not suggest a new clause— as the amendment in the name of the noble Lord, Lord Mendelsohn, would do—but the insertion of two paragraphs in Clause 43, “Pubs Code: market rent option”. My amendment envisages a situation where the Pubs Code would clearly set out what can and cannot be included in such a deferral agreement. Tenants would continue to enjoy all the protections of the Pubs Code and the Pubs Code Adjudicator. No tenant could enter into a deferral agreement without having first taken appropriate professional advice to ensure that he or she is aware of the terms of the agreement and has taken advice on its suitability for their business. The tenant must choose to opt into the deferral agreement; that is, he or she has the right to refuse to enter into any such agreement. The adjudicator should oversee the deferral system to allay concerns from tenants around the process of entering a deferral. A deferral would apply only to significant investments to be defined in the Pubs Code and would not therefore be available for incidental investments for maintenance or repairs which are the responsibility of the owning pub company. The deferral agreement could last for a mutually agreed period of time.

The Pubs Code could set a maximum period of time for a deferral agreement if appropriate. Some flexibility may benefit both tenants and pub companies depending on the scale of the investment, as the noble Lord, Lord Mendelsohn, pointed out, and the length and nature of existing lease arrangements. For the avoidance of doubt, during the deferral agreement the tenant will maintain their right to exercise all other MRO triggers, including significant price increases and material change in circumstances as defined in the Pubs Code.

Whatever approach is followed, it is critical that there is some reference to the importance of investment in the sector in the Bill. Without that certainty, the flow of investment, most of which will inevitably come from the big pubcos and are the subject of the restrictions in this Bill, will reduce. Having heard the remarks of the noble Lord, Lord Mendelsohn, as well as my own, I hope very much that my noble friend will be able to accept the spirit of what is intended and agree to table a suitable amendment to address this issue at Third Reading.

Photo of Lord Snape Lord Snape Labour

My Lords, following what the noble Lord, Lord Hodgson, has said, I hope that the Minister will do no such thing as regards his amendment. Amendment 33W seeks to legitimise a loophole in the legislation. The pub-owning businesses are seeking to introduce a provision in the Bill permitting them to defer market rent only option in exchange for significant investment. The fact is that there is nothing now and, as I understand it, nothing proposed in the Bill to restrain pub-owning businesses from undertaking such an exercise. A pubco could simply offer an investment in conjunction with the surrender of the existing lease in exchange for a new lease and a deferred period until the next rent review. I hope that the noble Lord, Lord Hodgson, who has tabled this amendment, agrees with that. I do not believe, and I think that most pub tenants do not believe, that there is any necessity to have this opt-out in the Bill.

As ever, the noble Lord talks about investment being urgently needed in some of these buildings. The reality is that this investment is not taking place. There is a queue of licensees and tenants who are anxious to tell noble Lords on both sides that this investment is not taking place. It would not take place if the Minister were to be unwise enough to accept this amendment, no matter how ably spoken to by the noble Lord, Lord Hodgson. As licensees see it at present, only pubs which accept an increase in rent to cover any investment by the pubco receive any investment. Much of the investment, such as it is, that takes place in pubs takes place in closed pubs in order to tart them up to sell them on the market. I am afraid that pubcos have a pretty bad reputation in these matters.

If one goes into a Wetherspoon house in any high street, one is immediately aware of who is the proprietor. Enterprise Inns and Punch never use their own names on the front of their premises. They are always, in theory at least, run by landlords and are therefore independent businesses. The noble Lord, Lord Hodgson, knows as well as me that the flow of investment out of the pubs business over the years, particularly as far as the two main pubcos, Punch and Enterprise Inns, are concerned, has been all one way. For every pound they have invested in their pubs—most of them not as going concerns—or the buildings that they own, which is perhaps a more accurate description, they have taken £1.30 or so out of the business in sales of properties countrywide. That is the reality of the relationship between pubcos and their tenants at the present time. For those reasons and for reasons of common sense, I hope the Minister will reject the amendment.

Photo of Viscount Younger of Leckie Viscount Younger of Leckie Conservative 5:00, 9 March 2015

My Lords, I shall speak to Amendments 33M and 33W.

In Committee I supported my noble friend Lord Hodgson in proposing an exemption from an MRO for a tenant in return for an investment by a pub-owning company. It is necessary for the companies to have reassurances that investments—some of which are significant—made in their pubs are realised in both financial and non-financial returns. The latter would include good will and more intangible aspects such as reputation, quality of service and better atmosphere, which all serve to draw new customers in over a longer period of time. My noble friend the Minister was not minded to accept an exemption but I am pleased that she has been willing to engage with all after Committee and the word “deferral” seems to have replaced “exemption”.

Like my noble friend Lord Hodgson, I have some sympathy with many of the inserts proposed by the noble Lords, Lord Mendelsohn and Lord Stevenson, in their Amendment 33M, which, essentially, seeks to place considerable detail in primary legislation in the Bill by seeking clarification of the regulations, the Pubs Code and guidance. However, the noble Lords would place too much information in the Bill and the detail is more suited to secondary legislation and proper debate at this stage.

For example, subsection (2)(f) of the proposed new clause states that regulations and guidance shall include an investment agreement as a trigger for MRO. This is too vague and there is no substance in the timescales attached. Equally, in Amendment 33M subsection (3) of the proposed new clause states:

“Any investment agreement must recognise the different nature and size of pubs and relevant investment requirements”.

This is an aspiration but it is too short on detail. Finally on Amendment 33M, in subsection (2)(b) of the proposed new clause, the noble Lord, Lord Mendelsohn, cites that the maximum deferral period of an MRO in return for an investment should be five years. My noble friend Lord Hodgson alluded to this. That is too prescriptive and further work is required to determine the length of deferral time in relation to the amounts invested.

However, the overall tenor of Amendments 33M and 33W, tabled by my noble friend Lord Hodgson, I hope will go some way to persuade and encourage the Minister to commit to giving more thought to the details in a review—or is it called a consultation?—and to debate it thoroughly as secondary legislation.

There remain important unanswered questions, including what constitutes a major or minor investment, over what periods these investments might be considered to be reasonable to allow a decent rate of return and how one might describe “decent” and how it should be defined. Perhaps my noble friend can give the House further reassurances here on Report as to the process of how the details will be debated and presented.

Photo of Baroness Wheatcroft Baroness Wheatcroft Conservative

My Lords, it is clear that pub companies need to be encouraged to invest in their estate: it is an obvious thing to do. The pubcos claim that they invested £200 million in their properties over the past two years and so, although there are complaints from tenants, there must be some happy ones out there.

Photo of Lord Snape Lord Snape Labour

I apologise for interrupting the noble Baroness so soon in her speech. If there are some happy ones out there, could she list them for the benefit of the House?

Photo of Baroness Wheatcroft Baroness Wheatcroft Conservative

I am afraid that I do not have the details of the happy ones because they are obviously getting on with running their businesses rather than contacting me, and I hope that they are doing very well.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Conservative

My noble friend might like to know that I produced three or four examples for the noble Lord in Committee. He just regards them as anecdotal evidence, but the fact is that there are anecdotes on both sides of this argument. There are just as many happy ones—or perhaps more—as unhappy ones.

Photo of Baroness Wheatcroft Baroness Wheatcroft Conservative

I thank my noble friend Lord Hodgson and I support him in his amendment because it finds the balance between being overly prescriptive and legislating to give some comfort to pub owners, thus persuading them that it is safe for them to invest. I cannot support the noble Lord, Lord Mendelsohn, in his amendment. It seems to be far too prescriptive for the Bill, as others have said, and somewhat contradictory. The Bill already states that a trigger event for an MRO will be something that was unforeseen. An investment agreement, by its very nature, will have to be something that is negotiated.

Surely there are pub owners and pub landlords who are capable of negotiating an investment agreement that suits both sides. I do not subscribe to the view that all pub owners are out to do the dirty on their tenants or that all tenants are weaklings. Indeed, the Pub Landlord, that character who is so well known to television viewers, is standing up to Nigel Farage in South Thanet, although it has to be said that that particular pub landlord has not been seen there very often.

We need to offer landlords some protection so that, if owners invest in their pubs, they will not immediately be forced into an MRO. The trigger, as cited in the amendment tabled by the noble Lord, Lord Mendelsohn, would have that option. What sensible landlord is going to put money into his pub if the recipient could instantly trigger an MRO? There needs to be some scope for negotiation. My noble friend the Minister has shown that she is open to negotiation and consultation, and the amendment tabled by my noble friend Lord Hodgson would be the best way forward. However, perhaps the Minister could reassure us that she sees the need for investment to be encouraged and that she will find a way of giving pub owners and landlords the protection they need in order to invest in their estate.

Photo of Baroness Neville-Rolfe Baroness Neville-Rolfe The Parliamentary Under-Secretary of State for Business, Innovation and Skills

My Lords, I am grateful to the noble Lord, Lord Mendelsohn, and my noble friend Lord Hodgson for their amendments and for providing us with an opportunity to debate further the very important question of continued investment by pub-owning companies in tied pubs. That is especially the case because, as my noble friend Lord Hodgson has just said, pubs are having to reinvent themselves in the 21st century. As we have heard, these two amendments approach the issue in rather different ways, and I understand the motivations behind both. I can reassure the noble Lord and my noble friend that the Government absolutely want to see investment in tied pubs. That is key to the success of the industry, both for pub companies and for tenants. We want to see pubs thriving and the new arrangements to work.

I think we all accept that the possibility of pubs exercising the market rent only option will create some uncertainty for pub companies, and it is possible that there might be more uncertainty than they can live with if they are thinking of making a substantial investment in a pub. It is equally clear that there is some nervousness around asking tenants to defer some of their MRO rights in return for investment and that serious consideration needs to be given to how this would work in practice and the safeguards that need to be in place. As I said earlier in our debate, we have been considering how best to address this and strike the right balance. I can reassure my noble friend Lord Hodgson that the Bill as drafted does not prevent pub companies issuing the tenant with a new lease alongside an offer of investment, and no amendment to the Bill is necessary to enable companies to do so.

As my noble friend pointed out, a new agreement may attract costs for tenants, including legal costs and stamp duty.

The situation means that the MRO triggers on rent review or renewal would not be available to the tenant for a period of five years, as that is the maximum interval that the code will currently allow between rent assessments. It would, however, provide the pub company with some certainty. We recognise that there will be occasions where a larger investment—

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Conservative

I am not quite clear whether my noble friend said that there was or was not a problem with stamp duty. My understanding is that there are repeat stamp duty obligations; in other words, you write off the stamp duty of the lease that is running and have to start again every time you have a new agreement, and for five years that is another £5,000, plus whatever you have written off before, plus the legal costs. I am not clear whether she said that was a problem. If this is too difficult and technical, I am happy for her to write to me.

Photo of Baroness Neville-Rolfe Baroness Neville-Rolfe The Parliamentary Under-Secretary of State for Business, Innovation and Skills

My noble friend is right: a new agreement would appear to attract costs for tenants, which would include legal costs and stamp duty.

As I was saying, we recognise that there will be occasions where a larger investment requires a longer return-on-investment period. After careful consideration and discussion with stakeholders, the Government have decided to address this issue, but to do so via secondary legislation, using the powers in Clause 42. I can reassure the noble Lord and my noble friend that the Government are committed to using these powers to set out in the code different rent assessment periods for different amounts of substantial capital investment offered. We will consult on what constitutes substantial capital investment and what the waiver period should be for different amounts. But we are clear that this could extend the rent assessment interval beyond the usual five years where it is appropriate to do so. This would mean that MRO cannot be exercised during the waiver period unless one of the triggers of a change of circumstances beyond the tenant’s control, or a significant price increase, is met.

In our discussions with stakeholders, we have heard varying calls for the length of waiver period that would be required to enable a pub company to see a return on its investment. These calls have varied between the five years suggested by the amendment moved by the noble Lord, Lord Mendelsohn, and 10 years. Clearly, individual circumstances will differ and we need to understand the details through consultation before we set this out in secondary legislation. The code will set out the safeguards that must be met to ensure that the tenant is protected from attempts to abuse a waiver. Again, it is vital that we consult on these to get them right.

I was glad that the noble Lord, Lord Mendelsohn, welcomed the idea of providing for investment. He set out a number of understandable concerns and potential safeguards where I think there is a lot of agreement but where we will need to work out the detail; for example, ensuring that the investment is substantial, that the tenant must take independent advice before agreeing to the deal, and that it is a genuine investment and not running repairs. He also mentioned that the pub company should not be able to require that a waiver agreement involves opting out of the Landlord and Tenant Act. I can reassure him that, using existing powers, we could restrict a pub company from requiring an opt-out of the Landlord and Tenant Act protections as a condition of investment.

My noble friend Lord Hodgson set out two areas of protection in his amendment: “significant investment” and “specified period”. Again, I think we all agree that these are important, and the secondary legislation I am proposing will set them out in detail. To meet the concerns of my noble friend Lord Younger, it will indeed be by affirmative resolution, which will enable us to have a debate.

There are other potential safeguards which will really benefit from consultation. The noble Lord, Lord Mendelsohn, asked whether the tenant can buy out of their agreement at a later date or source the finance from elsewhere. We will want to consider safeguards around ensuring that a pub company delivers the investment it promises, including when the deferral period should start. The adjudicator will have the power to intervene and arbitrate disputes where the landlord has breached the relevant provisions of the code. Remedies under the Arbitration Act are wide-ranging and the adjudicator can order redress which includes the payment of money in appropriate circumstances. I agree with the noble Lord, Lord Mendelsohn, that we need to take account of the fact that different sums of investment are significant for different types of pub—I think that he talked about urban and rural pubs, but it is probably even more complex than that. This is again a matter for secondary legislation and consultation.

The noble Lord suggests in his amendment that the investment agreement should be a trigger event for MRO and PRA. The Government are not convinced that this is the right approach. Tenants will have the right to choose the investment offer or to remain with their current agreement. They will have the opportunity to take advice on whether to take the investment deal. To require MRO every time an investment offer is made would be likely to discourage pub companies from making or agreeing to such offers and so undermine the very investment that we are all trying to encourage.

This is an area where considered consultation is required. I have listened to the many points made in the House by all noble Lords. We will take account of them during the consultation process. I thank the noble Lord, Lord Snape, and the noble Viscount, Lord Younger. I encourage noble Lords to feed in their thinking to the consultation.

The Government are committed to acting to enable investment in tied pubs, with proper safeguards for tenants, through the powers already available in the Bill. I hope this provides the reassurance that the noble Lord and my noble friend seek, albeit from a slightly different perspective. I hope they will be content to withdraw their amendment.

Photo of Lord Mendelsohn Lord Mendelsohn Labour 5:15, 9 March 2015

I thank the Minister for that reply. It is worth making a few brief points, the first being on the genesis of the amendment. Since our discussions in Committee, we have all been looking for ways in which we can still support the industry and the sector. We have been kicking around the draft of a partnership investment agreement between the pub companies and the tenants to find a framework that will work. What is important about the investment agreement arrangements is that the discussion has been about a partnership. It has become clear throughout the process that there is great difficulty and, in some cases, there will be a large variety of problems which prevent the sector moving forward in the sense of partnership. The amendment is intended to address that and to ensure a reasonable balance of options. Where there is investment, we want to ensure that there are no circumstances where it could be argued that a tenant did something which they did not mean or that they could be fooled, and that they enter into nothing without full appreciation of the situation. We also want to bring out the best in the pub companies as they seek to work with their tenants towards achieving a better outcome.

It would be nice if the £200 million of investment that we have heard about had actually gone into developing estates. We have tried to address this over a long period; we have even been through the annual reports and other things. Most of that investment is for things that go wrong or the general upkeep of buildings. Development of the commercial future of the estate represents a very small proportion of that. It is important that investment is considered on the basis of what it achieves for the ongoing development of the businesses and the sector. In trying to put something in the Bill, we wanted to set some tramlines. Unless there is a clear sense in the Bill—in that regard, I am grateful for some of the Minister’s comments on the tenant Act—our fear is that arguments over secondary legislation will be less helpful, will have the problem of unintended consequences and will poison discussion between the parties. In this debate, we have seen how that affects things. We feel that it would be sensible to consider such a provision. We would be grateful if the Government could consider the matter again and come back at Third Reading with something which gives us a better indication of how the framework of secondary legislation can be put together or at least some of the tramlines. I beg leave to withdraw the amendment.

Amendment 33M withdrawn.

Clause 43: Pubs Code: market rent option

Amendments 33N to 33V

Moved by Baroness Neville-Rolfe

33N: Clause 43, page 39, line 18, after “rent” insert “only”

33P: Clause 43, page 39, line 20, after “rent” insert “only”

33Q: Clause 43, page 39, line 23, leave out “the market rent”

33R: Clause 43, page 39, line 23, at end insert “—

(i) such rent as may be agreed between the pub-owning business and the tied pub tenant in accordance with the MRO procedure (see section 44), or

(ii) failing such agreement, the market rent.”

33S: Clause 43, page 39, line 25, after “rent” insert “only”

33T: Clause 43, page 39, line 27, after “rent” insert “only”

33U: Clause 43, page 39, line 44, leave out “may, in particular, require” and insert “must include provision requiring”

33V: Clause 43, page 39, line 45, after “rent” insert “only”

Amendments 33N to 33V agreed.

Amendment 33W not moved.

Amendment 33X

Moved by Baroness Neville-Rolfe

33X: Clause 43, page 40, line 24, leave out from “to” to “that” in line 26 and insert “the occupation of particular premises under a tenancy or licence which is MRO-compliant, means the estimated rent which it would be reasonable to pay in respect of that occupation on the following assumptions—

(a) that the tenancy or licence concerned is entered into —

(i) on the date on which the determination of the estimated rent is made;

(ii) in an arm’s length transaction ;

(iii) after proper marketing; and

(iv) between parties each of whom has acted knowledgeably, prudently and willingly; and

(b) ”

Amendment 33X agreed.

Amendment 33Y

Moved by Lord Hodgson of Astley Abbotts

33Y: Clause 43, page 40, line 27, at end insert—

“( ) The requirement to offer a market rent only option set out in subsection (1) does not apply to franchise agreements, defined as agreements whereby no rent is paid by the franchisee and their share of the profit is unaffected by the price paid for tied products.”

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Conservative

My Lords, with Amendment 33Y, we come to the issue of franchises—another great issue that has concerned us during discussion of the Bill. I and other noble Lords referred in earlier debates to the need for investment to allow pubs to reinvent themselves. I argue that there is an equally urgent need to allow pubcos to reinvent themselves by trying out and examining new corporate structures more in keeping with modern times, with less of the baggage of suspicion that traditional models carry with them, about which we heard from the noble Lord, Lord Snape, and about which other noble Lords clearly have similar concerns.

Noble Lords will know that I do not believe that changing the pub tie in any event is any more than a marginal answer to the fundamental challenges faced by the pub trade. The real challenges are: cheap beer in the supermarket at £1.13 a pint, compared to three quid in the pub; the increased drinking of wine, which people do not drink very much in the pub; the increasing tide of regulation of drink-driving, smoking and licensing; the rapid change in the structure of our society and the deindustrialisation of large parts of the United Kingdom; and, last but not least—in fact most importantly —the brutal hours required to run a successful pub. The presence or absence of a tie will have little or no effect on any of those.

I accept that the weakness of the tie is that it has two inbuilt conflicts of interest between the owner and the tenant: first, the rental level—the higher the rent, the lower the profit for the tenant—and, secondly, the price for which goods and services are supplied. To get around that conflict, pubcos have been developing the idea of a franchise. After all, that is how Burger King, McDonald’s, PizzaExpress, Starbucks, Costa Coffee and other successful companies have developed on our high streets in recent years. That is a revenue-sharing model. The tenant pays no rent and all goods are supplied on a sale or return basis. The tenants’ only responsibility is for the wages paid to staff of the pub and the council tax. Both parties, owner and tenant, thus have a joint interest, a joint incentive to maximise revenue.

My Amendment 33Y is again about the Pubs Code and the market rent option. I seek to amend the clause so that it is clear beyond peradventure that all the provisions and protections of the Pubs Code apply to those franchises, including the fact that franchised pubs will count as part of the 500 pub level which triggers inclusion in the provisions of the code, which I know that the noble Lord, Lord Whitty, will discuss shortly. This is not a way to get around the code. All the provisions and protections of the code are there, except for one—the market rent option, which is of course because no rent is being paid. It is a revenue-sharing model.

My noble friend on the Front Bench again wishes to leave all this to consultation. That is not satisfactory. The hard edges of how this new world is going to operate are all in the Bill; the soft edges may—I repeat, may—come about as a result of consultation. This consultation will take place after 7 May and while I am 100% confident that the next Government will be a Conservative one, the industry will be thinking, “What if?”. For example, it will be wondering what the outcome of a consultation is likely to be with a Lab-Lib coalition, with Mr Mulholland leading a charge for no changes as a result of the consultation process. That is why there needs to be some reference to this new model in the Bill, otherwise we risk tying the industry back into an operating model which all experience has shown has some fundamental flaws and inbuilt mistrusts.

The Minister has argued that all this can be achieved under the powers of Clause 71, which is not to do with the market rent only option and the Pubs Code’s operation. It is concerned with power to grant exemptions from Pubs Code. This clause has become known as the Harry Ramsden clause. Harry Ramsden, the well known purveyor of first-class fish and chips, wishes to be certain that if his fish and chip shops supply beer and cider they will be exempt from the code. I understand that the Government are proposing to give that assurance. I know that Mr Harry Ramsden is talking to pubs to see whether he could sell his fish and chips in a pub. That would mean that fish and chips sold inside a pub would come under the code and beers sold inside Harry Ramsden’s fish and chip shops would come outside the code. Where is the sense in that? Further, Starbucks is now beginning to think about obtaining licences to sell beer and wine in its coffee shops, which are of course run on the franchising model. Where is this going to leave the traditional pub and the traditional pub model? The answer is: operating at an ever greater disadvantage.

All these developments emphasise the need for the industry to be freed up to try new ways of meeting the exceptionally competitive nature of our leisure market. The issue today is not whether 5,000 pubs are going to close. In my view, 5,000 pubs are probably doomed under any scenario. They are in the wrong location and have the wrong footprint, construction and reputation.

The challenge for us is to prevent these 5,000 becoming 10,000 or even 15,000 pubs, and new corporate models such as franchising are one way to help.

My final words as we come to the end of this long saga are to those who think that the changes in the Bill will somehow herald a return to the golden age of the pub. I say to them: be careful what you wish for. I say the same to my Front Bench and to the noble Lords, Lord Mendelsohn and Lord Stevenson, as well. As we have heard already this afternoon, 25 years ago our predecessors introduced the beer orders. The orders were the result of a belief that big brewers with big chains of pubs were shutting out small breweries, so the answer was to limit the number of pubs that a brewery could own. The small breweries would then have a place in the sun, with the market space to thrive. No doubt to our predecessors, that all seemed extremely logically persuasive. As we know, the result was completely different. On the one hand there emerged the pure pubco, the focus of so much fury today, and on the other the market gap thus created was filled not by small breweries but by large, foreign brewers, so that noble Lords visiting a pub today will find the bar dominated by Stella Artois, Grolsch, Heineken, Foster’s, Castlemaine XXXX, Kronenbourg, Carlsberg and Peroni, with not a single UK brand among them.

At an earlier stage of the Bill, I suggested that there was the possibility of a similarly unpredicted and unwelcome outcome to these proposed changes. A pure pubco—not an integrated brewery, which does not have the same flexibility because it needs the pub to sell its beer—could say to itself: “Parliament wishes us to behave as a property company. So be it. We will behave as a property company. We will increase our short-term profitability by reducing or eliminating our support to our tenants. Where they can pay the rent, fine; where they can’t, we shall begin to look for alternative uses for the premises”. I have never been involved in a pure pubco so this is pure supposition on my part, but the pure pubcos own the overwhelming proportion of the current tied estate so, if this were to be developing trend, it would be a very serious one for the pub trade generally.

When I made these remarks in Committee, I described this as the nuclear option. I see on the faces of noble Lords opposite, particularly the noble Lords, Lord Whitty and Lord Snape, a weary look of resignation—“He would say this, wouldn’t he?”. My career has been in the City, the success of which has been based on a ruthless flexibility with an absolute absence of sentimentality. This is what a broker was writing last week about a company that I shall not name: its,

“like-for-like growth in net income reflects a number of self-help measures and estate improvements. However, MRO puts this progress at risk. Politicians are unlikely to soften their stance, in our view. The new rules are therefore likely to result in a material decline in support to tenants and capital expenditure. We think the most exciting option for shareholders would be the creation of a separate support-free”, real estate investment trust,

“for all existing and future free-of-tie leases”.

So these developments are afoot even before the ink is dry on the deliberations of your Lordships’ House.

For the Government, and indeed the Opposition, to suggest that it could all be covered in the codes devised after consultation will encourage investment bankers to think of, and put forward, proposals for their pubco clients. If those proposals show clarity of structure and profitability, the argument will be to press on forthwith. Why wait for the uncertain outcome of consultation? Why live with the uncertainties of how a Pubs Code adjudicator might operate in future? Just as the beer orders led to the creation of an entirely unexpected and, in my view, counterintuitive corporate structure, so may the decisions reached by your Lordships tonight have an equally unexpected outcome. The answer is for the Government—supported, I hope, by the Opposition—to conclude that they do not want to run this risk, and to put into the Bill some reference to investment and franchising. I believe that this would give the country the level of certainty that it needs and to which, in my view, it is entitled. I beg to move.

Photo of Lord Snape Lord Snape Labour 5:30, 9 March 2015

My Lords, I fear that I am going to miss the dulcet tones of the noble Lord, Lord Hodgson, on the rest of the Bill. I have sat through this paean of praise for the pubcos at Second Reading, in Committee and so far during the proceedings in your Lordships’ House today. I have some sympathy with the noble Lord’s view about the events of the late 1980s; it is a pity that he was not around in the other place when a Conservative Government were insisting that the power of the brewers at that time should be curbed. He obviously feels that the outcomes of that legislation, such as the beer orders that followed, have led to the situation in which we find ourselves now. Yet the contradiction appears to be that, while it is fair to say that he deplored the effects of the beer orders and what took place—the sell-off of the pubs and the relinquishing of the tie between the brewers and pubs has led to the pubcos that we have today—he has spent every stage of this Bill defending those same pubcos. He cannot really have it both ways; if the beer orders and their aftermath were so bad in the 1980s in creating these organisations, I wonder why he has spent so much time defending them during the passage of this legislation.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Conservative

My Lords, I know that this is Report, not Committee, but if I may say so to the noble Lord, I have made it perfectly clear that there are between 20,000 and 25,000 tied agreements between pubcos and tenants, and not every one of them behaves like a saint; clearly, mistakes are made. I have explained, if he was not listening to my remarks earlier, that the problem with the tie is that built into it are two inherent conflicts of interest.

Photo of Lord Snape Lord Snape Labour

I am grateful for that clarification; perhaps if the noble Lord had made it at Second Reading we might have spent less time bickering. The noble Lord’s Amendment 33Y seeks to put into the Bill some exemption for franchise agreements. The Minister will correct me if I have got this wrong but I think the Government have taken care of those franchise agreements and arrangements within the Bill itself. If they have not, they left themselves enough time, with the consultative procedures that the Minister has so ably outlined, to look at them again over the next few months, when these consultative arrangements are actually taking place.

The problem with accepting the amendment, of course, is that in effect it would pre-empt that consultation and we would be likely to see the pubcos working their way around the legislation in the way about which the noble Lord, Lord Hodgson, warned us. So although I found him as lucid as ever, I think that he convinced one or two of us on this side of the House that his amendment not only was not necessary but, were it to be accepted by the Minister, would lead to an even worse situation than we are in. Surely the noble Lord can see that making exemptions in the Bill, denying the adjudicator and the Pubs Code the opportunity to consider what agreements should be exempt, and to reverse that exemption if it transpires that the exemption is being gamed at a later date to circumvent the legislation, is the proper way forward. I hope that the way in which the Minister indicates the Government’s attitude to this amendment will indicate the way in which they will take this matter forward.

Like the noble Lord, Lord Hodgson, I am coming to the conclusion of my own remarks on the Bill. I would like again to say a few words about investment. It has been a consistent theme of the noble Lord that the Bill and the failure to accept his amendment would have a serious negative effect on investment that the pubcos make in licensed premises generally; I think that that is a fair summing up of his position. However, when one looks at what I repeat is the myth of investment by the pubcos, a different situation is immediately apparent. In 2014, for example, Punch invested £43 million in its core estate but sold pubs to the value of £111 million. It has already announced that it hopes to make £307 million from selling over 1,000 of its non-core estate. Enterprise Inns invested £66 million in pubs that year, then disposed of £73 million-worth of them. This does not sound to me like either a prosperous industry or an industry controlled by those who seek a sensible and profitable way forward for it, regardless of the legislation before your Lordships today.

Photo of Lord Berkeley Lord Berkeley Labour

Could my noble friend clarify whether those investment figures are those quoted by the companies concerned, or are they the figures that they told the landlords they were investing but in fact did not, so the landlord had to do it and then got charged extra for the investment that did not happen?

Photo of Lord Snape Lord Snape Labour

My Lords, the figures that I gave were the ones that the pubcos themselves published, but I certainly agree with my noble friend. Again, without detaining your Lordships too long, I could produce in the course of the debate on this amendment 14 or 15 independent licensees who told me—along, I am sure, with other noble Lords on both sides of the Chamber—about the broken promises made by the main pubcos about investment.

I admire the oratory and indeed the optimism of the noble Lord, Lord Hodgson, who not only told us that these institutions—the pubcos, whose creation he inadvertently deplored as a result of the legislation passed by a Conservative Government back in the 1980s —were really decent chaps who are anxious to invest in their property, but forecast the result of the election as a Conservative majority. However, my reaction is: has he put his money where his mouth is? Even better, perhaps he could put the pubcos’ money in that direction because, like me, he does not know the outcome. None of us does. Not even those well known pundits, the pollsters, can tell us the result of the next election. I admire his optimism, if not his sentiments, as far as the pub industry is concerned. I hope that the Minister will do as she has done with the two previous attempts made by the noble Lord, Lord Hodgson, at amending this legalisation and will smother him with honeyed words but kick his wishes into touch.

Photo of Lord Mendelsohn Lord Mendelsohn Labour

My Lords, I shall speak to Amendment 33AZ. I support the Government’s position on this. Before I explain why we support their position, I say to the noble Lord, Lord Hodgson, that we are very keen for the sector to prosper and develop and that initiatives by the pub companies and individual tenants will create a vibrant environment. I do not recognise the “sky is falling in” scenario that he presents, and I do not believe that the fact that some companies are looking at the potential of REITs is a big indication of things that have happened in relation to this Bill. I was approached to invest in a pubco REIT well before this Bill was even announced by the Government, and the reasons why it did not take off were leverage and risks associated with our operating model. The same issues will exist today when it happens. Ironically, I think we have more certainty now with the provisions of the Bill, but I do not think that this is a brand new scenario where the risks are so huge.

I shall speak to Amendment 33AZ because we are happy to accept Clause 71, which provides the Secretary of State with the power to make regulations enabling exemptions from the Pubs Code and that the specified descriptions of those exempted will be determined by secondary legislation. Our amendment seeks to apply the affirmative procedure to this to ensure that we can debate these matters properly and sensibly and allow the sort of discussion that we have had today.

We were concerned that the Government had described the notion of a genuine franchise as something they would be willing to consider within that context. The discussions have gone by. Our concern is not that there should not be such consideration, but we are not clear that there is a real definition which applies to that and we are yet to be convinced that there is a case for any particular exemption.

Generally, franchises are long-established arrangements. Many erudite books have been written on this subject, some of which bear my surname, but I have absolutely none of the credit for having written any part of them. These are arrangements where one party, the franchiser, grants another party, the franchisee, the right to use its trade mark, trade name or certain business systems or processes to produce or market goods or services according to certain specifications. Franchisees usually pay a one-time franchise fee plus a percentage of sales revenue as a royalty and gain name recognition, tried and tested products, standard building design and décor, detailed techniques in running and promoting the business, training of employees and ongoing help—a range of things that will help the franchiser to gain the rapid expansion of the business and earnings at minimal capital outlay, and where the franchisee is able to develop businesses that they are comfortable about being able to establish.

Essentially, once you have an integrated business where there is a property element owned by someone else, we are yet to be persuaded that any of the mechanisms is anything other than rent by another name. There are ways in which the contracting arrangements can be very different, but in effect it comes down to the same essential relationship, despite the method of payment, be it royalties, profit share, cost deductions, rent plus or minimum guarantees. We are yet to be convinced that there is an operable definition that can work. I look forward to hearing the Minister’s comments. We are very keen to support the Government’s position that there should not be such an exclusion. We are very happy to return to this if the Government wish, but we support their position as it stands.

Photo of Baroness Neville-Rolfe Baroness Neville-Rolfe The Parliamentary Under-Secretary of State for Business, Innovation and Skills 5:45, 9 March 2015

My Lords, I thank my noble friend Lord Hodgson for championing the industry. I agree about the importance of investment. There has been some investment in the industry, and I hope there will be more if we get these important reforms right. I also agree about the importance of franchising as a new potential avenue of prosperity for the sector. I thank the noble Lord, Lord Mendelsohn, for his amendment, which I will come to.

Amendment 33Y seeks to provide that the market rent-only option does not apply to franchise agreements. My noble friend defines them as,

“agreements whereby no rent is paid by the”, tenant,

“and their share of the profit is unaffected by the price paid for tied products”.

The Government recognise that there are turnover-based pub agreements on the market where the tenant’s interests are arguably more aligned with the pub company because both rely on a fixed proportion of turnover. The tenant does not face the combination of wet and dry rent, as with traditional agreements. The benefits of a franchise are that you are buying a proven business concept that has been tested by the franchiser. That should mean that your risk as a franchisee is reduced. Alongside the turnover share element, this would seem an important part of what constitutes a genuine franchise.

However, pub franchises also retain some characteristics of a traditional tied agreement that mean the tenant is still at risk. For example, the tenant is locked into the agreement for at least five years with no means to change the terms. The pub company remains in a stronger negotiating position, as we understand that the relative turnover share figure is fixed and generally non-negotiable, and a franchisee is unable to shop around for a better deal on some or all of his products and services.

However, after much consideration, I am pleased to confirm to my noble friend that the Government have listened to concerns expressed and agree that genuine franchises should be exempted from the MRO provisions. Given the differences between traditional tied pubs and genuine franchise agreements, we consider this a reasonable exemption, but we are clear that the remaining code protections should still apply.

We will exempt only genuine franchise agreements, and I shall make a few comments about our thoughts here. My noble friend put forward in his amendment two sensible criteria that are fundamental to defining a genuine franchise, but there are likely to be others. Therefore, it would be wise to consult further before we specify exactly what we mean by a pub franchise, and to take this forward in secondary legislation. It is our intention to provide for the exemption using the existing Clause 71.

In relation to Harry Ramsden’s, the code will regulate the alcohol tie in pubs. Harry Ramsden’s fish and chip shop clearly is not a pub, and Clause 71 enables the Government to exempt Harry Ramsden’s from the regime. Similar examples will be considered on a case-by-case basis. We will look at the points made today about Harry Ramsden’s and Starbucks in developing the code.

My noble friend Lord Hodgson was concerned about potential unintended consequences and asked for more to be done in the Bill. This is a difficult one. The best way to reduce the risks of unintended consequences is to allow for flexibility through secondary legislation because it is then possible to tweak arrangements should unintended consequences arise. If we fix these matters in primary legislation, any unintended consequences would be much harder to remedy.

On Amendment 33AZ from the noble Lord, Lord Mendelsohn, I am pleased to reassure him that the regulations we will make under Clause 71 will be subject to affirmative procedure, so we will be able to have a proper debate. However, we believe that subordinate legislation is the right way ahead. I am making it clear in Hansard that that is the Government’s intention, and my Bill team will be working away on franchise and other aspects of the subordinate legislation as soon as the Bill receives Royal Assent.

I hope that my noble friend will feel reassured by my response and will agree to withdraw the amendment.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Conservative

My Lords, I thought for one wonderful moment that my noble friend was going to agree to put something in the Bill, but it will be secondary legislation again, with all the disadvantages and uncertainties that that implies.

Of course the noble Lord, Lord Mendelsohn, has a family familiarity with franchising, in the sense that his uncle was the moving spirit of the British Franchise Association, which of course would help set the standards that would decide what a pub franchise looks like, because it has a lot of experience in that area—so this will come back to haunt him yet.

My concern about the Minister’s reply is that we find ourselves unable to move the structure of the pub trade forward. We need to find new and better models. There will always be concerns that any new corporate structure we invent carries the risk of it being used for a loophole. That is not the case, because the amendment brings every single aspect of the franchise within the Pubs Code and the Pubs Code Adjudicator’s power except the single issue that you cannot ask for a market rent option because you are not paying any rent.

I accept my noble friend’s assurances that the Government intend to make sure that this is properly dealt with in consultation, but they are making a mistake because there is a danger of slip ’twixt cup and lip. My concern is that the trade finds itself locked into a structure with which neither side is entirely satisfied, and that we may therefore perpetuate enmity, suspicion and difficulty. I had hoped to find a way out of that by getting something in the Bill. I am sorry that the Government will not do that, but I see no point in taking it any further on this occasion. I therefore beg leave to withdraw the amendment.

Amendment 33Y withdrawn.

Clause 44: Market rent option: procedure

Amendments 33Z to 33AH

Moved by Baroness Neville-Rolfe

33Z: Clause 44, page 40, line 31, after “rent” insert “only”

33AA: Clause 44, page 40, line 31, leave out “the market rent option” and insert “the MRO”

33AB: Clause 44, page 40, line 38, after “rent” insert “only”

33AC: Clause 44, page 40, line 39, at end insert—

“(ab) specify a reasonable period (“the negotiation period”) during which the pub-owning business and the tied pub tenant may seek to agree the rent to be payable in respect of the tied pub tenant’s occupation of the premises concerned under the proposed MRO-compliant tenancy or licence;”

33AD: Clause 44, page 40, line 42, after “where” insert “, at the end of the negotiation period,”

33AE: Clause 44, page 40, line 43, leave out “cannot agree on that market rent” and insert “have not reached agreement as mentioned in paragraph (ab)”

33AF: Clause 44, page 41, line 2, at end insert—

“( ) require that the market rent must be determined by the independent assessor within a specified reasonable period;”

33AG: Clause 44, page 41, line 14, leave out “market rent option” and insert “MRO”

33AH: Clause 44, page 41, line 18, leave out “market rent option” and insert “MRO”

Amendments 33Z to 33AH agreed.

Clause 45: Market rent option: disputes

Amendment 33AJ not moved.

Amendment 33AK

Moved by Baroness Neville-Rolfe

33AK: Clause 45, page 41, line 23, after “rent” insert “only”

Amendment 33AK agreed.

Amendment 33AL not moved.

Amendments 33AM and 33AN

Moved by Baroness Neville-Rolfe

33AM: Clause 45, page 41, line 27, after “rent” insert “only”

33AN: Clause 45, page 41, line 32, leave out “market rent option” and insert “MRO”

Amendments 33AM and 33AN agreed.

Amendment 33AP not moved.

Clause 62: Annual report

Amendment 33AQ

Moved by Baroness Neville-Rolfe

33AQ: Clause 62, page 49, line 5, after first “rent” insert “only”

Amendment 33AQ agreed.

Clause 68: “Tied pub”

Amendment 33AR not moved.

Amendment 33AS

Moved by Baroness Neville-Rolfe

33AS: Clause 68, page 51, line 26, at end insert “(whether or not it restricts such sales)”

Amendment 33AS agreed.

Clause 69: “Pub-owning business”

Amendment 33AT

Moved by Lord Whitty

33AT: Clause 69, page 51, line 37, leave out “tied pubs” and insert “pubs of any kind”

Photo of Lord Whitty Lord Whitty Labour

My Lords, the two amendments in this group deal with the issue of the threshold. I will be as brief as I can.

The discussion earlier today and in Committee has shown that there is an awful lot of movement within the pub world: there is buying and selling of pubs between large pubcos, breweries and other companies, and there is a lot of change in the status of pubs between being managed and tenanted and between different forms of tenancy, such as from tenancy to franchise and vice versa.

The definition of the threshold here is rather static in that it relates only to tied pubs. The Minister has made it clear that the definition of tied pubs includes franchised pubs, and I hope that she will repeat that assurance here today. I had also hoped that she would be slightly more favourable to the earlier amendment in the name of the noble Lord, Lord Stoneham, which related to pubs that are tied other than by beer and cider provision, because there are other forms of tie than the purely alcohol tie. Because pubs move from one status to another, and indeed from one company to another, it is surely a lot easier to define the threshold by the total number of pubs. Otherwise, there could be some gaming to avoid the threshold, or indeed changes in the structure of the industry that alter the way in which the code and the MRO option would apply.

The Government have said that if we did that we would run the risk of completely inappropriate pub owners falling within the area of the Bill. First, as of now, it makes a difference of one company, so it is not a comprehensive reassessment; it is just an easier way that will stand the test of time for longer. In any case, as was referred to in the debate on the previous amendment, if any company is caught inappropriately by this provision, either because of the threshold or for any other reason, the Government have the power under Clause 71 to exempt that company or companies.

It would therefore be a lot easier were the Government to accept the rationale of what I am saying. It would make the operation of the code a lot easier and clearer. It would not make a lot of immediate difference, but it would, as I say, stand the test of time, given the volatility of the patterns of ownership with the buying, selling and changing of status within this sector. I beg to move.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Conservative

My Lords, it will not surprise the noble Lord, Lord Whitty, that I urge the Government not to accept the amendment. The issue of the change in the MRO and its introduction is about tenants: that is to say, self-employed business men and women and the imbalance of bargaining power between the individual tenant and the brewery, in particular because of the issue of the rent charged and the charge for products and services supplied. That is the heart of the problem.

Managed pubs—the other big category—are run by people who are employed by the brewery, who run it like a branch office. The noble Lord, Lord Snape, referred earlier to how Wetherspoon runs its pubs. It has managers in every pub who are employees. They are paid a salary and a bonus, with all the other aspects that go with corporate existence. To include those in a Pubs Code would be wrong, first because there is no rent to pay and no question of any aspect of the Pubs Code applying to pubs like that. These are completely different vehicles and corporate structures, and the application of the Pubs Code can have focus and effect only where you are dealing with independent businessmen, whether they are tied, franchised, or whatever.

Photo of Baroness Neville-Rolfe Baroness Neville-Rolfe The Parliamentary Under-Secretary of State for Business, Innovation and Skills

My Lords, I thank the noble Lord, Lord Whitty, for his amendment, and for his engagement on these provisions in advance of Report. As the noble Lord explained, these amendments would change the definition of a pub-owning business for the purposes of the Pubs Code to one with 500 or more pubs of any kind rather than 500 or more tied pubs.

The noble Lord asked about franchises. They will indeed be included for the purposes of the 500, as I think my noble friend Lord Hodgson helpfully explained when we were discussing it earlier. The definition focuses on the alcohol tie, because that is where we have evidence of problems, as colourfully explained in four Business Select Committee reports, all of which focused on the tie.

I understand the noble Lord’s view that companies with more than 500 pubs of any kind are companies of sufficient size that they can cope with complying with the code. However, the amendments would lead to some striking anomalies. A pub-owning company with 499 pubs, all of which are tied, would not be covered by the code, but a pub-owning company with 500 managed or free-of-tie pubs and just one tied pub would be covered for that one tied pub.

Any intervention into the pubs market has to be proportionate and focused on problems of which we have evidence. The evidence of the past 10 years shows that the problems in the pub industry relate to abuses of the tied relationship. The Government do not have evidence of a problem in the free-of-tie or managed pubs market. We believe that, in the current market, the amendments would bring just one more company within scope—Mitchells & Butlers, which has around 1,800 pubs in total but fewer than 60 tied pubs in England and Wales. While I understand the noble Lord’s concerns about market share, bringing these few extra tied pubs within scope of the Pubs Code would create an anomaly. A regulatory regime for the tied pubs market would be regulating a company with 60 tied pubs but not several companies that each own several hundred tied pubs but fewer than 500 pubs in total, such as Shepherd Neame and Fuller’s. Indeed, we estimate that around 20 companies have around the same number or more tied pubs than Mitchells & Butlers, yet they would not be brought into scope by these amendments.

As noble Lords may recall, it was the will of the Committee in the other place that pub-owning companies with fewer than 500 tied pubs, including family brewers, should not be in scope of the measures in Part 4. Our legal advice also indicates that the anomaly I have referred to would put the Government at risk of a legal challenge. I hope that the noble Lord, Lord Whitty, understands the difficulty that this would place us in and the attendant risk. The legislation covers the six largest tied pub-owning companies with the vast majority of tied houses, with around 13,000 tied pubs in England and Wales between them out of around 20,000 in total, and there are anti-avoidance provisions in place. I hope that in the light of my comments he will feel able to withdraw his amendment.

Photo of Lord Whitty Lord Whitty Labour 6:00, 9 March 2015

I thank the Minister for that response, and particularly for her reassurance on the record on the inclusion of franchisees in the definition of the 500. The point here is that this is all about the balance of power, as she said herself: the power of very large companies that have pubs of different status to shift them from being tenanted and tied to tenanted and not tied, and vice versa, and from tenanted to managed, which applies as a result of their size. The code, of course, will relate only to their relationship with tenants of tied premises. So, in a sense, the noble Lord, Lord Hodgson, and to some extent the Minister, miss the point—it is defining who by size and influence on the market that would be most likely to present a problem for their tenants in this respect.

I do not think that I will get anywhere with the Minister tonight. I hope that the Government will bear this in mind, but at the moment clearly it makes very little difference—the difference of only one company. I hope that the Minister will not get the lawyers on to her for having named that company. Nevertheless, it is important that the vast majority of tied pubs are covered, and her definition of the threshold would ensure that. But down the line, again, there may be a problem with pub codes if large breweries began to change their status on a large scale of the pubs under their control. But for the moment, I beg leave to withdraw the amendment.

Amendment 33AT withdrawn.

Amendment 33AU not moved.

Amendment 33AV

Moved by Baroness Neville-Rolfe

33AV: Clause 69, page 51, line 43, at end insert—

“(2A) A person not falling within subsection (1) and who is the landlord of a tied pub occupied by a tied pub tenant who has extended protection in relation to that tied pub is also a pub-owning business for the purposes of this Part in relation to that occupation.

(2B) A tied pub tenant has “extended protection in relation to a tied pub” if—

(a) the tenant occupies the tied pub under a tenancy or licence at a time when the landlord is a person who is a pub-owning business by virtue of subsection (1), and

(b) before the end of that tenancy or licence the landlord is no longer such a person (whether because of a transfer of title or because the landlord ceases to fall within subsection (1)).

(2C) But a tied pub tenant ceases to have “extended protection in relation to a tied pub” on the earlier of—

(a) the end of the tenancy or licence concerned, and

(b) the conclusion of the first rent assessment or assessment of money payable in lieu of rent to be provided after the landlord is no longer a person who is a pub-owning business by virtue of subsection (1).

(2D) The Secretary of State may for the purposes of subsections (2B) and (2C) by regulations specify—

(a) when a tenancy or licence ends;

(b) when a rent assessment or assessment of money payable in lieu of rent is concluded.

(2E) Nothing in sections 43 to 45 and sections 53 to 59 has effect in relation to a person who is a pub-owning business by virtue of subsection (2A).”

Photo of Lord Colwyn Lord Colwyn Deputy Chairman of Committees, Deputy Speaker (Lords)

Before the noble Lord comments on his amendment to the amendment, it may assist the House if I explain that there is a mistake in the Marshalled List. Amendment 33AY, the third of the noble Lord’s amendments to Amendment 33AV, should also be in the names of the noble Lords, Lord Mendelsohn and Lord Stevenson of Balmacara.

Amendment 33AW (to Amendment 33AV)

Tabled by Lord Whitty

33AW: Clause 69, line 16, leave out from beginning to “after” in line 17 and insert “10 years”

Photo of Lord Whitty Lord Whitty Labour

My Lords, I shall not move the amendment, but I want to say a quick word on Amendment 33AY. I was very disappointed when the Minister, who obviously thought that it was already chucking out time on the pubs section of the Bill, said in replying to my noble friend Lord Mendelsohn that she would not look again at the question raised by Amendment 33AY: in other words, that she was not prepared to look at what, from my perspective, is a disproportionate infringement of the rights of the tenant. While there is a change of owner, all other aspects of the code and of the lease will apply to terms and relations between them and the new owner, except the very one on which Parliament has insisted. I find that a bizarre position and one that may be politically difficult for the Government.

I urge the Minister, even at this late stage—and the noble Lord, Lord Popat, is looking at it very assiduously just now—to say that she will have another look at this before Third Reading and come forward with her own proposition, or at least have some further consultation on the matter before Third Reading. If they do not do so, as this was central to the concerns of the House of Commons I fear that they will find themselves in some difficulty when the matter goes back there. Given that we all want to get this Bill finished with, although it is not very evident that we do today, there is a possibility of the Government running into trouble if they do not have another look at what is covered by Amendment 33AY. I ask the noble Lord, Lord Popat, to reflect on that on behalf of the Minister.

Amendment 33AW not moved.

Amendments 33AX and 33AY not moved.

Amendment 33AV agreed.

Clause 71: Power to grant exemptions from Pubs Code

Amendment 33AZ not moved.

Clause 72: Interpretation: other provision

Amendments 33AAA and 33AAB

Moved by Lord Popat

33AAA: Clause 72, page 53, line 25, after second “rent” insert “only”

33AAB: Clause 72, page 53, line 27, leave out “market rent option” and insert “MRO”

Amendments 33AAA and 33AAB agreed.

Clause 75: Exemption from requirement to register as early years provider

Amendment 34

Moved by Lord Popat

34: Clause 75, page 54, line 36, leave out subsection (5)

Photo of Lord Popat Lord Popat Lord in Waiting (HM Household) (Whip)

My Lords, Amendment 34 is a minor and technical amendment to Clause 75. It will remove subsection (5) of the clause, which made provision for a consequential amendment relating to independent school standards. This subsection is now no longer necessary, due to the repeal in England of Section 157(2)(b) of the Education Act 2002 by paragraph 16 of Schedule 1 to the Education and Skills Act 2008. Therefore, it now makes sense to take this opportunity to remove this subsection. This will not affect the purpose, impact or effect of Clause 75; it is a simple housekeeping amendment. I beg to move.

Photo of Baroness Jones of Whitchurch Baroness Jones of Whitchurch Shadow Spokesperson (Education)

My Lords, I am grateful to the noble Lord for giving that explanation. We concur that this is a minor technical amendment. We rehearsed the wider issues about the practicalities and appropriateness of very young children being cared for on school premises and the wider issues around exemption from registering as an early years provider in Committee and I do not intend to rehearse those arguments again at this stage. We are content that the amendment should go forward.

Amendment 34 agreed.

Amendment 34A

Moved by Lord Mendelsohn

34A: After Clause 81, insert the following new Clause—

“Register of people with significant control for property

(1) The Secretary of State shall by regulations made by statutory instrument establish a register of freehold estates and leases owned by or granted to people of significant control as outlined in Schedule 3.

(2) A statutory instrument containing regulations under subsection (1) may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament.”

Photo of Lord Mendelsohn Lord Mendelsohn Labour

My Lords, we have tabled this amendment to add another property dimension to the register of persons with significant control. There are a variety of considerations as to the way we do that, consistent with the notions of transparency we are trying to bring in. We were minded to table the amendment to probe the Government on this issue largely as a result of Transparency International’s very interesting report on properties in London being bought through offshore corporate secrecy. We have tabled this amendment to try to deal with this issue in the context of the persons with significant control register, where they use a holding company to acquire these properties. The amendment would establish a register of persons with significant control for property.

Research that analysed data from the Land Registry and the Metropolitan Police Proceeds of Corruption Unit found that 75% of properties whose owners were under investigation for corruption made use of offshore corporate secrecy to hide their identities. Since 2004, more than £180 million-worth of property in the UK has been brought under criminal investigation as the suspected proceeds of corruption. However, this is believed to be only the tip of the iceberg as the scale of proceeds of corruption invested in UK property is understood to be considerably higher. Indeed, more than 75% of the properties under criminal investigation use offshore corporate secrecy. Some 36,342 London properties, totalling 2.25 square miles, are held by offshore haven companies, invariably through UK corporate entities. Of these, 38% are in the British Virgin Islands, 16% in Jersey, 9.5% in the Isle of Man and 9% in Guernsey. Almost one in 10 properties in the City of Westminster, 7.3% of properties in Kensington and Chelsea and almost 5% in the City of London are owned by companies registered in an offshore secrecy jurisdiction.

According to the latest figures, which cover October 2013 to September 2014, estate agents contributed to only 0.05% of all suspicious activity reports submitted. This figure does not match the risks posed by money launderers to the UK property market, the distortions created or the problems associated with the amount of money involved. It is important to understand that the overall value of these transactions in the report alone, which is only part of what can be easily identified, is, on rough calculations, between £100 billion and £250 billion.

Naturally, this amendment is insufficient by itself to tackle the problem and will not deal entirely with these sorts of issues and the distortions to the market that the corrupt money brings. A debate about how transparency should be established over who owns the companies that own so much property in the UK through making such transparency a Land Registry requirement is for another Bill at another time. However, this provision is useful as a result of the frequent structures that are developed to hide ownership, largely by establishing UK holding entities. This Bill provides an opportune moment to take our first step in addressing this. It will not address the problem but it is a step in the right direction. I beg to move.

Photo of Baroness Neville-Rolfe Baroness Neville-Rolfe The Parliamentary Under-Secretary of State for Business, Innovation and Skills 6:15, 9 March 2015

My Lords, I thank the noble Lord for tabling the amendment and am grateful to him for providing the background to it. I think he suggested that it was a probing amendment but it may be helpful if I explain some of the concerns it may raise in its current form. We must also consider the potential costs and wider implications of such a measure and the actions that we are already taking in this space, so I will endeavour to do that.

If we attempted to register the beneficial owners of all properties, that would impact on the 24 million titles on the Land Register. I am glad that this amendment would add the Land Registry to the long list of government departments involved in helping with this Bill. Last year, the Land Registry processed more than 32 million applications, which underpinned property sales worth hundreds of billions of pounds. Depending on how it is defined, a register of this kind could impact on millions of home owners, the vast majority of whom will be entirely law-abiding, as I sure the noble Lord agrees. It could also potentially deter perfectly lawful inward investment in all our major towns and cities.

If we consider the problem of companies—particularly overseas companies—being used to obscure the identity of the true owners of high-value properties, the scale of the problem is comparatively small. Approximately 0.4% of all titles in England and Wales are registered to overseas companies. Implementing the proposed reform would require us either to create a brand new register or substantially to alter either the existing Land Register, the company register or both. We need to consider carefully the links and interactions between these registers. We would also need to consider new mechanisms for requiring individuals to provide beneficial ownership information in relation to property.

In short, the cost and wider implications of such a measure would be huge for both government and property owners. This seems perverse in a Bill that is designed to help small business. Furthermore, a property register is not required by any international standards or EU directive. It is not a commitment the UK or our G7 or G20 partners have made. On that basis, I urge noble Lords to consider this problem in the context of the regimes we already have in place and the reforms we are committed to make in this important Bill. For example, the Land Registry already records the legal owner of a property, both residential and commercial, whether that is an individual or a company, and regardless of whether that company has been registered in the UK. Where the registered owner is a company, the Land Registry will also record the Companies House registration number for UK companies, or the territory of incorporation for overseas companies. This is information that can be accessed by the public. Where allegations of corruption or fraud are raised, the Land Registry works across a variety of government agencies to assist their investigations.

Let me be clear: the UK does not turn a blind eye to corruption and money laundering. Noble Lords will no doubt be familiar with the case of James Ibori, a former Nigerian politician who is reported to have owned a number of UK properties. In 2012, he was sentenced by a UK court to 13 years’ imprisonment for money laundering.

In this Bill we are taking forward world-leading reforms to ensure transparency of UK company ownership and control. We will talk about the register of people with significant control in more detail shortly. However, that reform means that, subject to the will of Parliament, from 2016 all UK companies will have to register their beneficial owners at Companies House. So where a property is owned by a UK company, information on that company’s beneficial ownership will be immediately accessible, online and for free once submitted. However, the misuse of companies is a global problem, and we need a global solution. That is why the UK is working hard to encourage other jurisdictions to take equally ambitious steps. We are seeing progress. G7 and G20 countries have made firm commitments on company beneficial ownership. EU member states will be required to implement central registers accessible to those with a “legitimate interest” when the fourth money laundering directive is adopted shortly.

These commitments will all help ensure that UK authorities can quickly and easily access beneficial ownership information on non-UK companies. These reforms to company transparency form part of our commitment to protecting the integrity of our financial system and ensuring that the UK maintains a strong reputation as a clean and safe place to invest, and a hostile environment for corrupt funds.

We will of course continue to look at what more can be done to tackle company misuse and illicit financial flows. However, that action must be proportionate and targeted. For all the reasons that I have set out, I do not believe that a register of property beneficial ownership represents a sensible or proportionate step. I hope noble Lords have been reassured by my explanation and some of the information that I have given, and that the amendment will be withdrawn.

Photo of Lord Mendelsohn Lord Mendelsohn Labour

My Lords, there is certain irony in a Government who used the company wrapper on the purchase of property as a means of enhancing taxation perhaps not having been alive to the considerable opportunities that the amendment may present in the long run to deal with a variety of other things.

Aside from that, I thank the Minister for her reply. Uppermost in our considerations, in this and other amendments that we will come to, is ensuring there is the right level of transparency to ensure the integrity of how this country’s financial system operates. That is a goal we share. Both parties feel that, over time, they have dealt with the issue, only to find that problems come up again. It will constantly be work in progress and there is no step that one can take that will be sufficient to give everyone confidence that these matters will be dealt with. It would be useful for the Government to examine this area further. It is not a question of size or numbers. The reason that this problem is manageable is that a smaller number is involved, as opposed to the large mass of homes, and there will be little impact on the larger, law-abiding mass of people.

I am encouraged by what the noble Baroness has said. It is encouraging that we are looking to amendments that produce further enhancements to make sure that the ambitions that she has set out are fulfilled. I hope that she is sympathetic to them. I beg leave to withdraw the amendment.

Amendment 34A withdrawn.

Schedule 3: Register of people with significant control

Amendment 35

Moved by Baroness Neville-Rolfe

35: Schedule 3, page 163, line 30, at end insert “, and

(i) if, in relation to that company, restrictions on using or disclosing any of the individual’s PSC particulars are in force under regulations under section 790ZF, that fact.”

Photo of Baroness Neville-Rolfe Baroness Neville-Rolfe The Parliamentary Under-Secretary of State for Business, Innovation and Skills

My Lords, this group of amendments responds to recommendations of the Delegated Powers and Regulatory Reform Committee and to a number of issues raised in Committee. I thank the DPRRC for its diligent scrutiny of the Bill and am happy to accept all its recommendations relating to Parts 7 to 9 of the Bill.

Amendments 54 and 57 mean that regulations to provide for exceptions to the ban on corporate directors, and orders modifying Schedule 1 to the Company Directors Disqualification Act 1986, will be subject to the affirmative resolution procedure. Amendments 47 to 50 provide that the statutory guidance on the meaning of “significant influence and control” for the register of people with significant control will be subject to the negative resolution procedure, instead of merely being laid before Parliament.

I have also reflected on certain amendments tabled in Committee by the noble Lords, Lord Mitchell, Lord Watson of Invergowrie, Lord Phillips of Sudbury and Lord Stevenson of Balmacara, who is sitting opposite. The noble Lords called for information in the central register to be kept up to date. The Bill contains a power for the Secretary of State to increase the frequency with which PSC information is filed at Companies House. I can now confirm the Government’s intention to use that power to do this.

Having discussed the issue with Companies House, we intend to allow the central register to operate for around 12 months before using the power—in other words, in 2017. This will allow the system to bed in, thereby helping companies’ transition to the new requirements. In 2017, we will in any case need to increase the frequency with which PSC information is filed at Companies House. This is because proposals in the EU’s soon-to-be-adopted fourth money laundering directive will require all EU member states to have company beneficial ownership information in central registers that is “current”. This means that we could not rely on an annual update to the central register.

Some noble Lords were concerned that the requirement for a person accessing PSC information from the company’s own register to tell the company whether they would disclose information to any other person would be unduly restrictive. On reflection, I agree that requiring those wishing to inspect the register to say whether they would disclose that information to someone else and, if so, to whom, was unnecessarily burdensome. Amendment 42 therefore removes proposed Section 790O(4)(d) of new Part 21A of the Companies Act. However, I can reassure noble Lords that safeguards are still in place around inspection of the company’s own PSC register. The person wanting access must provide his name and address, and the purpose for which the information will be used. If the company suspects the information is not sought for a proper purpose, it may apply to the court to refuse access.

Individuals at serious risk of harm will be able to apply to the registrar to have their information protected from public disclosure. If granted, their information will not be disclosed on the register at Companies House or the company’s own PSC register. To ensure appropriate levels of transparency, noble Lords argued that the fact of a person’s information being protected from public disclosure should be stated on the company and central PSC register. I agree that this is important. It will ensure that users of PSC information know whether a company has PSCs, thereby preventing the company being unfairly accused of having failed to identify its PSCs because there is no information in its register. It will also act as a safeguard against erroneous disclosure of information by a company or Companies House. Amendments 35 and 45 provide for this.

Amendments 44 and 46 are technical. They make clear that a company must not make available for public inspection PSC residential address information, or information protected from public disclosure because the individual is at serious risk of harm.

I turn finally to Amendments 51 and 52. These enable investors in certain non-UK arrangements to be treated in the same way as limited partners in English limited partnerships—an issue raised by my noble friends Lord Flight and Lord Leigh of Hurley in Committee. I agree that we must ensure that investors in foreign limited partnerships that operate in broadly the same way as English limited partnerships are treated in the same way. At the same time, we must ensure that this does not open up a convenient loophole for criminals to exploit. I am satisfied that setting out the characteristics of such arrangements in secondary legislation is the best way to avoid this risk.

It may be helpful if I explain to noble Lords why we have not made equivalent provision for other UK and non-UK structures used for investment purposes. In cases where an individual holds, in the words of the Bill, a “majority stake”—that is, more than 50%—in a fund, and where that fund owns more than 25% of a UK company, we would expect that individual to be disclosed on the register. However, we do not expect companies to look through every investor in a fund to check whether there is a PSC. Nor do we expect investors continually to monitor their holdings in UK companies. I intend to ensure that this point is made clear in guidance and hope that my noble friends are reassured by this explanation. I beg to move.

Photo of Lord Watson of Invergowrie Lord Watson of Invergowrie Labour

My Lords, I offer my support to the Government on Amendments 35 and 42; I very much welcome both. I accept that individuals may have their details protected from being published in the PSC register in exceptional circumstances, and I have been reassured by Ministers’ comments in your Lordships’ House and another place stating that exemptions will be given only in such circumstances. I am sure that that will remain the case. In this respect, the Government have strengthened the Bill during its passage through both Houses. In another place, the Government accepted an amendment from the Member of Parliament for Hartlepool, whereby proposals for classes of companies to be exempted from the register should be subject to the affirmative procedure, which will allow greater scrutiny and debate.

I am also pleased that the Government have introduced Amendment 35 today, which will highlight in the register where a protection exists. This is a real step forward for transparency and accountability.

I have argued at previous stages of the Bill that the public interest test must always be available to challenge an exemption when new evidence comes to light. I ask the Minister whether she will undertake to keep this matter under consideration and to do likewise with regard to publishing a list of broad categories under which exemptions can be given.

Turning to Amendment 42, the requirements associated with proposed new Section 790O(4)(d) to the Companies Act really were quite prohibitive and ran counter to the spirit of the introduction of a register. Removing that proposed new section will have a significant effect. It will allow organisations and members of the public to view businesses’ registers and publish the information where they deem it necessary.

I tabled a similar amendment to this in Committee, and I appreciate the Minister listening and acting on it. I also want to record my thanks to noble Lords from across the House who spoke in favour of that amendment in Committee.

Photo of Lord Stevenson of Balmacara Lord Stevenson of Balmacara Shadow Spokesperson (Business, Innovation and Skills), Opposition Whip (Lords), Shadow Spokesperson (Culture, Media and Sport) 6:30, 9 March 2015

My Lords, I simply want to add a little to the comments of my noble friend Lord Watson. In his typically modest way, he did not take enough credit for himself for raising some of the issues. I think he touched on them at the end of his remarks, but without his probing in Committee we perhaps would not have got as far as we have. With the additional help of the DPRRC’s recommendations, which were very firm in a number of areas relating in particular to the change to the affirmative procedure but also to matters related to foreign limited partnerships and directors’ responsibilities, we have now got to a much better place. We are very grateful to the Minister for listening so well and for bringing forward these amendments.

Photo of Baroness Neville-Rolfe Baroness Neville-Rolfe The Parliamentary Under-Secretary of State for Business, Innovation and Skills

I thank noble Lords. I am especially grateful to the noble Lord, Lord Watson, for his support today and for the work that he put into what has become the government amendments. If I may, I will write to him on the public interest test.

Amendment 35 agreed.

Amendment 36

Moved by Lord Watson of Invergowrie

36: Schedule 3, page 163, line 30, at end insert—

“(i) where the control is exercised through a chain of legal entities (as described in Schedule 1A), details of name, service address and jurisdiction of registration of all legal entities in the chain”

Photo of Lord Watson of Invergowrie Lord Watson of Invergowrie Labour

My Lords, I begin by again stressing my strong support for the introduction of a register of people with significant control, and the enthusiastic welcome for it from the All-Party Group on Anti-Corruption, of which I am a member. Indeed, I believe that the PSC register should be overwhelmingly welcomed—I would even go so far as saying to the extent that we should be somewhat suspicious of the motives of those who oppose it in principle.

The introduction of the register is a step forward, and a big one at that, because it will frustrate people who hide or seek to hide criminal activities behind shell companies—a big and increasing problem that stretches across different parts of the world. For example, the UN has reported that Ukrainian arms licences are being given to UK shell companies involved in supplying helicopter parts to Assad in Syria, military kits to Gaddafi’s Libya and nuclear technology to Lithuania, all of which I believe should give noble Lords genuine cause for concern.

The legislation we are considering represents a significant step forward because the PSC register will record the ultimate beneficial owners of our companies and the public will be able to examine it. That said, the Bill leaves what I believe is an important gap: where the chain of ownership extends to foreign companies, not all of the links in the chain will be recorded. This will allow corruption to remain hidden away, out of sight of the UK authorities. These amendments aim to close this gap. Their implementation would involve a minimal burden for a small percentage of the most complex businesses. I very much hope that we can make some progress on this issue today.

Amendments 36, 37 and 38 seek to ensure that, where control of a UK company involves intermediaries in a chain, all the links in the chain should be revealed and exposed to scrutiny, because knowing and understanding the chain of ownership is, I believe, necessary to enable information on the register to be checked. I also believe that the importance of that has been acknowledged by the Government, because the Bill already requires that the method of control be declared, accepting that how control is exercised is important. These amendments seek to make sure that that will be made clear in the small number of cases where there is a chain of entities as part of the method of control. It would make a big difference. For example, developing countries require such information to bring legal action against a person of significant control—something they have often been unable to do in the past, often at great cost to their fragile economies.

When speaking about the register on 31 October 2013, the Prime Minister stressed that it would be publicly accessible and went on to say the following:

“It’s better for businesses here, who’ll be better able to identify who really owns the companies they’re trading with. It’s better for developing countries, who’ll have easy access to all this data without having to submit endless requests for each line of inquiry. And it’s better for us all to have an open system which everyone has access to, because the more eyes that look at this information the more accurate it will be”.

Needless to say, I thoroughly agree with the Prime Minister, but without placing on record the chain of ownership there will not be sufficient information available on the register to enable third parties to verify it properly. I believe that it is self-evident that the success of the register will rest on how accurate it is. To ensure that it is as accurate as possible, there is a need to maximise opportunities to ensure a higher level of accuracy from day one. That is what these amendments are designed to achieve.

The noble Lord, Lord Phillips, and I tabled similar amendments in Committee. The Minister said then that our amendments would be costly. Yet those amendments would have amounted to a minimal burden for a small number of companies—the most complexly structured companies at that. We estimate that only about 2% of UK businesses would need to provide only a very small amount of additional information when submitting their annual reports. The company should already have collected this information in confirming its person of significant control. The only extra demand would involve including this information in its annual report. This is such a minor requirement that I do not believe that it even merits being categorised as a “burden”, but it is a requirement that would fall exactly on the type of company that is most likely to be of concern. For that reason, I believe that it is proportionate.

In Committee, the Minister said that this would be confusing. On the contrary: surely the chain of ownership would be presented more clearly in the register, reducing the likelihood of confusion. The Minister also said in Committee that this would be seen as gold-plating. I agree with her, but is that not to be welcomed? I contend that it is not so much gold-plating as the rather more prosaic—and certainly cheaper—copper-bottoming: ensuring that the register achieves what it is designed to achieve. We are the first country in the world to introduce a public register. I believe that we should be proud of that and I also believe that we should get it right first time.

These three amendments would make a significant difference to developing countries at minimal cost to a small number of UK companies. Having listened to the Minister in Committee, the noble Lord, Lord Phillips, and I have scaled them back from the amendments that we tabled then. I very much hope that they will now find favour with the Minister. If they do not, I look forward from hearing from her how the Government intend to address this issue, perhaps in secondary legislation, so that the register can be established on the firmest possible foundations.

I turn briefly to Amendment 53. The intention of this amendment is to make a very simple point that the noble Lord, Lord Phillips, and I feel has not been properly addressed yet during the Bill’s consideration:

that it should be the Secretary of State who is responsible for the operation of the PSC register, rather than Companies House. We suggest an annual report to Parliament from the Secretary of State to highlight this point, allowing parliamentarians to hold the Secretary of State to account on the operation of the register. Since this will be the world’s first public register of beneficial ownership, I believe that it is really important that we get it right.

The Secretary of State must ensure that information in the register is properly verified and that it is kept as up to date as possible. I welcome the comments that the Minister made just a few minutes ago in respect of another amendment about increasing the number of times that it is updated. Throughout the various stages of the Bill, MPs, noble Lords, interested organisations and, indeed, to a significant extent, members of the public have made the point that the public register should be updated more than annually. As things stand, it would be out of date almost as soon as it is published, so again, the Minister’s remarks are to be welcomed.

I hope that the Minister will accept what I think is a relatively straightforward and simple amendment, which will clarify ministerial responsibility for the register and increase parliamentary scrutiny of it. If not, I hope that she will outline how she or the successors of the Secretary of State would ensure that the public register is kept as accurate as possible and that the information contained within it is properly verified. I beg to move.

Photo of Lord Phillips of Sudbury Lord Phillips of Sudbury Liberal Democrat

My Lords, my name stands with that of my noble friend Lord Watson of Invergowrie on these amendments. He has introduced them with great panache, and I do not have a great deal more to say but I think that the issues are so important that a few more points are necessary and worth while.

First, I shall give the House some of the facts that point to the scale of the problem of fraud and tax avoidance, which I do not think many of our fellow country people understand. My noble friend Lord Watson and I have been hugely helped by the Anti-Corruption APPG of this House, which, in turn, has been supported by Global Witness and Christian Aid, and a wonderful job they have done. One of the statistics they have produced for us—I think that Transparency International has had some part in this as well—is that the best estimate is that $21 trillion to $32 trillion of private financial assets rest in tax havens, and that 20% to 30% of that huge corpus of assets is corruptly diverted. Of that, they reckon that $120 billion to $180 billion per annum, which is far more than the entire global aid budget, is diverted unlawfully from developing countries. This is a rather poignant day on which to say that, as the Bill concerning the 0.7% contribution to aid has just been passed.

Another fact which I find rather depressing because it affects the UK is that it is reckoned that the Crown dependencies and overseas territories are host to one-third of all the world’s shell companies. On top of that, more than 36,000 properties, which are mainly in the most expensive parts of this wonderful city, are owned by overseas owners but are placed in shell companies in tax havens, 38% of them in the British Virgin Islands, 16% in Jersey, 9.5% in the Isle of Man and 9% in

Guernsey. In addition, the World Bank’s review of the 200-plus biggest corporation corruption cases shows that 70% use shell companies as their vehicles of fraud. Therefore, the background to this amendment could not be more important and striking.

At this point, I have to own up to something from my dim and distant legal past. In the mid-1960s I was what was then called a tax mitigation lawyer. I notice a groan from behind me.

Photo of Lord Phillips of Sudbury Lord Phillips of Sudbury Liberal Democrat

Yes, another lawyer. However, it is very striking because that was in the mid-1960s. In fact, the last case I did was just after the first Rossminster scheme was launched on the British public. Some of your Lordships may remember those schemes. They were the first of the hyperartificial—I would say hyperludicrous—schemes. I remember putting this to the best tax chambers in London at the time. I asked them, “Would you kindly advise my client via me? Is this scheme a runner?”. Back came the answer, “These chambers will not handle any cases relating to the Rossminster scheme because we view it as anti-social”. It is extraordinary to think of barristers saying that and I am not sure that they did not use the word “immoral”. But my goodness, the world we now inhabit is very different. The demoralisation—that is a useful word to use—of this country and indeed the entire world is really depressing because it has given rise, gives rise and will continue to give rise to an ever increasing number of really shameful frauds conducted by some of the biggest and best companies and banks in this country and everywhere else in the globe. It is very sobering to recollect that we are still a good deal less corrupt in our financial dealings here than virtually every other financial centre in the world.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative 6:45, 9 March 2015

My Lords, I am most grateful to my noble friend for giving way. I confess that I have not followed these proceedings at earlier stages of the Bill and perhaps he can help me out. He is describing a very undesirable situation. However, as these provisions apply only to companies which are registered at Companies House, why will the criminals and bad guys not operate in other jurisdictions, and how is adding so much cost and burden to honest small businesses justified in that context?

Photo of Lord Phillips of Sudbury Lord Phillips of Sudbury Liberal Democrat

I think that we need a short debate to answer the question that my noble friend poses. However, I think that the general feeling is that small companies will not be hurt by these provisions. It is these extraordinarily obtuse long chains of shell companies, sometimes in as many as 13, 14 or 15 tax havens, that are the object of this exercise.

Photo of Lord Naseby Lord Naseby Conservative

Can my noble friend honestly say that it will not affect small businesses? “Small business” is in the title. Every single small business in this country—not the micros but almost every other small business—is going to have to register, and that is going to cost it a considerable amount of time, money and resources. So how can he possibly say, “Well, it’s not going to affect any of them. It’s only going to be the great big national companies and other big companies that are manoeuvring things internationally”? He is talking rubbish, is he not?

Photo of Lord Phillips of Sudbury Lord Phillips of Sudbury Liberal Democrat

I did not say that it would not affect them at all; I said that it would affect very few of them to a significant degree, and I stick by that. I have been a small and medium-business lawyer for most of my life, and I can say that these companies will not be significantly inhibited by these provisions or be faced with significant costs.

Photo of Lord Naseby Lord Naseby Conservative

I am sorry to interrupt my noble friend again. He may have been a lawyer periodically dealing with a few small businesses; nevertheless, the chambers of commerce and others say exactly the opposite to what he is saying. Surely they know better than some lawyer working part time on small businesses.

Photo of Lord Phillips of Sudbury Lord Phillips of Sudbury Liberal Democrat

I would not deny for a minute that they know better than the description the noble Lord gave of me. I just repeat that I do not think it will seriously inhibit the small or medium-sized company that operates in a straightforward fashion in this country. I am confident of that.

Photo of Lord Flight Lord Flight Conservative

My Lords, we touched on this previously. Four million small companies are going to be affected, and if any of them does not obey the law, it will be committing a criminal offence. How is a small entrepreneur with a plumbing business up in Norfolk going to even know that this law exists and that he needs to comply with it?

Photo of Lord Phillips of Sudbury Lord Phillips of Sudbury Liberal Democrat

I have a huge amount of sympathy with the noble Lord pointing out the hypercomplexity of this. I can only say to him—I must also put it in the context of having worked in this field for more than 50 years and having been a non-executive director of more than 15 SME companies—that I do not think there is any real prospect of an innocent SME going about its business falling foul, let alone criminally foul, of this law. However, I accept that the whole Bill is of near barbaric complexity and I do not know how we get round that. I am afraid that the price for the scandalous intentional misbehaviour of large and some small entities is invariably paid by the innocent.

Perhaps I may try to return to my story. As I said, there is a real demoralisation particularly of the business world but also of our whole society which we need to take intense notice of. We are at a tipping point in terms of the common good. The publicity of some of these awful cases is universal now, so that more and more of the richest people and companies, in terms of the money they have, are seen to be getting away with murder—as the man in the street would call it—in terms of paying tax. That is totally antipathetic to the good and fair society that we seek to create and help in this House. It is a total denial of fairness and duty.

These provisions are very modest but will enable the authorities, in particular the tax and fraud authorities, to grapple with some of these very expensively advised entities and the chains that they establish around the tax havens of the world, without one arm being tied behind their back. We all know that the authorities are ludicrously understaffed in comparison with the private sector—I am talking about the irresponsible part of the private sector—although that is another issue which has to be dealt with another day. I hope that my noble friend will be able to reassure the House that this will not be yet another statute that lies gathering dust on the shelves of Whitehall, but that there will be a practical and rigorous enforcement of the provisions inserted here.

Finally, without the limited transparency that is afforded by Amendments 36, 37 and 38, the authorities will not be able to get at the malefactors any more than they have thus far. I think I am right in saying that not a single bank director has been prosecuted since the collapse of 2008, during which period tens of thousands of our fellow countrymen and women have been prosecuted before magistrates’ courts. We must stop that, as it is profoundly demoralising for this country. We must give the authorities the tools to do their hugely difficult job. The fact that we are the first country to introduce a PSC register is something that the Government should be congratulated on. I commend the Prime Minister, because it is not easy in his party to say some of the things that he has said. The noble Lord, Lord Watson of Invergowrie, mentioned one of those things, but I particularly like what he said to the G8 in 2013. The point he made and the language he made it in were absolutely right. The Prime Minister said that,

“companies should know who really owns them, and tax collectors and law enforcers should be able to obtain this information easily”— for example, through central registries—

“so people can’t avoid taxes by using complicated and fake structures”.

Bang on. All this series of amendments does is lend a few practical teeth to that sentiment. I hope that this commends itself to the House and the Government.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

My Lords, I will speak briefly against this amendment. Of course, no one could dispute the intention behind it. If the intention is to stop criminal activities and tax evasion—and I make a distinction between tax avoidance and tax evasion; when we are talking about criminal activities, we are talking about tax evasion—no one could dispute it. However, it rather seems like a sledgehammer to crack a nut, or perhaps a sledgehammer aimed in the wrong places. The impact assessment undertaken by the Department for Business, Innovation and Skills of the proposals as they already stand says that almost £1 billion will be added to the costs of small businesses, which the noble Lord, Lord Phillips, tells us is not really significant. I wager to suggest—

Photo of Lord Phillips of Sudbury Lord Phillips of Sudbury Liberal Democrat

I am grateful to the noble Lord for giving way. I do not think that he will find in that impact assessment any attempt to assess the cost of the amendments that we are talking about in this group. I will leave it at that.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

The noble Lord is absolutely right, because this is not the Government’s proposal—which is why I am against his amendment. He said in his speech that it would not be very much extra without actually telling us how much extra it would be. We already have £1 billion being added to the costs of small and medium-sized businesses at a time of great stress in our economy and when we are desperate for them to grow and create wealth. Yet here we are asking people running small businesses to fill in forms, and if they fill them in inaccurately, they will find themselves committing a criminal office.

Photo of Lord Phillips of Sudbury Lord Phillips of Sudbury Liberal Democrat

I am most grateful to the noble Lord for giving way a second time, and I promise not to intervene again—but that is not so. He should take account of the fact that if we were to recover even 20% more of the tax that currently is not paid but should be, many billions of pounds will redound to the benefit of SMEs as well as of everyone else.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

I am not sure which bit the noble Lord was saying was not so. He may very well be right in his assertion—although I doubt it—that the Government will collect more money, but that does not help the small business man who is faced with these additional costs, for whom there is no benefit whatever. They already struggle to fill in their VAT forms and their surveys on this, that and the other while trying to run their businesses. This would add a very significant burden.

Photo of Lord Popat Lord Popat Lord in Waiting (HM Household) (Whip)

My Lords, this is Report and we prefer not to take further interventions.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

I believe that interventions seeking information are allowed once on Report, so I will give way to my noble friend.

Photo of Lord Naseby Lord Naseby Conservative

My noble friend might mention the cost of business rates, which are a huge burden to every business in this country. Business rates are going up by 2%—and what is the rate of inflation? Under 1%.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

Indeed, but my noble friend must not tempt me to get away from the amendment and from this Bill. When it comes to compliance costs, the Government are going to have to find £109,000 just for,

“the IT development of the registry and communication to industry”.

My experience of government IT programmes is that they usually cost considerably more than estimated. Then we have £220,000 for ongoing maintenance. In addition, it is stated:

“Costs to businesses are estimated to be £417.4m set up cost, and £77.7m pa”.

This is a country that is not able to meet its expenses and these are businesses which, certainly outside London, are under severe stress.

My noble friend and the noble Lord argue that we need to add further to the burden put on these businesses to deal with the problem of international tax evasion by large companies around the world. I intervened to ask him how—even assuming that everything that he claims for his system works once it is up and running in Britain and we have spent the £1 billion—it would help prevent the crooks and people who wish to behave in this way operating out of a different jurisdiction. Surely, the only way this Utopian view of how to tackle the issue will be achieved is if every country does this, but I do not see any evidence of other countries rushing to implement this legislation. As far as I am aware, there is no great programme to do this among the other countries that were at the G8, so all we would be doing is hobbling honest, hard-working small businesses in this country to deal with a problem that needs—

Photo of Lord Watson of Invergowrie Lord Watson of Invergowrie Labour

I am grateful to the noble Lord for giving way. I always listen to the noble Lord, Lord Forsyth, carefully. He always makes very considered contributions to the House, although I may not agree with him very often. This is one of those occasions. I regret that he seems to be making a speech that should have been made three months or so ago at Second Reading, because he is not arguing specifically against the amendments that I have put down; he is arguing against this section of the Bill in its entirety. I accept that he is perfectly entitled to do that, but these arguments have already been given a considerable airing.

I just would draw his attention to the amendments, which say, “where the control”—that is, the control of a company—

“is exercised through a chain of legal entities”.

That will not impact on many small and medium-sized enterprises. This is for large, complex organisations, which is why I mentioned the figure of some 2% that it has been estimated would be affected. The other companies will have to say who their person of significant control is anyway, whatever the size of the company. In most cases, it will be the chief executive. This part of the Bill will not be a burden to any significant extent on smaller companies. The bigger companies, which have an international dimension and therefore will have a complex structure, are those that we are trying to catch with these amendments. It is not in any sense about companies based in the UK that have no ownership outside the UK.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative 7:00, 9 March 2015

My response to that is that it is a fair cop. He is absolutely right that I should have made this speech three months ago. I had no idea, along with, I suspect, 99.99% of the country, that this measure was included in this Bill. I had not read about a desire to set up a register, adding £1 billion to the cost, in any newspaper or seen any great debate about it. Perhaps I have been a little remiss. It is perfectly true that the occasion of this amendment has given me an opportunity to draw attention to the considerable cost involved, which I appreciate was argued at an earlier stage of the Bill.

However, in his speech, the noble Lord argued that the Minister had argued at an earlier stage of the proceedings that she could not accept his amendment because it would add to the costs on small business. I support my noble friend in arguing that we should not add to the costs on small businesses. Therefore, I think I am in order in arguing against this amendment because, as the noble Lord said, it was an issue at an earlier stage.

I apologise to the House that I was not involved at an earlier stage but when one of my noble friends pointed out to me what was in the Bill, I could not believe it. I looked up the Government’s assessment of compliance costs. Certainly, when I was in government, as the noble Lord will remember, impact assessments invariably turned out to be less than what they were. Even at this late stage, I hope that, in rejecting these amendments, my noble friend will think very carefully about introducing this measure at this time of great stress.

I could understand it if all the other G8 countries had their legislation in place; then I could see how it could work. The noble Lord is not addressing my main point; namely, that if we are concerned about people setting up shell companies to hide where their interests lie, passing this legislation will not deal with that problem because people will operate outside other countries. I made a speech the other day which upset Amazon and I received a letter from its public affairs person. I said that Amazon did not pay business rates and corporation tax in the same way as ordinary retail outlets. She pointed out that Amazon pays business rates on its distribution centres. I wrote back and said, “But you haven’t dealt with the point about corporation tax”. We understand that one of the reasons that Luxembourg will meet the quota on overseas aid is because it is based on gross national income, which includes revenues that really should have been in other countries. Therefore, although the amount that it is spending on overseas aid is tiny, it appears to meet the target because of the number of companies that use Luxembourg in that way. If the Government wish to recover the tax that my noble friend is concerned about, the answer is to pass the necessary legislation in the Finance Bill. It is not to ask hard-working people up and down this country to burn the midnight oil filling in registers of the kind proposed, nor to complicate the statute book.

I cannot believe this Bill, which is dealing with small business. It is pages and pages of stuff. The Explanatory Notes would take a whole evening to read. It seems to me that this amendment and the provisions in the Bill relating to the register drive a coach and horses through the Government’s declared policy of reducing the burdens on business and allowing it to concentrate on wealth creation.

Photo of Baroness Neville-Rolfe Baroness Neville-Rolfe The Parliamentary Under-Secretary of State for Business, Innovation and Skills

I am grateful to the noble Lord, Lord Watson, and my noble friend Lord Phillips for these amendments. I thank my noble friends Lord Forsyth and Lord Naseby for reminding us of the needs of small business, many of which will of course be caught by the Bill at a substantial cost, but it will be over 10 years. It has been properly costed in an impact assessment, which has been available for some months. Of course, businesses would have to deal with any additional requirements, as my noble friend has made clear, if we were to impose them. I should equally say that the benefits of the register have the potential to be substantial, whether as a result of improved efficacy of investigations and outcomes where companies are being used to facilitate serious criminal activity, or to businesses as a result of their operation in a more open and trusted environment. As my noble friend Lord Phillips said, this is a cause in favour of transparency and against corruption that the Prime Minister has led.

However, the group of amendments raises important questions about the information in the register of people with significant control and the integrity and accuracy of those data. I turn first to Amendments 36, 37 and 38, which would require details of every company in the ownership chain to be entered in the PSC register. The PSC register is a ground-breaking change and the UK is leading by example. The register will contain information on the individuals who ultimately control UK companies, including how that control is held. I do not think my noble friend was in the House earlier when I ran through some of the international efforts that have been going on and reported on the progress of the money laundering directive. However, I did not deal with the overseas territories and Crown dependencies, which were raised by my noble friend Lord Phillips. We are working closely with the overseas territories and Crown dependencies and are keeping them informed as the UK policy on corporate transparency develops. This will help to feed into their thinking. We believe that they have made significant progress on tax transparency and they have publicly committed to transparency of company ownership. Arguably, more has been achieved in the past year than over the past 10 years.

Some noble Lords and business groups feel that we have gone too far, in particular by making the register publicly available when this is not currently a global requirement. They fear that reform will impose unnecessary costs on business and have an adverse impact on UK competitiveness. These amendments seek to go further. They would require information not only on those individuals but on every legal entity in the ownership chain. The question we have to ask is whether this goes too far. Such an approach is not required by international standards, by the likely EU requirements shortly to be adopted in the fourth money laundering directive or by our G7 or G20 commitments. Nor is it something—this is significant—that the law enforcement community, including HMRC, has called for.

The amendments would add to the already substantial compliance costs. Companies must update their own registers as changes occur. Companies keeping their own registers would have even more information to obtain and keep up to date, plus the compliance cost of notifying every change in every layer of a chain. Companies owning other companies would have to work out if and when they need to report information. These amendments could also adversely impact the utility of the register. More data do not necessarily lead to more transparency. If the amendment were adopted, the very information we want to reveal may be buried under a mass of less relevant data. What matters is who ultimately exercises control, which, subject to the will of Parliament, from next year will be on the public record and not just available to law enforcement agencies. However, I recognise that this is an issue that some noble Lords feel strongly about.

Clause 82 already requires us to undertake a statutory review of the PSC within three years of the requirements coming into force. That review will provide an opportunity to look at the range of issues raised by noble Lords on all sides of the House. I am prepared expressly to consider looking at the question of the ownership chain in the context of that review.

I now turn to Amendment 53. Let me start by making clear that I am absolutely committed to ensuring the integrity and accuracy of information on the public register. I am satisfied that our current approach achieves this. It is based on a combination of pre- and post-registration checks, criminal penalties and public scrutiny. We are looking at what more we can do and have started with the creation of a new register integrity team at Companies House. The team undertakes compliance activities to help companies, ensuring that they are fulfilling their filing responsibilities, and data analysis to identify where specific activities can improve the integrity of the register. The Government already have powers of investigation that allow them, for example, to require the production of documents. Moreover, as the register will be public, transparency will be a driver of accuracy.

Amendment 53 calls for the Secretary of State to lay an annual report before Parliament on measures taken to ensure that PSC data are verified and accurate. A clear requirement on the register to verify every piece of PSC information would not be proportionate. However, I know that this is not what my noble friends have in mind. They want assurance that our proactive approach to ensuring data accuracy will continue. The Government fully support that objective. I do not, however, think that an additional bespoke report is the way to achieve that. The Bill requires the Secretary of State to review whether the register’s objectives have been achieved within three years of its implementation. The accuracy of the information will be a key part of the review as well as all other relevant issues, such as whether additional information on the ownership chain should be recorded.

I can also commit today to ensuring that, in future, Companies House will make explicit reference to activities undertaken to ensure the integrity and accuracy of information on the register in its annual report, which is, of course, presented to Parliament every year.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

Given the size and scope of the register, can my noble friend say how exactly Companies House will do that, how many people they will need to employ to achieve that objective and what the likely cost will be?

Photo of Baroness Neville-Rolfe Baroness Neville-Rolfe The Parliamentary Under-Secretary of State for Business, Innovation and Skills

My Lords, the point I was making about reporting is that we would extend the annual report, in any event, so that it covered this new function, which is sensible, and in that context we would obviously look at data and other relevant issues.

The noble Lord asked about the scale of staffing required. I may be able to give him a response if I can make a bit of progress. My normal port of call would be the compliance cost assessment. The answer is that we are going to do this within the existing budget but in co-operation with other enforcement agencies. I have been to see Companies House during the course of swotting up for the Bill and I am impressed by it. It is bringing a more modern approach to the way in which it does things. It has been aware for some time that it is going to be given this new burden and it is ready and willing to pursue it.

Photo of Lord Naseby Lord Naseby Conservative

As I understand my noble friend’s argument, she is saying that her department and other departments are in a similar mode. Their staff will cope with these changes and this huge register at nil cost other than what is already budgeted for the implementation of this Bill. Is that correct?

Photo of Baroness Neville-Rolfe Baroness Neville-Rolfe The Parliamentary Under-Secretary of State for Business, Innovation and Skills

My Lords, agencies such as Companies House have long-term plans to look at the duties coming down the line which they will have to fulfil. They have been aware for some time that this duty will fall on them. Obviously it follows the Prime Minister’s initiative at Lough Erne in 2013 and the money-laundering directive discussions that have been going on in Brussels for a long time. We will be bringing in this register. I will pass on the points that have been made to Companies House but it is ready to tackle this task. Of course, the reason the compliance costs are large is because it is a small amount of work by a large number of companies. It is because the multiplier is so big that you get the compliance costs that you do. That might be of some comfort to my noble friend.

The issue of timing was raised by the noble Lord, Lord Phillips. We intend to require companies to maintain their own PSC registers from January 2016 and to file information at Companies House from April 2016. We publicly set out these intentions in January this year.

On complexity, it will be straightforward for the majority of companies to identify their PSCs. We are thinking carefully about the guidance and communications to companies so that we can get the message across about how they might do it simply and what is required. We have a working group set up to develop guidance which contains representatives from all interested parties including, everyone will be pleased to hear, small business. Our enforcement user group is co-chaired with the National Crime Agency and will look specifically at how to make best use of the PSC data so that, in making this big change, we are using it to good effect and that the benefits I have described come through.

I have set out these points at some length. I hope noble Lords have been reassured by what I have said about the forward plans for the register and its review and will be willing not to press their amendments.

Photo of Lord Watson of Invergowrie Lord Watson of Invergowrie Labour 7:15, 9 March 2015

My Lords, this has been a longer and more vigorous debate than had been anticipated. I feel like a guest at my own party such is the distance we have travelled from the narrow effects of the amendments.

The noble Lord, Lord Forsyth, made an important point: a number of companies will be involved in the register and there will be some costs. I fully accept that. However, it is a central part of the Bill. It has come a considerable way down the road now and has been broadly accepted. The noble Lord said that he was not aware of any disquiet about it. That suggests to me that not many companies are making a great deal of noise about it. Yes, there are costs, but they have realised that benefits will follow the introduction of the register.

I disagree with the noble Lord when he says that we are the only country doing this. Yes, the UK is taking a lead—that is commendable—but someone has to start. There is considerable opposition to this within the EU, never mind beyond it, but we have to start somewhere. If we do not, it will never happen. From that point of view I give the Government credit for grasping the issue and taking it forward. Where it goes from here we do not know. Indeed, in doing research for this evening I noticed that since the Committee stage in January four Crown dependencies have come forward and said, “We have looked at the idea of a public register but, frankly, we do not think it is a good idea and we are not going to do it”. Also since the Committee stage the leader of the Opposition has said that, should he be in a position to do so after 7 May, he will make it a requirement on the overseas territories and the Crown dependencies that they have such a public register. I accept that there is opposition to a register but the UK is due credit for leading the way in this.

As to what the amendments seek to do, I was surprised that the Minister said she was concerned that if too much information came forward it might obscure the situation rather than clarify it. That is similar to the argument that there is no point in having a 50 pence tax rate because people will not pay it; that you will get more tax if it is only 40p or 45p. If you set laws in any civilised country you expect people to obey them and for those laws to have the effect intended. If information is sought, it has to produce the clarity that is the intention of the amendments.

I repeat that it is anticipated that about 2% of all UK companies would be caught by these amendments should they be accepted and added to the Bill—not small companies and the small and medium-sized enterprises, because they do not have a complex international structure in which to hide aspects of their business, even if they wanted to.

I am disappointed that the Minister is not prepared to accept the amendment. It is a narrow point and would not add a great deal to what the Bill is trying to achieve. I accept that she will not change her position and I respect that. I also respect the fact that she said there will be a review within three years and that will give the opportunity to look at the situation again.

During the debate on these provisions I have noticed that in fact three new sections in the Bill would allow secondary legislation to address the question of foreign companies and ownership issues. I just highlight new Section 790K(5), new Section 790L and new Section 790M(7). I agree with the noble Lord, Lord Forsyth, that it is indeed a beast of a Bill, although recently I was involved with the Deregulation Bill, which is every bit as complex and fat a document. There are opportunities, should the Minister feel that they are worth pursuing, but obviously it would be better if this was included in primary legislation. However, I accept what she has said and I look forward to the review of the legislation. There will be a lot of valuable impact as regards this part of the Bill. With those remarks, I beg leave to withdraw the amendment.

Amendment 36 withdrawn.

Amendments 37 and 38 not moved.

Amendment 39

Moved by Lord Flight

39: Schedule 3, page 166, leave out line 3

Photo of Lord Flight Lord Flight Conservative

My Lords, I suggest that measures like this and other anti money-laundering measures are much more effective to the extent that they are common preferably among the G20 countries, but at least among the G8 and other more advanced parts of the world. There is less scope to pick and choose jurisdictions if the same rules broadly apply across all the important areas. In that context, I have made the point previously that it is not achieving much to say, “The UK is in the lead here”. The question, in introducing measures like this, is whether they are going to be followed internationally and will they be similar in order for them to be effective. Although I am no great lover of the EU, the forthcoming fourth anti-money laundering directive is extremely important. It is expected that it will require a central register of company-beneficial information, which data will need to be accessible to those with a legitimate interest; that is, law enforcement agencies and regulated entities. The word “legitimate” has not as yet been defined and I do not know whether it is going to be, but the supposition is that it would cover the proper investigative bodies for anti-money laundering, tax evasion and security matters.

The amendments in my name in this group hang together as a package and reflect the fourth EU anti-money laundering directive. Amendments 41, 43, 55 and 56 seek to mirror the expected terms of the directive: to limit access to proper and legitimate purposes as they are generally understood. The second important point, which is picked up in Amendments 39 and 40, is that the EU directive also requires the implementation of central registers of beneficial ownership. The amendments seek effectively to remove the option of individual companies keeping their own PSC registers at their registered offices and would permit the Government to require either that Companies House should keep a register, or if the Department for Business, Innovation and Skills wants to do it, it could do so. But it would clearly be messy to leave the option for companies to keep their registers and for there to be a central register as well. Surely it is better to have one or the other, but not either/or, which would further add to costs and complexity.

I thank the Minister for her helpful reply to my letter of 6 March. From her letter I detect some movement towards implementation, at least in practice, of what would be a more common EU approach to PSCs. The noble Baroness made the point in her letter that although government Amendment 42 serves to remove the requirement for a person requesting access to a company’s PSC to state whether the information will be disclosed to any other person, a person seeking such access must provide their name, address and the purpose for which the information is to be used. The company will retain the right to apply to the court to refuse access if it suspects that the person is not requesting the information for a proper purpose. It will also be a criminal offence for a person to disclose information to another person if they know or suspect that such other person will use the information for an improper purpose. This is the language I have been arguing for—proper and improper purposes. My main objection to these measures has been that they would allow improper use to be made of the information about private companies, in particular writing about people’s private wealth in a potentially salacious way or stirring up hostilities. It seems that the UK is creeping towards mirroring the language of my amendments about proper purpose and refusing access to PSCs for what are not proper purposes. It would seem that the legislation, or its implementation in the UK, is shifting somewhat in the sensible direction, as I have argued throughout.

What matters is that the appropriate authorities—the tax and security authorities—can have access to information for proper purposes. Indeed, that is what the Prime Minister was saying at the G8 meeting, but not that any old media individual can look up people’s personal affairs. I would ask this of the Minister. In the references she has made more recently to proper and improper purposes, it would seem that the legislation now provides much more protection against improper use than was the case before. If that is correct, it may be that my amendments are not necessary. Surely the right drift of things is that the measures across the EU should be pretty similar, led by this country but not with this country out of line and overgold-plated. I beg to move.

Photo of Lord Borwick Lord Borwick Conservative

My Lords, there is a very significant difference between privacy and secrecy. There could be lots of reasons for privacy, but not only involving an entrepreneur. Take Tony Blair’s tax return, for instance. That is his private matter, but this Bill will open up private matters to anyone for any proper purpose. Blair and others can support their own cases, but who will speak up for the entrepreneurs? It is indeed a great power of the state to inquire about something, but that power should not be given to all its citizens. The state has its own secrets too, which is as it should be. Transparency is not always a merit. These proposals presume that anything which is not transparent is bad, and that anyone who is involved in anything secret is guilty of something. That is clearly not the case. There are nearly 3.5 million businesses in the UK. The vast majority of them are law-abiding and simply trying to make products that people want to buy or provide services that they need. In any case, there is unlikely to be reliable ownership information on criminals, who can be expected to conceal their interests. If this is intended to root out a few bad cases, then it really is using a sledgehammer to crack a nut.

Tony Blair mentioned in his memoirs that he regrets the freedom of information legislation. I can see why, as life has got more complex since then, with real threats affecting Britain. It is not impossible that extremist threats could be made against alcohol producers or other producers of goods not approved by IS sympathisers, or scientists and research facilities by violent animal welfare groups. Debbie Vincent was sentenced to six years in prison after attempting to blackmail an animal testing company. The campaign she was involved in used the threat of improvised explosive devices and the desecration of graves. Cases like that must be taken into consideration when we decide what information to make available. But it is not just extremist threats. Freedom of information has unquestionably changed people’s behaviour. This is mainly to avoid things being written down, which can make simple tasks all the more difficult to carry out. Not writing things down has the perverse effect of encouraging more secretive behaviour.

I took a look at the impact assessment of the policy, which was mentioned by my noble friend. I found it staggering. The cost is estimated to be £1.08 billion and the value zero—no benefits apart from a woolly promise to “lead the way” on transparency. Can our coalition partners or the Labour Party really not think of anything better to do with a billion pounds than make companies waste it on lawyers? There may well be Members of this House who believe that there could be nothing wrong with spending a billion pounds on professional fees, but they are in the minority and I believe they are proven lawyers. With these new rules, a private company raising money to employ more people and expand will have to go through extra hurdles to get a new shareholder. It is hard enough to get a new shareholder when a company really needs it so any extra burdens will make that important task much more difficult.

We must always remember that regulation is as bad as taxation—often worse, in fact, because it is insidious and stealthy. For this amount of money, we could reduce the rate of corporation tax by 2% for a year, causing a large increase in employment and more money for pay rises. Can I tease my noble friend the Minister into revealing whether she actually believes that this part of the legislation is better than a tax cut? But if we are to have this cursed regulation, I would like my amendments to be considered.

The first is to make sure that the proper purpose of the inquiries is the same proper purpose as had been declared. Is it inconceivable that a journalist or an animal rights activist would make an inquiry for anything other than a proper purpose? Is it likely that he will change the purpose when he gets the information?

The second will try to ensure that inquirers are honest. There is a list of severe penalties for directors of companies who cheat or lie on the register—two years in jail would seem to be a severe penalty indeed. Surely if the individual inquirer lies, he should face the same risks of two years’ imprisonment as a company officer; that is in new Section 790R, I believe. But I believe it is most likely that an organisation will get an individual to front for it. This amendment makes the organisation culpable.

I thank my noble friend the Minister and her Bill team for their time and courtesy in answering my questions. I believe they are doing a rotten task in the best way it can be done. The draftsmen of this sort of legislation believe that they are dealing with reasonable people. That is always an interesting idea. But the trouble is that there are some really nasty people out there. I fear that if we give the public this whole new power at enormous cost, certain responsibilities go with it. There are other options, too. My noble friend Lord Flight has proposed very sensible amendments. I think it would be a good idea to defer public access until we properly assess the international landscape, as we are the only country currently proposing to do this. Clause 82(4) creates a three-year review period. Can my noble friend confirm whether the review will reveal whether there has been any increase in the number of threats made as a result of this legislation?

Photo of Lord Naseby Lord Naseby Conservative 7:30, 9 March 2015

My Lords, I, too, pay tribute to my noble friend on the Front Bench. I thank her for arranging the briefing session last week that I took part in, which helped me understand this in greater depth. It did not assuage many of my worries but at least I understood more clearly where Her Majesty’s Government were coming from. I think that the House should be indebted to my noble friends Lord Flight and Lord Borwick, who have taken a detailed interest in the Bill. Both have raised issues that have always been there. I listened to my noble friend Lord Flight and, indeed, corresponded with him at an earlier stage.

Since the Bill was conceived several things have happened. First, we should be aware that the United States proposes to take no action at all. The President of the United States maintains that he is there as a central body, and that is he is not permitted by law and statute in the United States to take any similar action because it is a state matter. As far as the states of Delaware, Wyoming and at least two others are concerned, they are going to carry on business as usual and, in fact, probably benefit from any Bill that we start off as a wonderful, transparent initiative.

The other dimension that has been clarified is that the OECD has indicated that if the United States is not going to comply, it sees no reason why it should. That is a second block. The G20 and the G8 have already been referred to; there does not seem to be much movement there other than what is likely to come out of the EU. That seems to be a very strong case for waiting to see exactly what comes out of the EU in preference to going forward on our own. At least then there would be a significant number of countries that would have come to a conclusion about what can be done and what is proper and ideal in terms of helping the law enforcement agencies. That to me is absolutely crucial.

Perhaps I could raise a point about timing. I listened to what my noble friend on the Front Bench said about timing. I do not know how closely she knows the timings of the implementation of the pensions Bill, but small businesses are currently having to register—as far as I know, by 1 April. It all has to be done online—it is not an easy thing for anybody to do; it is not the most user-friendly process—but those small businesses are registering for a policy to be implemented in 2017. Obviously, that department, in a fairly complicated area, has decided that it needs a couple of years to get the whole thing up and running properly. But my noble friend on the Front Bench seems to be saying that although we are starting later with this Bill—it has not even had Royal Assent yet—the whole thing is going to be up and running by 2016. I just wonder how realistic that timescale is.

I know that Her Majesty’s Government want to do everything online but, frankly, the software that has been produced in a number of areas leaves much to be desired. Can my noble friend reassure me that the software that is associated with this is almost ready to be set forward for the market to use, or is it still being produced somewhere? Has it been trialled yet? I do not know but I am asking my noble friend to have a close look at timing. Finally, I repeat that for small business to have to face a charge of over £1 billion when this is supposed to be an enterprise country is, frankly, absolutely ridiculous.

Photo of Lord Watson of Invergowrie Lord Watson of Invergowrie Labour

My Lords, I oppose the amendments in the name of the noble Lord, Lord Flight. Frankly, they are quite in contradiction to the whole thrust of the Bill, which is to increase transparency. They would have the opposite effect and I very much regret that. I am not going to rehearse the arguments that we traded in Committee a couple of months ago but I would just like to point out that he has brought up a new point about proper purpose. I dare say we could be here till this time next week before getting any sort of consensus on what a proper purpose was—in fact, we might not have succeeded even by then. I really think that that would be a backward step.

Surely the basic premise of the legislation is that public scrutiny will root out corruption more effectively, and indeed quickly, than the legal authorities themselves could do. I cannot understand noble Lords being opposed to that. To a certain extent, as far as companies are concerned, there is a case of, “If you have nothing to hide, you have nothing to fear”—but, equally, what do companies have to fear from transparency? The analogy with the former Prime Minister Tony Blair was not particularly apt in this situation. Personal privacy is one thing but companies have to be prepared to be open about the way in which they operate. Commercial confidentiality is one thing, but it has its limits.

My final point is about removing the requirement for a business to make its register publicly available. That is an essential element of this part of the Bill. I find it strange that the noble Lord, Lord Borwick

Photo of Lord Flight Lord Flight Conservative

My suggestion was that we fell in with the new arrangements, which are not complete but which use the language of a public register while stating very correctly that it should not be available to any old Tom, Dick and Harry but should be available for legitimate purposes. That seems to me to be the essence of what we are here to do.

Photo of Lord Watson of Invergowrie Lord Watson of Invergowrie Labour

Yes, but defining what is a proper purpose is simply not achievable. People will ask for information. If they use that information in a way that is against the law, they leave themselves open to action. That is a protection.

The noble Lord, Lord Borwick, said that he did not understand why the Liberal Democrats or the Labour Party were supporting this legislation. I have to remind him that it is a government Bill, and it is a government Bill with different aspects to it. It did not emanate from his coalition partners or from the Opposition. However, this is one aspect of the Bill which all parts of the House should get behind, because it seeks to achieve transparency. In terms of the way in which British business operates, surely that has to be a positive development.

Photo of Baroness Neville-Rolfe Baroness Neville-Rolfe The Parliamentary Under-Secretary of State for Business, Innovation and Skills

My Lords, I am grateful to the noble Lords, Lord Flight and Lord Borwick, for their amendments. I thank them and the noble Lord, Lord Naseby, for the many points that they have made at a series of meetings and in correspondence, and express the hope that they will encourage business representatives with an eye for simplicity to help with the implementation process so that it is as business friendly as possible.

We are reasonably confident about our 2016 timeline. We have clear plans in place at Companies House which are already being implemented. All being well, we are on track to meet our 2016 deadline. I know that there can be problems with software, but that is the plan.

Amendments 39 and 40 would allow a company’s own PSC register to be held solely at Companies House. I agree that flexibility is important. That is why the Bill gives private companies the option of holding their company registers solely at Companies House. However, it is important that companies can continue to hold their own register at their registered office, service provider’s office or other suitable location should they wish to do so.

Amendments 41 and 43 would restrict access to a company’s own PSC register to law enforcement and tax authorities. Amendments 55 and 56 would do likewise in respect of PSC information held centrally at Companies House. As I explained during our Committee debates, reducing the level of access to PSC information runs entirely counter to our public commitments on this reform.

Company transparency matters, and it is not just about tackling criminals. The Prime Minister set out the rationale for this back in October 2013. He said that transparency of company control allows businesses better to identify who really owns the companies they are trading with, that it gives developing countries easy access to data without having to submit endless requests for information, and that a public register allows public scrutiny and therefore supports data accuracy.

I know that there are concerns about the impact on privacy of this reform. We are satisfied with the balance that we have struck. We will not, for example, place residential addresses in the public domain, and we will put in place a protection regime that allows individuals at serious risk of harm to apply for their information not to be disclosed.

Of most practical importance, in the coming months the EU will adopt the fourth money-laundering directive, which will require member states to implement semi-public central registers of company beneficial ownership. This will ensure that all with a “legitimate interest” can access the register. My noble friend Lord Flight asked what “legitimate” meant. We believe that a legitimate interest would include civil society organisations and journalists in the context of their money-laundering investigations. He also asked what “proper purpose” means. The term is intended to have a wide interpretation and application. We are satisfied that there is no need to define it in the Bill. This is in line with the approach taken for the inspection regime for the register of members. I was reassured to know that if a company suspected that a person wanted access to a company’s PSC register for the purpose only of carrying out identity theft or fraud or using junk mail, that would not be a proper purpose.

Concerns have been expressed about the UK being the first to move on this agenda. We have seen and are continuing to see growing international momentum. G20 leaders committed to implement the G20 high-level principles on beneficial ownership at the G20 summit last November. It was a commitment on a par with that made by the G7 in 2013. This obviously includes the US, and I know that my noble friend Lord Hill was in Washington recently talking about the importance of transparency issues. The White House published beneficial ownership proposals as part of the President’s budget proposal for fiscal year 2015. Those proposals would modify and expand the Internal Revenue Service’s existing tax reporting mechanism to provide a federal solution to beneficial ownership transparency. The US Treasury has been developing a legislative plan to take this measure through Congress. I hope that that gives some comfort to my noble friend Lord Naseby.

The noble Lord, Lord Borwick, asked about costs and benefit. I shall not repeat what I have already said, but his Amendment 43A would make it an offence for a person to disclose information obtained from a company’s own PSC register to another person if they suspected that it would be used by that other person for a different purpose from that told to the company originally. This desired outcome is already implicit in the Bill. In other words, it is already the case that a person should not disclose information to another person if they know the information will be used by that person for a different purpose. The penalty for breaching this requirement is up to two years in prison. This is the same penalty as that which applies to companies that fail to provide information or provide false information. I do not think that any further amendment is needed to make this clear, not least as we have followed an established precedent in respect of the inspection regime for the register of members.

Amendment 43B seeks to provide that where an offence in relation to PSC register inspection is committed by a company or organisation, every officer of that body would be guilty of the offence. I understand the noble Lord’s desire for this change. However, I hope that I may reassure him that common-law principles would mean that, if a company committed the offence, the officers of the company who were in default would be guilty of the offence without us needing to make any changes to the Bill. In the case of an organisation, the same principles would apply. I am sure that my noble friend will agree that punishing only those who committed the offence is a proportionate response.

I hope that I have dealt with the key points that have been raised in debate.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative 7:45, 9 March 2015

I apologise for being somewhat behind the curve, but I was trying to think of an example of what a legitimate purpose is. If, for example, a person wanted to get this information in order to compile the Sunday Times rich list, that would be legitimate if it was made clear that that was why they were seeking the information, but if they asked for the information for another reason and then used it or passed it on to a journalist, they could be sent to prison for two years. Is that what the Minister was saying?

Photo of Baroness Neville-Rolfe Baroness Neville-Rolfe The Parliamentary Under-Secretary of State for Business, Innovation and Skills

My Lords, on the face of it, the first part of the noble Lord’s presumption is correct, but I think that I will take the time to reflect on it further and write to him, because I certainly would not want to mislead the House on such an important point. There are safeguards, but it is also a public register.

I should perhaps answer the question asked by my noble friend Lord Borwick, about the number of threats that individuals receive in the context of the review. I hope that it will reassure him when I say that I intend to look widely at those issues, as I have already said. As he probably knows, threat levels are not directly within my department’s remit, but I certainly intend that the review should consider the impact and efficacy of the protection regime as a whole.

I hope that, in view of the various reassurances that I have given, my noble friend Lord Flight will feel able to withdraw his amendment.

Photo of Lord Naseby Lord Naseby Conservative

My Lords, before my noble friend sits down, will she clarify the point about the impending EU law? What happens if it goes through in, say, nine months, six months or 12 months? It is presumably the intention of Her Majesty’s Government to sign the law and then, if necessary, amend the Bill. Or will they wait another two years, or two and one-quarter years, and then amend it? If we are to sign up in Brussels to a law, it ought to be the law that applies in United Kingdom, not one that is half Europe and half something else.

Photo of Baroness Neville-Rolfe Baroness Neville-Rolfe The Parliamentary Under-Secretary of State for Business, Innovation and Skills

My Lords, we hope that the directive will be agreed in Brussels in the next few months. It is a directive, so there will be a two-year commencement, as normal. In the mean time we will bring in—and, I hope, road test and make a great success of—the register that we plan. If the detail of the directive requires some change either to the Bill—or, more likely, I suspect, from my experience of European directives, to regulations made under Section 122—that will be laid before the House in the usual way. I take comfort from the fact that that important bit of transparency legislation is going through in Brussels, and one would hope to see it on the statute book as soon as possible. That is the situation.

Photo of Lord Flight Lord Flight Conservative

My Lords, I suggest that what will happen is that the EU directive will come forth and we will be heavily gold-plated on its requirement. It is pretty clear that its requirement is for a register, but one available only for legitimate purposes.

I know that I have no chance of persuading the Government at this stage to fall in line with the EU and honour the privacy of private companies. What right is there for a snooping journalist to go around finding out what wealth someone has through the introduction of the register and looking up information about their private affairs? I find it quite unacceptable that that should be done, just like that, when it adds absolutely nothing to the task of unearthing fiscal and terrorist crime.

I have tried throughout to persuade the Government that it would be more sensible to limit access essentially to those tasked with finding crime, so there is little point in pushing the amendment further. I beg leave to withdraw the amendment.

Amendment 39 withdrawn.

Amendments 40 and 41 not moved.

Amendment 42

Moved by Baroness Neville-Rolfe

42: Schedule 3, page 166, line 31, leave out from “used” to end of line 40

Amendment 42 agreed.

Amendments 43 to 43B not moved.

Amendments 44 to 52

Moved by Baroness Neville-Rolfe

44: Schedule 3, page 168, line 24, at end insert—

“790SA Protected information

(1) Section 790N and subsections (1) and (2) of section 790O are subject to—

(a) section 790ZE (protection of information as to usual residential address), and

(b) any provision of regulations made under section 790ZF (protection of material).

(2) Subsection (1) is not to be taken to affect the generality of the power conferred by virtue of section 790ZF(3)(ea).”

45: Schedule 3, page 175, line 1, leave out “where an application is granted,”

46: Schedule 3, page 175, line 3, at end insert—

“(ea) the operation of sections 790N to 790S in cases where an application is made, and”

47: Schedule 3, page 180, line 36, leave out “prepare and publish” and insert “issue”

48: Schedule 3, page 180, leave out line 39

49: Schedule 3, page 180, line 40, leave out from “guidance” to first “in” in line 41

50: Schedule 3, page 180, line 42, at end insert—

“(3A) Before issuing guidance under this paragraph the Secretary of State must lay a draft of it before Parliament.

(3B) If, within the 40-day period, either House of Parliament resolves not to approve the draft guidance, the Secretary of State must take no further steps in relation to it.

(3C) If no such resolution is made within that period, the Secretary of State must issue and publish the guidance in the form of the draft.

(3D) Sub-paragraph (3B) does not prevent a new draft of proposed guidance from being laid before Parliament.

(3E) In this section “the 40-day period”, in relation to draft guidance, means the period of 40 days beginning with the day on which the draft is laid before Parliament (or, if it is not laid before each House on the same day, the later of the days on which it is laid).

(3F) In calculating the 40-day period, no account is to be taken of any period during which—

(a) Parliament is dissolved or prorogued, or

(b) both Houses are adjourned for more than 4 days.

(3G) The Secretary of State may revise guidance issued under this paragraph, and a reference in this paragraph to guidance includes a reference to revised guidance.”

51: Schedule 3, page 181, line 15, after “means” insert “—

( ) ”

52: Schedule 3, page 181, line 18, at end insert “, or

( ) a foreign limited partner.

(5) In this paragraph “foreign limited partner” means an individual who—

(a) participates in arrangements established under the law of a country or territory outside the United Kingdom, and

(b) has the characteristics prescribed by regulations made by the Secretary of State.

(6) Regulations under this paragraph may, in particular, prescribe characteristics by reference to—

(a) the nature of arrangements;

(b) the nature of an individual’s participation in the arrangements.

(7) Regulations under this paragraph are subject to affirmative resolution procedure.”

Amendments 44 to 52 agreed.

Amendment 53 not moved.

Clause 87: Requirement for all company directors to be natural persons

Amendment 54

Moved by Baroness Neville-Rolfe

54: Clause 87, page 61, line 22, leave out “negative” and insert “affirmative”

Amendment 54 agreed.

Clause 92: Duty to deliver confirmation statement instead of annual return

Amendments 55 and 56 not moved.

Amendment 56A

Moved by Lord Mendelsohn

56A: After Clause 103, insert the following new Clause—

“Director’s duties: takeovers and mergers

(1) This section applies to directors of companies involved in any or all of the following—

(a) takeover bids;

(b) merger transactions; and

(c) transactions (not falling within paragraph (a) or (b) that have or may have, directly or indirectly, an effect on the ownership or control of companies of which they are a director.

(2) Directors of companies affected by transactions outlined in subsection (1) must set out clearly in a public statement when making recommendations to shareholders how they have discharged their duties as directors, as outlined in section 172 of the Companies Act 2006 (duty to promote the success of the company).”

Photo of Lord Mendelsohn Lord Mendelsohn Labour

My Lords, I draw attention to my entry in the register of interests, which shows that I have a professional capacity in the corporate finance sector. Amendment 56A concerns directors’ duties in mergers and takeovers. It is a modest measure, and I shall speak to it briefly and swiftly.

On Second Reading in the other place, the Secretary of State raised concerns about whether in mergers and takeovers there are the correct provisions in the code under which companies act. Indeed, public concern about the takeover of Cadburys by Kraft and the AstraZeneca/Pfizer situation led the Secretary of State at that time to say that the Bill would address those matters.

We have an excellent Takeover Panel, which is to be complimented. Since then, the panel has been hard at work introducing measures relating to matters that arose in Kraft/Cadbury, which have led to: a reduction in the time to make offers; long-term considerations to be given greater attention and the determining decision to be made not just on price; greater disclosure of bidders’ plans, fees and the financing of such offers; and the recognition of employees’ interests in takeovers. More recently, AstraZeneca/Pfizer raised other concerns about whether companies can really be trusted to honour the commitments that they made during a takeover bid. The Takeover Panel amended the code to allow companies voluntarily to make a new form of commitment, with a post-offer undertaking with which they would be required to comply, subject to expressly stated qualifications or conditions, which will strengthen the panel’s ability to monitor compliance with such undertakings by enabling the appointment of an independent supervisor, requiring written reports and suchlike.

However, all those issues centre on takeovers and do not deal with mergers, or even non-listed company mergers. Our amendment would enshrine the obligation for the directors of the company affected by all transactions to set out in a public statement when making recommendations how they have discharged their duties as shareholders. All those duties are laid out in the Companies Acts, and we want through the amendment to bring them to the forefront of directors’ thinking.

We are encouraged that after consultation during Committee, many in business and the City see that as a useful complement to the current work, role and position of the Takeover Panel. We are sure that that would fulfil the Secretary of State’s commitment during Second Reading and would also deliver for many practitioners a more dynamic and modern framework and approach. On a number of occasions, there have been transactions where a fulsome explanation was provided for the offeree directors’ recommendation where wider issues and considerations were fully taken into account.

I urge the Government to examine the letters issued by the chairman of Manchester United in May 2005, of Beale plc in January 2015, of Dixons Retail in June 2014 and the offer rejection letter of the AstraZeneca board in May 2014. Our amendment would make that practice, which is fully consistent with the Takeover Panel’s approach, mandatory. I beg to move.

Photo of Baroness Neville-Rolfe Baroness Neville-Rolfe The Parliamentary Under-Secretary of State for Business, Innovation and Skills

My Lords, I thank the noble Lord. As I outlined in Committee, the Government have overseen a number of changes to the takeover code that have made the takeover regime stronger and more robust. Amendment 56A deals with the disclosure of compliance with directors’ duties. As I set out during that debate, Section 172 of the Companies Act 2006 makes it clear that directors have a general duty to promote the success of the company. Directors must comply with their duties at all times. That includes actively considering how they comply with their duties during takeovers, mergers and any other transactions that affect the ownership or control of the company of which they are a director. The question before us is how best to ensure that they do so.

The takeover code already requires offeree companies to provide the board’s opinion on the offer’s effect on,

“all the company’s interests, including, specifically, employment”.

If a company is listed on the London Stock Exchange, the listing rules will also require the company to make an announcement or send an appropriate circular to shareholders and obtain their prior approval for the most significant class 1 transactions.

As I know from personal experience, that covers a considerable amount of the ground suggested by the amendment. As I am sure the noble Lord will agree, significant policy changes need to be underpinned by clear evidence and supporting analysis. Requiring all companies to make disclosures in the broad way proposed would place a heavy burden on business and stifle innovation and entrepreneurship. This is partly because we believe that this amendment could be read as covering not only transactions for publicly traded companies, such as those regulated by the takeover code, but all purchases and sales of private companies. There are 3.3 million private companies in the UK, so the potential for business burden is substantial.

We would also need to consider the possibilities of unintended consequences. This includes considering whether the introduction of such a measure would impact on the overall competitiveness of the UK as a place to do business or as a place to list. It also includes whether a new reporting requirement might result in boiler-plate disclosure, which I think we all agree tends to be better avoided.

The takeover code is overseen by the Takeover Panel, which is independent of government. It is not for government to suggest changes to the code. That said, the panel may wish to reflect upon whether the provisions on disclosure in the code are as effective as they could be in providing shareholders with all the information that they need. I am therefore happy to commit to write to the panel to outline the issues raised during debate in the House today and to seek its view. If the noble Lord feels that it would be helpful, I can write in similar terms to the FCA, which is responsible for the UK listing rules and which dealt, for example, with acquisitions such as that of ABN AMRO by RBS. I hope that the noble Lord feels reassured by these comments and will agree to withdraw his amendment.

Photo of Lord Mendelsohn Lord Mendelsohn Labour 8:00, 9 March 2015

I thank the Minister for that reply. I was busily writing notes and wondering how I might be able to salvage a position, while feeling that today we have not really made as much progress as we would have liked. However, I must say that on this amendment, I am exceedingly grateful for what she has said. We will take those assurances and look forward to hearing the progress with the letters. With many thanks, I beg leave to withdraw the amendment.

Amendment 56A withdrawn.

Clause 106: Determining unfitness and disqualifications: matters to be taken into account

Amendment 57

Moved by Baroness Neville-Rolfe

57: Clause 106, page 86, line 5, leave out from “instrument” to “House” in line 6 and insert—

“(9) An order under this section may not be made unless a draft of the instrument containing it has been laid before, and approved by a resolution of, each”

Amendment 57 agreed.

Amendment 57A not moved.

Consideration on Report adjourned.