Official Report: Minutes of Evidence

The Deputy Chairperson (Mr Dallat): We have with us Mr Nick Perry, accounting officer at the Department of Justice; Mr Ronnie Armour, chief executive of the Northern Ireland Courts and Tribunals Service; and Mr Richard Ronaldson, deputy accountant general of the Court Funds Office (CFO). The Comptroller and Auditor General, Mr Kieran Donnelly; and the Treasury Officer of Accounts, Mr Jack Layberry, are also present. Members will find biographies of all our witnesses in their pack.

Thank you for joining us today; you are very welcome. We will begin with a few questions from the Deputy Chairperson, and I wish to direct my first question to Mr Nick Perry.

The Court Funds Office provides a service to some of the most vulnerable members of society. What steps are you taking to address the governance, performance, management and quality-of-service issues raised in the Audit Office report?

Mr Nick Perry (Department of Justice): Thank you very much, Deputy Chair. Perhaps at the outset I could just say that the Department welcomes the report and make three quick points that go to your question about the work of the Court Funds Office. First, the core purpose of the CFO is to protect the investments of vulnerable clients on behalf of the court. The CFO is neither a commercial investment operation nor a normal Civil Service business department; it is a department of the court, operating under judicial direction. Secondly, the responsibility to protect client assets fundamentally determines the way the CFO approaches its task. It deliberately manages funds in a careful and cautious manner and works hard to ensure that its 14,000 clients receive a tailored, reliable and, where possible, personal service that meets their needs. Thirdly, I accept that there is more we can do and that aspects of modernisation have been too long delayed. To that end, I have asked the chief executive to put in place a programme of work to implement the recommendations of the Audit Office report. That work is already under way, and Mr Armour will update the Committee on progress and outline his action plan, moving forward.

Our general approach in responding to the report is that we accept that we can do more to strengthen governance arrangements at the CFO, and we are taking steps to appoint an additional financial member to the judicial liaison group (JLG), which oversees the operations of the office at a strategic level. We are looking at putting a representative in place to represent customer and client interests. We are taking steps to improve transparency and the IT system.

It is perhaps worth saying that the CFO is already subject to very considerable oversight. It is unique, I think, among DOJ bodies in that it is subject to oversight by both the judiciary and the Civil Service. The chief executive of the Northern Ireland Courts and Tribunals Service oversees its work, the JLG monitors it at a strategic level, and the Courts Service management board monitors progress. The chief executive will report to me and the departmental board quarterly on progress in implementing these recommendations. There is a great deal of oversight and accountability already built in. A lot more is happening, building on the recommendations in this report. It is a report that we take very seriously, as we do the CFO's duty to its clients and the court.

The Deputy Chairperson (Mr Dallat): I am sure that members will be consoled that you are taking the report very seriously. Certainly, my colleagues took the report very seriously and will have some very searching questions to ask your team today, not least why you have had the same stockbrokers since 1930. That is an astonishing fact.

The Audit Office report indicates that little information is available on the performance of the Court Funds Office accounts. Can you provide the Committee with an overview of how well the CFO has performed against its 2013-14 targets? I remind you that you have just told me in your opening remarks that you can do more and that there is considerable oversight; indeed, you said that there was a great deal of oversight. Members will be most interested to hear about this.

Mr Perry: I will perhaps ask the chief executive to reply on the detail of performance against targets. On transparency generally, the office has been doing a lot to try to make more information available in its annual report on the website. Investments are outperforming the market, as they have since 2011. A great deal of work goes into dealing face-to-face with clients and making sure that they have the information they need. On the specific point about targets, perhaps I could ask the chief executive to reply.

Mr Ronnie Armour (Northern Ireland Courts and Tribunals Service): We have performance standards, which we publish in our annual report and accounts and which are available on the Courts Service website. The service that we provide achieves all those standards, looking specifically at the administrative service. In terms of our stockbroker, we do not have specific targets for the performance of our funds, but we do benchmark that performance against the FTSE all-share index and against neighbouring jurisdictions. In each of those benchmarking exercises, we are currently performing higher, as we have consistently since 2011.

The Committee may wonder why we do not have specific targets for the stockbroker. I suppose that goes to the nature of the Court Funds Office. We are not a commercial organisation in the sense that you would normally expect in dealing with investments and the like. The business of the Court Funds Office is centred on protecting court funds and, as accountant general, it is my statutory obligation to protect the funds that are held in my name and for which I am accountable to the court. In a sense, we do not have the targets for stockbrokers. It is not about them going out there and taking risks to increase the value of funds; it is about protecting those funds. However, it is encouraging to be able to report to the Committee that the values of those funds are rising and we are outperforming neighbouring jurisdictions and the FTSE all-share index.

The Deputy Chairperson (Mr Dallat): I understand, Mr Armour, that you are not going to invest your funds in oil wells that may or may not exist in Australia, or gold mines in Africa or whatever, but surely you have a responsibility to ensure that the most vulnerable people, whose money you have, is benchmarked and invested in the best possible way.

Mr Armour: We absolutely do. Both I and my colleagues in the Court Funds Office take that obligation extremely seriously, as does the court. The court will pay very particular and careful attention to the work that we do and to the investments that we are making. We have a stockbroker, and that stockbroker advises us on the investments that we should make. The investments are divided into three portfolio types and, if the Committee wishes, I can talk you through each of those. The three portfolio types are invested depending on client needs and in consultation with the client and the court. It is through those funds that we balance our performance: looking at the funds, seeing how they are doing and benchmarking them against others.

The Deputy Chairperson (Mr Dallat): Obviously, my colleagues will want to ask you some pertinent questions about that, and I will leave it to them to do that. Clearly, we are interested in the reasons why that fund was not managed in the way that it should have been in the past, and we want to know why people were either sitting on their hands or were not interested in what was happening. In the interests of accountability, you would agree that it is vital that the public sector bodies manage their performance. You outlined how that is probably happening now and, I suspect, since the report was published. Perhaps not. However, in this case, the Courts Service management board did not discuss the Court Funds Office's performance at any meeting between February 2006 and June 2012. I refer members to paragraph 2.3 on page 10 of the Audit Office report. Can you explain, Mr Lavery, I think —

Mr David Lavery (Department of Justice): Yes, I was the chief executive —

The Deputy Chairperson (Mr Dallat): — what on earth was happening for six years when there was not even a discussion taking place?

Mr Lavery: That is because I had established a court funds judicial liaison group with the explicit responsibility of overseeing the work of the Court Funds Office. I thought that it was much more appropriate that we have an oversight body designed specifically to look at court funds, and representatives who had an understanding of the nature of the work of the Court Funds Office. That was one of the recommendations of a consultancy report that I commissioned in 2003. As I said, I established a judicial liaison group, which, at the time, I co-chaired with one of the senior High Court judges. I think that that was a much more appropriate oversight mechanism than the management board of the Courts Service.

The Deputy Chairperson (Mr Dallat): Mr Lavery, I understand that a liaison board is very important to bring people together, but surely it falls far short of a body that would be responsible for monitoring the performance of the CFO.

Mr Lavery: No. With respect, Chair, that was explicitly the role of the liaison group. It received reports on the performance of the Court Funds Office, and that was the purpose for which it was established. It was also there to reflect the views of clients of the Court Funds Office. We had, for example, the Master of the Office of Care and Protection, many of whose clients were also clients of the Court Funds Office. We also had the Official Solicitor to the Court of Judicature, many of whose clients were clients of the Court Funds Office. We also had senior judicial representatives from the County Court.

I would argue that we had a bespoke oversight arrangement that was much more tailored to the business of the Court Funds Office than a general management board for the Courts Service.

The Deputy Chairperson (Mr Dallat): OK. We will park that for a moment. I am sure that some of my colleagues will want to pick you up on that because it seems rather strange.

At paragraph 2.7 on page 11 of the Audit Office report we are told:

How well has that progressed?

Mr Lavery: We certainly intend to establish a statutory committee but putting a committee on a statutory basis does not change, in any sense, the function that it discharges. When we enact new legislation, which we are committed to doing, we will almost certainly replace the liaison group with a statutory version of the same thing. However, putting it on a statutory basis is, to my mind, a secondary issue. The main thing is to have an oversight mechanism for the Court Funds Office, and whether it is statutory or extra-statutory does not seem to me to be materially significant.

The Deputy Chairperson (Mr Dallat): I am sorry; you are confusing me, Mr Lavery.

Mr Lavery: I beg your pardon.

The Deputy Chairperson (Mr Dallat): You are confusing me, and perhaps you can clarify it. Why have you been considering establishing a statutory investment advisory committee since 2007 when you have just told us that it is not really important anyway?

Mr Lavery: No, that is not what I said; I said that we had already put in place an extra-statutory committee — in other words, a non-statutory committee, which is the court funds judicial liaison group that I established in 2005. When the opportunity arises to change the legislation, we will almost certainly bring that onto a statutory footing. I am saying to the Committee that I do not think that statutory status would materially alter the function that it discharges.

Mr Armour: If I could comment, Chair, the important thing for me is to ensure that the judicial liaison group is as strong as it possibly can be. As Mr Lavery has indicated, when the opportunity is there, we want to take forward legislation to put the committee on a statutory footing but, in the interim, I think the important thing is that we make sure that the committee is as strong as it can be. I am currently looking at how we might do that.

The report helpfully suggests that we should strengthen our independent financial advice expertise on the committee. In April this year, we will appoint a second independent member to the committee who will bring very significant financial expertise. That is a positive development. The report also recommends that we need some consumer representation on the committee. I currently have the official solicitor sitting on that group, and I have been working very closely over the past number of months with her. She is in almost daily contact with clients and is very well — perhaps uniquely — placed to represent their views. Nonetheless, one of the things that I want to do is to take the recommendation in the report and appoint an independent consumer representative. We are taking steps to work towards that as quickly as we can.

The Deputy Chairperson (Mr Dallat): You say "quickly": why has it not been implemented sooner, and when will it be implemented?

Mr Armour: I received this report when I took up my post in September last year. I have already discussed with the judiciary and the judicial liaison committee the need to implement the recommendation in this report. Court funds is a complex area, and we are dealing with some very sensitive and significant issues. For me, it is about getting the right person. We could go out and appoint an independent person to come and sit on the committee, but it is about getting the right person who is best placed to cover the wide range of individuals whose funds we care for.

The Deputy Chairperson (Mr Dallat): Mr Armour, you say that you took over responsibility in September.

Mr Armour: Yes.

The Deputy Chairperson (Mr Dallat): I have a couple of short questions before I move to other members. Were you shocked by what you found in September?

Mr Armour: No. I have to say that I was not shocked by what I found. I have had an opportunity, I suppose, to look at the Court Funds Office with a —

The Deputy Chairperson (Mr Dallat): You say that you "suppose"; I would rather that you were definite.

Mr Armour: I will be definite: no, I was not shocked by what I found. In all honesty, I have been very impressed with the staff in the Court Funds Office and the job that they do. I have been impressed with the relationship that we have developed with the stockbroker and the way in which the stockbroker is overseen both by the staff in the Court Funds Office and by the judiciary —

The Deputy Chairperson (Mr Dallat): This question may come up later: who is the stockbroker responsible to?

Mr Armour: The stockbroker is appointed by the Courts and Tribunals Service and is, ultimately, responsible to me, as —

The Deputy Chairperson (Mr Dallat): Who does that?

Mr Armour: They are responsible to me, as chief executive and accountant general.

Mr McQuillan: I have a couple of wee questions on the back of what you were saying. Mr Lavery, you talked about referring the views of the clients to the oversight committee. Will you explain to me how that happens? How does that work in reality?

Mr Lavery: The views of the clients?

Mr McQuillan: Yes.

Mr Lavery: The views of the clients are central to the work of the Court Funds Office. There is contact right at the beginning, when funds are brought into court, to ascertain the needs of the client. Those can vary, of course; you might have an elderly person who requires a regular income, or you might have a young person whose money will be preserved for them until they are 18. We discuss with the client or their representatives on an individual basis what their requirements are, and we then refer the matter to the stockbrokers to advise on the appropriate way of achieving those interests. The stockbrokers have, in broad terms, three portfolio strategies that are designed to meet particular needs such as income generation, capital preservation and so forth. We then put the stockbroker's recommendation before the judge of the relevant court for approval. On a case-specific basis, the needs of the client are taken into consideration at the point when the investment is being made.

The point that I made to the Chairman was that, in addition to that, the oversight committee, which is called the judicial liaison group, has members who deal with a large number of clients of the Court Funds Office. The Official Solicitor to the Supreme Court represents, as solicitor, quite a large number of the clients and is on the liaison group. The other figure who represents a lot of clients is called the Master of the Office of Care and Protection. That office is part of the Court of Judicature, which deals with patients who, essentially, are people who cannot manage their own affairs. The Master of the Office of Care and Protection is also a member of the oversight committee. Both those people can speak on behalf of the service being provided to client groups that very much make up the majority of the clients of Court Funds Office business.

Mr McQuillan: Thanks for that. It is a wee bit clearer in my head. It seems from what you are saying that a lot of trust is placed on the stockbroker and his advice. Is his advice always taken or chatted about through the oversight committee?

Mr Lavery: The oversight committee does not look at individual investment recommendations; that is the job of the judge who is dealing with the case. The first port of call is Mr Ronaldson and the staff of the Court Funds Office. They look at what the client has told them about their requirements and what the stockbroker is recommending. If there is any challenge, it would be done at that stage. The final decision on endorsing the stockbroker's recommendation lies with a judge or High Court master. As Mr Perry explained, there are two measures of scrutiny: the work that the Courts Service does through the Court Funds Office and, ultimately, the decision of the judge on whether to approve the stockbroker's recommendation.

Mr McQuillan: Thank you. Mr Perry, the fund holds around £290 million on behalf of 14,000 clients. That is a lot of money, yet in paragraph 2.8 on page 11 of the report, we are told:

It is very concerning that the CFO manages £290 million but does not possess any independent financial expertise.

Mr Perry: Since 2011, the JLG has included an independent board member who has a financial background. As Mr Armour has just explained, we have reinforced that with a second independent member who has particular expertise.

Mr McQuillan: That has been reinforced on the back of this report.

Mr Perry: That is true.

Mr McQuillan: Had it not been for the report, that might never have been reinforced.

Mr Perry: That is true. Paragraph 2.8 refers specifically to "financial expertise", and that is correct. However, as Mr Lavery has explained, there is, of course, intense scrutiny of individual investment decisions by the court and by Courts Service management, as there has been for many years. There are intelligent experienced people who have great concern for the clients and for doing their best for them. We certainly recognise the need to reinforce the financial expertise in that area, but there has been a great deal of independent scrutiny for a prolonged period.

Mr McQuillan: I will move on to Mr Ronaldson. Paragraph 2.11 on page 12 of the report indicates that you do not enough appropriately qualified staff to review and challenge investment recommendations. Why has that skills gap not been addressed before now? Is it being addressed by you as a matter of urgency?

Mr Richard Ronaldson (Northern Ireland Courts and Tribunals Service): The recommendation is to identify any skills gap, if it is there.

Mr McQuillan: The report says that it is there.

Mr Armour: In fairness, that might be a question for me rather than Mr Ronaldson, who is a member of staff in the office. Maybe I could help you with that one.

The Deputy Chairperson (Mr Dallat): Mr Armour, I mean no disrespect, but I would prefer that members choose who answers their questions.

Mr McQuillan: Let Mr Ronaldson answer my question. You can then come in.

Mr Ronaldson: Since just before 2000, there has been a qualified accountant in the office. We have three qualified accountants in the office, and there is oversight from another qualified accountant. The JLG also has an independent member. The scheme of qualifications that was introduced in 2010 was really to help us to become an intelligent customer and to give us a bit of experience, a bit more knowledge and enhance the knowledge of the accountants who were already in post. The investment recommendations are dealt with by the investments team, which is a small team in the office. We have three members of staff who are qualified by the Chartered Institute of Securities and Investment, and I believe that that is sufficient. We plan to run in-house training in the office —

Mr McQuillan: So it is not really sufficient. If you are going to run in-house training, what is there at the minute is not sufficient. Is that what you are saying?

Mr Ronaldson: I believe that it is sufficient, but to enhance the knowledge in the office and to try to feed down some of that expertise to other members of staff, we will run in-house training. It helps with cover during leave periods and things like that.

Mr McQuillan: Fair enough. Mr Armour, do you want to add anything?

Mr Armour: Mr Ronaldson has answered the question very fully. I would just make the point that, when the report was written, the Court Funds Office was dealing with an issue called "flexi orders". I think that that was probably the issue that Audit Office had in mind when it made that comment and recommendation. The Court Funds Office is no longer dealing with flexi orders and we now have a very experienced stockbroker. The role of the Court Funds Office is about overseeing the work of the stockbroker.

Mr Ronaldson has explained the qualifications that a number of senior members of staff in the office have, and I am currently satisfied that we have the skills we need to do the job that is required of us at this point. That said, as I indicated earlier, we are bringing a second financial expert in to work alongside us, and I will certainly be willing to take his mind on that issue as a point of reassurance.

The Deputy Chairperson (Mr Dallat): In paragraph 2.11, we are told that:

We are then told that:

Can you reconcile that with the evidence that you and Mr Ronaldson have just given to this Committee?

Mr Armour: We have received the outcome of that court case, and, on the back of that, I am content that the staff are suitably qualified for the job that they are currently doing. Staff training is an issue that is, rightly, kept under consideration. That is why I say to the Committee that I want to take the mind of the financial expert we are bringing in just to reassure myself that I am right in my assessment.

The Deputy Chairperson (Mr Dallat): Earlier, Mr Lavery told us that the stockbroker is responsible to a judge. It is far from me to offer an opinion on any judge, but I assume that he has no particular expertise in investment and finance.

Mr Lavery: He will certainly have considerable experience of approving investments.

The Deputy Chairperson (Mr Dallat): I do not question that, but I am talking specifically about the ability of a stockbroker to do the right thing.

Mr Lavery: I think that the stockbroker does his job, and the judge does his or her job in the sense of challenging and testing the match between what the stockbroker is proposing and what the client requires. The judges are certainly not second-guessing the stockbrokers' advice. The stockbrokers were procured competitively, and they are one of the top 20 firms in the United Kingdom, so we are satisfied with the expertise that we have there. I do not think that it is really appropriate to try to duplicate that expertise somewhere else in the system. We pay the stockbrokers to provide expert advice. It is scrutinised by the Court Funds Office and, ultimately, by the judge.

The Deputy Chairperson (Mr Dallat): You paid the stakeholders a great deal of money, and I am sure that my colleagues will remind you of that later on.

Mr McQuillan: I have one more question. Mr Armour, it seems to me that, if this report had not been produced, there would have been no changes at all in the CFO. You would have just carried on with the same old, same old.

Mr Armour: I do not accept that. As I said in response to a question from the Chair, having looked at the work of the Court Funds Office with fresh eyes when recently appointed, it is clear to me that, consistently over the past number of years, there has been a desire and a willingness to continuously improve the work of the office. The Chair referred to the past 10 years. When you look over the past 10 years —

Mr McQuillan: There is a difference between a desire and willingness, and actually doing something. I might have a desire and willingness to be First Minister, but I doubt that I will ever make it.

Mr Armour: When you look over the past 10 years, I think that you can see, at key junctures, the progress that has been made. Has progress been as quick as colleagues would have liked? No, it has not, but there have been a number of reasons for that, including legal challenges that we had to await the outcome of. There have certainly been a lot of developments. Mr Lavery mentioned the establishment of the judicial liaison committee. There has been a modernisation programme that has taken a number of positive steps. We have introduced investment strategy guidelines and closed a number of sub-accounts in rationalising matters. Over the past number of years, we have taken forward legislation through a small number of clauses that have assisted us. Is there still a long way to go? Absolutely, there is a long way to go, and that is why we put the modernisation programme in place. As Mr Perry indicated, I am accountable to him and to Mr Lavery for performance management, as well as wider accountability for the delivery of that programme.

The Deputy Chairperson (Mr Dallat): I want to make sure that we understand each other, Mr Lavery. I get the impression from chairing this meeting that the message you are giving us is that absolutely everything is rosy in the garden and there is no need for change. Hopefully, I am picking up from Mr Armour that, actually, there is a great deal of need for change. Which is it?

Mr Lavery: Of the people at the table, I have the most experience of this. I was the accountant general from 2001 until 2012.

The Deputy Chairperson (Mr Dallat): Not the best period, I would have thought.

Mr Lavery: No, I dispute what you are saying, Chair. In your opening remarks, you said that the organisation had not been managed properly. I dispute that entirely. There is no basis in the Audit Office report to suggest that.

The Deputy Chairperson (Mr Dallat): Mr Lavery, is there any point, really, in discussing the report? The Department has already accepted it.

Mr Lavery: We accepted the recommendations in the report.

The Deputy Chairperson (Mr Dallat): The report is damning.

Mr Lavery: No, it is not damning. It does not sustain the remark that you made in your introductory observations. I commissioned a major review of the Court Funds Office by Amtec, the consultancy firm that also advises the Court Funds Office in England and Wales. It reported in 2003 and made a wide-ranging number of recommendations, and we have implemented, in whole or in part, its recommendations. For example, it recommended the competitive procurement of a stockbroker service, and we did that.

The Deputy Chairperson (Mr Dallat): Can you tell me when that started, Mr Lavery?

Mr Lavery: The report was in 2003, and we began a procurement exercise in 2005. The actual procurement was interrupted for legal reasons, but it was completed in 2008. We had a further procurement in 2013. The point that I am trying to get across concerns Mr McQuillan's point that, if we had not had the Audit Office report, nothing would have been done. That is an unfair reflection of what the Courts Service did. We commissioned a major review in 2003, and we have implemented the greater part of those recommendations. We welcome the Audit Office's further consideration, and Mr Armour is taking forward the further recommendations. It would be wrong for the Committee to form the impression that nothing was done to improve the Court Funds Office. Some of the things that we have already discussed are specific examples of that improvement. When I was appointed, there was no oversight body for the Court Funds Office. Amtec recommended one, and I appointed one. I think that that is an improvement. I did not have the Audit Office to tell me that; rather, that was put in place as a fairly early improvement. I think therefore that it would be misleading for the Committee to form the impression that nothing happened, or would have happened, until the report came out.

The Deputy Chairperson (Mr Dallat): I certainly hope that nobody would accuse the Committee of misleading anyone. Our evidence is based on a report that has been agreed by the Department.

Mr Beggs: I am struggling to get a clear picture of how the whole system works together. One of the comments that I picked up on was that the investment is determined by the judge in individual cases. Then there are the 24 administrative staff, and then there is the professional stockbroker who has been brought in to do the investing. What does the judge determine?

Mr Lavery: The judge determines whether the recommendation by the stockbroker is appropriate for the client's needs, and the judge will look to the Court Funds Office to have explored the client's needs with the client or the client's representatives. Therefore, ultimately, the investment is made on the order of the court, and the judge makes that order.

Mr Beggs: I am told that you have something like 14,000 clients, so, presumably, there are 14,000 meetings with a judge, on a regular basis, to look at where the investment has gone.

Mr Lavery: No, that would be misleading, Roy. A lot of the clients will have had investment packages in place for many years. The judge would have to look at the case again only if the investment was going to be altered in some way.

Mr Beggs: Most people, if they want to invest money, keep some in the bank for quick access. After that, you determine the level of risk and reward. Why does the legislation not allow your system to operate in a similar fashion, without the intervention of the judge, which also minimises a judge's time? Is reasonable reward without undue risk not all that is needed?

Mr Lavery: It is, but the money is being managed on behalf of the client by the court. That is the job of the court. The law requires the court to manage the fund on behalf of the client. As the Committee knows, the clients are either young people — under the age of 18 — who have not the legal authority to manage their own affairs, or patients who perhaps have not got the mental capacity to manage their own affairs. Therefore, the court is making the investment decisions on their behalf.

Mr Beggs: There are potentially 14,000 different investments to be tracked.

Mr Lavery: That is true.

Mr Beggs: That must be a nightmare, is it not? It must be very bureaucratic and time-consuming.

Mr Armour: Yes. We have 14,000 clients. It is fair to say, though, that 50% of those individuals would have less than £3,000, for example, with us. That money is held in deposit accounts. We do not have 14,000 people with equities and shares.

Mr Beggs: One thing strikes me. Have you considered changing the legislation so that you have bands or methods of determining the most appropriate investment for somebody? Have you considered having some criteria in a band so that you do not then need to track every individual criterion, only whether an individual is in the right band? That would considerably reduce the bureaucracy that is involved in your organisation.

Mr Lavery: As I mentioned earlier, and Ronnie will say more about it, the new stockbroker is moving much more towards that standardised approach. That is a reflection of that. As I said earlier —

Mr Beggs: With the judges, it is not. Judges still deal with individual cases.

Mr Lavery: The final decision in every case has to be made by a judge, but it is not as though you have 14,000 different types of investments. You now have increasing standardisation, into three portfolio groups. That has been helpful in reducing —

Mr Beggs: That is a lot less complicated than what you seemed to be talking about earlier.

Mr Lavery: It depends on the size of the case, though. Some cases might require to be tailored very much to the specific needs of the client, but, generally speaking, they would fall into those three groups, which would then be adjusted according to the individual's needs.

The Deputy Chairperson (Mr Dallat): Mr Seán Rogers wants to discuss the modernisation programme. We will certainly be most interested to hear about that.

Mr Rogers: Before we go on to that, Mr Lavery, you say that you accepted the recommendations. What Adrian has been talking about is the level of expertise in the CFO around investment and securities. According to the information that we have, around four of the 24 staff had some sort of qualification. One of the recommendations states:

What have you done about that?

Mr Lavery: As you have noted, three of the staff of the Court Funds Office are professionally qualified accountants. As Mr Armour said, other staff have accredited training through an appropriate professional body for investments. In addition, Mr Armour was saying that we are bringing in an additional independent member to join the liaison group to which I referred. That person will specifically look at what skills gap, if any, exists and make recommendations to us. Mr Armour is asking that person to undertake the role as a priority. If it reveals a skills gap, we will address it.

Mr Rogers: Do you not believe that there really is a skills gap?

Mr Lavery: Mr Ronaldson said that we can always improve. We are certainly committed to continuing professional development of staff. Refresher training, and so on, is necessary and desirable in any organisation. What we are not doing is training people to be stockbrokers. We have appointed one of the top 20 firms of stockbrokers in the country to provide that service. We need staff with the appropriate skills to work out whether what the stockbroker recommends matches the needs of the client in order to put the recommendation to the judge to approve. I am not going to train staff or give the Committee any expectation that I would train staff to do a stockbroker's job. That would be quite wrong. As I said, we have hired one of the best firms in the country to do that job. Our job is to test and validate the recommendation that it makes against the requirements of the client in the individual case. If there is a skills gap, we will address it. I think, though, that it would not be in the area of investment knowledge.

Mr Perry: I will pick up on that, if I may. We are looking for our staff to provide an intelligent-customer role and to be able to ask intelligent questions. As Mr Lavery says, they are not in a position to second-guess investment decisions.

Mr Armour: You mentioned 24 staff in the Court Funds Office, Mr Rogers. That has now fallen back to just under 21 staff through the efficiency programme. The key issue for me is that the senior staff in that office have the right qualification. A lot of the staff in the Court Funds Office are doing administrative work and processing. Mr Ronaldson, who is the deputy accountant general, and the people who are working closely with him are those in the office who are qualified and whom I need to be qualified.

Mr Rogers: OK, thank you. I will move on to the modernisation programme. It was originally planned in 2004 but was not finished, and then, in 2010, it was agreed that there was a need for some sort of legislative reform. I believe that some work has begun on drafting that legislative reform but that it will take at least three years to introduce it. Even when we have legislative reform, modernising the system could take even longer. Why has progress been so slow?

Mr Perry: To some extent, the 2004 programme has been overtaken, in that key elements of it, as both Mr Lavery and Mr Armour said, have been implemented: the recommendation to go to open competition for the stockbroker; internal reorganisation in the CFO to create a better customer focus; modernisation of annual accounts; the establishment of the JLG; and the creation of what are now investment portfolios. Quite a lot of the recommendations, as Mr Lavery described, have been implemented.

The run-up to devolution meant that progress could not be made on the legislation. Since devolution, a couple of legislative changes have been taken through, as Mr Armour was describing, around management fees and the mechanism for setting the CFO's interest rates. As it happened, one of those legislative changes led to the court case that lasted for three years, which prevented further progress. We are committed to legislating in the next mandate, but the nature of that legislation will now depend on the consultation that the Minister is considering on the future role of the CFO. I will ask Mr Lavery to say a word about that. It will help the Committee, because he is leading on the policy.

Mr Rogers: From your answer to me, Mr Perry, it seems that, to account for your lack of progress, you are hiding behind the lack of legislation.

Mr Perry: It was not safe to proceed with major legislative change until we had the outcome of the court case, because it was quite a fundamental case, but that has not prevented some legislative change happening; for example, the work on specific issues around the mechanism for setting interest rates. It is not that nothing has happened but that it was not possible to proceed with the major change that was envisaged before 2010. Now, as I say, a broader consultation will affect the nature of any future legislation, depending on the outcome.

Mr Rogers: There are a number of recommendations. Look at paragraph 2.12. Can you tell me what progress has been made?

Mr Lavery: How far do you want me to go back?

Mr Rogers: Take paragraph 2.12 on page 13 of the report. OK, "strategic and legislative modernisation" takes some time, but look at some of the other recommendations:

and

What progress has been made there?

Mr Lavery: The "governance arrangements", which is the first of the bullet points on paragraph 2.12, have been put in place. As I said earlier, that has not been done on a statutory basis; rather we created a non-statutory committee to do that job. That is the one that Mr Armour is strengthening further by bringing on to it another independent member, so that is in place. I said earlier that, when we change the legislation, we will put that committee on a statutory footing but we did revise the governance arrangements.

The second bullet point concerns the "modernisation of the stockbroker contract". For the first time since the Court Service was established, we procured a stockbroker in 2008 and took the opportunity to introduce new service standards. We then ran a further procurement exercise in 2013, which led to the appointment of the current stockbroker. The accounts were modernised and put on to the appropriate government accounting standard. The third bullet point is the "modernisation of transaction processing". Mr Ronaldson may be able to address that slightly better than I can.

The last bullet point is on "legislative modernisation" and is the one that Mr Perry referred to. The Minister has agreed that we will initiate a pre-legislative consultation later this year, with a view to introducing legislation at the beginning of the next mandate. The point that I think that Mr Perry was alluding to was that, in the consultation, we should ask the fundamental question, which concerns whether the particular role undertaken by the Court Funds Office should remain the responsibility of the Courts and Tribunals Service.

In England and Wales, for example, the Court Funds Office looks to National Savings and Investments to manage a lot of investments for it. Scotland takes a different approach. A lot of the funds that would be managed by the court in Scotland are out of the court and are instead managed by clients' representatives. They are not under the court's protection.

The South of Ireland modernised its system a few years ago and introduced something closer to what we have had in mind: a modernised court funds administration that retains the principle that the court is there to protect the clients and should continue to manage funds on their behalf.

It probably is worth going back to that fundamental question. There has not been a review of the appropriateness of the role of court funds in Northern Ireland since the report of the MacDermott committee in 1970, which stated that that was an appropriate responsibility for the court to continue to discharge. It would be useful if we were to ask that fundamental question in our consultation paper later this year.

Mr Rogers: Mr Ronaldson, may I go to you before we look at the modernisation of the transaction process and accounts? You have a computer system that is almost 20 years old and has not been significantly updated for some time. Based on what Mr Lavery has just said about the transaction process and the modernisation of accounts, what progress has been made?

Mr Ronaldson: In 2008, we carried out a review of the roles and responsibilities of the staff in the office. As a result, we were able to provide greater focus on customer services and increase the number of staff in the customer service team. That allowed us to increase vastly the number of face-to-face meetings with clients.

As for the updating of systems, we implemented an interface with the integrated court operations system (ICOS), which means that data is automatically uploaded on to the CFO system. That also removed the need for manual processing, so efficiencies were generated there. We removed the sub-accounts that we maintained in our bank accounting operations, and that enabled us to make full use of online banking facilities, thus generating efficiency there as well.

Mr Rogers: What are the problems with the computer system?

Mr Ronaldson: The computer system is supported on a best-endeavours basis, so at the minute it does its job. It is on a stable platform, but we are looking to implement a new system. We recently had a business case approved for the procurement of a new system.

Mr Rogers: You say that it does its job. I do not see how my computer, if it were 20 years old, could do its job at the same time as I was trying to modernise transaction processing and accounting procedures. Accounting and transaction processing have changed a lot in 20 years.

Mr Ronaldson: Correct. The system is a database system. At its very basic level, it records transactions. As a result, we are able to produce accounts. It just takes us longer, and a new system will generate efficiencies in the preparation of accounts. We hope that the new system will also be able to use automatic bank reconciliation processing, which, again, would generate efficiencies. That is where we are looking to implement the new system.

Mr Rogers: If the system breaks down, is there any way that payments can be carried out manually?

Mr Ronaldson: Yes, that is our contingency at the minute. If the system were to become irrecoverable, we would have the backup data every evening and would be able to continue to make payments, if necessary, through our online banking system.

Mr Armour: The system has been highlighted as a risk. As Mr Ronaldson indicated, it is 20 years old. We now have business case approval for a new system. Money will be available for that in the incoming financial year, and we hope to have the system in place by the end of the year. However, we do have very careful contingency arrangements in place should there be an issue with the system. Mr Ronaldson indicated that the contingency arrangements take the form of a manual system, and I accept that that would be time-consuming, but there are contingency arrangements in place, and those are covered in the Courts Service's disaster recovery plan.

The Deputy Chairperson (Mr Dallat): Mr Armour, would the Ulster Museum not be the best place for your computer?

Mr Armour: It might well be, Chair, but it is the system that we have at the moment. It is doing what we require of it, albeit not as efficiently as it should.

The Deputy Chairperson (Mr Dallat): I hope that I have not cut across Seán, but you have said that, basically, it keeps accounts.

Mr Armour: Yes.

The Deputy Chairperson (Mr Dallat): It may even do a reconciliation statement, but is it not possible to interrogate it to get information that will tell you whether your clients are getting the best return on their money? Have you been sleeping on the need to get a new computer system?

Mr Armour: We are absolutely able to interrogate it for it to provide us with information. It is not able to provide me with as much management information as I would want, and that is what the new system will do. We benchmark the return for our clients in other ways. We do not necessarily use the system to do that.

Mr Beggs: I am struck by the terminology used. You said that the system is maintained on a "best- endeavours basis". Can you explain what that means?

Mr Armour: The age of the system means that there is an issue with supporting it. Therefore, if we were to have a major problem with it, it would be difficult to get it back operating in the way —

Mr Beggs: How long has it been on that best-endeavours backup system?

Mr Armour: With the IT system, we recognise that, over the past number of years, there has been a need —

Mr Beggs: How long has it been classified as a best-endeavours maintenance backup?

Mr Ronaldson: I think that it has been for something in the region of 18 months. At that point, we got a feasibility report from Fujitsu on our options to replace the system, and we have been working with the business consultancy service in DFP to generate specifications for the exercise.

Mr Beggs: It sounds as though you have a very limited group of engineers who are able to support the system. Is that correct?

Mr Armour: Support for the system is undoubtedly a concern for us.

Mr Beggs: What hourly rate is charged, given that there are very few people in the world who can provide it? How does that compare with alternative, modern systems?

Mr Ronaldson: The system is supported in the current contract that we have with Fujitsu. There are no additional costs if anything goes wrong.

Mr Beggs: That is what I am asking: what is the cost?

Mr Ronaldson: I do not know.

Mr Armour: We do not have that figure. We are happy to write to the Committee with it.

Mr Beggs: Finally, are there off-the-shelf products that others are using elsewhere? Are we having to invent something bespoke?

Mr Armour: No, absolutely not. The new system will not be a bespoke one; it will be an off-the-shelf system. We are not designing something specific, no.

Mr Rogers: I will move on to paragraphs 2.16 and 2.17, which give the details of the estimated fees wrongfully deducted from clients' funds. In August 2012, the figure was estimated at £2·9 million. With interest, it went up to £3·7 million but was eventually reduced to £320,000. Can you explain why you did not have enough information on each case at the time to know whether the necessary court order was in place? I put that question to Mr Ronaldson.

Mr Ronaldson: The issue of the potential refund of fees depended on the outcome of the court case. Before the outcome, it was irrelevant whether the order was in place or not. That was one of the cruxes of the court judgement. The suggestion was that, even despite there being a court order in place, the fees were still deducted unlawfully. As a result of the court judgement, we were able to reduce the liability to £320,000. We then got further legal advice on the outworkings of the judgement to ascertain exactly what order we needed and what the wording of the order must be to determine whether the fees were deducted lawfully or unlawfully. We have now done that work. We have reviewed the court orders, and we estimate that the current total liability is no more than £55,000.

Mr Rogers: It started off at £3·7 million and is now at £55,000?

Mr Ronaldson: The £3·7 million was every single fee that had been deducted. That was the worst-case scenario if the court case had gone against us. The £320,000 figure came about because, as a result of the court case, we were able to discount the orders that we were definitely sure of. We then got further legal advice that has allowed us to discount further orders that we had questions over. That is why the liability is now £55,000.

Mr Rogers: ISAs worth £9 million were held on behalf of around 100 clients, despite a lack of legislative authority. That is in paragraph 2.18, Mr Lavery. How did that happen?

Mr Lavery: The legislation establishing the Court Funds Office is quite prescriptive about the types of investments that can be held. ISAs were a relatively new development and post-dated the legislation. We found that quite a number of clients, particularly elderly people, had ISAs. When their funds came into court, the ISA came into court along with their other holdings. We then had reason to question whether it was permissible to hold ISAs in the court. We took counsel's opinion and were eventually advised that a particular category of ISA could not be held in court, for largely technical reasons. We then put in place a strategy to allow the clients to decide whether to liquidate the ISA and have the money invested by some other means or to take the ISA out of the court. We did that to avoid anybody losing the tax advantage that the ISA represented for them. A number of clients simply chose to take the ISA out of the court so that they could continue to benefit from the tax advantage.

Mr Rogers: Was that situation related to the lack of independent financial expertise or the lack of qualified staff in the Court Funds Office?

Mr Lavery: I do not think so. We had to go to senior counsel for advice. It was not a black-and-white issue but a matter of interpretation of the legislation. It was certainly not obvious to anybody that ISAs were not permissible. We eventually took senior counsel's opinion. That was quite a lengthy, 12-page opinion. It was a finely argued point. The legislation inhibits certain types of investments, and ISAs are perhaps the most explicit example. The way in which we managed the situation was sensible. We allowed each client to decide what to do with his or her ISA. As I explained, clients could take the ISA out of the court to keep the benefit of the tax advantage.

When we modernise the legislation, we will want to remove those sorts of issues. What happened simply reflects the fact that the legislation was rather prescriptive and described types of investments in a very particularised way.

ISAs came along later and did not quite fit into the legislative environment.

The Deputy Chairperson (Mr Dallat): Mr Lavery, just for the record, you said to Seán that you do not think that it was a lack of independent financial expertise or of qualified staff that brought this about. With the gift of hindsight, what would have prevented it?

Mr Lavery: Do you mean prevented the ISA issue arising?

The Deputy Chairperson (Mr Dallat): Correct.

Mr Lavery: It is such a case-specific instance. What I tried to explain to the Committee was that we had to go to senior counsel to interpret the legislation establishing the court funds regime to see whether an ISA investment was permissible. It was not a straightforward issue; it is quite a complex issue of statutory interpretation. I certainly do not feel that it was a lack of knowledge on the part of the staff. If we had to go to senior counsel for advice, that indicates, almost by definition, that it was a pretty complex issue. There is no doubt that, when we modernise the legislation, one of our expectations will be that it is less likely that this sort of restriction could arise again, because an ISA, or its recent equivalent, pensioner bonds, would be a very useful investment vehicle for an elderly person whose funds are held in court. The point that I want to get across is that we still allowed clients to keep funds in their ISAs if they wanted to, but they had to take them back out of court in order to do so.

Mr Girvan: Thank you for your answers so far. I am quite interested in the tender process. To all intents and purposes, it seems a bit weird that one firm was able to deliver this from 1930 until 2008, when it went out for tender, which I might ask questions about later. Why was their no competitive tender for stockbroker services until 2008? Maybe David could answer that.

Mr Lavery: Honestly, I have no insight into the history of the appointment of the court stockbrokers. The Court Service, as colleagues will know, was established in 1979. This contract was awarded by the Supreme Court or possibly the Ministry of Home Affairs; well, it would not have been the Ministry of Home Affairs, but it might have been the Lord Chancellor's Department. We have no records indicating what process was used to appoint the stockbrokers at that time, but it was not uncommon for a professional entity to be appointed to represent the court almost on a permanent basis. For example, the legislation provided that the bank of the court would be the Bank of Ireland, and we have changed that approach as well. We carried out a procurement exercise of banking services, and our banking services are now provided by Danske Bank. The legislation, however, provided that the bank of the court was the Bank of Ireland. That seemed to be the way this business was organised back in the 1930s.

Mr Girvan: Would it be right to say that it leaves itself open to being described as an old boys' club? Things are done on a nod and a wink. It reeks of that when you are dealing with a company that had been investing on behalf of courts for well-nigh on 80 years, with no query whatever about what is going on.

Mr Lavery: I have no basis on which to question the performance of Cunningham Coates. There is nothing I saw between my appointment in 2001 and the appointment of Brewin Dolphin in 2008 to suggest that Cunningham Coates did not provide a suitable, professional service. I commissioned a consultancy report on the court funds, as I mentioned earlier, through Amtec Consulting, and it reported in 2003 recommending a competitive tendering process. We initiated that in 2005. I mentioned earlier that the award of the contract was delayed somewhat by a legal issue that emerged, and it was eventually awarded to Brewin Dolphin in 2008. It was retendered in 2013, so we are now in a pattern of competitive tendering of stockbroker services.

Mr Girvan: I want to go into the point about the tender process. I appreciate that we are fishing from a fairly small pool in relation to that matter. The Audit Office report indicates that the tendering process in 2008 was not robust. There was no business case completed for a contract estimated to be worth somewhere in the region of £430,000 a year, which I may ask questions on later. Despite the fact that the cost of the investment service is borne by the client's fund, and only a small percentage weight was given to that fact — I think that it was about 20% — do you acknowledge that the competitive process was flawed?

Mr Lavery: It adhered to the procurement rules that were applicable at the time. We were advised by the procurement service of the then Northern Ireland Office — this was pre-devolution — and the process that we used was compliant with the then requirements. So, a business case was not required, but there was an analysis of the services required, and a process that we were advised to implement was followed. I think that three companies made it through to the final selection process, so there was a competitive element to it, undoubtedly. The decision to weight cost slightly lower than quality of service was a deliberate one. We chose to give a higher weighting to quality and standard of service than cost. That changed in the subsequent procurement exercises as we gained more confidence in that process, but I think that the process was satisfactory and achieved a good outcome. The one run in 2013 was under the Central Procurement Directorate (CPD) rules and was subject to a full business case process, and the cost element was weighted higher on that occasion.

Mr Girvan: I do not want to suggest that the Courts Service was playing fast and loose with clients' money, but appendix 2 of the report referred to cash cases in which moneys were not necessarily going to be invested because of access. Where were those cash accounts held? Who held those cash accounts?

Mr Armour: The cash account is held in my name but in a deposit account.

Mr Girvan: It is not in the stockbrokers. It is not handed over for them to play the market with.

Mr Armour: No, absolutely not. It goes back to the point that I was making earlier about the protective nature of the Court Funds Office. We are not an organisation that is taking risks with the money that is in our care.

Mr Girvan: That is the reason why I asked the question. I wanted to make sure that there was no suggestion of that.

Mr Armour: We can give you an absolute assurance on that.

Mr Girvan: With it being held in a deposit account, does it attract any interest whatsoever? Some of the moneys might be there from when someone is two years old until they are 18, so it can be there for 16 years.

Mr Armour: It currently attracts around 0·5%.

Mr Lavery: It basically attracts the Bank of England base rate, which means that it is rock bottom.

Mr Girvan: They will soon be charging you money to put money in the bank. I think that they actually do that anyway.

As part of the tendering exercise, six options were identified. Four of them were assessed — it is in paragraph 3.12 on page 20 of the report. Is it fair to say that the CFO left insufficient time to fully consider all the options without risking the loss of clients' funds?

Mr Armour: No, I do not think that it is fair to say that. In 2012-13, we went through a process that was overseen by CPD and met its standards and requirements. I do not think that it is fair to say that we left it to the last minute. I think that it was done in a timely way.

Mr Girvan: Have you put plans in place to ensure that you have sufficient time to consider all options prior to the next procurement exercise?

Mr Armour: Absolutely. The current stockbroker was appointed on a three-year term with the option of two further one-year extensions, so there is plenty of time to consider whether we want to look at the extensions or whether we want to move to procurement.

Mr Girvan: You might well need that time, because I understand, from listening to what happened, that the wheels of justice and the Justice Department move extremely slowly in some cases, depending on what they are dealing with.

Mr Armour: We will certainly do it in line with the CPD requirements. We will obviously work closely with colleagues in CPD to do that.

Mr Girvan: I appreciate that. That brings me back to the performance area. You mentioned benchmarking against other jurisdictions on how they perform with their court funds. Is that the proper way to look at it? Private investments tend to do fairly well when individuals keep a very close eye on how their money is being worked and how it is being invested. I appreciate that there is some calculation, and I appreciate that we are following the stock market, which can be quite volatile, but you are going to hedge your bets — I have to use that word — on many occasions where you will be sure that you will come out on the right side fairly well. Over five years, you would expect a reasonable return on an investment. Coming from my background, you like to see that you are getting maximum bang for your buck and ensure that you do that. The benchmarking that you referred to only mentioned what happened in other areas, and some of them could be doing really badly. It is a bit like the talents that were given out to individuals: some decided that they wanted to be sure that, when the master came back in 10 years, it would be there for him, so they decided to bury them in the ground. However, when he came back to the man he had given one talent, he found that he had worked with it and had turned it into four. That man is the one who should be rewarded. How do you work with clients?

Mr Armour: We certainly want to protect the funds that we have been given. As the Deputy Chair indicated at the start, this is money belonging to some of the most vulnerable in society, so our primary objective ought to be, and has to be, protecting that fund. I think that it is right to benchmark against the FTSE all-share index. Richard can give you some statistics on the rates of return that we have been getting in comparison with the FTSE, which, I think, are quite impressive.

Mr Ronaldson: For the year ending 2011, the equities under our management increased by 11·6%, and the FTSE all-share was 5·4%. In 2012, the FTSE all-share decreased by 2·1%, and our investments increased by 7%. In 2013, it was 17·4% for CFO investments and 12·6% for the FTSE. In 2014, it was 6·2% for our investments and 5·2% for the FTSE. For the year to date, 2015, it is 6·7% for CFO investments and 1·9% for the FTSE all-share. We were definitely outperforming the market in that period.

Mr Armour: We are doing it within that protective environment, which is the important issue for us.

Mr Girvan: It is helpful to hear that and to know that. It is clients' money. I want to ask about how the fees are brought about. The fee that is paid to the stockbroker to manage the account is £430,000. I appreciate that, as was alluded to, it is not just 14,000 individual investments; they are managing three major funds and whatever movements they require over that period of time. Is that comparable to what people would expect if they were handling a pension fund of almost a third of a billion pounds?

Mr Ronaldson: The fees charged are based on a factor of the valuation of the investments under management. In the most recent tender, the larger clients were charging 0·27% per year of the value of their fund under investment. In the private sector, for a private client going for a similar service, you would expect to pay more than 1%, and potentially 1·2%, so, certainly, in terms of comparison with the private sector, there is a definite clear benefit with the funds in court.

Mr Beggs: Can you give us some idea of the actual amount of cash that you issue to clients each year? How much money in cheques would you post out to support them?

Mr Armour: Whilst Richard is looking for that figure, I will set the context: we do not just post cheques or cash out to clients. If clients want to withdraw money from their fund, they need to go to the court to get approval for that. In terms of the actual figure —

Mr Beggs: Just roughly.

Mr Ronaldson: In January, for example, we made payments out of court totalling £4·3 million. If you —

Mr Beggs: Is that normal?

Mr Ronaldson: Yes. I think that —

Mr Beggs: So, maybe £50 million a year.

Mr Ronaldson: I think that £40 million or £50 million would not be unusual.

Mr Beggs: Why do you then keep £87 million in cash deposit, as is in your analysis of 2013, and get what percentage return on it?

Mr Armour: It is 0·5%.

Mr Beggs: So, why keep £87 million if, in a typical year, you turn over £50 million?

Mr Armour: It depends on the value of the money and the duration that we would have it for. We take the decision that a significant amount of money should be held in a cash deposit account. For example, it is less than £3,000 if it has been held for less than two years.

Mr Beggs: There will be all sorts of variations in there. What was the turnover in the previous year? You are giving us spin that it is down to all these individual situations, but there is bound to be a rough line or an average cutting through it. That is why I want to get an idea of why you keep almost a third of your money in a cash deposit, where you are getting 0·5% interest, when you could have been getting up to 17% interest over the last number of years by investing it.

Mr Ronaldson: The cash that is held is allocated to each client. Therefore, if the money comes in and that client is not having funds invested, that will go as cash.

Mr Beggs: Who decides to keep so much cash?

Mr Ronaldson: Because we consider —

Mr Beggs: Is it the judge who decides that all that money should sit in the cash account?

Mr Ronaldson: The cash will be determined by each individual client. If a client has —

Mr Beggs: Who takes that decision?

Mr Ronaldson: It is the stockbroker's recommendation, and the judge will make the decision.

Mr Armour: Ultimately, it is the court's decision where the money —

Mr Beggs: Do you see why I am a bit surprised that, if you have a turnover of £50 million, you have £87 million in your cash account?

Mr Ronaldson: It is the way it is managed because we are basically —

Mr Beggs: Because of the way that you are set up in the legislation. Would that be it?

Mr Ronaldson: It is the way that the office manages the cash. We are treating it as that person's cash. We are not investing a pooled fund; we are not treating it as a pooled fund.

Mr Beggs: Why are you not treating it as a pooled fund? Would you get a better return of the money for the clients if you treated it as a pooled fund?

Mr Armour: You may, but, as Mr Ronaldson indicated, that is not the way that —

Mr Beggs: No, no. My question is this: would you get a better return for the clients if it was treated as a pooled fund? Would there be less of an administrative burden if it was treated as a pooled fund?

Mr Ronaldson: I will give you an example, because —

Mr Beggs: I am sorry, Mr Armour, could you answer that question? Would there be less administrative burden if it was treated as a pooled fund, as most investment companies would operate in those sorts of conditions?

Mr Armour: Yes, possibly; I would accept that.

Mr Beggs: Possibly. Is that a yes or a no?

Mr Armour: I accept that, yes. If you were holding it as a pooled fund —

Mr Beggs: What is stopping you holding it as a pooled fund?

Mr Armour: It is because we hold them as individuals in terms of the money that is —

Mr Beggs: No, no. What is stopping you? That is the way you do it. What is stopping you going to a better system that would benefit the individuals?

Mr Armour: The funds are held —

Mr Beggs: I am not asking how it is done. I am asking what is stopping you going to a modern system to benefit your clients.

Mr Armour: I would certainly look at that. I have not looked at that as an option as to whether there are strong benefits there. We will certainly have a look at it.

Mr Beggs: Why have you not looked at it?

Mr Armour: Because we hold the money for the individual in my name and it is dealt with in an individual way. The protection of the court is there rather than pooling that money.

Mr Ronaldson: England and Wales do use pooled funds —

Mr Beggs: I did not know that.

Mr Ronaldson: — but they do not offer the level of service that we provide.

Mr Beggs: Do they provide a better return on the investment?

Mr Ronaldson: The amount of funds that is invested in their pooled funds totals 5% of all funds that they hold in court and 95% of their funds are held as cash. We invest 50% or more, so we are happy that we are providing a better service than England and Wales in terms of the pooled service.

Mr Beggs: Would you accept that it could be even better?

Mr Ronaldson: That is something that we will obviously have to consider in future.

Mr McQuillan: Would it not also be riskier to go down the road of pooled funds?

Mr Armour: There is a danger, yes, but we will certainly have a look at that.

Mr Ronaldson: It cuts out the flexibility that we have under our current system.

The Deputy Chairperson (Mr Dallat): I will come back to Paul. I just want to get my head round this. Are you saying that there are millions of pounds overnight in banks that attract an interest rate of 0·5%?

Mr Ronaldson: No. The money is held with the debt management office, which is part of the Treasury. It is not in a commercial bank.

The Deputy Chairperson (Mr Dallat): So, it is the Treasury that benefits from it. Do you think that the Treasury should be benefiting from money belonging to the most vulnerable people in society?

Mr Armour: The legislation requires us to hold the money in that way. We are tracking the Bank of England base rate, and that is the current return. At a time, it was much better than that but it is what it is at this point in time. We are required to do it in the way that we do.

The Deputy Chairperson (Mr Dallat): I asked the question because I am familiar with organisations that attract 2·5% and 3% overnight on money that is not being used.

Mr Girvan: I have just one small point to make. Do you take any moneys out to manage and run the Courts Service from the moneys that you are working with? Does any money come out of that at all?

Mr Armour: Not at this point in time, because the interest rate is so low. The Court Funds Office is administered by the Courts Service from within the grant that we receive from the Department.

Mr Girvan: I note that you say, "Not at this point in time".

Mr Armour: At a point in time when the interest rate was much higher, the legislation allowed us to do that, but we have not been doing that for a number of years.

Mr Girvan: Look back to the late 1980s when there was interest rates of maybe 16% or 17%. Were you taking moneys to run the Court Funds Office out of that at that stage?

Mr Armour: I suspect that we were back in the 1980s, but I could not comment on that far back.

Mr Ronaldson: I can confirm that the cost recovery exercise was brought in in 1997. So, between 1997 and 2010, we recovered the costs of running the office. Since 2010, we have been unable to do so.

Mr Girvan: It is interesting that you say you have been unable to do so because of interest rates. You have performed fairly well with the return that you have been getting but, potentially, if interest rates increased and your return from your investments increased, you would also be taking some of the most vulnerable people's reward to run the Court Funds Office.

Mr Armour: That is a slightly separate issue. The report makes reference to the need to look at cost recovery in respect of the Court Funds Office. One thing that we want to do moving forward is have a public consultation on our charging regime, because, at the moment, it is being met from within the Courts Service's allocation. So, in effect, the taxpayer is paying for this. I think it is right that the client should be contributing towards the cost of that, but we want to have a public consultation exercise that will look at what the options are for full cost recovery, in line with DFP requirements.

Mr Girvan: To go back on a point on cost recovery and legal issues: does the current legal framework allow you to do that?

Mr Armour: On cost recovery, yes.

Mr Lavery: The Administration of Justice Act provides for this; it is not something that we came up with.

Mr Girvan: I appreciate that.

Mr Lavery: It covers court funds in England, Wales and here, and it provides for any surplus income that is generated on money on deposit with Treasury and the Debt Management Office to be used to defray the running costs of the Court Funds Office in England and the Court Funds Office here. That is what Parliament provided in the Administration of Justice Act.

The Deputy Chairperson (Mr Dallat): I am conscious that time is moving on, and a number of members have yet to ask their questions. To keep it tidy, address questions through the Chair.

Mr Easton: Richard, the Audit Office found a number of cases with concentrated portfolios, which, by their nature, expose clients to a higher level of risk. That is in paragraph 4·7, page 23, if that helps. Why was that allowed to happen? What action is the CFO taking to increase diversification and reduce the risk that client funds are exposed to?

Mr Ronaldson: That refers to nine cases. They are legacy cases, I suppose, in which the investments were bought many, many years ago — potentially in the 1970s or 1980s. There would be huge capital gains tax implications if we were to sell them and put them into the new portfolios. There is an assessment of those. Obviously, each year, we make use of the capital gains tax allowance, but there is an assessment of those based against the individual client needs and the age of the client on whether crystallising that liability would be beneficial to the client. That is the position we are in. Obviously, at the minute, it is not beneficial to crystallise the full liability of those nine cases.

Mr Easton: Are there any cases in which the clients have suffered significant losses as a result of poor investment decisions?

Mr Ronaldson: We are not aware of any cases in the last 10 or 15 years where there have been significant losses.

Mr Easton: Nick, you are next. The Audit Office report indicates that the CFO had been remiss in monitoring the stockbrokers' performance. On page 22, it is stated that the CFO no longer sets investment guidelines for the stockbrokers to follow. In September 2011, when you requested a risk metric from the stockbroker, the information provided was of poor quality. That is on page 23. Compliance with the global investment performance standards is not monitored. Although the existing contract was awarded in July 2013, it was almost a year before you started to receive attribution analysis from the stockbroker. That is on page 24. Do you acknowledge that the CFO has failed to manage the stockbrokers' performance robustly? How will the CFO ensure that it monitors performances more closely in the future?

Mr Perry: By accepting the report's recommendations, we have accepted that we can strengthen the governance around this, but I think there are a number of points there. The experts will correct me if I have got it wrong. The investment strategies by the previous stockbroker and the current stockbroker were agreed by the JLG, as has the portfolio approach. The parameters that the stockbrokers work within have also been agreed by the JLG, and they are monitored very closely by the CFO.

The new independent financial member on the JLG will strengthen things and be able to provide advice on the additional oversight that we can provide on stockbroker performance.

On the benchmarking against performance that we have just discussed and the monitoring of the implementation of the contract, the tender for the 2013 contract set out the required standards of the stockbroker and the performance of the stockbroker against the contract, as well as on investment returns. Those are closely monitored. The CFO does a very diligent job. I agree that we can strengthen it further, and we are looking to the new independent person to help us to do that.

Mr Armour: I can assure you about the contract management. The contract is very clearly defined with our stockbroker as far as our needs, requirements and expectations are concerned. We manage that through the Court Funds Office and daily contact with the stockbroker, but formal contract management arrangements are in place in the Courts Service.

We did an assessment quite recently and found a number of things, which I touched on earlier. The advice and the administrative actions of the contractor all took place within the agreed timescales, the performance is consistently higher than the FTSE all-share index, and our fees remain very competitive in comparison with others. As Mr Perry said, we are managing that contract and that relationship very diligently.

Mr Easton: I have one last very quick question. Ronnie, I am curious: why are the accounts in your name?

Mr Armour: That is what the legislation requires. The Judicature (Northern Ireland) Act 1978 requires that all funds are held in the name of the accountant general. Sadly, it is not in my personal name, but they are held in the name of the accountant general, which is the role that I fulfil. It is a dual role with my chief executive responsibilities.

Mr Easton: So you are worth a robbing then. [Laughter.]

Mr Armour: The accountant general certainly is, but I, unfortunately, am not.

Mr Beggs: In the Chair's opening remarks, he touched on performance and targets, yet that information does not seem to be easily accessible. I noticed in paragraph 5.9 of the report that the targets were once on your website but disappeared after 2010. I also noticed in paragraph 5.3 that information on performance against targets is not provided to clients. Paragraph 5.6 states:

That does not strike me as being a very open and transparent operation. Would you care to comment on that, Mr Armour?

Mr Armour: In recent years, a significant amount of work has been undertaken to develop customer service and transparency. I accept that there is more that we can do, and the new IT system will undoubtedly help us to do that.

As I said, our performance targets are in the annual report, which is on the website. On your point about the management fees, we are now advising clients up front what the fees are for the stockbroker. We also have very good user-friendly material that individuals and their representatives who come to the Courts Service can use, and we have a very effective customer service team in the office. There is a lot more information now.

It is worth saying to the Committee that the Court Funds Office has received very few complaints — I think that it was three in the last four years — so my assessment is that our clients are satisfied with the service that we provide. We have launched a customer questionnaire, so, in time, we will be able to substantiate that.

Mr Beggs: You said that you felt that clients were satisfied, but I understand that your last customer satisfaction survey was in 2006.

Mr Armour: I am saying that customers are satisfied on the basis of the lack of complaints.

Mr Beggs: Do they know how to complain?

Mr Armour: Details of the complaints process and procedures are on our website. We are in regular contact with a significant number of our clients, and, as I said, the official solicitor represents some of our clients and is in contact with them, so I do not think that there is an issue.

On the back of one of the report's recommendations, we are assessing quality through a customer service questionnaire.

Mr Beggs: I am pleased that you are carrying out a customer satisfaction survey. Do you agree that that is the only way to be sure rather than simply feeling that customers are satisfied?

Mr Armour: Yes, I accept that.

Mr Beggs: You talked about publishing the annual report. Apart from the annual report, will you be publishing your key targets and ultimate performance in an easily accessible format?

Mr Armour: We publish them on our website. When we get the new IT system later this year, it will further enhance the interaction between us and our clients. I will certainly want to move forward on that.

Mr Beggs: Court Funds Office charges are normally charged against clients' funds. That has not happened this last number of years because of low interest rates and, I dare say, the large sums of money that you have invested, which have not brought in a very significant return. If clients are paying for it, it would be reasonable for you to operate as efficiently as possible, so why do you not have specific efficiency targets?

Mr Armour: Over the past number of years, we have had efficiency targets. In response to a question from Mr Rogers, I said that we had reduced our staffing complement from 24 to 21, so the Court Funds Office is not immune to wider efficiency targets that face other areas of the Courts and Tribunals Service.

We have a target for when the IT system is implemented. I expect it to deliver, for example, a 20% savings reduction, so there have been targets, and efficiency targets are coming down the track.

Mr Beggs: What are your efficiency targets for this year, or is it all about your new computer system?

Mr Armour: We have been working on the basis of roughly a 5% reduction, but we are hampered to an extent in what we can deliver in the Court Funds Office because of the IT system and the manual backup and support that it requires. As I said, when we deliver that system, we are looking for a 20% reduction in our staffing costs.

Mr Beggs: Today, you used the word "processing" on a number of occasions. People were "processing", and I am trying to understand what they are doing when they are processing. Each day, how many new customers will have to be logged on to the computer system?

Mr Armour: For example, when an order comes across from the court, they will be bringing that forward for the funds to be brought in.

Mr Beggs: My question is: how many transactions relating to a new customer come in each day or each month?

Mr Ronaldson: We have approximately 50 new customers every week.

Mr Beggs: Do 50 people have to be logged on to the computer each week?

Mr Ronaldson: Yes.

Mr Beggs: How many transactions are there on your system each day?

Mr Ronaldson: We looked earlier, and 40,000 to 50,000 payments is not unusual for a year, and there are a similar number of receipts.

Mr Beggs: So there are 1,000 payments a month.

Mr Ronaldson: It will fluctuate. For example —

Mr Beggs: There are 250 payments a week.

Mr Ronaldson: It will fluctuate because —

Mr Beggs: On average, it is 250 payments a week.

Mr Ronaldson: Yes, that would not be unreasonable.

Mr Beggs: If I have got it right, new clients have to be added on to the system, and there are about 250 payments a week. What else do the 20 staff do?

Mr Armour: There is the customer care team, which interacts with the clients, and it, for example, takes phone calls from client representatives. There is the interface with the stockbroker and overseeing that relationship, and there is also the interaction with the judicial liaison group.

Mr Beggs: Aside from the computer system, have you looked at how you can improve your system so that fewer people are tied up in processes and the CFO could become more efficient?

Mr Armour: The primary focus is on the IT system. That will help us to reduce a number of the current processes.

Mr Beggs: Do you need any other changes to enable you to become more efficient so that clients can benefit?

Mr Armour: Rather than benefiting clients, it would benefit the Courts Service, because that is where the funding comes from.

Mr Beggs: Normally, it comes from the clients.

Mr Armour: We regularly review how we carry out our business, but, at the minute, we are in that difficult position with the IT system. We have talked through the issues, and it is difficult for us to make those improvements until the IT system is in place. Thankfully, the end is in sight with that.

Mr Beggs: Are legislative changes needed to enable you to become more efficient?

Mr Armour: I do not think that legislative changes would impact directly on efficiency. For me, the key issue is getting the IT system in. That is the big priority, because that is where the efficiencies will be significantly driven from.

Mr Beggs: This question is for the permanent secretary: should legislative changes be made to enable the system to operate more efficiently?

Mr Perry: Given the way in which the CFO is structured, I do not think so. I am sure that management is scrutinising carefully to make sure that resources are being used efficiently.

Mr Beggs: Given the report, what makes you sure that management is looking at it carefully?

Mr Perry: From talking to the chief executive, I know that they are.

Mr Beggs: Surely the report illustrates that management has not been carefully looking at the system.

Mr Perry: I know that, like every part of the Department, the Courts Service is carefully scrutinising what staff are doing daily. Clearly, I am aware of the IT business case, so I know that a significant justification for the new IT system is that it will help us to drive efficiencies. With the operation of the CFO, as Mr Lavery explained, there is a wider consultation on whether some administrative functions could be outsourced. That will form part of the consultation exercise.

Mr Beggs: I now turn to cost recovery. At present, surplus from deposits normally covers your running costs. I understand that smaller amounts of money are generally held in a deposit account rather than going for longer-term investment. Do you accept that that is unfair on your clients who have smaller amounts of funds? Surely that is inequitable.

Mr Armour: I accept that there is an unfairness. Of course, as I said, we have not been recovering funds from clients.

Mr Beggs: You did that until, I think, 2012?

Mr Armour: Yes, and that is one reason why we are now looking at our charging regime with a view to having a public consultation on what is the fair and appropriate way to do this.

Mr Beggs: You said that there were very healthy returns on the large funds that you had invested. In some years, it was 17%, and I think that the lowest was about 6%. You were not using any of that money to charge against your running costs, but you were looking at smaller clients who were putting money in the deposit account, and it was looking after your running costs.

Mr Armour: Individuals in that category will pay a management fee to the stockbroker for managing their funds. In principle, what you are saying is right. All our clients will have some sort of cash deposit, so they will be contributing. I do accept that there is an apparent unfairness in the way that that was operated. That is why, as I said, we want to move forward with a very different charging regime.

Mr Beggs: Would you not have a more stable income source if charges came out of all your investments?

Mr Armour: We will certainly look at that issue in the public consultation. We have a charging regime that covers our costs, is fair and is seen to be fair.

Mr Beggs: I turn to a different issue. It is important that all clients receive regular, timely updates on their investments. However, paragraph 5.13 states that 75 cases on the portfolio list slipped through the net; they were on the portfolio list but not the broker's list. How did that happen?

Mr Ronaldson: It was just a simple error by the broker at the time. Once it was uncovered, we took steps to rectify it and made sure that there were sufficient controls. We brought the controls in-house to ensure that it could not happen again.

Mr Beggs: Are you telling me that there are checks in the system to prevent this happening again?

Mr Armour: Yes.

Mr Rogers: My question is about driving efficiencies and the importance of internal audit, given the value and number of client accounts. Why was no internal audit carried out for about two years, between 2010 and 2012?

Mr Armour: You are right. The report highlights a period of just over a year — some 18 months, I think — during which no internal audit was carried out. As I understand it, there were other pressures at that time in internal audit's work, but I assure the Committee that there has been an internal audit inspection every year since then. The head of internal audit in the Department sits on my audit and risk committee. There are, therefore, very clear linkages now, and we go through the audit process annually. At that time, there were other pressures, which, regrettably, resulted in no audit being carried out.

Mr Rogers: Internal audits are a recommendation. Do you take that on board?

Mr Armour: Absolutely. As I said, the head of internal audit sits on the audit and risk committee. He presents his report to that committee, which is a subcommittee of the agency management board. An action plan is put in place, and the audit and risk committee monitors its implementation. Given that the audit is done on behalf of the Department, it is also fed into the Department, which has oversight of the delivery of the recommendations.

Mr Rogers: What were the other pressures over those two years that you refer to?

Mr Lavery: I will answer this, because I was the chief executive at the time. You may recall the case of the McDermott brothers in the village of Donagh; they had been abusing children. One of the issues that emerged from that case was an inaccuracy in the recording of a court order by staff in the court office, which did not, however, materially affect the outcome of the case. I was concerned that it might not have been an isolated example, so I redirected internal audit resources to carry out a complete review of all court orders made in cases involving sexual offences. This was to make absolutely sure that no other mistakes had been made. They had to pull resources in, and I judged that it was appropriate to redirect some internal audit capacity for a sustained period to carry out that urgent review. The internal audit consideration of the Court Funds Office resumed when the exercise was complete, but it brought to light some issues, although they are not material today. We worked with the office of the Lord Chief Justice to make sure that the orders were recorded correctly. We found that the courts were making one or two mistakes in some cases about the type of sexual offences prevention orders. That internal audit exercise helped us to fix that, but I simply redirected capacity to something that I thought was a much more immediate priority because it was a public protection issue.

The Deputy Chairperson (Mr Dallat): I have heard a lot of evidence today about the problems and concerns in the Court Funds Office. I am not sure whether you will be pleased with this remark, Mr Lavery, but it strikes me that it is an archaic, Cinderella service that is in urgent need of reform. Do you agree?

Mr Lavery: I think that we have consensus that the modernisation programme that Mr Armour described is a priority for us. I just did not want to give the Committee the impression that perhaps we had done nothing prior to the Audit Office report.

The Deputy Chairperson (Mr Dallat): The purpose of the CFO is to look after the financial affairs of the most vulnerable in society, such as minors who have been awarded damages in our civil courts and those who have become mentally incapacitated and rely on the Court Funds Office to manage their financial affairs. From what my colleagues and I have heard today, I think that those people have been let down and have not had value for money from the service that has been entrusted to look after their affairs. Do you agree?

Mr Perry: I think that the report has shown that there are valuable things that we can do to strengthen governance, demonstrate value for money and improve transparency. However, the acid test for us is whether the Court Funds Office provides a good and appropriate level of service, both for clients and the court. While we can do better, it essentially carries out its responsibilities, as I said, diligently and with great care and concern for the clients who are at the heart of its business. I take assurance from that.

The Deputy Chairperson (Mr Dallat): That is useful, and, just as I did in my opening remarks, I was simply regurgitating what was in the executive summary, which, I think, we all signed up to.

Members, we have all now had an opportunity to ask questions. Do the witnesses have any final issues that they wish to address before we conclude the session? Mr Layberry and Comptroller and Auditor General, is there anything that you wish to add regarding the evidence that you have just heard?

Mr Kieran Donnelly (Northern Ireland Audit Office): I have nothing to add at this point, thank you.

Mr Jack Layberry (Department of Finance and Personnel): No, thank you.

The Deputy Chairperson (Mr Dallat): Members, have you any questions that you would like clarification on from Mr Layberry or the Controller and Auditor General?

I thank you all for your attendance before the Committee today; it has been extremely useful, and the information received will be taken on board as we develop our report. It comes to mind, Mr Lavery, that, at an earlier stage you mentioned that you had drawn up a document. It would be useful if we had a copy of that.

Mr Lavery: Is that the investment protocol?

The Deputy Chairperson (Mr Dallat): It is the Amtec report.

Mr Lavery: Yes, of course we will make that available to the Committee.

The Deputy Chairperson (Mr Dallat): You will be pleased to know that we may seek clarification of issues raised today and other issues as they arise during our deliberations. We will write to you about that. Thank you very much for your time.