Clause 37

Legal Services Bill [Lords] – in a Public Bill Committee at 5:30 pm on 19th June 2007.

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Financial penalties

Photo of Simon Hughes Simon Hughes Shadow Attorney General, Party Chair, Liberal Democrats

I beg to move amendment No. 225, in clause 37, page 18, line 30, at end insert—

‘( ) The Board may not determine that it is appropriate to impose a penalty unless it is satisfied that the matter cannot be adequately addressed by the Board exercising the powers available to it under sections 31 to 36.’.

The amendment is supported by the hon. Member for North-West Norfolk and some of his hon. friends. I will read the proposal that was put to me and others by the Law Society which explains why the amendment is both sensible and justified. In the clauses so far, we have looked at various ways in which there can intervention. We have considered censure in clauses 35 and 36, directions that can be given by the board in clauses 32, 33 and 34. We considered the setting of performance targets in clause 31. Before that, we examined the rules that require the separation of regulatory and representative functions.

We are now discussing a clause on financial penalties. The amendment is designed to restrict the powers of the board by prohibiting it from imposing a financial penalty unless it is satisfied that it cannot adequately address the matter by exercising its other powers. It would put penalties on a gradated scale and would force the board to consider other types of intervention, such as direction or censure, before imposing a financial penalty. That position would be consistent with that of other regulatory regimes that have been established by Parliament in recent years. The amendment would ensure that the Legal Services Board could not impose fines unreasonably. It would also ensure that any action that is taken does not hit the wrong target.

It is commonplace for direct regulators of services, particularly those provided commercially, to havethe power to fine those who fail to comply with requirements. That is unarguable. The recent McCrory report emphasised the importance of the availability to regulators of a wide range of sanctions, including the power to fine, to ensure that the sanction for the breach of regulatory requirements is sufficient to removeany financial incentive to fail to comply with responsibilities. It is sensible to have a financial penalty to deal with wrongful activity for financial gain. That is entirely logical. The Law Society is seeking powers to fine solicitors for regulatory breaches in appropriate circumstances so that, as a regulator, it has an effective range of available sanctions, rather than having to refer all such cases to the Solicitors Disciplinary Tribunal. That is entirely sensible, too.

I have been told—I have thought about it and I cannot dispute it—that it is unusual for there to be a power to fine a body that carries out regulatory, non-commercial activities. I have been given the examples of the Council for Healthcare Regulatory Excellence, which has no power to fine any professional medical bodies, and the Financial Reporting Council, which has no power to fine the accountancy bodies.

Given that the Legal Services Board has extensive powers to make directions, which are by definition enforceable, it is far from clear that a power to fine approved regulators is necessary. The Joint Committee picked that up in its report during pre-legislative scrutiny and the Government said that they would reconsider the issue, but they have not come back with an answer to the concerns expressed in the Joint Committee or elsewhere. In the Lords, the issue was debated in part. Baroness Ashton, the Minister, sought to justify the power to fine with reference to the position of other regulators, including the Financial Services Authority and Ofgem. Both of those directly regulate service providers, however; there is no intervening tier, so they do not supervise other regulators. The Legal Services Board is, by definition, the umbrella. Other regulators, of which the Law Society is one, have been approved to set up in anticipation of the legislation. It is not a parallel situation. We are talking about a three-tier structure; the other organisations that have such a power to fine are part of a two-tier structure.

I have been told that the only example that supports the Minister’s case is the power of the Legal Services Complaints Commissioner, which was created under an addition to the Access to Justice Act 1999. It was intended to cover a specific problem with the Law Society’s handling of consumer complaints. I remember the debate on the subject, and there was thought to be a need to give the commissioner more teeth in that context. It is unusual for a supervisory regulator to have the power fine another regulator, so that power needs to be confined to circumstances in which no other sanction is appropriate. The first argument against the provision is therefore that it is not based on precedent and it appears wrong in principle.

The second argument is that, with legal services regulation, day-to-day responsibility for regulatory action will, by definition, rest with the regulatory arm of the relevant professional body. The representative side will not be able to control the way in which the regulatory arm operates; indeed, it would be a serious breach of the principle of independence if it sought to do so. One of our great debates was about ensuring that we separate regulation and representation absolutely and rightfully.

Any fine would not impact on the regulatory arm unless it were charged against the regulation side’s own budget, which would defeat the whole purpose of having a fine, because that would mean fining the fund that is there to put things right and to deal with problems. Any such fine would effectively be borne by the professional body, and thus its members and the representative arm. Members of the regulatory arm would not even be subject to any sanction from an electorate for having incurred the fine, as they are all appointed under Nolan principles rather than elected, so they could not be ousted. It would not be the equivalent of a vote of no confidence that would result in them leaving their office.

There is a risk that lawyers who are regulated by the approved regulator will bear the whole burden of any such fine without being able to exercise any effective influence over the people whose failings led to the  imposition of the fine. That seems wrong to me, as a matter of principle. I believe that the Joint Committee also thought it wrong, but the answers given in the Lords did not address the issue. That is my second reason for asking the Minister to be sympathetic.

In the debates in the other place, the Government tabled an amendment to ensure that approved regulators cannot be fined for the failings of their regulatory arm unless a direction has already been made under clause 31. That provides some welcome protection for approved regulators. By placing appropriate requirements on their regulatory arms, they will be able to ensure that they can intervene where necessary to ensure that directions are complied with, but there is still a significant risk of fines being used inappropriately, because the current drafting does not prevent that. It does not seem to guarantee that other options have to be considered before that power is used.

My last point is that there is frequent media pressure on professional bodies across the board, not just legal bodies, and on regulators to flex their muscles and exercise their powers to intervene. That is rightful and understandable in certain cases; you and many others, Sir Nicholas, have been keen, in our talks on rail services in this place, that the regulator should be able to intervene when railway companies do not do their jobs properly and services are not what constituents of yours, mine and our colleagues would wish. It is absolutely right that there should be calls for that to happen, but that alone is not a good justification for it to be the common practice if other remedies are appropriate and available.

Good regulatory practice requires regulators to use the least draconian sanction that will meet the regulatory need. It would be quite wrong to fine an approved regulator simply because circumstances have arisen in which there is, in theory at least, a power to do so. The power to fine should properly be exercised only when the Legal Services Board is satisfied, under the provisions in the Bill, that no lesser sanction, such as direction or censure, will suffice. I believe that the Government have accepted that principle as far as the board’s power to intervene in the functions of approved regulators is concerned. I think that that was said to be generally the case by Ministers elsewhere, and I suggest that the same principles should apply to fines as it does elsewhere. On that basis, I hope that the Minister will accept our arguments, or at least take them away to consider, and will be sympathetic.

Photo of Henry Bellingham Henry Bellingham Shadow Minister (Justice)

My name and those of my colleagues have, indeed, been added to the amendment. It is a simple and straightforward, but nevertheless important, safeguard to ensure that the LSB does not impose financial penalties where lesser sanctions would suffice. The hon. Member for North Southwark and Bermondsey made a very powerful case. It is designed to prevent capricious, over-the-top fining. It is to ensure that the fining option is the last option available. I take on point his point: there will be quite a lot of pressure on the Legal Services Board to make examples and to flex its muscles. If it is to do that, an extra constraint needs to be built in. That is why we support the amendment and I hope that the Minister will accept it.

Photo of John Mann John Mann PPS (Rt Hon Richard Caborn, Minister of State), Department for Culture, Media & Sport 5:45 pm, 19th June 2007

You missed, I suspect, Sir Nicholas, the floods and downpours across the north of England over the weekend. Hon. Members are more than making up for it with their attempts to water down the Bill. Indeed, one wonders whether one is living in a parallel universe. I expect the Tardis to appear at any moment. I know which Time Lord will be backing the people and which will be backing the solicitors, barristers and judges.

It is absolutely extraordinary in the context of the Bill and what is happening in the real world that we are seeing attempt after attempt after attempt by the vested interests of the legal profession to look after their own. If this was trade union legislation 15 years ago, if this was the immediate fining of trade unions for technical flaws in the holding of industrial action ballots,would the hon. Member for North-West Norfolk(Mr Bellingham) argue that it was capricious and over the top? I think not.

Let me balance the argument and cite the case of four of my constituents who three years ago madea consumer complaint against Rayleys Solicitors. Rayleys Solicitors disputed it. They disputed the fact that these four, elderly, ill miners had a complaint. All four went with me to visit Rayleys unexpectedly, with a little bit of publicity, and we went inside and met the senior partners. We explained their case for justice in no uncertain terms. Still Rayleys refused to pay out. They still do today. There have been no fines on Rayleys. They are allowed to prevaricate. Why? Because every time one thing happens, the legal profession comes up with a legal excuse for challenging it.

My constituents were required to go through70 pages of technical legal arguments as the defence to a very straightforward complaint that they had been diddled and double charged over meagre compensation for emphysema, money they needed to give them a better quality of life. They had 70 pages of legal argument thrown at them as the defence that they are required to make a judgment on. It is only because of the common sense of the Law Society in allowing representation from people like me that these claims have ever seen the light of day.

Is it a coincidence that no miner or textile worker put in complaints before tiny numbers of MPs started to do so on their behalf? Is it just a coincidence that none of them did so, that they did not realise that they could challenge the solicitor who had, in some cases, stolen the money from them? That was done quite openly and quite deliberately and from large numbers of them. The solicitors then threw the legal book at them, wriggling every way, challenging the Law Society, challenging the regulation. They issued writs, bullied, threatened and intimidated.

There are solicitors who visited complainants at home. There are solicitors who sent third parties to visit complainants at home. For example, my constituent, after his third heart attack, is no longer in the statistics of the Law Society because he withdrew his complaint, fearing that the pressures being put on him by the solicitors who had done him over would kill him. Some of my constituents who, in the process of attempting to get justice, died—

Photo of John Mann John Mann PPS (Rt Hon Richard Caborn, Minister of State), Department for Culture, Media & Sport

It is relevant. The hon. Gentleman, who spoke about capriciousness and being over the top, says that it is not relevant. What is relevant in the context of this debate and these attempts to water down the Bill is nowhere to be found in the hon. Gentleman’s and the Liberal Democratsamendment.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

Order. May I say to the Committee that what the hon. Gentleman is saying is relevant? When it is not, I will tell him.

Photo of John Mann John Mann PPS (Rt Hon Richard Caborn, Minister of State), Department for Culture, Media & Sport

I implicitly trust your sound judgment, Sir Nicholas. As ever, I shall stick entirely to the relevant facts brought from my experience of my constituents, who were unable to be heard in the Joint Committee—I was unfortunately unable to be chosen to serve on that Committee—whose voices shouldbe heard in the case of these amendments and, if necessary, others. Any watering down of the powers in the Bill will be resisted. If the point was put to the people outside, the 60 million who are not part of the cosy legal profession, I know which way they would go. They would say that the Bill is a modest attempt at self-regulation. It is a generous attempt at allowing self-regulation—I applaud that light touch and think that it is what is appropriate for Government, and therefore I am out of touch with most of my constituents, who would like me to be far more robust. I call on the Minister strongly to reject these representations and others to water down the Bill because those with vested interests, not least in the House of Lords, wish to protect them.

Photo of Simon Hughes Simon Hughes Shadow Attorney General, Party Chair, Liberal Democrats

The hon. Gentleman speaks with absolute justification, as far as I know, about solicitors’ abuse of their professional responsibility when acting in the sorts of cases that he has brought regularly to the attention of the House and dealt with locally. Nobody, and certainly nobody in my party, defends that activity. Nobody is suggesting that solicitors who behave inappropriately should not be dealt with.

If the hon. Gentleman is good enough to reconsider by re-reading the amendment, he will see that it does not say that there should not be fines or punishment for solicitors. It does not say that solicitors’ firms should not be punished or brought to book for breaking the rules and behaving in the disgraceful way that he described. It does not say that there should not be a fine on the Law Society, if appropriate. All that it says is that if the second tier of punishment, which involves punishment of the regulator—the Law Society in the case of solicitors—is a financial penalty, it has to come after consideration of the appropriateness of other matters. I do not think that that is contradictory to anything that the hon. Gentleman argues for. I certainly did not intend it to be, and on reflection, if he is fair-minded about it, I do not think that he will think that the amendment has that effect.

Photo of Bridget Prentice Bridget Prentice Parliamentary Under-Secretary, Ministry of Justice

I am a wee bit surprised to see these amendments. They were debated for some time in the other place, and we made a number of concessions at that time. I know that my hon. Friend the Member for Bassetlaw will not be happy to hear me say that, but we made some concessions and as a result the exercise of the board’s powers to fine is possible only where there  has been a failure to meet the requirements imposed by clauses 30, 32 and 51. I am not persuaded that we should go any further than the scope of the amendments that we have already made. To do so would put the board’s powers to impose a financial penalty in the same category as its powers, for example, to cancel the approved regulator’s designation. That is what the amendment seems to seek to do, and so it does not recognise the regulatory chasm between the power to impose a financial penalty and the power to take away completely a body’s ability to authorise and regulate the provisions of reserved legal activities.

The amendment, therefore, would reduce the board’s ability to exercise what I believe is a key regulatory function to make appointments if it were no longer able to respond with the flexibility that it needs to address failing regulators. That is inconsistent with the current approach to regulatory sanctioning regimes, which argue for greater flexibility and the use of the widest range of sanctions possible.

The hon. Member for North Southwark and Bermondsey said that he could not find many examples of one regulator fining another. Almost certainly he is right. The model of oversight regulation that we are proposing is unusual, but Sir David Clementi thought it preferable to the establishment of a single body along the lines of the Securities and Futures Authority because it will retain the best parts of the existing arrangements. He argued also that the LSB should have the maximum regulatory flexibility, which is consistent with the findings of the Macrory review, which argued that regulators should have the widest range of sanctions possible.

We have modified the fining power to meet some of the concerns of the Law Society. I have to say to Opposition Members that the consumer bodies would not support the amendment if it meant that we were watering down the powers any further. There might be times when it is necessary to impose a financial penalty—for example, where there were repeated failings that could be addressed by censure each time, but where, accumulatively, the situation was out of control and firm action was clearly necessary. If the regulator expects a lesser power to be exercised each time it fails in the same way, and if that power has no real impact on the regulator in preventing future failings, clearly that regulator has far less incentive to correct those failings. The board would be stuck then with issuing the same censure over and again and the problem would never be resolved.

Photo of Stephen Hesford Stephen Hesford PPS (Rt Hon Baroness Amos, President of the Council), Privy Council Office

Is not the point a little shorter? I know that the Minister is trying to do justice to what has been said, but is the point not that the amendment is completely unnecessary because, under clause 39(2)(c), one of the grounds for an appeal against financial penalties is that the penalty is unreasonable? If it were unreasonable, and there should have been a lesser penalty, the appeals procedure would find that to be the case.

Photo of Bridget Prentice Bridget Prentice Parliamentary Under-Secretary, Ministry of Justice

My hon. Friend is absolutely right. I raised clause 39 for that very reason in an earlier debate. The approved regulators would have that  opportunity if they thought that the fine was unreasonable. I said specifically that almost certainly they would appeal on the basis of the amount, rather than anything else. He is right to point that out.

Consumers, who are at the heart of the Bill, consider that the power to impose a financial penalty is essential to the regulator’s remit. I think that they are right. It sends a clear message to the regulated body that it must improve its standards, and acts as a reminder to other bodies that failings will not go unnoticed or unattended. That is vital for the consumer. Unnecessary restraints would deal a blow to the very heart of the principles in the Bill. If I need to convince the Opposition of that, Which? did a survey and found that nearly four out of five people—78 per cent.—agreed that the independent regulator should be able to fine the legal profession if it did not do its job properly. More than 53 per cent. agreed with that strongly.

I urge the Committee to reject the amendment for the reasons given by me and by my hon. Friends. I cannot accept any further constraints on the power. Its purpose is clear, its necessity is verifiable and its scope is balanced. I hope that Opposition Members will reflect on what has been said and reconsider whether they are helping the legal profession by giving consumers the belief that this is another opportunity for it to look after its own interests rather than theirs.

Photo of Simon Hughes Simon Hughes Shadow Attorney General, Party Chair, Liberal Democrats 6:00 pm, 19th June 2007

The Minister knows that I am a reflective individual. I shall make three short points. The first is that Which?, a good organisation that produces a good magazine—I have often consulted it, as have other Committee members—does not surprise the world by finding that a majority of the public at large would like solicitors who do not do their job properly to be fined. I do not think that that quite wins the argument of itself. It is a simple question to which the likely answer is yes.

To answer the contribution of the hon. Member for Wirral, West, of course there is a power of appeal on the basis that a fine is unreasonable. That is as it should be. The argument was not that there should be no power to fine; it was simply that the power to fine should be the end of the options available. However, despite what arguments may still exist for the amendment and for others like it, the Minister has asked me to withdraw it and to reflect. I am happy to reflect. I shall go back and read what she said earlier when the debate is printed. On that basis, and on the basis that I shall return to the matter if necessary, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 37 ordered to stand part of the Bill.

Clauses 38 to 40 ordered to stand part of the Bill.