Enterprise and Regulatory Reform Bill

Lord Stevenson of Balmacara Excerpts

Thursday 31st January 2013 Grand Committee

[Lord Clement-Jones]

My Lords, I shall say just a few words on the Minister’s very welcome amendments in response to the 10th report of the Delegated Powers and Regulatory Reform Committee. It is very interesting. The committee demonstrated the value of a collective memory, as it took us all back to the Digital Economy Act and the comments that it made at the time; it has been entirely consistent. It is good to see that the Government have responded. However, I wonder, especially in light of the fact that the Minister has confirmed that the affirmative process will be used for Clause 68, whether he will also confirm that the affirmative process will be used when the Hargreaves exceptions are introduced under the European Communities Act. The Minister has clearly stated that the Government will not be using Clause 66 when those exceptions are introduced; it will be purely for penalties. We very much welcome the assurance that the Minister gave on Monday. However, will he take the opportunity to confirm that the scrutiny process will be by the affirmative procedure of both Houses when those draft statutory instruments come under the ECA procedure?

[Lord Stevenson of Balmacara]

My Lords, we on this side will also be interested to hear the answer to that question, although I think I gathered from remarks made previously in Committee that that is the case. We will look forward to hearing about that. Other than that, we are very grateful to the Minister for bringing forward these amendments, which, as he says, go a step further than the DPRR Committee recommended, but are none the less welcome for that.

[Baroness Buscombe]

My Lords, I add my welcome for these amendments and thank the Minister.

--- Later in debate ---

[Lord Stevenson of Balmacara]

My Lords, we on this side of the Room support the introduction of the measures to do with orphan works and believe that the extended collective licensing system represents a good way forward, albeit, as has been pointed out by the noble Lord, Lord Clement-Jones, that it has to be done in conjunction with the copyright hub, which provides the missing ingredient in a lot of what we have been discussing recently.

As was made clear, we have some reservations about how the Government intend to ensure high standards of operation for collecting societies which are, after all, effectively monopolies in many sectors, so we are keen to see, at a very minimum, clarity on the standards to be set for collecting societies and transparency over the way the powers that the Government are taking will operate in practice. We also want to make sure that everything that needs to be done is done to make the copyright hub work well. The new regime and the copyright hub should ideally be brought into existence contemporaneously.

However, we are confident that things are moving in the right direction, and we hope that there will be opportunities for your Lordships’ House to be regularly updated on matters such as this so that we can feed in our continuing thoughts and support. I particularly refer to the point about photography, which I absolutely endorse. There is an issue there that we will need to keep an eye on. Assuming that everything is going well, we cannot support the noble Lord, Lord Clement-Jones, in opposing Clause 68 standing part of the Bill.

[Viscount Younger of Leckie]

My Lords, the very limited extent to which orphan works can be used is not just a cultural issue, but a real economic issue. The clause will allow for commercial and non-commercial use of orphan works in the UK. The Government estimate this could lead to benefits of up to £220 million a year. Nine out of 10 respondents to the Government’s consultation were in favour of commercial use of orphan works. The UK scheme has more safeguards than the EU orphan works directive. It includes a requirement that any diligent search is verified by an independent authorising body. The authorising body will not be able to license itself.

We are also making provision for remuneration of rights holders at an appropriate rate for the type of work and type of use. The directive is less restrictive about this. Remuneration will be paid whenever a work is used. It is yet to be determined how long such money should be kept on escrow for the returning rights holder. However, after a certain period it is envisaged that unclaimed money will be redistributed. Where the money has come from publicly funded institutions, such as archives, it may be possible for that money to be returned to fund archiving, preservation and digitisation costs.

The Government are pleased that the digital copyright hub is developing but have not yet made any decisions about who will run the orphan works scheme. However, regardless of its final decision, these powers are needed to enable the chosen organisation legally to operate the scheme.

The noble Lord, Lord Stevenson, my noble friend Lord Clement-Jones and other noble Lords raised concerns about the potential impact of these proposals on photographers. The Government continue to work with the photography sectors. The working group on orphan works and extended collective licensing contains significant representation from the world of photography, including the Association of Photographers, the British Association of Picture Libraries and Agencies and Stop43.

The Government appreciate that the stripping of metadata is a real problem for photographers. As noble Lords have noted, this is a current problem, and the practice continues despite the existence of legal instruments making it an offence. I am willing to meet noble Lords, who, in the course of this Committee session, have raised concerns, to discuss possible solutions to the problem of metadata stripping. This is an issue that is also being examined by the industry-led digital copyright hub, following Richard Hooper’s July report. However, the Government do not believe that the introduction of the orphan works scheme will negatively affect photographers, because historical photographs held in museums, archives and libraries, will form the bulk of photographs licensed under the scheme. If anything, the orphan works scheme will very likely improve matters, as it will become more obvious if works are being used unlawfully. Officially licensed orphan works, whether sourced from digital or analogue sources, will carry a reference to the authorising body. Courts may also take a dimmer view of infringement, if there is a legitimate and legal means of using orphan works.

The provisions on extended collective licensing are designed as a tool to help streamline rights clearance, but only where the sector wants it. We know that some collecting societies already operate extended collective licensing-type schemes, which are unregulated and unlawful. This means that rights holders are unprotected and could be missing out on money owed to them. A statutory basis for such schemes would help remedy this. The Government know that extended collective licensing might not be appropriate for all types of works or rights, which is why it can be initiated only by a representative collecting society acting with the explicit support of its members. The Government would have no power to impose extended collective licensing on a sector. Collecting societies tend to be monopoly suppliers in their sectors, so members and licensees cannot simply shop elsewhere.

The clause and schedule introduce provision for the statutory regulation of collecting societies, where self-regulation fails. Any collecting society that fails to meet the Government’s minimum standards for self-regulation would be required to adhere to a statutory code of practice. Collecting societies would have to comply with specified criteria, including on compliance and enforcement. The Government welcome the progress that the industry has made on a self-regulatory framework. Self-regulation remains the Government’s preferred approach. The safeguard of enforceable minimum standards will help to ensure that collecting societies operate in a manner that promotes open and efficient markets. If it works effectively, the reserve power will not be used.

Noble Lords have raised a number of questions. My noble friend Lord Clement-Jones raised the issue of having to wait for the hub before undertaking extended collective licensing, and pointed out that we need extended collective licensing because we have the hub. Both schemes are designed to facilitate legal and properly remunerative use of works; they are two sides of the same coin. The fact that ECL-type schemes are already in use in the UK demonstrates that there is a need. ECL cannot be imposed on a sector; if rights holders prefer to use direct licensing through digital copyright exchange, the hub or another method entirely, that is their decision. The hub cannot act on orphan works without the legislation in Clause 68 in place.

My noble friend Lord Clement-Jones raised an issue that the noble Lord, Lord Stevenson, raised previously, on photographers suggesting that we delay the implementation of the orphan works directive until the October 2014 deadline, and then implement only to relieve any restrictions that the copyright hub failed to address. I understand the concerns behind this suggestion, but this is not an option because we need to implement the orphan works directive in full, and we cannot go outside the requirements of the directive without this clause. This means that no one, including the copyright hub, would be able to license orphan works without the power of this clause.

My noble friend Lord Clement-Jones, in a further question, raised the issue of foreign rights holders who would not be able to monitor what is going on in the UK. The collecting society must produce evidence with its application to show how it deals with those affected, including foreign rights holders. I hope that that answers his question. He also raised the question of FOCAL and BAPLA, which were unhappy with the ECL. Photographers do not have to have ECL—it is voluntary and can be initiated by the collecting society only with the consent of members, as I mentioned earlier.

I believe that my noble friend Lady Buscombe stated that extended collective licensing in Nordic countries is different and guarantees remuneration for rights holders. However, collecting societies in the UK must also show how they will find non-member rights holders and distribute money that is collected to them. I hope that that goes a little way to answering my noble friend’s question. I commend the clause to the Committee.

--- Later in debate ---

[Lord Clement-Jones]

Amendment 33 is inspired by the Creators’ Rights Alliance which feels that the contractual scales are very much weighted against it. I do not often make common cause with Consumer Focus but I am delighted that it supports the amendment. Its brief on the amendment puts the position rather well. It states that the Copyright, Designs and Patents Act 1988 makes creators the first owners of copyright, and that creators’ ability to assign or license their copyright to others is central to the overriding aim of copyright: that is, ensuring that creators benefit financially from their works. However, in the UK, creators frequently assign all their copyright for a one-off payment to intermediaries, such as publishers or record companies. Individual creators are frequently at a disadvantage when negotiating contracts with intermediaries, and some creators complain that they are unfairly pressured into assigning all their rights for a one-off payment.

The 2012 research of Consumer Focus found that 77% of British consumers expect that a fair share of the money they pay for music, films and e-books goes to the artists who created the work. The ability of the copyright system to ensure that creators receive a fair remuneration is central to public support for the principle of copyright. I agree with Consumer Focus that removing the copyright exclusion from the Unfair Contract Terms Act 1977 should be central to the Government’s efforts to build a fairer copyright system that supports economic growth and innovation. How about that, my Lords? Many creators work as freelancers or microbusinesses. They are the bedrock of the creative industries and deserve the protection provided by the Unfair Contract Terms Act. I beg to move.

[Lord Stevenson of Balmacara]

My Lords, extended collective licensing requires fair contracts. People who work in the creative industries are already seeing intensified efforts by many publishers and other intermediaries to coerce individuals who are sole traders into signing away all rights to their work. Those who succumb to this blandishment would be deprived of the income that the ECL provisions in the Bill are supposed to offer. Therefore, the failure of the Bill to include measures to level the playing field for negotiation of contracts undermines the purposes of copyright in promoting fresh creativity. These are not just matters of concern to professional creators, vital though it is to the creative economy that the possibility of making a living as a professional creator is defended. Every citizen has an interest in enforceable creators’ rights and fair contracts now that so many people are publishing and broadcasting their own works through social media.

There is a well known example of the problems that this can cause. In late 2012, the Instagram online photo-hosting service attempted to impose a contract of terms of service that would allow the company to sell users’ photographs to advertisers. This was defeated only after alert users boycotted the service. Legislation will be required to ensure that the price of creativity is not an eternal vigilance which distracts from the work of creation.

The issue of unfair contracts typically arises in two circumstances: “take it or leave it” contracts presented by large businesses to sole-trader professional creators, who are informed that no negotiation will be contemplated; and “click-wrap” contracts offered to those, professional or amateur, who use online hosting services to store or share their creations in words, music or images.

Amendment 33 would bring contracts dealing with copyright works within the terms of the Unfair Contract Terms Act 1977. This would remove an inexplicable exemption and allow at least some challenge to the contracts being foisted on many creative members. I support the amendment.

--- Later in debate ---

Moved by

[Lord Stevenson of Balmacara]

58H: After Clause 74, insert the following new Clause—
“Relationship between an insolvent company and its suppliers
(1) Section 233 of the Insolvency Act 1986 (supplies of gas, water, electricity, etc) is amended as follows.
(2) In subsection (3)(a) at the end insert “or other supplier”.
(3) In subsection (3)(b) at the end insert “or other supplier”.
(4) In subsection (3)(d) at the end insert “or other supplier”.
(5) After subsection (3)(d) insert—
“(e) a supply of computer hardware or software or infrastructure permitting electronic communications.”(6) After subsection (3) insert—
“(3A) Any provision in a contract between a company and a supplier of goods or services that purports to terminate the agreement, or alter the terms of the contract, on the happening of any of the events specified in subsection (1) is void.””

[Lord Stevenson of Balmacara]

My Lords, one of the key aims of the Enterprise and Regulatory Reform Bill is to encourage long-term growth. Key to this is promoting the rescue of potentially viable companies that are facing short-term financial difficulties.

Suppliers are a company’s lifeblood. Companies cannot continue to operate without them yet, under existing legislation, suppliers can currently take a number of unreasonable actions when they hear a business is in trouble. Struggling companies can often be faced with extortionate payments, being moved onto more expensive tariffs or with certain key suppliers withdrawing their services altogether. This behaviour frequently leads to the unnecessary liquidation of potentially viable businesses, which is bad news not only for creditors but also for jobs and the economy. The company R3 has estimated that a change in the law could result in approximately 2,300 additional business rescues a year and increased returns to creditors.

It is true that Section 233 of the Insolvency Act 1986 currently prohibits utilities suppliers from withdrawing supply but it does not stop any other supplier, no matter how crucial, withdrawing supply or imposing a higher tariff or payment before agreeing to continue to supply. It also fails to prevent any supplier from raising its tariff once a business enters insolvency. These actions can prevent any chance of business rescue, damn the business to closure, and reduce dividends for creditors. We suggest that this legislation should be updated in the following ways to help rescue more businesses and save jobs.

Certain suppliers often use the advent of insolvency to extract “ransom payments” before they continue to supply the company. Furthermore, while utilities suppliers listed under Section 233 cannot withhold supply, there is nothing to prevent them moving an insolvent company onto a much higher tariff. We suggest that Section 233 should include a provision to prevent the exercise of contractual termination provisions on the grounds of insolvency alone, and should prevent suppliers of essential services from using their position to extract so-called ransom payments as a condition for continued supply, provided that the company continued to pay under existing contractual terms.

While original sellers of utilities services are prevented by the Insolvency Act from terminating their contracts on insolvency, on-sellers of telecoms services and equipment are not covered by the legislation, even though they are every bit as important to the business community—increasingly, these days. In addition, other services, such as IT and software suppliers, which are vital to business survival in the 21st century, are freely able to stop supplying a company on the ground of insolvency. Section 233 sets out the suppliers to which these provisions apply—currently, gas, electricity, water and communications. We suggest including in this list certain additional suppliers deemed essential for the continued operation of the business, particularly IT suppliers and on-sellers of utilities that are not covered by the original definition. A precedent for this change was set by Regulation 14 of the Investment Bank Special Administration Regulations 2011, which prevents suppliers of essential services such as financial data, computer hardware and data processing from withholding supply in the event of administration.

Finally, it is important to note that these changes expose suppliers to minimal risk, because they are paid as a priority, ahead of all other creditors during the insolvency. This is not about special treatment for insolvent businesses, but about preventing suppliers taking advantage of an insolvency and leapfrogging other creditors, at the expense of the business’s survival.

I turn to Amendment 58HZA in the group. The Finance Act 2009 established a duty on HMRC to produce a report each year on its adherence to its charter, which sets out the rights and obligations of taxpayers. Our amendment asks for HMRC’s annual report to consider a particular issue, consumer debt, and to relate that to the objectives in its annual business plan. One of the recurrent themes raised during the debates we held recently in your Lordships’ House on the Financial Services Bill was the need for the new regulatory structures to have the consumer at the centre of their thinking and practice. We have had not dissimilar debates on earlier sections of this Bill in relation to the new Competition and Markets Authority, to which we will return on Report.

This amendment is in the same vein, although the target is the HMRC, and is relatively uncontroversial and not particularly burdensome because it simply requests the HMRC to report additionally about what it is finding about levels of personal debt in the UK. This will be useful data for all those interested in this area, and might over time help to sensitise HMRC to what impact it is having on those struggling with unmanageable personal debts. I declare my interest as chair of StepChange, the leading debt charity. Its figures show that its median client owes more than £20,000 to five different creditors, with the bulk in credit cards and personal loans, and other consumer credit products. They also include mortgage arrears, rent arrears and, increasingly, fuel and utility debts, income tax and council tax. Nearly half the people who StepChange help report that unemployment or a reduced income was the main reason for their debt problems. However, people also say that life events such as illness and separation can quickly overwhelm family finances and cause or contribute to mounting debts. What StepChange finds, in fact, is that debt is rarely a problem in isolation—there are nearly always other factors that need to be addressed, including a particular concern of ours, which is the link between problem debt and depression. Nearly a half of StepChange’s clients say they had been worrying about their debts for a year or more before seeking help from a debt service provider. Around a third told the charity that their debt problems had weakened their relationships or led to a break-up. Nearly half said that debt had shattered their self-confidence to support themselves and their family.

Things changed in the personal debt world in about 2006-07, but the pre-crash boom in consumer credit also remains a key part of the UK debt narrative. Even after several years of near-zero lending, the total of outstanding secured and unsecured debt is still some 91% higher than it was 10 years ago. It is a pretty bad picture. Recent research by the Financial Inclusion Centre concluded that some 6.2 million households are currently either already in financial difficulties or at risk of getting there. And it is going to get worse. The IFS estimates that real median household incomes will fall by 7.1% between 2009-10 and 2013-14 as a result of low growth and fiscal tightening—the largest decline since the 1974 to 1977 fall of 7.5%. Recent research published by the Joseph Rowntree Foundation predicts an increase in both relative and absolute poverty between 2009 and 2020. Unemployment remains at a stubbornly high 8.3%, or 2.65 million people, and more than one in five young workers are without a job. That is particularly worrying as we know that time spent not in employment, education or training as a young adult can have a scarring effect as well as reducing lifetime earnings.

At the same time, we are experiencing an extended period where households are facing rising costs for essential goods and services. Food, fuel and transport costs are rising sharply, and we will sooner or later face a rise in interest rates, which are unnaturally low at present. Figures from the Financial Inclusion Centre show that, if living costs rise by more than £50 per week, it would double the percentage of households, currently 30%, who have no spare cash at the end of the month. That is the rather grim background to our amendment. I apologise for taking the Committee’s time, but it is important to get the context so that we can focus more closely on the amendment.

We need to know more about personal debt—how it arises, and how people cope with it. HMRC is a major player in this area, and it is important that it participates in the research that is needed and contributes to finding solutions to the problems that currently exist. Reporting on the situation that it finds each year would be a great step forward. I beg to move.

--- Later in debate ---

We are continuing to monitor information disclosed under SIP 16 reports and will report on our findings. I very much relate to the anecdote recounted by the noble Lord concerning companies that go insolvent and then re-emerge, days or weeks later, under a different guise. There was an instance of that rather close to home for me concerning a building company where that did, indeed, happen. I reassure the noble Lord that we are looking at those very important issues. With the assurances I have given about considering the important issue raised in Amendment 58H, I hope that the noble Lord and, indeed, the noble Baroness, will withdraw the amendment.

[Lord Stevenson of Balmacara]

My Lords, I thank the noble Lords, Lord Razzall and Lord Mitchell, for participating in this debate. We have ranged a little further than the original terms but it was useful to have that exchange on pre-packs. I think that the main focus of the comments from the noble Lord, Lord Mitchell, was more on the interests of shareholders than creditors but it still comes back to the same point in the end. There is a bit of an issue here and I am glad to hear that it is being discussed.

I shall deal with these two amendments in reverse order. As regards the points in the second amendment about the role of the Inland Revenue, I heard what the Minister said. However, I think that the problem is exactly as he stated it but in reverse. If your primary concern—it is not a wrong concern—is that the purpose of the Inland Revenue is to maximise revenue to ensure that government services and so on may be maintained, you may have to regard vulnerable consumers and others who have difficulties as a slightly lower priority. It is true that there are nine rights and three obligations in the wonderful Inland Revenue charter but none of them mentions either of those issues in any great detail.

It is more a question of tone and approach. It is true that we have done less badly in this recession than in many other recessions, largely because the banks and other private institutions have been extraordinarily generous in terms of forbearance. That was achieved in dialogue with the Government of the day and has been continued by the current Government. However, without that there would have been a huge hole in the public fabric and services which it would have been impossible to tolerate. There are ways in which we can reach out to the vulnerable consumers that we are talking about; we have those at the heart of my charity. What I was trying to get across in the amendment was that perhaps we could have a broader discussion involving Treasury Ministers to take account of some of these issues.

This is not the time for this but, as regards much of the insolvency and the other areas with which we are dealing; it seems we are gradually finding 20th-century solutions to 19th and 18th-century problems. The idea, which I think I have mentioned in other places, that somehow there is an unimpeachable line of integrity between the creditor and the debtor is at variance with the reality of what happens when vulnerable consumers get themselves into difficulty. It is time for us to have a mature discussion about people who are facing the possibility of going bankrupt.

Forbearance, for all its huge pleasures, is a wonderful approach, but is totally without a statutory framework. Does that need to be considered? Even when forbearance is operating and we are talking about keeping people in a family home which they would otherwise have to have left, is forbearance right if, as a result, they can neither heat that home nor feed themselves there? These are issues that we do not get quite right; there is a black-and-white approach to them. This amendment tries to say, “Perhaps we can begin by gathering the figures and thinking again about how these things operate”. Using the rights and privileges that the Revenue has above and against all other creditors is obviously important in terms of making sure that we maximise revenue, but that is not necessarily right in terms of societal norms and values. I am sorry to have taken so long but it is important to get that on the record.

Regarding Amendment 58H, I am glad that the Minister feels that there is something there to look at again. I would be happy to participate in any meetings or discussions he might have, wearing both, or one of, my hats. I beg leave to withdraw the amendment.

Amendment 58H withdrawn.

--- Later in debate ---

[Viscount Younger of Leckie]

Noble Lords will be aware that the reforms to the debtor-initiated bankruptcy process being introduced by the Bill remove the order-making function from the court and replace it with a new administrative process. These are minor and technical amendments to the “Extent” provisions in Clause 78 relating to those reforms. Individual insolvency law is a devolved matter in Scotland and these reforms will have no substantive effect on legislation in Scotland.

The jurisdiction of the adjudicator is limited to the determination of bankruptcy applications received from debtors who meet the jurisdictional criteria of having resided or traded in England and Wales for the required period. However, certain consequential amendments made by the reforms extend to Scotland. The purpose of these amendments is to ensure that we have the legal power to make all those consequential amendments that are necessary to give effect to the reforms being made in England and Wales. The amendments make no substantive changes to bankruptcy law in Scotland, which is a devolved matter. I therefore beg to move.

[Lord Stevenson of Balmacara]

My Lords, we have read the amendments and recognised the points. Rather surprisingly, given the volume of correspondence that we received on everything else in the Bill, we received no comments from anyone on this matter and therefore have to rely entirely on our own judgments. In this case, we are happy for the amendments to go forward.

Amendment 58HA agreed.