Plugging the loopholes in party funding

In the white heat of the ‘loans for peerages’ affair, No 10 commissioned the retired civil servant Sir Hayden Phillips to examine the question of party funding. Perhaps predictably, the exercise broke down in bitter recrimination, as the parties were unable to agree a way forward. Unlike in 1998 when the Neill Committee conducted a similar exercise, the consensus on party funding no longer exists.

So we are stuck in the meantime with the Political Parties, Elections and Referendums Act 2000, which despite its critics pursues worthy objectives: transparency about political party income and expenditure; a ban on foreign donations to political parties (which had cross-party support); and tight limits on election spending by political parties and their candidates.

But for all its under-estimated strengths, the 2000 Act is riddled with loopholes, which undermine its underlying purposes. Some of these loopholes were exposed during the ‘loans for peerages’ affair, but others remain to be dealt with. It is these loopholes that need to be closed before we embark on a more radical programme of funding reform, which is almost certain to happen at some point in the future.

First, there is a problem of transparency, relating mainly to unincorporated associations like the Midlands Industrial Council which has made donations of £1.5m to the Conservatives since 2003; and organisations like Constituency Campaigning Services (Coleshill Manor) which supplies electoral services (on commercial terms) to Conservative Constituency Associations, and which has received registered donations in excess of £1.8m since 2004, mainly from the Midlands Industrial Council.

Although it gives significant sums to the Tories, no-one knows who is giving the money to MIC or how much they are giving, unless the Council itself agrees voluntarily to be transparent. The issue with Constituency Campaigning Services on the other hand is that — although registered as a ‘regulated donee’ with the Electoral Commission — no-one knows its total income and expenditure (apart from donations in excess of £5,000), or how it spends its money on electoral activities.

Secondly, there is a problem of foreign donations, which arises as a result of a number of highly publicised claims that the law is easy to circumvent. One suggested strategy which is said currently to be permitted goes something like this: company A (not registered or incorporated and perhaps not carrying on business in the United Kingdom, and so not a permissible donor) buys shares in British company B (which is registered and incorporated here and is a permissible donor).

Company B then buys shares in company C (also British owned and registered, and carrying on business here), which then buys shares in company D (also registered and incorporated, and carrying out business here). Company D might then make donations to a political party, wholly or partly from the proceeds of transactions which may have enabled money to be channelled indirectly to it by company A.

So far as spending is concerned, this is a problem created inadvertently by the changes introduced in 2000. Before then, the tight controls on candidate election spending would be triggered from the date the candidate announced his or her candidature. The position now is that the official limits apply only from the date the election is announced, that is to say a short period of a month or so before the election.

This has given rise to a problem as the Conservatives in particular have announced their candidates early in target seats, and have channelled money to these constituencies to raise the profile of the candidates in question. The effect is to lengthen the campaign (and its costs), and the aim is to give the candidates in question a competitive edge at the general election, to the evident anger of many Labour MPs.

The Political Parties and Elections Bill, now before Parliament, addresses the third of these loopholes by proposing to take the triggering rules back to something like their pre 2001 position. But it is not clear how well the Bill addresses the first problem, transparency, while it makes no attempt directly to deal with the second problem, continuing foreign donations. This suggests the need for further amendments, to ensure that the objectives of the 2000 Act are more fully realised.

One solution to the emerging problem of transparency would be a series of nuts and bolts amendments to provide simply that the 2000 Act should apply not only to political parties but also to related unincorporated associations and private companies (bodies which are otherwise largely unregulated, in contrast to the detailed regulation of public limited companies and trade unions).

A ‘related entity’ would be an unincorporated association or private company whose principal purposes include: (a) raising money or making donations to a political party; or (b) providing services to a political party or its accounting units, whether or not on commercial terms. This would impose a number of additional (though not onerous) transparency obligations on these organisations.

In the first place, they would be required to submit annual income and expenditure accounts to the Electoral Commission which would be published and available for public inspection; while secondly they would be required to report their donations to the Electoral Commission, which in these circumstances might be set at a level of £1,000 in keeping with the current obligations on local party organisations.

This amendment would not, however, cover the foreign donations problem said to have emerged in recent years, with potentially important implications for party funding. Although there are perhaps various ways by which this question could be addressed, a straightforward legislative response would be to adopt the sound but apparently overlooked Neill Committee recommendations made in 1998.

It was proposed there that the British subsidiaries of foreign companies should be free to donate only from revenue generated by business activities in the United Kingdom. This principle could in turn be applied generally - extended to all companies including those based here which are not foreign owned subsidiaries, to prevent overseas transfers, however injected.

While debate rages about how best to plug loopholes in the 2000 Act, in the meantime one of the embers rescued by the Political Parties and Elections Bill from the ashes of the Phillips’ report should have been left to smoulder where it lay. This is the ill-conceived and poorly-judged proposal for politically partisan Electoral Commissioners: it is questionable in principle whether political parties should be policed by appointed partisans, and implausible in practice to believe that this will enhance the credibility of the system.

It is true that under the Bill only a minority of Commissioners will be political appointees. Nevertheless, there are difficult questions arising from the proposal that only the three largest parliamentary parties will be able to appoint their own Commissioners in what will be a cosy cartel. Which of the other parliamentary parties will get the fourth of these partisan seats? What about the non-parliamentary parties? How can it possibly be assumed that all these other parties have a common interest on these matters?

It has become a convenient sport to excuse the conduct of politicians as a symptom of the regulatory failure of the Electoral Commission. If only the Commission had been more obliging with advice; if only the Commission had been more proactive; if only. . . . But the problem lies not with the Commission: it lies ultimately with the failure of the political class to adapt to the culture the 2000 Act was designed to reflect and encourage. It makes no sense at all to put in charge of the regulatory system the very people whose conduct led to the need for regulation in the first place.