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On the inquiry being judicial, the noble and learned Lord will have plenty of experience on this and will understand the view that we have taken and the reasons for making the inquiry as it is. I very much welcome his endorsement of the three individuals who will lead the inquiry.

On the issue of clarity, one of the reasons for making this Statement is to try to give greater clarity in future for some of the decisions that are taken. For instance, there are no circumstances where we would authorise action, including receiving intelligence, in the knowledge or belief that torture would take place at the hands of a third party. If such a case were to arise, we would do everything that we could to prevent the torture from occurring. That is consistent with the absolute prohibition on torture and our values as a nation.

The reality is that, in most cases, countries do not disclose the sources of the intelligence that they share with us. However, the guidance leaves our partners in no doubt about the standards to which we adhere and the action that we will take if we suspect that intelligence has derived from the mistreatment of a detainee.

Lord Lloyd of Berwick: My Lords, I apologise to the House for missing the first few minutes of the Statement; I was in my room awaiting the announcement. I welcome all aspects of the Statement, particularly the decision to get to the bottom of what may have gone wrong in the past before looking to what ought to be done in the future. I welcome the appointment of Sir Peter Gibson as the chair of the inquiry. You could not have a better man for the job.

Does the Leader of the House agree that there is an almost exact precedent for the inquiry, as now contemplated, in the work that used to be done by the Law Commission, of which I once had the honour to be the chairman? If the procedure that we had in the Law Commission is followed, I hope that the inquiry will not go wrong. Does the noble Lord agree that the scope of the present inquiry will be altogether different from that of the Saville inquiry and that there is no reason at all to believe that this inquiry, like the old Law Commission inquiries, should not be completed within a year?

Lord Strathclyde: My Lords, I thank the noble and learned Lord for what he has said. He says it from a most authoritative position, with all his experience in

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reviewing terrorism legislation in the past. I am insufficiently well versed in these matters to know whether or not the Law Commission presents an exact precedent but, if the noble and learned Lord says that it does, I am happy to accept it. I also agree with him-this is important for those who might make comparisons with the Saville inquiry-that the scope of this inquiry is very different from that laid out by Saville. As we said at the time, we do not wish to see any more open-ended inquiries of that style. Again, I agree with the noble and learned Lord: there is no reason why it should not be able to complete within the next 12 months.

Lord Howarth of Newport: My Lords-

Lord Goldsmith: My Lords-

Lord Dholakia: My Lords-

Earl Attlee: My Lords, I think that we should hear from the Cross Benches-or, rather, the Lib Dems first.

Lord Dholakia: My Lords, I join my noble friend the Leader of the House in paying tribute to those who have lost their lives in recent days in Afghanistan. The torture allegation has been a shameful episode for the good name of our country and we welcome this inquiry. I hope that it will be able to look at why this has taken such a long time and that it will question the previous Administration about why the inquiry was not held much earlier. We are aware of the constraints placed on the coalition Government, as a number of outstanding issues need to be resolved, but I have two questions for the Minister. First, does the payment of compensation before the inquiry has reported compromise it in any way? Secondly, the Statement mentions our co-operation on intelligence matters with other countries, particularly the USA. Would it be possible for the inquiry to take evidence from those countries that are involved in the torture allegations?

Lord Strathclyde: My Lords, I cannot answer for the previous Administration. The noble Baroness, Lady Royall, has defended the position of the previous Government. However, we have taken action quickly and I know that my noble friend supports that. On compensation, I do not think that the two issues are related at all. We have suggested a process of mediation that could potentially lead to compensation, but that is better than the alternative, which could be years of unsatisfactory litigation in the courts. At least a process of mediation creates the possibility of creating certainty much sooner. With regard to working with other countries, we do not expect evidence to be taken from US officials. It is our intention that the inquiry will have access to material relating to foreign partners. Those partners will be consulted on the terms on which their material will be considered by the inquiry. Any intelligence material will be dealt with in private. We have, of course, discussed our plans with the US and a number of other partners.

Lord Goldsmith: Is the Minister aware that I, too, welcome this inquiry? I rather wish that I were welcoming it coming from the previous Administration rather than this one, but it is none the worse for that. The

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noble Lord is right that it is time to understand the truth or otherwise of these allegations, as I for one have been saying for some time.

I have three specific questions for the noble Lord. First, my noble friend the Leader of the Opposition raised the question of Guantanamo, rightly, because the allegations that have been made are connected with that issue. Is that an issue that the inquiry will look into-the relationship of this country to Guantanamo, the steps that were taken and why it was, as noble Lords all now agree, a wrong-headed thing for the previous US Administration to do, in principle and in practice?

Secondly, will the noble Lord help a little more on the timing of this inquiry? I understand the point about criminal proceedings and civil mediation, but I am still unclear on when this inquiry is going to be allowed to get on with its job. The more time before it starts, I suspect, the more difficult it will be.

Thirdly, the noble Lord finished his Statement by talking about future policy in relation to the use of intelligence in the courts. Is that going to include, finally, a clear answer to the question of the use of intercept evidence in court? I know that many noble Lords take a different view but for myself, from the position that I have held in the past, I believe that it is important to find a way of using such evidence in criminal proceedings. Will that be a part of the policy that will be announced?

Lord Strathclyde: Again, my Lords, it is encouraging to receive the noble and learned Lord's welcome and support for the principles that underlie the Statement. It is important, when we are dealing with these matters of national security, that there is as wide an agreement across the parties as possible. The noble and learned Lord's experience in this matter will give a lot of encouragement to others who are involved.

His first question was whether the inquiry will look at the reasons behind Guantanamo. I expect that it will be up to the inquiry to take a view about how important that is, and I cannot answer for the inquiry. I do not suppose that the topic will be excluded, but if it is, I shall write to the noble and learned Lord.

Secondly, on the timing of the inquiry, we would like it to start as soon as possible but it cannot begin until most of the legal proceedings have been dealt with, hence the reason for coming forward with mediation. It depends on the satisfactory resolution of the other legal proceedings. I also agree with what the noble and learned Lord said: the longer it is delayed, the more difficult it is to have this inquiry, so it is in everyone's interest to reach the start date as soon as possible.

As for the noble and learned Lord's third question, about the future and intercept evidence, I have my noble friend Lady Neville-Jones, our Security Minister, next to me here. The whole issue of intercept evidence still has to be resolved.

Lord Howarth of Newport: My Lords-

Lord Morris of Aberavon: My Lords-

Lord Mackay of Clashfern: My Lords-

Earl Attlee: My Lords, I think we should hear from my noble and learned friend Lord Mackay of Clashfern.



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Lord Mackay of Clashfern: I agree with the Statement, in particular the setting up of a very distinguished inquiry. I entirely agree with the views already expressed by others that these three people are eminently qualified for this task.

I also entirely supported the action of the previous Attorney-General in initiating criminal inquiries in connection with this matter. It must be right that these inquiries are completed before the new inquiry can start. I hope that it will not be unduly delayed. One cannot tell which precise circumstances will arise. However, I think it is clear that the criminal proceedings must take priority and be completed before this inquiry starts. I think I am right in saying that the Statement envisaged the work of the inquiry taking about a year. It will be extremely good if it can be done in that time. I also believe that the three people in question are eminently qualified to do it with reasonable speed. I am very grateful for the Statement. I have no particular question that I want to ask my noble friend, which is why I should not be standing at all.

Lord Strathclyde: My Lords, it is always a great pleasure to have my noble and learned friend standing and speaking, particularly on this, where he has very much given his support to what we are doing. I agree with him about the criminal inquiries that are ongoing, that the time for the inquiry is roughly 12 months, and about the people who have been chosen to lead it. I am sure that they, too, will be encouraged by his support.

Lord Morris of Aberavon: My Lords, while I welcome the setting up of the inquiry, would the Minister help us a little further on the start line? I can quite see the difficulty of outstanding procedures. As regards civil law, mediation can bring some of those procedures to an end. There are more difficulties with criminal procedures. There is a means of bringing even those to an end; it is a question of balance and whether it is in the public interest so to do. It would be helpful if the Minister could give some idea of when the inquiry is likely to start.

Secondly, I do not know how the Minister can give a firm assurance that this matter is to be completed within a year. I had to set up public inquiries-the first was 45 years ago-the intention being to finish in weeks, but some went on for months. I do not know how the Minister can give the assurance that it will finish within 12 months, as I hope it will.

Lord Strathclyde: My Lords, I am glad to hear that the noble and learned Lord shares the aim of delivering as quickly as possible. He is right to ask how we can guarantee that. We cannot, but there is a general will from all sides to complete an inquiry once it has started. When can it start? Like us, the police take the view that it is simply not possible to begin the inquiry while some of the allegations are still the subject of criminal investigations. The Government take the view that it is not feasible to begin the inquiry while the civil proceedings are not sufficiently resolved. We hope that we can deal with the civil proceedings through mediation if that is acceptable to all sides. The police are continuing their criminal investigations. It is in everybody's interests to start this inquiry but, for the reasons that I have laid out, I cannot give an exact date.



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Lord Wright of Richmond: My Lords, as a former chairman of the Joint Intelligence Committee-admittedly a very long time ago-I endorse everything that the Minister said about the professionalism, effectiveness and bravery of our security and intelligence services. I have one question. Will the inquiry address or readdress the question of the rendition of detainees through British territory and, in particular, through Diego Garcia?

Lord Strathclyde: My Lords, the noble Lord is experienced and knows full well about the bravery and work of our security services. As far as extraordinary rendition is concerned, there is no barrier whatever to the inquiry looking into such issues and the matter of Diego Garcia if that should be pertinent to it.

Lord Howarth of Newport: My Lords-

Baroness Hamwee: My Lords-

The Lord Bishop of Chester: My Lords-

Earl Attlee: My Lords, shall we hear from the noble Baroness, Lady Hamwee, and then the noble Lord, Lord Howarth?

Noble Lords: Bishop!

The Lord Bishop of Chester: My Lords, would the noble Lord the Leader of House comment a little more on the terms of reference of the inquiry? Is it an inquiry into the facts of what happened or into the broader reasons why it was permitted to happen?

Lord Strathclyde: The inquiry will look at whether the UK was implicated in the improper treatment of detainees held by other countries that may have occurred in the aftermath of 9/11.

Baroness Hamwee: My Lords, building on the last question and those of the noble and learned Lord, Lord Goldsmith, and the noble Lord, Lord Wright of Richmond, would the Government consider consulting on the precise terms of reference? We have seen on previous occasions that where matters fall outside the precise terms of reference of an inquiry, it can cause some problems. Secondly, can the Government be clearer about whether the Green Paper which is referred to will be part of the review of security which we know is in train?

Lord Strathclyde: My Lords, I do not think that the terms of reference have been finalised at this stage, not least because the inquiry has not been set up. I am sure that what the noble Baroness has said will be taken into account. I have completely forgotten the other matter which the noble Baroness raised.

Baroness Hamwee: Is the Green Paper to be part of the review of security?

Lord Strathclyde: The Green Paper is a Green Paper. It will be published next year. Because of that, we have not yet decided what will go into it.

Lord Howarth of Newport: My Lords, I was a member of the parliamentary Intelligence and Security Committee for four years. My whole disposition is to believe in the good principles and integrity of the agencies, and in their competence as they go about

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their crucial work which, as the Statement reminded us, often comes at a high price to them and their families. Is it not the case that because of the real danger of terrorist assaults on our people and of weapons of mass destruction getting into the hands of terrorists or irrational regimes, we live in a permanent state of emergency, and that the secret state is no less powerful now than it was in the Cold War? Will the Government ask the panel of inquiry, if it should find that there have been failures of standards, to propose reforms to the apparatus of deception and secrecy-necessary deception and secrecy-so as to make sure, as far as possible, that there would not in the future be covering up of embarrassments; concealment of crimes; circumvention of parliamentary oversight; and, at worst, manipulation of Ministers and disabling of the proper processes of policy-making?

Everybody must surely welcome without reservation the appointment of Sir Malcolm Rifkind to chair the ISC. Will the Government consider further empowering the ISC so that it can have access to persons and papers as it requires, without having to seek special permission from Ministers, case by case; and supplying it with a stronger secretariat to enable it to use those powers, so that if the parliamentary committee has the political will, it will be better able to do the job of exercising oversight and ensuring accountability to Parliament?

Lord Strathclyde: My Lords, it is because all those who have spoken today and the Government care so much about the integrity and reputation of the security services that we have made this Statement. It is not just about their reputation in the United Kingdom. What is so important is the international reputation of the security services. That is why we need to find out the truth of the allegations. When the inquiry comes to its conclusions, we will be able to see what action, if any, needs to be taken. None of us is in favour of anything being covered up, whether the defence is in the public interest or not. We wait for the inquiry to reach its conclusions.

As for the ISC, I am glad of the noble Lord's welcome for the chairman, Sir Malcolm Rifkind. I think we all agree that he will do an extremely good and useful job. On the ISC generally, the Government are committed to maximising the role of the oversight mechanism, which is why the Prime Minister has appointed a strong and experienced chairman who has committed to serving for the full parliamentary term and to undertaking a serious work programme, including public hearings. What "maximising the role of existing oversight mechanisms" means at this stage is something that will be reviewed in due course.

Cabinet Office: Constitution Committee Report

Motion to Take Note

6 pm

Moved By Lord Goodlad



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Lord Goodlad: My Lords, I welcome the opportunity to debate the fourth report of the 2009-10 session of your Lordships' Select Committee on the Constitution, entitled The Cabinet Office and the Centre of Government. The committee was grateful to all who gave evidence to us, including a number of your Lordships, and to our specialist advisers. I am also grateful to the previous Government for their response to the Select Committee report, whose consideration by the committee was forestalled by the Dissolution of Parliament.

The Cabinet Office originated in 1916. Its role has evolved greatly over time and continues to do so. Its three core functions today are: supporting the Prime Minister; supporting the Cabinet; and strengthening the Civil Service. Some of the most important elements of the centre of government are the Treasury and the Prime Minister's Office. The committee considered the relationship between, and functions of, the Cabinet Office, the Treasury and the Prime Minister's Office, and the roles of the Prime Minister, the Chancellor of the Exchequer, the Minister for the Cabinet Office and the Cabinet Secretary. We also considered Cabinet government and collective ministerial responsibility, departmental responsibility and accountability for policy, the genesis and co-ordination of policy across departments and the accountability of government to Parliament. We asked all our oral witnesses what they viewed as the main constitutional principles affecting the Cabinet Office and the centre of government. Five themes emerged: the role of the Prime Minister; the role of the Cabinet and collective responsibility; the role of the Civil Service; the changing role and function of the centre; and the accountability of the centre. The committee's report is based on the evidence which we received. We have made a number of recommendations, some of which I shall draw to your Lordships' attention.

The world has moved on very considerably since the response of the previous Government to the report and I know that the House greatly looks forward to the remarks of my noble friend the Minister. The committee was agreed that structures of accountability should mirror structures of power and, where the latter have changed, that the structures of accountability should change accordingly. For this to take place, all elements of the centre and its work must be transparent and parliamentary scrutiny must be upheld and improved. The previous Government, in their response to the report, agreed that transparency and accountability are key aspects in the working of the centre of government and that accountability structures should adapt to reflect changing roles and responsibilities. The question now is what must be done to achieve these objectives.

We received conflicting evidence on the relationship between the Cabinet Office and the Prime Minister's Office-whether the latter is a subset of the former and a business unit, or whether the two are functionally distinct. We suggested that the nature of the relationship should be clarified by the Cabinet Office and reflected in government publications, which recently appeared to suggest that the two offices are independent institutions.

The Prime Minister's Office is crucial to the role and structure of the centre of government. The establishment by the previous Government of the post

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of Permanent Secretary to the Prime Minister's Office was a new step in the evolution of the structure of the centre. We noted the arguments advanced by Sir Gus O'Donnell and Jeremy Heywood for the new arrangements, and Sir Gus O'Donnell's analysis of the roles of the six Permanent Secretaries now located in the Cabinet Office. We recommended that the Prime Minister's Permanent Secretary, and the six Permanent Secretaries located within the Cabinet Office, should be subject to appropriate parliamentary accountability mechanisms.

A substantial involvement in and influence by the Prime Minister on policy formation and delivery is a feature of recent years, although there is no shortage of historical precedent. As with the Cabinet Office, the role of the Prime Minister has evolved over many years under different Governments. Successive Prime Ministers have made different uses of financial, human and other resources in what they have seen to be their roles. We recommended that the Prime Minister's and the centre's roles in policy development and delivery should be both transparent and accountable to Parliament, as should the Delivery Unit and the Strategy Unit.

We accepted the evidence of the then Minister for the Cabinet Office that the current flexibility of the structure of the centre of government is in the public interest. We accepted the value of an incubator role, where the Cabinet Office develops units and functions which are subsequently transferred to other government departments, but shared the fears of some witnesses that the Cabinet Office has sometimes operated less as an incubator and more as a dustbin. That policy units for which there is apparently no other obvious home have been put in the Cabinet Office underlines the importance of ensuring that the Cabinet Office and all the units within it are properly held to account.

We consequently recommended that a review of the units which have accrued to the centre be undertaken by the Government, including an examination of the justification for each unit's continued existence and for its location at the centre of government rather than in a department. We recommended that a copy of the review be circulated.

We took evidence on the subject of special advisers and recognised that they can play an important role in government, but thought that their role should complement rather than diminish, or, indeed, duplicate, the role and responsibilities of Ministers and civil servants. Transparency should apply to the role of special advisers as elsewhere. We supported the idea of a code of conduct for special advisers. We recommended that the Government should define the role of special advisers and prevent a recurrence of the 1997 Order in Council giving advisers the power to instruct civil servants.

Following our recommendation that structures of accountability should reflect the existing structures of power, we expressed the view that the role of the Prime Minister should be subjected to more effective accountability and greater transparency. While the committee welcomed the biannual appearance of the Prime Minister before the House of Commons Liaison Committee, we did not believe that these appearances went far enough in achieving adequate parliamentary

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accountability of the Prime Minister's Office. There is a view that transparency has gone far enough. It is not a view which I share. I regard it as complacent and potentially dangerous.

We did not support calls for the creation of a separate Office of the Prime Minister, or an Office of the Prime Minister and the Cabinet, as we did not believe that either would enhance the effective functioning of government. Rather, we recommended that supporting the Prime Minister should remain a core function of the Cabinet Office, provided that the manner in which the office fulfils the role is accompanied by full transparency and that the accountability mechanisms reflect the importance of the function.

The ever-changing kaleidoscope of issues involving more than one department poses a ceaseless challenge to the machinery of government. So as to ensure that structures of accountability reflect structures of power, we in Parliament must, of course, ensure that our own accountability mechanisms take account of changing circumstances. But government must, we believe, ensure that the mechanisms of policy formation and delivery in respect of multidepartmental issues remain transparent. The previous Government in their response concurred.

We recommended that the post of Minister for the Cabinet Office should be retained in order not only to ensure that the work of the Cabinet Office is transparent but that Parliament can hold the Cabinet Office to account effectively-namely, through one of its own members. We were concerned that the responsibility of the Cabinet Office Minister seemed to be ill defined. We recommended that the Government should reassess the functions of the Minister for the Cabinet Office to ensure that his or her responsibilities accurately reflect the strategic role that the Cabinet Office plays. The world has moved on and this recommendation has in my view gained greater force now that the Deputy Prime Minister is in the Cabinet Office.

We examined the circumstances surrounding the proposal to abolish the office of Lord Chancellor in June 2003 and were critical of the procedures followed. We recommended that the Cabinet Office should consider means to ensure that such failures did not recur.

We also recommended that the Cabinet Office should play a formal role in investigating the likely consequences of any machinery of government changes, particularly those with constitutional implications. We recommended that Parliament and its committees should have a role and that ministerial Statements should be made in Parliament.

On the Civil Service, we were persuaded by the arguments which we heard that the current arrangements whereby the Cabinet Secretary has acted as head of the Civil Service have worked well. We recommended that the Cabinet Secretary should continue to fulfil the function of head of the Civil Service and that the Cabinet Office should continue to exercise responsibility for managing the Civil Service.

We noted with concern the evidence which we received suggesting that the authority of the Cabinet Secretary had diminished, despite being assured by Sir Gus

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O'Donnell that he had all the authority he needed. We agreed with his assessment that much,

Clearly, the Cabinet Secretary has a key role in promoting the effective operation of government and can fulfil that role only with the full support and backing of the Prime Minister.

The report necessarily covers a complicated network of offices, structures, functions and trends. The operation of the centre of government is of vital importance to our system. The committee's core conclusion was that structures of accountability should mirror structures of power, and where the latter have shifted so should the former. Our recommendations are designed to achieve that outcome, and I hope that they will be implemented.

It may appear to some that what we are debating is somewhat arcane-even abstract. Perhaps it is. However, not only at times of crisis, but rather over the lifetime of a Government and well beyond, structures and procedures have a very large, some would say insidious, influence on the balance between success and failure, both in war and in peace. As ever, the sands are shifting. My noble friend will, I trust, unlock their riddle.

6.12 pm

Lord Goldsmith: My Lords, I am in a happy position as the second listed speaker to congratulate the noble Lord, Lord Goodlad, on three things: first, on securing the debate; secondly, on this report, about which I want to say something in a moment; and, thirdly, on his stewardship and chairmanship of the committee. He is leaving, although I do not know whether this is the last time that he will speak in this House as chairman. Yesterday, during the Statement on constitutional reform, he made a remark that suggested that there may be at least one more report that he will bring to the House, but in any event I take the opportunity to congratulate him on the way in which he has steered this important committee through some choppy waters. I should say that, although I am listed as a member of the committee, I was not a member of it on this occasion and I have a sadness that I will not be under the noble Lord, Lord Goodlad-if I may put it that way-when the work starts.

I will focus on one aspect of the report-the part that deals with changes in government machinery and, particularly, the proposal to abolish the office of Lord Chancellor. The report and the evidence collected by the committee make striking reading, not least because of the dignified silence that the noble and learned Lord, Lord Irvine of Lairg, kept over this issue, despite, as the House now knows, the sudden and perhaps even brutal way that his office ended. As someone who stood a little to the sidelines, I am glad that that is now in the open.

I am, as it happens, a great admirer of the former Prime Minister, Tony Blair, but this was a bad business. There are lessons for the future, which is why I want to say a few words about it. It is plain from the report that inadequate consultation and advice were taken on

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the effect of a proposed change in the machinery of government, as it may have seemed to some, although it was in fact a major constitutional change. In the end, it is unclear from the report just what advice was provided. I say simply to avoid the accusation of being among the rogues gallery that my office was not consulted about the change either.

The consequence of what took place was not merely problematic in terms of how this House was to operate and how the judiciary was to act; it was much more serious. There was perhaps a comic element. I remember at least hearing stories that my noble and learned friend Lord Falconer had to scurry around to find tights so that he could sit on the Woolsack for the House to have a session. That is all very amusing, but there is a much more serious problem, because, if I may say so, he and the then Lord Chief Justice, the noble and learned Lord, Lord Woolf, who is in his place, were left in a strange position. It was not at all clear what the constitutional position would be in relation not just to a great Minister of State-the Lord Chancellor-but to the judiciary. Noble Lords will recall that what then took place was a period of negotiation between the noble and learned Lords, Lord Falconer and Lord Woolf, on behalf of the judges, which ended up with a concordat. However, that might well not have occurred and we have a great deal to thank the two noble and learned Lords for their wisdom and persistence. Dealing with the relationship between the Executive and the judiciary-the appointment of judges and who was responsible for what aspects of the courts-was a hugely important issue, which needed careful thought before the structure was changed.

Although the concordat was a good result that resolved many of the problems, it was done in an unsatisfactory way in terms of great public scrutiny and obvious concern by the judges. It put a great deal of strain on what had to be done by the noble and learned Lords, Lord Falconer and Lord Woolf, and led to one or two not wholly satisfactory results. I, for example, as Attorney-General at the time, was concerned to find a speedier way of dealing with certain court cases. That led to a question about whether we could produce lists of court cases that were ready for prosecution. It is a technical, but important, issue. The blank answer from the judges was, "It has been agreed in the concordat that listing is exclusively a matter for the judges". I see that the noble and learned Lord, Lord Woolf, is smiling. He thinks that that is absolutely right. I should have liked an opportunity to debate that question further, but it is one of the consequences of a decision about the critical constitutional position of the judges and the Executive being made in that way.

The moral is clear. I want to end with two points, including a question to the Minister. Constitutional changes require proper thought and planning, and then more thought. The pieces of our constitution fit together; sometimes, like an unsolved jigsaw, it is not apparent how they fit together, but fit together they do. That does not mean that they are immutable, but it does mean that if you are going to make changes you need to plan carefully and be clear what the end result will be.



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The changes were rescued on this occasion because of the work that was done, but that might not be the case on a future occasion. The present Government need to bear that very much in mind. My question to the Minister relates to paragraph 212 of the report, where the committee-I was going to say "complains", but it is too elegant for that-states that it never received sufficient information, as it perceived, in documents from the Cabinet Office on what had actually taken place. As a result, the committee states in paragraph 213:

"It is impossible to discern a consistent picture from the evidence received of what happened. With regret",

the report says with English understatement,

Can the Minister say whether, if a similar problem were to arise in the future with the committee, he and others in government would make sure that that sort of information was provided to the committee?

6.20 pm

Lord Butler of Brockwell: My Lords, I endorse in every respect the tributes paid by the noble and learned Lord, Lord Goldsmith, to the noble Lord, Lord Goodlad. They are richly deserved.

It was timely of your Lordships' Select Committee on the Constitution to choose the Cabinet Office and the centre of government as a subject for inquiry in the period leading up to the general election. It was timely for two reasons. First, the committee's report could inform a new Government. Secondly, it is clear from the report of the committee and from the evidence taken that the centre of our government had become something of a mess. The committee puts it more diplomatically, referring to,

The reason why that situation developed is clear. Recent Prime Ministers have tried to adapt an organisation designed for Cabinet government to a system more like the American presidency. There used to be a clear distinction of function between the Cabinet Office and the Prime Minister's Office. The function of the Prime Minister's Office was to serve the Prime Minister exclusively, whereas the function of the Cabinet Office was to serve the Cabinet collectively, including the Prime Minister as chairman of the Cabinet. Of course, since the Cabinet Office had responsibility for Civil Service management, it also supported the Prime Minister as the Minister for the Civil Service.

During Mr Blair's premiership, the role of the Cabinet Office was formally changed in the way that the noble Lord, Lord Goodlad, described. The Cabinet Office was given a separate and specific remit:

"Supporting the Prime Minister-to define and deliver the Government's objectives".

Professor Peter Hennessy told the Constitution Committee that the Cabinet Office had become a Prime Minister's department in all but name. The present Cabinet Secretary, Sir Gus O'Donnell, in his evidence to the committee, said that,

I found myself asking what Winston Churchill would have said about his office being a subset of the Cabinet

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Office. The logic would suggest that, in this respect, the Prime Minister is junior to the Minister for the Cabinet Office.

There is no doubt that the role of Prime Minister has become more dominant within the Government in recent decades. Media attention focuses on the Prime Minister, who is expected to answer for any aspect of government in Parliament. The Prime Minister deals with other heads of government not through the Foreign Office but by picking up the telephone. However, it does not follow that the Prime Minister should take on the role and trappings of a president. The Prime Minister certainly needs people in the Cabinet Office to advise him and to enable him to monitor the Government's progress. However, he should not have, in No. 10 and the Cabinet Office, executive units that usurp the role of departments and bypass Secretaries of State. Dr Tony Wright, the former chairman of the Public Administration Committee in another place, said that he had found the number of units that had come and gone in the past 10 years "utterly bewildering". The organogram at Appendix 4 of the Select Committee's report of No. 10 and the Cabinet Office is like a demented knitting pattern.

This confusion of roles at the centre of our government matters, as the noble Lord, Lord Goodlad, said. We are aware of things that have gone wrong; to some extent they have gone wrong as a result of this confusion. The Constitution Committee, as the noble and learned Lord, Lord Goldsmith, said, looked in detail at just one episode-the Government's attempted abolition of the post of Lord Chancellor. As the noble and learned Lord said, the Government would not release the papers that would have enabled the Select Committee to get to the bottom of this episode. Even so, it is clear from the evidence that one government hand did not know what the other hand was doing and that the Prime Minister acted in ignorance of factual advice that was available to him.

Fortunately, one of the many advantages of the coalition is that it will force some of these muddles to be sorted out. Decisions will have to be discussed and properly recorded and something approaching Cabinet government will be-perhaps is being-restored. It is generally agreed-I know that this is the view of my noble friend Lord Armstrong of Ilminster, who could not take part in the debate because of its postponement-that the Cabinet Office in general, and Sir Gus O'Donnell in particular, performed superbly both in the lead-up to the general election and in the negotiations leading to the coalition.

The noble Lord, Lord Goodlad, referred to the three functions of the Cabinet Office, but I have looked at the Cabinet Office website and I am glad to be able to say that that is now out of date. The website says:

"Following the outcome of the general election ... the objectives and business plans for the Cabinet Office are being revised".

I am very pleased to hear it. I hope that, under the coalition, the Cabinet Office will no longer be a Prime Minister's department, because who would then support the Deputy Prime Minister? Will the Minister assure us that the new terms of reference and objectives of the Cabinet Office will revert to being to support an effective system of collective Cabinet government?



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6.27 pm

Lord Shaw of Northstead: My Lords, it is a privilege to take part in this debate. The report was produced under the very able chairmanship of my noble friend, who has had great experience in all these offices, and so many of our witnesses could not be bettered in their experience of the matters that we were discussing. As a lifelong Back-Bencher, I felt that I had a lot to learn-but I confess that my basic beliefs remained the same.

I believe strongly that we must continue to support the system of Cabinet government. I also believe that modern conditions, particularly intensive media scrutiny, often of deliberately disruptive nature, can make this all the more difficult. The government response to the Select Committee report stated:

"We conclude that a greater involvement and influence by the Prime Minister on policy delivery is inevitable in the modern age, that the Prime Minister's role has evolved over a long period under different governments".

I agree with that, up to a point-but the point is that he should never forget that he is leader of a Cabinet team.

Some 50 years ago, when I first entered Parliament as a united Liberal and Conservative member-some things do not seem to change-I had in my mind the picture portrayed by Harold Macmillan of the role of the Prime Minister as chairman of his Cabinet team, relaxing in Downing Street, the works of Jane Austen by his side, while the details of government were attended to by his Cabinet team with their own departmental teams in support of them. This view curiously enough was sustained to a certain extent by the then procedure at Question Time. Prime Minister's Questions at that time were in two quarter-hour sessions on Tuesdays and Thursdays. Any Question relating to a department was switched to be answered by the appropriate Minister. I confess that before we undertook this report I continued to have a hankering for the return of such a system, but I have to admit that things have changed considerably since those days.

While the principles of Cabinet government must be preserved, and the role of the Cabinet with its Ministers, backed up by their own departments working as a team under the leadership of the Prime Minister must also be preserved, today it is very necessary for the Prime Minister to work more actively and closely with his Cabinet team so that he can express and give a lead to agreed policies on behalf of his colleagues. The intrusive and varied nature of the modern media and the various international and other meetings that the Prime Minister must now attend often demand that he gives such a lead, but he should always remember that he speaks as the leader of a team. On this point, incidentally, it was interesting to hear the evidence of the noble Lord, Lord Butler, when he said:

"Lady Thatcher has often been talked about as ignoring the Cabinet but she did not. She tried to dominate them, succeeded in dominating them, but felt that she had to get their agreement".

That view was not always held by her successors.

That leads me to the question of a possible presidential role for a Prime Minister. As a firm supporter of Cabinet government I cannot resist quoting Professor Hennessy in answer to my question, which was that,



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His reply was:

"Cabinet Ministers are there to say, 'Wait a minute'".

They are the,

Those are strong words but they are well worth noting.

For myself, if Cabinet government is to continue successfully I believe that there will have to be rules insisting in some way or other that important statements made by the Cabinet, including of course the Prime Minister, have the backing of the Cabinet.

The only other point that I wish to make is on the subject of special advisers. While we believe that there is a role for special advisers we say in our report that,

I would add only the trenchant words of the noble Lord, Lord Heseltine, on the subject of special advisers when he said that he would,

That was good sound sense.

6.34 pm

Lord Rodgers of Quarry Bank: My Lords, I, too, am grateful to my noble friend Lord Goodlad for steering through the Constitution Committee's inquiry shrewdly and on a tight timetable. Although we might have investigated some further areas, such as the link between the Cabinet Office and departments-and more about the Treasury-the report is a useful contribution on how best to run government. Much of the evidence is certainly worth reading to those who share responsibilities in Westminster and Whitehall, to the academic world and beyond.

The Government's response, published a week ago, is a puzzle. It is bland and complacent as if drafted in the twilight of the previous Administration, or very hastily last month. It refers to:

"The Constitutional Reform and Governance Bill currently before Parliament",

but there is no such Bill. The Bill existed in the previous Parliament. In the circumstances I shall not refer further to the response as it serves no purpose. I would, however, be grateful if the Minister could clarify the purpose and origin of this response.

I was first introduced to the Cabinet Office, particularly the Cabinet Secretary, when I became a junior Minister serving George Brown, the First Secretary of State and, in effect, the Deputy Prime Minister in 1964. In the 1960s there was relatively little public discussion about the processes of government and Prime Ministers strongly discouraged newspapers from probing into the recesses of offices and departments. The Cabinet Office was the holy of holies, or so it seemed to me.

Life between George Brown and Harold Wilson, especially on the telephone, was often lively. George was vigorous and outspoken and Harold was calm

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enough to be discreetly absent. In that case, when George was frustrated, he would shout to his Principal Private Secretary, "Get me Burke"-Sir Burke Trend, Secretary of the Cabinet. Clearly, he had an important role as a peacemaker in the warring relationships between the major figures in the early years of that Government. I hope that no such warring relationships exist between David Cameron and Nick Clegg today but I am sure that Sir Gus O'Donnell, the current Cabinet Secretary, has a very important role in resolving the inevitable tensions between the two and avoiding unintended conflicts.

Six months before the October 1964 general election, arrangements were facilitated by the Cabinet Office for what became the Department of Economic Affairs. Eric Roll-later Lord Roll, a distinguished Member of this House-was to become Permanent Secretary. Parts of the Treasury and the Board of Trade would be detached to make the new department. Similarly, two months ago the Cabinet Office played a crucial role in making organisational sense of the coalition.

I hope that the Cabinet will play an effective role between general elections. As the report makes clear, and as the noble and learned Lord, Lord Goldsmith, reminded us, there was a failure to recognise the consequences of abolishing the office of Lord Chancellor. The Prime Minister always has the right to make changes to the machinery of government but the Cabinet Secretary has an obligation to examine any proposals carefully and not to accept them sight unseen. The Prime Minister of the day may be primarily concerned with the personal relationships of Ministers, shuffling them around and making them happy, but the Cabinet Secretary must examine the rationale as, in future, Parliament may wish to explain the outcome.

In our inquiry, we considered the role of the Minister for the Cabinet Office. I was not entirely persuaded that there should be any such Minister, as there had been a long list of Ministers without a clear function or responsibilities and who had not carried real weight at the centre of government. In the previous Administration, the Minister doubled up with the person responsible for the Olympics, and two other Ministers lodged in the office. However, now we have not two but four other Ministers in addition to the Minister for the Cabinet Office, who is also the Paymaster-General. Why? I should be grateful if my noble friend could give me the terms of reference for both the Paymaster-General and the Minister without Portfolio. There is also the Minister for government policy. What does he do and to whom does he report?

In taking evidence, we dwelt on the "dustbin" function of the Cabinet Office-the bits that are stuck on to the core of its work. We acknowledged an incubator role, whereby the Cabinet Office develops units and functions that are consequently transferred to the relevant government departments. However, we recommended a review of these to justify their existence. This is precisely the time to slim down the office, wholly in keeping with the new Government's approach.

I return briefly to the structure of the Cabinet Office, as spelt out in the report and on the Cabinet Office website on 31 May, to which the noble Lord, Lord Butler, referred. I told my noble friend Lord

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Taylor of my interest and am asking for the relevant parts of the report to be updated, given that there is now a coalition and a Deputy Prime Minister.

In taking evidence, we discovered that there were six Permanent Secretaries in the Cabinet Office. Are there still six? Jeremy Heywood remains Permanent Secretary in the Prime Minister's office. Does the Deputy Prime Minister's office have a Permanent Secretary and, if not, what are the role and status of the head of his office? He seems to have a small staff dealing wholly with constitutional matters. The structure chart does not show the line of responsibility from Jeremy Heywood to Sir Gus O'Donnell. I should be grateful if my noble friend could confirm that there has been no change in the relationship between the two, with the Prime Minister's office remaining fully within the Cabinet Office. The same relationship exists between the Deputy Prime Minister's office and the Cabinet Office. Again, I reflect on a comment made a moment ago by the noble Lord, Lord Butler.

I am tempted to ask further questions but it might be better to invite the Cabinet Secretary back to the Constitution Committee later this year, given that a new Prime Minister may wish to reshape the Cabinet Office. Plainly, there are implications in coalition government.

Making government work better is a very good objective. In that, the Cabinet Office has been a crucial stabilising factor over very many years since Maurice Hankey put together an efficient secretariat in 1916, as my noble friend Lord Goodlad reminded us. I think that the Constitution Committee was right to conduct an inquiry, and there is a great deal of interest-at least, among insiders-about the role of the Civil Service, its structure and management.

There is also concern about the prospect of moving from Cabinet government towards a presidential style and presidential practices-the dominance of the Prime Minister, as the noble Lord, Lord Butler, referred to it. However, if this is to be checked or reversed, most of all we need men and women with character, strength and independence who are ready to enter Parliament and play their part.

6.44 pm

Lord Norton of Louth: My Lords, the noble Lord, Lord Armstrong, has had to leave, but if Hansard wishes to confuse me with him, I shall not object.

I congratulate my noble friend on securing this debate. I, too, declare an interest as a member of the Constitution Committee. As my noble friend said, this is an important debate. It may appear to some to be a somewhat dry discussion of the machinery of government but it is crucial to how government policy is agreed and delivered.

Government is often viewed as a single entity-a smooth-running body, agreeing collectively on policy and structured in order to deliver that policy. In practice, it comprises a range of bodies that have their own views on the content and delivery of public policy.

The Prime Minister has always been a powerful figure in government-at least, relative to the Cabinet. As has already been mentioned, the report notes the

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recent development of a presidential style of prime ministerial government. The term is often employed but rarely defined. It is designed to identify the growing detachment of the Prime Minister from the other parts of the political system-from Parliament, from the Cabinet and from the party. The Prime Minister is not directly elected by the people but acts as though he is so elected. This was a notable feature of the Blair premiership.

We have also seen the development of a more powerful role for the Treasury-always a powerful department but operating in recent years as a supra-departmental policy-maker. At the same time, other government departments have remained important political actors. Statutory power continues to rest with Secretaries of State. I have elsewhere likened senior Ministers to medieval barons, albeit operating in a shrinking kingdom. Senior Ministers have their own departmental bailiwicks, their own courts and courtiers.

Then one has the officials within departments. They serve their Minister but also have a loyalty to the Civil Service and to the department. A department can develop its own ethos. Officials remain important as policy advisers and implementers, and indeed as ministerial gatekeepers. They are also important links with bodies outside government and at times may develop a strong affinity with them. There are occasional accusations of departmental capture by particular interests.

We thus have a range of bodies within government and their interests may at times not be wholly compatible with one another. There has always been the potential for tension within government and that potential has variously been realised. There has never been a golden age of government-that is, internally harmonious and wonderfully efficient-but there have been times when tensions have been less severe than they have been in recent years.

The disparate nature of government and the potential for clashes between the several parts means that the Cabinet and the institutional support for it in the form of the Cabinet Office have a crucial role to play. We have arguably never had Cabinet government in the sense of consistent collective policy-making. None the less, the Cabinet has a critical role to play in integrating and co-ordinating government policy. It is the essential buckle in government, linking the Prime Minister and senior Ministers with the rest of government. It can form a vital two-way transmission belt and constitute the body through which Ministers understand and feel engaged with the collective goals of government. At times it may not appear powerful, but without it the Government lack coherence.

In recent years, the role of Cabinet has been downgraded, especially under the premiership of Tony Blair. He exhibited some leadership skills but lacked an understanding of the processes of government. That was illustrated by the decision, covered in the report, to abolish the role of Lord Chancellor and to create a Supreme Court. These were seen as machinery-of-government matters rather than important constitutional issues, with the result, as the noble and learned Lord, Lord Goldsmith, detailed, that there was inadequate consultation. Throughout his premiership,

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Tony Blair failed to grasp the significance of Ministers and the Cabinet. He told Dennis Kavanagh and David Butler that Ministers were the "agents of the centre". He saw the Cabinet as little more than a forum for reporting matters already decided. He worked around it rather than with it. The result was to exacerbate tensions within government; the means of relieving those tensions was in essence closed.

At the same time, as we have heard, the Cabinet Office became increasingly cluttered and diverted from its core roles. As various witnesses told the committee, it came to fulfil something of a dustbin function, housing various agencies and units. We were told that it performed a useful role as an incubator for such bodies before some of them moved on to departments, although why it was uniquely placed to fulfil such a role was never fully explained. The effect was to produce a larger and less coherent body than had existed previously.

As has been mentioned, we have also seen the development and growth of the Prime Minister's Office, which appears to have had a distorting effect, essentially helping to draw the Cabinet Office more and more into a supporting role for the Prime Minister. It could be argued there was always something of a skewed effect, given that the Cabinet Office answers to the Prime Minister as chairman of the Cabinet. However, recent years appear to have seen an exacerbation of that tendency. As Professor Kavanagh noted in his evidence to the committee, after 1997, the Cabinet Office changed from its traditional role of an honest broker between departments to an arm of the centre, which is decided by the Prime Minister. The Cabinet Office appeared to become misshapen and too much the creature of the Prime Minister.

I agree with the committee that that situation was not satisfactory. I disagree with the Government's response, which constitutes a notably poor piece of work. I agree with the noble Lord, Lord Rodgers of Quarry Bank: the response is notable for its complacency. It fails to accept that there is a case for change. I appreciate that the response is the product of the late Government. I hope therefore that my noble friend Lord Taylor of Holbeach-whom I very much welcome to his new role-will discard that response and tell us not only what the Government are doing to address the concerns of the committee but what plans they have for the future.

I note that the Cabinet Office under the new Government has retained some features from the last Parliament, but has acquired not only a new dimension in the form of the Deputy Prime Minister's Office and Constitution Unit, but also some other units.

I welcome the statement on the current Cabinet Office website as to its purpose-not least,

That strikes me as eminently appropriate-certainly in line with what I regard as the purpose of the Cabinet Office.

However, I have some concerns which I hope that my noble friend can address. Enabling the Cabinet Office to focus on its core functions entails decluttering

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it, so that it no longer fulfils a dustbin function. I can see the relevance of many of the units-the secretariats, groups and other bodies-that appear in the organisation chart of the Cabinet Office. However, there already appears to be an element of incremental accretion. The Office of Government Commerce and the public sector procurement agency have moved from the Treasury to the Cabinet Office. Some Ministers in the Cabinet Office have been giving talks or making statements on important issues, but matters which are not obviously-to me, anyway-within the remit of the Cabinet Office, such as the regional growth fund and the Government's commitment to children and families.

What is being done to ensure that the clear institutional remit of the Cabinet Office is maintained? What mechanism is in place to protect against the Cabinet Office becoming, in the phrase of my noble friend Lord Heseltine, a bran tub?

Again repeating a question that has already been asked, what is the status of the Prime Minister's Office? The organisation chart shows it is as one of the component parts of the Cabinet Office. It continues to be headed by a Permanent Secretary. When the committee took evidence, there was some confusion as to the relationship of the Prime Minister's Office with the Cabinet Office. Some witnesses told us that they were functionally distinct. The Permanent Secretary, Jeremy Heywood, said the border between the two was "very porous", and the Cabinet Secretary, Sir Gus O'Donnell, told us that No. 10 was a subset of the Cabinet Office.

Like the noble Lord, Lord Butler, I favour a formal institutional separation, reflecting the physical separation, with no porous borders, with the other units in the Cabinet Office fulfilling roles on behalf of government and kept separate from the influence of the Prime Minister's Office. Are they indeed functionally distinct?

Peter Hennessy, in his evidence to the committee, said that Cabinet Ministers were there to say, "Wait a minute". That is appropriate in terms of policy. What is also required is a Cabinet Secretary who can say, "Wait a minute", in terms of process. The Prime Minister has to be prepared to accept guidance on process if government is to work effectively.

The relationship with the Cabinet Secretary is thus crucial, although, as the committee recognises, much depends on the individuals involved. The crucial point is that the Prime Minister needs to be cognisant of what is appropriate-indeed, necessary-in terms of the relationship. There is a responsibility on Parliament, through the Constitution Committee in your Lordships' House and the Public Administration Committee in the other place, to monitor the relationship and check the health of the system operating at the heart of government.

My penultimate point follows and relates to accountability. The committee stresses the need for greater accountability. The Deputy Prime Minister is but one of seven Ministers, excluding the Prime Minister, located in the Cabinet Office. I welcome the fact that the Deputy Prime Minister has a dedicated slot in Question Time in the other place, as does the Minister for the Cabinet Office and the rest of the ministerial team. The decision to establish a Select Committee in the other place to cover constitutional and political

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reform-in other words to scrutinise the Deputy Prime Minister-is also very welcome. That goes a long way to enhance accountability to Parliament. However, it divides the Cabinet Office into two halves and raises the question as to how the Cabinet Office, other than the Deputy Prime Minister, is to be held regularly to account, other than through Question Time. The Public Administration Committee in the other place and the Constitution Committee in your Lordships' House can play an important role of general oversight, but is there a means of more regular scrutiny that can deliver the accountability sought by the Constitution Committee? I ask that for information rather than to make a critical point. I very much welcome how much has already been done to deliver accountability.

My final point is that effective government derives not just from structures but from those responsible for creating those structures and making them work. I have highlighted the capacity for tension within government. If government is to work harmoniously, or at least reduce tension between the different parts, there has to be an acceptance by the Prime Minister and senior Ministers that leadership does not mean dictation. There needs to be an appreciation of the extent to which the component parts of government rely on one another, and that you get most from Ministers and civil servants by making clear that you are working with them and that they are part of a team. Cabinet is a bonding element, not a channel through which Prime Ministerial orders are relayed to Whitehall. If the Prime Minister sends out that signal, we are moving very much in the right direction.

6.58 pm

Lord Bichard: My Lords, I, too, very much welcome the report of the Constitution Committee. It makes a number of important points about the structure and accountability systems at the centre of government, which I very much hope the new Government will take note of. As the noble Lord, Lord Goodlad, said in opening the debate this evening, the way in which the Cabinet Office and the centre works is vital to the effectiveness of the whole of government. It is, as the noble Lord also said, anything but arcane. It should not be something which interests only insiders, and certainly not something about which any of us can be complacent. All of which are reasons why the Institute for Government, of which I have to declare an interest as the current director, this year looked at the issues surrounding the Cabinet Office and the centre of government in a report entitled Shaping Up. We, too, concluded that there remained considerable scope for making the centre more effective. The findings of the institute report sit very happily alongside the Constitution Committee's report, and perhaps could provide some pointers for the Government on a way forward.

In that report, our first recommendation was that the centre and the Cabinet Office should be very much smaller, but more strategic, with fewer of the ad hoc functions that we have already touched upon this evening and a much greater sense of purpose and direction. It is rather surprising that at the time of the election, there were no fewer than 1,500 civil servants working in the Cabinet Office. We can argue about

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whether there were six or seven Permanent Secretaries, but it was a fair clutch. Whatever the structure, the centre had become overextended and, as the noble Lord, Lord Butler, said, it had become something of a mess. It needs to be smaller and more strategic.

Our second recommendation was that the powers of the centre should be clearer, especially where Whitehall departments are concerned, so that it is more apparent where the responsibility for final decisions rests. We do not need a larger centre-on the contrary-but people need to know when the centre has the final say. As a former Permanent Secretary, I have to say that on many occasions, that was not clear to me and it is one of the reasons why some rather strange things have happened across government.

Our third recommendation was that the Cabinet Office should support the Cabinet more vigorously in developing a strategy for the whole of government. Perhaps we should try to encapsulate that in 20 key outcomes which should then be reflected in the business plans of departments. That is even more important in the current fiscal crisis. It is really important at a time when there is very little money that government is absolutely clear about its priorities and the issues on which individual departments should be focusing. The Cabinet Office-the centre-has a really important part to play in ensuring that there is that clarity.

The fourth issue that we commented on was the need for the centre to play a greater part in ensuring that departments collaborate where necessary, not just in the development of policy that crosses bureaucratic boundaries, but also in some more prosaic areas, such as the purchase, management and use of materials, goods and services. I have said before in this House that the public sector procurement budget amounts to £220 billion a year, and more than £100 billion of that is spent on common goods-goods that are purchased by different departments and public agencies-yet no convincing purchasing strategy is in place, and a vast amount of public money is consequently being wasted. Those of us who have worked in any bureaucracy know that too often there is a tendency to defend territories and resist justified attempts for greater co-operation, not least where procurement is concerned. Such behaviour is simply unaffordable in times like these, and the centre-the Cabinet Office-needs to have the power to exert its authority. It may be that the recent appointment of a chief operating officer or the establishment of an office of efficiency and reform will improve that situation.

Finally, we concluded that, contrary to popular belief, we have in this country one of the most devolved systems of central government in the developed world, by which I mean that departments retain a huge amount of power. Eighty-five per cent of the budgets allocated to departments remain within their control. This contrasts rather sharply and strangely with the wider governance system in this country in which power is heavily centralised in Whitehall and Westminster.

I think that most of us are now agreed that we need to devolve the power of government closer to communities and neighbourhoods. However, paradoxically, it may just be the time to think about rebalancing the power within government between the Cabinet Office and

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individual departments with a smaller, stronger, more strategic centre playing its part in ensuring that government really does work, when necessary, collectively.

7.05 pm

Baroness Quin: My Lords, it is a great pleasure to follow the speech of the noble Lord, Lord Bichard, and his reflective comments with which I had a great measure of agreement. I am also very glad to be able to say a few words about this report as a former member of the Constitution Committee who participated in the work that led to it being formulated. I join other members in taking the opportunity to say how good it was to work with members of the committee and to pay my own tribute to the outgoing chairman not only for the efficiency with which he always chaired our proceedings but for his considerable good humour. It caused the meetings to be interesting and full of often amusing and entertaining anecdotes as members drew on their considerable experience when considering issues such as those contained in the report.

When we have these reports, they are often dominated by members of the committee. That is not entirely the case on this occasion, but it always allows committee members to stand back and reflect on the outcome of their work as a whole in a way that is not always possible when you are going through the details of a report in committee. From that perspective, I think the debates are extremely valuable.

Given some of the comments that have been made, it is fair to say that the background to the report was the concerns that had been expressed inside and outside Parliament about the centralisation of government and the worries that we could be moving to a presidential system rather than a prime ministerial one and moving away from our traditional system of collective Cabinet decision-making and responsibility. From the evidence that was given to the committee and from my experience in Parliament as a parliamentarian and as a Minister under the previous Government, I think that a lot of those fears are somewhat exaggerated. There have been fears of an elective dictatorship-I think the phrase was coined in the 1970s-and of growing presidentialism for a long time. As many members pointed out, there are certain pressures in the system that seem to push in that direction. The emergence of the open question at Prime Minister's Questions-meaning that the Prime Minister is increasingly called on to answer on virtually all areas of policy-makes me, like the noble Lord, Lord Shaw, hanker back to the days of Prime Minister Attlee who would apparently say in answer to a question, "Don't ask me. That's a matter for the Home Secretary" or whichever Minister was responsible.

However, those pressures are with us and continue to operate. As other members have pointed out, they have been supplemented by the pressure from the media, particularly from television, which tends to focus visually on the leaders of parties in a way that we saw very vividly during the recent general election campaign. As the noble Lord, Lord Shaw, pointed out, these days, Prime Ministers tend to get very heavily involved in foreign policy simply because of their attendance at EU summits, G8 meetings and so on. I accept that the pressures exist. I also accept the

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point made by the noble Lord, Lord Butler, that in response to those pressures it is possible to create a rather messy structure and, in that sense, the report of the Constitution Committee is valuable in trying to look at some of those intricacies. However, at the same time, I do not believe that there is a deliberate attempt to create a presidential system in Britain. It is a danger because of the pressures, but it is not something that Prime Minister Blair or previous Prime Ministers actively espoused. On the contrary, there is still a very strong belief in the traditional virtues of our Cabinet government.

The system is elastic in many ways. It changes depending on the nature of the Prime Minister, on the nature of the Prime Minister's political situation-whether or not that Prime Minister has a big parliamentary majority-and partly on the Prime Minister's personality. In some ways, there were similarities between the style of the Thatcher Administration and that of the Blair Administration. Both Prime Ministers were very much bolstered by very big parliamentary majorities.

On the other hand, in between those two premierships we had the premiership of John Major. Many people commented during our inquiry that his was a very collective approach to government, although I am not sure that we would put it quite as the current Justice Secretary put it when he said, "It was frightfully collective, allowing people to talk and talk until the last dissenter came on board".

Even the careers of strong Prime Ministers might end when they lose the confidence not necessarily of the electorate but of their colleagues in Parliament. Many of us who remember the dramatic exit from the Prime Minister's office of Prime Minister Margaret Thatcher remember that very vividly indeed. While Prime Minister Blair's career did not end in entirely the same way, there was a feeling among colleagues that there needed to be change. That was an important aspect of it.

I took slight issue with my good colleague on the committee, the noble Lord, Lord Norton of Louth, when he talked about Ministers being seen perhaps simply as an agent of central government under the Blair Administration. As a Minister in departments at that time, that was certainly not my experience. The loyalty to departments was very strong, and although one might be very much aware of his view on particular issues, that did not always mean that his view or the view from the centre prevailed. An interesting example of that was given to us in evidence by a former Home Secretary, David Blunkett, who described how officials, and sometimes political advisers from No. 10, would attend departmental meetings and would very often "go native"-his words-as a result. The balance between the departments and the Prime Minister is not always as it has been caricatured. I agree very strongly with the committee that accountability is important, and that any change that seems to occur to structures at the centre should be mirrored by a corresponding accountability to Parliament.

I am perhaps less cynical about the creation of the Liaison Committee in the House of Commons, which tests the Prime Minister very thoroughly in the twice-yearly grillings that last several hours and that allow committee chairmen from across the spectrum of policy-on

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behalf of their colleagues in the committee, too-every opportunity to put the Prime Minister under searching scrutiny. I was struck by the evidence that was given to us by the former Justice Secretary Jack Straw. He talked about how he hardly ever had to accompany Barbara Castle to committee grillings when he was a political adviser in the 1970s, but how as a Minister and as a Cabinet Minister he went weekly or fortnightly to committees either of your Lordships' House or indeed to committees of the House of Commons to answer questions, and indeed subject himself to rigorous scrutiny, sometimes for hours at a time.

I definitely do not think that there was a golden age and that somehow things suddenly went wrong in recent years. There is a great deal of continuity, as well as a certain amount of change, in the way in which the system works. I would not go as far as the noble Lord, Lord Heseltine, did when giving evidence to us. On page 109 of our report, he says:

"Watersheds-I should be the Vicar of Bray; nothing changes except the titles on the doors".

There have been changes, and the committee was right to highlight some of them. None the less, Ministers and the Prime Minister have many avenues of accountability that ensure that they are held to account.

The report is right to preach the virtues and the importance both of accountability to Parliament and of Parliament's vigilance in this respect. The report very much reinforces the message that ensuring that Governments of all persuasions are properly and thoroughly held to account is vital. While I am not a supporter of the coalition Government, I wish them well in taking forward the task of Cabinet government. They are unlikely, as the previous Government were, to turn to a presidential system, but will retain the elements of parliamentary democracy and Cabinet responsibility that we all rightly think are very important.

7.15 pm

Lord Pannick: My Lords, it has been a great privilege to serve on your Lordships' Constitution Committee under the chairmanship of the noble Lord, Lord Goodlad. His wise judgment, experience of practical politics and deep commitment to fundamental constitutional principle embody all that the committee seeks to achieve.

The report that we are debating today examines a notorious episode when the Cabinet Office was unable to prevent a serious lack of judgment in practical politics that resulted in a fundamental breach of basic constitutional principles. The noble and learned Lord, Lord Goldsmith, has already drawn attention to the matter, but I will add some details. In June 2003, to the surprise and anger of the senior judiciary and politicians, who had not been consulted, the Prime Minister announced that the office of Lord Chancellor would be abolished and that a Supreme Court would be created to replace the Appellate Committee of this House. The noble Lord, Lord Turnbull, who was Cabinet Secretary at the time, gave evidence to the committee in which he agreed that the implementation of this reform, however sensible its substance, was "a complete mess-up". For so distinguished a civil servant,

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who was always careful in his use of language, to apply such a term demonstrates the magnitude of this egregious mistake.

In his written evidence, the noble and learned Lord, Lord Irvine of Lairg, pointed out that as Lord Chancellor he had been kept in the dark about the proposal until very late in the day, because the Prime Minister, Mr Blair, knew that he would not support it. When he discovered how far advanced the proposals were, he understandably complained to the Prime Minister that it was constitutionally inappropriate for decisions of this importance to be made without consulting the Lord Chancellor, other members of government, the judiciary and, indeed, the authorities of this House, which would lose its Speaker. This was not so much sofa government as pulling the chair from under a senior member of the Cabinet as he was about to sit down.

That episode was an object lesson in unconstitutional government. Fundamental changes were announced without proper consultation and without proper consideration by politicians, who did not receive adequate advice from senior civil servants about the impropriety of their conduct. If they did receive proper advice, neither the Cabinet Office nor the Cabinet had the power to prevent such an abuse of proper process. That these reforms were designed to secure greater transparency in the legal and political process is a rich irony, which was entirely lost on their promoters.

The merits of the substantive reforms that were eventually introduced, which I entirely support, cannot begin to excuse the abuse of proper process. Your Lordships' Constitution Committee has done a valuable service in casting considerable light on this unsavoury episode in our constitutional history. Before this report, students of our constitution who wanted to know how and why proper governmental processes failed so abjectly in 2003 would find little on the subject, apart perhaps from Mr Alastair Campbell's diaries. The entry for 12 June 2003 commences:

"TB was dreading the Derry discussions".

It is a matter of considerable regret that these events occurred at all in 2003, but it is truly astonishing that the previous Government did not understand these issues seven years later when they published their response to the committee's report, dated 31 March 2010. The response says that it was not possible to consult the judiciary in 2003 because the Government had not consulted their own Lord Chancellor. If a Prime Minister does not have sufficient confidence in his Lord Chancellor to discuss matters of profound constitutional reform, the obvious answer is not to go ahead with reform behind his back but to appoint a new Lord Chancellor to consult and, through him, the judiciary. The 2003 process remains a serious stain on the reputation of the previous Government. Their 2010 response to the committee's report shows an obstinate refusal to understand the need for proper process in considering constitutional reform, even when the issues are set out with conspicuous clarity in the report.

I dwell on this extraordinary episode not just because it is of historical interest and importance. I hope that the present Government will study the report so that when they bring forward, as they will, their proposals

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for constitutional change they will have understood better than their predecessors two vital constitutional imperatives. The first is the need for full consultation on proposals for constitutional change, which means that they do not just consult those who agree with them but listen with an open mind to views other than their own. The second imperative is that proposed constitutional change should be rooted in an objective assessment of the advantages and disadvantages. It must not be based on perceived short-term political advantage. That is how this House will judge the proposals for constitutional change to be brought forward by this Government.

7.25 pm

Lord Maclennan of Rogart: My Lords, I hope that your Lordships will not regard me as unwelcome intruder on this debate, for I think that I am the only person to speak who neither is a member of the committee nor has given evidence to the committee. None the less, I believe that this is a most important report for all of us who are interested in the quality of government. I pay strong tribute to the chairman of the committee, which has produced the most fascinating insights and evidence on which we can formulate political responses. No time seems to me to be more appropriate than the present, with a new coalition Government, for seeking to build on the central message of the report, as I read it, which is that changing structures of decision-making should lead to changing structures of accountability.

I believe that this debate is timely in two senses. First, the report is up to the moment. It has a response, albeit not very eloquent, from the previous Administration. It is also timely in that the new Government can take account of some of the principles and suggestions that have been raised. I hope that they will come back to Parliament with their own statements about the new structures of decision-making in Cabinet government and, in particular, describe how the newly structured Cabinet Office, in which the Deputy Prime Minister sits with a lot of constitutional experts, is apparently considering further constitutional reform.

As a first step, we should hear from the Government. I cannot expect the noble Lord, Lord Taylor of Holbeach, to reply in full to all the questions that have arisen from this report tonight, although I am extremely grateful that he is here to give us his thoughts. When that process has settled down, we need to have another debate on broadly the same questions with particular answers on the responses that the Government will make.

In my short contribution, I should like to focus on issues that were well described prior to this committee's report, although it more than alludes to them, by the executive committee of the Better Government Initiative. The third chapter of its report dealt with the issues of the centre of government. It drew particular attention to the growing complexity of decision-making and a number of issues which perhaps might have been more easily divided between departments in the past but which it described as "cross-cutting". That raises an issue that needs to be addressed in considering the proper role of the Cabinet Office.



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I have heard, and I broadly agree with, the suggestion of the noble Lord, Lord Bichard, that the Cabinet Office needs to be slimmed down as far as possible. Certainly, if it is going to be properly accountable, its heads of responsibility need to be fairly sharply defined. Then there are the balancing considerations of incubator activities. The Better Government Initiative pointed out that a number of matters are intractable and are regulated within government to some extent by public service agreements. They cover matters such as social inclusion, drug misuse, environmental policy and, it was suggested, foreign affairs, including Iraq and Afghanistan.

What is the role of the Cabinet Office in these areas? I ask the question because it seems that we cannot rest on the old assumption that it is a matter for individual departments to take up these issues and simply to resolve them by sitting around the table in Cabinet committee. A deeper ongoing discussion is required before positions are formalised so that all those who are to contribute to the ultimate debate are able to be properly informed and bring whatever particular departmental interest or knowledge they have to bear on the conclusions. That could well be a role for the Cabinet Office.

Again, on reading the evidence, I am struck by the growing tendency towards presidential government. The noble Baroness, Lady Quin, attempted to rebut that view, arguing that fears about presidential government were somewhat exaggerated. However, that is not the thrust of the evidence that has been reproduced in this valuable report. Within the space of four paragraphs, we have the noble Lord, Lord Burns, saying that the search for joined-up government had,

we have in paragraph 147 Professor Peter Hennessy saying that departments were "thinly used" in comparison with the past; and we have the former Cabinet Minister, David Blunkett, saying that he,

What is that if it is not a tendency towards presidentialism? This is a serious issue, although I believe that a beneficial side-effect of the coalition may be that it less likely that one power, that of the Prime Minister-described by Sir Gus O'Donnell as a "subset" of the Cabinet Office-will attempt to hijack not just the presentation of policy to the cameras but the decision-making itself. Some of us were shocked at what we had read in earlier reports about the decision-making process on the Iraq war, which seemed to exemplify this danger at its very worst. Again, the report is constructive in its approach to these things. Sir Michael Bichard is reported as saying that,

It would be helpful if the present Government, in addressing these problems, could take a long, hard look at the issue of co-ordination by the Cabinet Office and indicate how they are going to improve it.



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In the past 48 hours, a respected broadsheet has reported that the Foreign Secretary intends to take under his wing all matters to do with the European Union within government. That is an interesting suggestion, but it has to be recognised that many other departments are involved in decisions on Europe. If we are going to make those decisions properly accountable, which again is the thrust of this report, we need to know exactly where and how they are being made. The Cabinet Office could play a great part in all this.

I ask the House to forgive me for these external thoughts on this valuable report. I am most grateful, as I am sure many others are, for the work that has been done and I hope that it will be followed up.

7.35 pm

Lord Brett: My Lords, first, I welcome the noble Lord, Lord Taylor of Holbeach, to his new position. As everyone has before responding to reports of this kind, he already has a whole list of questions, and I can absolutely guarantee that I will add to that burden.

I am not sure that there is anything particularly new about the tensions that exist between Prime Ministers and Cabinets. Was it not the Duke of Wellington who said of his first Cabinet that, when he gave his instructions, it "argued back"? Those arguments are healthy and they certainly take place. I think that we can be grateful to the noble Lord, Lord Goodlad, and his committee for this excellent report. The timing is perhaps accidental because we would have wanted its publication to be the same but the result of the election to have been somewhat different, but it provides a detailed view on how the Cabinet Office and the centre of Government work; gives a clear insight into the operation of the Cabinet Office and the centre; and comes to a broad range of conclusions and makes a number of recommendations.

While I agree with much of the report, there are certain areas where we do not enjoy the same degree of agreement. I suppose that one can instantly recognise the conclusions of the committee on the handling of the departure of the previous distinguished Lord Chancellor, my noble and learned friend Lord Irvine of Lairg. The official response on this side of the House on that issue is set out in the letter from my right honourable friend the Member for Dulwich and West Norwood. I see no point in going back to it because the significance of this report is its relevance to today and moving forward, a point made also by the noble Lord, Lord Goodlad.

This report was prepared and a government response was made before the general election, and therefore it refers to a time before the formation of a new and relatively, for most of us, unique form of coalition government. It is not unique in history, but it is for the present time, and certainly in the context of the question of whether we have presidential, co-presidential or Cabinet government. We think that the report's analysis and recommendations are equally important to the new coalition Government. We will seek to hold the new coalition Government to account against the recommendations made by your Lordships' Committee, and indeed against the considerable weight of argument

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made by distinguished Members of the House in the debate today. Also, I yield to no one in my experience, which is tangential to government, in my admiration for senior British civil servants. We have had a mandarin cadre which has given us great service over many years and I see no diminution of that. With Cabinet Secretaries from the noble Lords, Lord Armstrong, Lord Butler and Lord Wilson, to Sir Gus O'Donnell, I can see that the quality is there. It is of course for the machinery of government and for Parliament to hold to account how we use the good talents that we have before us. The central points of the report as reflected in the concerns recorded and the recommendations made relate to the previous Government, but they must apply equally to the future.

The central recommendation is that the structures of accountability should mirror more closely the structures of power. We have seen another adjustment because we now have the fairly unique relationship of a Prime Minister and a Deputy Prime Minister almost walking hand in hand-the Ant and Dec of politics. I see that they are to make another major announcement on Thursday. If you look up that announcement with the Lobby correspondents, you will see that they are going to make it together. I do not criticise that because it makes sense in a coalition, but it does present a new dynamic both in terms of how the Government operate and, indeed, the role of the Cabinet Office with an Office of the Deputy Prime Minister. We have two parties, not one, in the coalition Government, and we have a Prime Minister and Deputy Prime Minister acting jointly on many occasions. We agree with the committee's conclusion that where the structures of power have changed-they unquestionably have-so should the structures of accountability.

This leads me on to a number of questions, some of which have been raised by other noble Lords. The noble Lord, Lord Butler, asked whether the Minister could tell us what effect on accountability the changes in the structures of power and the conjoining of the Prime Minister and the Deputy Prime Minister will have, and where that will take us. Will, for example, the Government continue in this House with the innovation introduced by these Benches-when they were on that side and in government-of providing an opportunity to question members of the Cabinet who are also Members of your Lordships' House? Specifically, will the Government now declare their commitment to provide an opportunity to question the one Member of your Lordships' House, apart from the Leader of the House, who is a Cabinet Minister-the noble Baroness, Lady Warsi?

Can the Minister make clear to the House the noble Baroness's responsibilities in government? Can he specifically make clear what those responsibilities are in relation to government? She is, I am sure, an excellent chairman of the Conservative Party and will be a great asset in that function, but she is a member of the Cabinet and therefore it is reasonable to ask what role she has in government. Will the Minister undertake to bring forward proposals to give the House the ability to question and scrutinise the noble Baroness, Lady Warsi-if he can find out what she does? If she does not do anything, it begs the question, given the years

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of austerity before us, whether we can afford the luxury of Ministers who have no responsibility in government.

The committee recommends that the Prime Minister's Office should be subject to appropriate parliamentary accountability mechanisms. In the light of the formation of the coalition Government, can the Minister set out what mechanisms are now considered appropriate in that direction? Equally, the committee recommends that the Prime Minister's role and the centre's role in policy delivery should be transparent and accountable to Parliament-I am sure every Member of your Lordships' House will agree with that-but, in the light of the committee's recommendations, what do the Government propose to make the deliberations of the committee headed by the Deputy Prime Minister on further reforms of your Lordships' House transparent and accountable? The coalition Government have, to their credit, named these two measures of transparency as being among the key objectives they hope to achieve.

This is a good report which, by and large, we accepted when we were in government, with all its strictures and criticisms. I would like this Government to do likewise-not in terms of our operations in government but in terms of the coalition, which, of course, is a different animal.

I endorse the remarks of the noble Lord, Lord Maclennan of Rogart. Clearly the Government need to consider these matters-I would not expect all the answers to be available when the Government have been in office for only a few weeks-but it would be useful to have either a further report from your Lordships' Committee or a debate in this House when we have a greater understanding of where the Government are taking us and how far they will go in implementing the excellent recommendations in the report. We will probably find more differences than we would wish, but that is politics.

The coalition Government should be and will be held to account. We on these Benches will do all we can. We commend the committee for its report and its attention to the question of good governance. We hope that it, too, will continue to keep a careful eye on the coalition Government and its intentions in relation to the Cabinet Office. I prefer "bran tub" to "dustbin", but I understand the point that has been made.

Although I do not go back as far as when the Duke of Wellington was Prime Minister, reading the report reminds me that as long ago as 1971 I found myself making representations to the then Minister for the Civil Service about the decision to eliminate the Civil Service Department. Little did I think then that, going on for 40 years later, that Minister would now be the Minister for Foreign Affairs in your Lordships' House, the noble Lord, Lord Howell of Guildford. However, time passes and, in government, some of the problems come back. Questions about the machinery of government have been around for all of my time in the Civil Service. I understand that we now have coming up questions about regional pay and the dispersal of civil servants to the regions. All these questions have been posed before; all have been answered. However, all the answers have not been correct. Let us hope that on this occasion the excellent report of your Lordships' committee helps the Government to reach the right conclusions.



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7.45 pm

Lord Taylor of Holbeach: My Lords, I thank my noble friend Lord Goodlad for securing the debate and for his typically cogent introduction of it. Tributes have rightly been paid to him for his chairmanship of the House's Constitution Committee and we will miss him in that role.

This is an important topic which is even more relevant to the current scene than might have been envisaged by all those who took part in the Constitution Committee's deliberations in the summer of last year. This is reflected in the contributions of all noble Lords who have participated in the debate, which, as might have been expected, has been of an exceptionally high quality. The depth of experience that the House possesses when investigating such an issue is an invaluable attribute of the Chamber.

I thank my noble friend for having chaired the committee. Together, he and his committee have produced a report which has made an important contribution to the debate on the complex role of the Cabinet Office and the centre of government. The report sets out clear recommendations that need to be addressed to ensure that the Cabinet Office's position and its role at the centre of government are evidenced and fortified.

I remind your Lordships, however, that the basis of the committee's report goes back to a previous time-almost to a distant age-and, while I thank the noble Lord, Lord Brett, for his welcome, I was not surprised that he seemed as enthusiastic as I am to look to the future. He was right to note the way in which the creation of the coalition has changed things.

I hope that the noble and learned Lord, Lord Goldsmith, will forgive me if I do not pursue the insight and analysis of the eclipse of the Lord Chancellor's role and the lack of information on the matter made available to the committee. I say to the noble Lord, Lord Pannick, that I realise there are lessons to be learnt from this episode. However, I give the noble and learned Lord, Lord Goldsmith, my assurance that I am committed to openness and accountability in government, and I see openness and accountability to this House and its committees as part of that commitment.

When the nature and shape of government was somewhat different from today, the Government in their response noted that there was a need for the centre of government to react quickly and flexibly to new challenges. It is right to accept, as did the noble Lord, Lord Rodgers of Quarry Bank, that there needs to be a mechanism within government to cope with change. The noble Lord asked me a large number of questions and I hope that he will forgive me if I go through some of them and write to him about those I do not answer. It is important that we use this debate to analyse the current structure and to recognise the role of the Deputy Prime Minister in leading political and constitutional reform.

The Minister for the Cabinet Office deals with efficiency across government; the Minister for Government Policy sets policy objectives and milestones for government departments. The Minister for political reform is working very closely with the Deputy Prime Minister, and the Minister for Civil Society seeks to place the role of community in government-in other words, the big

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society agenda. If the noble Lord had been in his place, he would have been able to hear the noble Baroness, Lady Warsi, the Minister without Portfolio, responding on behalf of the Government to a debate on this very issue. I assure noble Lords that her role, particularly in connection with children, families and diversity across Parliament, is seen as very important, and I expect that they will find her at this Dispatch Box answering for the Government on a number of issues in future. I hope that the noble Lord will accept those assurances.

Since the last general election, the new coalition has continued to make necessary changes to the centre of government to rise to the challenges that face it and at the same time to strengthen the accountability and transparency of all Ministers and government departments to the citizens of the country. As found by the report, despite the role of the Cabinet Office evolving and changing constantly, the same three core functions remain at the heart of its work. They are: to support the Prime Minister; to support the Cabinet; and to strengthen the Civil Service. These core functions are not exclusive to any one group within the Cabinet Office. Not for the first time, I learnt much from the contribution of my noble friend Lord Norton of Louth. He rightly pointed out the potential for tension that can exist within government. I hope that what I have to say satisfies his desire to learn how the Cabinet Office views its role within a coalition Government. Similar views were expressed by the noble Lords, Lord Butler and Lord Bichard, who sought a small, uncluttered and powerful Cabinet Office, while the noble Baroness, Lady Quin, and the noble Lord, Lord Maclennan of Rogart, pointed to the danger of power being too concentrated. I hope that the noble Baroness will be reassured by the update that I provide.

The Prime Minister's office is directly responsible for supporting the Prime Minister on a day-to-day basis, but this is not done in isolation. It is fully supported in this role by a number of other groups within the Cabinet Office as well as more widely across government. The Prime Minister's office is further strengthened by the inclusion of a dedicated Permanent Secretary whose role complements that of Sir Gus O'Donnell, the Cabinet Secretary. The transparency and accountability mechanisms for these roles, which the noble Lord and his committee recognised as needing to be strengthened and formalised, are key areas of political reform specifically highlighted in this Government's coalition agreement. It is accountability not just to Parliament but also to the electorate. This applies equally to the roles played by other Permanent Secretaries located in the Cabinet Office, of which there are currently six in addition to the two whom I have already mentioned. Much of their work is focused across government.

To increase the transparency of the centre's role in policy-making, it is the coalition agreement's pledge to introduce a public reading stage for Bills to give the public an opportunity to comment online on proposed legislation, and for these comments then to form the basis for debate by the scrutiny committees. These new routes of transparency and accountability will sit alongside established routes such as parliamentary Questions,

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Written and Oral. Along with departmental publications, fewer but higher-quality websites and Select Committees, they will enhance their work and allow greater involvement and influence on the part of the public.

The Cabinet Office's flexibility has always allowed it to function as a unique department within government. The report describes the Cabinet Office as operating at times as an "incubator"-a department that can grow and nurture vital policy areas prior to bedding them out into a home department. In this new era of political reform, this unique practice will provide solid ground from which policy areas can flourish. The diverse skills, knowledge and expertise housed within the Cabinet Office allow it to morph and adapt quickly to include new objectives while maintaining its core functions.

The part played by the Cabinet Office in supporting negotiations following the general election is a good example of its flexibility and professionalism, which, coupled with the core values of the Civil Service-impartiality, integrity, objectivity and honesty-helped to deliver a coalition Government. That was referred to by the noble Lord, Lord Butler of Brockwell. The Civil Service fully recognises, however, that its role was one of helping the politicians who made the coalition a reality.

I can reassure the noble Lord that an intrinsic part of the UK Government is their focus on Cabinet with its ministerial and Cabinet committee system. This will continue under the coalition Government, where an effective Cabinet committee system will be critical to securing agreement across the coalition as well as across departments. The coalition Government have set out their aspirations and plans in the document, The Coalition: our Programme for Government. A new coalition committee has been set up to support the governance of the coalition. The committee provides a place to bring about resolution of any difficult coalition issues arising in these unprecedented times that are not resolved through the policy-focused Cabinet committees. I hope that my noble friend Lord Shaw of Northstead will be reassured to learn that the new guidance produced by the Cabinet Secretariat, headed by the Cabinet Secretary, reinforces the need for proper collective consideration of policy decisions and for the business of government to be taken forward in a timely and efficient way. The coalition is committed to there being focus and efficiency in government.

The Cabinet Secretariat chairs interdepartmental, official-level committees to provide rigorous scrutiny and discussion of policy issues prior to their being raised with the relevant Cabinet committee or, where further joint working is required, after a committee has discussed an issue. The officials' committees are held primarily to monitor policy development, particularly in cross-departmental priority areas. They are well placed to monitor progress on departmental action points from previous meetings, to resolve interdepartmental disputes and to identify topics for future ministerial consideration.

Overall, under the coalition, ministerial responsibility and strategic direction in the Cabinet Office have increased to include the Deputy Prime Minister, with responsibility for political and constitutional reform. The very nature of the work to be led by the Deputy Prime Minister shows the flexibility of the Cabinet Office, as it has taken on policy responsibility for a

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wide range of political and constitutional reform. Some of that work might be described as "incubation" within the interpretation that I mentioned earlier. Examples include: introducing fixed-term parliaments; a referendum on the alternative vote system; power for the electorate to recall their Member of Parliament; reforming party funding; and heading the committee on House of Lords reform. His wider role as deputy to the Prime Minister and in leading one half of the coalition partnership brings with it oversight of the full range of government policy and a need to ensure strong processes between his office and the office of the Prime Minister. It might be concluded that the existence of a coalition Government reinforces the role of the Cabinet Office in supporting government cohesion and accountability.

The Minister for the Cabinet Office published in June this year a structural reform plan that sets out six key priorities: reform of the Civil Service; a reduction in the number of quangos; to reduce the cost of information and communications technology; to drive efficiency in government operations; to drive transparency in government; and to support the building of the big society.

The new Efficiency and Reform Group will, in the main, work to deliver the milestones identified against the priorities in that plan. This group has been formed by pulling together capabilities from the Cabinet Office and HM Treasury, such as the Office of Government Commerce and Office of the Government Chief Information Officer, to help deliver efficiency savings across government. The board of the group is jointly chaired by the Minister for the Cabinet Office and the Chief Secretary to the Treasury. I hope that it pleases the noble Lord, Lord Bichard, that I have read the Institute for Government's report and agree that although it is not directly the subject of this debate, it is an important contribution to the consideration of the structure of government and the role of the Cabinet Office in particular.

The Efficiency and Reform Group is already leading much of the drive to deliver the £6 billion efficiency savings announced by the Chancellor of the Exchequer in May and is now developing longer-term approaches to improving the performance and efficiency across government.

I do not propose to discuss each of the six priorities of the structural reform plan in full, but I will highlight actions within two areas as examples. Under the auspices of the first of those six priorities, the Minister for the Cabinet Office will be focusing on improving accountability and governance across government. To further support good levels of accountability each government department will appoint at least one non-executive director to its main board. This community of non-executive directors will meet regularly under the leadership of the Government's lead non-executive director who has recently been appointed. That appointee, a Member of this House, is the noble Lord, Lord Browne of Madingley. The noble Lord will work with Secretaries of State to appoint non-executive directors to their departments, and will work with the Minister for the Cabinet Office in overhauling how departmental boards are run and, thereby, improve governance across Whitehall.



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The appointment of such non-executives will galvanise departmental boards as forums where political and official leadership are brought together to drive up performance. While these are roles within government they are also independent of government and their purpose is to assist in the implementation of policy using relevant experience from business. During these challenging times for our country, there is a great need for both the best of the business community and the best public servants to be involved. I am sure that the House will welcome the appointment of the noble Lord.

Turning to the second priority, reducing the number of public bodies, or quangos as they are often called, might be seen as exactly the opposite of incubation. Here the centre is co-ordinating a cull of functions that would then be removed from the portfolio of government-funded or government-sponsored activities or, where appropriate, taken back into departments. Those bodies that remained at arm's length would find that new standards were being more rigorously enforced.

The Minister for the Cabinet Office who is also the Minister for government policy performs a new role in driving the Government's structural reform agenda and providing a counterpart to the Chief Secretary to the Treasury as a key partnership in the management of the coalition. The role for such work is exemplified in the way that the Government are preparing for the next spending review. The spending review 2010 has already begun and all departments are fully engaged with the Treasury. However, the process has been enhanced to include more robust challenges to plans across the public sector at both ministerial and official levels. In this, Ministers based in the Cabinet Office and the Cabinet Secretary are taking key roles. The Government are committed to working collectively to make the decisions about how to reduce spending in a way that is in line with their values.

To lead this collective approach in government, the Prime Minister has appointed a committee of senior Cabinet Ministers-the Public Expenditure (PEX) Committee. Chaired by the Chancellor of the Exchequer and supported by the Chief Secretary, the PEX Committee will advise the Cabinet on the high-level decisions that will need to be taken in the spending review. Secondly, a spending challenge has been launched to engage all public servants in thinking about ways that public services are and, more importantly could be, delivered in different or better ways to make more effective use of the available resources.

The Minister for Civil Society is also located in the Cabinet Office with responsibility for co-ordinating government action in relation to social exclusion and the voluntary sector. The Cabinet Office is currently restructuring to align itself to the new priorities and provide a more strategic approach to its work while maintaining strong core services.

Lord Brett: I am grateful to the Minister for setting out more clearly than I understood the role of the noble Baroness, Lady Warsi, for whom I have great admiration. He may not have time to answer the question that I asked, which I am sure he will be writing to me about along with the other questions that I asked. But will there be an opportunity, through the usual channels, to question her about her portfolio

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on the big society, as we have had when previous Cabinet Ministers had responsibilities across departments? I hope that he will take that on board.

Lord Taylor of Holbeach: I understand the significance of the noble Lord's question. I will ask the usual channels for an answer and let the noble Lord know. I am indeed running out of time and therefore the noble Lord was correct to prompt me.

I am grateful to all noble Lords who have spoken in this debate. I have not had a chance to answer all the questions. There will be many that I will need to write to noble Lords about and I will make sure that answers are copied to all noble Lords who have participated. It has been an encouraging debate about a well-considered report and I thank the noble Lord, Lord Goodlad, for securing it for us. It would be a foolish Government who did not study the report and listen to this debate.

8.07 pm

Lord Goodlad: My Lords, I join other noble Lords in welcoming my noble friend to the Dispatch Box and I thank him very much for his very thorough reply. I would expect no less from a fellow Lincolnshire yellowbelly.

My noble friend emphasised the Government's commitment to accountability and openness about which there has been a confluence of views during the course of this debate. The Government will of course be judged not only by their words but in future by their deeds. I am extremely grateful to all other noble Lords who participated in the debate. We had extremely trenchant contributions from the noble Lord, Lord Butler of Brockwell, about the avoidance of muddle and from the noble Lord, Lord Bichard, and the noble and learned Lord, Lord Goldsmith, and others about the regrettable-if not disgraceful, as the noble Lord, Lord Pannick, said-events of June 2003. I will not add to that other than saying that I hope that they act as an example to the present Government in their ambitious programme at the centre of government to have regard for due process and respect for our constitution and institutions. I have every confidence that that respect will be forthcoming.

I have had far less contact with the centre of government and the Cabinet Office than many noble Lords in their places tonight, but over the years I have developed an enormous admiration for their dedication and skills and I hope that the committee's report and our debate tonight will make some contribution towards the future development of these institutions. I suspect that other noble Lords will join me in assuring my noble friend that, like General MacArthur, we shall return.

Motion agreed.

EU Committee: Alternative Investment Fund Managers

Motion to Take Note

8.10 pm

Moved By Baroness Cohen of Pimlico



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Baroness Cohen of Pimlico: My Lords, in introducing this debate, I need to alert the House to a potentially major threat to the United Kingdom financial industry. The alternative investment fund managers directive is an unexciting title for a piece of European Union financial legislation that could cause substantial damage to an industry worth €250 billion in Europe and the UK, of which 80 per cent is located in the UK, and which sustains 40,000 jobs also in the United Kingdom. Unless the new Government can achieve some amendment to the present cumbersome proposals for regulation, much of this economic activity could vanish from the United Kingdom, leaving an ever higher financial mountain for us all to climb.

This particular directive has been bedevilled from the start by a misunderstanding of the industry and confusion of objectives. The Commission, which has been under acute political pressure to produce regulatory proposals for this rapidly growing sector and its highly paid employees, has not helped. The result has been politically charged and highly emotive rhetoric, which has resulted in a confused directive that risks killing the goose that has been laying the golden eggs. This is the more curious because, from the outset, from the report written by Monsieur de Larosière, all Commission officials have publicly accepted that the components of the alternative investments-mostly hedge funds and PE funds-did not cause the financial crisis. Investors in those funds lost money but those who lent to the funds-the banking community-lost virtually nothing. This was well controlled lending that left the risk with investors and produced no systemic threat, in stark contrast to the poorly controlled lending to individual householders and uncontrolled trading of products, such as CDSs and CDOs, which did threaten the financial system and whose effects we are still working through.

My committee spent quite a long time on this important inquiry, from June 2009 to February 2010. We found that the term "alternative investment fund" includes a broad spectrum that most significantly consists of hedge funds and private equity funds. We found serious problems with the European Commission's draft of the directive, which, if it came in the form that we considered, could seriously damage competiveness. The effect would be wider than fund managers and investors. One is not just worrying about a few highly paid young men. Many pension funds and charities include alternative investments funds in their investment portfolios and, as such, anyone with a pension or a charitable contribution will be affected indirectly by this directive. We took evidence for the report from June to December 2009, including two lots of evidence from the former Financial Services Secretary to the Treasury, the noble Lord, Lord Myners. We also travelled to Brussels and heard from representatives of think tanks, the European Parliament and member states. We published the report in February 2010, just at the moment when it appeared that agreement might be reached on a Spanish presidency compromise in the Council, though that was not to be. I thank Professor Robert Kosowski of Imperial College, London, for acting as specialist adviser to this inquiry.

Before I discuss the main conclusions of the report, I shall say where the directive stands today and explain its passage through the European institutions. On

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17 May, the ECON committee of the European Parliament, chaired by Sharon Bowles MEP, agreed its amendments to the Commission's original draft. On 18 May, the ECOFIN council, under the direction of the Spanish presidency, reached a general approach on the directive. But in order even to get to a general approach, a minuted statement was agreed setting out the opposition of some member states-actually very few-including the United Kingdom, to parts of the Council text. This has allowed tripartite negotiations to begin in Brussels, where the three parties-the Council, the Parliament and the Commission-attempt to reach a compromise between the texts of the Parliament and the Council. By all accounts, little progress has so far been made toward agreement and it looks as if the original objective of reaching a compromise by the summer will not come to pass. This apparently blessed relief in the timetable should not be taken as meaning that we are really making progress; it is just impossible to tell.

The necessity for regulation of some sort is not disputed. In our inquiry we found that the size of these funds and the potential for crowding out, when a lot of managers all follow the same financial strategy, can indeed unbalance the financial system. We welcomed the aspects of the directive that attempted to reduce the risk proposed by fund managers. It is perfectly true that there is very little supervision of managers at EU level and it is impossible to find an alternative investment fund manager who does not accept that some regulation is necessary. The principal difficulty seems to be the recommendation surrounding the alignment of the directive with the global regimes and the proposals on the EU passport. In our report, our principal recommendation was that the Government must ensure that the directive is in line with and complements global arrangements. Co-ordination with the US regulatory regime in particular is essential to avoid a situation in which the EU alternative investment fund industry loses competitiveness at a global level as a result of regulatory arbitrage. The industry can go overseas but much will be lost if European investors do not invest in it. I shall be particularly grateful if the Minister could explain in his speech how the new Government will ensure that this does not happen.

As it stands, the directive would provide the opportunity for authorised managers to market their funds to professional investors across the EU. The directive would extend to non-EU managers but would apply restrictions to these managers that would, as originally drafted, restrict investment into and out of the EU to the disadvantage of the EU economy. Many of our witnesses described these measures as protectionist. This is a sensitive subject and solutions need to be found to prevent disadvantaging EU investors, which, as I mentioned earlier, include charities and pension funds.

The EU passport could provide fund managers with access to the whole EU market, which would deliver all the benefits of the single market, and most EU fund managers are keen that this should be so. If, however, the requirements for attaining a passport are made too difficult to meet, then non-EU fund managers could be locked out from marketing in the EU and EU investors' options for investment severely restricted.

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On the other hand, if the restrictions come out being too tenuous, that will not solve the difficulties of those who argue that regulation should be a gold standard in order to protect market stability effectively.

My committee supported the passport and the principle of its benefits being extended to non-EU funds, so long as the passport was not so difficult to attain as to prevent managers marketing non-EU based funds in the European Union. The committee also supported-this seems like a sensible measure-the continuation of national regimes until an equivalency regime with third countries could be set up. While national regimes continue, you can make adjustments to the passport regime to make it work effectively without damaging the EU economy. If the passport regime is set up before it works, it will damage the EU.

We concluded that the original draft of the directive made it difficult, if not impossible, for third-country regimes to achieve the equivalency required for managers to get EU passports. It appears that this issue is still where the biggest divide remains between the European Parliament and the Council. The Council text does not provide for a passport but would allow member states to continue operating national regimes, should they wish to do so. The Parliament text provides for a passport to third-country funds with either an EU or non-EU fund manager, but would not allow the continuation of national regimes.

It is important that the Government find a workable solution. How will the Minister ensure that an effective compromise is found between the Council's and the Parliament's texts that does not disadvantage non-EU fund managers-mostly us-or EU investors?

There are other difficult bits in the directive. One of those is the requirement for transparency. The provisions of the directive that aim to ensure increased market stability are its requirements for disclosure of information on funds by fund managers to supervisors. This seems like a good idea. It could include leverage caps that would set a cap on how much a manager could borrow, while disclosure and transparency requirements would also allow supervisors to spot build-ups in risk, the infamous crowded trade, and take some action to reduce it.

These requirements, however, are not free from the problems that bedevil the detail of the directive in its original draft. We concluded that the directive should differentiate more effectively between different types of alternative investment funds, in order to prevent the disclosure requirements from placing EU funds at a competitive disadvantage. We also argued that national supervisors, rather than a pan-European body, should play the key role in analysing and acting upon data retrieved from fund managers, as not only would they be most effective in carrying out this task but it is national supervisors who will carry the can if it all goes wrong.

We also suggest that it is important that national supervisors identify here and now what specific data they need from managers to monitor risk. The directive, as drafted, could require supervisors to collate huge volumes of data, most of which is irrelevant to stability. It is clear that the possibility of analysing such data effectively would be reduced, thereby reducing the effectiveness of supervision.



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In fact, one of the things generally wrong with the directive is that it operates on a one-size-fits-all principle, so that big hedge funds would be regulated in the same way as very small property investment funds. This leads to the kind of overregulation that will disadvantage everyone. We therefore recommended that the Government push for the directive to be appropriately tailored to different types of funds, and I would be glad if the Minister could provide an update on how successful efforts in this direction have been.

I shall conclude by briefly discussing the process behind the drafting of the directive. We found that the Commission had not followed its own better regulation guidelines in the drafting. There was an insufficient consultation process, a wholly inadequate impact assessment and a general rush to draft the directive, driven heavily by political motivation. Most of the problems with the detail could have been avoided if the better regulation guidelines set by the Commission had been followed.

With this in mind, how will the Government ensure that in future the Commission has sufficient time to follow its own better regulation practices in order to prevent the problems with this directive occurring again in future directives? There is a large amount of financial legislation still coming forward that may well suffer from all these defects, and the pressure on the Commission for it to happen as soon as possible could easily cause the same problems all over again.

All in all, there is quite a lot to do to this directive. I am sorry that we were not able to press the previous Government to do more-they were very willing to do more but made no progress-and I can only wish the next Government better luck with making progress on this one. I beg to move.

8.24 pm

Lord Woolmer of Leeds: My Lords, I congratulate my noble friend Lady Cohen on opening the debate and on her chairmanship of the committee over a considerable time. It is 14 months since the draft directive came out. It was conceived in a rush, it was supported by a very weak impact assessment, and it was conceived in a heavily political and politicised context both before and following the financial crisis. In many respects it is a very good example of how not to bring forward legislation in such an atmosphere.

I suppose it is easy now to forget that the mood at the time of the financial crisis was one of "something has to be done". When something has to be done, people pile in behind that to solve many other problems at the same time. The objectives were stated to be twofold. The first was to increase the stability of the financial system. The second was to facilitate a single market in financial services. Those were the stated objectives but for some there were, in addition, at least two others. The third objective was to bring tighter controls on activist hedge funds and intrusive private equity in different cultures and environments, such as Germany and, in particular, France. The fourth was to bring all remaining financial services under regulation and have a full house of all nine UCITS funds-so achieving a single market, but achieving it with political aims and controls which often conflicted with the wider global nature of the financial services concerned.



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There was also, at the time, very little discussion about who uses alternative investment funds and what their views were and are. It struck me, as I think it did many members of the committee, that much of the evidence was from people who felt that something had to be done and saw problems with the industry itself. However, there was not much discussion-certainly in the European Parliament-about who is investing in these funds. What were the benefits of them? Of course, in part, it is high-wealth individuals but, as we know in this House, hedge funds receive something in the order of three-quarters of their capital from institutional investors, particularly pension funds and endowment funds. This is not a retail operation; these are people who take a lot of time and care over which hedge funds they invest in. It is a very professionalised business. As my noble friend said, the industry itself is extremely important, not only to the UK but to Europe.

In a sense, this was a draft directive that was conceived as a series of objectives, many of which conflicted. In the European Parliament in particular, one sensed that, having got the draft directive going, there was then an attempt to reconcile those conflicting objectives in a way that was inherently very difficult, if not impossible. I am not at all surprised by the European Parliament for sticking to the directive as it is amended. Essentially, there are some objectives in the minds of Members of the European Parliament that conflict with a global environment and open global markets in finance, as I shall comment on in a moment.

What are the remaining issues 16 months after the draft was published? I shall mention just very few; the Minister will have all this at his fingertips. He knows that there are many problems but some are slightly more important. To everyone who has a problem, every problem is important, but some are probably more significant than others. There is no doubt that third-country issues are extremely important, not only for the operation of the alternative investment fund industry in this country, but because of the global nature of the marketplace. These issues include the ability of European fund managers to market non-European funds, which is a large part of the business; the ability of non-EU managers to market into the EU funds and non-EU funds into the EU; and the question of passport versus single placement.

In principle, I would like to see an EU-wide passport and so would the committee; that is, a measure conferring the ability to sell funds anywhere within the European Union on the basis of a single approval. However, the tough issues that remain of the equivalency conditions, access conditions, who would regulate and who would supervise are exceptionally important and conflict with the global nature of the business, as I said. The idea that we can simply say in Europe, "These are the rules, you have got to play by them; otherwise you do not sell into Europe" is not in my view the way in which we should handle relationships in global markets. When the crisis arose I sensed that the European Union felt that it had an opportunity to set global standards and to be the leader. It was slightly fed up with the United States always setting down the rules. There was a feeling that this was Europe's chance to be the leader, that it should set the terms and that you either traded on those terms or you did not. Those feelings have

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moderated a little but when it comes to getting votes through the European Parliament, such views are not always easy to reconcile. That mood still exists in the European Parliament.

I mentioned supervision and the role of the European Securities and Markets Authority. I understand the position of the European Parliament is that ESMA-the European Union's supervisor-should supervise whether funds meet the necessary criteria or equivalency tests. As I understand it, the Council of Ministers does not go along with that. I should be grateful if the Minister could confirm the UK's position on that. As regards the Commission's proposals for credit rating agencies, Her Majesty's Government appear to be saying that they accept that the European regulator-or supervisor in our language-of credit rating agencies should be the body that approves them. That seems to me potentially something of a precedent. I am beginning to wonder whether we are seeing the early stages of Her Majesty's Government beginning to believe or accept that supervision of European-wide matters will have to be carried out at European level. Rather than being given a simple yes or no answer, it would be helpful to be given an explanation of the thinking behind this. Will credit rating agencies be an exception?

Clearly, private placement is not ideal. In many senses it would be much better to move beyond individual countries approving funds for marketing. However, if that has to be the case, I will support it. I certainly would not want to see a European passport going forward on terms that were simply unacceptable to the industry and unacceptable to us in terms of supervision. There are still some unrealistic and uncommercial limitations in the draft directive and in the discussions going on regarding who can be used as depositories and on the liability of depositories. The Council of Ministers' position seems to be more reasonable than that of the European Parliament, but there are deep concerns among alternative investment fund managers about the liabilities that might be imposed on depositors.

I will not say that the committee had an enjoyable time, but it had a busy time looking at this draft directive. It threw up a number of issues and I am greatly concerned that after 14 months the Council of Ministers has not been able to reach an entirely agreed position without the need for dissenting notes, and that the European Parliament seems fundamentally not to have changed its position, but in the fine print is seeking to retain what I would regard as a rather insular view of a very global marketplace. It also does not recognise the enormous experience and contribution that this country can make in the discussions on and resolution of difficult but nevertheless important global relationships.

8.35 pm

Lord Newby: My Lords, I congratulate the noble Baroness, Lady Cohen, and her committee on producing such a clear and thoughtful report on an extremely esoteric but vital area for the UK.

The report highlights a number of areas where anyone, at least in this country, who has looked at the draft directive is in agreement. First, there is agreement that alternative investment funds did not cause the financial crisis, but equally, given their scale and size, there was a need to regulate alternative investment

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fund managers on an EU-wide basis. This is now accepted within the industry.

However, the proposals have major shortcomings from a UK financial services sector perspective. We have seen in recent months frantic attempts by the industry and government to make the proposals more palatable to UK interests. I do not intend to detail the shortcomings in the current text. The noble Baroness and the noble Lord, Lord Woolmer, have done that extremely well, but I should like to discuss the broader question of why we find such unsatisfactory detail in these proposals and how we should attempt to avoid this situation when future proposals come forward.

The problems flow in some part at least from the UK's at best schizophrenic approach to EU initiatives in general. The predominant mentality of previous British Governments-not just the last one-has been to stand back or positively oppose many initiatives which are of vital concern to the UK. When it has become clear that a policy is to be adopted, we have none the less fought a series of rearguard actions at EU level to minimise the damage to UK interests of these initiatives, as we see them. This has been a debilitating and wearisome approach, but when applied to the financial services industry it borders on madness. London is the predominant financial centre in the EU and it is clearly in our national interests that it remains so. There has been much discussion, during and since the election, of the need to rebalance the economy, but the way to do that is not by humbling and bringing down the financial services sector but by building up other sectors. The figure quoted by the noble Baroness of 40,000 people employed in this sector, which is a relatively small subset of the financial services sector as a whole, gives some idea of the importance of the sector to the UK economy.

If we look at the attitude of the previous Government, we saw in Gordon Brown an approach which in my view, in terms of achieving the best deal for the UK in Europe, was almost completely misguided. It comprised an attitude of patronising disdain and an unwillingness to show the common courtesy of attending meetings to their conclusion, if attending them at all, with the inevitable outcome that those who were patronised and ignored were disinclined to be helpful to British interests when considering specific proposals that came forward. I strongly urge this Government to take a different approach.

I do not support the idea that was floated before the election, but not so far pursued, of posting a Treasury Minister permanently to Brussels. This would isolate them from events at home and deny them the joys of having to explain themselves and the Government to Parliament. No other EU member state, as far as I am aware, does that-and for a good reason. There needs to be a continued link between the domestic ministry and Brussels. However, Treasury Ministers should spend much more time in Brussels and also, just as importantly, should do the rounds and visit their opposite numbers in their own countries to discuss on a one-to-one basis what we believe is the sensible way forward on proposals like this. For example, during the Swedish presidency, the noble Lord, Lord Myners, did just that. We need to be in a position where we know our opposite

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numbers better, at an earlier stage, because the value of that kind of charm offensive in an international body such as the EU cannot be overestimated. I realise that this is very time-consuming, but diplomacy-which to a considerable extent is what we are talking about-is a time-consuming business.

I also think that the Government need to review not the quality but the quantity and seniority of officials dealing with European financial matters. It has been a constant theme of debates during my time in your Lordships' House that, while individual officials are extremely bright and work very hard, they are trying to do too much and very often they are not at a level of seniority where their voices carry as much clout as they should. I realise, of course, that in an era of cuts, talking about strengthening anything by putting in more resources is a difficult proposition to make. However, making sure the financial services industry is not hobbled is such an important economic necessity for the UK that I hope the noble Lord will feel emboldened to make representations in that direction.

It is also important, as the Foreign Secretary pointed out last week, that we make sure that we get more of our best civil servants working in EU institutions. The value of this has been well understood for many years by a number of other member states-the French and the Irish in particular spring to mind-but we have been woefully neglectful in this area, and it has been reflected subsequently in the policy documents that have flowed from the EU.

In the months ahead, Treasury Ministers will necessarily be in a defensive mode on this directive, mitigating the potential damage that it might cause. However, for the sake of the UK financial services sector and the British economy, they need to get onto the front foot, think ahead and get in first so that when the first drafts of future directives in this area appear, they will more broadly reflect UK interests than has so often been the case in the past, and has been in the directive that we are discussing tonight.

8.44 pm

Lord Tunnicliffe: My Lords, I, too, thank my noble friend Lady Cohen for initiating this debate. We should all be particularly grateful to the European Union Committee for its report-more grateful than usual, as it has had to deal with a moving target. As the letters to the noble Lord, Lord Roper, from the noble Lord, Lord Myners, and from the Vice-President of the European Commission clearly demonstrate, improvements to the directive are still being made. It is clear that the committee has made a valuable contribution to the improvement of the directive, on which it is to be congratulated. I believe that everyone now welcomes the directive's goal of providing a coherent regulatory framework, particularly for hedge funds and private equity firms. Indeed, this goal has been endorsed by the G20. The difficulty has been in agreeing what exactly a coherent framework would look like.

The committee's report provides a useful overview of the tortuous history of the directive. I do not intend to go into all the political cross-currents that seem to have contributed to the lengthy saga. Instead, I shall concentrate on four areas that are important in going

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forward. First, is the report's analysis entirely satisfactory and do any deficiencies in that analysis detract from the conclusions? Secondly, is the general criticism of the one-size-fits-all approach of the directive still valid? If so, what is to be done about it? Thirdly, are the conditions for passporting non-EU alternative investment fund managers now satisfactory? Fourthly, what can be learnt from the history of this directive for future regulatory reform?

I turn first to the analysis. The report devotes itself almost entirely to the impact of the directive on hedge funds and on private equity firms. The report accepts the widespread position that hedge funds did not cause the financial crisis, but I am not at all sure that that is correct. It should be remembered that the crisis at Bear Stearns, the first major investment bank to encounter serious difficulties, was precipitated by the collapse of two hedge funds that the firm owned. Even if we leave those direct losses aside, it is inconsistent for the report to accept the argument that hedge funds contribute significantly to the liquidity of markets but not to take into account the devastating role that hedge funds played in the downward spiral of prices once deleveraging had begun.

On the same theme, it is worth pointing out that the report's acceptance of the argument that hedge funds' contribution to price discovery is valuable activity is not now universally shared. Hedge funds' trading may help to make a price, but the link between that price and wider economic efficiency is now recognised to be tenuous at best. Hedge funds are contributors to systemic risk-that is, the risk inherent in the structure of the financial system as a whole-and it is right that they should be incorporated in new attempts to mitigate systemic risk. Perhaps the report takes too benign a view of hedge fund activities in this respect.

With regard to private equity firms, the report is surely right to focus on leverage. However, it is not the leverage of the private equity firms themselves that is the relevant issue but the actions of those private equity firms that pursue a strategy of leverage buyout, leaving the firms that they buy burdened with excessive levels of debt. It would have been useful to have had the committee's views on the economic value of this sort of activity. It would be helpful if the Minister would, when he sums up, comment on the Government's attitude to leveraged buyouts and their impact on stability and growth.

Next, I come to the criticism of one size fits all. One of the oddities in earlier versions of the directive was the presentation of relatively precise regulatory controls on disclosure, capital requirements and independent valuation that were to be applied to firms with very different business models The consequence was not only a number of anomalies but the general feeling that the directive was not well fitted to any particular business model. Significant progress has been made since the early drafts of the directive to remove such anomalies and perhaps the committee's conclusion on this point has been overtaken by events.

The position taken by the Commission, as outlined in the letter of the Vice-President of the Commission to the noble Lord, Lord Roper, is that,

This is surely right. Moreover, it is in tune with the British approach to principles-based regulation. The issue, then, is whether the directive in the compromise form developed by the Spanish presidency is really playing that tune or whether it is a discordant cacophony of principles and rules. It would be helpful if the Minister could tell us whether the Government now feel that the key problems of one size fits all have been overcome and whether the directive has now assumed the flexible form that the Vice-President of the Commission suggests.

Finally on this topic, the report does not deal with the impact of the directive on investment trusts. These are peculiarly British institutions, which play an important part in the UK savings and investment industry. Is the Minister content with the application of the directive to investment trusts? It would be helpful if he could give us the Government's assessment of the impact of the directive on the UK investment trust industry.

I turn now to the conditions for passporting non-EU firms. The report is surely right to argue that passporting should be available to all fund managers operating in well regulated, although not necessarily perfectly equivalent, jurisdictions. However, it was not clear whether the report supported one important aspect of the directive-the need for reciprocity between jurisdictions allowed passports into EU markets. Will the Minister help us on this point when he sums up? Are the UK Government wedded to the notion of reciprocity?

Finally, I turn to the question of what lessons can be learnt about future regulatory reform from this episode. The obvious first lesson is that, given the central role of the UK financial services industry in the economy of the UK, and indeed the economy of the European Union, it is vital that the UK authorities should be in the forefront of regulatory reform. In this respect, I must take issue with one of the report's conclusions:

"The Government should ensure that EU regulation is in line with, and complements, global arrangements. We believe that the Government should not agree the Directive unless it is compatible with equivalent legislation with regulatory regimes in third countries and in particular in the United States, in order to avoid a situation in which the EU AIFMs lose competitiveness at a global level".

That conclusion was rendered out of date by the Toronto G20 summit. At that summit, the consensus that had until then characterised the international reaction to the financial crisis substantially evaporated. Of course, we all hope that the G20 meeting in Seoul in November will reinvigorate a common approach to regulatory reform. However, it would be a serious mistake to allow the search for consensus to be an excuse for inaction.

The United States has already indicated by its actions-notably the passing of Senator Dodd's Bill by the Senate-that it intends to pursue its own interests in the first instance. We should do the same-not to try to create division but to set the agenda and lead constructive thinking on reform. The most damage that the directive, with its tortuous history, could do would be if it were to stifle European, and more especially British, regulatory initiatives. On this count,

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it is disturbing that the committee established to consider the future of the banking system will not report until September 2011-10 months after the Seoul meeting. Will the Minister assure us that the Government will not be waiting for international consensus to publish their reform proposals?

This is a valuable report both because of its detailed assessment of the directive's impact and because of the light that it sheds on the process of regulatory reform and the necessity for that reform to proceed with some dispatch. It is for the Government to lead in the development of financial regulation in Europe and the world. To do otherwise would be a grave disservice to this crucial British industry.

8.54 pm

The Commercial Secretary to the Treasury (Lord Sassoon): My Lords, I thank the noble Baroness, Lady Cohen of Pimlico, for bringing forward this debate and I thank noble Lords for their contributions. It has been an important and thoughtful discussion. She started by giving an admirable summary of the importance of the alternative investment fund industry to the UK and indeed to Europe, and she drew attention to the troubled and tortuous history of the directive. It is striking that, in the debate, noble Lords have focused on the same series of key issues.


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