During its initial passage through the House of Lords in 2011-12, the government suffered seven defeats on amendments to the Welfare Reform Bill. The defeats concerned highly contentious policies, including changes to housing support (the “bedroom tax”), the introduction of a benefit cap, disability benefits, and the reform of the child maintenance system. When the bill returned to the Commons, MPs overturned all seven defeats and asserted their “financial privilege” (or primacy over tax and spending matters). It was argued that, by convention, the Lords could not then insist on its changes. The episode revealed significant confusion about the process, and led to claims that the government had abused parliamentary procedure to avoid unwelcome scrutiny of its policies.

Even to seasoned observers of parliament, financial privilege may be something of a mystery. To shed light on it, Meg Russell and I conducted a research project into the operation of financial privilege between 1974 and 2013, funded by the Nuffield Foundation. The aim of our research was twofold: to clarify how financial privilege works in practice; and to consider whether arrangements in Westminster should be reformed. Yesterday we published our conclusions in Demystifying Financial Privilege, and launched these at an event in parliament, with responses from well-respected Crossbencher and senior barrister Lord Pannick, and former first parliamentary counsel Sir Stephen Laws.

One major complaint voiced is that the government controls financial privilege for its own political purposes. In reality, ministers have far less involvement than is sometimes assumed. When Lords amendments are received by the Commons, an impartial clerk first identifies whether any have tax or spending implications (or “engage” financial privilege). Government officials will often argue their case – which, as we identify in the report, is a potential problem – but it is ultimately for the clerk to make a decision based on precedent. The next step is for MPs to decide what to do with each amendment. They have three broad choices: if they agree it, financial privilege is automatically “waived”; if they make an alternative proposal (eg an amendment in lieu), financial privilege does not arise; and if they reject the amendment outright, financial privilege is “invoked”. Although the government usually determines the Commons’ choice (by virtue of its majority), it does not determine whether privilege was engaged on the amendment in the first place.

A second complaint, particularly made since 2010, is that financial privilege is being used in a way that it wasn’t in the past. Financial privilege is certainly not a new innovation: it is one element of the Commons’ “financial primacy” over the Lords, a principle that dates back centuries and was formalised in the late 17th century. The Commons claimed financial privilege on Lords amendments throughout the period we studied (160 amendments, 1974-2013), with the highest absolute number (36) in the 1974-79 parliament. However, in 2010-13 the Commons asserted financial privilege in response to a particularly high proportion of Lords defeats: 24%, compared to just 6% in 2005-10. But this change did not result from privilege being interpreted more broadly than before (although we do identify the possibility of “creep” over a longer period); instead, the key political battlegrounds are now over spending matters, which means that a higher proportion of Lords defeats engage financial privilege.

An important complaint is that the financial privilege process lacks transparency. At present there are no clear definitions as to what falls within Commons financial privilege. And once privilege has been invoked on an amendment, the Commons gives no explanation as to why. Such lack of transparency makes it difficult for peers to anticipate whether financial privilege will be applied to their amendments, and has fed perceptions outside parliament that the process is being abused. There is also some lack of transparency about how the Lords may respond when faced by a claim of Commons financial privilege. Notably, some overseas legislatures manage arrangements better in this respect: in Australia, statements are published explaining how and why an amendment is judged to be financial, while in Canada statements have specified the costs involved.

It seems clear to us that existing arrangements surrounding financial privilege are unsatisfactory, and that more could be done in particular to improve transparency. Both Houses (especially the Commons) should consider how clearer information could be provided about financial privilege, for example by expanding the text on the parliament website. We believe it is reasonable for peers to be given an explanation of why their amendments engage privilege, including an indication of the amount of money involved. Most importantly, the Commons should publish a clear definition of what types of amendment it considers to be covered by privilege. The Lords should also make clearer in its own guide to procedure its interpretation of how the Lords may respond to the Commons’ claim of financial privilege.

Commenting on the report at the launch event, Lord Pannick (who has experienced his own amendments being rejected on financial privilege grounds, without clear reasons) said “the Constitution Unit, Meg Russell and Daniel Gover have done a very great service in identifying the principles of financial privilege” and said that the report was “particularly persuasive” with respect to transparency. He concluded saying “I hope the report will encourage the Commons’ authorities to look again at their procedures. At the moment, the procedures are indefensible”.

Ultimately, however, our report notes that arrangements around financial privilege rest entirely on convention, and (contrary to some claims) there are currently no absolute restrictions on how the Lords may respond. All parties – and especially the government, when determining how the Commons responds to Lords amendments – should thus exercise caution, to ensure that tensions are not inflamed too far.