Clause 174

Legal Services Bill [Lords] – in a Public Bill Committee at 6:00 pm on 26th June 2007.

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The levy

Photo of Henry Bellingham Henry Bellingham Shadow Minister (Justice) 6:15 pm, 26th June 2007

I beg to move amendment No. 301, in clause 174, page 92, line 6, at end insert—

‘( ) In apportioning or imposing a levy the Board shall have regard to—

(a) the extent to which any resulting increase in the regulatory fees of a Regulator will be reasonable and proportionate in comparison to the fees already levied on relevant regulated persons;

(b) the extent to which the levy might discourage entry to or retention in the regulated sector;

(c) the extent to which the number of persons regulated by a regulator might be reduced in consequence of the amount of the levy;

(d) the extent to which the regulator might be disadvantaged and another regulator might derive an advantage, in particular through the movement between regulators of regulated persons as a consequence of any differences in the levy imposed;

(e) the likely ability of the Regulator to raise the levy from Regulated Persons;

(f) the impact of the levy on the Regulator’s viability.’.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss amendment

No. 302, in clause 175, page 93, line 13, at end insert—

‘( ) A debt recovered under subsection (5) may only be recovered from practising fees held by a regulator.’.

Photo of Henry Bellingham Henry Bellingham Shadow Minister (Justice)

I shall be very brief, because we are making substantial progress. The clause is on the levy, which is an important mechanism in how the board will run its affairs. The amendment would insert a new subsection setting out various factors to which the board must have regard when imposing a levy. It is basically a tidying-up exercise and would put various qualifications into the clause. It would improve the Bill, addressing in some detail a concern that a number of outside bodies have put to us. That is why it is important that the clause be amended as suggested, and I hope that the Minister will consider the amendment.

If the wording of the amendment is not up to scratch and the Minister can consider it and return to us on it, we will be more than happy to accept that. The amendment is probing, but it strikes me as a sensible way of improving an important clause. The same can be said for amendment No. 302, which would add to clause 175 the words:

“A debt recovered under subsection (5) may only be recovered from practising fees held by a regulator.”

That speaks for itself and would remove any semblance of doubt on the matter.

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

I have listened carefully to both what the hon. Gentleman has said and what was said in the other place on the matter. I reiterate the point that my right hon. and noble Friend Baroness Ashton made. She highlighted the fact that the board would have to be satisfied that the apportionment of the levy was in accordance with fair principles before making levy rules. I am still of the strong opinion that that is the right way to go about it, rather than set out in the Bill a prescriptive list of factors as the amendment would.

To set such a list in primary legislation would restrict the board and preclude it from considering factors that might subsequently prove to be equally, or even more, important. I recognise that the list sets out, among other things, what the board should consider, but my concern is that any list would put pressure on the board to consider the matters on it above all else for fear of its decision being reviewed. That would restrict the flexibility that I have constantly said will be an important part of the board’s function.

I understand where the amendments come from and I have great sympathy with the views of the smaller legal organisations that want to ensure that they are not disproportionately burdened by the levy. They say that they do not want a one-size-fits-all approach to the matter, and I agree absolutely and wholeheartedly with them, which is why we need flexibility. The amendments would reduce that flexibility by predetermining some of the factors, which might be to the detriment of some of the smaller organisations that will be subject to the levy. On that basis, I ask the hon. Gentleman to withdraw amendment No. 301.

On amendment No. 302, for the record, I would in general expect money owed in respect of the levy to be paid from practice fee income, but I do not think that it is appropriate for the Bill to state that practice fees are the only source of funds by which debts to the board may be paid. Once again, that would restrict the flexibility of a regulator to meet a debt that might best be dealt with in a way that suits its own financial arrangements. On that basis, I do not support the amendment.

It is quite unusual for legislation to restrict the way in which moneys owed may be recovered. In effect, it would fetter the court’s ability to enforce payment of debts. The standard procedure for recovery of debts should apply, so I ask the hon. Gentleman to withdraw the amendment.

Photo of Henry Bellingham Henry Bellingham Shadow Minister (Justice)

The Minister has stressed the point about flexibility. I am glad that we gave the issue another airing—it was discussed in the other place, as she rightly said, but the proposals were rejected. I am glad that we have had another discussion. In the light of what the Minister said, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

I beg to move amendment No. 237, in clause 174, page 92, line 14, after ‘means’, insert ‘two-thirds of’.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss the following amendments:

No. 238, in clause 174, page 92, line 16, leave out ‘including’ and insert ‘excluding’.

No. 239, in clause 174, page 92, line 17, leave out ‘and’ and insert ‘but including’.

No. 240, in clause 174, page 92, line 26, leave out ‘including’ and insert ‘excluding’.

No. 241, in clause 174, page 92, line 33, leave out ‘means’ and insert ‘excludes’.

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

The amendments are about the start-up and running costs of the board. They propose dealing with those matters differently so that the Government would meet a third of the running costs of the LSB, and would bear the start-up costs rather than transfer them to the legal profession.

The Joint Committee on the Draft Legal Services Bill supports the amendments. The Government intend that the cost of the regulatory regime, including the LSB—the umbrella organisation—should be borne by the legal profession. The amendment would split the responsibility. No body, and certainly not the Law Society, has argued that the professions should meet the costs of the lower tier of regulation, by which I mean the regulators and the office of legal complaints—that is the current position. The Law Society supports the status quo, as do we.

The supervisory tier is a different matter because its responsibilities are different. To ask the legal profession to meet its costs is not only unreasonable but illogical and inconsistent with other Government policies. Sir David Clementi’s report, to which we have referred often today, said:

“The issue arises as to how the LSB should be paid for. At present a substantial part of the oversight function is paid for by the State: judicial oversight falls to the taxpayer, as does the cost of the oversight function carried out by Government departments. The arguments in favour of the Government contributing to the cost of oversight functions, beyond the fact that it does already, are...that the LSB, in pursuit of its objectives...such as ‘access to justice’, has a wider role in the public interest than the oversight of practitioners in the legal sector”

—the LSB has a duty to the public as well as to the legal profession—and

“that an element of payment by other than the bodies being regulated confirms that the regulator is independent of the regulatee.”

That is an important principle We discussed that earlier in a different context.

Sir David Clementi went on:

“There is an interesting precedent in the proposed funding of the Financial Reporting Council. Its funding is to be split, two thirds falling to the private sector and one third to Government. How the split should be made between the private sector and Government for the LSB would need to be covered in statute and would, therefore, be the subject of Parliamentary scrutiny.”

He pointed out that the Government already meet a third of the cost of the Financial Reporting Council. I understand that they also meet the full cost of the supervisory tier of health care regulation, the Council for Healthcare Regulatory Excellence. They have not  given a significant or convincing explanation of why they consider it appropriate for them to meet part of the supervisory tier of regulation in accountancy, but not in legal services.

One function of the Legal Services Board is to consider what additional legal services should come within the regulatory net. That function is currently the Government’s function and does not form part of the regulation of legal services. It is carried out entirely in the public interest rather than in the interest of providers of legal services. It seems therefore particularly unreasonable for the Government to expect those costs to be borne by the legal profession. The Joint Committee considered the issue and concluded that the legal profession should not be expected to finance public policy considerations currently funded in-house by the Government.

At the moment, the Government are saying that they will shift responsibility from the public purse and pass it entirely from the taxpayer collectively to the legal profession exclusively. They currently meet the costs of the legal service ombudsman, whose functions will be absorbed in the Office for Legal Complaints, now to be taken over entirely by the legal profession, and part of the costs of the Legal Services Complaints Commissioner referred to in glowing terms today by the Minister and others, whose post is to be abolished by the Bill.

The Government also meet the costs associated with the legal services consultative panel and the costs of the work in relation to the legal services regulation of the Lord Chancellor and the senior judiciary. A substantive amount of work is funded by the Government. Contributing on a continuing basis towards the cost of regulation would thus maintain the existing position rather than represent a new spending commitment by the Government. We are not asking for more responsibility, but for the status quo to be preserved in essence.

I hope that I can persuade the Minister that, although the Government will always try to reduce their expenditure commitments, the amount spent on such matters as a proportion of their expenditure is extremely small. The sum that goes to the Lord Chancellor’s budget at present relative to the other budgets of state is extremely small. I hope that the Government will agree that there is no absolute requirement to shuffle off that responsibility.

I have referred to the running costs, but I want now to say a word about start-up costs. I am talking particularly in relation to amendment No. 241. Under the present provisions of the Bill, the Government intend that not only the full continuing costs of both tiers of the regulatory system, but the start-up costs, should be borne entirely by the legal profession. Our amendment would change that and require the Government to fund the start-up costs.

Anyone would accept that it is unreasonable for all the start-up costs to be met by the profession. As we have heard from the Minister’s own mouth, the functions of the Legal Services Board are essentially to provide public assurance about the regulatory system rather than do a front-line job. It is even more unreasonable for the transitional costs to be paid by the legal profession, bearing in mind that it has its system in place and that all have said that it has been ameliorated and made more effective. To say, “Hang on, guys, you not only have to pay for what you are  doing now and for what you have been doing, but for getting from where you are to where the Government want you to be,” seems unreasonable.

The Joint Committee’s look at the draft Bill, in paragraph 455, said:

“We recommend that the Government give further consideration to funding the start up costs of the new regulatory system. We understand that such assurances have been given in respect of Part 2 of the Compensation Bill which introduces a new regulatory regime for claims management.”

The Committee went on to say, in paragraph 467, that

“if the start-up costs of the new system are to be met through levies and charges on front line regulators, initial costs to the profession will be high and will be met both by practitioners and consumers. This adds weight to the argument that the start up costs of the LSB and OLC should be borne by Government.”

The Government’s only substantive argument so far is the assertion that those being regulated should pay for the regulatory system. However, there is no explanation why, for example, accountancy—a profession of a similar type, often discussed in the Bill in the context of working together—should be regulated and funded in one way, but law should now be regulated differently and should now be funded differently, which is by the practitioners themselves.

There is no incentive in the proposals for Government to make sure that the start-up costs are limited. By definition, if the Government do the job and give the bill to someone else, there is no incentive to keep the bill down. If the Government do the job and know that they have to pay for it, there will be in-house regulatory systems to control the costs. The estimates provided by PricewaterhouseCoopers, discussed in Committee in the last few days, were very high for the transitional process. Government indications are now that start-up costs are going to be even higher. All the more reason for the Government to know that they have a responsibility, which will hopefully add to the pressure to keep the costs down.

My last point is about the precedent across Government. It is not unusual for the start-up costs of regulatory bodies to be met by the Government, whatever is done about the running costs later on. The accountancy Financial Reporting Council, referred to earlier, had the Government meeting the full transitional costs of establishing the new body and a third of the continuing costs. That was the approach that the Government took with the Claims Management Regulator, which we discussed in a Committee like this not many months ago. Before that, the Government took the same approach to the Council for Licensed Conveyancers. There have been several precedents for one type. There is now a change. The Joint Committee did not believe the change was right. Sir David Clementi did not believe the change was right. The Government have really not made their case. I hope that they see the benefit to the taxpayer, to the consumer and to the profession from moving in an agreed way. I hope that the Minister will be helpful and seriously consider this, because at the moment there is severe discontent that all the burden is being put on the professions to pay for a system that, by definition, is a system of the Government’s creation.

Photo of Bridget Prentice Bridget Prentice Parliamentary Under-Secretary, Ministry of Justice 6:30 pm, 26th June 2007

During the Report stage in the other place, my right hon. and noble Friend Baroness Ashton set out for their lordships the further work that we have done in updating the financial analysis conducted by PWC in support of the draft Bill. I have written to hon. Members to set out how we have approached that work and provide more detailed figures. Hon. Members should also now have received a copy of the supplement to the regulatory impact assessment, which was published alongside the Bill. That updates the cost figures.

As I explained in that letter, and in the supplement to the RIA, following our work on the revised costs, implementation now stands at £32.1 million and the revised running costs are £4 million for the board and £19.9 million for the OLC. Of those costs, £2.4 million will fall to the Ministry of Justice, so the Government are making a contribution.

It is obviously important that both hon. Members and the legal profession can have some confidence in the figures. I want to emphasise, therefore, that the adjustments that have been made are based on robust and detailed analysis. Baroness Ashton has set out the revised figure for implementation that will now form the basis of the implementation budget for the board and the OLC, when they finally assume management responsibility.

I come now to the principled argument about who should pay. Let me say right from the outset that I do not accept that the Government should contribute more than the £2.4 million that I have already mentioned—either to the establishment costs or to the costs of running the board and the OLC. We all know that the legal services market is thriving, and that there was a turnover of some £22 billion in 2005. The legal professions are in a very privileged position in that they operate in a market where they provide reserved legal services.

I believe absolutely that the increased consumer confidence that will result from a demonstrably independent regulatory and complaints-handling service will benefit the lawyers. The opportunities that the Bill creates for alternative business structures will benefit lawyers as well. So it seems to me entirely right that, as they will be beneficiaries, they should pay.

Another argument has been that the Bill will allow the Government to make considerable savings. I am not at all convinced of that. We will make some savings, but when we do, the savings should be invested in other priority areas where the investment is needed and where other funding sources are unavailable. I am sure that I do not need to mention other aspects within the Ministry of Justice in relation to which hon. Members on both sides would like to see us invest some of that money.

Equally I cannot accept that the Government should contribute because the board plays a public interest role. The legal professional bodies currently raise fees from the members that are not solely intended to pay for regulatory costs and that also fund important public interest activities in which those bodies participate—on human rights and law reform, for example. That approach should continue under the new framework.

The hon. Member for North Southwark and Bermondsey mentioned the arguments on funding arrangements that are in place for other regulatory organisations—in particular, the Financial Reporting Council. I have considered the funding arrangements of other bodies, including the FRC, the Council for Healthcare Regulatory Excellence, the Financial Services Authority, the financial services ombudsman, the pensions regulator, the Office of Communications, and the claims management regulator. I discovered no rigid approach; the Government fund establishments and running costs in some cases but not others.

On the FRC in particular, its accounting, auditing and corporate governance activities are funded by a tripartite arrangement with contributions from the accountancy professions, the business community and Government. Other costs, connected with audit inspections and the investigation and discipline of accountants, are funded entirely by the accountancy professions. The Government provide no funding in relation to actuaries. There are therefore big differences between systems, and the decision must be made on a case-by-case basis. Our starting position is that unless there is a compelling case for public funding there should be no increase in public expenditure, and I do not believe that there is such a case in the present instance.

I know that the legal profession has argued that, if the Government made a contribution, that would incentivise them and us to reduce costs. We are absolutely committed to ensuring value for money in the reforms. That is why the Bill contains the safeguards that it does. The levy rules are subject to extensive consultation requirements, the Lord Chancellor’s consent and parliamentary scrutiny through the negative procedure and, under clause 147(5)(c), the affirmative procedure. All those measures will ensure that the new bodies’ spending will be properly contained. As I said, the revised figures that we have announced will form the implementation budget for the board and the OLC. That is another check on costs.

I am conscious that there is some concern about the impact that the costs involved in establishing the board and the OLC might have on individual practitioners. I reassure Members that the Government are clear that we will not seek to recover those costs in a single year; rather, we will do so on a phased basis, and we share that with the professionals in every discussion about the matter. That will help relieve any potential pressure on the bodies themselves and on their practitioners.

I will continue to work with stakeholders on the details of the process, just as I want the Government to work with them on all other aspects of the Bill’s implementation. Only last Friday, officials held a useful discussion with stakeholders about costs, and it was agreed that further individual meetings with stakeholders will take place to ensure that they are fully sighted on all the issues, methodology and assumptions underpinning our work on cost. That open dialogue is important if we are to retain the confidence of the professional bodies as well as of consumers and others. I am committed to ensuring that we do so. On that basis, I ask the hon. Member for North Southwark and Bermondsey to withdraw his amendment.

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

There was quite a lot in the Minister’s reply. I shall pick up on a couple of points, because the issue is substantive and significant for the professionals.

First, the Minister said that the Government will contribute £2.4 million. Can she put on the record why that sum has been plucked out? She gave figures according to the latest assessment that she called robust. Can she put on the record what percentage of the start-up costs she and her Department believe that sum represents? I have been arguing that the payment is the start-up costs and a third of the running costs. It would be helpful to see where we are starting from in this debate, or where we have got to in our difference of views.

Secondly, I should be interested to know whether the Government have any independent support for their position. I have not heard the Minister cite any. If there is any, where does it come from, and will the Government put that on the record? Independent support exists for the position for which I am arguing.

Thirdly, the one point with which the Minister did not deal was the argument that if the profession is to fund all but the £2.4 million, that does not support the proposition that the board is a brand new body, entirely independent of the profession, set up by Government to give that independence. It is inconsistent, because the system will still be funded by the people against whom complaints will be made. In terms of showing the independence of the agency, I do not think that the Government have made the case.

Fourthly, the Minister conceded that savings will be made by Government. She said that they were small. I should be grateful for her best estimate on advice of the smallest and largest band of savings a year in each of the first three years so that we can understand, because we are all interested in the budget of the Ministry of Justice. I am intrigued, as other people watching and listening will be, to know what the expected savings are. It would be helpful to have that on the record.

Lastly, the Minister said, “If we make some savings, there are all these wonderful candidates for other spend.” The one wonderful candidate that the hon. Member for North-West Norfolk and I have argued should get more expenditure is legal aid, but Ministers in the Department are saying that there will be no more expenditure on legal aid. On Sunday, according to my television, the new Labour leader said to the nation that the new Government will listen and will serve the people and bow down in front of them. They should therefore be listening.

If the Minister had said to us that the Government were going to make savings of £1 million, which would be added to the legal aid budget, we would have been tempted, but I have not heard her say that. She has said that there will be some small savings, which the Government will spend somewhere, although she will not tell us where. She tells us that she still does not know whether the Department will get a significant increase in the comprehensive spending review, which has now been delayed until the autumn.

I would be grateful for quick answers. With the agreement of the Committee, I shall not press for a  Division now. The Minister dealt with the comparative points to an extent. I want to go away and examine accountancy set-up costs, accountancy running costs and the costs of the Healthcare Commission, which the Minister talked about. There are issues that it would be sensible to consider again. If she can answer the specific questions, we can go into that debate better informed.

Photo of Bridget Prentice Bridget Prentice Parliamentary Under-Secretary, Ministry of Justice 6:45 pm, 26th June 2007

I will do my best to answer at least some of the questions that the hon. Gentleman has raised. I will, of course, write to him and to the Committee about any that I do not answer.

The figure of £2.4 million relates to the closure of the Office of the Legal Services Ombudsman and the Office of the Legal Services Complaints Commissioner, plus the Ministry of Justice’s costs associated with the internal running of the programme. That is about 7.5 per cent. of the implementation costs. The hon. Gentleman said that he felt that the independence of the board and the OLC would be compromised, to which I say that both the Financial Services Authority and the Financial Ombudsman Service are entirely funded by the professions that they regulate. I do not think that any of us consider that they lack independence. Despite the fact that the professions will provide the funding, there is no need to believe that the board and the OLC will not be absolutely independent.

On some of the other issues, I will have to write to the hon. Gentleman. I want to ensure that everyone on the Committee is aware of how we see the money being spent. He made a plea for increased spending on legal aid; I had a feeling in my heart of hearts that that would be the first call, should there be any spare money. It is not for me to make those spending commitments on behalf of the Government, but I will try to give him the figures of likely savings to the Ministry of Justice and an idea of how the Department might use them.

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

I am grateful for that response. By way of a postscript, I add that we have today been given the chance to pick up the Criminal Justice and Immigration Bill, which is the first product of the Ministry of Justice—the first Bill born of its womb. I venture to suggest that we might save a lot of money if we did not have yet another Bill with more apparent remedies, just like the past 10 years’ worth of criminal justice Bills. Will the Minister be kind enough to tell us the cost to her Department of implementing that Bill? Some of us would say that that money would be better spent elsewhere. I look forward to as full an answer as possible. I would certainly rather that the Committee has all the information to look at. We will return to the issue on Report, but in the meantime, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 17, in clause 174, page 92, line 16, leave out ‘the Compensation Act 2006’ and insert ‘any other enactment’.—[Bridget Prentice.]

Clause 174, as amended, ordered to stand part of the Bill.

Clauses 175 and 176 ordered to stand part of the Bill.