Clause 3 - General requirements for accounts

Local Audit and AccountabilityBill [Lords] – in a Public Bill Committee at 2:45 pm on 5th November 2013.

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Photo of Andy Sawford Andy Sawford Shadow Minister (Communities and Local Government) 2:45 pm, 5th November 2013

I beg to move amendment 79, in clause 3, page 2, line 39, leave out paragraph (a).

Photo of Michael Weir Michael Weir Shadow SNP Spokesperson (Business), Shadow SNP Spokesperson (Energy and Climate Change)

With this it will be convenient to discuss amendment 78, in clause 3, page 3, line 13, after ‘accounts’, insert

‘, but only after consultation with relevant persons as may be affected by any changes’.

Photo of Andy Sawford Andy Sawford Shadow Minister (Communities and Local Government)

My hon. Friend the Member for City of Durham gave me a brief respite, and showed me how to do it. The example of the LEPs shows us one of the many holes in the Bill.

The amendments seek to address some of the issues around the financial year. Amendment 79 would delete paragraph (a). The power of the Secretary of State to make regulations throughout the Bill is extensive. We have serious concerns about the number of issues that the Secretary of State has taken away for his determination. In this case it is perhaps slightly more understandable than where he seeks to redefine the English language at later points in the Bill. Here he only seeks to vary the financial year for local authorities.

Relevant authorities should assume that the financial year that they operate on will be determined by statute. That is set out in clause 4 quite clearly to mean the period of 12 months ending 31 March, which is the financial year that most authorities covered by the Bill will be used to. Alternatively it should be determined by custom and precedent. Extraordinary circumstances may mean that the financial year needs to change for a group of authorities. There might be a major structural change in public service organisation where a group of authorities were changed by a subsequent piece of legislation or were wound up as bodies. The Government are wont to do that from time to time as they are doing with the Audit Commission. That subsequent primary legislation would in itself set out a new financial year.

We are concerned about the Secretary of State taking it upon himself to vary at a stroke the financial year that the relevant authorities are operating under. I hope the Minister can give us a sound explanation of why that power is needed? Have his right hon. Friend the Secretary of State or the officials thought of an eventuality that is not immediately obvious to me? Otherwise we will oppose this extraordinary power for the Secretary of State.

We tabled amendment 78 to make the point that any body affected by these changes would expect there to be a proper Government consultation. Again, it speaks to our concern that so many of the details in the Bill are left to regulations and the vagaries of the Secretary of State himself. They could quite clearly be stated in the Bill. If the Minister could assure us on those points we would be grateful. Perhaps he might just agree to support the amendment and omit paragraph (a).

Photo of Brandon Lewis Brandon Lewis The Parliamentary Under-Secretary for Communities and Local Government

Clause 3 sets out the general duties of non-health relevant authorities to maintain accounting records and prepare annual statements of accounts. Clause 31 provides a power by regulation to fill out these statutory requirements in accounts and audit regulations. To assist understanding of the legislation, subsection (8) in clause 3 provides a signpost to the power in clause 31, so that readers are aware that additional requirements may be imposed. This is perhaps not strictly necessary, but I hope the Committee will agree that it is helpful.

The effect of amendment 78 would be to add a requirement to consult to subsection (8). This is completely unnecessary, because a duty to consult before making accounts and audit regulations is already included in subsection (3) of clause 31. So, the amendment would merely clutter the signpost with unnecessary information.

Turning to amendment 79, one of the purposes of clause 3 is to specify the financial year for non-health relevant authorities. It does this in subsection (4), where the period of 12 months ending with 31 March is specified. Under subsection (3) authorities are required to prepare a statement of accounts for each financial year. But subsection (5)(a) allows the Secretary of State to alter this period by regulations. Subsection (6) allows these regulations to make consequential amendments or modifications to the Act or provisions made under it, and under subsection (7) the regulations can apply to all authorities or particular authorities.

Amendment 79 would remove the power to alter the financial year, removing a flexibility that has existed for many years in local government audit legislation. Under current legislation, the financial year can be altered by direction of the Secretary of State, but in preparing the Bill we judged it more appropriate that such a significant change should be made by regulations subject to negative resolution procedure.

Photo of Andy Sawford Andy Sawford Shadow Minister (Communities and Local Government)

Given that it is set out in current law, if the Government consider it important to continue to have the provision, which we consider to be an overreach by the Secretary of State, can the Minister give us an example of when the power has been used in the past? That would clearly be instructive as to why it is important now.

Photo of Brandon Lewis Brandon Lewis The Parliamentary Under-Secretary for Communities and Local Government

That is a fair point. Nobody is suggesting that the power has been used in any great way, but it does give the flexibility for authorities to use it if necessary. As I think the hon. Gentleman said in his opening remarks, some authorities might well need a change of year if there is a change of authorities and one is taking over from the other. The power has not been used often, and we do not expect that to change. I see no reason why it would be any different in future. However, it has an important function. If an existing body is wound up or absorbed into another body on a date other than 31 March, the body will need to produce accounts for its final period, or a body may be established on a date other than 1 April, and accounts will be needed for its initial period to 31 March.

Photo of Andy Sawford Andy Sawford Shadow Minister (Communities and Local Government)

Can the Minister describe to us circumstances in which any relevant authority would be wound up or have its structure changed in such a way that it would not need to provide accounts for a period, or that the year over which it functions would need to vary, without requiring primary or indeed secondary legislation? I am thinking, for example, of a move to create a unitary local government. That would be subject to procedures in this House. Therefore, through those, any sensible changes around the financial year could be made to deal with the specific circumstances, rather than giving the Secretary of State a carte blanche power. In terms of how the Minister frames it, my clear reading is that power is given to the Secretary of State, rather than flexibility to the local authority.

Photo of Brandon Lewis Brandon Lewis The Parliamentary Under-Secretary for Communities and Local Government

The flexibility is there for local authorities should they need it, and the Secretary of State can facilitate it. As I said, any such significant change made by regulations would be subject to the negative procedure. Often, relevant legislation will make the necessary provision  for that, but to safeguard proper accountability to the public—to pick up on an earlier point about future-proofing—the power should be available in case of need. In the light of those explanations, I hope that the hon. Gentleman will withdraw the amendment.

Dr Whitehead rose—

Photo of Andy Sawford Andy Sawford Shadow Minister (Communities and Local Government)

I would be delighted to hear from my hon. Friend, an expert in local government, if he wishes to intervene.

Photo of Alan Whitehead Alan Whitehead Labour, Southampton, Test

I wanted to ask the Minister, but clearly I must ask my hon. Friend, whether he is fully aware that the clause is in fact is a smack bang on the head Henry VIII clause, a type of provision which the Lord Chief Justice said fairly recently should be confined to the dustbin of history. Does my hon. Friend agree with the Lord Chief Justice and that the clause might fit that description, or does he think that the Minister is happy to continue the tradition of Henry VIII clauses in Bills for which he is responsible? He will be aware, of course, that they related to the king’s prerogative to call his particular Acts equivalent in value to Acts of Parliament, bearing in mind that Henry VIII was a particularly oppressive tyrant.

Photo of Michael Weir Michael Weir Shadow SNP Spokesperson (Business), Shadow SNP Spokesperson (Energy and Climate Change)

Order. Before Mr Sawford answers that intervention, I remind Members that interventions should be brief, not speeches.

Photo of Andy Sawford Andy Sawford Shadow Minister (Communities and Local Government)

I appreciated the intervention, although I am sure that hon. Members have noted your advice to us, Mr Weir. My hon. Friend is absolutely right that this is a classic example of a Henry VIII clause. There are so many in the Bill. We became aware of the Secretary of State’s predilection for taking extraordinary powers to himself in the Localism Act 2011. The great contradiction of the Localism Act was that it took a huge number of powers to the great centraliser, the Secretary of State. There are other such examples. Later in the Bill, the Secretary of State will take the power to redefine independence. This will worry democrats and campaigners throughout the ages and will send shock waves around the world.

If the Minister is not persuaded, I urge him to read the excellent piece by Henry Porter called “A new politics: Restrict the use of secondary legislation”, which I would be happy to share with him. It sets out the rationale for restoring power and respect to MPs by ending the overuse of secondary legislation, and particularly the negative procedure. He describes it as

“a blank cheque, if you like. Eventually these refined measures are presented to parliament and made law with almost no debate”.

Photo of Brandon Lewis Brandon Lewis The Parliamentary Under-Secretary for Communities and Local Government 3:00 pm, 5th November 2013

The hon. Gentleman and I had a conversation at the Dispatch Box last week about combined authorities. We said that we would work with him and the team of the right hon. Member for Leeds Central (Hilary Benn) on having one authority for Leeds. That is a good example of why the way things are structured is important. If a combined authority is set up by order, not primary legislation, the Government may not be  able to make provision about its financial year. A clause like this would help a combined authority to move forward.

Photo of Andy Sawford Andy Sawford Shadow Minister (Communities and Local Government)

It was interesting to hear an example. It is a shame that it had to be dragged out of the Minister, because it would have been instructive to hear it earlier, so that we could understand his intentions. I would welcome a further intervention if he could clarify whether changes to a combined authority would themselves require secondary legislation in this House.

Photo of Brandon Lewis Brandon Lewis The Parliamentary Under-Secretary for Communities and Local Government

To clarify, combined authorities are set up by order, not primary legislation, so the Government do not necessarily have the ability to make provision about the financial year. That is what the clause would allow.

Photo of Andy Sawford Andy Sawford Shadow Minister (Communities and Local Government)

The statutory instrument changing or setting up the combined authority could include measures to vary provision for the financial year.

Photo of Andy Sawford Andy Sawford Shadow Minister (Communities and Local Government)

But it could. The point is that if it was necessary for the Secretary of State—or other Secretaries of State, in relation to other relevant authorities—to change provisions relating to a financial year, they could do that at a subsequent time, rather than the Government taking yet another of these sweeping Henry VIII powers.

Photo of Roberta Blackman-Woods Roberta Blackman-Woods Shadow Minister (Communities and Local Government)

My hon. Friend raises a really important point about how these sweeping powers are debated in Parliament. Is not the issue for the Minister that perhaps the Government should not use the negative procedure to the extent that they do? For example, there have been sweeping changes to permit development rights, with no opportunity for discussion or scrutiny in Parliament. That is one of the issues that needs to be addressed.

Photo of Andy Sawford Andy Sawford Shadow Minister (Communities and Local Government)

I thank my hon. Friend. She has been actively following the changes to planning law on the high street, and spoke about them only recently in a debate in the Chamber that I heard. She is quite right. There is a significant loss of accountability, both to this place and to the public, when the Government take these Henry VIII powers. The Government, and particularly the Secretary of State, often rhetorically masquerade as the champion of the public, when the reality is often so different. The armchair auditors policy was readily ditched earlier today by the Minister when it became inconvenient; the same has happened to the commitment to localism, the support for LEPs, and the channelling of funding to LEPs. This is clearly a centralising clause. It is unnecessary, and it takes power to the Secretary of State, away from Parliament, and away from the public.

Photo of Alan Whitehead Alan Whitehead Labour, Southampton, Test

Would my hon. Friend care to emphasise his point by reading into the record the exact wording of subsection 5(b)? If he would not, perhaps I could. It says that the Secretary of state may

“make provision for any requirement in this section not to apply, or to apply with modifications, in relation to the relevant authorities”,

as defined in schedule 2,

“other than health service bodies, specified or described in the regulations.”

What does he make of that? Does he think that that is a bit of a wide power?

Photo of Andy Sawford Andy Sawford Shadow Minister (Communities and Local Government)

My hon. Friend could perhaps indicate with a nod whether he means clause 5(5)(b) on page 4.

Photo of Andy Sawford Andy Sawford Shadow Minister (Communities and Local Government)

That is an excellent example. The Bill has some welcome detail on how some aspects of the new arrangements will operate. We welcome that, and we broadly support those parts of the Bill. We do not want the Bill to be so prescriptive as to rule out local choice. We have had the debate on opt-ins and opt-outs. It is important, however, that there is clarity on how the arrangements will apply. Wherever clarity has been provided in the Bill—my hon. Friend has shown us an excellent example—we find a clause snuck in that empowers the Secretary of State to vary any of that clarity at a stroke. My hon. Friend is absolutely right.

I draw the attention of hon. Members to other powers that the Secretary of State is taking. He will tell us who a “close friend” is, and I look forward to the debate on the definition of that. We will, after all, spend a great deal of time together over the next few weeks, and I wonder whether we might become close friends. We might find that under regulations set out by the Secretary of State in years to come, we are defined in law as close friends, when we had understood that not to be the case from the wording in the Bill.

Photo of Brandon Lewis Brandon Lewis The Parliamentary Under-Secretary for Communities and Local Government

Obviously, I hope that during the passage of the Bill we will become close friends, if we have not already reached that point. I lightly point out that under the Bill, the power to change the financial year would be in regulations, and so would be scrutinised by Parliament.

Photo of Andy Sawford Andy Sawford Shadow Minister (Communities and Local Government)

I thank my hon. Friend—[ Interruption. ] My close friend.

Photo of Andy Sawford Andy Sawford Shadow Minister (Communities and Local Government)

We may think that now, but in years to come, the Secretary of State may vary the financial year through an order or regulations, and that is the point. While there may be some notional fig leaf of future scrutiny through parliamentary procedures, we all know that the reality is—this is the whole point about Henry VIII clauses—that the change will sail through Parliament. I would be surprised if the measures even came to our attention.

What is most likely is that the Secretary of State will use the powers in future years to effect significant change to relevant authorities and to the public they serve, without us ever having debated or envisaged those circumstances. That will just be allowed to happen and, for every one of those provisions in the Bill, that is wrong, except where the Minister can outline the  circumstances envisaged by him or his officials that mean that the provision is helpful and one that we could all support with good faith and common sense. The power to vary financial years is certainly not one such example.

We have tested the principle, and I hope that the Minister has understood our concerns. As we proceed to debate the Government’s creation of these Henry VIII powers in Committee and on Report, I hope that he will seriously consider whether the powers are needed. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Photo of Andy Sawford Andy Sawford Shadow Minister (Communities and Local Government)

I want to speak—in a clause stand part debate, for the first time—about our concerns about the fact that local health bodies are treated differently throughout the Bill. As we rehearsed this morning, we would not have found ourselves in this situation, having prematurely abolished a body without consulting and setting out properly how we would make future arrangements. We certainly would not have produced a Bill with such holes in it. Nevertheless, we support the Government’s intention in some of the detail. No doubt the Minister’s officials have worked to ensure standards of probity, independence, value for money and the effective and efficient use of public money that we seek through proper audit arrangements. We would want those to apply to local and other relevant authorities, as well as to health authorities.

Will the Minister explain why health authorities are specifically exempted from the clause? Lord True and others have raised the same issue in the other place. Although I am certainly receiving an education in how technical and complex legislation can be, I am sure that the Minister will understand that on first reading, it is implicit in clause 3 that a health service body does not need to keep adequate accounting records. The clause rightly states that adequate accounting records must

“show and explain the relevant authority’s transactions...disclose at any time, with...accuracy, the financial position of the authority” and

“enable the authority to ensure that any statements of accounts required to be prepared by the authority comply with the requirements imposed by or under this Act.”

The clause also states that a statement of accounts must be prepared in respect of each financial year.

I understand why provisions are made for health authorities, and that they are different because of prior legislation. I understand that there are Acts that govern aspects of the audit and structural arrangements of health service bodies—the National Health Service Act 2006, for example—but when it comes to points of principle rather than points of practical difference, such as around the financial year, why are health bodies treated so differently? Will the Minister reassure us and comment on the points of difference?

I have taken the time to look at the memorandum submitted by the Department of Health to the Bill Committee. I understand that the points made in it will be enacted through the Bill. For example,

“Clinical Commissioning Groups will appoint their own auditors, based on recommendations from their audit committee”.

So clinical commissioning groups will operate through an audit committee, rather than through an independent audit panel. Many have been critical of independent audit panels. For example, the County Councils Network has questioned the use of such panels, given that, in its view, it has effective audit panels, and given that 90% of local authorities have audit panels. Of course, we have an amendment on the subject later in the Bill, and we hope that the Minister will support our move to ensure that all councils have audit panels. Given that those audit panels operate, councils are asking why they need the bureaucracy and duplication of an independent panel, but we will have that debate in due course.

Is an independent panel necessary to introduce the required level of independence? We are all concerned about that, and I am open to persuasion. There are many practical questions about how independent panels would operate, but I understand that the Government’s intention is that an independent panel will operate with a measure of independence. We wait to hear what the Secretary of State will tell us about the meaning of independence, but the point is that elected members of a local authority would not sit as the independent panel, conduct the procurement process, or judge who was the best auditor to meet the requirements of the local authority and indeed the Act. They would make recommendations back to the council, and in so doing put some distance between the process of appointing the auditor and considering who will best provide the audit services; that will give some assurance to the public. We understand the Government’s intention, but why would they not replicate the arrangements for health service bodies? Why specifically exempt such bodies from clause 3?

There are other significant omissions. The CCGs are subject to some of the provisions of the Act, but will report in the first instance to the NHS Commissioning Board. Some local authorities are not automatically accountable to the Secretary of State for Communities and Local Government. The Bill enables the Government to abolish the Audit Commission, which covered a broad range of authorities, so we want to understand why CCGs are provided for separately.

The NHS body recommended that

“the audit committee will carry out the functions of the independent auditor panel”.

Presumably that was the subject of considerable discussion between Ministers and officials in the Minister’s Department and the Department of Health, so we want to understand how the Minister reached his conclusion and what the compelling case is for the Committee to support the whole range of significant differences in how health bodies are treated. I will gladly provide a copy of that document to the Minister, although he will find it in the evidence to the ad hoc Committee that considered the draft Bill.

From a policy point of view, given that this is the first significant example of health service bodies being exempted, will the Minister explain why that approach has been taken, and elaborate on the point that this is not just about different practical arrangements, such as different financial years in CCGs or even different accounting,  but about setting a different standard? For example, how can he justify the fact that the standard for independence is quite different for health service bodies?

Photo of Alan Whitehead Alan Whitehead Labour, Southampton, Test 3:15 pm, 5th November 2013

The Minister might also reflect on my understanding of how the Bill stands. As far as the accounting records of a relevant authority are concerned, the Minister can, by non-statutory legislative provision, simply not require relevant authorities to keep sufficient records. Under subsection (5)(b), the Minister can determine by fiat that that requirement does not apply, so those adequate accounting records can simply be wiped out. He cannot do that for health service bodies, because of the provisions that cover them. I do not advocate putting additional Henry VIII clauses in legislation, but there is no such clause for health authorities. Such an omission could be rectified either by removing the Henry VIII clause in clause 3, or by introducing a further Henry VIII clause to apply to such authorities. I am not sure which is preferable, but perhaps it should be done for the sake of consistency.

Photo of Andy Sawford Andy Sawford Shadow Minister (Communities and Local Government)

I invite my hon. Friend to speculate on whether the Secretary of State for Health takes a different view on how appropriate it would be to take such significant powers to himself. Perhaps the Secretary of State did not seek such powers, but it would be welcome if the Minister could assure us of that.

Photo of Alan Whitehead Alan Whitehead Labour, Southampton, Test

My hon. Friend’s makes an interesting point. We might have a constitutional hero in shape of the Health Secretary because he might have demanded that such clauses that would indirectly or otherwise affect his Department are not put in legislation. If he has done that, we should know about it, but I fear we will not know, given the rather obfuscatory way in which the Bill has been drafted.

Photo of Brandon Lewis Brandon Lewis The Parliamentary Under-Secretary for Communities and Local Government

The clause refers to accounts, not audit itself. The NHS has a slightly different structure. The base requirement on an authority to keep accounts does not apply to health service bodies because their accounting requirements are set out in the National Health Service Act 2006, as amended by the Health and Social Care Act 2012. Health bodies’ governance agreements are therefore different from those of local authorities. For example, they have no political elected members and they have boards that include designated non-executives. The Department of Health has provided public consultation on the definition of independence, and I am happy to share that proposed definition with the Committee.

Photo of Chris Williamson Chris Williamson Labour, Derby North

For the record, it would be useful to clear up a point that has been made to me. A number of cynical observers have speculated that the exemption of health service bodies from the clause is something to do with the NHS Act and the privatisation of up to 49% of the NHS. It would be helpful if the Minister would allay those concerns and say that this is nothing to do with giving the private sector another free run without subjecting it to the same scrutiny as the public sector.

Photo of Brandon Lewis Brandon Lewis The Parliamentary Under-Secretary for Communities and Local Government

I am disappointed by what the hon. Gentleman says. He is trying to go beyond the scope of what we are talking about. This is about not audits, but  requirements on local authorities to keep accounts. As I made clear in the seconds before he stood up, the measure does not apply to health service bodies because their accounting requirements are already set out in the National Health Service Act 2006. That Act was amended by the 2012 Act, which the hon. Gentleman should read.

Photo of Brandon Lewis Brandon Lewis The Parliamentary Under-Secretary for Communities and Local Government

Not at the moment.

We have taken the opportunity to move away from the outdated formulation of the Audit Commission Act 1998, under which accounts must be made up each year to 31 March. That expression itself harks back to days when accounts were kept in bound ledgers. By the year end, the various accounts were ruled off and totalled, and the final fund statements of balance sheets were written into the very same book. Clause 3 follows a more modern approach, which is in the Companies Act 2006 and charities legislation, by drawing a distinction between the continuing accounting record containing all the day-to-day transactions of the authority and the annual published statement of accounts. The clause sets out basic requirements of the accounting records and the statement of accounts and defines the financial year end as 31 March. Subsection (8) flags up the fact that more detailed provision will be made regarding accounts and audit regulations under clause 31.

Powers are given to amend the period of the financial year and other requirements of the clause by regulation. The power to amend the year-end date exists in current legislation and is exercisable by direction. We thought that it was more appropriate to bring the power under the greater parliamentary scrutiny provided by regulations and to provide for an explicit power to make consequential changes. For example, there may be a need to change the publication dates for a statement of accounts prepared for a period ending in a date other than 31 March.

The power to amend or modify the application of other requirements of the clause would allow, in an exceptional case, the duty to prepare a statement of accounts to be lifted. The use of such powers is expected to be rare, but they provide the flexibility to cope with developments affecting relevant authorities.

Photo of Andy Sawford Andy Sawford Shadow Minister (Communities and Local Government)

The Minister asks us to place a lot of trust in both the intentions behind the clause and the Secretary of State, whoever that might be—I envisage that he will shortly be my right hon. Friend the Member for Leeds Central (Hilary Benn). The Secretary of State will need to be able to make a good judgment about the appropriate use of these regulations. The Minister says that the power will be used by exception, but it would be helpful if he could give us some examples. Given that the clause, like others, allows the Secretary of State to vary how the Bill applies, we clearly would have expected the Government to have based their approach on some consideration of scenarios that might arise, or that have arisen in the past. We would have expected that to be the stimulus for their approach.

Photo of Brandon Lewis Brandon Lewis The Parliamentary Under-Secretary for Communities and Local Government

As I said, it is expected that the powers would be used rarely, but they do provide flexibility to cope with developments affecting relevant authorities—

Photo of Brandon Lewis Brandon Lewis The Parliamentary Under-Secretary for Communities and Local Government

No, I will finish this point. Such a development might be the winding up of a body mid year, or its absorption into another body.

Question put and agreed to.

Clause 3 accordingly ordered to stand part of the Bill.