Tom Winnifrith and Jonathan Mathews persuaded an appeal committee of the Liberal Democrat London regional executive not to expel them from the local party after accepting criticisms in an inquiry by Lord Lester QC.
Lord Lester's advice that they and a third man, Jeremy Shaw, should be expelled was dismissed by Mr Winnifrith last month. But following a mammoth hearing on Sunday night, both agreed to meet conditions in the report, in which Lord Lester said that the exercise of their right to appeal would 'enable the regional party to have regard to whether and to what extent each of them accepts our findings and is willing to give appropriate and enforceable and effective undertakings about their future conduct'.
Mr Winnifrith, author of a by-election leaflet implying that black people were responsible for elderly council tenants 'fearing for their lives', has undertaken not to stand for elections or publish campaign literature. It is not clear how long the bans will last.
The affair has been highly embarrassing for Paddy Ashdown, the party leader, who made no public comment yesterday. A source said he believed there were 'a lot of chastened people in the party'. Jack Straw, Labour's environment spokesman, said Mr Ashdown had endorsed the report but the London party had failed to deliver. 'I have no doubt that the London party acted as they did because they were petrified that any members expelled would blow the whistle on the complicity of senior members of the Tower Hamlets party about the use of the race card.'
Matthew Taylor, the Liberal Democrats campaigns director, admitted: 'Clearly the whole thing has been an embarrassment to the party.' But the party is still angry that Labour has mounted no inquiry into two of its campaign leaflets, which allegedly presented the party as seeking to avoid its duty to house homeless Bangladeshis.
Labour's credibility has, however, been damaged by continuing delay in presenting the results of a secret post-mortem into the leaking of fake canvass returns that talked up the chances of the British National Party winning last September's Millwall by-election. The episode sparked accusations of racism against Labour, with critics claiming that it gave the BNP, which won the contest, credibility among voters. The culprit may never be identified.
A Liberal Democrat source rejected a claim from Gerry Malone, a deputy Tory party chairman, that they were hypocrites. 'The Tories have been guilty of creating a housing crisis which leads to conflict in urban areas.'
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