Yes, it is good to make progress on a number of clauses where we can see the Government’s intent and believe that the clauses are sensible. Sadly, clause 31 is perhaps not, although we will hear from the Minister as to why he considers the clause necessary.
The clause is, for us, another example of overreach by the Secretary of State. We hope that the Government, in light of some of their assurances on how audit operates, will consider it unnecessary and over-prescriptive.
Clause 31 will allow the Secretary of State to make regulations about provision of the form and contents of accounting records; the form, contents, preparation and approval of statements of accounts and so on. Hon. Members will be able to see in subsection (1)(a) to (g) the range of areas in which the Secretary of State may make regulations.
As the Minister has rightly pointed out, there is a great body of law, guidance, custom and practice regarding the conduct of audit in this country in both the private and public sectors through the good work of the Chartered Institute of Public Finance and Accountancy. There will, for example, be a code of audit in the Bill, which will be published in consultation with CIPFA by the Comptroller and Auditor General. We support that and consider that to be a helpful form of guidance.
What we consider to be unhelpful is providing a power for the Secretary of State to meddle in the detail of, for example, how a local authority will present its accounts. Clearly, we would all expect it to do so appropriately, in a way that is transparent to the public and that its auditors consider appropriate. If it were not, the auditors would certainly not be shy in including in their letter to the local authority that they were concerned about the way in which the accounts were kept and prepared. Clearly, it would fall foul of the code that the CAG will set out, and the professional conduct that members of CIPFA, who are the leads in local authorities for the preparation of accounts, would have to be concerned about, given their own professional reputations and qualifications. We do not, therefore, consider the code necessary. There is, however, an extraordinary bit of over-reach, even within a clause that is unnecessary overall. That is subsection (1)(f), which states:
“The Secretary of State may by regulations applying to relevant authorities…make provision about…the financial management of relevant authorities”.
To take that power through secondary legislation to meddle in the financial management of relevant authorities is wholly inappropriate and not in line with the rest of the clause.
The Minister might tell us that it is helpful for there to be guidance on or uniformity in how local authorities and other relevant bodies prepare their accounts, but to say that the Secretary of State can, as he chooses, issue provisions about the financial management of relevant authorities seems wholly disproportionate and out of step with the rest of the clause. Will the Secretary of State use that power to direct how local authorities spend their money? Will he use that, for example, to extend his noted obsession with bins to direct how local authorities should reserve money for that particular interest of his? Will that power provide effectively an open door for him to meddle in what are rightly local authorities’ policy decisions on local expenditure and proper financial management?
The Secretary of State has not been shy in telling local authorities how much they should pay people and, notably, he has told local authorities how much they should keep in reserves. Those are rightly matters for those local authorities: they are dependent on local circumstances and should be judgments left to them. Yet, here he has snuck in, to what otherwise appears to be a fairly innocent—if unnecessary—clause, a huge, sweeping power that will allow him to meddle and advance his role as the great centraliser.
The Secretary of State pretends, through measures such as the Localism Act 2011—I and other hon. Members have supported some of these—to be committed to localism, yet by virtue of the Bill, and this measure in particular, he is taking extraordinary powers in terms of secondary legislation. If he wants to bring forward some kind of Bill, statement or White Paper on financial management in local authorities and what he thinks the priorities should be, he could publish that alongside the review of local government finance for next year. If he wanted to make substantive comment about local authority financial management, he could do so when he sets out the provisional allocation of grant in December, rather than seek this power that, if we do not check today, will allow him to do anything he likes in respect of the financial management of relevant authorities. That is quite extraordinary.
We urge the Minister simply to remove the whole clause, because it is unnecessary. If he is minded to keep the clause, we urge him to remove subsection (1) altogether. If, however, he is minded to keep subsection (1), because for some reason he thinks it necessary, certainly we urge him to support our amendment that would delete paragraph (f), which surely he must agree is out of order.
Nice to see you too, Sir Edward. I have missed you over the weekend, so it is nice to reacquaint ourselves.
I rise to support my hon. Friend, who talked about the over-reach in the clause. He is absolutely right. We hear much rhetoric from the Minister and the Secretary of State about the importance of localism, but, as my hon. Friend pointed out, this measure flies in the face of localism. I cannot believe that Government Members would disagree. The Secretary of State and the Minister are in danger of indulging in doublespeak—they talk about localism but they have included this clause in the Bill.
As my hon. Friend pointed out, we have heard a lot of talk from the Secretary of State in the past three years about the level of reserves held by local authorities, but those reserves were put in place to enable them to cope with the unprecedented cuts made to local authority funding by central Government. Local authorities have inevitably tried to build up their reserves to minimise budgetary and financial disruption and to manage the cuts that have been imposed on them. They draw on their reserves to manage the cuts in an orderly way, and to ensure that there is not a huge impact on members of the public who rely on local authority services.
I recognise the point that the hon. Gentleman is making about reserves enabling councils to plan, but does he not share the frustration of council tax payers who see local authorities—predominantly Labour authorities—cutting vital public services while racking up millions in reserves?
I am not sure whether the hon. Gentleman is living in a parallel universe. I would be interested to hear whether he can cite a specific example of that. He should look at the sorts of situations that local authorities, whether Labour or Conservative, face. This is not a party political issue. Local authorities right across the piece are alarmed about the scale of the cuts being imposed on them, and they have used their reserves to manage the cuts in an orderly way. Of course, it can appear curious that reserves are being built up while cuts are being made, but local authorities are between a rock and a hard place. They have got to use their reserves creatively to minimise the impact of the funding cuts. I hope that the hon. Gentleman will recognise that, because this issue affects not only Labour local authorities, but all local authorities. The situation is patchy, because local authorities in the most deprived parts of the country have been subjected to the biggest cuts, but all local government has had significant reductions.
Local authorities face a difficult situation, and it is unreasonable for the Government to impose a clause such as this, which could meddle with authorities’ ability to manage a financial situation that they are in through no fault of their own, but as a result of Government decisions. If localism means anything, local authorities must be empowered to manage their finances on the ground in a way that reflects their needs and the pressures on them. If Whitehall and the big, heavy hand of the Secretary of State disrupt that ability, it will have a very negative outcome on council tax payers.
I wonder whether the hon. Gentleman would like to comment on the neighbouring local authority to mine, Manchester city council. Although it has £100 million of reserves, last year it received £1 million from the Government to handle the spare bedroom subsidy. It felt that it was so well off that it sent £500,000 back to the Government, but it continues to evict families without spending that money.
Order. Clause 31 is about accounts and audit regulation. I know that the hon. Gentleman, who is very skilled, will keep referring to accounting records and financial management.
Reflecting on your advice to my hon. Friend, Sir Edward, the interventions are instructive when it comes to showing us how the clause might be used. Government Members have sought to make completely inappropriate political points that are factually inaccurate, and that reveal their intention of using the clause to bring about their political view of the world, rather than allowing local authorities to decide on their financial priorities.
My hon. Friend eloquently makes a point that I was about to deal with. The intervention by the right hon. Member for Hazel Grove was instructive, because it indicated that the Government want to adopt a power to intervene in a way that would disrupt and damage a local authority’s ability to manage its finances. He talked about the spare room subsidy. As we know, the money available from the Government for that purpose is inadequate, and by accepting it, local authorities would be making life complicated and difficult, and would not be dealing with the situation. It would have been far better to abolish the bedroom tax, and there was an opportunity to do that when the issue was voted on last week. We know, however, which way he voted.
I will try to help the hon. Gentleman to move away from political point scoring, as the hon. Member for Corby called it, by pointing out that he might want to double-check the clause. He referred to reserves and how councils manage their finances in relation to this clause, but reserves are governed by council tax setting, which is covered by part 2 of the Local Government Act 2003. Regulations made under clause 31 are not relevant to reserves.
In speaking of party political point scoring, I am only responding to interventions from Government Members. The fact is that the power is wide-ranging. I hear the Minister’s assurance, and I will be guided by my hon. Friend the Member for Corby as to our ongoing response, but I still have a good deal of concern about how the power might be used.
Does my hon. Friend agree that the Minister’s argument against the amendment on the grounds that provisions governing local government finance exist elsewhere does not really follow? Clause 31(1)(f) is not necessary, and where the Government want to specify policies concerning local authorities’ financial management with regard to matters such as reserves, they should do so in the appropriate place. They should not adopt a sweeping additional power that would enable them to act contrary to existing provisions on local government finances and reserves.
It is important that we debate the question of financial management. The hon. Gentleman pointed me to the facts of the situation when I mentioned reserves; I will confirm the facts to him. Last year, Derbyshire county council increased its reserves from £234 million to £241 million, while it closed libraries and children’s centres. Does he not agree that it is important to focus on financial management?
I am not sure that that intervention is entirely fair or, indeed, relevant. Derbyshire county council is adjacent to the hon. Gentleman’s constituency, so I am sure that he is aware that it faces huge financial pressures. He can point to the council’s reserves, but I am talking about trying to manage the situation in as undisruptive a way as possible. He can point to Derbyshire, but many Conservative-led local authorities are in a similar situation. This is not a party political point; this is about the role of local government versus central Government, and unnecessary interference by central Government. The Government claim to be in favour of localism, but if they are, what is the point of the provision? The Minister’s intervention indicates that he acknowledges that the clause is unnecessary and irrelevant, because existing powers are available to him. What is the point of this additional clause, unless—as my hon. Friend the Member for Corby suggested, and as I fear—it is being used in an overbearing way to affect decisions at a local level in a way that would have a damaging and disruptive impact on that local authority?
The clause would force local authorities to take a line that the Secretary of State feels is the flavour of the month. We have heard about bins and the Secretary of State’s determination to reintroduce a weekly bin collection. We have heard his continual criticism and complaints about remuneration levels in local authorities. He constantly interferes, yet claims to be a localist. Here is yet another example where his actions do not meet his rhetoric.
I know the hon. Gentleman always views the motivations of the Secretary of State for Communities and Local Government with a degree of suspicion. Is he not reassured by subsection (3), which says that the Secretary of State “must consult” before making these regulations with
“(a) the Comptroller and Auditor General,
(b) such representatives of relevant authorities as the Secretary of State thinks appropriate”?
That probably means the Local Government Association and other bodies in local government. He must also consult
“the recognised supervisory bodies.”
The hon. Gentleman’s rhetoric on the Secretary of State’s motivations and the powers imbued in the clause is undermined by subsection (3), which suggests that the Secretary of State must consult extensively within local government before making any regulations relevant to subsection (1).
It is not so much the Secretary of State’s motives, though I do question those, but his actions that concern me. Actions speak louder than words. It is of course welcome that he will consult. If his previous record is anything to go by, he can consult and then ignore those whom he consulted, if their view does not coincide with his view of the world.
Even in the context of the Bill, there is an example. Will my hon. Friend look at the Secretary of State’s consultation on the provisions we are to discuss shortly? In April 2013, the Secretary of State announced a consultation on protecting the independent press from unfair competition, but he announced plans to legislate within two days of the close of the consultation, clearly having paid no regard to it.
Order. The Chair is in some difficulty. The clause relates to accounts and audit regulations. Paragraph (f) is about the financial management of relevant authorities. I do not know, as I have not yet heard the Minister, whether that relates to financial management of accounts and audit regulations. I am anxious not to have a long debate about the iniquities or otherwise of local government finance, and what the Secretary of State is or is not doing. We could get very wide of the point. I know, Mr Williamson, that you will want to stick strictly to the financial management of accounts and audit regulations, will you not?
I absolutely will, Sir Edward. I will draw my remarks on the clause to a conclusion. My fear is that the clause is intended to be used as a Trojan horse to influence, affect and, indeed, direct decisions of local authorities on the ground. It flies in the face of any concept of localism.
My other concern is this: writ large throughout the Bill is an intention to reduce scrutiny. We heard from Transparency International about the lack of checks and balances, and that that will lead to more fraud and corruption in local authorities. My worry is that this is another opportunity for the Secretary of State to force more privatisation and externalisation on local authorities. As we know, a consequence will be less scrutiny of the private sector organisations providing public services through externalised contracts.
As we have heard from organisations such as Transparency International, that will lead to more fraud and corruption. That is a real fear and concern. If all of us in this room are concerned about the public pound, securing value for money and ensuring tax council tax payers are not ripped off, this is a clause too far. I hope that the Secretary of State will withdraw the entire paragraph.
After a wide-ranging discussion I will try to keep strictly to clause 31, which provides a power to make accounts and audit regulations. The regulations have a long history and form a vital part of the legislative framework for financial management and accountability in local government and other non-health bodies covered by the Bill. The amendment would remove the power to make regulations on the financial management of relevant authorities. This is a new provision, which did not appear in the equivalent power in the Audit Commission Act 1998. It complements and supports another new power in paragraph (g) to make regulations on internal control systems, whose removal has not been proposed, I notice.
These are rapidly developing topics and the use of regulations allows the requirements to be kept up to date with the latest good practice. This is in line with the approach in the private sector, where the Financial Reporting Council publishes the UK corporate governance code, with which listed companies are expected to comply. It is an approach followed in central Government and the national health service, where these issues are also covered by codes. Reliance on primary legislation runs the risk of freezing practice in local government at the time the legislation is passed.
It is worth commenting on the issue of “meddling”. The regulations made under the clause will give legal backing to the CIPFA code, as do the current accounts and audit regulations. The apparently new powers are essential to allow a natural evolution of the accounts and audit regulations in order to keep up with modern practice. These regulations have for decades contained important provisions on financial management and internal control, where they are linked with documents and processes connected with the accounts which were within the regulation-making power. However, now that the financial management and internal control provisions form such a significant part of current practice, which the regulations must cover, we have decided to include a specific power in the clause, so that it is absolutely clear what powers are being granted.
Let me just finish this point. I will give way in a couple of minutes. It may help the Committee if I outline the requirements on financial management and internal control that have been included in the regulations. In the 1974 regulations, the provisions were quite rudimentary, simply requiring the chief finance officer to determine the systems of accounting control and ensure that they were observed. Those regulations also placed a duty on that officer to maintain a current internal audit—a vital part of effective financial management and internal control. Regulations made in 1983 and 1996 broadly maintained these requirements, but strengthened them in a number of ways: in particular the duty to maintain an effective internal audit was transferred from the chief finance officer to the authority itself.
Major changes were made in the 2003 regulations, which placed a duty on the authority to ensure that its financial management was adequate and effective and that there was a sound system of internal control. Authorities were required to review the effectiveness of internal control at least once a year, and a statement on internal control had to accompany the statement of accounts. The internal audit duty was also strengthened. Important amending regulations were made in 2006, requiring the review of internal controls to be considered by the body or a committee. The current accounts and audit regulations, which date from 2011, broadly maintain these requirements with some modernising of the language.
That development of the regulations over the years has been accompanied by the issue of professional guidance by the Chartered Institute of Public Finance and Accountancy, which complements and expands on the core duties set out in the regulations. These developments have mirrored developments in the private sector following the publication of the Cadbury report in 1992, and in the rest of the public sector.
As ever, it is helpful when we hear the Minister’s response and understand the intention behind the measures in the Bill. Some of what he says is reassuring. On the point about internal control, he noted that the Opposition have not highlighted that provision, but we see it as different to the specific point about financial management of relevant authorities. Will the Minister provide examples of why that power may be necessary and how may it be used? The one example he has given so far, specifying sound financial management, is clearly the whole purpose of the audit itself—indeed of the Bill. It is not something that needs to be specified in secondary legislation by the Secretary of State.
That is why it is important that we get the right provisions in any given Bill, so that the Bill does not just outline what we are trying to do, but is able not only to change the wording of policy, but to change and develop the policy in practice.
In central Government and the NHS, provision can be made by codes issued under the authority of the Treasury and the Department of Health, but for local government we must proceed by legal provision. Regulations are the appropriate medium to use, so that the requirements can keep pace with developments in best practice. That is what has happened over the past 20 years, and the addition of paragraphs (f) and (g) to the accounts and audit regulations will give explicit recognition to that important function of the regulations.
As I said earlier, the amendment would remove only paragraph (f), on financial management, leaving paragraph (g), on internal control, in place. That would make little sense. Internal control exists within the overall financial management framework of a local authority. To be able to regulate one but not the other risks leaving the framework incomplete. Key aspects of financial management, such as internal audit; the role of committees in reviewing their annual governance statement; and the overall duty to maintain adequate and effective financial management will be covered by the regulations. Removing the power from the clause would call into question our ability to include such provisions in future regulations.
I concur with my hon. Friend the Member for Corby that the way in which the Minister is describing the provision is reassuring. Despite his words, however, there remains considerable concern for us about the use of subsection (1)(f). If it is used in the way he describes in relation to paragraph (g), it sounds entirely reasonable, but the provision remain a stand-alone paragraph in a clause that is about accounts and audit regulations, which would give considerable power—the sort of power that has been suggested by some of his colleagues in this debate, for example, the power to direct local authorities on how they manage their reserves. That is only one example. The power is broad ranging. Is the Minister not concerned that he is creating an extraordinary precedent, not only for the current Secretary of State, but for any future Secretary of State?
If the hon. Gentleman looks in Hansard at what my hon. Friends were saying about the use of reserves in response to the hon. Member for Derby North, he will see that they were responding to his comments on the stringencies of local government finance. I will not test your patience, Sir Edward, by getting into the strengths of local government finance and how well it has coped, with the latest BBC report highlighting how satisfied people are.
I cannot overemphasise the importance of effective financial management in local government. In this country, we have been mercifully free of the sort of troubles we currently see in some American cities, for example. In part, that is due to the strong emphasis on sound finances that has always been in our local government system, but it is vital that the legislative framework provides for proper direction and support for the future.
I was interested by the Minister’s reference to American cities. I am assuming that the implication is that some of the problems in American cities could have been dealt with by direction to the city in how they manage their money, not simply how they regulate their accounts, audit procedures or financial reporting. Is that the power the clause is seeking for the Secretary of State?
I repeat exactly what I said a few seconds after the quote the hon. Gentleman has referred to. In part, it is due to the strong emphasis on sound finances, which has always been in our local government finance system. We need to ensure that we keep it that way and allow the system to be flexible enough to develop as things move forward and practice moves.
The Public Accounts Committee has recently taken a close interest in financial viability and financial control systems in local government. The Department for Communities and Local Government’s accounting officer has set out his responsibilities for those systems in a statement that has been considered by the PAC. His power to act on those responsibilities depends on the ability of Ministers to set an adequate legislative framework for local government. That is essential, so that Parliament can receive the assurance it needs about the proper use of public funds.
In light of my explanation, I hope that the hon. Gentleman will withdraw his amendment.
I thank the Minister for his response, but I do not feel it adequately addresses the points raised by my hon. Friends.
The Minister makes the provision sound benign, describing the way in which it updates practice in the world of audit and financial management. He clearly sees paragraphs (f) and (g) as inseparable, but my hon. Friend the Member for Sheffield Central highlighted how they are separate points and allow the Secretary of State to do very different things, and, specifically in relation to paragraph (f), to meddle in financial management. That is relevant.
The Minister tells us that the provision might be used in relation to the audit and accounts of local authorities. Indeed, Sir Edward, I heard you ruminating on that and whether the wording of the clause is such that paragraph (f) would confine the use of the power.
Is not the hon. Gentleman alighting on the key point, which the Minister also raised, that the term “financial management” as it relates to the clause is quite narrowly defined? In accounting terms, when people talk about financial management in this type of context, they are specifically relating it to a framework by which the accounts and the framework of local authority accounting is to be taken into account, so financial management in the clause is narrowly defined. Is that not the key point that should reassure him?
The hon. Member for Halesowen and Rowley Regis makes a characteristically helpful intervention. He thinks the best of the Government’s motives, as we would expect, but we too want to think the best of the intentions behind the clause. I was looking to see whether the Minister was nodding in the direction of his hon. Friend to confirm the point he made. If the Minister had made that point clearly in his remarks, it would have been incredibly helpful, but he was not able to give us any clear examples of how the clause would be used. Part of the process of scrutinising the Bill is to help people in the future to interpret the meaning of the clause, and to ensure that the parameters in which the clause could be used are more clearly set out on the record.
In fact, the Minister made much more general reference to the Government’s need for powers to meddle in financial management, causing us greater concern, as did interventions from some Government Members on the policy decisions of local authorities on how they manage their finances. If the intention behind the clause is to have some very limited powers over financial management, relevant to audit in a local authority and clearly linked to the points on internal control the Minister made well, that is something altogether different from a clause which, as it stands—certainly by any reading of the Minister’s inability to give examples or clarify how it could be used—could be used much more broadly to meddle with policy decisions that are rightly the preserve of local authorities accountable to their local electors.
I cannot recall the Minister using the word “meddle” in relation to paragraph (f), but the point remains that in common practice, when any regulatory body talks about financial management—if we look at the Companies Act 2006 and at other ways of approaching audit and control—financial management is used in a very specific, defined way, and that obviously applies to the clause.
I thank the hon. Gentleman for that intervention. No disrespect to the Minister, but I would be happy to see the hon. Gentleman responding for the Government on this point. He makes a much more helpful contribution to the debate and is more reassuring on how the power could be used. As the paragraph stands, it is inconsistent with the intentions set out around the rest of the clause. It is certainly inconsistent with the Government’s much vaunted commitment to localism, and I am a localist, so I want to help them to be consistent in their claiming to be the champions of localism.
Frankly, it would be unconstitutional in the United States and in most western countries for the central Government to take this kind of power and to meddle in local financial affairs. If it were debated in the United States there would be public uproar about the overreach of the federal Government, yet the Government have slipped it through our parliamentary system without any real explanation, clarification or limitation of how it can be used. I note that the Minister failed to respond to my hon. Friend the Member for Sheffield Central, who sought clarification on how the power will be used.
My hon. Friend the Member for Derby North called the clause a Trojan horse. Again, I suspect that there is a difference of opinion about the Government’s motivation. The Government may not have designed it as a Trojan horse, and we should give them credit for that. The officials who drafted subsection (1) may have thought that it was helpful. However, we cannot deny that it can be used as a Trojan horse.
We do not want to oppose something that could be important and helpful to matters such as internal control and the conduct of audit, on which the Opposition have sought to bring scrutiny to bear. It would be wrong of us to limit the ability of auditors to properly hold local authorities and other authorities to account. However, we are struggling because we have not been assured that that is the intended effect of paragraph (f).
The hon. Gentleman has been generous in giving way today. I appreciate that he is not referring to the clause as a Trojan horse just to make political capital and to score political points, and he has stressed that he does not seek to do that. Clause 31 specifically and clearly refers to how accounting procedures are dealt with, so it seems self-explanatory that it refers to accounting procedures rather than anything else. As I said in my main remarks, the regulations that may be made under the clause will give legal backing to the CIPFA code, on which I know the hon. Gentleman puts great weight, and to the current accounts and audit regulations—but it is obviously a matter for the hon. Gentleman.
As I made clear, we want to understand why the Government think the clause is necessary. The Minister’s view is that it is necessary and that some elements of it carry forward previous provisions relating to the world in which the Audit Commission was responsible for audit. However, my point, which the Minister again failed to address by conflating the debate on the whole clause, is that paragraph (f) leaps off the page.
I will have one more go at trying to allay the hon. Gentleman’s fears. It is clear that the clause seeks to deal with the key aspects of financial management, such as internal audit and the basic content of annual accounts, as the current accounts and audit regulations already do. We do not intend to change the scope of the regulations, and I struggle to see how even the Opposition can argue that the clause will do that.
I thank the Minister. That was his most helpful reply so far, and it would be helpful if future Secretaries of State and others to refer back to it. He said that paragraph (f) relates to the basic content of annual accounts and matters of internal control. If that is the effect of the clause in the long run, we can understand the Government’s intentions. I ask the Minister to go away and think about whether that can be made clearer and more explicit on the face of the Bill, although it is now in Hansard. It is a shame that we have had to draw it out of the Minister, because we all want to make rapid progress on the clause. We will return to this on Report to ensure that there is the strongest possible clarification that the measure will not be used in an inappropriate way. In thanking my hon. Friends for making incredibly helpful, important and telling contributions to the debate, which have finally drawn some clarification, I beg leave to withdraw the amendment.