Submission to the Department of Internal Affairs on Managing Conflicting Interests in Local Government: The Local Authorities (Members' Interests) Act 1968 and Associated Issues
General comments
1
Our overall concern is that the Act's basic approach to the management of conflicts of interest is out of step with other public sector legislation and no longer aligns with the needs and practices of the local government sector.
2
We originally set out our views on the problems with the Act and some options for reform in our 2005 paper, The Local Authorities (Members' Interests) Act 1968: Issues and options for reform. Our views have not fundamentally changed since then. However, our thinking has evolved, in particular in relation to the discussing and voting rule in section 6, and the role of the Auditor-General in administering and enforcing that rule.
3
In summary we consider that:
- The contracting rule in section 3 no longer serves any useful purpose and should be repealed.
- The risks to decision-making currently addressed by the discussing and voting rule in section 6 will always exist and need to be managed. However the rule in its current form does not recognise or accommodate the different types of decision-making functions exercised by local authorities or the relatively complex decision-making processes they are required to follow under the Local Government Act 2002. The rule needs to be reviewed to ensure it is both clear and 'fit for purpose'.
4
In particular, we think that:
- The current 'dual' system of legal rules on discussing and voting – where financial conflicts of interest are dealt with under a statutory framework and non-financial conflicts of interest are dealt with under common law – is confusing for elected members, council staff, and the public. A single body of legal rules covering both financial and non-financial interests would be preferable.
- There is relatively little case law on bias as it applies to decision-making by an elected body, and the law that does exist does not provide clear or accessible guidance on the management of conflicts of interest to the sector. It would be preferable for both financial and non-financial interests to be governed by statute, and for the statutory rules to be framed in a way that addresses the issues specifically faced by the sector.
- The Act is out of step with other public sector legislation in providing for third party oversight of conflicts of interest. Third party oversight is also arguably inconsistent with the statutory position that local authorities are autonomous bodies with full legal capacity to manage their own affairs. We query whether third party oversight is necessary or appropriate and, if it is, whether it is appropriate for the authority's auditor to carry out that role. If third party oversight of conflicts of interest is considered desirable, that role might be better fulfilled by a specialist body set up by the sector for that purpose and for the purpose of providing guidance and support on other related 'code of conduct' issues.
5
The remainder of this submission comments on the specific questions in the discussion document.
Questions 1-5 declarations and registers of interests
| 1. | Is it desirable to require local government candidates to declare any known conflicts or likely conflicts of interest they would have if elected? |
| 2. | How practical would such a requirement be to implement and enforce? |
| 3. | How desirable would it be to require members to declare conflicts of interest in advance, and for a register to be kept of these? |
| 4. | Would making these registers public contribute to public confidence and to the accountability of the member and the local authority? |
| 5. | What would be an appropriate balance between effective disclosure and protecting members' privacy? |
6
These questions all concern the benefits of requiring candidates for election and elected members to declare interests and of making interests registers publicly available. As a preliminary point we note that there is a difference between declaring an interest and declaring a conflict of interests.
7
A conflict of interest can only arise in relation to a specific matter under consideration by the authority. Therefore it is not generally possible to declare conflicts of interest 'in advance'. It is only possible to declare an interest that might give rise to a conflict of interests, for example a significant role or ownership interest in another entity whose interests might at some point overlap with the interests of the authority.
8
An interests register serves as a tool to alert elected members and Council staff to potential conflicts. It does not replace the need for elected members to proactively identify and manage conflicts as they arise in relation to specific matters under discussion.
9
We see benefits in requiring elected members to declare certain types of 'outside' interests and for these interests to be recorded in an interests register.
10
Interests registers have two benefits:
- they help Council staff manage conflicts of interest by alerting them to interests that might give rise to conflicts;
- if made available to the public, they can enhance public confidence in the decision-making process by supporting the principles of openness, transparency and accountability.
11
We understand the use of interests registers is relatively commonplace within the sector, although the degree to which registers are made available to the public varies.
12
If interests registers were made mandatory, it would need to be clear what type of interests are required to be disclosed and there would need to be a requirement for the register to be periodically reviewed and updated.
13
If there were a requirement for the register to be made publicly available there would need to be rules covering the amount of detail that would need to be disclosed. As a general rule we think it would be sufficient to note the nature of the interest (eg shareholding, ownership of property in a general location) rather than specific details of that interest (eg value of shareholding, address of property). The interests registers required for Ministers and members of Parliament by the Cabinet Manual and the Standing Orders of the House of Representatives are useful models.
Questions 6-8: The contracting rule
| 6. | Is retaining a rigid prohibition on members having an interest in contracts with the local authority over a certain value a better option than other ways of achieving the same objectives (eg audit oversight, transparency and public scrutiny)? Please give reasons for your answer. |
| 7. | If a rigid rule is the better option:
|
| 8. | Would a requirement for existing contracts to be declared at the time of candidacy provide appropriate safeguards and accountability? |
14
Our concerns about the contracting rule are set out in our 2005 paper. In that paper we outline:
- some of the technical difficulties we have encountered in applying the rule (paragraphs 3.20 to 3.26);
- the reasons why we do not think the rule needs to be retained (paragraphs 4.13 to 4.23); and
- various options for reform (paragraphs 5.57 to 5.78).
15
Our views have not fundamentally changed since 2005. As a result of developments within the sector since the rule was first introduced, we think that it no longer serves any useful purpose. The fundamental concern the rule attempts to address is the potential for undue influence or preferential treatment. That concern is now adequately addressed by a combination of:
- Local Government Act 2002 principles requiring open and prudent decision-making and financial management;
- accounting and auditing standards;
- the Local Government Official Information and Meetings Act 1987;
- the operation of the discussing and voting rule;
- the organisation's own internal controls, including sound procurement policies and practices;
- scrutiny by the media, the public, politicians and relevant central government agencies.
16
The compliance costs and risks created by section 3 are real. The best example of the complexity and compliance cost caused by the rule is the situation of a councillor in a small North Island town, for whom we have dealt with more than 40 applications since 2005. The councillor's situation and business interest is reasonably straightforward, well understood, and well managed by all concerned. But for a range of reasons the Act requires frequent approvals if he is not to be disqualified. In our view, the scrutiny we provide when approving the relevant contracts adds more cost than value to the process.
17
The rule also continues to generate uncertainty for candidates and staff at the time of local authority elections and to prevent some people from standing for election. See paragraphs 3.23 to 3.26 of our 2005 paper for details.
18
We suggest that the rule can simply be removed from the law and not replaced.
Questions 9-10: Statute or common law?
| 9. | Are statutory rules for managing conflicts of interest in public bodies necessary or would reliance on the common law be preferable? What would the consequences be of reliance on common law? |
| 10. | What interests should be covered by whatever approach is taken to conflicts of interest? Should this be limited to pecuniary interests, or be extended to include non-financial interests? |
19
Local authorities currently operate under a dual system of legal rules for managing conflicts of interests. Financial conflicts of interest are dealt with under the LAMIA, with third party oversight by the Auditor-General. Non-financial conflicts of interest are dealt with under common law with third party oversight by the courts.
20
The rationale for having a separate statutory regime for financial interests is that, at common law, financial conflicts are considered the most serious form of conflict, leading to an automatic presumption of bias. The same presumption does not apply to non-financial conflicts. The other reason the statutory rules currently cover only financial interests is probably simply that non-financial interests are much more difficult to define and do not lend themselves as easily to statutory rules.
21
However, in our experience the current dual regime is confusing for elected members, council staff, and members of the public.
22
It is not uncommon for members to assume that the only rules they need to be aware of are the statutory rules relating to financial interests. They are often unaware that, in relation to non-financial conflicts, common law rules apply, even though the Act does not.
23
Having no statutory regime for non-financial interests risks creating the impression that a non-financial interest is less serious than a financial interest. This is not always true. Council staff tell us it is sometimes difficult for them to get elected members to take concerns about a non-financial conflict seriously in the absence of specific statutory rules, even though the risks posed by a non-financial interest might be just as serious as the risks posed by a financial interest. This is particularly so given that the common law does not pose any sanction on individual members of a decision-making body for breach of the conflict rules. Non-financial interests create an organisational risk rather than a personal one.
24
We find that the dual regime also results in confusion about the role of the Auditor-General in administering and enforcing the rules on conflicts. Our responses to complaints and requests for guidance or 'rulings' are generally prefaced by lengthy explanations of why the law, and our role in relation to it, differs depending on whether the conflict is financial or non-financial. We appreciate that this approach can frustrate and confuse people, who are looking to us for a "simple yes or no" that we cannot give.
25
In principle, a single body of legal rules covering both financial and non-financial interests would be less confusing.
26
In our view, it would be preferable to expand the scope of the statutory regime to include non-financial interests, rather than repealing the legislation completely and relying on the common law. However, we do not underestimate the difficulty of this task.
27
In order to effectively manage conflicts of interests the sector needs rules that are clear and accessible. The common law does not provide this. There is relatively little case law on bias as it applies to decision-making by elected bodies and the rules that do exist are not available to council staff and elected members in a clear and accessible form. Members of local authorities are more likely to be aware of statutory rules, and to know how to comply with them.
28
The other problem with relying on the common law is that it does not impose any sanctions on individual members of a decision-making body who breach the rules on conflicts of interest. We are aware that this is sometimes a concern for Council staff responsible for managing the authority's judicial review risk.
29
Statutory rules would also be consistent with the approach taken for many other public bodies who have rules about conflicts of interest (mostly covering similar ground to the discussing and voting rule) inserted into their own governing legislation.
30
We do not see any need to retain stand alone legislation. The rules governing conflicts of interest for local authorities could be inserted in the Local Government Act 2002 alongside related provisions relating to Codes of Conduct and Standing Orders.
Questions 11-14: The nature and scope of rules on conflicts of interest
| 11. | Is it preferable for the scope of "interests" or "conflicts of interest" to be:
|
| 12. | Should a member's interests be deemed to include the interest of relatives and associates beyond his/her spouse or partner? Is so, whose interests and what type of interests should be included? |
| 13. | How prescriptive should (or can) the rules for managing conflicts be? |
| 14. | Are there benefits in having relatively 'black and white' rules (as is the case for financial interests under the LAMIA) or is a broader principles-based approach more appropriate? |
31
In the interests of certainty it would be preferable to define 'conflict of interest' as tightly as possible. However the desire for certainty needs to balanced against the need to ensure that the rules do not unreasonably restrict members from participating in the decision-making process or prevent them from performing their representative role.
32
It also needs to be recognised that conflicts of interest – in particular non-financial conflicts – can arise out of many different circumstances and their potential to affect the integrity of a decision-making process will vary considerably, depending on how serious the conflict is. Managing a conflict is often as much about perception as reality and careful judgement is often required. In particular in the local government sector the risks that need to be managed are as likely to be political as legal; a knowledge of, and sensitivity to, local circumstances and views may be vital.
33
As we have said above, there are benefits in having a statutory regime that covers both financial and non-financial conflicts. We also think it is possible to clarify the rules to create more certainty. We have suggested some of the ways this could be done in relation to financial conflicts in our 2005 paper.
34
However it needs to be recognised that conflicts of interest, in particular non-financial conflicts, do not lend themselves easily to prescriptive rules. Any form of statutory regime, however well written, will not replace the need for judgement to be exercised on a case by case basis. Therefore the question of how conflicts are defined is inextricably linked, in our view, with the question of who, as a matter of policy, should be making those judgement calls – the local authority, members themselves, or a third party?
Financial interests
35
In the case of financial interests, we favour an approach generally along the lines of the Crown Entities Act (CEA). That approach is not dissimilar to the current LAMIA regime, but the language in the CEA is clearer and more up to date. The CEA also excludes by definition remote or insignificant interests rather than relying on a third party to make this assessment and grant a formal exemption.
36
We have made other suggestions for clarifying the rules in relation to financial interests in our 2005 paper, including:
- defining 'financial interest'; and
- clarifying what is meant by 'interest in common with the public';
- defining more clearly exceptions to the rule.
37
Thought should also be given as to whether it is possible to clarify when a financial interest is deemed to arise and how it should be managed in the context of the complex consultation and decision-making processes provided for under the LGA. That is, at what point does a possibility or option being floated for discussion become a concrete enough proposal for a decision on it to be "likely to result in gain or loss"? This is an issue which has increasingly caused difficulties for us in administering the Act.
Non-financial interests
38
Non-financial interests are much trickier. The circumstances which can give rise to a non financial conflict are more varied, and therefore more difficult to define. Furthermore, in the case of non-financial conflicts, often the question is not so much whether there is a conflict, but whether it is serious enough to require an elected member to withdraw from the decision making process. The judgment that is required to be exercised in the case of a non-financial conflict is generally more subjective than in the case of a financial interest.
39
We are not aware of any legislation that attempts to define non-financial interests, except in the most general terms. For example, in the CEA, non-financial interests are covered in section 62(2)(f) which provides that a person is interested in a matter if he or she is 'otherwise directly or indirectly interested in a matter'. Similarly, for school boards of trustees the Education Act 1989 excludes, without further definition,
a trustee who has a pecuniary interest in any matter or any interest that may reasonably be regarded as likely to influence a trustee in carrying out his or her duties and responsibilities as a trustee. (Schedule 6, clause 8(8)).
40
We doubt it is possible to adequately define specific types of non-financial interest that can be presumed to create a conflict. We think if non-financial interests are to be included in the statutory regime, the rules can only be defined with any degree of certainty in terms of the mischief they are designed to prevent. An example is the UK legislation which includes the concept of a 'prejudicial interest' - defined as
an interest which a member of the public with knowledge of the relevant facts would reasonably regard so significant it is likely to prejudice the member's judgement of the public interest.
41
Greater certainty might also be achieved by identifying the factors that need to be taken into account when assessing:
- how serious a conflict is; and
- whether the benefits of allowing the member to participate outweigh the risk that the conflict might unduly influence the outcome of the decision-making process.
Questions 15-19: Third party oversight
| 15. | Who should decide what the rules are? Should it be left entirely to the local authority to determine how best to manage a conflict? Or is there benefit in third party oversight? |
| 16. | Is third party oversight of an elected body appropriate? |
| 17. | If there is third party oversight, who should that party be? |
| 18. | If candidates are required to disclose any interest in contracts with the local authority and other potential conflicts of interest, should it then be up to the voters whether to elect them or not? |
| 19. | If local authorities are required to transparently adopt and implement their own rules for dealing with conflicts of interest (including decisions on exemptions), would normal political processes and feedback provide sufficient accountability on these issues? |
42
As we note in our 2005 paper, third party oversight involves four possible functions:
- Granting applications for exemptions;
- Investigating possible breaches;
- Prosecuting breaches by bringing formal enforcement proceedings; and
- Adjudicating in ensuring proceedings.
43
In relation to financial interests, the first three of these functions are currently carried out by the Auditor-General. The Auditor-General does not adjudicate proceedings. That role is fulfilled by the courts.
44
In relation to non-financial interests, there is currently no ability to apply for an exemption to allow participation, and there is no third party oversight, other than judicial review proceedings.
45
In our 2005 paper we said we thought it was probably unnecessary to create a whole new administrative bureaucracy to administer a relatively small piece of legislation, and that it made sense for the Auditor-General to continue to grant applications for exemptions and investigate possible breaches. However we thought it was desirable from a procedural fairness and independence perspective to formally separate the investigation and prosecution.
46
Our experience since 2005 has caused us to reconsider this view. We would now go further and query whether it is necessary or appropriate for the Auditor-General to continue to provide any form of third party oversight, in particular if the scope of the legislation is expanded to include non-financial interests.
47
Third party oversight is arguably at odds with the statutory position that local authorities are autonomous and responsible bodies able to act with full legal capacity. The Act is also out of step with other public sector legislation in this regard. In other sectors, the legislation may set out declaration requirements, and sometimes rules on participation, but these are left to the entity to manage and administer. It is very unusual to have an independent third party making final decisions on who can and cannot participate.
48
We also question whether this approach is appropriate for a body where the members are elected rather than appointed, and where many of the decisions being made are more in the nature of policy and political choices than administrative or judicial decisions. In setting up a situation where a third party must take a decision on who can participate, the Act effectively gives the Auditor-General the ability to alter the elected balance on key matters of political responsibility.
49
Conflicts of interest are very fact specific and often require careful balancing of legal, political and ethical considerations. Assessing whether a conflict exists and if so, how serious it is, requires relatively detailed knowledge of the facts, and a sensitivity to local opinion, as well as an understanding of the law on conflicts. Judgement calls need to be made. This is particularly so in the case of non-financial interests. We query the extent to which a third party, who is not close to the issues, is in a position to effectively fulfil this role.
50
In particular we query whether it is appropriate for the authority's auditor to act in this capacity. As we have noted in the past the LAMIA is highly unusual in giving this role to the Auditor-General. We are not aware of any other jurisdiction where this happens. We query whether it is appropriate for the authority's auditor to be involving itself in what are essentially risk management decisions for the entity.
51
We are aware that Councils do value the role that we currently play in providing guidance on conflicts of interest and acting as a sounding board to Council staff who manage conflicts or mediate differences of opinion between Council and individual members. However, there may be less need for this role if the rules in relation to identifying, disclosing and managing interests were made clearer and if specific provision were made for enforcement action against individual members in relation to non-financial interests. From our perspective there is also a significant difference between providing informal advisory support, and taking on a formal role in determining who can and cannot participate in decisions to be made by an elected body.
52
We are already conscious that the decisions we make in relation to granting exemptions for financial interests sometimes have the potential to change the result of a vote. The risks of being seen to become unduly involved in political processes are likely to increase if the role is extended to include deciding whether to grant exemptions for non-financial interests, where subjective considerations are much more likely to come into play.
53
If it were decided that some form of third party oversight would still be desirable we suggest that consideration be given to establishing a specialist body within the sector for that purpose. In 2005 we thought it was probably unnecessary to create a whole new administrative bureaucracy to administer a relatively small piece of legislation. However, if the intention is to expand the scope of the legislation to include non-financial interests, the increase in workload and complexity is likely to be considerable. We are also aware of wider concerns within the sector about their capacity to manage other 'code of conduct' type issues, such as the use and disclosure of confidential information. It may therefore be time for the sector to consider setting up its own advisory body to provide support and guidance on issues of this type, including the management of conflicts of interest.
Questions 20-22: Sanctions
| 20. | Are there circumstances where criminal sanctions and/or automatic disqualification would still be required to protect communities from major decisions being captured by the private interests of elected members? |
| 21. | In what circumstances would these apply, and what sort of penalties would be appropriate? |
| 22. | Should prosecutions be initiated by the Auditor-General (as now), the Police, the local authority itself, or someone else? |
54
As our 2005 paper set out, we do not think that criminal sanctions are appropriate for poor management of a conflict of interest. No other sector takes this approach. In our view it is better to regard the management of conflicts of interest as part of the quality of the governance of an organisation, rather than as a matter of criminal law. In any event, if the relevant statutory rules were extended to cover non-financial conflicts of interest, it is unlikely that the law could be drafted in specific enough terms for criminal sanctions to be appropriate.
55
We also note one technical point that has been of practical significance when administering the Act. Automatic disqualification on the occurrence of a set of facts is problematic in practice because it means that the legal status of a member can change without anyone realising and without a clearly defined point of change. In practice failures to comply with the Act are usually discovered or established after the event, through investigation and discussion. Questions can then arise about the status of decisions that the person may have participated in while they were technically disqualified. We suggest that at a technical level this is an unhelpful way of drafting legal rules and their consequences. It would be better if any change in status followed from a clear decision or administrative action.