Environment Bill (Sixteenth sitting)
Tuesday 17th November 2020
(3 years, 5 months ago)
Public Bill CommitteesRead Full debate Environment Act 2021 View all Environment Act 2021 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 17 November 2020 - (17 Nov 2020)
The Committee divided: - Ayes: 5 / Noes: 9 - Question accordingly negatived.
The Committee divided: - Ayes: 5 / Noes: 10 - Question accordingly negatived.
The Chair
I welcome hon. Members back to line-by-line consideration of the Environment Bill. I particularly welcome the hon. Member for Ynys Môn, who joins our Committee for the first time.
Clause 75
Water resources management plans, drought plans and joint proposals
Dr Alan Whitehead (Southampton, Test) (Lab)
I beg to move amendment 9, in clause 75, page 66, line 11, leave out “may” and insert “must”.
We start this morning with an amendment relating to clause 75. It will not be a surprise to any member of the Committee. The suggestion is to replace the word “may” in the line under the heading “Plans and joint proposals: regulations about procedure”. Proposed new section 39F of the Water Industry Act 1991 states:
“The Minister may by regulations make provision about the procedure for preparing and publishing—
(a) a water resources management plan,
(b) a drought plan, and
(c) a joint proposal”.
It seems to the Opposition that it is very important that these things—a management plan, drought plan and joint proposal—are actually published and that provision is made about the procedure for publishing them. That is a central part of this clause.
As we have said in this Committee previously, no aspersions are cast in any direction concerning the present intentions of Ministers, but I remind the Committee that we are making legislation for a very long time and that there might conceivably be circumstances in which Ministers less well inclined towards the process light upon this clause and decide that it is not really so important that regulations are made, hence we think that the word “must” should be inserted in the Bill.
We have pointed on a number of occasions to the lack of “musts” in the Bill. I think that this is one of the more important ones and I hope that the Minister, even if she is not prepared to consider a number of the other “musts”, will have laid by a little store of sympathy for this “must” proposal, because it relates, as I think she would agree, to a very important feature of this clause.
Fleur Anderson (Putney) (Lab)
I would like to add to the argument about the fact that this legislation will stand for a long time. Even the fact that clause 75 amends the Water Industry Act 1991 is a reminder to us of how long we expect this legislation to be in force and people to be acting on it accordingly. The Water Industry Act became law 29 years ago and we are still discussing it, and how we will amend it, now. Many years from now, we will still be discussing this legislation, and therefore it is so important to get it right. That is why a “must” instead of a “may” is very important, especially in this clause.
This amendment seeks especially to talk about regional plans. Currently, planning on a regional rather than a company-by-company basis is non-statutory, and so to put this on a statutory basis would be a gear change in terms of water resource management. I would welcome any moves to put regional plans on a statutory footing, but the Government have to be clearer on the circumstances in which the Secretary of State would use the powers and how adherence to the regional plans would be encouraged if it were not clearly set out here. The current drafting is too weak and does not give this clause the teeth that it needs.
By changing “may” to “must”, amendment 9 would tighten up the clause considerably and make it far more effective. It would require the Secretary of State to make provision setting out the procedure for preparing and publishing water resources management plans, drought plans and joint proposals. I would like the Minister, before rejecting the amendment and dismissing it as unnecessary, to answer the following questions. Under what circumstances would the Secretary of State expect to use the powers created by clause 75 to direct water companies to prepare and publish joint proposals—the regional plans? There is a concern that that will not become standard practice if it is not expected. If the powers are not used and regional water resources planning remains on a non-statutory footing—if it is just a “may”—how will the Secretary of State ensure that companies produce water resources management plans that are aligned with the regional plans?
In the absence of a commitment to using the powers created under clause 75 to direct regional planning, can the Minister assure us that the Secretary of State will direct the Department for Environment, Food and Rural Affairs to set out the need for company plans to align fully with regional plans in its strategic policy statement to Ofwat? Otherwise, many who are listening to and reading this debate will remain concerned that companies’ individual plans could deviate from regional plans, affecting our ability to provide sustainable water resources for society in the light of the worrying projections set out in the Environment Agency’s national framework for water resources.
Anthony Browne (South Cambridgeshire) (Con)
I want to make a general philosophical point about “mays” and “musts”. We have been talking about this matter a lot over the past couple of weeks. Obviously, our end objectives are the same: we all want a Bill that strengthens environmental protection, and a strong and independent Office for Environmental Protection.
I realise that this clause is slightly different from earlier clauses, but I will make the generic point that when we say that something should be a “must” rather than a “may”, we are often prescribing what the OEP can do. I realise that this amendment is about Ministers, but if we accepted all the amendments on this point, the OEP would end up with a whole list of things that it must do, as prescribed by the Committee, and it would spend all its time ticking those boxes. We would take agency away from the OEP.
As a parent, if I go around telling my children, “You must do this, and you must do that,” they do not feel very independent. If I tell them that they have to be grown up and make their own decisions, they feel more empowered. Throughout this whole process—we have another couple of weeks to consider amendments—it is worth thinking about what being so directive towards the OEP would do to its agency and independence.
The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs (Rebecca Pow)
It is good to be back this week. I welcome the shadow Minister again, and the new member of our Committee, my hon. Friend the Member for Ynys Môn. I thank the hon. Member for Southampton, Test for the amendment. I understand that the intention is to give certainty that Ministers will make secondary legislation about the procedure for preparing and publishing water resources management plans, drought plans and joint proposals, but he is again playing on my sympathies over “may” and “must”. He will not be surprised that I am not going to relent on this one.
I think the hon. Member will agree that the explanation is quite clear. The duties under sections 37A and 39B of the Water Industry Act 1991, which we have already heard about, to prepare and maintain water resources management plans and drought plans remain on statutory undertakers; they are “must” duties on the Minister. This was raised by the hon. Member for Putney. The plans are already on a statutory footing, and the Minister’s power to make regulations about procedural matters, to which the amendment refers, does not remove those duties. Ministers fully understand that water undertakers need to know the procedural requirements for fulfilling their duties in good time.
I thank my hon. Friend the Member for South Cambridgeshire for the good points that he made about independence and his children. It is entirely appropriate to provide Ministers with flexibility on when and how this provision is given effect.
Daniel Zeichner (Cambridge) (Lab)
I come from a very dry region, which adjoins the constituency of the hon. Member for South Cambridgeshire. Some water companies, such as Anglian Water, are already working with other parts of the country, and there are regional plans coming into place. Does the Minister agree that it would be much better to give legal certainty by specifying that as the amendment suggests?
Rebecca Pow
I thank the hon. Gentleman for that point, and lots of companies are already working towards that. We will talk later in more detail about how water companies will work holistically together to deal with the whole water landscape.
In the Bill, the Secretary of State has powers to direct future procedure under statutory legislation if he thinks, for example, that more attention needs to be given to what the hon. Gentleman suggests. There are existing powers in section 37B of the 1991 Act to make regulations for procedural requirements, and those are replaced by new section 39F. The existing powers have already been used by Ministers to make the Water Resources Management Plan Regulations 2007 and the Drought Plan Regulations 2005.
Water companies’ plans are revised every five years. The plans are prepared at different times within their own five-year cycles. When exercising these powers, Ministers in England therefore need to be flexible and mindful of when to introduce the new planning requirements, so as not to have unnecessary impacts on the preparation of water companies’ plans, many of which are under way. I therefore ask the hon. Gentleman to withdraw the amendment.
Dr Whitehead
I think the Minister knows what my answer is going to be. The hon. Member for South Cambridgeshire made a fair point about what would happen if we put in every “must” in every place in the Bill, and how that might constrain the agencies that are responsible for carrying out its business, but that is not what the Opposition has done with our repeated suggestions for the inclusion of “mays” and “musts”.
We agree with the hon. Gentleman that it is not appropriate for an agency to be constrained in that way if, for example, it may decide to carry out an action relating to an investigation or look at the extent to which it ought to do certain things. In that case, it is not appropriate to use “must”, and “may” is perfectly appropriate. There are, however, other circumstances where it is clear that an agency, or indeed the Minister, ought to do something.
In his analysis, the hon. Member for South Cambridgeshire made reference to parents and children, and I would say that this is on the parents’ side. It is a “must” in the same way as a parent must not leave their child on a bare hillside for the evening to see whether they survive. That is the sort of “must” this is, rather than a stipulation that a parent or a child must do certain things. I would put the Minister in the role of the parent, as far as this process is concerned. If the Minister is, in a sense, the parent of these activities, the Minister ought to act like a good parent. If there is a suggestion in the Bill that the Minister “may” not, that should be recognised.
In answer to the Minister’s question, I will not press this amendment to a Division. I know that this is becoming a little formulaic, but the Minister may want to reflect on whether drafting amendments need to be made at certain places in the Bill, either now or at a future date, bearing in mind that this is not a spray-paint job as far as “mays” and “musts” are concerned. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Dr Alan Whitehead
I beg to move amendment 130, in clause 75, page 66, line 22, at end insert
“including persons or bodies representing the interests of those likely to be affected.”
I will give the game away straight away by saying that this is a probing amendment, as I am sure the Minister will be pleased to learn, and we seek her comments on it. As my hon. Friend the Member for Putney said, the 1991 Act has been with us for a while. Does the Minister think that bodies that represent those who are likely to be affected by a water resources proposal or a drought plan should be included in the process of preparing and publishing regulations? There is a distinction to be made between the Government deciding to make a plan, and those who would be particularly affected by that plan—for example, the hon. Members who would be affected by a drought plan in Cambridgeshire—having input into the process. There is a relationship between a high-level plan and the reality of any changes on the ground, and it is important to have both perspectives.
That is the reason for this amendment, and the Minister may wish to comment on whether she agrees with the principle behind it, even if the wording is not quite right. I would particularly like to hear whether she is signed up to the idea that I have set out and, if so, whether there are other ways of ensuring that the drawing up of these plans and proposals is a two-way process.
Fleur Anderson
I would like to unpack the amendment slightly more and highlight some areas that may be affected by the Government’s proposals. We would be very interested to hear from the Minister how this Bill will be enacted on the ground after it has progressed through both Houses.
Consultation is key during any planned preparation. The plans to clean up our water across the country are essential and, unless they are done correctly and with the full engagement of all the representative bodies, they will not work. If that happens, the current plateauing of environmental protection, which many people find very concerning, will continue.
The removal of section 37A(8) from the Water Industry Act 1991will remove a list of other bodies. The Act states:
“Before preparing its water resources management plan…the water undertaker shall consult”—
the use of the word “shall” is interesting. Following on from the comments of the hon. Member for South Cambridgeshire, I think that our job in this Bill is to say what is within the OEP’s remit, what must happen and what the OEP, with its flexibility, can decide should happen. We need to set that framework, and an essential part of that is engagement with all the right agencies. The proposed deletion will remove the Environment Agency; Natural Resources Wales; the Water Services Regulation Authority, or Ofwat; the Secretary of State; and any licensed water supplier, as listed in the 1991 Act. These bodies will not be included in this Bill unless we add the text of the amendment, which is, I think, very reasonable,
“including persons or bodies representing the interests of those likely to be affected”.
I do not think that that is overly restrictive, because it would give the OEP the ability to decide who those persons or bodies are. It does, though, say that they must be consulted. Has the Minister considered how to ensure that the new provisions on the preparation of plans by water undertakers will retain stakeholder engagement requirements? Does the Minister believe that the proposals are sufficient to ensure that the Environment Agency, in particular, is fully engaged in plan development? Its involvement is crucial to ensure a high level of environmental scrutiny of water resources options. That is essential for both the working of the Environment Agency and the effectiveness of any plans.
The Minister may suggest that this is dealt with through other requirements such as the customer challenge groups. However, those arrangements are typically extremely narrow and do not enable the wide engagement of the stakeholder that is necessary for the best plans—world-leading plans. Amendment 30 would ensure that consultation rights for stakeholders—
Fleur Anderson
Thank you, Mr Gray. Amendment 130 would ensure that consultation rights for stakeholders could be created under such regulations and allow these provisions to include a requirement for
“persons or bodies representing the interests of those likely to be affected”
by a plan to be consulted during the plan preparation. This requirement should be included in the Bill to make it as clear as possible and to ensure that full consultation with stakeholders takes place, so that we have the best possible water resources management plans and the best likelihood of increasing water quality across the country.
Rebecca Pow
I thank the shadow Minister for this amendment—a probing amendment, as he said. I understand the intention to ensure that those who are likely to be affected by water resource management plans, drought plans and joint proposals be consulted. The Government recognise that planning for water resources is strengthened by the involvement of a range of stakeholders, both individuals and representative organisations, in the development of the plans, as was outlined by the hon. Members who spoke.
The Government intend that stakeholders will be involved in the preparation and delivery of these plans in England. Clause 75 enables Ministers to set out in regulations which bodies are to be consulted on the preparation of plans. Under existing powers, Ministers have set out a long list of relevant consultees in the Water Resources Management Plan Regulations 2007 and the Drought Plan Regulations 2005. The Environment Agency’s national framework for water resources in England, which was published in March, already gives further clarity. It sets out how we expect water undertakers in England to engage with stakeholders to prepare their plans in future.
Reflecting on the comments from the hon. Member for Putney, I want to clarify that Ministers in England want to ensure that the process of developing these plans is open and transparent—more so than ever—through these changes and that stakeholders are involved at the right time, so that they can effectively collaborate on the plans. If we are to encourage this more holistic joint-working approach, that is really important.
While the current wording of “persons” is not defined in the Water Industry Act 1991, the Interpretation Act 1978, which applies here, defines “persons” as including
“a body of persons corporate or unincorporate”—
that is, a natural person or a legal person. It includes a partnership, which would include representative bodies. The meaning of “persons” is very broad and would include representative bodies, making the amendment unnecessary. I hope that provides clarity.
The changes introduced by clause 75 will help the plans to deliver cross-sector and mutually beneficial outcomes, which we all want for the wider water environment, as well to secure water supplies. I hope, therefore, that the hon. Member for Southampton, Test will see that his probing amendment is unnecessary. He was right to ask those questions, but I hope that I have answered them. I respectfully ask him to withdraw his amendment.
Dr Whitehead
I have, as a result of this debate, begun to feel that this is less of a probing amendment than I initially thought. My hon. Friend the Member for Putney made an important point, which I neglected to include in my contribution. The Water Industry Act 1991 included these things. At that time, there were specifications about agencies and bodies that should be consulted and involved in the plans. That has all been swept away.
While the Minister makes the possibly important point about the phrase “persons to be consulted” in proposed new section 37F(3), that appears to be a rather feeble replacement for what was firmly in the previous piece of legislation. At the very least, I would like some assurance. The Minister says that the phrase “persons to be consulted” could be interpreted as persons in the collective. By a transfer of reasoning, we might therefore get to the Environment Agency and various other people in the end. I would like the Minister to actually shorten that course and say, “Yes, it will,” so far as the Bill is concerned.
Rebecca Pow
The hon. Gentleman makes a good point, but just for clarity, we can make regulations to specify what persons or bodies must be consulted during the plan preparations, and we plan to use that power. I just wanted to get that on the record.
Dr Whitehead
I think we may be getting there. When the Minister says, “we can make regulations”, is she saying that the Government will make regulations that effectively restore that arrangement, in terms of persons, by a regulatory route, as I was trying to tease out? It would be helpful if the Minister said that it is very likely that regulations will come about that include a better definition of persons, so that those bodies can effectively be brought back into the process in a way that the Bill seems to have neglected to do.
Dr Whitehead
The hon. Gentleman would like to encourage the Minister to say something else on this.
Rebecca Pow
I will intervene one more time, just for clarity. As I said, we made the Water Resources Management Plan Regulations 2007 and the Drought Plan Regulations 2005, which demonstrates that we have already done something like what the hon. Gentleman asks for. I reiterate that we can make regulations to specify what persons or bodies must be consulted during plan preparations, and we plan to use that power.
Dr Whitehead
I thank the Minister for that. That is 65% of the way there. On balance, I am happy to withdraw the amendment. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendments made: 47, in clause 75, page 67, line 20, leave out “the Assembly” and insert “Senedd Cymru”.
See Amendment 28.
Amendment 48, in clause 75, page 67, line 32, leave out “the Assembly” and insert “Senedd Cymru”.—(Rebecca Pow.)
See Amendment 28.
Clause 75, as amended, ordered to stand part of the Bill.
Clause 76
Drainage and sewerage management plans
Richard Graham (Gloucester) (Con)
I beg to move amendment 200, in clause 76, page 68, line 17, at end insert—
“(ca) the water quality and impact of the discharges of the undertaker’s drainage system and sewerage system,”.
This is a probing amendment, tabled in the name of my right hon. Friend the Member for Ludlow (Philip Dunne), myself and others. The last amendment I tabled proposed to change one word and add one letter to the Bill’s proposed environmental improvement plans. This probing amendment adds 16 words to a subsection on drainage and sewerage management plans. Both amendments have in common the shared interests of our environment and us as beneficiaries of that environment.
Amendment 200 focuses on drainage and sewerage management plans. It is an uncomfortable fact for us all that a huge amount of raw sewage is still discharged into our coasts and waterways—200,000 times in the last year, with 3,000 discharges in UK coastal waters between May and September—all of which threatens the quality of the water itself and water users. It is for that reason that 40,000 people signed a petition to end sewage pollution. My right hon. Friend the Member for Ludlow was motivated to initiate a private Member’s Bill, which will be heard in the House in due course, and to table this amendment to the Environment Bill.
Surely it is the aim of all of us to stop discharges into rivers, lakes and waterways, as well as into our sea, and to raise our current rating within Europe—although we are leaving the European Union, we are still a geographical part of Europe—from 25th out of 30 for coastal water quality. Only 16% of our waterways meet good ecological status.
Why does that matter for all of us, as users? Ultimately, there are health risks—gastroenteritis, ear, nose and throat illnesses, and apparently even, although I have not seen evidence, hepatitis and E. coli. Those of us who enjoy wild water swimming—in the River Wye, for example, on the Gloucestershire-Herefordshire border—will know that there are times when agricultural companies are pumping discharge into the water and damaging its quality and the experience, particularly for the young.
Cherilyn Mackrory (Truro and Falmouth) (Con)
My hon. Friend is making an important point. Does he agree that we need a change in when water companies give notifications of sewage outlets, particularly around the coastline, such as in my constituency and around the Cornish coast? Currently, they do it only in what they call “bathing months”. With better equipment and better wetsuits, we now swim all the year round off the Cornish coast. We have no way of knowing—unless we know that these things happen after heavy rainfall—whether the water is safe to bathe in.
Richard Graham
My hon. Friend makes a striking point. From a human perspective, Cornwall is probably the most used bit of coastline in our United Kingdom. The pressures are considerable and the point that she makes about more people swimming and surfing all year round is important. The restrictions should not just cover the traditional swimming months of May to September. I am sure the Minister will address that point.
Alongside a duty on water companies to ensure that untreated sewage is no longer pumped into the seas, the amendment would tackle a series of other actual and potential issues—for our water quality has implications across the whole ecological system, from plant life to fish stocks, as well as the health of the population. Our surface, coastal and ground waters suffer from significant pollution, as I have illustrated, and they also take that pollution into our seas and oceans. The Government have not made as much progress as we would have liked on meeting the targets established under the EU water framework directive, and the Bill is a step towards making significant improvements.
While diffuse pollution from agriculture, as I illustrated with the River Wye, accounts for 40% of river pollution, wastewater from sewage treatment accounts for almost as much, at 36% of river pollution.
Fay Jones (Brecon and Radnorshire) (Con)
As a Parliamentary Private Secretary, I am not always meant to speak, but my hon. Friend mentions the River Wye, which runs through my constituency. It would be remiss of me not to mention that there are many actors in this space. We cannot solely blame farmers in their entirety. The issue needs a whole supply chain response, because it is too important a problem to lay solely at the door of agriculture.
Richard Graham
My hon. Friend makes a very good point. There will not be too much specific finger-pointing with the amendment, nor in the Bill in general. We have already referred to water companies. Agriculture, in the broadest sense, is a challenge along the river that she loves in her constituency so much. There are, of course, others who discharge pollution into our waterways. Everyone has to do their bit; that is why the amendment is so important.
Let us be clear that the drainage and wastewater management plans proposed under clause 76 are an excellent step forward. They seek to improve water company focus, and they send a clear message about improving the safe and environmentally responsible treatment of human effluent. However, there is an omission in the objectives. The amendment would therefore place the obligation on water companies, in their five-year plans, to consider the impact on water quality of the wastewater facilities for which they are responsible.
Sewage is estimated to account for 55% of the rivers that are failing to reach the good ecological status to which I referred. This can lead to pollutants such as organic material, which depletes the dissolved oxygen in the water, and other pollutants such as phosphorus, nitrates, ammonia, pathogens and man-made toxic chemicals entering the water environment.
Dr Whitehead
The hon. Member for Gloucester has made a powerful speech in support of the amendment, covering many points that I would have raised had he not done so. The Opposition would have tabled an amendment on this subject had amendment 200 not appeared. We did not, because we saw that a substantial number of Members from both sides of the House had put their names to the amendment, which I think adds to its gravity. Frankly, we felt that if we had proposed a separate but similar amendment, it might have decreased the chances of this one being made, so we kept the position as it was. The one point I would disagree with the hon. Gentleman on is that the amendment should not be probing; it should be a serious attempt, with cross-party support, to get a provision into the Bill that will undoubtedly be to the benefit of the natural environment and its users as a result of changes in water companies’ activities.
I want to reinforce what the hon. Gentleman had to say about discharges of sewage and similar activities that have taken place over a number of years. He is right to state that there were more than 200,000 releases of raw sewage into rivers last year. That number slightly underestimates the actual effect of the releases, since some occurred over an extended period rather than being instant. We should think about why that happens.
These are not accidents; they are provisions within the operating arrangements for water companies which allow the occasional release of raw sewage into watercourses. All water companies have an emergency release provision in their operations. They have a system of stop valves that normally separate the sewage from the water, but if the system is so suffused with water at certain points—during a heavy storm, for example—that it cannot cope, those valves are effectively released; the two flows are then mingled. That is the point at which raw sewage may be released into watercourses.
Water companies say that, generally speaking, the dilution of the sewage is such that it does not make a great deal of difference, particularly in heavy storms and similar conditions. That is partly overthrown by the fact that discharges sometimes take place over a substantial period and are not simply brief discharges into rivers at the height of a crisis like a storm. I do not think that anybody would say that in periods of severe crisis for a water company, those sorts of provisions should be removed, but that provision far exceeds what we might expect.
The discharge of spills came to an incredible 1.53 million hours across the nine English water companies last year. As I mentioned, a lot of the spills are not brief. The water companies could introduce procedures that would ensure that they were brief by improving how they separate out water and sewage, and ensuring that those flows can be combined only in the most critical circumstances. It is evident from what we know about those discharges that that is not the case. This is being used as a safety valve by water companies in many instances, rather than as an emergency, last-stop procedure. It is certainly within the companies’ ability to ensure that those safety valves become last-gasp emergency procedures just by improving their procedures to ensure that arrangements for the separation of water are maintained to a higher standard.
As a shadow Minister, I would say that, wouldn’t I? However, it is perhaps not surprising, given that this concern is shared pretty much across the House, that other people have said much the same thing. For example, I believe the Minister met chief executives of the 15 water companies in September, at which point she called on them to take further action to protect the environment, reduce leakage and safeguard water supply. She said that
“we discussed a number of issues I feel strongly about, including storm overflows, and how we can work together to see much more ambitious improvements. This country’s green recovery from coronavirus can only happen if water companies step up and play their part.”
I could not have put it better, and the Minister indeed put it very well.
The hon. Member for Gloucester, who made an excellent contribution, reminded us that the amendment is supported, and was substantially crafted, by the Chair of the Environmental Audit Committee, the right hon. Member for Ludlow. Other hon. Members pointed out the concerns on this issue in their constituencies and why action needs to be taken. The entire Opposition think that this is a good idea and wish to pursue it, and of course the Minister has made admirable comments on how water companies need to step up their activity, particularly on storm overflows, to get things organised.
Basically, what is there not to like about the amendment, and why can it not just be instantly put into the Bill? It will not detract from anything; it will simply add a layer of urgency to something that we all think needs to be done, which surely is what Bills should be about. They should frame action in such a way that entreaties and suggestions are added to by a piece of legislation that says, “Go and do this over a period of time.”
We not think that this should be seen as a probing amendment. That is a very minor disagreement between the Opposition and the hon. Member for Gloucester, who I appreciate may have suggested that it should be deemed a probing amendment out of sensibility for his own side’s manoeuvrability, shall we say, on this issue. In his heart, I think, he would be absolutely behind the idea that it ought to go in the Bill straight away. I sense that very strongly from the vibrations that are coming across the room.
Rebecca Pow
I thank my hon. Friend the Member for Gloucester for the amendment and for painting such a charming picture of wild swimming in the River Wye, which I should think is quite chilly. I must also refer to my right hon. Friend the Member for Ludlow, who has done so much work on this. As my hon. Friend knows, I have met colleagues several times to discuss this very important issue. He quoted some, frankly, fairly ghastly statistics, as did the hon. Member for Southampton, Test. My hon. Friend is right that this matters and he knows, as does our right hon. Friend, that I take it extremely seriously. I think the hon. Gentleman knows that too.
The issue of river health and the impact of sewer overflows is a priority for me. One of my hats is Water Minister. I vowed that I must do something about that while I am in this role, and I am determined to take action. It has been overlooked for far too long. I have discussed that with my officials at great length. I will not say that they thanked me for it all the time, but it is a priority that I believe we have to get right.
I assure my hon. Friend the Member for Gloucester that controlled sewage discharge to watercourses from sewage treatment works are tightly regulated by the Environment Agency using powers under the environmental permitting regulations, so we obviously already have that in place. I want to be clear that when we were designing the current provisions in the Environment Bill on drainage and sewerage management plans, in clause 76, it was a prime objective to tackle the discharge of sewage into our waterways better.
Clause 76 specifically requires that each sewerage undertaker must prepare a drainage and sewerage management plan. [Interruption.] Yes, there is a “must”—that got a cheer! The clause also specifically requires that a drainage and sewerage management plan “must” address relevant environmental “risks”—those two words are very important—and how they are to be mitigated. That will include sewer overflows and their impact on water quality.
Although I understand the intention for specific references to address sewer discharges and water quality, it is entirely appropriate in this case to provide a broad definition in primary legislation of relevant environmental risks. The provision needs to stand the test of time and be fit for the environmental challenges of tomorrow, not just of today. I can say unequivocally and can confirm that I and any future DEFRA Ministers will also have a failsafe power to make directions to specify any other matters that a plan must address. In simple terms, that will ensure that if a plan or plans are not adequate, the Government can take swift action. I will not hesitate to use that power to direct companies if I am not satisfied with their performance to address sewer discharges and water quality. They should consider themselves on notice; in the meeting that was referred to by the hon. Member for Southampton, Test, I pretty much gave that message. I am not messing about.
Ruth Jones (Newport West) (Lab)
The Minister is making a powerful point. The Opposition have no problem at all with how diligent she is and how conscientiously she does her job. I am just wondering how she would feel if a successor—obviously in many years’ time—was not quite as diligent. We need to know that the safeguards are in the Bill. We want them enshrined in primary legislation. If the Minister is so keen on the power and so committed to it, what is the problem with putting it in the Bill?
Rebecca Pow
I thank the hon. Lady for reiterating my commitment. We believe the measures and steps that are here will ensure that that does happen—the sewerage and drainage management plans will come into use and the idea of that will become normal—but there will be an opportunity for a DEFRA Minister to have a failsafe power to make directions to specify any other matters. We also have the Environment Agency keeping abreast of all this. We even have the OEP, at the end of the day. We have so many checks and balances in the Bill that once we get the system going, it should be failsafe.
Richard Graham
The Minister has reiterated her own commitment, which none of us doubts. None the less, as the chair of the Environment Agency has said, despite all the various checks and balances, progress has not been as strong as any of us would have liked. Here is the opportunity to insert the words about
“the water quality and impact of the discharges of the undertaker’s drainage system and sewerage system”.
Even if the Minister believes that the Bill has enough “musts” and enough powers for the Minister to direct, the explanatory notes are not that clear, saying simply that
“The sewerage undertaker is required to set out in the plan what it intends to do to maintain an effective system of sewerage and drainage, and when those actions are likely to be taken”,
then adding, rather vaguely:
“Should other factors become relevant”.
Does the Minister not agree that there is a real opportunity to specify, at least in the explanatory notes, that the water quality and impact of sewerage overflow must be addressed?
Rebecca Pow
My hon. Friend is doing absolutely the right thing in checking up on the issues. I have been doing that myself, in fairness. He mentions the EA. As he said, Emma Howard Boyd, the chair, made it clear that much more is expected of water companies, which includes developing, publishing and implementing specific plans by the end of this year, to reduce pollution incidents. The Environment Agency is on the case. Following my meeting, the Secretary of State is meeting with water companies again very shortly. I repeat that “relevant environmental risks” will include sewer overflows and water quality; I said that just now and I hope my hon. Friend the Member for Gloucester was listening. Once that has been established as a risk, it would be very hard for anyone to argue in the future that it was not a risk. That addresses the point made by the hon. Member for Newport West, and I reiterate that point.
Dr Whitehead
The Minister talks about checks and balances, but I am sure she will know that, as far as the checks and balances relating to storm overflows are concerned, more than 60 discharges a year should trigger an investigation by the Environment Agency. Those storm overflows have been released hundreds of times per year by each water company. The Environment Agency relies on water companies to self-monitor their discharges, so the check and balance does not work as well as it should. Does the Minister think that arrangement is sufficient to keep those discharges under control?
Rebecca Pow
I thank the hon. Member for raising that important point; I just want to talk a little bit about the Environment Agency. They are actually part-way through a programme to improve the management of storm overflows. Event duration monitoring gadgets are being installed on the vast majority of combined inland and coastal sewer overflows, and will provide data for the duration and frequency of storm spills by 2025. Approximately 13,000 of the 15,000 overflows will receive this event duration monitoring, so it will make a difference—I am convinced of that. We do, however, accept that there is a great deal more to do.
Let me clarify how important I think the issue is; we do not want to sit around waiting, but to get on and do something about it. In addition to the Environment Bill and the ongoing discussions around making it as strong as possible, I have set up a new storm overflows taskforce to make rapid progress in addressing the volumes of sewage discharge into our rivers. This has been done at speed and very recently, when all of this “stuff”, as they call it, came to my attention. I would like to thank everyone involved for moving so fast on this. I will set a long-term goal on the storm overflows for sewerage undertakers, which I will talk about in more detail later, but the work on that needs to start now. The taskforce is developing actions that will increase water company investment to tackle storm overflows in order to accelerate our progress.
Daniel Zeichner
The water companies operate in a tightly constrained regulatory framework, always having to balance bills, investment and shareholder returns. What impact does the Minister think her welcome initiative will have on that, and will she be directing them as to either what they do not do instead, or where that investment should come from?
Rebecca Pow
I thank the hon. Member for Cambridge for that, and of course he makes a really important point. All those things will be in the mix for consideration. The storm overflow taskforce has been set up between the EA, DEFRA, Ofwat, the Consumer Council for Water, Blueprint for Water and Water UK. These are all things they are well aware of and will be discussing, and they will be the ones setting out clear proposals to address the volumes of sewage discharge into our rivers. They are working on that now, at speed, and I anticipate we will have a good idea of their list of actions by spring. The hon. Member might say that that is a long time away, but we are already in November; it is actually only a in few months’ time. I anticipate that this will be really beneficial and really helpful.
The whole thinking behind the taskforce’s action list is to increase the amount of sewage processed at treatment plants, for example through building additional sewage storage capacity, which I think my hon. Friend the Member for Gloucester might be pleased to hear, and separate surface water connections for the combined sewerage network.
I want to thank my hon. Friend the Member for Truro and Falmouth for her input; I have met her and others from Cornwall over the issue of surfers, as well as Surfers against Sewage, who do great work highlighting the issues. As I said, the taskforce is looking to all issues to do with water quality and sewerage overflows, which will include bathing water. We are looking into that.
I also want to thank my hon. Friend the Member for Brecon and Radnorshire, who makes a good point—always standing up for her farmers, in that great farming country she is in—and she is absolutely right. We cannot lay all of this at the door of the farmers. There are many causes and they all have to be looked at and tackled, but that is not to say that there is not work to be done with farmers—I believe they know that. Through our new environmental land management scheme, there will be opportunities to work with farmers to reduce pollution. That is coming down the tracks as well and will also help with the whole water pollution issue.
Richard Graham
I am very grateful that the Minister has announced this storm overflow taskforce, which is an interesting new group. Taskforces come and go and they have occasionally been used in the past—surely not by this Government—as a sort of alternative to action. One thing that would make us all have greater confidence in the Bill being able to deliver the change that the Minister and all of us wish to see, if she is unwilling, at this stage, to amend clause 76 with the words the amendment suggests, would be if she would consider amending the explanatory notes. At the moment, the relevant sentence reads:
“Any relevant risks to the environment and mitigation measures should be recorded in the plan.”
The Minister could, if she wished, insert “any relevant risk to the environment and mitigation measures, including water quality and the impact of sewerage overflow.”
Rebecca Pow
Thank you, Chair. I thought my hon. Friend would try and sneak in a final go. I do not blame him for that.
Rebecca Pow
Thank you, Mr Gray.
On that note, I hear what my hon. Friend the Member for Gloucester says about the explanatory notes but I want to reiterate what I said earlier: relevant environmental risks will include sewer overflows and water quality. Once that has been established as a risk, it will be very hard for anyone to argue that it is not a future risk. I shall leave it there.
I thank my hon. Friend the Member for Gloucester, my right hon. Friend the Member for Ludlow and other Members for all their work, particularly in raising awareness of this issue. I hope, on the strength of the assurance that I have given today, that my hon. Friend will kindly consider withdrawing his amendment.
Richard Graham
This has been a helpful discussion, with Members contributing from all sides. The hon. Member for Southampton, Test is even able to detect vibrations from across the room, which perhaps none of the rest of us has been able to do. As for the key issue in the proposed amendment, my right hon. Friend the Member for Ludlow put it very well in a note to me where he said, “This amendment would require water companies, their regulators and overseeing Ministers to have regard to continuous improvement through these admirable five-yearly plans to ensure our rivers can gradually recover from their polluted state to once again become clear and clean for our children and grandchildren to enjoy.” Members on both sides have highlighted how, in their constituencies, that is relevant.
The Minister has tried to reassure us that that is exactly her own objective. I have no reason to doubt that, as she has confirmed it several times. However, it seems to me that were I to withdraw the probing amendment, it would be on the basis of the words she used, which were that the relevant risks would include water quality and the impact of sewerage overflow. It is great that the Minister has made that statement, but we need to see that in the explanatory notes. If she can give an indication that she would consider that on Report, I would be happy on that basis to withdraw the amendment.
Rebecca Pow
I thank my hon. Friend for his passionate words. I am happy to consider making it clearer in the explanatory notes.
Richard Graham
I am very grateful to the Minister for making a significant step to recognising the strength of feeling on this, and I beg to ask leave to withdraw the amendment.
Dr Whitehead
I beg to move amendment 199, in clause 76, page 70, line 4, leave out “may” and insert “must”.
When a minister chooses to make a drainage and sewerage management plan, this amendment obliges them to consult on it.
Yes, this is another amendment. By the way, I thought that last bit was really exciting. I am sorry that hon. Members did not vote our way on amendment 200 this morning, but I appreciate the effort that everyone put it to make it almost get there.
Amendment 199 relates to the amendments to the Water Industry Act 1991. This is about how regulations “may” make provision about consultation, which is a particularly weak “may”. I would have thought that consultation is an essential element of the process. In particular, we are talking about consultation to be carried out by sewerage undertakers—that is, water companies—who are required by regulation to make provision about the person to be consulted, the frequency and timing of the consultation and the publication of statements.
There is a pretty tight requirement on water companies to be clear about what their provision is, except they do not have to do it. That seems to me to be a suggestion that holds the entire subsection. There is quite a fierce thing in this subsection about consultation. This is a good thing. It covers not just consultation, but who it should be carried out by—the sewerage undertakers—as well as instructions on who should be consulted and so on. It is all spoiled by the “may” at the beginning of the sentence. I think this is another important “must”, which ought to go into the Bill. Again, I will not push the amendment to a Division, but I hope the Minister will take careful note of our strong feelings on the issue and will put it in the box of reconsiderations for when she gets around to deciding whether there should be drafting amendments to the Bill in the future.
Fleur Anderson
I welcome the Minister’s earlier comments about taking action on sewage pollution, of which this is an additional part. I welcome the aims of the clause, and I believe it is vital that a strategic approach is taken to waste water management. However, I have a couple of issues with it that I would like to point out.
Sewage pollution is a very important issue for constituents across the country, including in my constituency of Putney, next to the beautiful River Thames, where we are extremely concerned about it. Some 39 million tonnes of sewage is dumped into the River Thames every year, with an estimated 50 epic dumps of pollution. The Tideway project is making great headway—it is making amazing progress, and I commend it. It will result in a real difference being made. However, there are still extreme concerns. One is about the use of the term “sewerage” in the clause, whereas the industry would prefer to use the term “wastewater”. Wastewater is a much larger section of domestic, industrial, commercial and agricultural production, of which sewerage is only a small subsection.
I slightly digress from the amendment—
Fleur Anderson
Which I should not do. I acknowledge that, but I would welcome the Minister’s comments on that.
Clause 76 amends the Water Industry Act 1991 by adding new section 94C. There are a whole rash of “mays”, and we have chosen modestly, and I think correctly, to identify one that should be a “must”. It is in new section 94C(3), which, again, talks about consultation on plans. We have talked about that previously, and it is absolutely vital for ensuring that those plans work and that they tackle the 39 million tonnes of sewage going into the River Thames and the similar incidences across the country. The Bill places obligations on water companies only for something they are already doing; it does not reflect the scale of the challenge from climate change or the fact that drainage is universally recognised to be a shared responsibility with other organisations that are also responsible for managing service water.
Water UK is concerned that, as written, clause 76 will exclude significant bodies that are involved in drainage and will eliminate much of the potential benefits that customers, society and the environment could otherwise gain. It is a fundamental feature of drainage and wastewater planning that water companies cannot do this in isolation, because drainage is shared with other risk management authorities, as defined in the Flood and Water Management Act 2010. For example, large numbers of drainage assets are not under the ownership of water companies, the management of which needs to be integrated into the drainage and wastewater management plans. That has been recognised by the National Infrastructure Commission in its recommendation that water companies and local authorities should work together to publish joint plans to manage surface water flood risk by 2020. Ensuring that such consultation is done as a “must” rather than a “may”, which is the aim behind the amendment, is absolutely essential.
As a minimum, all flood risk management authorities should have a duty to co-operate in the production of drainage and wastewater management plans. There should be the ability to require other flood risk management authorities to provide the information needed for the production of such plans. Clause 76 would ensure that that would happen as a directive to the OEP, which is needed to ensure that we have the best sewerage management plans and wastewater management plans that we can.
Rebecca Pow
I thank the hon. Member for Southampton, Test for the amendment. It is amazing that we have managed to get him excited—for me, that is a massive milestone in the Bill’s passage. I hope he does not mind my saying that.
I understand that the intention behind the amendment is to give certainty that Ministers will pass secondary legislation about the consultations to be carried out by sewerage undertakers on their drainage and sewerage management plans. Under proposed new section 94A of the Water Industry Act 1991, sewerage undertakers will have a duty to prepare drainage and sewerage management plans. Ministers understand that sewerage undertakers need to know the procedural requirements for fulfilling their duties in good time. Ministers require flexibility on when and how the provision is given effect so that procedural requirements for plans remain proportionate and current.
Dr Whitehead
I thank the Minister for what she has said. She has gone some way towards assuring us on this matter, and I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Dr Whitehead
I beg to move amendment 131, in clause 76, page 70, line 6, at end insert
“including persons or bodies representing the interests of those likely to be affected”.
This amendment is very similar to amendment 130. It adds the same wording to the end of this clause to ensure that persons or bodies representing the interests of those likely to be affected are included. We have effectively discussed this, so I am not very excited about this amendment. [Hon. Members: “Shame!”] By the way, I ought to assure the Minister that, although I am probably among the least excitable Members of this House, I do get excited about quite a few things; I draw a distinction between those two uses of language.
I think that the Minister will probably respond to this amendment in the same way that she did when we tabled a similar amendment to the end of a previous clause, so I do not think that we need detain ourselves very long, other than to say that we still think that such an amendment is a good idea.
Rebecca Pow
I thank the hon. Member for the amendment and his brevity. Clause 76 enables Ministers to set out in regulations which bodies are to be consulted on the preparation of drainage and sewerage management plans—a process that will be strengthened by the involvement of a range of stakeholders. We intend to make those regulations in England to include those persons or bodies representing the interests of those likely to be affected, including representative bodies such as the Consumer Council for Water.
I went into some detail about the meaning of the word “persons” previously, so I refer the hon. Member to that. As I also mentioned, this was done in a similar way when the existing water resources management regulatory making powers were used by Ministers in making the Water Resources Management Plan Regulations 2007. The regulations set out a long list of persons to be consulted by undertakers. I hope, therefore, that he will see that the amendment is unnecessary, and I respectfully ask him to kindly withdraw it.
Dr Whitehead
In the light of that answer, which I had anticipated, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendments made: 51, in clause 76, page 70, line 38, leave out “the Assembly” and insert “Senedd Cymru”.
Amendment 52, in clause 76, page 71, line 6, leave out “the Assembly” and insert “Senedd Cymru”. —(Rebecca Pow.)
See Amendment 28.
Question proposed, That the clause, as amended, stand part of the Bill.
Dr Whitehead
I will not detain the Committee at great length on this particular clause stand part debate, because I just want to raise an issue that somewhat puzzles me about the wording of the clause.
The Minister alluded to the source of my puzzlement a moment ago in her response to the previous debate. As hon. Members can see, the title of the clause is
“Drainage and sewerage management plans”.
The clause refers repeatedly to such plans, but what we should be talking about are not Drainage and sewerage management plans but drainage and waste water management plans.
Some hon. Members may think there is not much of a distinction, but there is quite a substantial distinction, in that sewerage and waste water are not the same things. Waste water includes all the sources of waste water coming into a particular riverine or estuarial area, which may have a number of sources that are not sewerage-based. Therefore, the definition of these plans as drainage and sewerage management plans narrows what they might consist of—not only that, but the definition narrows who might be involved in these particular plans. It narrows it down to water companies, whereas a number of other companies are indeed involved in waste water management and properly ought to be within those plans, to make a comprehensive arrangement as far as waste water is concerned. What is a further source of puzzlement is that the Department and industry have actually worked on such plans for many years, and they are called drainage and waste water management plans.
The Minister may say, as she did a moment ago, that in the Water Industry Act 1991 the words “drainage and sewerage management” effectively mean a wider issue as far as waste water is concerned, but of course the wording in clause 76 is not what was in the 1991 Act but is actually an amendment to that Act. It would have been easily possible, as far as the construction of the Bill is concerned, to include the words “sewerage and waste water management” in the Bill, with no cost to anybody—no additional amendments; nothing—whereas the less than adequate wording in the 1991 Act has been retained for the purpose of these amendments.
I wondered why that was the case. Is it an omission or is it deliberate? Other than the rather obscure reference to the 1991 Act, why does not the Bill state what plans the Department has and what the plans should consist of if they are properly to take account of what “waste water” defines and accommodates?
Rebecca Pow
How quickly, in the space of 10 minutes, we have gone from excitement to puzzlement. I hope I can, however, assuage some of the puzzlement.
Clause 76 amends the Water Industry Act 1991 to place drainage and sewerage management plans on a statutory footing to match the status of water resource management plans. The provisions are modelled closely on the existing approach to water resource management plans.
I shall deal with the interesting point about the distinction between sewerage and waste water. The clause amends the 1991 Act, which defines the term “sewerage system” in a way that covers all relevant aspects of waste water, so we have used that wording. This includes facilities to empty public sewers and other facilities such as waste water treatment works and pumping stations.
The term “waste water” is not defined in the 1991 Act. The statutory name is not intended to dictate what the water industry chooses to call the plans as part of its daily operations; it might have some other casual term for it. Drainage and sewerage planning is the only key planning process without a formal statutory status in the water sector. Placing plans on a statutory basis will ensure a more robust planning and investment process to meet future needs, including housing.
Statutory plans will also allow waste water network capacity to be fully assessed and encourage sewerage companies to develop collaborative solutions with local authorities and others who have responsibility for parts of the drainage system. They should also sit with planning for population and economic growth and therefore help to deliver improved resilience in sewerage and drainage sources over the long term.
There is strong cross-sectoral support for the measure. When we consulted publicly on making plans statutory, over three quarters of respondents supported the proposal. The statutory production of the plans will clearly demonstrate how a sewerage undertaker intends to fulfil its duty under the Act to provide, improve and extend the public sewerage system to ensure that its area is effectively drained. A statutory plan will help to set out the actions needed to address the risks that some assess that might pose to the environment or customers.
Dr Whitehead
I think the Minister should accept that I am one of the least puzzled Members of the House, but I do admit to puzzlement sometimes. On this occasion, my puzzlement has not been assuaged. The Minister is talking about how good these plans could be, but that does not take us much further in terms of why the wording is as it is when it would have been so easy to put it right when the Bill was introduced. I take on board the Minister’s assurances that, in practice, the word “sewerage” can be used by reference back to the bits of the 1991 Act that have not been amended by this legislation to expand its remit, but it would have been easier to get it right first time round, but I shall not pursue this. It can go into the Minister’s box of things to think about should she wish to clarify this part of the Bill any further.
Question put and agreed to.
Clause 76, as amended, accordingly ordered to stand part of the Bill.
Dr Whitehead
I beg to move amendment 132, in clause 80, page 78, line 1, leave out “2028” and insert “2021”
The Chair
With this it will be convenient to discuss the following:
Amendment 133, in clause 80, page 78, line 34, leave out “2028” and insert “2021”.
Amendment 134, in clause 80, page 79, line 7, leave out “2028” and insert “2021”.
Dr Whitehead
These amendments all make the same point about there being no compensation for certain licence modifications in water abstraction. Should licences be modified as a result of environmental considerations, especially with the uprating of environmental legislation, water companies and other organisations will have to undertake additional actions to ensure that their licences are adhered to, but they will not receive compensation for those modifications. That is all well and good, except when those licences come to be revoked or varied, in pursuit of a direction under a section of the Water Act.
The no compensation clause comes in on 1 January 2028, so it could be argued that that gives the water undertakings a reasonable period to adjust to the changes, but it may have the reverse effect of what is intended. If companies were to make changes that might need to be undertaken before 2028, they would get compensation. I am not sure whether the clause requires a period of notice for changes caused by increased environmental protection—it is reasonable to give water companies time to adapt—or is it a device that allows water companies to get some money for environmental changes that they should be doing anyway, if they do them before 2028? It is a pretty long run-in for changes. I ask the Minister—and this goes for all these amendments, because they all seek to change the date from 2028 to 2021—whether she thinks that the 2028 date is satisfactory in terms of a run-in for the water companies to make their changes.
If they make the necessary changes before 2028, would they be protected from a legal requirement to enter into and discuss compensation? I would suggest that that is less than satisfactory. The Minister faces a choice this morning on which way she jumps; or perhaps, with great dexterity, she could jump in both directions.
Not only is there potential confusion about the precise intention of this clause, but the 2028 date itself seems to be excessively generous by any measure. If the Minister is not able to at least give us an indication that that date might be considered for foreshortening, we may wish to divide the Committee.
Fleur Anderson
I would like to speak in support of the concerns raised by my hon. Friend the shadow Minister about the long deadlines of this Bill, which would be rectified by amendments 132, 133 and 134.
Clause 80 amends the Water Resources Act 1991 to improve the way in which the abstraction is managed. This additional Environment Agency power, to act on licensing that causes environmental harm, is welcome. However, the timescale proposed in the Bill is too long, as the changes will apply to licenses revoked or varied on or after January 2028. With compensation remaining payable on any license changes opposed by the agency before that time, budgetary constraints will significantly limit its scope to act, which cannot be the aim of this Bill.
The current timescale does not appear to fully grasp the severity and immediacy of the problems facing UK waterways and the poor performance of water companies to date. Four out of nine companies assessed by the Environment Agency require improvement. We cannot wait until 2028 to start revoking licenses and take action, when there is clearly systemic underperformance in the water industry.
Moreover, water companies in England were responsible for their worst ever levels of environmental pollution in the five years up to 2019, leading to condemnation from Ministers and the Environment Agency. In the agency’s annual assessment of the nine privatised water and sewage companies, its chair, Emma Howard Boyd, said that their performance continued to be unacceptable.
Unsustainable abstraction can do serious environmental damage, particularly by changing the natural flow regime. This results in lower flows and reduced water levels which, in turn, may limit ecological health and result in changes and reductions of river flows and groundwater levels. This is about far more than just hosepipe bans.
The Government’s own analysis has shown that 5% of surface water bodies and 15% of groundwater bodies are at risk from increasing water use by current license holders, which could damage the environment. With the Environment Agency recently warning that in 25 years, England’s water supply may no longer meet demand, we will have to clamp down on over-abstraction now. Before becoming an MP, I worked for the aid agency WaterAid, where I saw the result of over-abstraction and how damaging that was for communities around the world. We do not want to face that here.
Abstracters are unlikely to give up these abstraction rights voluntarily and forfeit potential compensation payments. This means that over-abstracted rivers and groundwater-dependent habitats will continue to suffer for at least another eight years under the clauses of this Bill, putting threatened habitats and public water supplies at risk. Further clarification could then ensure that the new date would not impose unrealistic time pressures on water abstractors.
Variations to licences could then be made, setting out a reasonable compliance period for changes to be put in place before the abstractor would be in breach of the new conditions. That would give fair notice to abstractors, which I understand is a concern for the Minister and is the original purpose of the 2028 date, while also enabling swift action on the mounting environmental harm caused by damaging abstraction. It would put environmental risks in the driving seat, not the concerns of water companies, which is what the Bill does at the moment.
Does the Minister agree that without bringing forward the date from which environmentally damaging abstraction licences could be amended without compensation, we are unlikely to achieve the existing Government targets for the health of the water environment, which require us to bring our waters into good status by 2027 at the latest? Bringing the date forward to 2021 will allow action to be taken within the final cycle of the river basin management plans for 2021 to 2027, and allow us to reduce abstraction damage in line with Government targets set under the water environmental regulations of 2017. The dates need to add up.
In its report, “Water supply and demand management”, published in July, the Public Accounts Committee advised:
“The Environment Agency should write…within three months setting out clear objectives, and its planned mitigation actions and associated timescales for eliminating environmental damage from over-abstraction”.
The Committee wants immediate action and we should, too. Has the Environment Agency yet been able to outline how it will eliminate the environmental damage in line with statutory deadlines, given that this power will not come into effect until after those deadlines have passed?
I support these amendments, in order to put the Government’s own targets in line with each other and make sure that we take action against over-abstraction as urgently as necessary.
Rebecca Pow
The hon. Member for Putney has highlighted why we need to control water abstraction, which is why these clauses are so important. The Government would strongly prefer that solutions are found at a local level between abstractors and the Environment Agency, before these new powers are utilised. A lot of work is already going on to look at abstraction licences, to find different ways of working and to reduce quantities of water abstraction. Indeed, the Government’s 2017 abstraction plan sets out the Government’s commitment and actions to protect our water environment, and it is already beginning to have some effect. Since 2014, a total of 31 billion litres of water has been returned to the environment, and a further 456 billion litres has been recovered from unused or underused licences.
The implementation date of 2028 will afford the Environment Agency the time to engage directly with abstractors to resolve situations without the need to use these powers. That is one of the main pieces of work in progress, as I have outlined. It will also allow time for a catchment-based approach to water resources, to produce solutions. There is a lot of catchment-based work going on. Opportunities will come through the new environment and land management scheme and its systems of new environmental management, where farmers and catchments work together, which is crucial in a holistic approach to the water landscape.
Finally, the date allows time for the transfer of abstraction licensing into the new environmental permitting regime. The powers are more of a big stick, but we are hoping that these other things will swing into place before they have to be used.
Ruth Jones
Does the Minister agree that 2028 is a long time into the future? By then, small water bodies and wetland habitats, which are an essential but unnecessarily overlooked part of our water environment, may be lost. Something that has already gone cannot be brought back. The year 2028 is far too far into the future and we do not want things to be lost in the meantime.
Rebecca Pow
I thank the hon. Lady for her intervention, but I hope she realises, as I have just outlined, that we are taking action now. The Environment Agency is already working on reducing abstraction with these licence holders in many cases, and that work must carry on at pace.
I also want to be clear—the hon. Member for Putney touched on this—that these measures do not apply to water company abstraction licences. Following the Water Act 2014, water companies are not eligible for compensation for any revocation variation of their abstraction licences, so it is not the water companies we are actually talking about, but the other abstractors of water.
Dr Whitehead
I would have thought that if measures to sort out sustainable abstraction were already being taken, that would be a compelling argument for bringing the date forward from 2028. It is, after all, a longer period than the second world war. I am not convinced by the Minister’s arguments, and on the basis of that date we would like to pursue a Division.
Question put, That the amendment be made.
Dr Whitehead
I beg to move amendment 135, in clause 81, page 80, line 28, leave out subsection (9) and insert—
“(9) Regulations under this section are subject to the super- affirmative resolution procedure.
(10) In this subsection, ‘super-affirmative resolution procedure’ has the same meaning as it does in Section 18 of the Legislative and Regulatory Reform Act 2006.”
I will not detain the Committee for long. Our amendment suggests that instead of regulations under this section being subject to the negative procedure, they should be subject to the super-affirmative procedure. There is a real difference between the two because, as hon. Members will know, the negative procedure for secondary legislation requires merely that the legislation be laid before the House, and if no one objects to it within 21 days, it automatically becomes law. The affirmative procedure, on the other hand, means that under normal circumstances, the House is entitled to a debate on the legislation, in which the Minister is required to take part, at least to air the reasons behind the introduction of the regulations.
The affirmative procedure is potentially an important protection for Parliament to hear properly what is happening with secondary legislation. The super-affirmative procedure guarantees a 90-minute maximum debate on a piece of secondary legislation, and that is the procedure that we would prefer for this clause. We will not press the amendment to a vote, but we would be grateful if the Minister reflected briefly on why she thinks the negative procedure is the right way to go.
Fleur Anderson
Although there is some justification for a power to make technical updates to regulations, as my hon. Friend the shadow Minister has set out, the clause could provide a licence for the Secretary of State to weaken, via secondary legislation, the standards of our waters, and their chemical status in particular. Secondary legislation has caused a huge amount of division between the Opposition and the Government, as we have asked that much more of it be put into primary legislation. If there is more secondary legislation, and “may” does not become “must”, it is really important that it is debated under the super-affirmative procedure.
That is particularly worrying in the light of Sir James Bevan’s speech, which suggested possible reform of the way in which the status of our water is considered. What is behind that suggestion? The last thing we need now is a regression of water quality standards. According to data released by the Environment Agency last month, not a single lake or river in England that has been recently tested has achieved a good chemical status. We are experiencing a five-year high for environmental pollution by the water industry.
Stakeholder concerns about the unmitigated power in the clause would be unlikely to evaporate if there were a commitment to non-regression of environmental standards. Given the public support for environmental protection, which I am sure the Committee will acknowledge, why are the Government reluctant to provide assurances and to agree to the amendment? That goes to the heart of many of the issues at the centre of the Bill. Time and again, we have heard assurances of non-regression, but the Government have so far avoided every single opportunity to put those promises into statute. That persistent refusal makes us all highly suspicious.
At the heart of the water framework directive is the principle that the water environment is a system and that all its parts need to be in good working order for it to operate effectively. That principle remains true. The clarity of the one in, one out rule should not be abandoned, and any weakening of chemical standards would be a backward step in the light of growing public concern about water pollution and the new data showing the extent of water quality failures across England.
I urge the Committee to support the amendment, which goes some way towards addressing that significant risk, and would ensure that any changes to water quality regulations would be subject not to the negative procedure, as the Bill currently states, but to the super-affirmative procedure—as a new MP, I had to go and look it up and have learned a lot about it—as defined in section 18 of the Legislative and Regulatory Reform Act 2006. That would give stakeholders the right to input into any water quality regulation changes, including UKTAG, the UK technical advisory group that currently advises on standards—
Financial Services Bill (First sitting)
Tuesday 17th November 2020
(3 years, 5 months ago)
Public Bill CommitteesRead Full debate Financial Services Bill 2019-21 View all Financial Services Bill 2019-21 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 17 November 2020 - (17 Nov 2020)
The Chair
Before we begin, I have a few preliminary announcements: please switch electronic devices to silent. Tea and coffee are not allowed during sittings. Can I emphasise the importance of social distancing? Spaces available to Members are clearly marked. As you can see, not all Members can fit around the horseshoe. Will Members sitting at the side of the Room or in the Public Gallery please use the standing microphone if they wish to ask a question? Date Time Witness Tuesday 17 November Until no later than 10.25 am Prudential Regulation Authority; Financial Conduct Authority Tuesday 17 November Until no later than 10.55 am UK Finance Tuesday 17 November Until no later than 11.25 am International Capital Market Association Tuesday 17 November Until no later than 2.45 pm The Investment Association Tuesday 17 November Until no later than 3.30 pm TheCityUK; City of London Corporation Tuesday 17 November Until no later than 4.00 pm The Association for Financial Markets in Europe Tuesday 17 November Until no later than 4.30 pm The British Private Equity and Venture Capital Association Tuesday 17 November Until no later than 5.00 pm StepChange Debt Charity Thursday 19 November Until no later than 12.15 pm Spotlight on Corruption Thursday 19 November Until no later than 2.45 pm The Association of British Insurers Thursday 19 November Until no later than 3.30 pm Transparency International Thursday 19 November Until no later than 4.15 pm The Finance Innovation Lab; Positive Money Thursday 19 November Until no later than 5.00 pm Hon Albert Isola MP, Minister for Digital, Financial Services and Public Utilities, Her Majesty’s Government of Gibraltar
Today we will first consider the programme motion on the amendment paper. We will then consider a motion to enable the reporting of written evidence for publication, and then a motion to allow us to deliberate in private on our questions before the oral session begins. In view of the time available, I hope we can take these matters without debate. I call the Minister to move the programme motion standing in his name, which was discussed yesterday by the Programming Sub-Committee for this Bill.
Ordered,
That—
(1) the Committee shall (in addition to its first meeting at 9.25 am on Tuesday 17 November) meet—
(a) at 2.00 pm on Tuesday 17 November;
(b) at 11.30 am and 2.00 pm on Thursday 19 November;
(c) at 9.25 am and 2.00 pm on Tuesday 24 November;
(d) at 11.30 am and 2.00 pm on Thursday 26 November;
(e) at 9.25 am and 2.00 pm on Tuesday 1 December;
(f) at 11.30 am and 2.00 pm on Thursday 3 December;
(2) the Committee shall hear oral evidence in accordance with the following table:
(3) proceedings on consideration of the Bill in Committee shall be taken in the following order: Clause 1; Schedule 1; Clause 2; Schedule 2; Clauses 3 to 5; Schedule 3; Clauses 6 and 7; Schedule 4; Clauses 8 to 21; Schedule 5; Clause 22; Schedules 6 to 8; Clauses 23 and 24; Schedule 9; Clauses 25 to 27; Schedule 10; Clause 28; Schedule 11; Clauses 29 to 44; new Clauses; new Schedules; remaining proceedings on the Bill;
(4) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 5.00 pm on Thursday 3 December.—(John Glen.)
Resolved,
That, subject to the discretion of the Chair, any written evidence received by the Committee shall be reported to the House for publication.—(John Glen.)
The Chair
Copies of written evidence that the Committee receives will be made available in the Committee Room. I call the Minister to move the motion about deliberating in private.
Resolved,
That, at this and any subsequent meeting at which oral evidence is to be heard, the Committee shall sit in private until the witnesses are admitted.—(John Glen.)
The Chair
Q
Victoria Saporta: Good morning everyone, and good morning, Chair. I am Vicky Saporta, executive director for prudential policy in the PRA within the Bank of England.
Sheldon Mills: Good morning. I am Sheldon Mills, interim executive director of strategy and competition at the Financial Conduct Authority.
Edwin Schooling Latter: Good morning all. I am Edwin Schooling Latter, director of markets and wholesale policy at the Financial Conduct Authority.
The Economic Secretary to the Treasury (John Glen)
Q
Victoria Saporta: Thank you for the question, Mr Glen. Yes, we worked closely together, as you would expect for a Bill that proposes to revoke elements of the acquis and give the regulators specific powers. Ultimately, of course, it is for the Government to introduce the Bill and for Parliament to take it forward. However, the working relationship was very close, and because of that we are content with the content of the Bill and the proposed measures.
John Glen
Q
Sheldon Mills: We have had close interaction with you and your officials throughout the drafting of this Bill, and also the preparations for a new UK financial regulatory system, as we move to exit from the EU. We think it is important that there is an agile and confident UK financial services regulatory system, which will support the UK financial services industry and, importantly, also protect consumers and ensure market stability. We feel that the Bill is a good first step in that direction, to enable us to play our role in those goals and objectives for the UK financial services industry.
John Glen
Q
Edwin Schooling Latter: Yes, of course. Committee members will be aware that LIBOR is a benchmark that has had a troubled past. It is also a benchmark that probably does not suit the needs of its users as well as some alternatives; but it is very deeply embedded in the financial system, so while we think it is the right thing to move towards the end of LIBOR and its replacement with better alternatives, we need to be able to do that in an orderly way. The provisions in front of you contain some important measures to enhance the FCA’s powers to manage an orderly wind-down—for example, to identify the point at which the benchmark is no longer sustainable and to take measures to ensure that its publication ceases in the least disruptive way possible for the many hundreds of thousands of contract holders who have mortgages or more complex financial instruments that reference the benchmark in some way.
Mr Pat McFadden (Wolverhampton South East) (Lab)
Before I begin, can I get some sense from you, Mr Davies, about whether we can have a few questions?
Mr McFadden
Q
Victoria Saporta: Yes, I am happy to do so. The way the EU tends to function in terms of regulations—particularly banking regulations, which are part of the provisions of the Bill that relate to the PRA—tends to be quite unique relative to other non-EU regulators. Essentially the Commission proposes very technical regulations, which in banking are often agreed by technocrats in the Basel environment—in the Basel committee—and then these are debated in the European Parliament and the Council of Ministers, and become directly-applicable law. The reason for that way of doing it relates to the single market, so that every EU member state has exactly the same regulations. As I said, that is very unique. Every other member of the Basel committee, for example—all the G20 jurisdictions with the exception of Switzerland, which is another federal democracy—would have its regulators applying these technical rules that they have themselves negotiated internationally.
Pre the treaty of Lisbon and before the single market rulebook, this was the way that regulation was done in the UK through the Financial Services and Markets Act 2000. Primary legislation set out the objectives, framework and constraints through which regulators would operate and the regulators would then go about implementing the rules for the purpose, so that they could achieve the objectives that Parliament would have set for them.
Traditionally, UK regulators have done that in the prudential sphere, which is my current sphere. To preserve safety and soundness and contribute to financial stability, the PRA currently has a secondary objective of facilitating competition, but with the remit that the Government give them and always with an eye to preserving responsible openness and dynamism.
Mr McFadden
Q
Victoria Saporta: There is a considerable body of empirical research that suggests that regulatory independence is strongly correlated with stronger financial stability. Particularly in the banking system, there are lower losses under stress. One of the reasons for that is because regulators—at least in theory, but I happen to believe from my experience that that is the practice—potentially have longer horizons than Governments, and therefore regulatory independence tends to be more robust to such lobbying in the longer term, subject, of course, to accountability and objectives set by Parliament.
Mr McFadden
Q
Sheldon Mills: It is a good question. The starting point is our statutory objectives. We set our priorities for the year and also over three years on the basis of our statutory objectives, which are consumer protection, competition and market integrity. We then work out whether, serving those objectives, certain types of activities will help protect consumers, and help us ensure market integrity or further competition.
If you take the example of net zero, it is quite clear, regardless of where Government’s ambitions are in relation to net zero, that the move towards net zero forms a part of the issues that we face globally in terms of climate change. Those are risks in the economy and therefore impact the firms that we regulate and in turn may impact the consumers that we seek to protect. In a sense, we have little choice but to consider and be cognisant of Government’s aims in relation to net zero, because if we are not thinking about those climate risks and challenges, which our firms face, we would not be doing our job and serving our statutory objectives.
Quite often, you find that the aims of Government are merely looking at some of the risks that are impacting markets, impacting the firms, and therefore it is right and proper that we have work in relation to those areas, and we do have work in relation to net zero and climate change.
Mr McFadden
Q
Edwin Schooling Latter: In answering that question, I think that an important starting point is to recognise that the UK regulators, including the FCA, played a very large role in designing a lot of that EU regulatory framework. So the overall picture is definitely one where we support the nature of that framework and the provisions within it. There are a few areas where compromises to span 28 countries perhaps do not suit as well as they might the particular circumstances of UK markets. I think that there are some areas, for example in the MiFID regime, where we could look at an approach that was better calibrated to the UK’s capital market infrastructure, but areas where we would diverge are the exception rather than the rule.
Alison Thewliss (Glasgow Central) (SNP)
Q
Sheldon Mills: We have an obligation under FSMA such that all authorised firms will sit on our financial services register, and that allows a sense of public transparency as to who is authorised and what they are authorised to do. As the Committee may or may not know, we regulate tens of thousands of firms, upwards of 60,000 firms, so the register is quite large. The current rules allow firms that are authorised on the register to maintain their registration even though their activities are, in effect, dormant and they are not actually carrying out certain financial services. We need to give them rights to be heard in order to remove them from the register, and that takes time. Therefore, having a different regime, whereby we can give notice to firms that their removal might be pending unless they prove to us that they are active, is going to be a much more efficient and effective way of operating the register. This is important because harms are occasioned by the presence on the register of dorman firms. There is the activity of cloning, whereby firms use dormant names on the register to practise certain fraudulent and scam activity, which is a significant problem that we are seeking to tackle. We are committed, of course, to removing people from the register as swiftly as possible, but the provisions in the Bill will really help to accelerate that for us.
Alison Thewliss
Q
Sheldon Mills: It is not a resourcing issue as such. The process that one needs to go through in order to remove somebody from the register is time and resource-intensive and requires quite a lot of back and forth to execute, so this will be a more efficient process, which still respects the right of the person on the register to explain to us that they are using their licence or authorisation, but which will allow us to move forward a bit more quickly.
Alison Thewliss
Q
Sheldon Mills: I will need to come back to you on that.
Alison Thewliss
Q
Sheldon Mills: We can always do with more resources—that is a common refrain of regulators. Naturally, we will have to reorder our priorities in order to ensure that we are able to take on the onshored rules, to provide them with the right level of attention and make the right decisions. They will fall into two categories. Some we will be able to accept quite quickly and onshore reasonably easily, but others will have areas where we will rightly need to work through how they sit within the specifics of the UK market in a post-Brexit world, and they may take a little more time. All of them will require some form of consultation with the public, so that will take some time. I feel, however, that we have the expertise, experience and knowledge that certainly help us to have the head start on onshoring.
Alison Thewliss
Q
Sheldon Mills: I do not think so. What Ms Delfas was referring to is the need for firms to ensure that they are making efforts to be ready for transition. We have worked with firms and the Prudential Regulation Authority to ensure that firms are ready for transition. When we describe a “cliff edge”, what one is describing is the need to ensure that we are prepared for what we know is coming. We are working closely with firms and putting the right sort of pressure on them to be ready for that point.
Ms Angela Eagle (Wallasey) (Lab)
Q
Sheldon Mills: As I said, we have a significant amount of expertise in the United Kingdom. The reason we have that expertise is that—I have to be careful how I put this—much of the financial services legislation that has come about in the EU, the UK has fully participated in, often leading on the legislation. If we take the investment firms prudential regime, which is in the Bill, our colleagues at the FCA were leaders in that space, setting the pace and direction in the EU. So I think we have the expertise and the experience.
When I think about resources, there are areas where we will need to consider hiring more people, in particular the area of prudential expertise—that is a specific area within the FCA where we will need to hire. We will need to consider our resourcing carefully, as more parts of the acquis are onshored, but currently, where we stand, we think we are capable of moving around our resources in order to meet the demands.
The impact that it could have is of course the speed at which we are able to turn to the different pieces of legislation. If the ask was to do everything on day one, there would be an impact on resources; if we have a sensible framework and approach, I think we can manage.
Ms Eagle
Q
Are you sure that will not cause your resources to be stretched in a way that you had not anticipated? For example, if we have to approve new ways of doing things, onshore all these things and get new systems up and running, those who might wish to carry on can just shift to the internal market and carry on doing things, without having to wait for all the consultations that you and your colleagues will be doing to try to re-establish a UK-based regulatory system.
Sheldon Mills: The starting point is that the foundations of the system are clear to all financial services markets in the UK, so there will not be a gap that means organisations will not know the type of regulatory system that they expect when they are authorised a licence to operate in the UK. We will ensure that that is maintained and is clear throughout the transition and into the future.
On what I think you are referring to as the competitive regulatory system that we might enter into, I can assure you that we are engaged internationally through all international bodies. We play leadership roles in the ESB, the Financial Stability Board and all sorts of international bodies in financial services. Therefore, we are key actors in regulatory systems and the latest approaches to regulation across the world, and that will also support our being a sensible regulatory environment in which firms wish to operate. We are clearly engaged with negotiations and discussions with the European Securities and Markets Authority in relation to a range of regulatory activity, so I am confident that we will not have any significant gaps or issues that would cause issues for the UK financial services industry or for those who wish to come and play an active role in that industry.
Ms Eagle
Q
Sheldon Mills: The Bill is a matter for Government to take through Parliament. The important thing for us, as regulators, is that the Bill provides us with sufficient flexibility to meet the needs that we face as we move through the transition and into the future. In a sense, the Bill is silent on whether we are divergent or equivalent. Equivalence is a policy matter for Government, as opposed to a matter for us. All we need is sufficient flexibility to ensure that we have an appropriate regulatory system, depending on how Government policy emerges in relation to equivalence.
Ms Eagle
Q
Sheldon Mills: Neutral is too strong a word. My point of view is that we are interested in what I would call outcomes-based regulation. Equivalence can be done in one of two ways within the bounds of equivalence: it can be done line by line and letter by letter, or it can be done on the basis of seeking to meet equivalence objectives within an outcomes-based regulatory system. We are moving towards the position of the latter. Overall, equivalence is a matter for Government.
Ms Eagle
Q
Sheldon Mills: I do not think so at all. To give an example, it may look like it would take an army of 50 or 60 people to do the work of the investment firms prudential regime, but in reality it takes around 10 people to do that work. These are significant specialists in the technical architecture of designing prudential regulation. We would not ordinarily use those people in our consumer protection work, and they have different skills and are involved in different activities. I do not think that we will be any less vociferous in protecting consumers. During the crisis, those who watched us saw that we were at the forefront of ensuring that we tried to provide relief to consumers during the pandemic. We will continue in that vein. As the FCA’s conduct regulator, I am committed to ensuring that the consumer is at the heart of everything we do.
Abena Oppong-Asare (Erith and Thamesmead) (Lab)
Q
Sheldon Mills: I will go first and then pass over to Vicky. It is useful to start with our current accountability, because the Bill and future regulatory frameworks being consulted on by the Government deal with that issue. We wish to be accountable. As an independent regulator, an important part of our process is for us to have public accountability. We serve the public and ultimately are scrutinised by Parliament. Our main form of scrutiny is that of the Treasury Select Committee, but we attend many other Committees. Explaining our activity to Parliament is an important part of our work. Below that, within the Financial Services and Markets Act for the FCA specifically, are our statutory panels. They are there to scrutinise our work in a much closer engagement with the organisation. Then we have the consumer panel, the practitioner panel and the small business practitioner panel, as well as the advisory panel on markets and listings. They are able to make public their views, and—believe me—they do very often make public their views on our activity. In addition to that, we will consult on our policies when we do policy-making work ourselves, as do other public authorities. We will also provide access to non-confidential information and data so that all interested parties can make their views known to us.
We also evaluate our work to ensure that it meets its intended outcomes. We already have an existing accountability framework that would sit well with the additional rule-making powers we may get through the Bill and as we move forward with the proposed reform to the financial services regulatory regime. The future regulatory framework is out for consultation, so I will not say much in relation to it, but we of course acknowledge that there may need to be adjustments to the accountability framework to accord with the additional powers that we are getting. We look forward to seeing the responses to the Government’s consultation in relation to that.
Abena Oppong-Asare
Q
Sheldon Mills: As I said, we acknowledge that we will be getting additional powers and there may need to be changes to that accountability framework. Within the Bill, you see the foundational approaches in terms of how things may change. Within each of the specific policy areas, if we take the investment firms prudential regime review, there are certain “have regards” obligations that we will need to take account of in that regime. I think that is a sensible approach to take as you bring in onshored regulation. There are specific needs that Parliament considers it is appropriate for us to consider for that onshored regulation. Then, that “have regards” mechanism of pointing that out to us and us being accountable for meeting those “have regards” in accordance with our statutory objectives is a sensible approach and adds an additional layer of accountability and scrutiny for us.
There are other mechanisms within the future regulatory framework, which is out for consultation. Again, I do not have a strong view on them. I recognise that we are getting more rule-making powers and we may need to have more strengthening of the accountability framework.
Abena Oppong-Asare
Q
Victoria Saporta: To response to your question directly, yes, from the very beginning we had discussions with Treasury colleagues about how, within the narrow confines of this Financial Services Bill—I can talk about the related but quite distinct issue of the future regulatory framework—we could be more accountable, given that the Bill effectively gives the Government powers to revoke particular narrow areas of what will become, on 1 January, primary legislation, and then asks the regulators to fill in those particular gaps. The Government were keen that the process should be part of an enhanced accountability framework.
As Sheldon has said, within the confines of this Bill, the enhanced accountability framework applies to the updating of the rulebook to take into account the new Basel III provisions and the investment firms regulation, and three new “have regards” regulatory principles, which are set out in the relevant schedule and refer to us having to take regard of relevant standards recommended by the Basel Committee on Banking Supervision. That applies obviously to the PRA. We need to take the likely effect of the rules on the UK’s relative standing as a place for internationally active credit institutions and investment firms to carry on activities. Also, we need to take into account the likely effect of the rules on the ability of firms to continue to provide finance to households and businesses. This is an enhanced accountability framework, and the Bill also obliges us to publish how we have taken into account these “have regards”.
Those measures are within the proposals in the Bill to enhance our accountability publicly. There is the separate issue of the consultation that the Government are currently doing on how the future regulatory framework will look, what the enhanced accountability provisions within that are and how they should apply. I would not want to pre-empt that consultation but, clearly, the Government are interested and are trying to look at ways of keeping our feet to the fire, and that is absolutely appropriate.
Harriett Baldwin (West Worcestershire) (Con)
Q
Sheldon Mills: We have not undertaken a cost-benefit assessment of the Bill. That would be a matter for the Government. We have considered, as we discussed in response to earlier questions, the impact on resources within the FCA. Our current intention is to keep that within our current financial envelope, so we are not predicting at this stage an increase in fees or levies to take account of the Bill. That is all I can say at this stage.
In terms of the impact of the Bill and the onshored legislation, when we review the regulations on the investment firms prudential regime and so on, we will do a cost-benefit analysis of the rules and regulations that we are proposing at that stage. At this stage, we will not be doing that—that would be a matter for the Government, not for us.
In terms of the impact on consumers more generally, as I said, there are aspects of the Bill that are very consumer enhancing. I do not think they came up very much on Second Reading, but the provisions in relation to breathing space will be very helpful for consumers facing issues around statutory debts, which we are interested in as a financial regulator. The issues in relation to the register will be extremely helpful for us in terms of tackling fraud and scams. There are many elements of the Bill that are helpful. It is complicated, but the investment firms prudential regime is also consumer enhancing; currently, the capital requirements facing investment firms are those for the systemically important banks, and they are not fit for purpose. This regime will help us have a capital and prudential regime that is fit for investment firms. So there are a whole host of aspects of the Bill that are supportive of consumer interests and will not necessarily increase costs in a way that will be inimical to their interests.
Harriett Baldwin
Q
Sheldon Mills: All these measures are Government proposals, so the cost-benefit analysis that is required will be carried out by the Government and not by us. Once the Bill has been passed, in whatever form—we are bringing forward rules and regulations—we will undertake a cost-benefit analysis. I am giving an indicative view, as opposed to one based on a cost-benefit analysis that we are not required to carry out at this stage.
Stella Creasy (Walthamstow) (Lab/Co-op)
Q
Sheldon Mills: It is a broader question than the Bill, but I will answer by giving our approach to debt.
As a regulator, our approach is not to have a policy on whether people should be able to access credit, but we are concerned about the impact on people of firms providing credit. We want firms to be able to provide credit in a way that treats individuals fairly, takes account of their needs and circumstances and, in particular, supports vulnerable customers if they are in debt.
We work closely with debt charities. Some of the issues that we are seeing, which we all face and of which the FCA is cognisant, include the accumulation of debt among certain parts of the population, which is why it is important that rules and processes are in place to support people with debt management and why a breathing space policy forms an important part of that. I think that answers your question, but you might have more specific questions.
Stella Creasy
Q
Sheldon Mills: I think it is for Government to decide whether we should have that “have regard” regime, but there are current rules that firms should take account of the needs of customers. If customers are clearly displaying signals that they are taking on debt that is not affordable—and, in that sense, is not sustainable—firms should have in place mechanisms to ensure that they do not provide further credit or loans to them. There are rules in place on unaffordable lending.
It is for Government to decide whether we have “have regards”, but I do not think that we necessarily need them. I agree that there are issues with debt throughout society that we need to tackle, but I believe we have the right rules in place to ensure that firms make appropriate lending decisions.
Stella Creasy
Q
Sheldon Mills: You will have seen that we have done a significant amount of work in relation to high-cost credit and unaffordable lending. We have put caps in relation to forms of high-cost credit; we have tackled payday loan operators; we have a business priority that relates to consumer credit; we have introduced a review, which our former interim CEO, Chris Woolard, is undertaking in relation to aspects of unsecured consumer credit. We are extremely proactive in this area, and the overall system—in terms of the regulatory system—works well. The fact that consumers are able to go to the Financial Ombudsman Service, where they have had certain issues and the service is therefore enabled to give redress to those customers, is an important part of the system. However, I would not want you to think that that we are not proactively seeking to tackle the issues in this area.
Stella Creasy
Q
Sheldon Mills: I will let my colleagues go first, then I will come in.
Edwin Schooling Latter: Let me raise one area where work is under way. FinTech was mentioned, but the area of crypto-assets has been popular in some quarters. That is an example of an area where we have taken a very proactive approach to putting limitations on where those can be marketed to retail investors who may not fully understand the difficulties of valuing those, the risks attached to them, or the possibilities that they would lose all of their money the more speculative end of that product range.
Sheldon Mills: I would agree with Edwin. The main area which we will see in relation not just to financial services, but to any product, is the continued development of digital means both of accessing and of providing products and services. Our approach to that is twofold: one approach is to encourage innovation. These products and services can bring efficiency and lower cost, and they can bring different levels of access for consumers, including vulnerable consumers. However, while doing that, we ensure we are clear on the ethics and consumer protection aspects of these new forms of products and services. Those are some of the areas where we will see future opportunities and challenges within the financial services system.
Stella Creasy
Q
Sheldon Mills: With respect, I cannot regret not acting on something which I do not regulate. However, what we are doing is looking at that area through the form of this review. As you know, and as is implicit in your question, that does sit outside our specific regulation.
The Chair
Victoria, I think you were about to say something.
Victoria Saporta: Sorry, I am conscious of the time. I have basically one comment to make in our particular area. I agree very much with Sheldon on digitalisation and with Edwin on crypto. Another particular area that we are looking at—
The Chair
Order. I am afraid that brings us to the end of the time allocated for this session. I thank our witnesses on behalf of the Committee for their evidence.
Examination of Witnesses
Simon Hills and Daniel Cichocki gave evidence.
The Chair
We will now hear from Simon Hills and Daniel Cichocki from UK Finance, who are joining the sitting remotely. Can you introduce yourselves for the record?
Daniel Cichocki: Good morning, Chair. I am Daniel Cichocki. I am the London inter-bank offered rate transition director at UK Finance and, as such, am focused on the benchmark elements of the Bill.
Simon Hills: Good morning. I am Simon Hills. I lead the prudential policy work at UK Finance, so my particular area of expertise is the prudential regulation of banks.
The Chair
I remind colleagues that we have until 10.55 am for this session, so it is much shorter than the previous one. I hope that colleagues will be mindful of that.
John Glen
Q
Simon Hills: It is important to recognise that the Prudential Regulation Authority has been a strong supporter of Basel 3.1. It has been very influential in the way it was finalised, and I think that it is committed to implementing the Basel 3.1 framework in an internationally aligned way. That is important for our members, particularly if they are internationally active, because they want a coherent and harmonised regime across the world. If you are a UK bank operating in the UK, North America, Europe and Asia, you want one version of Basel 3.1 and you want it to be implemented in a coherent way. If not, and if there are different approaches to regulatory reporting, to how credit risk is assessed and to liquidity requirements, you have to implement a number of different versions of Basel 3.1, which will be more difficult.
In terms of UK Finance’s competence in, if you like, holding the PRA to account, we have a wide range of members for whom Basel 3.1 implementation is very important. I am pleased to say that I have good working relationships with Vicky and her colleagues at the PRA.
John Glen
Q
Daniel Cichocki: Certainly, the issues with the lack of sustainability of the LIBOR benchmark are very well documented, and it is important, as the Financial Stability Board has acknowledged at an international level, that we move away from LIBOR on a smooth and timely basis. It is also very important, certainly from an industry perspective, that as a result of moving away from LIBOR on to more robust reference rates, customers who have contracts referencing LIBOR are not inadvertently affected by that transition.
What this Bill seeks to do—and we are very supportive of its provisions—is to make sure there is a safety net in the form of powers being granted to the FCA, to ensure that those contracts that cannot be migrated on an active basis before LIBOR ceases have a solution so that the customer has a clear outcome for the contracts beyond LIBOR cessation.
These powers are important because before 2017, and the acknowledgement that LIBOR would cease, many contracts did not have clear, robust terminology setting out what would happen if LIBOR ceased. They may include terminology addressing if LIBOR should be unavailable for a day or two, and that might be the reference point those contracts would take. In that instance, without these powers, we may have seen customers falling back on to the last available LIBOR rate to the point of cessation, essentially becoming a fixed-term contract. We may have seen customers falling back on to cost of funds, which would create very diverse and disadvantageous outcomes for them. Equally, we would have seen fairly significant levels of contractual disputes beyond the end of 2021. These powers, in preventing all those negative outcomes for both customers and market integrity, are absolutely critical as part of the transition.
Mr McFadden
Q
Simon Hills: I am not sure that we would want the UK Government and authorities to diverge significantly, if at all, from other standards. We are not sure yet what Europe will do in respect of Basel 3.1. We do not expect draft legislation from the Commission until around Easter next year. That said, from the way in which the Commission has implemented previous iterations of Basel, I would expect it to stick quite closely to that Basel 3.1 framework, for the same reasons I have mentioned: international coherence and harmonisation, and easing the comparison of different banks and jurisdictions.
Mr McFadden
Q
Simon Hill: Yes, I think there is likely to be work to be done there. Of course, one of the accountabilities the Financial Services Bill gives the PRA is to take financial services equivalence and international competitiveness into account, and, importantly, the banks’ ability to continue to provide finance to UK businesses and consumers on a sustainable basis. I think we will all want to understand how different regulators around the world—not just in Europe—look at the PRA’s implementation when it gets down to those technical standards, which is why it is important for both Parliament and UK Finance to make sure there is no inappropriate deviation from international standards. I can assure you that if UK Finance members see that there is, we will speak up about it.
Mr McFadden
Q
Daniel Cichocki: It is absolutely right to acknowledge the issues with conduct around LIBOR in the past and the reforms that have taken place to make sure that those things are prevented. That includes the FCA oversight of the LIBOR benchmark, the introduction of the benchmark regulations at a European Union level, and transcribed into UK law, and broader reforms since the financial crisis, including the senior managers regime to ensure that the issues with LIBOR are not repeated. As the Committee will be aware, the fundamental reason why it is important to move away from LIBOR is that the underlying markets on which the rate is based have largely dried up. Therefore it is right to move us on to robust reference rates based on markets that are highly liquid and not reliant on expert judgment.
Simon Hills: It is important to remember that individuals in banks who are responsible for benchmark submission and administration are classified as so-called certified persons under the senior manager certification regime and they have to be certified as fit and proper every year by their firm. If they are not certified as fit and proper, they will lose their job and will find it very difficult to find a role in financial services again.
Mr McFadden
Q
Daniel Cichocki: LIBOR as it is formed today includes both elements of actual transactions and expert judgments of firms. These expert judgments, as a result of the issues in the past, are subject to those very high levels of governance control that I have talked about being introduced as a result of the benchmark regulation—absolutely appropriate as a result of the issues with LIBOR in the past. The underlying reason why we need to move away from it is that we want to be internationally on rates that do not require that expert judgment.
Alison Thewliss
Q
Simon Hills: Shall I go first and talk about the prudential regulation of banks? The Financial Services Bill achieves what it sets out to do: to implement a coherent version of Basel 3.1 in the UK. It is quite important to our members that we do Basel 3.1 the same in all the major financial centres in which firms operate. If a firm that is regulated by the UK operates in a different host country and the host country says, “That UK firm operating on our patch is supervised by the PRA and the PRA has introduced a watered-down version of Basel 3.1”, then they would add extra supervisory levels to bring it back up to the Basel 3.1 standard. That leads to a bifurcated approach with different regulatory standards in different countries, which makes life very difficult. A coherent approach, which is what the Bill seeks to achieve, is what we and our members want.
Alison Thewliss
Q
Simon Hills: We would not want to see wholesale deviation from Basel 3.1. Of course, Europe itself may choose to deviate from Basel 3.1, and that is a matter for its legislative process. I would not want to see the UK deviate from the agreed framework for Basel 3.1.
Alison Thewliss
Q
Simon Hills: I think there is a difference of approach in some G7 countries. Some perhaps apply a graduated or targeted approach to regulation. Canada, Japan and the US apply different iterations of the Basel standards to different sorts of firm. A large, internationally active bank would face the full gamut of Basel 3.1 in all its glorious granularity—in my view, that is right and proper—but a smaller, less systemic bank might face a different approach.
Of course, Basel 3.1 is applied by Europe—and that is what we are bound by at the moment—to all banks, not just those internationally active banks that are the target of Basel 3.1. The EU took the decision back, I think, in 1992—before even I got involved in this space—to apply the Basel III framework to all banks, from the smallest local Sparkasse in Germany to the largest, internationally-active bank.
I feel we must ask ourselves whether that is right; should there not be a risk-adjusted approach to safety and soundness? A sub-regional building society operating in the UK, for instance, has a vanishingly small probability of bringing the whole financial services system crashing down if it fails. Is it right to ask that firm to comply with all aspects of Basel 3.1? Maybe not.
Alison Thewliss
Q
Simon Hills: We don’t know yet how Europe will determine equivalence. I hope that our colleagues in the EU will look at our implementation of Basel 3.1, compare it with their own implementation and ask themselves the question, “Does this achieve what Basel 3.1 is seeking to achieve?” If they do, I hope there will be a form of equivalence—however we term it in the future—determination.
Ms Eagle
Q
Daniel Cichocki: As the Committee can imagine, from an industry perspective, we are absolutely focused on ensuring that the transition away from LIBOR—which is the right thing to do—is done in a way that treats customers fairly and consistently.
There is an awful lot of work being done at both an international and domestic level to agree standardised approaches to transition, where possible, but also to ensure that there are clear expectations from our regulators—here in the UK, it is the Financial Conduct Authority—about how that transition should be done.
Lots of work has been done and lots of work remains to be done, and, as you can imagine, we are speaking very frequently to the regulators here in the UK, and also working through the national working group to ensure that customers are transitioned on a fair and transparent basis.
Ms Eagle
Q
Daniel Cichocki: We are one voice from the perspective of the banking and finance industries, but it is important also to recognise that, within the overall national working group in the UK, there are voices that, rightly and properly, represent the end users of LIBOR, be they corporates themselves or the representatives of corporates. Although those voices are important in our national transition working group, it is equally important to address the concern that you articulate, which is absolutely right: the guidance that the FCA has provided to all firms that are transitioning their customers that the process should not be used to move customers on to inferior terms or rates that would be expected to be higher than LIBOR would have been. After speaking to our members in the industry, that message from the UK conduct authority has been heard loudly and clearly. All of us who are focused on moving away from LIBOR are acutely aware of the history of the benchmark and committed to ensuring that we move away from it in the right way and in a manner that treats customers fairly.
Ms Eagle
Q
Mr Hills, the industry has been lobbying the Government, Parliament and regulators to design regulations that will make UK firms more internationally competitive. Indeed, all of us in the room would share the aim of protecting our financial services industry. Do you think that the Bill achieves that?
Simon Hills: Yes, I think it does. The important thing is that the Bill achieves that by setting expectations of how the Basel 3.1 framework is implemented in an internationally coherent way. The PRA has to think about not only international competitiveness, but financial services equivalence, and the Bill achieves that.
Ms Eagle
Q
Simon Hills: I do not think that it is in the interests of the UK financial services industry and banks to introduce a divergent regime. We are talking about the importance of the City, and we want people to bring their money to the City for the right reasons, not the wrong ones. UK Finance members are certain that it is in no one’s interest to diverge from internationally agreed frameworks because that creates the risk that we bring in the wrong sort of people.
The Chair
If there are no further questions, I thank the witnesses for their evidence.
Examination of Witness
Paul Richards gave evidence.
The Chair
Q
Paul Richards: I am Paul Richards. I am a managing director at ICMA, which is the international bond market association. I am here to give evidence on the transition from LIBOR. I am involved in the transition from LIBOR to SONIA—the sterling overnight index average—because I chair the bond market sub-group, which consists of issuers, banks, investors and four major law firms. We work closely with the FCA and the Bank of England. If you will permit me, I shall make a short introductory statement.
I hope to be able to give you a bond market perspective on the Bill but, for the market as a whole, we are all trying to move away from LIBOR to risk-free rates while minimising the risk of market disruption and litigation. The Bill is welcome and very important for the bond market because it will give the FCA extra powers to deal with tough legacy LIBOR contracts and wind them down in an orderly manner.
There are three main points on which it would be very helpful if the Committee was willing to strengthen the Bill. First, the Bill needs to provide continuity of contract between the current definition of LIBOR and the new definition of LIBOR for legacy transactions once LIBOR is prohibited for new transactions. Legacy contracts referencing LIBOR under the current method of defining LIBOR need to be read as references to LIBOR under the new definition as determined by the FCA, so that there will be continuity there—this is sometimes called a deeming provision. This will reinforce the message that LIBOR will continue to appear on the same screen page, and it should also help to remove uncertainty and minimise the risk of a legal challenge on the basis that the current definition of LIBOR and the new definition are not the same and one party or another is worse off.
This is particularly a risk in the bond market in cases where LIBOR is specifically defined in legacy bond contracts in terms of its current definition. Continuity of contract or deeming provision like this was used when the euro was launched in 1999, and it worked well. Clearly, it would need to be drafted with the help of the Treasury and it would probably need to be drafted in terms of an article 23A benchmark in the way that the Bill is looked at. That is the first point.
The second and related point on which I hope the Committee will help is that the provision of the continuity of contract under the Bill needs to be accompanied by a safe harbour against the risk of litigation. This would provide that the parties to contracts would not be able to sue each other as a result of the change in the definition of LIBOR, and it would allow them to make conforming changes to bond market documentation.
The third point on which I hope the Committee will help is that the safe harbour and contract continuity provisions in the Bill need to be drawn as widely as possible, to protect any entity that uses the new definition of LIBOR for legacy transactions in place of the current definition of LIBOR. This would need to cover not just supervised entities in the Bill, but non-supervised entities, as the range of institutions involved in the international bond market is very wide.
Finally, I would like to draw your attention to two other points where there are significant legal risks under the Bill. One is that there needs to be equal treatment between legacy LIBOR bonds when the new definition of LIBOR takes over from the current definition, so that some legacy bonds are not preferred to others and there is no discrimination between them; otherwise, legal problems may arise. This would be a matter for the FCA under the Bill.
The other point is that there needs to be alignment internationally between the Bill and the similar legislation that is being introduced in the US and the EU, so that the rate used for legacy dollar bonds under English law and legacy dollar bonds under New York law is the same. Thank you, Mr Davies. I would be very happy to do my best to answer your questions.
John Glen
Q
Paul Richards: Thank you, Minister. First, as I mentioned, we welcome the Bill. The only question is: can it be improved to minimise disruption and litigation? The essential point is that, in the bond market, we have moved to SONIA as the risk-free rate, and new issues have been in SONIA for over two years now. That is the first step in the process.
The second step in the process is that we actively convert as many bonds as we can from legacy LIBOR to SONIA. We are making some progress there, but the third point is that we will still have tough legacy contracts that cannot be converted, either because they are too difficult to convert or because there are too many to convert by the end of 2021. In those circumstances, the provisions in the Bill are extremely helpful, because they provide for an orderly wind-down of tough legacy contracts. From that perspective, the Bill is very helpful. My questions relate to when the current definition of LIBOR is replaced by a new definition. Will there be contract continuity and a safe harbour to minimise the risk of disruption in the market and litigation?
Mr McFadden
Q
Paul Richards: LIBOR was set by a panel of banks. As the market no longer uses the underlying information that it used to use for banks, it has now changed, or will change, with the admission of SONIA, to a different definition. SONIA is essentially an overnight rate. It is a robust rate, because it is used widely in the market, whereas LIBOR is no longer used in the market as it was 30 or 40 years ago. That is one difference. A second difference is that LIBOR is a term rate—it is expressed over one month, three months or six months—whereas the liquidity in the SONIA rate is focused on the overnight market, which is therefore a much more representative selection and does not require expert judgment, unlike LIBOR.
A third point, perhaps, is that it is not just a UK proposal to replace LIBOR with risk-free rates in SONIA. A similar change is taking place globally. In the US, USD LIBOR is being replaced by the secured overnight financing rate, which has a similar sort of construction, and the situation is similar around the world. Those are the main reasons for the change.
Mr McFadden
Q
Paul Richards: As you say, LIBOR depended on expert judgment in many cases, because the market was no longer using LIBOR in the way it had been constructed. With SONIA, it is a much more liquid market and there is no need for expert judgment at all. That is one of the reasons why it is being preferred as the replacement for sterling LIBOR, and similarly around the world in other currencies.
Mr McFadden
Q
Paul Richards: A significant difference between LIBOR and SONIA is what is called the credit adjustment spread, which takes account of the difference between LIBOR and SONIA. In the consumer market, the proposals are, at a general level, to treat customers fairly. In the wholesale market, the aim is to have continuity of contracts between the old definition of LIBOR and the new definition that will be used for legacy transactions. This will be determined under the Bill by the FCA. It is not specified how it will determine it. There are market assumptions about that, but it is not decided yet how they will determine it. It is thought that it will consult the market before making a decision, but the end result will be that the rate that arises under the new definition of LIBOR will take over from the old definition of LIBOR, and there will be continuity of contracts between them. If that is emphasised in the Bill, that will give legal protection for all those involved, which is one of the main reasons for providing it. It needs to be accompanied by a safe harbour provision, which would protect all the different market participants involved. I would like to be able to tell you that this will eliminate the risk of litigation, but I cannot tell you that. What I can tell you is that it will minimise the risk of disruption and litigation that might otherwise occur because of the huge volume and value of transactions.
Mr McFadden
Q
Paul Richards: They are both needed, I think. The FCA’s judgment about treating customers fairly relates primarily to consumers. The protection that a safe harbour would provide, so that parties would not sue each other as a result of the change from the old definition to the new definition, is essentially designed for the international markets. So they are both needed. The FCA is already making statements about treating customers fairly, but the Bill should include both the continuity of contracts provision and a safe harbour protection to accompany that. The broader the safe harbour protection is drafted in the Bill—the Treasury, I am sure, could help on this—the better and more effective it will be in minimising disruption and the risk of litigation.
Mr McFadden
Q
Paul Richards: These are points that law firms that work in the City are acutely aware of from their previous experience. The law firms have been looking at what needs to be done to ensure that there is continuity of contract and a safe harbour protection. Of course, I hope that the Treasury will take account of that, as your Committee will take account of it before reaching a final conclusion. We should do everything we can to minimise the risk of market disruption and litigation, within the context of the overriding point, which is that we do need to move away from LIBOR to risk-free rates. That is, of course, what we have done, with new issues in the bond markets and with the conversion of legacy contracts from LIBOR to SONIA. We have a tough legacy problem for the future, which needs to be dealt with. The Bill helps to deal with that.
Alison Thewliss
Q
Paul Richards: Sorry, I did not quite catch the last point.
Alison Thewliss
You mentioned the uncertainty of how the FCA makes decisions around LIBOR contracts and benchmarking. Do you feel that needs to be set out more explicitly in the Bill so that you can know what to anticipate?
Paul Richards: I think it would be helpful for the Bill, specifically, to make provision for continuity of contracts—the deeming provision—and also for protection against litigation through a safe harbour, to be drafted as broadly as possible. That is not because the move away from LIBOR is not something that we should do—on the contrary, it is something we must do and we have made great progress in doing it already—but because, to deal with the tough legacy contracts in the Bill, we have to make sure that the new definition and the old definition are treated in the market as the same.
Alison Thewliss
Q
Paul Richards: I think that we are talking about 23A benchmarks in general in the Bill. What I have been talking about is specifically relevant to LIBOR. When the Treasury looks, as I hope it will, at whether anything is needed to advise you to strengthen the Bill, it might need to draft that in terms of benchmarks in general and not just LIBOR in particular.
Alison Thewliss
Q
Paul Richards: In the bond markets, we have to convert legacy contracts bond by bond, so it is the number of the bonds that is important, not just their value. In the sterling bond market, we think we have about 520 different legacy bond contracts, or 780 if you include the different tranches of securitisations. We have converted just over 20 of those so far in the market, but we know that we will not be able to convert all of them because some are too difficult to convert and there are too many to convert.
The FCA has an international role and English law applies in dollars as well as in sterling, so we need to take account of dollar legacy bond contracts under English law. In terms of number, we understand that there are more than 3,000 of those. In terms of value in bonds, we think we have around 110 billion in sterling outstanding.
The critical point for us in the bond market is that we need to convert them bond by bond. You will notice that that is different from the derivatives market, where there is a multilateral protocol that enables the market to do everything at once, which is currently in course. We cannot do that in the bond market.
Alison Thewliss
Q
Paul Richards: It is impossible to estimate the cost of litigation. The great thing is to avoid it wherever you can, and the Bill presents an opportunity to minimise the risk of it.
Alison Thewliss
Okay. It sounds like a good time to be a lawyer in this area. Thank you.
Ms Eagle
Q
Paul Richards: In the US, the alternative reference rates committee, which is the group equivalent to the sterling risk-free reference rates working group, has proposed legislation that is not identical to the UK’s but has the same effect, and so the concepts of continuity of contract and protection through safe harbours in the UK context will be recognised, we think, internationally as well.
Of course, we are not dealing here just with the proposals under New York law. We are having to look more generally. The EU has a proposal for legislation as well. It is important to recognise that the FCA has an international role, because the FCA is the regulator of the administrator of LIBOR, so what the FCA, through this Committee, decides in the UK will have an international impact.
Ms Eagle
Q
Paul Richards: No, I hope that the Government will consider this and say yes. I hope that that will happen, but it needs to be looked at in the context of the Bill as a great help to the market. It needs to be looked at in this context: can anything be done to strengthen the wholesale market?
Ms Eagle
Q
Paul Richards: The FCA has great powers under the Bill and I am sure that it will exercise them wisely, but we are dealing here with law internationally, and anything that can be done to strengthen that—and the Bill has the capacity to do that—will be helpful. I hope that it will also be helpful to the FCA.
The Chair
If there are no further questions from Members, I thank the witness for his evidence. That brings us to the end of our morning sitting. The Committee will meet again at 2 pm in the same room to take further evidence.
Ordered, That further consideration be now adjourned. —(David Rutley.)
Financial Services Bill (Second sitting)
Tuesday 17th November 2020
(3 years, 5 months ago)
Public Bill CommitteesRead Full debate Financial Services Bill 2019-21 View all Financial Services Bill 2019-21 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 17 November 2020 - (17 Nov 2020)
The Chair
I remind members of the Committee sitting on this side of the room, or in the Public Gallery, to use the standing mikes when posing their questions. Our first witness this afternoon is Chris Cummings from the Investment Association. Mr Cummings, welcome.
Chris Cummings: It is a pleasure to be here. Thank you for your time.
The Chair
We have until 2.45 for this session. Mr Cummings, can you first of all introduce yourself for the record?
Chris Cummings: Good afternoon. My name is Chris Cummings. I am chief executive of the Investment Association, the representative body for UK-based fund managers, an industry now of some £8.5 trillion pounds, based here in the UK. Our products and services are used by three quarters of UK households, and we are deeply grateful for the opportunity to give evidence to your Bill session this afternoon.
The Economic Secretary to the Treasury (John Glen)
Q
Chris Cummings: Thank you for the opportunity to speak to one of the most central parts of the Bill. May I take a moment to congratulate you and your team on introducing the Bill? It provides much-needed reassurance to my industry, so thank you for that.
The industry is very pleased to see the overseas funds regime introduced as part of the Bill. Around 9,000 funds are currently available to UK investors as a result of the current regime. The reason we feel it is in the interests of UK savers and investors to have access to such a variety of funds is that it brings to the market not only choice but much-needed competition. It means that individual investors have greater choice and an ability to tailor their portfolio in a way that makes sense to them and reflects their risk profile. It is really the foundation of why the UK is the pre-eminent fund centre, not just in Europe, but globally. As the Minister knows, the UK has long enjoyed a reputation for being an attractive centre for fund management. That is built on the ability of UK investors to access an innovative and ever-adapting fund market.
We support this measure in the Bill wholeheartedly. At the moment, as the Minister knows, we manage around 37% of Europe’s assets, which is enabled through measures such as this. It is important for UK savers and investors; having such a variety of funds goes to the heart of having such a sophisticated savings environment in the UK.
It is important to note that if there was a cliff edge—if UK investors were not able to access these funds—that would constrict consumer choice. In trying to replicate something akin to what we have at the moment, we would bring a heavy burden of extra costs on to the industry and greater bureaucracy. It would reduce significantly the number of funds to which UK investors could have access. That is why we believe that the overseas fund regime is material.
It is worth contrasting that with what we see at the moment. In order to help navigate these turbulent waters through the Brexit period, I was delighted that the Government heard our calls to introduce a temporary permissions regime with the Financial Conduct Authority. I am pleased to note that the Bill extends the period from three to five years for that requirement, which is very good. It also allows us to tackle two particular issues wrapped up in the overseas funds regime.
First, there is a review of section 272, which is the current structure by which a fund sponsor or investment management company would seek to have their fund recognised by the FCA—our regulator here in the UK. Section 272 is okay, but it is rather cumbersome. It does not stand up well compared to international comparators. It is a rather lengthy form, which takes a while to complete and gives the FCA a six-month period to look at approving that particular fund.
The proposals in the Bill take us to a completely different level, where the FCA is able to look at fund structures across the piece rather than at each individual fund. We feel that is a big step forward. While section 272 could be reviewed and reformed, there is a different category of opportunity presented by the Bill and that is why our industry is so keen to see the Bill come forward and have the overseas fund regime baked into it as a measure that goes ahead. I will pause there in case there are comments before I move on to comment on equivalence, as you were kind enough to mention.
John Glen
Q
Chris Cummings: Currently, we enjoy unfettered marketing right across the whole of Europe and the EEA. Post Brexit, naturally, that will come to an end. The way that the regulatory authorities assess whether a particular fund is suitable is to judge the equivalence of the regime of the sponsoring organisation or where the organisation is based. Having that judgment of equivalence has been one of our industry’s clear calls throughout the Brexit process.
We were pleased that the Chancellor took a step forward in recognising and granting equivalence to a limited measure in the House of Commons in his statement last week. We think that was absolutely in the right direction. We have been unstinting in our calls for the European Commission and our European regulator, the European Securities and Markets Authority, to respond to those in kind and move forward so that the equivalence determination could have been made by now and be working. We were sorely disappointed that in June ESMA decided not only not to make a decision on equivalence, but to defer it for a period of time until after the IFR comes into effect.
We feel that that was a missed opportunity to settle the fact that the UK and the EU would be equivalent, which we currently are, having adopted, rather in full vigour, the European rules under which our industry labours. We are hopeful that continuing industry efforts to encourage ESMA and the European Commission to recognise the UK as equivalent will come through, but we are more than pleased with the steps that the Chancellor announced and the comments that are carried forward in the Bill. At the moment, we see that as a first step, but we look forward to greater work being done on this in the months and years ahead.
Mr Pat McFadden (Wolverhampton South East) (Lab)
Q
The Bill does lots of different things, but I would like to mention two. First, it onshores or incorporates a significant body of EU law through different directives into UK law and gives the governance of those to the UK regulators. Secondly, it sets up this overseas fund regime, by which it grants equivalence on a country-by-country basis. It says that the Treasury will make these equivalence decisions as well. The Chancellor announced the direction of travel last Monday.
How do you see the relationship between these two different parts of the Bill? In theory, in future, having onshored the body of EU law and the directives, we are now at liberty to depart from them if we so choose. Do you see a relationship between that debate around divergence and the degree of divergence that the UK decides to opt for and the equivalence decision that we now need from the rest of the EU?
Chris Cummings: It is worth reflecting on the good work that has been done so far in trying to bring the different regimes together and match equivalence. Looking to the future, there is a strong argument for the UK to continue to bolster its presence in the international standard-setting fora, whether that is the Financial Stability Board, the International Organisation of Securities Commissions, Basel, and so on. Our authorities can continue to play a very strong role in arguing for what our industry would prefer, which is global and international standards.
We continually push for international standards as a global industry because that allows us to operate with reduced bureaucracy and by taking costs out of the organisation so we can really focus on looking after client needs. The UK has an outstanding track record of having its policymakers and regulators taken seriously in those international fora, because of the scale of the market that we have in the UK and the sophistication of our capital market in particular. At that level, if we can push for international standards in an international environment, that reduces some of the potential friction between the EU and the UK or other jurisdictions about where divergence may or may not be happening. That is the first thing we would like to stress—the international nature.
Secondly, something that has become part of the discussion in terms of the future relationship of the UK and the EU, and which our industry thoroughly supports, is a much clearer focus on outcomes and outcome-based regulation. It is noticeable that across the EEA there are different approaches in different European jurisdictions, all of which have been judged equivalent so far. Recognising that different jurisdictions will walk up to the same issue from different directions, yet seeking to achieve the same thing, that is the material part.
The third area I would just point to, if I may, is the depth of relationship between the UK authorities and those across the EU, not just in ESMA, our European regulator, but in the national domestic regulatory authorities. It is still absolutely the case that the UK policy-making apparatus—the UK regulatory bodies—is seen to have considerable expertise to offer. So just because we start in different places, it does not mean that we should not see the UK taking a little leadership and the EU tacking towards us in terms of lessons learned because of the sophistication of the market that we can offer. That was one of the reasons why we in the IA, among many other organisations, through the Brexit process was keen to press for a regulator to regulate a dialogue, which could be technically oriented, focused on bringing market and regulatory understanding to bear and making sure that there was a no-surprises, keeping-markets-open focus through the process that we have been through.
So I do not see equivalence and divergence as axiomatically pulling in different directions. I think what we will undoubtedly see is a period where the definition of equivalence needs to be—we need to have a thoughtful discussion, actually, about the substance of equivalence, moving away from its ephemeral nature and the fact that it can be granted or dismissed within a 30-day notice period. We need to have a much more joined-up and mature discussion about how two major markets can keep on doing business together, particularly in investment management when, as I mentioned earlier, 37% of Europe’s assets are managed here in the UK and when, for certain member states, whether it is the Dutch pensions industry or something else, the quality of investment management conducted here in the UK is seen as a prized asset and something that they want to learn from and continue to enjoy the benefit of.
Mr McFadden
Q
Chris Cummings: We have been helping our members prepare for all shades of Brexit outcome over the last four years. Firms have taken the decisions that inevitably they would take, so they have set up extra offices, they have recruited further staff, they have gained the necessary permissions and licences from the national competence authorities. At the moment, even with, perhaps, no deal or a rather thin deal, we are as well prepared for that outcome as it is possible to be. We are giving much more thought to the companies that we invest in—everything from life sciences to technology, to transport and infrastructure, to make sure that those companies are well prepared for the Brexit outcomes, but from our industry’s point of view, recognising the equivalence decisions that have been made today, we are set as fair as any industry can be. I am trying not to over-promise, but suggesting to you that the industry has thought long and hard about potential outcomes, and we are as prepared as we can be for immediate issues.
Mr McFadden
Q
Chris Cummings: Thank you for the question. You have touched on such an important issue for our industry. Through the consultation on PRIIPs we highlighted to EU policy makers and regulators, to our own Financial Conduct Authority and others, the dangers that we saw in the PRIIPs key information document, the PRIIPs KID. Because of how the methodology for PRIIPs was created—taking a rather avant-garde view of the calculation basis—it meant that we could have negative transaction costs. Somebody could trade in the market and it would not only not cost them any money; they could actually lose money by making a trade. That led to some perverse outcomes that were pro-cyclical in the presentation of the information they gave.
Let me give you an example by reflecting back on a new fund that has had just two or three years’ experience. Imagine if, over the course of its life, that fund had had a very strong performance; it had done very well over a three or four year period. Because of the pro-cyclicality of how it had to report performance scenarios—looking to the future—it would have to present a potential investor with scenarios that were entirely positive and that generated levels of return that nobody in the industry would seriously put in front of a retail investor to suggest that this was what they could actually get. They were being forced to do it because of the methodology—the calculation basis—which reflected only that, if you had a few good years of performance, your fund would continue to have good years of performance. Similarly, if your fund had had a few bad years of performance, all you could project was that that bad performance would just continue and continue. That was because of the calculation basis and the way that the rules were written.
As an industry, we kept drawing this issue to the attention of the policy-making community in order to say that, if nothing else, when it comes to disclosure and investment, we have managed to convey the central message that past performance is no guarantee of future performance. Please let us keep on reminding people that past performance is no guarantee of future performance. Sadly, that requirement was taken away. The new calculation basis was introduced, which led to the industry ultimately being forced by its regulator to produce this pro-cyclical—and deeply misleading, in our view—information.
We continued to lobby against the wider introduction of the PRIIPs KID, arguing first that it should not be introduced. Secondly, having lost that argument and seen that that it was introduced only to closed-ended funds, we argued that it should be kept there until the wider implications were seen and not extended into the world of undertakings for the collective investment in transferable securities, because of the scale of UCITS and how many millions of people across the UK and Europe rely on them.
We were genuinely heartened when the Treasury announced that, post Brexit, it would be undertaking a review of the PRIIPs KID. What we hope to see, actually, is a wider-scale review of disclosure, whereby we can start from a different position. Given the technologically advanced world that we are living in today—the greater use of mobile phones, applications and computers, and just understanding that people engage with financial services in a very different way—could we have a rounder discussion about how we can do the thing that we want to do as an industry? We want to have a more engaged client base and to help them understand the different funds that are available and the different risk profiles of those funds, so that they can invest with more confidence, and certainly with more clarity about likely outcomes, rather than having to give false performance scenarios that simply nobody trusted in the industry.
Alison Thewliss (Glasgow Central) (SNP)
Q
Chris Cummings: I think this is a “two ends of the telescope” question, if you pardon the analogy. We tend to think a lot about the UK changing rules and changing approaches, and there are one or two examples of that in the Bill—we have just mentioned PRIIPs KID. There always seems to be a sense that it would be the UK moving away from the central European view of regulation. Of course, that need not be the case. There are a number of regulatory reviews that are timetabled to be considered by the European Commission. There is the alternative investment fund managers directive. There is the review of PRIIPs and so on. Looking two or three years out, there are quite a few opportunities where, actually, the UK may stay still because the rules work in practice and it could be the European Commission that is drifting away from the central scenario that we are in today. That is perhaps almost inevitable, looking 10 years out; there are bound to be changes to the regulatory architecture and the regulatory regime, because the UK will need to modernise its approach to regulation, and not only here and across Europe, but more globally, every economy is thinking about growth-oriented policies as a result of the covid crisis.
That is why, for us, we approach the discussion around equivalence very much from a point of view of saying, “Okay, even if the words on the page change, how can we make sure that the bandwidth is agreed by all sides, so that minor degrees of divergence from equivalence are not the straw that breaks the camel’s back?” That is why I come back to the point I was making just a moment ago about having a regulator to regulate a dialogue—a set, established forum where the FCA and the Prudential Regulation Authority can meet the European Securities and Markets Authority and the European Central Bank and so on, in order that information can be shared, regulatory approaches can be discussed and data can be shared as well, on a “no suprises” policy, so that we can make sure that in the UK and Europe there is a commonality of view, or a commonality of outcome certainly, that is being laboured towards.
I am confident that that would make sure that any discussions on equivalence are structurally much more sound and that we remove the political overlay. Across the industry, there is a concern that equivalence could be used as a political process rather than a regulatory one, which perhaps does not really lead to an outcome that is in the interests of savers and investors.
Every time a new rule is introduced that is different in the European Union from the UK, that adds costs to the industry, because we have to navigate our way through two sets of rules, which might not contradict, but simply do not join up. There are different reporting deadlines for data and so on. That is why we would really like to make sure we move to an outcome-based approach, rather than to a prescriptive, words on the page, exact phraseology, which will simply prove a headache for all.
Alison Thewliss
Q
Chris Cummings: Our friends in Switzerland have been navigating these waters for a period of time. The Investment Association continues to cultivate deeper relationships with our Swiss opposite number to see how it has mapped the terrain. We should make sure that we learn the lessons from how the US and the EU have negotiated when it has come to major directives. We have had a few instances where either the US was trying to apply its rules extraterritorially, into the EU, or where the EU sought to apply its standards and approaches outside the EU.
A really noticeable one was around costs of research. The EU, as part of the MiFID approach, suggested that all research had to be paid for. Investment managers had to pay for research produced by investment banks; in effect, we had to hand over cash. In the US, those payments were illegal. So the two regulatory regimes, both trying to protect consumer interests, found themselves at loggerheads.
Through industry intervention and working very closely with the regulatory authorities in the UK and in Europe and the SEC in the US, we were able to come up with a reasonably uncomfortable but workable compromise that has lasted over three years now, which gets reviewed on an ad hoc basis, but which allows both markets to function, even though the rules do not align. It is that kind of approach that makes you think, well, it works but it is sub-optimal. It feels ephemeral and, from an industry point of view, it is something else that is a distraction from the work of looking after our clients and investors. That is why we think that an openness and transparency around regulatory initiatives and regulatory thinking will help cement relationships into the future.
Alison Thewliss
Q
Chris Cummings: Actually, I think the Bill is a rather comprehensive document. I would defer to others who may have different opinions, but from the investment management industry, there is a good discussion about the overseas fund regime, which was essential for us; the future of passporting; a review of section 272, which we felt very strongly about; and of course equivalence. If anything, it goes towards what is most essential for our industry, which is protecting the delegation of portfolio management, because our industry in the UK is underpinned by an ability to manage the clients’ investments—yes, from the UK, but across Europe and much more internationally. Ensuring that ability to protect and preserve delegation is simply mission critical for the investment management industry, which is one of the few UK growth success stories that we have seen really expand over the past decade.
Alison Thewliss
Q
Chris Cummings: This is a matter that we have been working on very closely with our regulator, the FCA, and talking to Treasury about. It is part of the reason why, in firms’ preparations for—forgive the terminology—a no-deal or a hard-deal Brexit, the industry had to do the thing that we exist to do, which is look after our clients. So that has led to more substance, regulatorily speaking, being established in other jurisdictions, particularly in Luxembourg and Ireland, which have traditionally been the places where most investment management back-office work has been done, with the UK, of course, being the centre for fund management and the actual investment aspect of the industry.
Abena Oppong-Asare
Q
Chris Cummings: I am terribly sorry. I was having an IT glitch and I missed your question. I do apologise. Can I ask you please to repeat the question?
Abena Oppong-Asare
Q
Chris Cummings: Thank you for the question. We take the very strong view that we, as investors, rely entirely on public information. The quality of information produced by management is pivotal to the investment decisions that we make as investors. That has led to the point now where the investment management industry has a stake in more than a third of the FTSE. We think long and hard about investing in any particular company, listed or unlisted, and that is why we believe that it is the investor who is the client of the audit. A company pays for the audit, but it is the investment community that is the client of the audit. That is why we are so outspoken in pushing for better quality audits, and ensuring that the chairs of the audit committee take their responsibilities towards their investors seriously.
We absolutely worry about too close a relationship between an auditor and the company that they are auditing. That is why we feel that audits should be reviewed and we are constantly striving to have a more competitive ecosystem in the audit world, so you raise a very good point. If I may, I will offer to review that section of the Bill in more detail, and if we see anything that strikes us as being too weak or in need of strengthening, I will write to you with our proposals on that very quickly.
Abena Oppong-Asare
Q
Chris Cummings: Indeed. The audit profession has been through three major reviews recently. We entirely support the proposals to bring ARGA into existence. The work the FRC has been doing to prepare for the transition to ARGA has been commendable, but we need to go one step further and actually encourage policy makers to ensure that ARGA is brought into being as quickly as possible. Personally, I have been impressed by the new head of the FRC’s ability to convene and cajole the audit companies to exercise some soft power, to encourage them to improve the quality of audit. Still, it is not the same as having that statutorily recognised independent regulator, and we encourage this Committee—and other parliamentarians —to push for the establishment of ARGA as soon as possible.
The Chair
I call Gareth Davies. Gareth, I think you will have to move to the microphone over there.
Gareth Davies (Grantham and Stamford) (Con)
Q
Chris Cummings: You are right in saying around 75% are UCITS. UCITS have become a global brand. It is a high watermark, at least currently, in an investor-centric investment vehicle, and rightly recognised by jurisdictions across Europe and internationally. In thinking about how the UK develops its own UK fund regime, which is some work that the IA has put forward to the Treasury and the FCA, we have taken the UCITS regime as our benchmark to think about how it can be expanded upon; how can it be modernised given the experience with UCITS over the last few years.
One of the core issues that the industry takes very seriously is better governance of funds. That is one of the reasons why we supported our regulator, the Financial Conduct Authority, in stipulating that, at fund level—not at company level—there must be an independent, non-executive director who asks the big questions about governance of the fund, and ensures that there is a clear value for money assessment at least annually, to drive down costs for investors and to ensure that investors are getting a better deal out of those funds. In terms of modernisation, we think that a great deal is already happening in the industry, with more to come.
Although money market funds are used by some retail investors, they are seen more as a capital markets instrument. Given their brevity, they tend to attract a lot of overnight money. Their particular structures are perhaps for more sophisticated professional and institutional investors. They are a useful counter, but really for us UCITS are the gold standard at the moment. We are naturally keen to extend the UCITS regime, especially post Brexit.
That is why we brought forward our own proposals for a long-term asset fund, which we think will not only modernise the UK fund regime but draw together some of the more interesting parts from other fund regimes. It has the benefits of an open-ended fund, and some of the advantages of a closed-ended fund, with an extra layer of governance. It will allow UK savers and investors, institutional as well as retail, to invest more in infrastructure, taking a longer-term view, and in what traditionally have been higher-growth companies—technology companies, life sciences, biotech and so on—taking a much longer-term perspective. We think that the long-term asset fund will be a great complement to the existing UK and European fund family.
The Chair
Does anyone else on the Committee wish to catch my eye in the remaining four minutes? In that case, thank you very much, Mr Cummings, for your evidence.
Examination of Witnesses
Emma Reynolds and Catherine McGuinness gave evidence.
The Chair
We move on to our second panel of the afternoon, and the fifth in total. We have Emma Reynolds, formerly of this parish, now at TheCityUK, and Catherine McGuinness from the City of London Corporation. We have until 3.30 pm for this panel, and I will pull the plug if it goes over. Emma and Catherine, could you first introduce yourselves for the record, please?
Emma Reynolds: I am Emma Reynolds from TheCityUK. We represent the UK-based financial and related professional services industry, which employs 2.3 million people, two thirds of whom are based outside London. We are the largest taxpayer, biggest net exporting industry and contribute over 10% of the UK’s total economic output.
Catherine McGuinness: I am Catherine McGuinness, policy chair at the City of London Corporation. We are the local authority for the square mile. In addition, we work very closely with the UK’s financial and professional services sector, which carries our name even though, as Emma says, it is a UK-wide sector.
John Glen
Q
Emma Reynolds: Thank you, Mr Glen. We support the measures in the Bill, and both the overarching and the stated objectives. It is absolutely right that the UK Government are onshoring the regulations. There are obviously other measures within the Bill that are extraneous to that, which we support. The Bill is a welcome first step, but we look forward to working with the Government to develop an overall strategy for the financial services sector that could pull all the different strands together, building on what the Chancellor said last week, which was very welcome.
John Glen
Q
Emma Reynolds: It is a very welcome first step. All I would say is that we, as an industry, have a broader agenda about our industry’s long-term competitiveness going forward. I would not have expected to see that in this Bill. We had a very good relationship with Government, particularly with the Treasury, but some of the other issues that we are concerned about relate more to other Departments, whether it is access to skills and talent from abroad or green finance or other issues that are not in the Bill. It is a welcome first step.
John Glen
Q
Catherine McGuinness: Thank you for inviting me to give evidence. I cannot answer on the technical ability of the regulators in detail, other than to say that, in our experience, they are very capable of adapting and innovating. Indeed, we heard last week at Mansion House from both the Financial Conduct Authority and the Prudential Regulation Authority about their plans. Obviously, the regulators will be gaining significant powers under the Bill. It is important that we look at how those powers are scrutinised, including by Parliament.
On that front, the International Regulatory Strategy Group, which both TheCityUK and the City Corporation support, has suggested that parliamentary scrutiny be strengthened and reordered, and that the role of the Treasury Committee be complemented by setting up a joint Select Committee on financial regulation to look in detail at specific pieces of financial services regulation. That would be important to strengthen scrutiny, as we hand more responsibility to the regulators. It would also be useful––and the IRSG has recommended it––to increase the transparency of decision making by both the Treasury and the regulators, and to improve scrutiny. I am not sure if I have fully answered your question.
Mr McFadden
Q
The Bill does lots of different things but two big things are that it transposes, or onshores, lots of different parts of EU regulation from many different directives. It gives powers to the UK regulators to govern all that. In doing that, as we come to the end of the transition process, there is greater freedom for either the Treasury or the regulators to diverge from that body of EU law. The Bill does that, but it also has this overseas markets vision, which is granting equivalence on a country-by-country basis, to the 9,000 funds that are domiciled overseas but which operate in the UK. I want to talk a bit about these two different parts of the Bill. Starting with you, Emma, what do you think your members’ attitude is to onshoring this body of EU law? Do they broadly regard it as something that they would like to stick with or are there areas that they would quite quickly want to diverge from and, if so, what would be the most prominent areas?
Emma Reynolds: We were delighted that the Government took the unilateral decision last week to grant the EU equivalence in a number of different areas. We are still hopeful that the EU might follow suit. We have been calling for a technical outcome-based approach to equivalence for some time now. Within that, you could have different rules but the same outcomes. Even if there are pinch points around Solvency II—only some elements of Solvency II—you could have different rules in the UK that achieve the same objective.
From now until 1 January, we will remain technically equivalent. Inevitably, over time, there will be some changes in regulation, both on our side in the UK and in the EU. The EU is currently reviewing some of its own directives, MiFID being a case in point, but there are others too. We do not want to see divergence for divergence’s sake. We would like to encourage a strong dialogue between regulators in the UK and the EU. There already is that dialogue, but we would like to see a framework for that plan. If you are a member of ours who trades across borders, you want similar or the same rules.
Mr McFadden
Q
Emma Reynolds: We are still hopeful that the EU might take a similar decision to what we saw last week. We would not like to see divergence for divergence’s sake. There is no immediate appetite for great divergence from EU rules from our members. Does that answer your question?
Mr McFadden
Q
Catherine McGuinness: First of all, I do think the regulators can handle this, but I think it is important that we look at the right degree of scrutiny. Yes, when we speak to practitioners with the International Regulatory Strategy Group, it is their view that a joint Select Committee on financial regulation, which could look in detail at pieces of financial services regulation, would be a useful way of enhancing and embodying that scrutiny.
The Chair
For the Scottish National party, first of all, their spokesperson, Alison Thewliss.
Alison Thewliss
Q
Catherine McGuinness: Actually, what I was mentioning was the International Regulatory Strategy Group, which is a cross-sectoral group of practitioners, who come together to look at a number of issues and make recommendations. We can provide the Committee with their recommendations in this space. As I said, they are suggesting that we look at a joint Select Committee on financial regulation in Parliament. I am happy to share with the Committee more details about the International Regulatory Strategy Group and its current programme of work, if that would be useful, and to provide copies of the paper in this space.
Alison Thewliss
Q
Catherine McGuinness: Regulation is a complicated issue. I think that if we are handing powers to the regulators to make regulation, when over the past few years we have made regulation through the EU, where there is level after level of consultation and development, we need to look at how we replicate that and put in the appropriate level of scrutiny as we take things forward ourselves.
I have to say that we very much welcome this Bill as a step in the right direction in getting the framework in place but, as people have said, it is a first step. We think it is then important to move on and look at the next round in the Treasury’s consultation on the regulatory framework, as well as how to implement—to stray a little from your question—the Chancellor’s statements in his announcement last week.
Alison Thewliss
Q
Emma Reynolds: I would agree with Catherine and echo what she has said. Obviously, there are significant transfers of powers to the regulators, given that we are onshoring this regulation. In an EU context, we had the European Parliament’s Committee on Economic and Monetary Affairs, which is a sizeable Committee with huge resources and an enormous amount of time to write and draft amendments in this area.
It is not in the tradition of our Parliament to have such Committees. In a way it would mean this Bill Committee sitting permanently. In Parliament, working with industry and Government, we need to work out exactly how we will do it, bearing our traditions in mind. That is why the IRSG, which is a point of contact between us and the City of London Corporation, came up with some of the ideas in the paper, which Catherine mentioned. We are very willing to share that with the Committee.
Alison Thewliss
Q
Emma Reynolds: Yes, we sent that briefing out. Thank you for referring to it. Yes, we would like to see more guidance and clarity from the Government as to whether the UK’s version of the so-called CRR II—Capital Requirements Regulation II—is going to differ in any substantial way from the EU’s CRR II. Some of our members have put resources and time into planning for that. It is just a question of ensuring that we have the most efficient planning for what comes next.
Ms Angela Eagle (Wallasey) (Lab)
Q
Catherine McGuinness: The Bill must be viewed as part of a package with what we then heard from the Chancellor’s announcement. It is a first step, but it does not set out an ambitious overarching strategy for financial services for the future. This is a critical part of our economy and we would suggest that we need that strategy as we move forward. The Chancellor’s announcement last week and the emphasis on openness, innovation and green seem to us to be a significant next step, but we need to look at an overall direction for this important part of the economy.
Ms Eagle
Q
Emma Reynolds: We agree entirely with what Catherine has just said. I think the Chancellor has made a start prior to the consideration on Second Reading of the Bill. He obviously set out certain key reforms in certain areas, most notably in green finance. He also launched a number of calls for evidence and taskforces. Working in partnership with Government, industry would like to see the Government come forward with a strategy that pulls all of that together. That is not an easy thing to do, but we are a world-leading financial services sector in the UK, and we want to see that continue. This is a question of partnership with the Government. We are not saying we want it done to us without us being in the room, but we do think there is probably more to do to create a more coherent strategy for going forward.
Ms Eagle
Q
Emma Reynolds: If you are a global company that trades across borders, not just in the EU but in other jurisdictions, what you really want is the same or a similar set of rules. You certainly want global norms and standards on which those rules are based. There is no clamour for significant divergence from what we have. It is worth saying that although we are technically equivalent right now, and that will not change until 1 January, there will need to be responses from regulators, in terms of new regulation going forward.
We have the rise of FinTech, which brings its own challenges, but is a great asset to the UK. We have green finance, as well as some of the socioeconomic trends that have been accelerated by covid. All of these bring new challenges, and so our regulation cannot afford to sit still. We want to avoid unintended divergence when the EU and the UK are facing some of the same challenges. We may go about making our rules in a very different way, but if we could achieve broadly the same outcomes, that could mean we were equivalent, and that would provide advantages to those of our members who trade here and in the EU.
Ms Eagle
Q
Catherine McGuinness: I would say two things here. First, if we are not at the table helping to shape the regulation, there is, of course, the risk of divergence from either side as we exercise our own autonomy. I think that global standards are going to be critical for all of us, because we are talking about markets that operate across borders. It is in all our interests—the EU’s, ours and the institutions in the sector—to have a set of global standards around global issues. So, yes, there is a risk of divergence from either side. Keeping the conversation going as the regulation develops is going to be critical.
Taking the green question, for example, we have the EU, which is fairly advanced with its own taxonomy. We are now going to be looking at our own taxonomy, and I think that is a great thing that we should be doing. I also think that green finance is an area in which we can really lead the way, including in regulation. It will be important that we look at how those systems mesh together, and this is a conversation that the sector is encouraging our regulators to have with other countries, too—not simply the EU. I was nearly late because I came from a panel in the US speaking about the importance of a regulator-to-regulator discussion about some of these issues, and the role the sector might play in helping to develop thinking. It is possible that we may diverge, but it is in the interest of customers and businesses that there should be well regulated financial markets, with consistent rules and regulations over cross-border challenges.
Ms Eagle
Q
Emma Reynolds: I hope you do not mind if I take your last question first, because I think it sets the scene for the rest of your questions. There is very little in the deal for financial services, if there is a deal. However, our industry thinks it is incredibly important that there be a deal, because that would leave the door open for the EU granting equivalence in certain areas of financial services, and for other agreements that are essential to services more generally, such as provisions around data; frankly, if there is not a better agreement on that between the two sides, that could be very difficult, not only for our members, but for other service industries, too. I hope that answers your question on deal versus no deal.
There is nobody in our industry I could name who wants a race to the bottom. That is not the way to make yourself more competitive. We view the UK’s high standards as giving us an competitive edge. We have some of the highest standards in the world. We do not think that there will be a race to the bottom in that way.
On your question about protectionism, I think there is a live debate right now in the EU. One EU interlocuter put it to us very succinctly the other day as the trade-off between location and efficiency. European business has access at the moment to deep and liquid capital markets in the UK, which they find very useful, and which they cannot find in the EU currently. We would like to see that continue—that is in the interests of businesses not only here, but on the continent—but you are right that there is a live debate about what happens next, and whether location is more important to the EU. That debate is going on not only in the EU; covid has accelerated the trend towards protectionism, which is why it is so good to see that the UK Government are taking such an open approach in the Bill. We would encourage that to continue, because we think it is one of our strengths, and it gives us that competitive edge.
Ms Eagle
Q
Catherine McGuinness: Yes, but I think it is welcome that the FCA, under its new leadership, is also carrying out a review. That is appropriate. Clearly, we are asking a new role of it, and it is absolutely appropriate that it should review how it operates as it takes that on. I am very confident in our regulators, but I am also pleased to hear that the FCA is carrying out its review. Secondly, I would go right back to my point around the need for scrutiny and challenge in that space. That should involve not just the Joint Select Committee, but looking at the Treasury’s role.
May I revisit the question about how the UK can retain its voice in setting standards?
Ms Eagle
Q
Catherine McGuinness: I feel I missed a couple of points there. It is true that part of the way we will retain our global leadership in standard setting is by bilateral dialogue and co-operation, regulator to regulator, with other countries. There is also the question of how we work with the multilateral organisations. We need to take a good look at how we engage, on our new footing, with the Basel committee—how we engage with other global standard setters. We have a good story to tell. I think next year gives us a very good opportunity, as we take up the presidency of the G7 and with COP26 coming up. I have already mentioned our potential leadership on green standards. We should really look at next year as part of this new chapter for financial services, and look at how we can make clear our place in standard setting, and in that conversation around global standards.
Stella Creasy (Walthamstow) (Lab/Co-op)
Q
Emma Reynolds: There are measures in the Bill that do, as I understand it, reflect some of the measures that the EU has taken around prudential requirements. In the past, there has been a bit of a one-size-fits-all for different sizes of companies. For smaller companies that carry a smaller risk, you need to take a proportionate approach to regulation. That is by no means saying that we want lower standards, or a race to the bottom; it is about considering firms of different sizes and the risks that they bring.
Obviously, there are challenges every time there is a significant change such as this, and 1 January will look and feel very different, but there are some opportunities, too. For example, we will be in a position where the UK is making laws and regulations for one member state. I mentioned the fast-moving challenges coming up, involving socioeconomic changes to do with covid, FinTech and green finance; the UK will have more flexibility and agility, and so can perhaps act more quickly than before, or than the EU can, operating with 27 member states.
Catherine McGuinness: I think that is right. To add to what Emma has said, the Bill is very helpful in demonstrating the planned way forward. People will be looking for an ongoing commitment to high standards—and, yes, agility in how we make our rules, but also a rigor in that. We cannot stress often enough the importance of this country’s openness to welcoming trade and business, and to high standards, against our strong regulatory backdrop.
It is very welcome that the Treasury will be looking at the strong patchwork of the bases on which people can come into the UK and operate here—the overseas persons exemption and so on. The Treasury will look at how that whole framework can be knitted together in a more coherent manner, as I understand it. What people will be looking for is an ongoing commitment to high standards and the ability to do their business.
The Chair
Are there any further questions? In that case, I thank our two witnesses on this fifth panel. Emma and Catherine, thank you for your evidence.
Examination of Witnesses
Adam Farkas and Constance Underwood gave evidence.
The Chair
For this third afternoon evidence session—the sixth in total—we have Adam Farkas and Constance Underwood from the Association for Financial Markets in Europe. It is our first panel in person. We have until four o’clock for this session. Adam and Constance, do you want to start by introducing yourselves for the benefit of the Committee, and for the record?
Adam Farkas: Good afternoon. Thank you for inviting us both. We are delighted that we decided to come physically. We did not know what the other invitees would decide. I am Adam Farkas, CEO of the Association for Financial Markets in Europe. AFME is a pan-European trade group representing a broad array of European and global participants in the wholesale financial markets. Our members include banks headquartered in various jurisdictions, spanning from Japan to the United States, and inside and outside the EU. What they have in common is that they all do business in the UK and the EU. Our purpose is to serve as a link between capital markets, participants and policy makers across Europe.
My experience in the financial services sector spans over 30 years, covering both private and public sector bodies. Prior to joining AFME this February, I was executive director of the European Banking Authority for nine years, and before that, I acted as executive chairman of the Hungarian financial supervisory authority. In my capacity at the EBA, I also served on the Basel committee for eight and a half years. I should note that there are a few topics directly related to my prior position at the EBA that I am not permitted to address today because of my restrictions, but Constance will address those as appropriate.
Constance Usherwood: I am Constance Usherwood, director of prudential regulation at AFME. My experience also covers both public and private sectors. I also worked at the European Banking Authority some time ago, and have worked for a globally systemically important bank. I am very grateful for the invitation to be here with Adam today to give evidence. I hope that that is helpful to the panel.
John Glen
Q
Adam Farkas: I will try to answer the first part of the question, but then I will leave it to Constance. because this is one area where I was personally involved, and I am not allowed to comment.
On the first part of the question, it is beyond doubt, and everybody in the public and private sector recognises it, that the UK as part of the European Union was playing a leading role in shaping and forming financial services regulations in the Union. That is clearly evidenced by the leading role of London and the UK more broadly as the financial services centre or hub of the Union. That is beyond any doubt. It was respected as such, and had a very strong voice in shaping the different regulatory initiatives. For the future relationship, it is important to have engagement and openness, and that a co-operative attitude, or co-operative setting, is retained, with two autonomous decision-making jurisdictions, in which the two sides can co-ordinate, exchange views and possibly even influence each other’s new initiatives or the evolution of their respective regulatory frameworks, with the potential aim of maintaining as much consistency as possible and practicable. On the investment firms regime, I pass the floor to Constance, because I was part of the development of the standards at the EBA, so I must refrain from comment.
Constance Usherwood: With the investment firms prudential regime, the UK authorities have played a key role in the development of the prudential regime that is specifically targeted to the business models of investment firms and making sure that it is proportionate. In that respect, we fully support the approach that is being taken today. In terms of the application to the different prudential frameworks and of the regimes versus the CRR, the bulk of our membership will probably not be directly impacted by the regime due to their size and activities. That would also tally with the approach that the EU has taken.
John Glen
Q
Constance Usherwood: Yes, I would agree with that, absolutely.
John Glen
Q
Constance Usherwood: I am going to apologise, but I think that Adam is probably best placed to come in on this one.
Adam Farkas: We very strongly support the clear and oft-repeated message of the UK authorities that active transition by transaction parties to the new risk-free rate is the only way to achieve certainty of outcome in the transition. We have promoted this message regularly and we have developed market standard language to support it that can be used by investors to assist them in this process.
A very difficult part of the transition process relates to what happens to legacy contracts already in place that reference the old LIBOR rates that are being phased out. Within legacy contracts, there are the so-called tough legacy contracts, which are very difficult to repaper or change the reference in. They cause the most complex challenges for end users as well as for members of AFME or other financial services providers. We therefore very much welcome the provisions of the Financial Services Bill that give the FCA new powers to mitigate that risk by directing the administrator to change the methodology of LIBOR if doing so would protect the consumer and market integrity. That would enable the FCA to stabilise certain LIBOR rates during the wind-down period so that their limited use in legacy contracts can continue. The answer is yes, we are very supportive. None the less, we welcome the further clarity which, I think, will be forthcoming on 25 November from the FCA and the Treasury on what steps the authorities are planning to further this objective, because there are some outstanding questions that require clarification. I would be happy to go into them, but in the interests of time, I will stop there.
John Glen
Q
Adam Farkas: That is a difficult question to answer because we have not speculated on different outcomes, but certainly the path that the Bill is taking is something that we can very strongly support.
Mr McFadden
Q
Adam Farkas: Very briefly, equivalence determinations provide the major legal framework for different jurisdictions to provide access to service providers that are licensed and supervised in each other’s markets. To answer your question, if equivalence determinations by the EU are not forthcoming, or not brought forward at pace or with the width that is expected, that will put limitations on the access of service providers—financial services companies and firms—to the EU market. This is really an issue of market access.
Mr McFadden
Q
Adam Farkas: In very simple terms, if a company is licensed in the United Kingdom and does not have access, or loses access, to the EU—of course, that is completely free under passporting regimes—it will find limitations in serving clients or trading with counterparts in respect of the financial services that it provides in the other jurisdiction, which would be across the channel in this case. A lack of equivalence has been a risk throughout the process of the negotiations, so authorities have made significant efforts to prepare regulated entities—financial firms—and to force them to prepare for all eventualities. In other words, everyone is hoping for the best but preparing for the worst.
AFME members—of course, our membership is tilted towards the large players—have made extensive preparations over the years to get ready for the worst outcome, which would limit direct market access from the United Kingdom to the EU, by way of setting up entities, moving activities across the border and making all necessary arrangements to allow them to continue to serve their clients across the European market. Of course, if equivalence is granted and access is provided on that basis, it would improve the general situation of market access between the EU and the UK, so we welcome the Chancellor’s announcement and the UK Government’s determination last week to grant equivalence within a certain scope to third countries, including EU countries.
Mr McFadden
Q
Adam Farkas: With a lack of equivalence. If no market access is provided on another basis, the main mechanism is to establish entities that are licensed, capitalised and supervised in the other jurisdiction, meaning that that entity can have access to the market, but that involves costs and operational implications.
Mr McFadden
Q
Adam Farkas: It is a very difficult question. We all know the history of what happened. What is important is what happened afterwards and how the authorities decided to move away from the possibility of manipulating these rates. There is a global co-ordination effort and a long-standing global discussion on transitioning out of the old way of setting different financial benchmarks.
Regulations were put in place, changes to methodologies were put in place and public institutions took a stronger role to make sure that benchmarks are more robust and not prone to manipulation or potential distortions. I think, in that sense, this issue of reputation and the credibility of these benchmarks has been very strongly addressed by the authorities globally, and also in the UK by the authorities. I believe strongly that this will lead to a much sounder and more credible framework once the transition is completed.
Mr McFadden
Q
What is your view of what will happen on the EU side, absent a British influence, as financial services regulation inevitably evolves and develops? We no longer have one table, if you like. We have two tables—a British one and a European one. Does that mean, inevitably, that the two sets of regulations gradually spin off in different directions, or is that not the case?
Adam Farkas: Before I answer the bilateral question, I think that there are other forms of international co-ordination of financial services policy. One is multilateral in the form of the FSB, IOSCO—that is on market rules—and the Basel committee, which deals with prudential rules. Both the EU and the UK are significant players and participants in this global co-ordination. In the interest of having open, transparent, and well-functioning financial markets and maintaining international flow in capital movement, allowing both banks and corporates to manage their risks cross-border, these multilateral engagements are extremely important. They actually provide a very good platform to co-ordinate the major direction of financial regulation globally.
Now, the bilateral co-ordination will change, because it will take the form of the so-called bilateral regulatory dialogue—or whatever similar term the EU uses—with third countries, which provide a platform. Inevitably, if two jurisdictions take a separate course in legislation, there will be some divergence between the rules. What is very important is that if that happens, it is transparent to this multilateral setting as well as in the bilateral context; it is well-explained and co-ordinated as much as possible; and it is only done if there is a real justification for it.
Mr McFadden
Thank you. Constance, do you want to add anything?
Constance Usherwood: I would add that in the context of the Basel framework, that does allow for some adjustments or tailoring for jurisdictions when it comes to implementing that in law. That is certainly something that we would expect the PRA to look at, going forward—such things as mortgages and trade finance. There are little aspects of the Basel framework that already allow for some consideration of how that is best tailored to the market in which it is being implemented.
Alison Thewliss
Q
Adam Farkas: The Bill provides the possibility to achieve those recommendations. It provides the framework for future UK financial regulation. It provides the possibility, delegated to the respective regulatory authorities, to shape the UK’s financial regulation. However, if it is going to be a transparent process, as it is expected to be under the Bill, that opens up the possibility of retaining co-ordination with the EU in a new setting. The Bill sets the foundation to meet the policy recommendations that we put forward, but it does not guarantee it.
Alison Thewliss
Q
Adam Farkas: Yes.
Alison Thewliss
Q
Adam Farkas: I am probably not qualified to answer that. I am allowed, but I am probably not qualified. I think the FCA, as an authority, has been playing a leading role globally in the whole transition process and the whole global co-ordination process. The Bill’s intention to give a strong role for the FCA in defining the last steps of what happens with the legacy contracts and with LIBOR as a benchmark is pointing in the right direction, but I will not go further than that.
Alison Thewliss
Q
Adam Farkas: That is probably a legal question.
Alison Thewliss
Q
Constance Usherwood: The Basel 3.1 aspect, in particular, is about ensuring that banks hold capital commensurate with the risks that they take. As such, the Basel framework that it seeks to emulate in UK law does not consider climate risk as a risk. That is not to say that that work is not under way in international forums. The Network for Greening the Financial System is certainly looking at how to incorporate climate risk—or whether it can be incorporated—into prudential regulation. It is at a very nascent stage. I think the work that the PRA is doing in that forum is very positive, as well as such things as climate risk stress testing.
That is something that the PRA might want to open the door to later, once it is more considered and technically advanced. Certainly, the sustainable lending aspect is an important mandate that it has to look at. We remain interested in how it develops that mandate in its consideration of the rules.
Angela Richardson (Guildford) (Con)
Q
Adam Farkas: Answering the first question involves a bit of speculation into the future. Given the importance of the City of London as a global financial centre, and given the weight and experience of UK authorities in global standard-setting bodies, I would be inclined to confirm that yes, the United Kingdom is expected to remain a strong voice in multilateral standard-setting bodies and in multilateral discussions on financial stability, as well as in micro-financial regulation, markets, insurance and prudential banking regulation.
There is probably no conclusive answer to your second question, but the Bill certainly opens up the possibility of creating a framework within the United Kingdom that will delegate a lot of rule-making powers to the respective authorities—the PRA and the FCA. It will provide a well-defined, clear and transparent framework, and it will also define an accountability regime with that framework. In my view, that will establish the possibility—subject to the detailed rules that will then be adopted—that financial regulation as a whole will continue to ensure financial stability in a global financial centre.
Gareth Davies
Q
Adam Farkas: I do not know. What I can say is that the equivalence determination process consists of two stages. One is a technical assessment that involves a detailed assessment of the rule book for the set of regulations, with questions and interactions. In every jurisdiction there is a second stage, which is the determination itself after the technical assessment. That stage is a much more political decision, or is a decision of a more political nature; it considers other aspects in addition to the interests of the jurisdiction making the determination. The answer probably lies there, but I have no information on why equivalence decisions have not yet been made on the EU side. It is not true to say that no equivalence decisions have been made; some have been determined and published, even if on a temporary basis.
Gareth Davies
Q
Adam Farkas: I do not think I would like to express a view. One point of correction I would make is that there is no such thing as overall equivalence; unfortunately, the equivalence decisions are very technical and made bit by bit. There are equivalence provisions in different parts of the EU legislation, and there are equivalence decisions possible in parts of the UK legislation. Looking at the announcements from the Chancellor, it is very specific and is focused on certain activities or institutions that are deemed equivalent to the domestic regime. There is no overall equivalence, and there will probably not be.
On the Swiss equivalence case, I will refrain from commenting, if you will allow that.
The Chair
We have until 4 o’clock for the entire session, so you can ask a quick question.
Gareth Davies
Q
Adam Farkas: As an association, we are very strongly advocating the openness of markets, both in the United Kingdom and in the EU. We are very strongly advocating maintaining the co-ordination of dialogue and the consistent implementation of global standards. Of course, it is very difficult to speculate which way the EU will go. What I can say is that our members have a very clear view on this issue, and we are—
The Chair
Adam, can you please speak into the microphone? For the recording, you need to be in the right place.
Adam Farkas: Yes, of course.
Our position on this issue is very clear, and we have been open and transparent about our members’ position on arguing for market openness, maintaining consistency and, on the basis of constituency, maximum market access and flow of capital and services between the UK and the EU.
The Chair
Constance, do you have anything to add?
Constance Usherwood: Generally, we hope that the EU and the UK will establish a close, co-operative and stable long-term relationship for financial services, and it is very important to underline that that should be the long-term goal. I think the Bill leaves the door open for doing that.
Julie Marson (Hertford and Stortford) (Con)
Q
Constance Usherwood: It is very clear that the UK Government’s intention is that the UK should maintain high, consistent and global standards. From my knowledge of interaction with the PRA, it is committed to doing that. That was also made clear last week by Sam Woods in his Mansion House speech—it is not about a race to the bottom. In so far as a jurisdiction maintains a predictable, open and transparent rule-making process—we expect the PRA to do that with consultation processes—and operates a high, globally consistent standard, that is a really good competitive base from which global banks can operate out of.
Ms Eagle
Q
Adam Farkas: Given that it is providing a framework for the future regulatory architecture in financial services, I am not suggesting that these are missing, but I will list what is important for the industry: that the framework is predictable—that is key for the players—that the framework provides transparency, so that when the rule making is happening under the Bill, the process is transparent; that it is possible for the industry to engage, so when different rules or pieces of the rules are consulted on, there is sufficient accountability provided, but that is not for us to decide on; and that sufficient time is provided for implementation—that is always a critical issue for the industry.
I think that what is proposed in the Bill goes very far on all those points. In that sense, it is difficult to give a definite answer of what else would need to be in the Bill. Those are the points that we are looking at with great interest in relation to the final adoption of the Bill.
Ms Eagle
Q
Adam Farkas: I agree that this is an issue that will need to be addressed. There is a question as to whether it needs to be addressed in this particular Bill or in the context of the future rule making by the FCA, but the points raised are valid ones and we also agree with them.
Ms Eagle
Q
Constance Usherwood: Yes, I think we support it. One thing that I would note is that there are a lot of rules to implement; the Basel III framework that is going into this part of the Bill is over 160 pages long, so there is a lot of technical detail that will need to be considered. We hope that the full impact assessment is therefore done on that basis for the UK banking sector, and also that the consultation process allows the industry to have a meaningful input. I notice that there have been a couple of smaller consultations done recently by the PRA that have only required a month or two months for consultation, and certainly that is something we hope will be fully considered when they put the rules before industry.
Ms Eagle
Q
Constance Usherwood: Yes, I think that is probably the best way forward and I agree with the approach that has been taken. The other alternative is that it would all have to come before you and you would have to look at all these pages. I think that the regulatory authorities are best placed, and the most technically capable of really assessing it, and doing the impact assessment that will ensure that it is tailored to the UK banking sector.
Ms Eagle
Q
Constance Usherwood: Usually we would expect the impact assessment to be done before the rules are formalised, but it is a fluid process and I would not be certain what the PRA has in mind. We imagine it would take place at some stage prior to any finalisation of the rules.
Adam Farkas: Normally when detailed rules are produced there is some sort of obligation on the authority to provide an impact assessment with it, on the basis of the draft rules. Then, typically, there is a consultation, so opinions are sought from different stakeholders, and then the rules are finalised. The impact assessment is clearly a key feature of financial services rule making, at EU level and at national level. It is part of the broader accountability, which is very important.
The Chair
If there are no further questions, I thank our two witnesses for their evidence.
Examination of Witness
Gurpreet Manku gave evidence.
The Chair
Q
Gurpreet Manku: I am Gurpreet Manku, the deputy director general and director of policy at the British Private Equity and Venture Capital Association. The BVCA represents more than 300 private equity and venture capital firms in the UK, ranging from the smallest venture firms investing in start-ups, all the way through to growth-capital and mid-market firms investing domestically. We also have a number of larger pan-European and global fund managers.
The Chair
Thank you very much. We are going to follow the time-honoured tradition of going first to the Government, then to the Opposition, and then to other members of the Committee. We will start with the Minister, John Glen.
John Glen
Q
Gurpreet Manku: We welcome the Financial Services Bill as it implements a prudential regime for investment firms that is tailored to the specificities of the UK market while maintaining world-class regulatory standards. To give you some context, the UK has already regulated private equity and venture capital firms. Broadly, there are two categories. First, we regulate the managers of private equity and venture capital funds. Those entities are regulated under the alternative investment fund managers directive. We also regulate advisory entities under MiFID. Those firms will be most impacted by the investment firms prudential regime. These advisory firms advise on and arrange private equity transactions for other regulated fund managers, sometimes within the same group. Those other managers tend to be based overseas, including in the US, Asia and Europe.
That is important because the fact that the UK has a lot of those advisory entities signifies that the UK is a global hub for private equity and venture capital. Many international firms choose to make the UK a base for carrying out UK, European and, in some cases, international investment and fund-raising activity. Since the inception of the investment firms review, the BVCA has been in dialogue with both the FCA and the Treasury about its implementation.
We welcome the introduction of a tailored regime that appropriately covers the activities of these firms, as well as their size, and the relative risk they pose to the financial system when compared with other banks and financial institutions. The new regime will lead to additional requirements for some of those firms, particularly the advisory entities that I mentioned, including higher capital requirements. We submitted feedback to a recent FCA discussion paper on the need to calibrate these new requirements for the risk posed by those firms. Our key ask for the FCA and the Treasury is that an appropriate transition period is available to those advisories.
Interestingly, the FCA’s discussion paper acknowledges that while there are transition provisions in place for other categories of investment firms, there is a gap for the category that includes these private equity advisers. That FCA category in the UK is known as exempt CAD—capital adequacy directive—firms. That is not just an issue for private equity and venture capital firms. There are many other types of firms in this category. My understanding is that they tend to be smaller financial services firms, such as corporate finance advisory boutiques and other consultants. That reflects the UK market, which has a huge number of financial services firms at the smaller end.
We think that the omission of this transitional period in the EU text was not deliberate and was just a mistake. The category of advisers that we are referring to should also have a transition period. The benefit of the Financial Services Bill is that it will enable the FCA to correct this omission and ensure that all types of investment firms benefit from transition rules.
Finally, I welcome the confirmation that the target implementation date is January 2022, because I think that will give sufficient time for the FCA to consult on the detailed rules and we need that lengthy consultation period. It will also give firms the time that they need to implement them.
John Glen
Q
Gurpreet Manku: Interestingly, we have been speaking to the FCA about this since 2016. The need for a special investment firms prudential regime emanated out of discussions in the UK, because there was a recognition that regulatory requirements that apply to banks do not necessarily work in an investment firms context.
The FCA does understand the breadth and variety of firms that operate in the UK. The confirmation that there will be a bit more time to think through how the detailed rules will operate in practice is really welcome. If I had one ask, it would have been for more time to look at the details of what would follow.
Mr McFadden
Q
Gurpreet Manku: No, actually they will be holding more. The bulk of the members most affected are in that category known as exempt CAD. It is an odd category that exists in UK legislation. At the moment, that broad category of firms is required to hold a level of capital set at €50,000. Under the new regime, the calculation methodology will change to a quarter of their fixed annual overheads. For many firms, that will lead to an increase in capital requirements, which is why I referenced the need for a transitional period. A few years ago, we recognised that this was coming, and the transitionals were always going to be a feature of this regulation. In terms of what it means in practice, for some firms, there would have been a fixed requirement of €50,000, and that will move to several million pounds; for others, it might not be much of a jump. There is a wide variety of firms out there in the UK market. Those that might not be in my constituency could also be significantly affected.
Mr McFadden
Q
Gurpreet Manku: What I have seen in recent years is that other jurisdictions have tried to emulate what we have here. That is because the UK has always been an attractive jurisdiction, because of its highly regarded legal and regulatory framework, as well as the quality and depth of the financial and broader professional services ecosystem. In practice, that means that global institutional capital can be raised from here. So when it comes to the onshoring and the development of regulation in the future, we would be looking for continued high standards, but clear and effective regulation.
Mr McFadden
Q
Gurpreet Manku: Sorry, I had not thought about that for this session. Interestingly, one of the regulations that probably caused the most concern was referred to earlier—the PRIIPs regulation. Most of our members will market to professional institutional investors rather than to retail ones, but where that particular regulation is relevant, it has led to information that many have felt is misleading. Seeing that changed and the changes being introduced in the Bill is welcome.
The investment firms regime is probably one of the biggest changes to come—we are implementing that now. If we are looking ahead a few years, we want to look at how the alternative investment fund managers directive changes. The way it was implemented in the UK historically—through the work that our authorities and regulators have done—has meant that it was implemented in a proportionate and sensible way. We want that to continue.
Mr McFadden
Q
Gurpreet Manku: Throughout the past few years, we have continued to work with both the Treasury and the regulators. Given the body of legislation that has come to the UK’s shores and the work that we have done historically, it makes sense for the policy-making and rule-setting process to sit within the regulator, and there is an appropriate accountability framework around it.
Alison Thewliss
Q
Gurpreet Manku: I think that what will be important to see over the next year and in future is sufficient time for consultation, because that leads to further transparency. The documents that the FCA publishes are generally quite good and detailed, but I have seen some cases in recent years, and not just domestically, where there were very short windows to respond to quite technical consultations. Ensuring that there is sufficient time to review and digest any changes and to sit down and speak to the regulator about them will be helpful, and will also support the transparency objectives.
Alison Thewliss
Q
Gurpreet Manku: A typical consultation process is usually three months, which is usually enough time for us to gather the feedback from our members, whether they are large or small firms, and turn it into an industry-wide submission.
Alison Thewliss
Q
Gurpreet Manku: Yes, I believe it does, because robust regulatory standards and a clear and stable legal and tax framework attract global investors. While I recognise that there are concerns about Brexit, over recent years we have seen the continued ability of our members here to raise international capital and invest it.
Alison Thewliss
Q
Gurpreet Manku: Equivalence is important for us as well. I agree with all the feedback that has been provided to you throughout the day; I have been listening in on some of the sessions. Our members are prepared for all eventualities, which in practice means looking at setting up additional structures and obtaining additional licences in Europe to cover a period where equivalence decisions might not be available. Thinking about institutional fundraising more broadly, there are other ways to access EU investors, and some firms will have been looking at those routes in the absence of equivalence.
The Chair
If there are no further questions from Members, let me thank Gurpreet—who did a panel all on her own, remotely—for her evidence.
Examination of Witness
Peter Tutton gave evidence.
The Chair
We will now move on to our final panel of the afternoon. It is another one-man virtual panel, with Peter Tutton from StepChange joining us remotely. We have until 5 o’clock, when we must adjourn. Peter, could you introduce yourself for the record and for the members of the Committee?
Peter Tutton: Good afternoon, everyone, and thanks for inviting me. My name is Peter Tutton; I am head of policy at StepChange Debt Charity.
John Glen
Q
Peter Tutton: That is a good question. We are delighted that the two new debt schemes are going forward. We think that they will be a very important help for people who are struggling. What we think they will do is partly driven by our experience of being a deliverer of the debt advice scheme in Scotland. From when we have spoken to our clients, we know that the protections that both the breathing space scheme and the statutory debt repayment plan will offer––a sort of guarantee that if you keep up with your payments you will have protection from your debt spiralling, from collections activity, with people asking you to pay money that you cannot afford, and the threat of enforcement action––deal with the things that frighten people and make them stressed and anxious. They damage people’s health and lead them to do things like borrowing more to cope with unaffordable demands. The lack of a guarantee of forbearance can really impede people’s recovery from debt and financial difficulty.
We are very pleased: those protections have existed in England and Wales for insolvency solutions for some time but not for people who are able to repay their debts. Very often, clients will come to us after an income shock. As we sit here now, people are losing their jobs, having income reductions or falling ill. Their income will drop significantly for a time, but then it takes time for them to recover and get back on track. In those cases, these kind of schemes, first the breathing space scheme to help people to get advice and then the statutory debt repayment plan to help people pay their debts off within that safe space, will be really important in helping people. A lot of the fine detail about how they will work has still to be worked out. It will be important to ensure that they are accessible and that they fit together.
One thing we are interested in is when someone gets to the end of their breathing space scheme. If someone is still recovering, as we call it, from their financial difficulties, will they be able to go into the statutory debt repayment plan, where it may not be apparent that they can pay their debts within their long-stop period at that point, but where we have good reason to believe that their income will recover and that they have a good chance of getting back into work? It would be useful if the two schemes aligned so that people do not, first, get protection, then fall out of protection and only come back into it later. There could be a position where creditors could all pile in to take enforcement action or debts could begin to grow again. That is one of the things where we are keen to see the detail to ensure that the two schemes align and that we can move people from one to the other, with a long-stop on “How long is a reasonable period to repay their debts?” but one that is not worked out very strictly at the beginning while people’s circumstances are still fluid.
There is lots of fine detail to work out. We are going through the process at the moment with the Insolvency Service creditors and debt advice. Agencies are working out the detail of how the scheme will work in practice. What is important for both schemes is that we as debt advisers need to be able to administer them without significant extra cost. We might come to that later. With breathing space, there is no direct funding so the cost situation is very important. If it is very burdensome for us to deliver, it may be hard to do. We then need to do some work still with the creditors to make sure that everyone is getting the information that they need to get protection quickly to people who need it. There is a bit more work to be done there. Likewise, with regard to the way in which the statutory debt repayment will work, there are practical details such as how people will go into the scheme; how the “fair and reasonable” test will work—there is a need to make sure that it is not too cumbersome, and that it is effective and cannot delay protection unduly—and ensuring that creditors do not abuse the right to object, although they must have that right, in a way that can slow the whole scheme down. These are the sorts of things we will need to work out.
John Glen
Q
Peter Tutton: I think this is a necessary measure. We should cast our minds back to the child trust fund. In some ways that was similar, as it was a way of encouraging people to build up savings, although in that case the savings were for their children. As you may remember, one aspect of the child trust fund is that people got a voucher and then had to put it somewhere. A huge number of those vouchers ended up in default. We know that, especially among people who are less experienced in using financial services and in lower income households, it can be quite daunting when a choice has to be made between a number of different savings products that they do not really understand, and when they do not really know the difference.
That can create inertia. It makes a great deal of sense to give a safe way of moving people automatically into a successor product so that we do not have that problem of trying to contact them to get them to make a decision. The clause is worded so as still to allow people to make their own decision, which is quite right, and having safeguards seems sensible. We are big supporters of the Help-to-Save scheme, which is a cracking scheme. Our own research shows that having a pot of precautionary savings can significantly reduce people’s chances of falling into debt. If I had one criticism—
John Glen
I agree with that. We are trying to do what we can to improve awareness and get people to use small amounts; I think they can put by up to £1 or £2 minimum.
Peter Tutton: But it is a good scheme, and it is sensible to allow people who have saved into the scheme to put their savings somewhere else. They can make a choice if they want to, but we know that some of the people whom the scheme is designed to attract may struggle to choose between superficially similar financial service providers and get stuck in the middle. This makes sense.
Mr McFadden
Q
Peter Tutton: In an ideal world, we would like the breathing space period to be longer. We can understand why it has been set up as it has. It is very good that it includes, for instance, Government debt; it is a new thing that people will have protection from Government and local government debt; things like council tax are a very big problem for our clients. We can see that the Government may be nervous about a longer scheme. Perhaps if there was a way of looking again soon, once we are satisfied that it works okay, we could give that breathing space a bit more time. There are two things that the breathing space can do. There is what it does at the moment, which is largely about allowing people to get advice and get into a debt solution, but there is also time during which people need to recover.
As I said earlier, when people come to us they are often still in quite a degree of difficulty and their circumstances have not resolved themselves. We cannot always instantly put them into a stable long-term solution. One of the things that might help that would be a longer period of breathing space while they are recovering. In lots of cases, there is an obvious solution to put people into; if their circumstances are not going to improve and debt relief is the right solution, we will put them into that. We may be able to deal with that by articulating the statutory debt repayment plan and the breathing space such that there is a gap in the middle. Ideally, a longer period would be good. There may be a way of effecting that just by making sure those two things align, so that people whose circumstances are still recovering—they come to us and have a very small amount of money, but we believe that they will back into work, and for a lot of our clients that is what happens—can keep that protection going through until their circumstances improve and they can get back on the track of repaying their debts. That would be the one thing, instantly, that we would think about changing.
Another thing is that in the Treasury policy statement, including this legislation, there is a provision for funding the statutory debt repayment plan. The Treasury policy statement talks about that funding for debt advice providers being around 9% if you distribute funds as well. That is something that may need to be looked at again—not a lot, but a bit. That 9% is a bit less than the funding that we currently get from what is called fair share funding, which is [Inaudible] funding we get for helping clients with debt management plans. That funding actually allows us to do a lot of things.
One of the things that we are not yet sure about and are not able to model is what the additional costs of the statutory debt repayment plan will be. For instance, there is a provision in there for creditors to have a vote as a safeguard before a plan can be accepted. If we have to administer that vote in some way, for instance, it would mean an extra cost. There are some bits and pieces around that that may need looking at a bit more once the precise details of the debt repayment plan scheme are better understood.
Mr McFadden
Q
Peter Tutton: That is a really good question. I agree that that is what we are seeing—we put a report out last week. We see a growing number of households struggling because of covid—those who have lost their jobs. Furlough may be picking up 80% of their wages, but if you are on low pay, that is a big jump and a big cut can put people into difficulty.
You are absolutely right: this is growing. In an ideal world, it would be great if we had those breathing space protections tomorrow so that people had a safe place to go and we could start getting them back on the road towards control of their finances and stopping their debts growing. For practical reasons, I do not think that it will be possible to put that in place tomorrow. For the scheme to work and for us to be able to do it at the scale that we think it would need, it needs to work as an online remedy.
It also needs to work for advisers, to make sure that where we capture information or when someone inputs information into our online system debt help tools, for example, we do not then have to copy that again into the Insolvency Services portal, which is incredibly expensive. That is something that happens with DROs and can be very expensive. The software and APIs need to be developed so that there is a seamless process and the cost is minimised for the scale that we need to get people into this. I do not think it is possible to do that or for us, as debt advice providers, to be organised to do it on the scale that we would need to, much before the implementation date.
Bringing the scheme forward, for practical, implementation and software reasons—all that kind of stuff—is going to be hard, but I think there are things that the Government can do, in the areas that we are really worried about at the moment, to bring forward the protections, if not the breathing space scheme. One of the things that our polling estimates, and other people have said the same thing, is that a large number of people have fallen into rent arrears. Those people [Inaudible] in the private rented sector have relatively little protection against eviction for rent arrears. There are longer notice periods, but that will start unfolding quite soon—it probably already is—so are there protections? Similarly with council tax, there are people falling behind who may be subject to enforcement by bailiffs, which we know can be intimidating and expensive and can make people’s problems worse.
It seems to me that the Government and Parliament supported breathing space. There was cross-party support for the idea that people in financial difficulty need protection from unaffordable collections and enforcement that make their problems worse, so I think there is something the Government can do. That may not be through the breathing space scheme itself now, but it is in the spirit of those protections, particularly for key debts: things like rent arrears and council tax, and maybe other types of debt enforcement that will have lasting, harmful consequences if they are not addressed. That is something that the Government should be looking at now, to make sure that in the coming months people are not worrying more and more about what will happen to their house if their incomes do not recover, or worrying about a bailiff for council tax. Those are things that can be done by Government without the whole breathing space scheme, so I agree: with covid, there is a pressing need to look at the different things that Government may be able to do to help people through this period. Otherwise, we are likely to see some of those harsh enforcement actions starting to happen, and people experiencing harm because of covid. No one really wants to see that.
Alison Thewliss
Q
Peter Tutton: That is a very good question, and I am not sure I have a complete answer for you off the top of my head. First, the Government have some communications routes: those eligible for help to save are effectively those people who are in receipt of universal credit and tax credits, so these are people whom Government can identify and should be communicating with anyway.
To a certain extent, the thing about the transition is that because it is automatic, it is about ensuring that people know where their money is. I do not have an answer straight away when it comes to the best way of doing that. We know that it can be difficult to communicate and get people to engage. It is one of these things where we need a trial wording approach, communicating, and making sure that that communication is very clear that this is something that is happening to your benefit: “Here it is, and here is how you can get at it.” At the same time, there need to be more comms, perhaps to recipients of universal credit—the numbers of whom have grown quite a lot recently, as you will know—about the fact that this scheme is available to help them, and that if they put some money into it now they will get a bonus, which they may be able to use quite soon to deal with their difficulties. Those are the two things that spring to mind immediately.
Alison Thewliss
Q
Peter Tutton: I think that is a good idea. There is a maximum amount of savings, so if you can afford to save the full £50 a month, you will get the full bonus. If you are only able to save £20 a month, you will not, but if you allow the £20 savers to save for longer, they would get more of a bonus. There is definitely an argument there to say, “If we want people to build up a precautionary savings pot, we should give those who have started saving the best opportunity to build that savings pot where possible, albeit by leaving the accounts open a bit longer within the scheme.” That sounds sensible.
Alison Thewliss
Q
Peter Tutton: Yes, we are supporters of a duty of care as well: we have spoken with Macmillan about this, and we can see the point. It is an interesting one to attach to the Bill. The FCA said that it is due to reply to a consultation on a duty of care. That response probably will not come until Q1 next year, so it has been a bit delayed. That is a bit unfortunate, because if there is a need to legislate or it concludes that there is a need to legislate, the opportunity of doing so through this Bill will have passed.
We agree that there is a need for a duty of care. There has been a succession of problems over the years with financial services. The FCA does a good job: it does rules, and it is getting on top of some of the wide-ranging historical problems we have seen, from unauthorised overdraft charges to payday lending, other bits of high-cost credit, aggressive collections, and a whole range of things in my areas of interest. It is starting to get on top of these.
We think the measure could still be clearer. We think a duty of care, or at least being specifically required by a rule-making power to think about a duty of care and what that means, and empowering the FCA to make rules would be helpful. We have a particular take on duty of care. There are lots of definitions of it. One thing that we see is the idea of having regard to consumer protection. A duty of care could also help better define the consumer protection definition.
We still see too many cases where people who are vulnerable or face constraint choices because of lower incomes and are forced to use credit and things like that or because of behavioural biases built into products. People are in a situation where effectively there are firms exploiting those circumstances. This is the sort of thing that we think a duty of care could deal with. We need a more explicit statement in the legislation about the way firms need to understand the measure. In vulnerability guidance, we would make that more explicit and biting on the way firms have to think about their products and services, and making sure that they do not have the effect of exploiting vulnerable consumers.
We are not quite there yet with financial services, because these problems keep happening. It would sharpen that up and give a better line between what is regulatory policy and what is social policy. We would start to be able to have a better debate about when it is reasonable for someone on a low income to be on credit, the sorts of credit they may be offered that make their debt problems worse and why that is happening . That may help to stop that happening. For lots of reasons, we are supportive of the idea of a duty of care. It would sharpen the focus on vulnerability. It would sharpen the focus on the kind of detriment that people face when they are using financial circumstances as a sort of distressed purchase. For us, the measure is a good thing and something we would like the FCA to take forward.
Andrew Jones (Harrogate and Knaresborough) (Con)
Q
Peter Tutton: We spend quite a lot of time looking at the experience of our clients, and we survey our clients and poll them to see what has happened to them. When we were looking, back in the day, at breathing space we were trying to understand what brought our clients to advice and what helped them to recover. What we found was that our clients often had multiple creditors. On average, they would have about five or six. Typically, we find that some creditors, even most, will be very good, but it only takes one creditor to defect from good practice and to push for more money to destabilise people’s financial situation and restart the process of juggling bills and borrowing more to deal with a particularly aggressive, unaffordable payment demand.
There was a very strong message from clients that that impeded their ability to recover. At the same time, we spoke to our clients who were in the debt arrangement scheme in Scotland, and we got a very clear message from them that that kind of guarantee—the statutory framework that the debt arrangement scheme in Scotland gave them—reduced their anxiety and gave them a really good, strong and solid platform for recovery. They knew that if they paid what they could afford to pay and kept doing that, nothing else bad would happen to them in terms of unaffordable demands and escalating enforcement.
In that sense, we have known for a long time that people need protection from their creditors in certain circumstances. Both the experiences of clients who do not have that protection in England and Wales outside of insolvency and the experiences of clients who do have it in Scotland persuaded us that what has become breathing space in the statutory debt repayment plan was a necessary additional protection that we did not have at the time.
Andrew Jones
Q
Peter Tutton: Yes, I will dig some out.
Stella Creasy
Q
With the debt repayment schemes, I think all of us recognise that the breathing space is a very positive development. First and foremost, I want to ask for your view on the midway review element. Do you have any thoughts on what impact that might have as currently drafted?
Peter Tutton: It is a good question. We were very concerned initially about the midway point, simply because it could be very expensive and hard to administer the debt advice. The provision is now not quite as onerous, so we are not having to do full outbound calls and things like that. We are now reasonably comfortable with it as something that is a touching point, where clients touch in with us to ensure that they are still engaged with the process. That is something we do anyway. If someone has come for advice and there is a recommendation that the next step of a particular debt solution requires them to do further things for us to help them, we will follow up and keep in contact with them to ensure that they do not drop out of the process and that they have some help. The initial relief of having spoken to someone about it can lead people to think, “Well, I’ve got that out that way,” whereas it is important to keep going and get people into the debt solution.
There is some element of the midway review that is not dissimilar from the kinds of things that we would do anyway. The important thing is that the way it is done in practice should not become an onerous burden that does not really have any practical use to it. I think we are sort of there. We are talking to the Insolvency Service about the guidance and the way it will work. I think we will get to a place that we can live with. My operational colleagues who are implementing this are not saying it is unworkable at the moment, so we are reasonably comfortable with it, but time will tell. [Inaudible.] If, six months in, it turns out to have been really onerous with no practical effect, that is something we would ask the Treasury to come back and look at again.
Stella Creasy
Q
Peter Tutton: That is a good question. Our starting point here is that we would end the breathing space scheme as soon as it is no longer needed. At the moment, people come to us in a variety of different situations, and a number of different debt solutions are appropriate for them. If the most appropriate solution for them is a debt relief order, which is a type of insolvency for people with very low incomes or with disposable incomes and no assets, and they want to do it, we would put them into that as quickly as we can. If that can be done—sometimes it can, and sometimes it cannot—before the breathing space period ends, the breathing space will end.
There is actually a provision in the Bill that means that if you are in a debt solution before the review, it will end. It certainly is not a case of putting people in breathing space until it comes to the end of its 60 days, and then putting them in a solution. We will always try to get people into the right solution as quickly as they can. The other end of your question is that there might sometimes be cases whereby there is a debt solution but, for whatever reason, it takes a bit longer to get them into it. In exceptional circumstances, there might be a case to extend the breathing space, if for some reason it takes us longer to get someone into a DRO or something like that.
There is another question about this. One of the problems with debt relief solutions at the moment—debt relief orders and bankruptcy in particular—is that they have fees. These people are so poor and their debts are so big that they need to go into insolvency, but they have to find a fee, and the fee is hundreds of pounds for bankruptcy. Very few of our clients could afford that; they would have to save up for a year or two years to meet the fee.
There is a bit here that Government will need to think about, in relation to breathing space, if someone has come for advice and we have given them protection and worked out that the best thing for them is bankruptcy, but it will take them ages to find the fee to actually go bankrupt. They will fall out of that statutory protection, as it were, back into the mosh pit before they can get their protection in bankruptcy.
So you raise a really good question. There are two ends to it. One bit is that we would not keep people in longer than we needed to; that is a case of getting them into the debt solution they need. But there may be other people who will not be able to progress to the right debt solution for them, for a variety of reasons, before the breathing space runs out. That is something that Government may look at. Perhaps we need to build some evidence of that problem as we go along, but it would be good to do a quick review to see whether there are circumstances where the period needs to be extended or, indeed, whether elsewhere in Government we need to look at things like the barriers to accessing debt relief that mean it is not a good option, either because of the cost of getting into it or because it is still quite a stigmatising process and puts people off. There is another need, elsewhere in Government, to look at how the whole debt relief thing is working.
Stella Creasy
Q
Peter Tutton: The particular issue with the insolvency schemes for England and Wales—well, one of the issues—is the application fee. That is a point that is slightly different from the threshold; that is an issue about people having to find money to pay for those solutions.
Stella Creasy
Q
Peter Tutton: It makes some sense to look at this, because a debt relief order is so much cheaper than bankruptcy. Debt relief orders have a restriction on debt size and, as you say, a restriction on disposable income, both of which are to safeguard the creditors, because the Insolvency Service will not do a full investigation. The idea is that it is the people who have really got no money, no assets, and so if we let them into insolvency without an investigation, there is nothing squirreled away that otherwise would benefit creditors.
DROs have been running for many years now, and I think you are right: it is time to look at whether we could have an easier route into them rather than bankruptcy, which might mean lifting the disposable income threshold a bit or the debt threshold a bit, or both. There is now a bunch of people for whom we would be advising bankruptcy who are never going to get into bankruptcy because they cannot afford it, and often it is the debt size as well.
I think it is the right time for the Government to do this. Given what we might see after the fallout from covid of more households, more people, facing financial difficulty, it is a good time to review how these debt solutions work at the moment and to see what can be done to increase accessibility for those who need that help.
Stella Creasy
Q
The Chair
Order. Can we be a little briefer? We are slightly straying from the scope of the Bill. A very quick answer, please, Peter Tutton.
Peter Tutton: That is a good point. There are things we can do. There are a number of interventions, from lending rules to product features and price. Also, on the relationship between who is using high-cost credit, there is a social policy point here. Is there more to be done to give people affordable alternatives, so that they do not have to go to those products? It would be good to talk more about all of that, because it is absolutely key.
We estimate that survival borrowing under covid—people having to borrow to make ends meet—is up to about £6 billion. There is a big pile of debt building there, which people will not be able to afford to pay down. Some action now to give them an alternative and think about how to deal with that debt is timely and important. We should try to do something now before it gets much bigger.
The Chair
If there are no further questions, let me thank Peter Tutton. A few times we thought that your technology would fail us, but we got through, so thank you. I thank all our witnesses from our eight evidence sessions today. That brings us to the end of the oral evidence for today. The Committee will meet again in the same room at 11.30 am on Thursday.
Ordered, That further consideration be now adjourned. —(David Rutley.)
Environment Bill (Seventeenth sitting)
Tuesday 17th November 2020
(3 years, 5 months ago)
Public Bill CommitteesRead Full debate Environment Act 2021 View all Environment Act 2021 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 17 November 2020 - (17 Nov 2020)
The Committee divided: - Ayes: 5 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 5 / Noes: 9 - Question accordingly negatived.
The Committee divided: - Ayes: 5 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 5 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 5 / Noes: 8 - Question accordingly negatived.
The Committee divided: - Ayes: 5 / Noes: 8 - Question accordingly negatived.
Fleur Anderson (Putney) (Lab)
Before our lunch break, we were discussing clause 81, on water quality and the powers of the Secretary of State. The clause gives the Secretary of State a wide-ranging power to amend the regulations that implement the EU water framework directive, particularly as they relate to the chemical pollutants that should be considered under the regulations and the standards applied to them.
I have some concluding comments to my earlier statement. The amendment would ensure that any changes to water quality regulations would be subject not to the negative procedure, as the Bill sets out, but to the super- affirmative procedure. This would give stakeholders—including UKTAG, the UK technical advisory group, which currently advises on standards and which should retain a lead role in this process—the right to input into any water quality regulations changes. It would also legally require the Secretary of State to have regard to that input, ensuring that standards and targets are altered only in line with scientific advice and following appropriate stakeholder consultation.
A robust, binding legal assurance of non-regression on environmental standards would give further assurance on that point. The Government still have the opportunity to give such assurance through the Bill, and that would be warmly welcomed by the environmental sector and many other stakeholders.
The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs (Rebecca Pow)
I thank the hon. Member for Putney for tabling the amendment. I understand entirely the desire to ensure an appropriate level of scrutiny when this delegated power is exercised. The clause creates a narrow power for the Secretary of State to maintain a list of the most harmful chemical substances that could enter watercourses and sets out measures to monitor and tackle them, keeping pace with the latest scientific knowledge. This is a key aspect of our wider regulations that protect and enhance our water environment. The exercise of the power in the clause is subject to consultation with experts in the Environment Agency who provide scientific opinion and have a statutory duty to monitor water.
I highlight the fact that the Secretary of State will take into account the latest scientific evidence when updating lists. In addition to the EA, a lot of that evidence comes through the UK technical advisory group, a working group of experts drawn from the environment and conservation agencies for England, Wales, Scotland and Northern Ireland who already derive threshold values for UK-specified pollutants, which are monitored for the purposes of contributing to the ecological status of our surface waters. A statutory consultation requirement could not be placed on the UK technical advisory group as it is not a statutory body, but it offers valued expert advice. The Secretary of State must also consult any person or bodies appearing to represent the interests of those likely to be affected by these provisions.
I understand that the amendment seeks to increase the level of parliamentary scrutiny of the exercise of the power by upgrading to the super-affirmative resolution procedure, as the hon. Member for Putney mentioned. As we have mentioned, this procedure is used extremely rarely for statutory instruments that are considered to need a particularly high level of scrutiny—for example, legislative reform orders under the Legislative and Regulatory Reform Act 2006, which could be used to abolish, confer or transfer statutory functions or create or abolish a statutory body or office—so we do not feel that that would be appropriate.
The hon. Member was concerned about a lowering of standards, which is absolutely not the case. I know that she has a particular interest in this, and I was so interested to hear earlier that she worked for WaterAid. Lots of Back Benchers engage with WaterAid—I did—when it holds events in Parliament. It does really good work. The wider regulations require the EA to have an extensive and robust monitoring regime for chemicals in the water environment and refer to the priority substances as those that must be used to assess chemical status in surface waters. The EA will monitor for new and emerging harmful substances through an early warning system and, in consultation with the EA, the updates to the list will be based on the latest science and monitoring data, which currently suggest a potential increase in the number of substances of concern, rather than a reduction. An eye will certainly be kept on that, because it is so important.
Although I fully acknowledge the importance of parliamentary scrutiny, a super-affirmative, or indeed a standard affirmative, resolution procedure is wholly disproportionate in this instance. This power can be used only to make relatively narrow changes to existing transposing legislation for the purpose of updating certain water quality standards. The power does not extend to changing the wider regime for assessing and monitoring water quality, which is enshrined in the Water Environment (Water Framework Directive) Regulations 2017. An update to the list of priority substances involves highly technical discussions, as I have mentioned, around emerging pollutants and their threshold values, measured in micrograms per litre, and sophisticated monitoring techniques, including biota testing.
I hope that clarifies the position, and I therefore ask the hon. Member for Southampton, Test to withdraw the amendment.
Dr Alan Whitehead (Southampton, Test) (Lab)
As the Minster indicated, the name super-affirmative suggests that this is not an everyday procedure. It has been suggested in the amendment because the clause would allow the Secretary of State, albeit on a reasonably narrow basis, to amend or modify legislation, and thereby to degrade or completely remove environmental protections that are already in the regulations. That would essentially be a power to deregulate current regulations, underpinned by the ability to do so by simply notifying the House. We do not think that is good enough.
As my hon. Friend the Member for Putney emphasised, the super-affirmative procedure would not just allow for greater parliamentary scrutiny but would allow for greater consultation in the process. We think it is an appropriate device to add, although it is a relatively new one. It has been in place, as the Minister alluded to, since 2016.
However, the Minister has given some assurances on the limit of the Secretary of State’s power to degrade or remove secondary legislation. She has also indicated that that would not be the intention of the Government, and that, on the contrary, it is their intention to try to uprate those regulations.
Rebecca Pow
Apologies; I was mistaken earlier. It was the shadow Minister who tabled the amendment. In addition to all these matters, the Secretary of State will conduct a two-yearly review of significant developments in international legislation on the environment. That is another prong that will help to keep up the standards of environmental protection. I thought the hon. Gentleman might be interested to hear some of the ways we might use—
Dr Whitehead
I thank the Minister for her intervention. Alas, we will never hear the detail of what those changes might be, but the fact that she was brandishing a sheet of paper that clearly had them written on it is perhaps further assurance. I did indeed move this amendment, but the multi-talented nature of Opposition Members could have led one to believe that someone else had done so, such is the power of our interventions this afternoon.
We do not intend to press the amendment to a Division, but I hope that this is another thing for the Minister’s “to think about” box. I do not think that it is generally a good idea for secondary legislation to be put through the negative procedure on this catch-all basis. Among other things, doing so puts considerable impediments in the face of Parliamentary scrutiny, because the negative procedure requires the legislation to be prayed against. That means that the right to a debate lies with the usual channels rather than being guaranteed, as it is with the affirmative procedure.
I hope the Minister will take the general point on board for future legislative purposes that we do not think that is a good idea. We would be grateful if the Minister could have that in mind when she is reviewing the legislation. On this occasion, we are reasonably happy with the Minister’s assurances on this clause and the additional—alas, secret—assurances that she has on her piece of paper. Therefore, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 81 ordered to stand part of the Bill.
Clause 82
Water quality: powers of Welsh Ministers
Amendments made: 53, in clause 82, page 81, line 19, leave out
“the National Assembly for Wales”
and insert “Senedd Cymru”.
See Amendment 28.
Amendment 54, in clause 82, page 81, line 21, leave out “Assembly” and insert “Senedd”—(Rebecca Pow.)
See Amendment 28.
Clause 82, as amended, ordered to stand part of the Bill.
Clauses 83 to 86 ordered to stand part of the Bill.
Clause 87
Valuation of other land in drainage district: Wales
Amendment made: 55, in clause 87, page 85, line 9, leave out
“the National Assembly for Wales”
and insert “Senedd Cymru”.—(Rebecca Pow.)
See Amendment 28.
Clause 87, as amended, ordered to stand part of the Bill.
Clause 88
Valuation of agricultural land in drainage district: England and Wales
Amendment made: 56, in clause 88, page 87, line 33, leave out
“the National Assembly for Wales”
and insert “Senedd Cymru”.—(Rebecca Pow.)
See Amendment 28.
Clause 88, as amended, ordered to stand part of the Bill.
Clause 89
Disclosure of Revenue and Customs information
Amendment made: 57, in clause 89, page 89, line 9, leave out
“the National Assembly for Wales”
and insert “Senedd Cymru”.—(Rebecca Pow.)
See Amendment 28.
Clause 89, as amended, ordered to stand part of the Bill.
Clause 90 ordered to stand part of the Bill.
Dr Whitehead
Apologies, Mr Gray, but we had previously notified the Committee that our amendments to the natural environment and environmental protection elements of the Bill would be moved by my hon. Friend the Member for Cambridge.
Daniel Zeichner (Cambridge) (Lab)
I beg to move amendment 169, in schedule 14, page 207, line 26, leave out paragraphs (3) and (4) and insert—
“(3) The relevant percentage is a minimum of 10%.
(4) The Secretary of State may by regulations amend this paragraph so as to increase the relevant percentage.
(5) The Secretary of State shall review the relevant percentage after 5 years or sooner.”
This amendment amends the power to vary the 10% level so that it can only be increased.
I apologise to anyone who was expecting to continue to hear the mellifluous tones of my esteemed colleague, my hon. Friend the Member for Southampton, Test. I am grateful to have a backing part; it is a huge honour.
After all the excitement this morning, I hope we can have a similarly exciting afternoon. We are coming to the bit that I have been looking forward to most since I first read the Bill: the exciting part around nature and biodiversity. Part 6 is fascinating. It is hard to imagine a more important and pressing subject when we all know that around the world, the targets we have collectively set ourselves continue, sadly, to be missed. At the same time, we look to find ways out of the economic crisis stemming from covid.
Part 6 is a very important part of the Bill. As I looked at the Bill last night in revising for today, I reread some of the 25-year environment plan. What an optimistic, forward-looking and exciting document it is, full of “wills”, “shalls” and “musts”. The trouble is that some of that enthusiasm seems to have been mislaid en route. One of the key things is that somewhere along the line, the planning White Paper came along, and there is an unresolved tension between the excellent ambition of the 25-year environment plan and those new suggestions.
As my hon. Friend the Member for Southampton, Test said at the beginning of our discussions, we think this is a good Bill, but we want to make it better. My task this afternoon is to try to help the Minister restore it to the Bill it might once have been. We could see this as a bit of a whodunnit. Who was it, and how did the changes creep in? Who did such harm to it, and how can we now help the Government make good? In some of the discussions on this schedule, the Government thought about going beyond net biodiversity gain towards net environmental gain, and we would really like that desire to be addressed.
Much of the schedule is about the planning system. I suspect many Members here have direct or indirect experience of our planning system and know how important it is. For the moment, the provisions for reducing environmental impact in the planning system are focused on preventing and mitigating harm. The net gain objective has been embraced in the national planning policy framework since 2012, when it replaced the previous policy objective of no net loss, which sought only a neutral outcome after losses and gains were accounted for. Thanks to the rules for site-based protection in the Conservation of Habitats and Species Regulations 2017, the net gain objective has been relatively effective in reducing loss of habitats and species without slowing down development, but it has been far from enough to turn the tide in nature’s decline. The principle of taking a more strategic approach to restoring nature and requiring a 10% net gain in biodiversity is one we fully support. That is what is addressed in this schedule.
We know how important that is because, sadly, the UK continues to suffer rapid biodiversity loss. The Government have failed on too many metrics: 46% of conservation priority species in England declined between 2013 and 2018. This is serious. We welcome the fact the Government have begun to address some of the issues, although we think we need to approach this serious issue in an open and clear way. We note the Prime Minister’s announcement a few weeks ago about 30% of land being protected, but we also gently point out that some 26% of that is achieved through a counting mechanism that includes areas of outstanding natural beauty and national parks. We want to address this problem. We have to be serious about it and not try to play with the figures, and our view is that at the moment the Bill is a lost opportunity to stop the decline. However, the new general condition has the potential to be an effective tool to boost biodiversity across the country, and there are many issues we want to address in the amendments to see how the Bill can be improved.
I will touch on several of our amendments, including on the length of time for which habitats should be maintained, which is 30 years; the exemptions, too many, in our view, from the biodiversity gain condition; the relationship between the new system and irreplaceable habitats; and the lack of a mechanism to guarantee what is prescribed in the biodiversity gain plan to ensure it is actually delivered on the ground. To turn to the detail of amendment 169, our fear is that we are in danger of being left with a rather unambitious percentage of biodiversity net gain that is all too easy for the Government to decrease if they choose to do so. At first sight, setting the condition for planning permission at 10% biodiversity net gain seems a reasonable thing to do, but it is important to note that the impact assessment published alongside the biodiversity net gain consultation in December 2018 said that 10% is merely the lowest level of net gain at which the Department
“could confidently expect to deliver…net gain, or at least no net loss”.
It does not appear that this is taking us very far forward. Indeed, 10% net gain is less ambitious than the current practice of some local authorities. I am told that Lichfield District Council already requires 20% net gain on new development, so although we welcome the Government’s statement and its response to the biodiversity net gain consultation, the 10% should not be viewed as a cap on the aspirations of developers who want to go further. I was pleased that the Minister reiterated this point on Second Reading. It would be very helpful if she could make a clear statement, to facilitate ambitious developers and to help them and local planning authorities, underlining that the aspiration is to go further.
A number of changes need to be made. Under schedule 14, the Secretary of State has a number of powers to make regulations, including a Henry VIII power to amend the 10% biodiversity net gain objective and to amend the types of developments the net gain will apply to. The Bill’s provisions read that “the relevant percentage” of biodiversity net gain for developers is 10%, and:
“The Secretary of State may by regulations amend this paragraph so as to change the relevant percentage.”
Our amendment is very clear: that must be amended to include a commitment to monitor and review practice, so that the level of gain can be increased in future if evidence demonstrates this is possible and needed. We also need a lock-in so that the percentage can only be increased by the Government, not simply decreased at a later date. There must be no mechanism in the Bill to lower the level of gain; that would seriously undermine the objectives of the system as a whole, and would likely result in little or no gain being achieved in practice.
Amendment 169 would ensure that the only way the 10% net gain figure could be changed is by being increased after review by the Secretary of State. It would also lock in a timeframe to ensure the percentage is reassessed after an appropriate amount of time, within a maximum period of five years.
I am sure the Minister will, as she has throughout, assure us that there is no need for concern. But to return to my whodunnit, I fear that there may be a villain in my story and Members might be able to guess who some of the contenders might be. Looking back at the Prime Minister’s “Build, build, build” speech in July, he did claim—spuriously in our view—that:
“Newt-counting delays are a massive drag on the prosperity of this country.”
We will discuss newts in more detail later, but when Government policy lurches from one approach to another, we need certainty that the commitment of the current Minister will not be trumped by future Ministers who might take a different view. Unless we get that certainty, we will certainly wish to press this amendment to a Division.
Rebecca Pow
I welcome the hon. Member for Cambridge as he takes the floor this afternoon. This is a tremendously exciting part of the Bill, through which we can all be a part in doing our hugely important bit for nature in this country. He is right about degradation—I am not even going to think about denying that—and about how important the Bill is. This is the tool for achieving the measures in the 25-year environment plan, which was the first environmental improvement plan. It is great that the plan is full of optimism because it sets out what we want to do and where we want to go, and these measures will be in this Bill.
Let me turn to the amendment. Responses to the net gain consultation revealed that some developers have already made voluntary commitments to no net loss or net gain and there were calls for both a higher and a lower percentage. It was quite interesting how that came out. On balance and having considered all responses, we believe that requiring at least a 10% gain strikes the right balance between ambition, creating certainty in achieving environmental outcomes, deliverability and costs for developers. It should not be viewed as a cap and the hon. Member for Cambridge has already mentioned a local authority that has set its sights higher. Many more are doing that and going voluntarily above 10%.
The hon. Gentleman mentioned the “Planning for the future” White Paper, which I think will probably be referred to a lot today. It specifically sets out support for biodiversity net gain and rightly identifies improving biodiversity as one of our most important national challenges. It is important to build the houses people want and all of the developments that we need, but that cannot be done to the detriment of the environment.
That is quite clear in the White Paper that biodiversity net gain and biodiversity more generally are one of our most important challenges. The Department for Environment, Food and Rural Affairs is working closely with the Ministry of Housing, Communities and Local Government on the implementation of biodiversity net gain to make sure it is fully integrated into the planning system. I have already said that the 25-year environment plan is the first environmental improvement plan, and all these things will work as part and parcel of one another.
The ambition of 10% net gain represents a significant step forward beyond current practice while striking a balance and meaning it does not have be reviewed as a cap. Restricting the ability to set a lower percentage requirement may force the Government to exempt any development types that cannot achieve a 10% net gain, rather than keeping them in scope and subjecting them to a lower percentage requirement. Broader exemptions would be a greater risk to the achievement of the wide policy aims than targeted application of a lower percentage gain.
Limiting the power might therefore compel future Governments to make other adjustments to the requirement, which could compromise environmental and development outcomes more fundamentally than a lower percentage of net gain.
Dr Whitehead
The Minister is making an interesting case for the clause. However, does she accept that it is a particularly egregious example of “first you have it, then you don’t” legislation appearing in consecutive paragraphs? That is to say—a bald statement, as she said—the relevant percentage is 10%, but then the Secretary of State can take that away. Does she have any suggestions as to how one might make that a little less alarming, if she is indeed suggesting that that sort of arrangement needs to be in place?
Rebecca Pow
I reiterate how closely we are working with other Departments and on the “Planning for the future” White Paper to make sure that biodiversity remains the significant objective that it needs to be, as has been indicated already.
Other measures in the Bill, such as the local nature recovery strategies that we will come on to talk about, will help with our moving towards biodiversity net gain. There are a lot of measures that will make it much clearer where the net gain is, what the advantages and benefits of it are, and where it should go.
One of the main aims of our planning reforms is to enhance the environment while having the development that we need. We want environmental assets to be protected. We want to provide more green spaces, more sustainable development and new homes that are energy-efficient. Many of these measures have already been announced and are being introduced, such as the measures on houses and on the reduction of carbon-intensive modes of transport. All these things will work together, and measures in the Bill will help that process. We will also work through the White Paper to deliver even further on the net gain.
Let me reiterate that limiting the power might compel future Governments to make other adjustments to the requirement that would compromise environmental and development outcomes more fundamentally than a lower percentage of net gain. What we are trying to do overall is to raise up the whole net gain.
Ruth Jones (Newport West) (Lab)
Does the Minister agree that these amendments are very moderate? We are not looking to limit things down, but to raise things up. The Bill already has the relevant percentage—10%—so to put that as a minimum is surely a very moderate thing. That word is a very important one. As she has already said, she is very ambitious, so adding that word would surely increase the ambition.
Rebecca Pow
I hear what the hon. Lady says, but I still stick to my point that restricting the ability to set a low percentage requirement might force Government to exempt any development types that cannot achieve the 10%. What we are trying to do is to make sure that everyone gets to the 10% mark, and others might go above that voluntarily.
On the final point about the amendment, about compelling the Secretary of State to review the percentage within five years, I offer my assurances that the Government intend to monitor closely the policy outcome of net gain after its implementation. Of course, Members should remember that we have our Office for Environmental Protection; we have a great big monitoring and reporting body. It will be very difficult for anyone not to stick to these measures. They are all in the Bill and they add to the overall enhancing of the environment. I respectfully ask the hon. Member for Cambridge to withdraw the amendment.
Daniel Zeichner
I am grateful to the Minister. I suspect that a theme is already emerging from this discussion, whereby the Minister tries very hard to explain away the differences that have emerged. That is her job and she has made a very good attempt at it. However, it seems counterintuitive to argue that, on the one hand, the Government are going to introduce this level and, on the other hand, they will have the ability to reduce it. As for the argument that that somehow protects the measure, I think that the cat was slightly let out of the bag by the suggestion that there might be exemptions that will allow another way round it. We will come on to that in a moment.
In some ways, this is a strange discussion, because the White Paper on planning emerged in the summer, after this Committee was in abeyance. It seemed to us—we made this point very strongly—that this process is a complicated set of interactions that would have benefited from the detailed interrogation of experts. We will get into some quite detailed planning law issues in the coming hours, I suspect, and many of us possibly do not have the expertise that some of our witnesses might have been able to bring to these discussions. It is a great pity that we are not able to explore that in more detail. But we are where we are and we will have to do our best.
The problem is that a lot of this goes back to the question of trust. Basically, the Minister is asking us to trust the Government. She says that they are introducing the OEP, but the OEP will work to the legislation that we are putting in place today. Inevitably, there is pressure —we know that there is huge pressure and we understand why—from local developers and a Government who want to build, build, build. That is why nature needs a voice: it needs the legislative protection that the Minister is so passionate about. There should not be any loopholes, because we know what will happen: if we leave loopholes, people will use them. That is why—and I will keep repeating this point—I want to understand what changed, who did it and why, because if we get an answer to those questions, we will understand what is likely to happen in future.
This Bill might look lovely and sound great, but when we begin to delve down into the detail and look at the “mays” rather than the “musts” and at the exemptions and loopholes it introduces, we may find that, like on so many other occasions in the past, it is a great disappointment. That is why we want to absolutely tie this down. On that basis, we wish to divide the Committee.
Question put, That the amendment be made.
Daniel Zeichner
I beg to move amendment 168, in schedule 14, page 209, line 37, leave out
“maintained for at least 30 years”
and insert
“secured in its target condition and maintained in perpetuity”.
This amendment requires habitat created under net gain to be secured in perpetuity.
The Chair
With this it will be convenient to discuss the following:
Amendment 75, in schedule 14, page 209, line 37, leave out
“for at least 30 years”
and insert “in perpetuity”.
This amendment would require post-development habitat enhancements for the purposes of biodiversity gains to be maintained in perpetuity rather than for 30 years.
Amendment 74, in clause 91, page 92, line 1, leave out
“for at least 30 years”
and insert “in perpetuity”.
This amendment would require habitat enhancements for the purposes of biodiversity gains to be maintained in perpetuity rather than for 30 years.
Amendment 230, in clause 91, page 92, line 1, leave out
“for at least 30 years”
and insert
“secured in its target condition and maintained in perpetuity”.
This amendment would require habitat enhancements created under net gain to be secured in perpetuity.
Daniel Zeichner
The theme continues with this set of amendments because, in exactly the same way as I have just explained, there is a risk of not achieving the desired outcome and ambition of the 25-year environment plan.
The amendment relates to the length of time that the biodiversity gain habitats should be maintained. Our amendment challenges the Government’s suggestion of 30 years. In our view, both schedule 14 and clause 91(2)(b) would allow protected sites potentially to be downgraded or destroyed after 30 years, thereby destroying the ecological gains and carbon storage benefits, and any prospect of those gains and benefits making a long-term impact.
That is essentially the issue: we are talking about the long term. I am sure the Minister will explain in a moment the logic for the Government’s 30-year proposal, but this takes us back to the basic point about how serious and ambitious we are about embedding these changes for the future. There will be little point to the provisions if they do not work in practice. For instance, if someone gets rid of a pond that has been in place for hundreds of years, with all the richness in biodiversity it has developed, and replaces it with another pond nearby, that replacement could be let go after 30 years. Our concern is that the provisions do not give the necessary strong support. The danger is that too short a period could simply see the biodiversity gains swiftly lost. Thirty years sounds like quite a long time, but when one bears in mind that we are already two years down the line from the 25-year environment plan and that politics does not always move at a frightfully great pace, it is not hard to imagine things moving quickly and those gains being quickly lost. If biodiversity gains are to properly contribute to the 25-year environment plan commitments to a nature recovery network and to provide carbon sequestration, which is so crucial to our net zero targets, these areas must be secured and maintained for the long term, because only through that kind of approach will we secure long-term nature recovery.
There really ought to be some binding mechanisms to ensure that the habitat condition target is reached in a timely way. One does not want to be cynical about some of these things, but one can well imagine that people wishing to build, build, build will try to find ways around them and will try, on occasion, to take advantage. The time taken for a habitat to reach its target condition—for example, for woodlands to reach maturity—could be specified in a biodiversity gain plan and included in planning conditions to ensure that it can be enforced. One can see so many possibilities here, and yet, even though the goal is within grasp, it seems that it is being clawed back. Again, I wonder by whom and for what purpose.
Amendment 168 to schedule 14 and amendment 74 to clause 91 would change the provisions by requiring post-development habitat enhancements for the purpose of maintaining biodiversity gains in perpetuity, rather than for 30 years. I have no doubt that the Minister secretly agrees with that; I suspect that she would like to see these things achieved. However, I suspect that she is constrained.
Our amendment 168 would ensure that those habitats are maintained at their target condition. It is interesting to note that that proposal comes not only from the Opposition Benches but is broadly supported. I was delighted to see a similar amendment in this group from the hon. Member for Chatham and Aylesford (Tracey Crouch), although I do not think that it goes quite as far as ours. However, there are clearly Government Members who see the significance and importance of achieving this for the long term. I have to say once again that, if we do not get the commitment we are looking for on amendment 168, we will divide the Committee.
Dr Whitehead
I want to add a few thoughts to the excellent introduction to the clause from my hon. Friend the Member for Cambridge. This issue has a considerable relationship to not only biodiversity gains generally but our targets under climate change legislation.
Part of the purpose of a number of the biodiversity gains that may arise as a result of putting percentages on biodiversity gain is not only to make a little gain but to actually sequester what is in that gain. That sequestration should and will count towards the carbon balance, so far as getting to net zero is concerned. We will discuss, when considering a new clause later in Committee, the whole question of what to do about planting trees over a period of time and how the planting of those trees leads, as those trees mature—my hon. Friend alluded to this—to substantial gains in net negative emissions, which are absolutely essential for reaching a net zero target in the future. The assumption would be that the carbon embedded in those trees is permanently placed on the carbon account as a negative input, because it has been effectively sequestered by the trees. That means not only that we can get to net zero, but that the whole question of net negative in the net zero equation is an essential starting point, and without that net negative input, there is no way we will get to net zero by 2050. As we in this House have all agreed, 2050 is the proper target, although we would like net zero to be achieved sooner in this country as far as emissions are concerned.
Rebecca Pow
I thank both hon. Members for their comments. The 25-year environment plan has been referred to, and I would say that Opposition Members are talking about weakening the commitments on biodiversity net gain in the 25-year plan. The Bill actually takes us further on biodiversity net gain. The plan only included a commitment to consult on a mandatory approach and strengthened policy. We are proposing a robust mandatory requirement with a broad scope of mechanisms for securing gains. I think that is important to register at the beginning.
The schedule states that “any habitat enhancement” within a development site that is considered significant by the planning authority must be
“maintained for at least 30 years after the development is completed.”
Respondents to the net gain consultation expressed strong support for a minimum period of maintenance, and Government responded by confirming that they would introduce a minimum period—hence the 30 years.
Ruth Jones
I am just seeking some clarification on the definition. The Minister said the amendment appears to weaken the Bill, but “in perpetuity” cannot be weaker than 25 years, because perpetuity is longer than 25 years.
Rebecca Pow
My point was that what we are introducing in the Bill is much stronger than what was in the 25-year environment plan. That was the point I was making. I will press on—
Rebecca Pow
But it was referred to earlier. It is a commitment we have made, and we are strengthening it. Credit should be given where credit is due. A great amount of work has advanced since the launch of that plan, which I went to in 2018 with the then Prime Minister, my right hon. Friend the Member for Maidenhead (Mrs May). We are forging on and doing even more than was promised in that plan.
I welcome the acknowledgment by hon. Members of the importance of long-term maintenance of biodiversity gain sites to ensure that we provide long-lasting benefits for wildlife and communities and for climate change, as was ably referred to by the hon. Member for Southampton, Test. There are, however, practical reasons why we should keep the minimum requirement to a 30-year duration. We need to create the right habitats in the right places for wildlife. Increasing the minimum required duration of maintenance might dissuade key landowners from volunteering their land for gains. Agreements made for perpetuity would also risk creating permanent conditions or obligations to maintain particular types of habitat, when future changes in climate or ecological conditions might make a different type of habitat more suitable. The Bill leaves space for flexibility.
I want to give some more detail about what we term conservation covenants. Any conservation covenant used for net gain would be drafted to secure the carrying out of habitat enhancement works and maintenance of the enhancement for at least 30 years. We would expect responsible bodies to respect that purpose when deciding whether or how to modify or discharge a conservation covenant. They might consider whether any flexibility for landowners would better serve that purpose than retaining the conservation covenant unchanged. I have talked to landowners about this, and it is a point they make, so that has to be respected. The Bill leaves the flexibility for that.
There are also a range of existing protections for habitats, which will not be going away. They could apply to biodiversity gain sites even after the 30 years have expired. These are principally of relevance to off-site habitat enhancements, but would still apply to habitats created within developments. We understand from stakeholders that there may, in some cases, be little difference in funding requirements between the minimum 30-year agreement and a longer agreement.
In cases where it is acceptable to a landowner and would deliver greater biodiversity benefits, we would, of course, encourage longer-term agreements. We would do that initially through guidance. Should further evaluation of the policy show that this is not achieving the right outcomes, the encouragement might be adjusted through policy, the biodiversity metric, which has been in existence for about five years and is currently being updated by Natural England, or further guidance. Any future decision relating to the mechanisms of the encouragement will be made by Government on the basis of evaluation of the biodiversity net gain practice rather than speculation, which, I suggest, is what is being done at the moment.
Dr Whitehead
First, I think it should be put on record that suggesting that a Government initiative is better than an amendment being proposed, when the comparison is made between two Government initiatives, one of which is better than the other, really should not stand. We did not write the 25-year environment plan; the Government did. If this improves on the 25-year environment plan, fair enough, but it is not to do with us.
Secondly, in law, 30 years means 30 years. It will be found out whether that was the right thing by encouragement only after 30 years. If someone rips everything up after 30 years, they will find the Government’s encouragement was not as good as it should have been. I am puzzled as to how the Minister will find out whether this is working short of the 30-year period. Would it not be better not to have that 30-year period, to ensure that we do not have to find out the hard way at the end of 30 years, when that change is made in law?
Rebecca Pow
I take the point that the hon. Gentleman made earlier. I put on record that I hear what he has said. We will not fall out.
Things will not stop after 30 years. For example, while the agreements made for biodiversity net gain might expire, the created habitats will remain subject to a wide range of protections at that point, as I just said. For example, if a woodland had been created, it would benefit from existing protections for woodland and would then fall into the scope of the felling licence and potential environmental impact assessment regulations for forestry. All those other protections would come into play.
I reiterate that people can voluntarily enter into contracts longer than 30 years if they so wish. I am sure that certain people will want to do that. In light of the reasons I have set out, I ask the hon. Member for Cambridge to withdraw his amendment.
Daniel Zeichner
I have been elevated, Mr Gray, to doctor. Thank you very much.
Daniel Zeichner
I am not sure what a doctor looks like, but thank you.
This has been a useful discussion, because it begins to show how complicated some of this is. It shows—we will come to this in subsequent discussions—that the interactions between the different pieces of protection legislation are complicated, as I have already hinted. This is possibly already a discussion for lawyers, and my fear is that it will become a discussion for lawyers in the future, because these things will be disputed. If we do not get the legislation clear now, it will lead, I suspect, to disappointment in the future.
Perhaps I was overly gushing in my praise for the 25-year environment plan at the beginning, but I was seeking to make a broader point, which is that in too many cases we have stepped back. This is a case in point. The Minister, in explaining the logic behind the 30 years, has raised more concerns in people’s minds than she might have allayed. I am grateful to my hon. Friend the Member for Southampton, Test for linking this issue to sequestration and our necessary attempts to achieve net zero by 2050. He seems to me to be absolutely right; we need these improvements.
It is striking that, in this schedule, this is the key tool that the Government are adopting. They are using the planning process. If that is the key path to protecting nature in future, we do not want to start introducing loopholes and qualifications in this way. I understand the debate around the 30 years—I was ploughing my way through the submissions to the net gain consultation and the Government’s responses—but I am sure that the Minister will concede that many people agree with our position, which is that this needs to be seen in perpetuity. An additional point is about how we monitor and check that progress in between. As we all know, it is all too easy for this place to pass legislation and think, “job done,” only to wonder why it has not had an effect in the real world. We will probably touch on some of those points as the debate continues.
Daniel Zeichner
I beg to move amendment 22, in schedule 14, page 212, line 15 leave out “may” and insert “must”.
Amendment 22 would make it a duty for the Secretary of State to provide a clear procedure to planning authorities. Here, again, we come back to the realms of local government. I should perhaps have said earlier that some years ago I was a district councillor in rural Norfolk. I very much enjoyed the experience, and spent many hours—as, I suspect, did many other members of the Committee—on local planning processes. I learned that planning law is lengthy, complicated and sometimes controversial, but very important when it comes to protecting and developing local communities.
This is another one of those “may” and “must” issues. The amendment would strengthen the Bill, which states only that
“The Secretary of State may make regulations as to the procedure which a planning authority is to follow in determining whether to approve a biodiversity gain plan”.
I fear, yet again, that the devil is in the detail. I remember being quite impressed as a district councillor some years ago that there was an interest in biodiversity. We had a biodiversity committee, which meant that we had some fascinating discussions, but I fear that nothing much happened. That is so often the problem: that there is concern but no means of translating intent into action.
Whether the Secretary of State “may” or “must” make regulations is therefore quite important. I fear that many planning authorities that do not have to engage with this will look at it sympathetically, because people want it, but it will be the usual thing: when they are constrained by so many competing requirements, it is tough to do something unless they have to, which is what we are in this place to ensure.
Regulations may specify the details of the
“time by which a determination must be made…factors which may or must be taken into account in making such a determination”,
and appeals against the planning’s authority’s decisions. I suspect that we are all familiar with the dilemmas that local councillors often face. We give them a huge range of things to take into consideration while trying to achieve balanced outcomes that can withstand scrutiny and appeal, and quite often—and rightly so—they have to take direction from their expert officers who have already made those calculations.
The question is where we balance this issue as a priority against the other things that councillors take into account. My sense is that unless we strengthen the Bill, it will become one more on the list of things that they really ought to take into account. At best, it may become a line on an agenda that gets ticked: “Yes, we have taken it into account, because somebody raised it,” but will it actually be considered among the trade-offs in the decision-making process? I am not convinced.
We also wish to raise the question of how the regulations will be decided here; again, we believe that they should be subject to the affirmative procedure to allow proper parliamentary scrutiny. They should also be subject to proper public consultation; because the issue is complicated, the input of biodiversity and planning professionals through public consultation would strengthen discussion and improve procedures. These are not simple matters—they have significant consequences and significant costs—but in due course such input would improve the overall planning outcomes. Improved procedures could ensure that all planning authorities’ biodiversity gain plans are sufficiently detailed, subject to public consultation, and made available in draft so as to inform planning applications. That is a part of the democratic process that we believe very valuable, although the planning White Paper seems to suggest that, for whole swathes of the country, that process may not be continued in future.
We want to get the Minister’s thinking on this, because it is not clear why she would not want to accept the amendment. We will not press it to a Division, but we would like an explanation.
Rebecca Pow
I thank the hon. Member for moving the amendment. Paragraph 16 of schedule 14 sets out that the Secretary of State may impose further procedural requirements relating to how a planning authority approves a biodiversity gain plan. Paragraph 15 makes it clear that the biodiversity gain objective must be met; it also specifies that other key factors, such as the accuracy of the plan’s ecological information, must be considered by the planning authority. The Government intend to use the paragraph 16 power to ensure that the requirements fit well with the planning system; the hon. Member alluded to that, and obviously it is really important, but we believe that the other considerations in paragraph 15 should provide confidence that approved plans will meet the legislation’s environmental policy objectives.
Primary legislation consistently takes this approach to the balance between powers and duties, as we have discussed many times. It is entirely appropriate to provide the Secretary of State with flexibility as to how the provision is given effect. Forcing the use of regulations when they might not be needed risks creating unnecessary complication, or even weakening the purpose of the measures. It may not be necessary for the regulations to cover all the areas in paragraph 16; they are set out to give the Secretary of State discretion to address them if it is considered necessary. While we cannot rule out needing to address appeals in the regulations, that may not be necessary. Forcing the Secretary of State to regulate such matters immediately when that may not be a clear necessity would risk adding complexity to a process that we aim to keep straightforward. The addition of undue complexity risks undermining the benefits of the approach for the planning authorities, the communities—which are obviously so important—and the developers using it.
The biodiversity gain plan is simply the document that allows the developer to demonstrate to the planning authority how it has satisfied the biodiversity net gain requirement. A typical biodiversity gain plan will consist of the completed biodiversity metric and some supplementary information. We expect that the consistency of the plans will make their assessment easier for the planning authorities, and reduce the risk of miscommunication. I therefore ask the hon. Gentleman to kindly withdraw his amendment.
Daniel Zeichner
I listened with interest to the Minister’s explanation. I am not entirely sure that I am convinced by it, because it is not clear to me why making regulations at a later date, rather than making things clear sooner, will make the position less complex. Having the discretion to make them or not does not seem helpful.
The Minister also raised an issue about the biodiversity net gain metric, which is worthier of comment. There is a worry that we are creating yet another algorithm that people will not understand—the phrase “mutant algorithm” has already been bandied about with regard to housing numbers and the planning White Paper. As someone who is interested in data, I am not convinced that it is the algorithm that is mutant, the issue is those who put the data in, or interpret or programme it in a certain way.
Clearly, there is concern that technocratic approaches to making such decisions will take away local input—that those with unique knowledge of the local community and local biodiversity could in some way be excluded. That is a concern. The amendment has the potential to explain to local planning authorities how things should work, so the Minister is missing an opportunity.
An important point was made to me by the Town and Country Planning Association: if there is just a simple metric, where sites have apparently lower biodiversity value, people’s attachment to that local open space and its social values could somehow be lost. There is a big debate to be had about how the metric works, and what parameters feed into it in.
Rebecca Pow
I am sure the hon. Gentleman is aware of this, but although he suggests that the metric is a new thing being imposed on people, it has been used for about five years, and is referred to by planning authorities and developers. As I think I just mentioned, Natural England is working on updating it, because it is complicated —it is not a simple thing, but it is a very useful thing. We want to know what is there, what the value is, and what the value could be—all that. We must also remember that all of this will link into the local nature recovery networks, which local communities will be really involved with.
Daniel Zeichner
Yes, and we will discuss those local nature recovery networks. The point that I am making is that the amendment was an opportunity for the Government to give direction to local planning authorities. Different planning authorities would do this differently—some would probably not do it at all, some would do it well, and some less well. It is sufficiently important for the Government to give direction. That is the point of our probing amendment.
To some extent, the Minister has clarified things, although I am not sure that has left us any more hopeful about the impacts, but at least we have had clarification. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Daniel Zeichner
I beg to move amendment 170, in schedule 14, page 212, leave out line 26.
The Chair
With this it will be convenient to discuss amendment 171, in schedule 14, page 212, leave out lines 29 and 30.
Daniel Zeichner
Amendments 170 and 171 relate to a major concern about the proposals, which is that a number of exceptions have been made to the condition to provide a biodiversity net gain. As I said earlier, a noble ambition can be undone if there are too many exceptions and loopholes.
Under the Bill’s schedule 14 amendments to the Town and Country Planning Act 1990, biodiversity net gain provisions will not apply to development for which planning permission is granted by a development order, an urgent Crown development, or a
“development of such other description as the Secretary of State may by regulations specify”.
I hope Members are all still with me. The excitement of this morning cannot necessarily be replicated when discussing this provision, but it is clear that, in the wrong hands, it could lead to some pretty major exemptions.
In order to maximise the benefits of biodiversity gain, provide developers with certainty and create a level playing field, it is important that the application of the biodiversity gain system is broad, and that most development is part of the net gain system. As I said, the intention is noble, but if people want to find gaps and we give them the opportunity to find lots of them, I am afraid that that is what is likely to happen. We have probably seen that kind of thing happen in the past. If biodiversity gains are to be delivered on the scale that I genuinely think we all agree is needed, we need to ensure that the exemptions and loopholes are limited.
We think that the exemptions for development orders could have a very broad application in practice, particularly if they are extended to the full range of development orders, which include local or neighbourhood development orders, and development orders brought forward by development corporations. That could lead to major developments such as new towns, and wider proposals for free ports, being exempt from the biodiversity gain provisions. That is a significant loophole, and a major missed opportunity to deliver biodiversity gains at scale.
The problem that we face, which goes right back to where the discussion started, is that the challenge is pressing and huge. We know that. If we start introducing exemptions and loopholes, we know what happens. It is not an aspersion on developers; we know that lots of people are paid in the development sector to find ways around planning laws. In my part of the world, there are many of them, and they are very good. They are assiduous, and they probably know planning law better than I do—in fact, I think I can guarantee it. That is why we need to ensure that we do not give them extra opportunities to get around it. Clarification on the development orders exemption and its intended scope would be very welcome from the Minister, not least because I think her words might be useful in future, as local authorities try to defend themselves against clever people who are trying to find ways through this.
I am sorry to have to go back to the planning White Paper, but it is relevant because of its proposals. Incidentally —I do not think I made this point earlier—the Minister had to search pretty hard in the planning White Paper to find references to net gain and biodiversity; the mention of it is very tangential. Anyway, the White Paper includes proposals for the extended use of development orders for large-scale development, as well as wider permission in principle.
We fear that significant swathes of development could be taken out of the system of net gain. If I were being kind, I would say that that would be an unintended consequence of the planning White Paper, but I think that there are some who know full well what they are doing with this. It allows the Government on the one hand to say, “Look what we’re doing with our wonderful new Environment Bill. We’re delivering on our 25-year environment plan,” while on the other hand it is business as usual. That is really not what we need. Perhaps the Minister could use this moment to explain how she sees the relationship between the Bill and the planning White Paper. It is highly significant, and difficult, because the White Paper has come along since the Bill Committee was originally formed, but it is hardly irrelevant.
Paragraph 17(b) of the proposed new schedule introduced by schedule 14, which effectively enables the Secretary of State to exempt any type of development in future, could lead to wide exemptions from net gain. I note that in their response to the net gain consultation, the Government have outlined that a “targeted exemption” may be intended for brownfield sites. That is quite a significant statement. For many years, there has been considerable interest in pursuing brownfield sites. I think there is sometimes a misunderstanding that nature exists only in some parts of our landscape. It can, of course, exist everywhere. Brownfield sites are no exception to that. It may not always be as diverse and high grade, but it is still very important to our overall attempt to restore and recover nature.
I understand that some environmental organisations such as Greener UK have expressed concerns that the proposed targeted exemption for brownfield sites could undermine the delivery of biodiversity gain as a whole, if a substantial amount of brownfield land is brought forward for housing development. One can see how that could begin to happen. If it is predominantly brownfield land, frankly, for all our good intentions, we are not making sufficient progress. The sites can have significant biodiversity interest, even when there is no formal biodiversity designation. Under these proposals, we could see damage to brownfield land of high environmental value, which sometimes is not really appreciated until the planning process is well under way. That raises some issues around how the process will happen. At some point in the process, it has to be assessed. The point at which that assessment is done is quite significant. We will come on to that with other amendments.
Will the Minister clarify how brownfield land of high environmental value will be protected and enhanced? What steps will the Government take to ensure that any brownfield site exemption does not undermine our goal of biodiversity gain as a whole? Will she also clarify by what process any future exemptions will be considered by the Secretary of State before being pursued under the broad power in the Bill?
Will there be any public consultation on further significant exemptions from biodiversity net gain? That is a very important point. In my part of the country, which the hon. Member for South Cambridgeshire will be familiar with, we have a very engaged electorate, to put it mildly, which is a good thing, but it means that people are interested and would not want to be excluded from a discussion. It would be hard to exclude some of them, frankly, but they should have a proper, formal role in that discussion, and a sense that their involvement affects the outcome. Otherwise, it leads to further disenchantment in the way our politics works.
There is a range of weaknesses and loopholes, even before we get to what I have described as the real whopper. It is deeply concerning that nationally significant infrastructure projects and other large-scale infrastructure projects are currently exempted from mandatory biodiversity gains. That is a bigger discussion, but it is a factor in this discussion. We know that such projects can cause significant damage to nature and we believe that provision must be made to include such developments within the scope of mandatory biodiversity gain, in line with the Government’s 25-year environment plan to embed environmental net gain in infrastructure. We will return to this point later in Committee when we discuss new clause 32.
Amendments 170 and 171 would strengthen what the Government are trying to do, by removing the potentially very wide exemption from net gain for development orders, and remove the broad power given to the Secretary of State in the Bill to lay down regulations exempting further development from biodiversity gain as and when they wish. We are genuinely interested in the Minister’s response. I have posed a series of questions. We do not seek to divide the Committee on the amendment, but it is important that people in the wider world get a sense of what the Government are trying to do through this measure.
The Chair
I call the Minister. [Interruption.] I call Dr Alan Whitehead. I am terribly sorry. I would be most grateful if you would indicate more clearly if you wish to speak. The order of speaking goes from the proposer of the amendment to the Minister, but if you wish to add anything, please indicate that to me by standing up or by any other method that is clear.
Dr Whitehead
Thank you, Mr Gray. I escalated from a pen to a hand, but I can escalate to a full body motion, if that is acceptable.
I want to add to the admirable exposition of the two amendments by my hon. Friend the Member for Cambridge by drawing attention to amendment 171, which would leave out two lines from paragraph 17 of the proposed new schedule, which has the heading, “Exceptions”. I ask members of the Committee to see what has been done here, because I think it is shocking. At the start of part 2 of the proposed new schedule, conditions for planning permission relating to biodiversity are laid down:
“Every planning permission granted for the development of land in England shall be deemed to have been granted subject to the condition in sub-paragraph (2).”,
which is,
“The condition is that the development may not be begun unless”
there is a biodiversity gain plan. That looks terrific. The casual observer would think, “That’s it sorted out. The biodiversity gain plan has to be in place. That’s what the Bill’s about.”
On turning to paragraph 17, we see that there are some exceptions:
“development for which planning permission is granted…by a development order, or…under section 293A (urgent Crown development)”.
That is arguable, but then we have this sentence:
“development of such other description as the Secretary of State may by regulations specify.”
Put into English, that means that if the Secretary of State introduces a regulation, development is exempted. The whole thing is meaningless from the beginning. All it needs is a regulation, which I presume may well be under the negative procedure, for this to be completely undone.
I know that it is fashionable to blame drafting for these issues, but something as shocking as this has to have had an intention behind it. This cannot arise from someone taking a lax instruction, writing the provision in the bowels of a building, presenting it and no one noticing. How these things are written is instructed by Ministers, who under the Bill can simply remove stuff that the Government do not feel like doing. It refers to all development, not just to some developments—it says “development”. That really is not good enough for a Bill of this kind.
Rebecca Pow
I thank hon. Members for their comments. The hon. Member for Cambridge asked a lot of questions, so if I do not cover them all, we will put something in writing because I could not keep up with them all.
Paragraph 17 of the proposed new schedule introduced by schedule 14 sets out when the general biodiversity gain condition does not apply. Sub-paragraph (b) creates a power to exempt specific types of development through regulations. While I welcome the hon. Member’s acknowledgement of the importance of keeping exemptions narrow, there are good reasons to use this power, which amendment 171 seeks to remove, to introduce targeted exemptions for more constrained development types.
The Government will not introduce broad exemptions from delivering biodiversity net gains, which was something the hon. Member specifically asked about. The power will be used to make narrow practical exemptions in order to keep net gain requirements proportionate. Exemptions will ensure that the mandatory requirement is not applied to development on such a small scale that it could be negligible, and I will go on to talk a bit more about that and about no losses in terms of habitat value. Some development will result in negligible losses or degradation of habitat. Examples of such development might include changes or alterations to buildings and house extensions, for example. Applying the 10% targets to such development would not generate significant ecological gains, and the requirement might result in undue process costs for developers and planning authorities alike.
Ruth Jones
The Minister has talked about targeted, narrow exemptions, but that is not what it says in the Bill. I take on board the fact that she is enthusiastic about and fully committed to this, but somebody coming after her—heaven forbid—could use the wording in a completely different way and we would need to follow that is actually in the Bill, rather than what is in an explanatory note.
Rebecca Pow
I thank the hon. Lady for that and I reiterate my first sentence. The Government will not introduce broad exemptions from delivering biodiversity net gain, and we have made that quite clear.
Amendment 170 would undo the exemption for permitted development from the net gain requirement. Permitted development rights play a vital role in freeing up local planning authorities to deal with planning applications that really matter to local communities, and have a wider social, economic and environmental impact. The hon. Member for Cambridge will know that from his time on the planning committee at the district council. Many permitted development rights are for small-scale development or changes of use, such as modest alterations to buildings, small fences or temporary use of land for fairs, where there is little or no impact on biodiversity.
Development undertaken through local planning orders is not exempt from net gain, as we have touched on. Only development under the general permitted development order, such as adding a conservatory, is exempt. It is true that we have extended the scope of the permitted development rights in recent years in order to deliver more homes, but permitted development rights such as allowing office-to-residential conversions and allowing residential blocks to be built up are principally about the use of existing developments and development land, and so are generally outside the scope of biodiversity net gain.
Brownfield sites were mentioned. It is not the Government’s intention to exempt brownfield sites. We absolutely recognise the biodiversity value those sites can have and, indeed, their value to communities—many of them are right in the centre of towns and cities. Any brownfield exemptions will be narrow and will have to recognise biodiversity value. We will consult further on the details of exemptions. For example, brownfield sites will have a set of criteria that would relate to them when these matters were being considered.
Special development orders are rarely used, but it is important to retain the legislative flexibility to make them very quickly to respond to urgent priorities. For instance, in recent years they have been used to secure urgent planning permission for the temporary lorry parks as part of the Brexit preparations, and Members will be able to see the benefit of that and why it is important to do that quickly.
New towns were also touched on, and we are aware that there are extant powers in the New Towns Act 1981 to use special development orders to set out the planning framework for new towns. There are no plans to use those powers at present, and the Government recently consulted on modernising the planning powers of development corporations to ensure that they are fit for purpose. However, we are clear that any new town would need to contribute to biodiversity gain: indeed, one of the great things about new towns is that there is the opportunity and scope to make them wonderful, green, biodiverse spaces in which to live. We have learned so many lessons this year about how important those things are.
We think it is right that the legislation is clear that biodiversity gain should not be included in permitted development rights, and that a clear exemption for development orders is the best way forward. I hope I have given clarity on some of those other areas, and for the reasons I have set out, I ask the hon. Gentleman not to press amendments 170 and 171.
Daniel Zeichner
I thank the Minister, and I do think that some of what she said was helpful. However, I have to say that not only was my hon. Friend the Member for Southampton, Test excited this morning; he is now shocked. Being excited and shocked in the same day is a bit worrying, but the Minister will have heard the shocked tones from the Opposition Benches.
I think a close reading of the text gives cause for concern, and I hope that the Minister might, on reflection, look at what she described as “narrow”. One person’s flexibility is sometimes another person’s loophole. There are different definitions of narrow, and some of us can see a yawning chasm—a big gap that anyone who is astride a bulldozer could drive straight through—so we do think there is legitimate cause for concern. Clearly, the permitted development rights extensions have been extremely controversial and a cause for concern, so I am not entirely sure that the Minister’s defence would reassure everyone. Certainly in my part of the world, some huge problems have arisen from some of those changes, and I am not convinced that any concern was given to restoring nature when making those changes. I also have to say that whenever a Minister says there are no plans to do something at present, that is generally a good sign that it may happen sometime soon, so that is also a cause for worry.
I do think this issue needs to be further examined, and I suspect we will be coming back to it. I also suspect that the other place will look quite closely at this, so I do not think today’s discussion will be the end of the matter. However, it is useful to have had it, because if the Bill is not precise, the words that Ministers use become more helpful in defining and limiting.
I suspect that many people will look at the Bill and think that this is too big a loophole, and ask—exactly as my hon. Friend the Member for Southampton, Test did—what was the thinking behind doing this? That is the question I keep going back to: why has there been this change from the optimism of a couple of years ago? It may just be that this is what happens in government: officials look at it more closely and say, “You really do not want to do that, because”—and then the Government find that they are losing out on the noble ambition they had at the outset. We are pretty determined to make sure that that noble ambition stays on track.
I hope the Minister thinks we are in being in some way helpful to her; I am sure that is not how it feels at the moment, but she may come to see that in time. With the reset of Government policy, she may suddenly be flavour of the month. Maybe she can feature in a 10-point green plan—who knows? However, we do not need to pursue this issue further at the moment, so I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Daniel Zeichner
I beg to move amendment 172, in schedule 14, page 212, line 32, leave out “may” and insert “must”.
This amendment would commit the Secretary of State to make regulations excluding irreplaceable habitat from the net gain policy.
I am afraid that we are going to go further into the legalities of the planning system. I apologise: mid-afternoon is probably not the time to be doing this, but it needs to be gone into. This amendment is another may/must one. We are concerned about the provisions for net gain in the Bill, and the relationship between this new system and the irreplaceable habitats that, in many places, we treasure and love. These irreplaceable habitats are very precious places and include ancient woodlands, salt marshes, blanket bog and lowland fen, which, if destroyed, are technically extremely difficult to restore, and it takes a hugely long time to do so. By their very nature, these habitats cannot be properly recreated, so this is not a case of providing a replacement or, in any real sense, a gain.
The national planning policy framework sets out that
“development resulting in the loss or deterioration of irreplaceable habitats…should be refused, unless there are wholly exceptional reasons and a suitable compensation strategy exists”.
We need further clarity that provisions on biodiversity net gain will not undermine existing protections for irreplaceable habitats. The amendment seeks to explore the complicated relationship between these new provisions and the existing protections.
Schedule 14 gives the Secretary of State powers to define what is meant by “irreplaceable habitat” and to exclude such habitats from net gain or amend how the legislation applies to them. Amendment 172 would place a duty on the Secretary of State to make such regulations, such that they “must” rather than “may” make them. Any regulations and associated guidance on irreplaceable habitats should make it clear that current legal protections and requirements for irreplaceable habitats are fully retained and take precedence.
That is the problem with the interpretation of the different pieces of legislation. I suspect that the Minister has probably had these conversations. We want to add clarity to the process. If that is not done, we fear that it will be open to dispute in future. Not only that, but people would also be able to do things that they would not have been able to do before. The theme of some of the upcoming amendments is that there is a danger that something that looks good could end up doing harm as a result of unintended consequences. I am not in any way suggesting that that is the intention, but it is the risk, and that is why it is important that this is sorted out.
The Government should also reiterate that adverse impacts from development should be avoided, not just minimised. Our concern is that if the requirements for irreplaceable habitats are less arduous than those for other habitats, a perverse incentive could be created. We do not want the regulations to do that or to end up with the extraordinary situation of developers being incentivised to target irreplaceable habitats instead.
The Bill should be absolutely explicit that the mitigation hierarchy, existing designations, and statutory and planning protections for sites and species are not undermined by any of the new proposals. Net gain should be what happens right at the end of the process, if planners cannot find a way of stopping damage to habitats along the way. These protected sites should remain inviolate and rely on and benefit from the current protections and systems, which we want to ensure are in no way diminished.
Any regulations proposed by the Secretary of State should be taken under the affirmative procedure, and there should be public consultation because there is very real public interest in these issues. We believe that allowing third parties, including experts in the nature sector, to input into those regulations through public consultation would ensure that new net gain conditions would not inadvertently provide the kinds of loopholes that I have been describing. I do not think that the Minister will disagree with this, but in my experience local people invariably know their own locality best, and we should not be silencing them.
I say again that this amendment is an attempt to tease out from the Minister some safeguards and words of reassurance, and that we will not need to divide the Committee.
Rebecca Pow
I thank the hon. Gentleman for looking into this issue and for the amendment. Some habitats include ancient woodland, with which I have a great affinity, having been chair of the all-party parliamentary group on ancient woodland and veteran trees. We did a lot of cross-party work on this habitat. These habitats cannot be recreated and are typically considered irreplaceable. They are of enormous ecological and cultural importance and significance.
Daniel Zeichner
I welcome the Minister’s helpful comments. I do not think anyone doubts her commitment to those irreplaceable habitats. The key points are ensuring that that message is clear and understood and that the regulations are made, and the relationship between them explained, in the correct way. We are concerned about future arguments as a result of misunderstanding the gaps. We are all trying to get to the same place. On that basis, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Schedule 14 agreed to.
Clause 91
Biodiversity gain site register
Daniel Zeichner
I beg to move amendment 10, in clause 91, page 91, line 37, leave out “may” and insert “must”.
I am sure you will be delighted, Mr Gray, that we have moved on to another clause, but the previous schedule was a big and important one. The biodiversity gain site register requires another discussion about “may” and “must”. The amendment seeks to tease out the intention behind the measure.
Clause 91 sets out that the Secretary of State may make provision for a biodiversity gain site register to be created. To some extent, this is the last stage of the mitigation hierarchy: it is not something that anyone would want to do, but we recognise that it might sometimes be necessary. It is very important that a register of compensatory habitat sites is publicly available and updated regularly, and that we are able to see how the process works.
All our amendment does is seek to tighten the Government’s responsibility to provide the register by turning it into a duty for them to do so. A register of sites is essential to secure and record meaningful and lasting net gain. I refer to some of my earlier comments: we worry that in some cases there will be not necessarily a lack of will but a lack of capacity to check and monitor. Not only does this have to work, but the message needs to go out that it works, such that, as my hon. Friend the Member for Southampton, Test said earlier, people will not think, “Well, no one is ever going to check. It’s not going to matter, and after 30 years who’s going to know and who’s going to care?” If that becomes the attitude, clearly this whole process and system will have failed in its intentions.
We do not want a simple tick-box exercise where it looks as if it has been done but no one knows what is happening in the real world. We think the amendment would help check on progress in delivering and maintaining enhanced habitat sites. We think it would help with the checking, monitoring, and enforcement function, even though we worry whether it will actually be done. This is a probing amendment, so we will not seek a Division. The question to the Minister is: why would one not do it? If the net gain system is to be established respective of mitigation hierarchy, it is hard to see why one would not do this as soon as possible.
Rebecca Pow
I thank the hon. Member for his amendment. It is definitely worth enquiring about this register, so I am pleased to have the opportunity to talk about it.
Clause 91 makes provisions for the creation of a register of these biodiversity gain sites. The register is necessary for the biodiversity gain condition to work effectively. Without a register, no habitat enforcement outside development sites would be undertaken in pursuit of biodiversity net gain. Furthermore, without the register, a development that is unable to achieve biodiversity net gain within its site boundary may not be able to commence development at all. That would block a significant proportion of new development, so the register is useful in a number of ways.
I welcome the hon. Member’s acknowledgement of the importance of the register and the provisions in this clause, and understand his wish that the powers within it should be exercised in good time. There is a clear need for the Government to design and implement this register before the biodiversity gain condition comes into effect, and I can confirm that, while the hon. Member seemed to suggest that one or may not create the register, it is the Government’s intention to do so.
I want to clarify that this clause provides this power for the Secretary of State to make regulations that will set out the rules and procedures for the operation and maintenance of the new register of biodiversity gain sites. That will include setting fees for applications to add land to the register, criteria for determining eligibility of land to be added to the register, and rules for the allocation of land in the register in relation to developments. The use and nature of the register is likely to evolve, and flexibility will be needed to update its requirements. Before making an order under this power, the Department wants to consult stakeholders. Detailed regulations will need to be in place to provide all parties with sufficient guidance on how the biodiversity gain register will operate. This will help create confidence that the system can achieve the intended environmental outcomes. I hope I am answering all the things that the hon. Member has on his mind.
Primary legislation consistently takes this approach to the balance between powers and duties, as I have said many times before. It is entirely appropriate to provide the Secretary of State with the flexibility as to how this provision is given effect. I hope that provides clarity. I think it is a probing amendment, and I ask the hon. Member to withdraw it.
Daniel Zeichner
I am grateful to the Minister. This is a probing amendment, so we will not divide the Committee, but it is extraordinary that it almost seems like a global change has resulted in “shall” or “will” appearing as “may” throughout the Bill. We could do a global change back again. It is clear that the system cannot work without the register, which gives rise to the question: why the delays? The Minister may be slightly nervous, in the sense that she said that we will need to design and implement the register. It comes from a 25-year environment plan from two or three years ago, so how long is this all going to take? She might want to intervene to say roughly how long she thinks it will take, but I suspect she will not want to do so.
Why is there not a greater sense of urgency? To go right back to where we started, it is urgent and crucial that we tackle this crisis, yet in designing the system it appears that there was a presumption that it would take a few months for the legislation to get through and that the register would then need to be designed.
Rebecca Pow
I will intervene. I am sure the hon. Gentleman will agree that local authorities in particular will want a system that works, not some flim-flam, half-developed thing that is going to go wrong. That is why it is so important to do it step by step. There is urgency, hence the Bill and all the measures in it. All this has to work with the local nature recovery strategies and the overall nature recovery strategy. The targets and all the rest of it will fit together, and it will come on stream with some urgency. Was that an intervention? Does he agree?
Daniel Zeichner
I have clearly touched a nerve. I am delighted to hear that. All I gently observe is that things move rather slowly sometimes. I am sure that the Minister wants it to happen quickly, just as we all want it to happen quickly and to work. I am not entirely sure that those two things have to be mutually exclusive, but I suppose experience suggests that things do not always instantly work smoothly. I appreciate the Minister’s contribution, and having heard what she has had to say, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
The Chair
Amendment 74 was discussed previously. It was originally tabled by the hon. Member for Chatham and Aylesford (Tracey Crouch). I suspect that it will not be taken forward by another Member. Perhaps the Committee might like to send our warmest, best wishes to the hon. Lady. Perhaps the Minister might like to take that forward.
Amendment proposed: 230, in clause 91, page 92, line 1, leave out
“for at least 30 years”
and insert
“secured in its target condition and maintained in perpetuity”.—(Dr Whitehead.)
This amendment would require habitat enhancements created under net gain to be secured in perpetuity.
Question put, That the amendment be made.
Daniel Zeichner
I beg to move amendment 11, in clause 92, page 93, line 5, leave out “may” and insert “must”.
I am afraid that this is going to sound remarkably similar to the previous discussion. We welcome the measures in the Bill to ensure that developers who cannot achieve biodiversity net gain on a particular site will be required to fund improvements elsewhere, through purchasing biodiversity credits, to make up their required 10%—we would say at least 10%, but that is what the Bill requires—biodiversity net gain. We also welcome that the funds from these credits must be used for projects to enhance habitats and biodiversity. However, we have some concerns about clause 92, which we will interrogate with amendment 11 and amendment 136, which we will come to next. On amendment 11, clause 92(1) uses the wording:
“The Secretary of State may make arrangements under which a person who is entitled to carry out the development of any land may purchase a credit from the Secretary of State for the purpose of meeting the biodiversity gain objective”.
This is exactly the same point as in the previous discussion: the system cannot work unless that is done. The amendment would tighten the Government’s responsibility to operate those credits by requiring them to get on with it—to put it crudely.
Rebecca Pow
Clause 92 makes provision for the Secretary of State to set up a system of statutory biodiversity credits. Some developers might find that there are no suitable local habitat enhancement schemes to enable them to achieve net gain, and in such cases, a biodiversity gain requirement might become a barrier even to the most appropriate and sustainable of developments. To mitigate that risk, the Government will sell biodiversity credits, which may be counted towards a development’s net gain. That will allow us to achieve biodiversity net gains through strategic investment in habitat restoration, while reducing the risk of undue delay to development.
I welcome the hon. Gentleman’s clear acknowledgment that this and the environmental potential of the statutory biodiversity credits system are important. Obviously, there is a clear need for the Government to design and implement the credits system before the biodiversity net gain requirement comes into effect, and I can confirm that that is the Government’s intention. He is right about urgency and about wanting it to happen now, but it all has to happen step by step. The Government have every intention of doing that, because it will be an important part of the whole machine.
The Government will apply principles for setting the tariff rate—that was set out in the net gain consultation—in setting the standard costs of statutory biodiversity units. Although the Government still consider the consultation’s proposed range of between £9,000 and £15,000 for the cost of a biodiversity unit to be broadly appropriate, some respondents raised concerns that it was too low and would stifle habitat creation, while others thought it was too high. Several respondents asked for further evidence and work to refine the cost per unit.
The Government will undertake a review of the rate and seek further stakeholder engagement on this subject before announcing specific costs per unit of biodiversity. That is really important. I have spoken to a whole range of different people, from those who have land and who might want to offer it up for the offsetting, to the agents operating for them. Loads of people in this space clearly need to be consulted. I hope this explanation gives a bit more clarity.
Primary legislation consistently takes the approach, as we have set out in the clause, of balance between powers and duties. Forcing the creation of arrangements that might not be needed risks creating unnecessary complication in the process, or even a weakening of the purposes of the measures. In the long-term, for example, we might no longer need a credit system if sufficient habitat enhancement opportunities were offered by local landowners or conservation bodies. I hope that has given a bit more clarity and I ask the hon. Gentleman to withdraw his probing amendment.
Daniel Zeichner
The Minister’s comments are helpful. There is concern that if the system does not work appropriately, we could end up with credits stacking up without the work being done, which is clearly not the aim of the exercise. I think that we are all trying to get to the same place, so there is no need for me to re-rehearse the previous arguments. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Daniel Zeichner
I beg to move amendment 136, in clause 92, page 94, line 5, at end insert—
“(11) In accordance with the biodiversity metric, the Secretary of State or another person, is obliged to carry out such works as necessary to enhance the biodiversity of habitat associated with the sale of biodiversity credits.
(12) The Secretary of State or another person is required to secure and maintain the enhancement in perpetuity after the habitat enhancement has reached its target condition.”
There is concern that biodiversity credits could undermine the biodiversity gains system as a whole. Our worry—to some extent this touches on my previous point—is that it is obviously uncharted territory. We do not entirely know how it will work, but the key thing, in our view, is that it is linked as much as possible to local priorities. The Minister hinted in her previous reply that it may be a touch optimistic to imagine that local alternatives will always be found, which is the reason for setting this up in the first place, but through the amendment we want to press her on how the Government can guard against the long-term pooling of revenue, instead of funds being used to achieve the net gain that we all want. That is our worry.
We also think—this goes back to an earlier discussion—that it would have been possible to make a requirement for habitats created through the purchase of biodiversity credits to be maintained in perpetuity. I suppose our worry throughout is that, for all the good intentions, it is possible that the system could end up not achieving what we want it to. It could be abused, and could, in effect, buy a way through for developers to access habitats that none of us would want to see developed. That is the danger and the risk, and we want to help the Government, through the amendments, to ensure that is not the case.
We also think that there ought to be a reporting function, and that the added value of biodiversity credits to local habitat creation projects and strategic ecological networks should be set out clearly in an annual report. To ensure transparency, habitats created through biodiversity credits should also be held on a register of biodiversity gain sites. That is partly about ensuring that the mechanisms work in an open and transparent way.
We have had strong representations from both the Town and Country Planning Association and the Local Government Association, which are genuinely worried about the possibility that biodiversity credits really will not be reinvested in their own locality. I think that is a reasonable concern. The danger, as those organisations see it, is that communities that accept developments might not see improved biodiversity, which could, in turn, make the process really quite hard to justify to local people. I can see how that could happen.
There is a question about whether credits should be retained by local authorities, so that funding stays in the area where development takes place, and local people can have a say in how the funding can be used to improve the natural environment. What level we should set that at is quite a big question. To some extent, we are trying to tease out from the Minister what she thinks it should be. We think that there is a genuine discussion to be had. I think she has already hinted that she shares my view that the overwhelming priority should be to get new development to achieve net gain onsite and locally, and that offsite contributions and credits should be a last resort. Further reassurance on that would be helpful.
We are placing, through the amendments, two key requirements on the Secretary of State, or any other body charged with using biodiversity credit funds, to ensure that natural sites created or enhanced by biodiversity credit funds are held to a high and lasting standard. I guess one of the running themes through our amendments is the sense of the provisions actually being for the long-term, rather than a mechanism for developers to find a way through to sites that they might not have had access to before.
The first requirement is that all habitat work carried out using biodiversity credits would have to achieve an actual enhancement in biodiversity, as measured by the biodiversity metric. The second requirement is that enhancement be maintained in perpetuity. I anticipate the Minister’s answers, because I think we have heard some of them before, but this amendment is sufficiently significant that, unless she comes back with a miraculous response, we will seek to divide on it.
Rebecca Pow
I thank the hon. Gentleman for his acknowledgement of the importance of the long-term maintenance of biodiversity gains in order to ensure that we provide that long-lasting benefit to wildlife and communities. The Government, too, recognise the importance of those long-term benefits. Indeed, the Government response to the net gain consultation confirmed that through the stated criteria for selecting habitat projects. The response stated that enhancement projects will be selected
“on the basis of their additionality, their long-term environmental benefits and their contribution to strategic ecological networks.”
Obviously, they have to have some real value.
The long-term benefits of habitats are vital, but binding future Secretaries of State to deliver only habitats that can be secured “in perpetuity” risks compromising another of the criteria: that of delivering habitats in strategically critical networks. We would not want to see new habitat creation fail to provide the coherent networks that our wildlife needs because we are bound only to use land that can be secured forever. Where enhancements in perpetuity are an appropriate option, the Secretary of State will have powers under the clause to use payments to purchase land interests in England for habitat restorations, or to secure the enhancements through other means.
With regard to the obligation on the Secretary of State to spend those credit sale funds, I draw the Committee’s attention to the reporting requirement under the clause, which will create a strong incentive for the Secretary of State to spend the funds both promptly and prudently. It was intimated by the hon. Gentleman, I think, that the Secretary of State might be hoarding the funds, but the idea is that this becomes its own trading platform—a bit like the nitrates trading platform, for example. DEFRA would only get involved were the market not working, or potentially just at the beginning when it is getting going. The intention is not that he or she is the banker—that is absolutely not how it should work.
Subsection (6) of the clause should also provide some reassurance. It clarifies that funds may only be used for activities related to habitat enhancement. I think the hon. Member for Cambridge was pressing to ensure that that is what would happen, but that is absolutely what they are for. Furthermore, subsection (10) will ensure that the long-term value of the money received from the sale of credits and the use of biodiversity enhancements can be monitored. That is important as well.
In the light of the reasons that I have set out, I ask the hon. Gentleman to withdraw his amendment.
Daniel Zeichner
I welcome much of what the Minister has said but, as I intimated, the perpetuity issue, and the concern about what might happen with the system not working and the potential for achieving outcomes other than those we are all trying to achieve, mean that we think our amendment would strongly improve the clause. On that basis, we seek to divide the Committee.
Question put, That the amendment be made.
Daniel Zeichner
I beg to move amendment 140, in clause 93, page 94, line 13, after “biodiversity in England” insert
“, including in particular the species and habitats listed in section 41,”.
The amendment clarifies the intent of the duty in relation to the conservation of priority species and habitats.
I am afraid that we are back to some of the interaction with different pieces of legislation. We welcome the change in the Bill to strengthen the Natural Environment and Rural Communities Act 2006—abbreviated to NERC—so that local authorities have a duty not just to conserve but to enhance biodiversity, as well as to follow the obligations of public authorities to plan for appropriate action in order to fulfil their duty and to report on their actions regarding that duty. That is the good news. That is the bit we support.
However, we have some concerns. Public authorities have a key role to play in turning around the state of nature, and the current duty on public bodies to have regard to conserving biodiversity has been rightly criticised for not being strong enough. A House of Lords Select Committee report on NERC in 2018 clearly outlined that
“the duty is ineffective as it stands, as a result of limited awareness and understanding among public bodies, weak wording and the lack of clear reporting requirements and enforcement measures.”
I cannot help but notice that those are exactly the kinds of concerns that I have been expressing all the way through this Bill as well. I guess what it shows is that there is nothing new about the difficulties that people have had trying to do good things but not necessarily doing them in ways that are clear and specific enough to translate into action.
The Lords Select Committee said:
“We recommend that the NERC Act should be amended in order to add a reporting requirement to the duty; the Government should also consider strengthening the wording.”
The measures taken in the Bill to do so are welcome, but we have concerns about the rewording of the duty of public authorities. We want to probe some of those points with some amendments. We will come to the more serious changes, but the first one is proposed in amendment 140. Currently, clause 93 stipulates that the “general biodiversity objective” be defined as
“the conservation and enhancement of biodiversity in England”.
Our amendment would broaden that to include the species and habitats listed in section 41 of the NERC Act. In effect, it is a clarifying amendment, as we feel that the provisions in the duty could be seen as being too open-ended to guide everyday action by public authorities.
We think it would be more helpful for there to be a direction that the biodiversity duty clearly requires authorities to act in order to further the conservation of the species and habitats listed under section 41. For those who are not familiar with section 41, it is a list of some of our most precious and vulnerable species, from water voles and otters to particular species of orchids and the short-haired bumble bee. We believe the amendment would provide a closer link between the public duty to enhance biodiversity and the species that need the most attention. Although I will listen with interest to the Minister’s comments, I do not think it is an amendment on which we will seek a Division.
Rebecca Pow
I appreciate that the intent behind the amendment is to ensure that action that might be taken under the biodiversity duty is effective and is targeted where it is most needed. At the same time, one of the strengths of the duty is that it is broad, and we want public authorities to consider all functions when determining the best action to take. That could be action on limiting their biodiversity footprint or addressing wider, indirect impacts on biodiversity, such as from transport policy, water use or energy consumption. We would not want to stop authorities considering such action, even inadvertently, by focusing their attention on what can be done for a targeted set of species and habitats. Also, there are some 943 species, some of which the hon. Member for Cambridge named, including the hairy bumble bee.
Rebecca Pow
There are some fantastic creatures and 56 habitats of importance on that list, as set out under section 41 of the Natural Environment and Rural Communities Act 2006. Interpreting this list and the actions required is likely to require specialist knowledge, which may not be available within every public authority.
In complying with the strengthened biodiversity duty, public authorities must have regard to any relevant local nature recovery strategy. If Government amendment 222 is agreed to, public authorities must also have regard to relevant species conservation strategies and protected site strategies, which will help public authorities to identify the actions with the most benefits for biodiversity, including for species and habitats listed in section 41 of the 2006 Act. I therefore suggest that the amendment is not needed; indeed, it might constrain public authorities’ actions to conserve and enhance biodiversity. While I think that it was a probing amendment, I urge the hon. Member to withdraw it.
Daniel Zeichner
We will not press the amendment to a Division. While the Minister and I might have a slight difference of opinion, the approaches are legitimately different. I was grateful for her reference to the short-haired bumblebee. Like many Members, I am a species champion. I stand up for the ruderal bumblebee, although I have never had the pleasure of meeting one—I live in hope. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Daniel Zeichner (Cambridge) (Lab)
I beg to move amendment 138, in clause 93, page 94, line 18, at end insert—
“(1ZA) A public authority which has any functions exercisable in relation to England must exercise those functions consistently with the aim of furthering the general biodiversity objective.”
This amendment requires public authorities to apply the biodiversity duty in the exercising of all of their functions.
This is a slightly more serious amendment, in the sense that this is a more difficult issue, as we think that the clause has a couple of key weaknesses. Section 40 of the 2006 Act currently states that any public authority must,
“in exercising its functions, have regard, so far as is consistent with the proper exercise of those functions, to the purpose of conserving biodiversity.”
That implies a biodiversity duty in all day-to-day public authority decision making. As it stands, although the new duty widens public authorities’ responsibility to both conserve and enhance biodiversity, the wording narrows the application of the duty. Its current drafting applies only to actions taken in line with specific policies and objectives developed in relation to clause 93(3), which requires authorities to consider from time to time what action they can take to further the biodiversity objective and to take the actions appropriate to do so.
I apologise that this is slightly complicated, Mr Gray, but, yet again, we see the interaction between different forms of wording in various pieces of legislation. The risk is that the Government are changing the duty on public authorities to have regard to conserving biodiversity in all their functions to a duty on conserving and enhancing biodiversity with specific considerations that they must make from time to time. The reach into their everyday functions is not made clear.
This is, I guess, a discussion about how local authority members should make their decisions—what they should take into consideration and when. We fear that a key opportunity is being missed to improve the effectiveness of public authorities’ biodiversity work, namely by requiring them to factor in the need to conserve and enhance biodiversity in all decision making, including statutorily required planning and spending decisions. This is actually quite a big issue.
Biodiversity work is in continual danger of being marginalised. I referred to that when I spoke about my experience as a councillor, and I suspect that others will have had the same experience. This is not a criticism of councils or local government—they are under pressure, and many, many demands are put on them. However, if we have the challenge of restoring nature to a level that every member of the Committee would agree is what we are seeking, and if that is actually going to happen, the agenda needs to be taken up in local government. Embedding biodiversity into all public authority decision making is vital to ensure that we do not miss the opportunities that are available.
During my time as a councillor, I very much enjoyed our discussions but, as I have said, I do not think I could honestly say that I recall, when we came to make big decisions—we did make some quite big decisions, such as when the new Norfolk and Norwich hospital was discussed, which was referenced at today’s Health questions—any discussion around biodiversity, although we tried to take many things into account. It would make a real difference if biodiversity was central to decision making.
It is worth noting that the House of Lords Select Committee identified the “have regard” wording in the current obligation as the main reason, in its view, why the duty has been ineffective. That point has not been properly addressed. “Have regard” is a perfectly innocuous term, but it is just that—have regard in passing, not as a central part of decision making. We would welcome an explanation from the Minister on that point.
The amendment would fix the problem with the current wording of legislation and prevent biodiversity opportunities from being missed by requiring public authorities to exercise all their functions consistently with the aim of furthering the general biodiversity objective. That would prevent biodiversity being siloed. It would be rendered as a critical factor to be considered in all public authority decisions, including statutory planning and spending decisions, which can have significant impacts on nature and biodiversity.
Rebecca Pow
Our purpose in strengthening the current biodiversity duty is to ensure that public authorities take robust action to drive nature recovery. It is absolutely not the intention for biodiversity to become siloed, as the hon. Member has just said. He referred to the Norfolk hospital planning having no reference to biodiversity. I do not know what year that was—
Rebecca Pow
How times have changed. That will change—biodiversity will come into the general parlance. This is an ambitious duty. All public authorities will have to undertake a thorough consideration of what they can do to enhance biodiversity at least every five years, and then take action. As I said before, they will need to have regard to local nature recovery strategies and, if Government amendment 222 is accepted, relevant species conservation strategies and protected site strategies will provide information, data and tools to identify the most beneficial action to be taken in the region.
Clause 93 requires all public authorities to take a broad look across all their functions to identify the action they can take that would be most beneficial for nature. In our view, the strengthened duty in the Bill strikes the right balance by supporting action to conserve and enhance biodiversity while retaining the flexibility for public authorities to balance competing priorities. The amendment risks distorting those priorities by requiring public authorities always to exercise their functions to further the objective of conserving and enhancing biodiversity. Public authorities must retain the power to decide the best use of their resources. I am sure that the hon. Member for Cambridge, having been a councillor, appreciates that point.
We expect public authorities to look across all their functions and prioritise the actions that will have the most impact, in contrast to the existing biodiversity duty, which is a reactive duty. It is intended to be universal but, as we know, in many cases it has not driven action on the ground, as the hon. Member suggests. The amendment risks replicating the reactive nature of the existing duty by requiring a case-by-case assessment of each individual function and decision to ensure that it is furthering the biodiversity objectives. We would thereby lose the advantages of the more strategic view, which allows the most effective measures to be prioritised, so I urge the hon. Member to withdraw the amendment.
Daniel Zeichner
I hear what the Minister says, but the amendment is crucial to tilt the balance in local authorities. On that basis, I wish to divide the Committee.
Daniel Zeichner
I beg to move amendment 139, in clause 93, page 94, line 42, at end insert—
‘(1G) In this part, “public authority” has the meaning given by section 28(3) of the Environment Act 2020.”
The Chair
With this it will be convenient to discuss the following:
Amendment 147, in clause 99, page 99, line 16, leave out “95” and insert “93”.
Amendment 148, in clause 99, page 99, line 31, at end insert—
‘(4) “Public Authority” means—
(a) a Minister of the Crown, a government department and public body (including a local authority), and
(b) a person carrying out any function of a public nature that is not a devolved function, a parliamentary function or a function of any of the following persons—
(i) the OEP;
(ii) a court or tribunal;
(iii) either House of Parliament;
(iv) a devolved legislature;
(v) the Scottish Ministers, the Welsh Ministers, a Northern Ireland department or a Minister within the meaning of the Northern Ireland Act 1998.’
Daniel Zeichner
We tabled these technical but important amendments to interrogate the definition of “public authority” in the Bill as it applies to the biodiversity objective and the local nature recovery strategies—they are linked. Amendment 139 is consequential on amendment 147 and would clarify the meaning of “public authority” under section 40 of the Natural Environment and Rural Communities Act 2006 by using the definition set out in clause 28(3) of the Bill, as that particularly strong definition would apply well to biodiversity provisions. It would make it clear that the term “public authority” would apply to local authorities or organisations
“carrying out any function of a public nature”,
which would ensure that bodies with key public statutory undertakings, such as water companies or rail providers, would have a responsibility to comply with the enhanced biodiversity duty.
Such bodies might not be included in a narrower definition, and that is important because we know that they have many responsibilities, or a lot of land or many rivers to look after. Keeping them within the ambit of the biodiversity duty would therefore give them a much stronger incentive to do the right thing. Such bodies’ legal status or corporate structures might be different from those of local government authorities, but they still provide key public functions. Amendment 148, like amendment 139, would make it clear that the term “public authority” in relation to local nature recovery strategies applies to planning authorities and all planning functions.
Amendment 147 would amend clause 99, which currently provides definitions of a “local authority” and a “national conservation site”. However, that clause applies only to clauses 95 to 98, which set out provisions for local nature recovery strategies. Our amendment would extend the definition of local authorities and national conservation sites to the Bill’s broader provisions on biodiversity objectives and reporting—clause 93 on the general duty to conserve and enhance biodiversity; and clause 94 on biodiversity reports. Yet again, our proposals would strengthen the Bill, so my question to the Minister is: why would she not choose to support us on that?
Rebecca Pow
I thank the hon. Member for tabling the amendments—I shall rattle through them.
Amendment 139 would change the definition of “public authority” in relation to the strengthened biodiversity duty to that used in clause 28. Taken together, amendments 147 and 148 would have the same effect. Clause 93 does not alter the definition of public authority under section 40 of the Natural Environment and Rural Communities Act 2006, but clause 28 represents a different approach: it is drafted to be UK-wide, and then has carve-outs. Amending the definition to that in clause 28 would not make a significant difference to the bodies covered by the duty, although it would mean that the parliamentary estate would not be captured.
Amendment 147 would apply two additional definitions to the Bill’s biodiversity duty provisions, the first being “local authority”. The definition in clause 99 is very similar to the existing definition in section 40 of the 2006 Act. However, that definition includes parish councils, so the amendment would remove parish councils from the scope of the biodiversity duty—[Interruption.] “Shocking,” says the hon. Member’s colleague, the hon. Member for Southampton, Test.
I accept that many parish councils are very small and have limited resources, but they are likely to make a contribution to local biodiversity and we do not want to exclude them from the duty. I speak from experience: the hon. Member for Cambridge might have been a district councillor, but I was on my parish council for 10 years—I am very proud of it. We did a great amount of work on biodiversity, including by planting a chestnut avenue and creating a village garden out of a piece of tarmac. There is biodiversity if ever I saw it—we walk past it every day.
The second definition, “national conservation site”, is not a term used in the Bill’s biodiversity provisions, so applying it would have no practical effect. On its own, amendment 148 would have no effect. It would insert a new definition of “public authority” into clause 99. The definitions in clause 99 apply to the provisions relating to local nature recovery strategies, which are set out in clauses 95 to 98, but the term “public authority” is not used in a way that has an effect in those clauses.
I hope that that information was helpful, and I ask the hon. Member for Cambridge to withdraw the amendment.
Daniel Zeichner
I am grateful for the Minister’s clarification and I endorse her comments about parish councils. I, too, started on a parish council, and as a district councillor, I diligently attended my five parish councils regularly. They have a hugely important role to play. We were trying to widen the scope of the bodies that would be drawn into the process. That might be something that we need to revisit in order to embrace both points, which would be a good outcome.
The amendments were probing, so we will not need to divide the Committee. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Daniel Zeichner
I beg to move amendment 137, in clause 93, page 95, line 1, leave out subsection (5) and insert—
“(5) After subsection (2) insert—
“(2A) the authority must act in accordance with any relevant local nature recovery strategy in the exercise of relevant public functions, including strategic and local land-use planning and decision making and in spending decisions, and in particular in complying with subsections (1) and (1A).””
This amendment would ensure that Local Nature Recovery Strategies are considered in day-to-day planning and spending decisions by public authorities.
Amendment 137 addresses a key issue in the Bill’s current drafting regarding local nature recovery strategies, which we welcome. If they are implemented properly, the strategies can enable a wide range of organisations to contribute to measures needed to address the biodiversity crisis and deliver the Government’s ambitions in the 25-year environment plan, in particular by supporting the creation of a nature recovery network.
By identifying local biodiversity priorities, including restoration opportunities, we think—I am sure that the Government agree—that policy integration and better value for money could be achieved at the same time as saving nature. I suspect that we all have good examples from our areas, but I am sure that the hon. Member for South Cambridgeshire will join me in praising Natural Cambridgeshire, chaired by Richard Astle, and the excellent work that it is already doing through its nature recovery toolkit. I believe that the hon. Member addressed Natural Cambridgeshire recently. I hope to do so again soon, and I will be keen to bring news of a strengthened Bill.
At the moment, despite local enthusiasm, the duty to use local nature recovery strategies is very weak. It is included in the duty to conserve and enhance biodiversity under clause 93(5), which requires local authorities to “have regard” to the strategies when making plans to conserve or enhance biodiversity, but that risks creating obligations for local authorities to develop local nature recovery strategies, thereby expending precious local resources, only to see that that effort might be wasted through a failure to give the strategies any influence on real decision making. That is a problem.
The duty should be a much stronger requirement to take the strategies into account in the exercise of public functions, including in the statutory planning system and in spending decisions. This mirrors arguments that I have previously made. Unless such a change is made, there is a real risk that local nature recovery strategies will overburden local authorities and once again risk sitting on the proverbial dusty policy shelf.
This is not a criticism of local authorities, but a reflection of the fact that many are already hard pressed and will not have the capacity to do what is asked of them. When I raised this previously, the Minister reassured me that all necessary funding will be made available under the Bill. I liked her reassurance, but she was not able to point me to where that was specified. I invite her to do so again, but I do not think she will be able to do so, because it is not specified—it is just an aspiration. This is not a party political point, but anyone who has been in local government well knows the problem that while central Government frequently make promises, the outcomes rarely transmit. They often end up in general funding, and we are told that it is in there somewhere, without clarity that it is enough. It is important to note that the success of the measures in general will be dependent on the Government making those funds available. I recognise that at this stage it seems difficult to predict the costs—there was some discussion in the impact assessment about how it was not entirely clear how much would be needed—but I ask the Minister how the Government intend to carry out an assessment of how the new duties operate and how they can ensure that resources are available to make the duties work.
The strategies are potentially a very useful tool. If they work well, they could effectively co-ordinate the actions of multiple stakeholders and direct local use of biodiversity gains from the planning system, environmental land management systems and other sources, helping to build and maintain ecologically coherent networks and nature recovery sites. That leads me back to the 25-year environment plan, particularly page 58, which is littered with “we will”, “we shall” and “it will happen”, including the statement that we
“will coordinate our action in England with that of external nature conservation…as well as farmers and land managers.”
That is great, but I have to ask when that will happen.
I had the pleasure of being an Opposition spokesman on the Agriculture Bill, and we were begging constantly, and tabling amendments, for an integrated approach between this Bill and the Agriculture Bill. I am afraid that we were constantly knocked back. Here we are, just a few weeks from the beginning of the phasing out of basic payments, and we do not have ELM schemes in place. The Secretary of State will have to deliver a fix in 10 days’ time. I am happy to be corrected by hon. Members on the other side if that is not correct, but that is what I hear. While the sustainable farming initiative sounds fine, it is a missed opportunity to link to the local nature recovery strategies that we are discussing today. Because of this weak duty to apply the strategies in decision making, I am afraid the potential that these have may well fall short.
Amendment 137 aims to strengthen the duty to use local nature recovery strategies by requiring all public authorities to “act in accordance with” any relevant local nature recovery strategy in exercising their duties, including the statutory requirements, planning and spending decisions. That would make a big difference and deliver real change, and that is why I worry that it is not in the legislation as it stands at the moment. It is essential to ensure that the local nature recovery strategies actively influence important day-to-day decisions that affect nature.
Fleur Anderson
I, too, would like to support amendment 137. I can picture the scene in the drafting committee. One group wanted to have “act in accordance with”, to make the duty very strong so “we would definitely put this into action”, and on the other side was the “must have regard to” group. I would like to speak on behalf of the “act in accordance with” group, and it was a mistake that the “have regard to” group won the day.
The provision for planning to work for nature is very welcome, but there is a risk that it will be stalled indefinitely if we do not have the amendment in the Bill. The duty to use local nature recovery strategies is very weak. The environmental coalition, Greener UK, has similar concerns. The amendment would embed biodiversity in public authority decision making, because here the rubber hits the road—or the hedgerow or the greener area of a siding. The amendment includes complying with spending decisions, and that is what will ultimately decide whether this is put into action.
There is great potential for these strategies to be a highly effective tool, and I welcome the five pilot schemes, as I know the Minister does. However, as it stands, the potential will not be realised because the duty is so weak. The amendment would ensure that local nature recovery strategies actually influence day-to-day decisions that affect nature. There are two examples of how that would work out in my constituency. We have many wonderful green spaces which have “friends of” groups, and they are knocking on the door and trying to get the attention of the local authority all the time. It is not a given that that will happen. Those groups really care about biodiversity, but the day-to-day work of the local authority is not reflecting that.
I have a very active save our hedgehogs group, and I am surprised that they have not been mentioned this afternoon up to now, so I want to put that straight. Those vulnerable mammals have been in decline by 30% in urban areas and 50% in rural areas since 2000. That is dreadful. If the local authority will have regard to the local nature recovery strategies, rather than acting in accordance with those strategies, there is a danger that the work to reverse the decline of hedgehogs will not happen. There is a mention of hedgehogs in the environment plan, but this amendment would cement action to save hedgehogs and all other biodiversity in our planning system.
Rebecca Pow
Some strong points have been made about local nature recovery strategies. I think we all agree that they are a good idea. When I was a trustee of the Somerset Wildlife Trust many years ago, it was working on a similar idea to that which is now coming into legislation. Subsequent Government amendment 222 changes the provision so, if accepted, public authorities will be required to have regard to species conservation strategies and protected site strategies. However, I will speak only to the original purpose of the amendment now.
We want public, private and voluntary groups to engage openly in the development of local nature recovery strategies and for this to follow through into their implementation. That is exactly what the hon. Member for Putney is asking for, so that those hedgehog highways and interlinking runways through fences in towns will stay there. I love a hedgehog as much as she does. I had some rescue ones from the rescue centre sent to my garden. We need to look after our hedgehogs.
Requiring public authorities to have regard to a specific document is an established and effective means of achieving that aim. I have discussed this with the officials. They have convinced me that this is the right terminology. We should also be mindful that public authorities have a wide range of existing duties such as housing, health and social care, which have to be considered. Some flexibility to take these wider considerations into account is important. Similarly, local planning authorities are required to balance a wide range of important considerations when establishing their planning policy for this area. I am keen that we continue to work with the planning system, rather than create complexity by making separate demands on planning authorities. The spatial information provided by the local nature recovery strategies will support the development of local plans.
I want to reassure the hon. Member for Cambridge that the Department for Environment, Food and Rural Affairs, will continue to work closely with the Ministry of Housing, Communities and Local Government to set out clearly the role for local nature recovery strategies as part of the ongoing planning reforms. The work has already started, and it has been clear that this must be an integral part of our future going forward. Those five pilots will inform the local nature recovery strategies. They have already been announced and money has been agreed for them. We will learn a lot from those about how these strategies will work.
We want the reformed system to play a proactive role in promoting environmental recovery and long-term sustainability. We have really high ambitions for the local nature recovery strategies in helping to do this. They are a crucial tool towards the whole endeavour of biodiversity from the ground upwards. I therefore urge the hon. Gentleman to withdraw his amendment.
Daniel Zeichner
I am grateful particularly to my hon. Friend the Member for Putney for enlivening our discussions late in the afternoon—well past teatime, in some people’s view, which I understand—and for introducing hedgehogs into the discussion. I had a side bet with one of my colleagues as to how long it would take for the Minister to raise a hedgehog highway. I am grateful to my hon. Friend the Member for Putney because that allows me to mention Nora the rescue hedgehog. The Cambridge Wildlife Trust allowed her to escape down a hedgehog highway in my sight. I am not sure where she went, but hedgehogs are very important.
The problem was confirmed by the Minister, who admitted that she had been convinced by her officials that this is the correct terminology. We do not think that it is the correct terminology; it is not strong enough. I invite the Minister perhaps to go and have that conversation again. That point takes us back to the beginning of our sitting, when my hon. Friend the Member for Southampton, Test and I questioned why some of these things are as they are. I am led to conclude, I am afraid, that despite the admirable enthusiasm, there are flaws in the process.
The Minister said that we do not want to put too many demands on planning authorities. Actually, we do want to put demands on planning authorities; that is exactly what this will be about if our goals are to be achieved. We get distracted by the hedgehogs and the bumblebees, but at heart there is a serious question of allocation of resources, effort and money through the planning process. That is often what it is about, and my fear is that, wonderful though much local effort is, sadly if it cannot be translated into action it will go on being just good effort, without the kind of gain that we want to see.
I suggested at the beginning of our sitting that there were some villains in the piece, and I think the Committee has a sense of who I think one villain is, but it is not just about the current Prime Minister. It is worth remembering that in 2011 the then Chancellor, George Osborne, described the EU habitats directive as placing
“ridiculous costs on British businesses”,
and spoke about companies being burdened with
“endless social and environmental goals”.—[Official Report, 29 November 2011; Vol. 536, c. 807-808.]
The point is that there is a view out there that this is all “green crap”, as another eminent former Prime Minister described it. That is why we are worried, why this matters, and why the Bill needs to be strengthened.
The Chair
The hon. Gentleman used the word “villain” with regard to the Prime Minister. He might wish to withdraw it as unparliamentary.
Daniel Zeichner
I withdraw the comment. [Interruption.] But I would like to press the amendment to a Division. I was distracted by the pantomime.
Question put, That the amendment be made.
Rebecca Pow
I beg to move amendment 222, in clause 93, page 95, line 3, at end insert
“and
(b) any relevant species conservation strategy or protected site strategy prepared by Natural England.”
This amendment requires a public authority to have regard to a species conservation strategy or protected site strategy in complying with its duties under section 40 of the Natural Environment and Rural Communities Act 2006.
The Chair
With this it will be convenient to discuss the following:
Government new clause 25—Species conservation strategies.
Government new clause 26—Protected site strategies.
Government new clause 27—Wildlife conservation: licences.
Rebecca Pow
The overall purpose of this group of amendments is to enable better species and habitat conservation in England as part of the Government’s commitment to growing back better, faster, greener. They will allow for the creation of two new types of strategies and will resolve inconsistencies regarding the licensing of development.
New clause 25 will allow Natural England to create species conservation strategies, which are innovative approaches to safeguard the long-term future of species that are at greater risk. The strategies will be developed using up-front surveying, planning and zoning across a wide area. Natural England will then develop measures to mitigate, or compensate for, the impact on species— from building projects, for example. This approach helps to avoid the need for reactive site-based assessments and mitigation.
The legislation is based on the successful district-level licensing approach to the conservation of great crested newts, which have already been mentioned today. An area is comprehensively surveyed in advance and a licensing strategy is developed. Up-front mitigation work is then carried out to cover the creation or restoration of ponds in areas that are known to provide the best habitats for newts to thrive in. Developers then make a conservation payment and can begin work without delays.
New clause 26 will allow Natural England to prepare and consult on protected site strategies. These will enable the design of bespoke solutions for sites that are affected by a combination of different impacts, such as pollution from agriculture and pressure from development. Protected site strategies are also based on existing, innovative schemes such as that in the South Humber Gateway, which has unlocked development on hundreds of hectares of land while creating 275 hectares of new wet grassland for birds, and is held up as something of a model.
For both species conservation and protected site strategies, local planning authorities will be placed under a duty to co-operate with Natural England. They will also be required to have regard to relevant strategies as they carry out their planning functions. These new strategies will deliver better environmental protections through simpler processes, and are therefore fully aligned with the proposals set out in the “Planning for the future” White Paper. The planning reforms will reinforce the implementation of these measures.
Amendment 222 adds an important provision to support the new strategies. Clause 93 strengthens the existing duty under the Natural Environment and Rural Communities Act 2006 to require public authorities to take action to further the conservation and enhancement of biodiversity. It also requires public authorities to have regard to local nature recovery strategies as they do so. This amendment extends that duty so that public authorities must also have regard to any relevant conservation strategy or protected site strategy as they consider what action to take, so the three kinds of strategies are designed to work together. The local nature recovery strategies will be a system of strategies covering the whole of England, and will identify where action can be taken to reverse the decline of nature as a whole. Species conservation and protected site strategies are more bespoke, targeted measures to help protect specific species and sites that are at risk, and are intended to ensure public authorities comply with legal protections in a way that achieves better outcomes for nature. It is therefore important to make this amendment, to ensure public authorities have regard to all three types of the new strategies.
Finally, new clause 27 makes three changes related to protecting species licences granted under section 16 of the Wildlife and Countryside Act 1981. Those changes are intended to unlock the full potential of strategic licensing for protected species. First, the new clause will introduce an additional “overriding public interest” purpose for granting a licence. Secondly, it will introduce two additional tests that must be met before a licence can be granted if
“there is no other satisfactory solution, and…the grant of the licence is not detrimental to the survival of any population of the species”.
Thirdly, the new clause will extend the maximum permitted licence period from two years to five years.
Taken together, the amendment and new clauses strengthen the nature chapter of the Bill and help to protect and restore species and habitats at risk, while also enabling much-needed development. I have rattled through them, Chair, and there is a lot of detail there, but I commend amendment 222 to the Committee.
Amendment 222 agreed to.
Daniel Zeichner
I think I may have missed a point. We discussed all those new clauses, did we?
The Chair
There was no sign from the Opposition that the hon. Gentleman wished to discuss Government amendment 222, so it was passed. Therefore, we will move on to Government amendment 223. If you are waiting for votes on Government new clauses 25, 26 and 27, they will come at the appropriate point in the consideration of the Bill—not now.
Dr Whitehead
May I seek your guidance, Mr Gray? Presumably, we will want to have a stand part debate on the clause.
The Chair
Hang on, this is not a general conversation. It is of course possible that if anyone in Committee wishes to have a stand part debate, they may do so at the appropriate moment. That is absolutely fine, but it is not to become a discussion.
Rebecca Pow
I beg to move amendment 223, in clause 93, page 95, line 21, after “England))” insert—
“(a) in subsection (1), after ‘conserving’ insert ‘or enhancing’;”.
This amendment adds a reference to enhancing biodiversity to section 41(1) of the Natural Environment and Rural Communities Act 2006.
This amendment makes a small change to section 41 of the NERC Act. The section requires the Secretary of State for Environment, Food and Rural Affairs to publish a list of species and habitats that are of principal importance to conserving biodiversity. The amendment will change the requirement to “conserving or enhancing” biodiversity.
The language mirrors that of the strengthened biodiversity duty under section 40 of the NERC Act, as amended by clause 93. The duty will require public authorities to take action to further the conservation and enhancement of biodiversity. The amendment will therefore create consistent language across two related sections of the NERC Act.
When the list is updated in future, the amendment will allow wider consideration of which species and habitats should be included. That is consistent with our intention, as expressed in the 25-year environment plan, to improve beyond merely trying to maintain the status quo—or conserving—and instead recovering and restoring nature. This small amendment further signals our ambitions to enhance biodiversity.
Daniel Zeichner
I regret to say that we have some extensive questions about clause 93 as amended, which may not come as a welcome moment for the Government. I get the sense, however, from looking at the Government Whip, that he may think tea has come.
Ordered, That the debate be now adjourned.—(Leo Docherty.)