Lords watchdog 'learnt about loans in the press

The Lords watchdog responsible for vetting potential peers only found out that some nominees had made loans to political parties by reading about it in the newspapers, it emerged today, as MPs continued their investigation into the "cash-for-peerages" affair.

Lord Stevenson, the chair of the Lords appointment commission, told MPs it was after reading of one substantial loan by a nominee that the body then asked all political parties to declare if loans had been received by the other nominees.

His revelation came as the public administration select committee announced it would be suspending its investigation for the summer to allow the ongoing police investigation to be carried out, but would interview more witnesses in September.

These witnesses could even include Mr Blair's chief fundraiser, Lord Levy. The chair of the committee, Labour's Tony Wright, promised an "interim" report in July.

Mr Wright said: "It's pretty clear that some of the witnesses that we have identified are very much in the frame as far as the police are concerned."

He added: "These are big important public issues, but I want to be responsible and above all I don't want it to be said at any point that we compromised police action."

Today, MPs on the committee grilled Whitehall's most senior civil servant, Sir Gus O' Donnell, about the row, which saw a series of Labour lenders nominated for peerages.

Sir Gus told the committee it was "perfectly reasonable" for donors to Labour's flagship city academies to be considered for peerages - so long as the peerage was for "what they have achieved" rather than reward for particular support.

Lord Stevenson revealed that his committee had been kept in the dark over the fact that some nominees had made loans.

In fact, it had only been alerted to the potential stumbling block by media reports, he said.

"When did we become aware of the saliency of loans in the most recent list? When we read that a particularly large loan had been made by one of the nominees," he said.

"We moved very fast and got round all three political parties. It was rather late in the consideration and we had to move very fast."

The commission eventually registered its objection to the elevation of several lenders to the upper house - the first time it had made such a recommendation.

And, although Tony Blair effectively held a veto over the commission's advice, he had stuck to a public commitment always to accept it, the peer said.

Lord Stevenson told the committee that the rules on disclosure would now be tightened to make clear that any loans should be revealed when nominations were put forward.

At present, party chairmen have to sign certificates about nominees' financial and personal links to the party when putting them forward for a peerage.

They would now be amended to make clear they should include "anything that could conceivably be thought to affect a peerage", he suggested.

By taking loans at "commercial" rates, parties were able to bypass a requirement for significant financial contributions to be publicly declared. The police are now believed to be looking at whether all loans were in fact at commercial rates - or even expected to be repaid.

Giving evidence, Sir Gus said it was "perfectly reasonable" for supporters of the government's controversial city academies to be considered for peerages.

He told the committee there was a principle that those who had made donations to political parties should not be precluded from such consideration.

"It's for the heads of all the political parties to decide who they put in," he said.

"What's important here is those people who they nominate are people who can make a real contribution to the House of Lords in its legislative mode."

He added: "It seems to me perfectly reasonable to have someone, if education is to be a big issue, that they are someone who is an expert on education and can make a contribution."

Sir Gus said Tony Blair would not "rule out" people who have donated to his flagship city academies programme but he would be "absolutely clear" that peerages are awarded for "what they have achieved" rather than their support for a policy.

He added: "The prime minister and I think all the leaders of political parties are attempting to put people into the Lords who will make a strong contribution to the governance of this country."

Scotland Yard said earlier today that police hoped to make an initial submission to the Crown Prosecution Service this autumn - but this did not mean its investigation would be concluded by then.

The public affairs committee was first persuaded by the police in March to postpone its inquiry - which is due to include evidence from Lord Levy and two Labour backers.

Chai Patel and Sir David Garrard had been due to be questioned over loans they made to the Labour party totalling more than £3m.

Lord Levy raised millions of pounds from them and other wealthy backers in undisclosed loans to bankroll Labour's general election campaign last year.