(1 week ago)Grand Committee
Committee (1st Day)
My Lords, the hybrid Grand Committee will now begin. Some Members are here in person, respecting social distancing, others are participating remotely, but all Members will be treated equally. I must ask Members in the Room to wear a face covering except when seated at their desk, to speak sitting down, and to wipe down their desk, chair and any other touch points before and after use. If the capacity of the Committee Room is exceeded, or other safety requirements are breached, I will immediately adjourn the Committee. If there is a Division in the House, the Committee will adjourn for five minutes.
I will call Members to speak in the order listed. During the debate on each group, I invite Members, including Members in the Grand Committee Room, to email the clerk, if they wish to speak after the Minister, using the Grand Committee address. I will call Members to speak in order of request.
The groupings are binding. Leave should be given to withdraw amendments. When putting the question, I will collect voices in the Grand Committee Room only. I remind Members that Divisions cannot take place in Grand Committee. It takes unanimity to amend the Bill, so if a single voice says “Not Content” an amendment is negatived, and if a single voice says “Content” a clause stands part. If a Member taking part remotely wants their voice accounted for if the question is put, they must make this clear when speaking on the group. We will now begin.
1: Before Clause 1, insert the following new Clause—
“Objective of this Act
(1) The overarching objective of this Act is to allow the Secretary of State to safeguard national security in respect of economic and social harm.(2) When making decisions under this Act, including for the purposes of assessing a risk to national security, the Secretary of State must have regard to the objective in subsection (1).(3) The Secretary of State must also have regard to the effect of the application of this Act on—(a) technology investment;(b) the research and innovation environment; and(c) business opportunities for small and medium-sized enterprises.”Member’s explanatory statement
This amendment sets an objective for the bill in relation to national security and includes a number of other elements to which the Secretary of State must have regard.
My Lords, Amendment 1 is in my name and that of my noble friend Lord Clement-Jones. At Second Reading the Minister described the Bill as
“a major upgrade to the Government’s powers to screen certain acquisitions on national security grounds”,
which builds substantially on the Enterprise Act 2002. It certainly is, but perhaps in the Bill we are dealing with architect’s drawing of the upgrade, rather than a 3D model.
First, let me say without equivocation that those of us on our Benches see the need the Government to scrutinise potentially sensitive transactions, and we think that an upgrade is timely and sensible. However, as the Minister has acknowledged, there is the rub. Defining what is sensitive and what is a transaction of concern are key to the effective operation of the Bill. As we progress through the amendments ahead of us, I would say that virtually all seek to better define the operational process of the new investment security unit within BEIS and to ensure that the disquiet it has caused is alleviated.
At Second Reading, the Minister spoke about reflecting
“the modern economic and investment landscape in the UK.”—[Official Report, 4/2/21; col. 2332.]
In fact, what is proposed here is culturally different from what successive Governments have practised. Blair, Cameron—including and excluding us—through May to Johnson have all, so far, rightly or wrongly, pursued a distinctly hands-off approach. It is not hard to understand the alarm that the Bill might cause in the outside world.
Its publishing sends a message about the future nature of interventionism. This concern comes not just from the traditional free traders of the City but from universities, industry trade associations and sectors as wide as space and bioscience. The abiding link to these academic and industrial concerns is that these are, by necessity, international and collaborative activities.
The overwhelming concern coming from all sides of the House in that Second Reading debate was how this unit was to operate effectively without stifling innovation, scaring off capital and becoming a proxy for wider strategic considerations. It is with this in mind that my noble friend Lord Clement-Jones and I penned this first amendment, which sets out the objective of the Act. By exclusion, it also sets out what is not the objective of the Act and thus what is within and not within the purview of the investment security unit. It is designed to send clear messages about how this Bill will operate in practice.
Looking at the amendment in detail, first, in making regulations under proposed subsection (1), the Secretary of State’s overarching objective must be safeguarding national security. This is reinforced by proposed subsection (2). There is no controversy here, given that this is the purpose of the Bill, and on their own the subsections would offer nothing new. That is down to proposed subsection (3), which would add that
“The Secretary of State must also have regard to the effect of the application of this Act,”
on other things. In our case we have listed:
“technology investment … the research and innovation environment … and … business opportunities for small and medium-sized enterprises.”
We put those three there, because in our view these areas are key elements of our national security. I am happy to debate what should be on that list, but I will explain why we put these in the amendment.
Technology investment is key to keeping ahead of the security arms race, and it is reasonable that the Secretary of State and, by extension, the unit in BEIS would have regard to this technology base. Similarly, the research and innovation environment is needed to deliver that technology leadership. Without vibrancy in investment here our future security is compromised. Finally, in many cases it is the SMEs that bring true innovation to all the 17 sectors on the Minister’s list. They take technology to market and must not be disproportionately disadvantaged by the application of this Bill.
This amendment is designed to send two messages. One is internal, seeking to influence the nascent culture of the investment security unit to ensure that it recognises publicly what elements contribute to the delivery of national security. The second is an external message to the market, our universities and our innovative businesses, big and small. They need to know that these issues are in the Government’s mind when they are making security decisions. They need to be reassured that this is a vehicle to help to reassure them. The Minister may well say “trust me”, and of course I do, but what of future Ministers and future Governments? This amendment would ensure that the Government have regard to the conditions and the culture that will deliver national security and investment in that security. I beg to move.
My Lords, in principle, I do not support proposed new clauses such as this, whether they are called objective clauses or purpose clauses. I have tabled them myself in the past, but they are usually not much more than an excuse for another Second Reading debate, and we had a little of that in the introduction from the noble Lord, Lord Fox.
Amendment 1 could be positively harmful. It confines national security to “economic and social harm”. The obvious item omitted is physical harm, but other harms could be missing. Purpose or objective clauses would be used as an aid to interpretation of the main body of the Act so, if they are there, they have to be comprehensive in their drafting if they are not to act as a constraint on the operation of the Bill.
Similarly, the “have regard” matters in proposed new subsection (3) could act as a constraint on the Secretary of State. The noble Lord, Lord Fox, explained the rationale for his list, but I could not see why “technology investment” was singled out compared to other kinds of investment—for example, in manufacturing capability or intellectual property. What exactly is meant by “research and innovation environment” is unclear from the drafting, and is the omission of “development”, which is the normal companion to “research”, significant or not? Singling out SMEs, which we are all aware are important to our economy, implies that larger enterprises are not important in the considerations.
There is a good reason why Bills do not often contain purpose or objective clauses. They are traps for the unwary and can do more harm than good.
My Lords, there are very wide-reaching powers in this Bill and, to start where I ended my Second Reading speech:
“I am not against the notion of interventions, but the Bill should be more than notion and compulsion, and I hope that it is possible to include more direction and balance.”—[Official Report, 4/2/21; col. 2364.]
That is exactly the aim of Amendment 1. It aims to be positive rather than negative, by defining an overarching objective. One might debate whether it could be slightly different, but the idea is to have an overarching objective to safeguard national security in respect of economic and social harm. “Social harm” is a very broad term. Recognising that broad scope, it specifically lists that the Secretary of State must
“have regard to the effect … on technology investment… the research and innovation environment … and business opportunities for small and medium-sized enterprises.”
I can almost hear the Minister assuring us that the Secretary of State will have regard to a lot of things, and that would be right, but it is also necessary to make sure that there are correct messages given by the Bill—messages that endure and give confidence to the business sectors most likely to suffer, perhaps entirely unnecessarily, from rumours, concern or finger-pointing from competing jurisdictions.
If we take the starting point that the Bill has good intentions, that there are similar moves internationally, that we have perhaps been too slack in the past, and that there are inevitably burdens arising from both notification requirements and notification concern, that will lead to unnecessary voluntary notification. One wonders if there are not more mechanisms that can give an all-clear signal.
Maybe some will become clearer or develop over time but, wherever that is possible, as we work through the Bill, I am mainly looking to see what incremental steps can be made towards certainty. That can be helped right at the start of the Bill by using the combination of broad objective plus a list of the most sensitive “have regard” matters. This appears in various other pieces of UK legislation, not least in the financial services legislation that is occupying both my time and that of the noble Baroness, Lady Noakes, on the days either side of this sitting. Therefore, I hope that the Minister sees the advantage of taking that approach here.
My Lords, I will disappoint my noble friend Lady Noakes by making a comment that is more a Second Reading comment than anything else. But it is important we see this Bill in context. The genesis of this Bill is, I assume, largely about Chinese influence and the debates we have had about Huawei and so on. I want to raise only one issue on the context; it is the way in which British commerce and the economy are so intricately and deeply linked with China. Is that globalisation? I am not sure.
We all know how much we buy now comes from China on the one belt, one road programme or elsewhere. The interdependence between western consumers and economies and the Chinese economy is extraordinarily deep-rooted. I am going to use a little example—a silly one, you may say. Old-fashioned fellow that I am, I try to buy British if I can. Looking for a butter dish online, I bought quite an attractive one from the English Tableware Company. I thought that was pretty safe, until the moment it arrived. I turned it over and found it was made in China, which seems quite strange to me. I took it up with the company, and it came back to me saying its products were all ethically sourced and it had checked the suppliers. Of course, we have no idea about the working conditions or possibility of slave labour in Chinese factories.
We know quite a lot about what is sadly happening in Xinjiang, and that the Chinese Communist Party sees commercial influence as intricately linked to broader power. We should all remember what has happened to the relations between China and Australia since Australia demanded an investigation into the roots of the Covid crisis. The Chinese apparently talk about civil/military fusion. Butter dishes may not be of huge importance to intelligence, but they reflect the broader context of the intricate involvement of western economies with the Chinese economy.
My Lords, I declare my interests as stated in the register. My noble friends Lord Fox and Lady Bowles have cogently outlined the purposes of Amendment 1 and the importance of having a framework of this kind for the Secretary of State when he is exercising his powers under the Bill.
I am taken by the fishing analogy which has been used in relation to the Bill. On these Benches, we support the trawling process and its purpose, but a large number of questions in consequence need answering about the extent of the net, the size of the mesh, and which species will be taken on board and which discarded, and how long that will take. We will come to those questions later in Committee. This amendment asks the broader question: what impact on the broader ecology is the trawling having? The Secretary of State cannot be oblivious to the impact on the investment ecology, as set out in the proposed new paragraphs, but must take account of the impact of what he or she is doing. I am sure that the Minister will want to give us assurances on many questions to do with the Bill as drafted. But we need certainty about this aspect and how the Secretary of State will exercise these considerable powers yet not thereby damage what we have in the UK—a thriving investment climate. As my noble friend Lord Fox has pointed out, it is not just the City but universities, trade associations and sectors such as space and biosciences that have raised concerns about the width of the Secretary of State’s powers.
Today, we have seen the outcome of the sector consultation, all 111 pages of it, which allays concerns somewhat, but I anticipate that many will still believe—as I do—that the net is being too widely drawn. This amendment is designed to constructively allay that concern. I hope that the Minister will recognise its merits. It is far from harmful, as the noble Baroness, Lady Noakes, suggested it was. She asked why we singled out these three elements: it is because, looking at the sectors, it is precisely those areas that we believe are most likely to be damaged if a net is drawn too wide. I am going to resist the temptation to pick up the points made by the noble Lord, Lord Robathan, because I am conscious we are not on Second Reading, but he has raised some interesting questions.
My Lords, it was clear at Second Reading, and again today from when the noble Lord, Lord Fox, began, that everyone across the House agrees that national security is the number one priority.
The discussion therefore is twofold. First, will what is, and is not, covered in this legislation be clear enough? Secondly, is the balance between security needs and the desire for economic growth, research, innovation and freedom to invest, correctly delineated? On the first issue, it is obvious that the new regime must be based on the best advice coming from across government, as well as on emerging and current threats, and the behaviour and developments of our adversaries. We will come in the next group to the definition of national security.
This first amendment is focused more on the second question that I posed. Will the unit take sufficient account of technology investment, research and innovation, and business opportunities, particularly for SMEs? From everything said at Second Reading and even today, that is an important discussion. We should not expect the Bill, nor its new unit, to be the generator of investment, research and development—that is for an industrial strategy—but the Government must have a careful eye on whether the workings of the Bill have a detrimental impact on technology investment and innovation, while ensuring that the economy does not override security interests. That is a difficult judgment. If it were not, there would never be any problems for the Government to solve.
I read today—others may already have been aware—of possible changes to the listings regime to help the City compete with New York, Amsterdam and Frankfurt in attracting fast-growth companies by creating an “agile” new economy focused on innovation and technology. We welcome such moves and attention being given to making Britain a more attractive place in which entrepreneurs can take companies public.
We hope that the proposals emanating from one of our colleagues, the noble Lord, Lord Hill, on relaxations on the use of dual-class shares, to allow founders to keep control over their companies by giving them deciding votes on decisions such as corporate takeovers, could work in harmony rather than at variance with the objectives of the Bill. I hope there will be an opportunity to discuss those interplays as we go forward.
In the meantime, we will consider future amendments that will look at whether the right procedures, definitions, timelines and so on strike the right balance as to workability in making those fine judgments between security and economic interests. However, this amendment is calling for the Secretary of State to be required to have regard to those other interests. The Minister will say that, of course, he or she is bound to do so. However, it is a question on which some assurance is needed and we look forward to the Minister’s view on that.
I am grateful to noble Lords, Lord Clement-Jones and Lord Fox, for their introductions to this debate. I thank them for proposing this new clause and for enabling a further discussion on the purpose of the Bill.
Amendment 1 seeks to establish an objective for the Bill and include a number of elements to which the Secretary of State must have regard when using his powers. Let me say at the start that the intent behind this amendment is to provide a clear statement of the scope of the Bill, to prevent so-called mission creep and give certainty to businesses and investors, while avoiding the pitfalls of attempting to define “national security”. However, the legal effect of the amendment presents us with a number of challenges.
The amendment would require the Secretary of State when exercising his powers under the Bill to safeguard national security in respect of economic and social harm, which is reasonable. It is indeed possible that economic or social harms could give rise to risks to national security, but so could other harms such as physical or military harm. For example, a hostile actor could use control over a piece of critical infrastructure to put UK citizens in physical danger or they could acquire companies in the UK defence supply chain and thereby degrade our military capabilities.
The absence of other harms in the factors listed by the amendment suggests that the Secretary of State may not use his powers under the Bill to safeguard national security from those harms that I have outlined. It is also unclear how he should have regard to the factors in subsection (3) of the proposed new clause. As the amendment does not say that they are to be regarded as part of national security, that would suggest the scope of the Bill is being expanded beyond national security. It is important to note that the government position on the issue of defining, wholly or in part, “national security” remains consistent with when amendments in a similar vein to this were discussed at Second Reading and in the other place; I have discussed that with the noble Lord, Lord Fox, previously. The Bill does not set out the circumstances in which national security is, or may be, considered at risk. That reflects long-standing government policy to ensure that national security powers are sufficiently flexible to protect the nation. It also does not include factors which the Secretary of State must or may take into account in assessing national security risks on the face of the Bill.
While it is crucial for investor confidence that there is as much transparency in the regime as possible, there is clearly a limit to how much the Government can and should disclose in this regard, given that the regime deals explicitly with national security matters. National security risks are multifaceted and constantly evolving. What may not constitute a risk today may well do so in future. We may find over time that such specificity becomes outdated. Indeed, as my noble friend Lady Noakes pointed out, it is enough of a challenge to ensure sufficient specificity in the objectives of the Bill, especially with regard to concepts such as those referenced in the amendment.
While I have nothing but gratitude for the noble Lord’s intention—to provide a specific objective for the Bill—it is primarily for the reasons I have set out that I am unable to accept the amendment, and hope that in the light of that he feels able to withdraw it.
I am grateful for the Minister’s gratitude. I am also grateful to Members of the Committee who have spoken, but I am a little shocked by the noble Baroness, Lady Noakes, who seems to have an internal inconsistency. I always think of her as such a logically consistent Peer, but in one breath the amendment was dismissed as legislative fluff and in the next it was the most harmful thing that could happen to the Bill; I suggest that it is either one thing or the other. I appreciate the Minister’s solid response.
My noble friends Lady Bowles and Lord Clement-Jones added to the point that is central to this. The culture of how the Bill is delivered by the investment security unit will be central to how it is viewed in the outside world. If the unit has a combative and aggressive culture, that will affect the way in which the investment community regards investment in this country. The amendment seeks to explicitly influence the culture of that organisation, but I am very happy if the Minister’s lawyers can find better ways to do so. However, a Minister simply saying something will not make the unit run that way. In the end, that will be the measure of how successfully the Bill sets the balance between seeking to assure national security while not throwing out all the good things that our current investment world has.
I look forward to debates on other amendments that seek different ways to do the same thing but, in the meantime, I beg leave to withdraw Amendment 1.
Amendment 1 withdrawn.
Clause 1: Call-in notice for national security purposes
2: Clause 1, page 1, line 10, after “security” insert “, including public order and public safety”
My Lords, I shall speak also to Amendments 13 and 83. Perhaps I will take a little more time than usual over this because it is one of the central issues on which we wish to hear the views of the Committee and, indeed, the response of the Government.
Given that national security is clearly the Government’s priority, it is important that to make the Bill work everyone involved in its provisions and their interpretation are clear about how the Government see national security—its range and depth, if I may put it that way. Therefore, Amendment 13 seeks to establish the issues which should be taken into account because clear rules will be vital for businesses seeking funds, researchers, investors and the unit having to take decisions. They need to work on basically the same template.
Let me take a moment to say that the Government have published 112 pages today—the Minister expected someone to say it, so I may as well say it now—but his letter covering the first amendment arrived as he was speaking to it and the Written Ministerial Statement did not even refer to a policy statement that I gather has also been put out, according to my up-to-date information. I think the Committee will understand that we have not had time to digest this and we may therefore have to try to look at some important issues in that.
One of the points relevant to Amendment 13 is that this response states that several respondents indicated that “national security” should be clearly defined. We are therefore interested to know whether the Minister will listen to those concerns which, in a sense, is what Amendment 13 is seeking to do. It is not trying to define exactly what is national security nor, by implication, what is not. It is setting out how people tasked with scrutinising potential investments may approach the first question—“Might this risk our security?”—by listing the sort of factors to be considered. The “have regards”, while not an exclusive list, indicate to officials, the Secretary of State and those handling investments the matters which should be considered in any decision.
We absolutely agree that neither the Government nor Parliament should prescribe or limit what national security covers, as is long-standing practice, and therefore do not seek by this amendment to curtail the Secretary of State’s flexibility to act, but we nevertheless think that the other parties involved who will be impacted by this legislation need to know the range of issues which will be among those considered by the Secretary of State.
Amendment 13 provides a framework which is neither rigid nor exclusive. It simply does what other countries have done, what experts have recommended and what we have heard that people submitting comments to the Government have also said. The Law Society argues that without something like this, there is a risk that a Secretary of State could become exposed to political influence, and the Investment Association says that a better understanding of national security could help calm investors. Therefore, the amendment indicates factors that the Government might consider, such as the impact of a triggering event on defence capabilities or how a hostile actor might be enabled to gain access to critical infrastructure. I hope that the Minister will accept that Amendment 13 provides such a framework and flexibility to help alleviate the concerns that have been raised, particularly in the defence sector.
We are also keen to ascertain whether critical infrastructure is included in the Bill. As we know from the ISC report published last year, Russia has
“undertaken cyber pre-positioning on other countries’ Critical National Infrastructure.”
It would therefore be useful if the Minister could clarify whether that is covered in the Bill.
Later this month—the rumour is a week tomorrow but certainly while the Bill is in this House—we will see published the Integrated Review of Security, Defence, Development and Foreign Policy. Perhaps the Minister could confirm its publication date and that it will indeed be a week tomorrow. He nods—I think I am not going to get a yes that question. Can he also outline how the results of the analysis of that review will feed into the work of the new unit and its decisions on what constitutes a security threat? Will the review focus on the private sector and on the role that the Government see for business, as well as on how the interests of innovation both in academia and in business should be promoted?
Amendment 83, to which the noble Baronesses, Lady Northover and Lady Bennett of Manor Castle, have added their names, highlights the relationship between the review just mentioned and the objectives of the Bill and seeks a government statement on it. Given that the Government have said that the review will include the
“long-term strategic aims for … national security”,
there are questions about how these would align with the Bill’s new regime and how we are able to keep an eye on technological developments in the private sector while keeping pace with security challenges. What we do not want to see is an important new national security regime buried in BEIS which does not link with the UK’s wider and longer-term security concerns and priorities.
The ISC noted
“the extent to which economic policy dictated the opening up of the UK to Russian investment”,
whereas the Bill seeks to put security first and our investment needs second. As I said on the earlier group, it is an important but not always easy judgment to make. It is therefore essential that the Government’s view on security is considered by the BEIS unit and that Parliament is able to see how that is happening by way of the statement suggested in the amendment. That statement should focus both on how the Government will align the provisions in this Bill with the outcome of the integrated review and on how the UK will respond to identified threats, including new technology, biological weapons, cyber and misinformation. The reference to new technology is key since new weapon capabilities could as easily be developed in the private sector as in an MoD lab. The Government will need to procure these assets while preventing certain foreign states also purchasing them.
I return to Amendment 2, which probes whether public order and public safety are included within the Government’s view of national security. The similar German regime captures “public order” as part of its national security, while the Japanese regime applies equally to “public order and public safety” and to national security. Is the UK regime narrower than the approach taken by these other jurisdictions? Perhaps the major issue we want clarified within that is whether an investment which could have an impact on the working of our democracy would be covered.
Last year’s Intelligence and Security Committee report on Russia stated:
“The UK is clearly a target for Russia’s disinformation … Russian influence in the UK is ‘the new normal’ … It is clear that Russia … poses a significant threat to the UK”,
including “interference in democratic processes”.
With regard to elections, the discussion at the time of the publication of the report, which of course was written a whole year before it was published, was more on bots, messages, and so forth, the report noting that
“Russia has carried out malicious cyber activity … including attempting to influence the democratic elections of other countries”.
The Government’s own response concluded that
“it is almost certain that Russian actors sought to interfere in the 2019 general election through the online amplification of illicitly acquired and leaked Government documents.”—[Official Report, Commons, 16/7/20; col. 71WS.]
However, an external force intent on interfering with our elections could instead invest in the electronic gear that stands behind our pencil and paper voting, and perhaps pose a threat that way. Given, as the ISC report notes, the
“fusion of government and business”
in Russia, a business providing advanced IT for elections could have very close ties to that regime, or indeed to any other regime. Indeed, the Government’s response to the ISC noted that the Defending Democracy programme in the Cabinet Office includes consideration of
“direct attacks on electoral infrastructure.”
So the thinking is clearly there. Perhaps the Minister could therefore clarify whether foreign investment in democratic electronic infrastructure would come under the remit of the Bill. It is partly about what we think of as national security.
When the ISC covered this, it noted that
“the issue of defending the UK’s democratic processes … has appeared to be something of a ‘hot potato’, with no one organisation”—
I assume it meant within government—
“recognising itself as having an overall lead.”
Could the Minister outline how such responsibility and oversight will sit within the BEIS unit, such that investment in any democracy-related hardware or software could be included in its remit, and explain how the Government will overcome what the ISC describes as
“nervousness around any suggestion that the intelligence and security Agencies might be involved in democratic processes”,
given the committee’s view that
“Protecting our democratic discourse and processes from hostile foreign interference is a central responsibility of Government, and should be a ministerial priority.”?
The answer to the questions may indeed be no, but to have a discussion on national security and the future of our democracy and our safety without considering this seems to us to miss out a vital ingredient. I beg to move.
My Lords, I thank the noble Baroness, Lady Hayter, for bringing forward this group of amendments. I will speak in particular to Amendment 13.
In preparing for this stage of the Bill we have received a number of briefings from outside bodies. Every single one has said, in the words of the noble Lord, Lord Clement-Jones, that the trawl is being done far too widely. The Government would not be drawn on that at Second Reading, and it is absolutely appropriate that we try to pin them down through this form of probing amendment.
In leaving the parameters drawn as wide as they are, it is fair to say that all those who have briefed ahead of today would prefer to see a strict definition of what national security is. Am I right in assuming that national security for the purpose of the Bill covers everything that is not defined or covered elsewhere? Water treatment, the water supply and air traffic are covered by other legislation, so does that mean they are not covered by the purpose of the Bill? Are we wrong to assume that the Bill covers critical infrastructure in the way the noble Baroness, Lady Hayter, set out? It would be helpful to know whether we have to work on a process of elimination rather than on a specific reference point such as a definition, as is set out in Amendment 13, which is quite wide in its own right, given its number of “have regards”.
The Law Society of Scotland states that
“national security itself is not defined within the Bill. We note that the Enterprise Act 2002 definition refers to EU legislation”.
Are we right to assume that that definition still applies, or can we safely assume that, because we have now left the European Union, it is no longer valid? A steer from the Minister would be very helpful in summing up this debate.
The Law Society of Scotland goes on to say that
“: it might be helpful to introduce a stand-alone concept appropriate to the current context. An exhaustive definition is likely to be neither possible nor desirable but a general delineation of the concept together with detailed additional guidance as to how this is likely to be applied would be helpful.”
Does the Minister intend to do that as the result of this amendment to date?
I, too, received the letter from the Minister within the last half hour, when I was on another call. In the normal course of events, I would have studied such a letter quite closely to enable me to prepare for today, so it is a matter of some regret that we have not had a chance to read it. Perhaps the Minister will cover its main points in replying to this little debate on this group of amendments.
I believe that either we should adopt something like Amendment 13 in the course of proceedings or the Minister should bring forward some definition of the Government’s own drafting during the proceedings, before the Bill leaves the House.
My Lords, the noble Baroness, Lady Hayter, laid out in her opening remarks the necessity for clarity about what risks this Bill seeks to address, arguing for a definition of national security in Amendment 13. There are indeed arguments for such a definition, as the Law Society of Scotland, and that for England and Wales, have laid out, lest the Government might, for example, respond to political, economic or electoral pressures to define risks which should not be brought within the scope of this Bill. Others see risks associated with such definitions and further legal minefields. However, the Law Society of England and Wales sees a risk in Amendment 2—that extending the scope of the clause to cover “public order and public safety” could give rise to similar concerns, unless these terms could be strictly defined so as not to include political motives. However, I hear what the noble Baroness says about her aim here, and about the risks to our democratic processes.
I speak here particularly to Amendment 83 in the names of the noble Baronesses, Lady Hayter and Lady Bennett of Manor Castle, which I have also signed. The amendment is extremely restrained. The Government have made much play of the importance of their proposed integrated review of security, defence, development and foreign policy. From time to time, these reviews are made. There was one after the general election of 2010, and another after the 2015 general election. Of course, that latter one included pandemic as a risk, and emphasised how important it was to the United Kingdom, economically and strategically, to be at the heart of the EU, through which, as it put it, we amplified our power and prosperity.
One might say that a new assessment is indeed desperately needed. It was due last year but was knocked off course by the pandemic, which did not stop the Government pre-empting its conclusions by merging DfID with the FCO and cutting aid, even though in 2015 this was seen as a mark of our global reach—global Britain, you might say. In addition, the Government announced spending levels for the MoD before Christmas, none of this waiting for a proper strategic review.
So now we have this Bill on threats to national security, without that review having been published. We hear that it is imminent. Could the noble Lord update us? Is it indeed being buried by the Budget coverage? We have certainly heard that it has got thinner and thinner, perhaps one-fifth the length of the 2015 one, and that it is large on rhetoric and small on how it is to be achieved. Nevertheless, this should be an important statement of what the UK identifies as threats and ambitions. Therefore, this should have preceded this Bill and underpinned what it was trying to do, if the Government are to be joined up.
Amendment 83 asks that, when the review is finally published, the Government publish a statement that outlines how provisions in the Act will align with the UK’s long-term security priorities and concerns as identified in the review. The amendment states that this should be
“As soon as reasonably practicable”,
a generous phrase that Baroness Hayter used in tabling this amendment, more generous than the one I would have used.
Perhaps, because there is little confidence in the review, as one would have thought these areas would definitely be covered, this statement should also include how the Bill will respond to emerging threats, new technology, biological weapons, cyber, misinformation and military developments by the UK’s adversaries. One of the successes of the 2015 review was certainly the emphasis on cyber and the subsequent and important expansion of UK capacity in this area. I am sure that this will not be neglected in the new review. The amendment asks the Secretary of State to lay a statement before Parliament. It is surely the least that the Government should do to try to ensure that the Bill is aligned with whatever comes forward in the strategic security review. The Government should be able to simply accept the amendment, and I look forward to the Minister’s reply.
My Lords, at Second Reading, I said that I felt that a lack of definition for national security was a problem, and I still feel uneasy about that. I understand the need for flexibility to take account of how threats evolve over time. My noble friend the Minister said at Second Reading that national security was not defined in other legislation, but I am not sure that is quite good enough, given that this legislation will have a particularly big impact on commercial transactions, and what the business sector needs is certainty. Other uses of the term have not had that sort of impact on business transactions. I completely understand the difficulties of definition—problems of being too restrictive or insufficiently comprehensive. I think Amendment 13, in the name of the noble Baroness, Lady Hayter, is a better approach than Amendment 1 with its objective clause, but I am concerned that it may still carry some of the defects that I outlined when I spoke to Amendment 1.
The statement that the Secretary of State will make under Clause 3 will certainly help businesses and their advisers but, at the end of the day, national security is the big overarching concept in the Bill which is left without further detail. Several noble Lords have already referred to the letter from my noble friend the Minister to all Peers, which came out while he was speaking earlier. I have had an opportunity to have a quick look at it on my iPad, and I do not think that any Member of the Committee will find that it advances our consideration of the Bill this afternoon at all: it just says that there is a lot more work to do.
If there is no definition or further elaboration of what national security means in the context of the powers created in the Bill, the Government will be giving the courts a blank sheet of paper if, as is probably likely, at some stage a challenge to the use of the powers under the Bill is mounted in the courts. We must remember that we have an activist judiciary, especially over the road in the Supreme Court, and the Government really ought to be alert to that fact and try and proof legislation against what can be done there. I shall be listening very carefully to what my noble friend says are the reasons for leaving national security as such a completely open issue in the Bill, and I look forward to hearing his remarks.
My Lords, I should perhaps begin by noting my position as the co-chair of the All-Party Parliamentary Group on Hong Kong. The noble Lord, Lord Fox, in opening this Committee, said that most of the amendments were seeking better to describe national security. The noble Baroness, Lady Hayter, said that, without a definition, the Bill is missing a vital ingredient. It would indeed be interesting if, as the noble Baroness, Lady McIntosh of Pickering, said, we were to continue to use the EU definition. My personal position is that we should keep as close to the EU as possible, but that has not seemed to be the Government’s position.
The noble Lord, Lord Fox, noted how successive Governments of different hues had taken a hands-off approach to mergers and acquisitions, those involving both national and international assets. We have had, to an extent matched by few other countries in the world, a “Robber barons welcome” sign out in the process of selling off the family silver in a veritable orgy of privatisation and financial isolation. That has clearly had an impact on public order and national security.
I will not let rip with a Second Reading speech—something that the noble Baroness, Lady Noakes, expressed concern about—but will point out that “have regard to” clauses are at the very core of democracy. If the Government are taking new or extending existing powers, for there to be democratic oversight there surely needs to be an outline of how those powers will be used, a legal framework against which a Government can be held to account, should they go off the rails. As the noble Baroness, Lady Noakes, just said, that does not reflect an activist judiciary; rather, it is one doing its job and fulfilling its constitutional role.
We know that the Government do not like to have such oversight, both democratic and legal, but it is surely the responsibility of this Committee to attempt to insist on it—for nothing more than national security, because of the degree to which it was not secured by previous Governments, having been exposed by the Covid-19 pandemic and imminently threatened by the climate emergency. I will address some of those national security concerns in my Amendment 93, which we will get to later, but I speak now on Amendment 13, in the name of the noble Baroness, Lady Hayter. I thank her for her clearly careful and detailed work on it. I will not address all its elements, but focus on a couple of paragraphs, particularly proposed new paragraph (b)(iv),
“enabling a hostile actor to … corrupt processes or systems”.
There is grave concern about the impact of big money on our quasi-democratic processes, particularly in the age of social media. These are so well known that I do not need to expound on them at length, but I will point to how the 2010 national security strategy already referred to such concerns, and they have obviously greatly grown since. Even in our conventional media, we have a quite astonishing concentration of media ownership, often foreign or offshore. That surely needs to be acknowledged as a national security concern. I note the comments of the noble Baroness, Lady Hayter, about how Amendment 2 seeks to address such issues.
I also point to proposed new paragraph (f) in Amendment 13, which is about
“the likely impact of the trigger event on the United Kingdom’s international interests and obligations, including compliance with legislation on modern slavery and compliance with the UN Genocide Convention”.
This has obviously been of great concern to your Lordships’ House; we reflect on the debate around the Trade Bill. These are surely national security concerns. They are not just moral issues, but of great effect to our national security. A stable world, in which no one is subject to genocide or held in slavery, is a world that is far more secure for every citizen of the UK and the nation as a whole.
I come to proposed new paragraph (g) on
“organised crime, money laundering and tax evasion”.
The security of funding for schools, hospitals, roads, police and all the other services on which we rely depends on companies in our society paying their taxes. When it comes to money laundering, we have seen, in many aspects of our society and internationally, the disastrous impact of dirty money—something that, in some societies around the world, has led to almost a total state breakdown.
Overall, having such a set of definitions, as many noble Lords have said, has been of help to the Government, giving the relevant Minister a list against which their decisions can be checked. Without such a list providing an explanation against its clauses, how can a Minister avoid accusations of corruption, malfeasance or simple neglect of duty?
I am pleased to attach my name to Amendment 83 in the name of the noble Baroness, Lady Hayter, also signed by the noble Baroness, Lady Northover, which refers to the integrated defence review. It is a great pity that we are forced to debate the Bill without that. It is a situation in which we find ourselves in many areas of government work. The reasons for ensuring that we have a tight interlinking between the review and the Bill have been clearly outlined by the noble Baroness, Lady Northover, so I will not go into them further.
My Lords, like other noble Lords, I spoke at Second Reading and referred to this question. Together with the noble Lord, Lord Truscott, I took the view that there were inherent problems in attempting a definition of national security and that the best definition is rendered through the Bill as it stands. Once one defines the nature of an entity, the nature of the assets covered, the nature of the acquirer concerned and the extent of control—or the definition of control for these purposes—I think one arrives at what a trigger event is. By definition, a trigger event gives rise to the question: does this trigger event cause a problem for national security?
I do not dispute that large numbers of consultees to the White Paper and speakers in our debates have said that it would be very helpful to define national security and—I would expect nothing less from her—the noble Baroness, Lady Hayter, has done as well as one is likely to do. However, I fear that Amendment 13 in particular demonstrates all the flaws with providing such a definition. I will not seek to delay our debate too long, but I will go through a number of them.
The noble Baroness asked whether critical national infrastructure was included. In Amendment 13, critical national infrastructure is included but not defined. We do not know which bits of national infrastructure are in the regime and which are outside it. We know, broadly, the sectors in the scope of the mandatory regime even if we have further detail and amendments to them today. However, if I look at what the Government have published, I find the nuclear industry, the communications industry, data infrastructure, energy infrastructure and transport infrastructure, including ports, harbours and airports. I do not find water infrastructure and food security infrastructure. That is the question and, with the greatest respect, Amendment 13 does not answer whether they are in or out.
We will come on to debate these things but it slightly introduces the concept of whether we are using the EU regulation. My noble friend Lady McIntosh referred to it. The EU regulation includes food security and water. Even if we do not follow the EU lead, which of course now we will not be doing, it at least gives us an interesting list to work from and to question why there are differences.
This brings me to Amendment 2. One of the other differences between our proposed legislation here and the EU regulation is that the EU regulation says that it proposes to safeguard against threats to security and public order. Amendment 2 proposes including public order. However, the European investment screening regime includes freedom and pluralism in the media as one of its investment screening criteria. We are not including that in the Bill. Why are we not including it? It is already in the media public interest regime inserted into the Enterprise Act by the Communications Act 2003, on which I served. I also served on the Enterprise Act Standing Committee in 2002. In that sense, we are not pursuing a public order regime here; we are pursuing a security regime.
I now come to some of the other issues with Amendment 13. Proposed new paragraph (c) talks about the characteristics of the acquirer. If you were to say to me that in my little definition of what constitutes a security risk, we have definitions of the natures of the entities and assets concerned and quite exhaustive definitions of what constitutes control, I would say that what we do not have are definitions of the nature of the acquirer, other than that, presumably, it is hostile in intent.
Amendment 13 effectively tries to give us a list of the trigger events that might give rise to an intervention. In some senses, the amendment is far too narrow. There may be all sorts of unanticipated trigger events that would not be included in primary legislation through this amendment. In other respects, it might be far too wide. Proposed new paragraph (c) talks about
“the characteristics of the acquirer, including whether it is effectively under the control, or subject to the direction, of another state”.
There are virtually no Chinese entities for which that is not true. There are many American corporations for which one could say that that was true. One could certainly say the same of a number of state-owned European companies, including EDF and those engaged in our national infrastructure. What does proposed new paragraph (c) tell us? Does it tell us whether those characteristics are a threat to national security or not? It does not tell us either of those things; all it tells us is that we must have regard to them. We know that Ministers will have regard to them because they are having regard to that kind of issue. It does not get us very far.
The same is true on three occasions, in proposed new paragraphs (a), (e) and (f), which refers to
“the likely impact of the trigger event on”.
It does not say whether the impact is adverse, beneficial or on security. Therefore, almost by definition, all that Amendment 13 tells us is that Ministers should have regard to trigger events in relation to these activities, whether they relate to data or defence capabilities. That is what Ministers are setting out to do.
In a couple of respects, Amendment 13 takes us further than we were intending to go in the Bill. The idea that non-compliance with our international obligations is, by definition, a security risk to the United Kingdom seems to be misplaced. It may be a matter on which we have obligations or be of great policy importance but one cannot construe that compliance with our international obligations in every respect is a security risk to this country.
I am afraid that one also has to look at proposed new paragraph (h), which asks
“whether the trigger event may adversely affect the safety and security of British citizens or the United Kingdom”.
It does not say “British citizens in the United Kingdom”. For example, there are hundreds of thousands of British citizens in South Africa. I was in Natal a few years ago, where there are 500,000 British passport holders, many of whom are British citizens. Are they, by definition, therefore included in this security investment regime?
All that I seek to demonstrate is that although Amendment 13 is a helpful effort, trying to define all the trigger events is bound to fail. Therefore, we should focus on making sure that the listing of entities and assets—as, for example, those published today by the Government—is as good as we can make it, and we will have some debates on that. We should define control properly—not too broadly or narrowly—and we should understand what kind of acquirers we are talking about. We will talk about whether something is foreign or domestic, state or non-state, or hostile and in what circumstances. That is where the lack of definition in the Bill is as yet more important. I refer to the question of what kind of acquirers. I hope that we will talk about that matter in later debates but, for the present, I cannot see the merit of adding Amendment 13 to the Bill.
I thank all noble Lords who have taken part in this debate. Let me first say to the noble Baroness, Lady Hayter, that I anticipated that she might be a little critical—in her normal, super-polite way—about the letter coming out late. There were some delays in the internal approval process and, faced with a choice of whether to send it out now or wait until after Committee, I thought that, on balance, it was best to get it out to noble Lords. I was fully aware that when I arrived today, some noble Lords might have criticisms for me, but I thought they would like to see the letter rather than not see it before we started Committee. I hope that during a lull in proceedings, Members might have a chance to read the letter—all 100-odd pages of it.
I am grateful to the noble Baroness, Lady Hayter, as well for her amendments to Clause 1 and after Clause 5, which are Amendments 2 and 13 respectively on the Marshalled List, and I give my combined thanks to her and the noble Baroness, Lady Northover, for the proposed new clause relating to the integrated review.
I will begin with Amendment 2, which would expand the scope of the Bill to include public order and public safety, in addition to national security. The noble Baroness, Lady Hayter, is of course right that public order and public safety are exceptionally important and some of the highest priorities for any Government. However, the Bill is about national security—nothing more, nothing less. Including public order and public safety as grounds for calling in an acquisition would be a substantial expansion in the scope of the Bill, as has been pointed out. We do not wish to see any additions to national security, to ensure that we maintain the careful balance struck in this regime between the appropriateness of government powers for intervention and ensuring that the UK remains one of the best places in the world for investment.
In addition, I note that the regime has been carefully designed with the protection of national security in mind and not public safety or public order, as important as they of course are. For example, the trigger event thresholds in Clause 8 are calibrated to protect against activity that could harm national security due to an acquisition of control over a qualifying entity. It is far from guaranteed that these would also protect against risks to public order or public safety, or that they would be the most effective or proportionate way in which to do so.
For example, a certain type of investment may give rise to a risk to public safety or public order only if an entity were bought in its entirety or if, conversely, any investment could harm public order or public safety. Of course, there may be situations in which a risk to public safety or public order is considered to give rise to a risk to national security as well. I assure Members of the Committee that, in such cases, the Secretary of State will be able to call in the acquisition in question if it meets the tests in the Bill, and will be able to take action if appropriate.
I will pick up on a specific issue raised by the noble Baroness, Lady Hayter. The Bill would apply where a qualified acquisition could undermine democracy in a way that amounts to a national security risk.
Amendment 13 seeks to create a non-exhaustive list of factors which the Secretary of State must take into account when assessing a risk to national security for the purposes of the Bill. It will not come as a great surprise to the Committee to hear that the Government’s position on this issue remains consistent with their position when amendments related to this one were discussed on Second Reading and in the other place.
As drafted, the Bill does not set out the circumstances in which national security is, or may be, considered at risk. That reflects long-standing government policy to ensure that national security powers are sufficiently flexible to protect the nation. It also does not include factors which the Secretary of State must or may take into account under the Bill in assessing national security risks. Instead, factors which the Secretary of State expects to take into account in exercising the call-in power are proposed to be set out in the statement provided for by Clause 3. A draft of that statement was published on introduction of the Bill, to aid noble Lords in their parliamentary scrutiny. The draft statement includes details of what the Secretary of State is likely to be interested in when it comes to national security risks. That includes certain sectors of the economy, and the types of acquisitions that may raise concern.
While it is crucial for investor confidence that there is as much transparency in the regime as possible, there is obviously a limit to how much the Government can and should disclose in that regard, given that the regime deals explicitly with national security matters. Nevertheless, the draft statement goes into some detail about the factors which the Secretary of State expects to take into account when deciding whether to call in a trigger event. The proposed new clause would instead create, alongside this statement, a non-exhaustive list of factors which the Secretary of State must have regard to when assessing a risk to national security.
It is our view that this is not the right approach, primarily for two reasons. First, I note that many items on the list proposed may seem entirely reasonable for the Secretary of State to consider, where relevant, when assessing a national security risk. For example, the Secretary of State will, of course, consider the nature of an asset or entity over which control is being acquired, including its place in our critical national infrastructure, a fact that I hope is reassuring to the noble Baroness, Lady Hayter.
Briefly on the subtopic of critical national infrastructure and to address the query first raised by my noble friend Lady McIntosh regarding the water sector, while not all the national infrastructure sectors are included in the mandatory regime, the call-in power is economy-wide. I reassure noble Lords further that a number of additional protections already exist for these critical national infrastructure sectors. These include exiting regulation and controls about who can acquire entities in these sectors and the diverse range of suppliers in certain sectors. It would also be hard to argue that the Secretary of State should not consider whether such an acquisition could give rise to a risk of espionage or undue leverage. Indeed, these are two risks highlighted in the draft of the statement on the use of the call-in power which the Government published alongside the Bill and which I referred to earlier. It is therefore unnecessary to set these things out in the Bill.
Secondly, it may also be unwise. National security risks are multifaceted and constantly evolving. What may not constitute a risk today may well be one in future. We may find that over time such a list becomes outdated. Of course, the proposed amendment creates a non-exhaustive list, so the Secretary of State may consider factors that the list does not include. However, the value of this list would diminish over time, providing less insight to businesses, investors and Parliament on the expected use of the regime. It is therefore more appropriate that the Secretary of State sets out how he expects to use the call-in power in the statement provided for in Clause 3, where it will be reviewed and updated as appropriate, rather than it be codified in the Bill. There are also elements on this list that could take the Bill beyond the realm of national security, as has been discussed in the other place and mentioned in this debate. This Bill, which is focused solely on ensuring that investment does not cause harm to our national security, is not the right place to address these issues, important as they are.
I shall pick up on the specific issue raised by the noble Baroness, Lady Hayter, that the Bill is careful not to define what is or is not national security, and I must be careful not to be drawn into defining or describing national security in this Committee. Clearly election fraud and the undermining of our democracy would be of great concern. If an acquisition met the tests within the Bill due to national security risks arising from threats to democracy, the Secretary of State would be able to call it in for scrutiny.
Turning finally to Amendment 83, to preface, the integrated review will define the long-term strategic aims for our national security and foreign policy, and it is entirely reasonable for the noble Baronesses to seek assurance that the national security and investment regime and the integrated review will align.
It may be helpful for the noble Baronesses, Lady Hayter and Lady Northover, if I touch on the function of the integrated review to begin. First, it will assess the current and emerging threats and opportunities that we face. Secondly, it will define the UK’s ambitions on the international stage. Finally, it will upgrade our soft and hard power credentials so that we can continue to defend our interests and support those ambitions.
I think the concern behind this amendment is that the left hand may somehow not know what the right hand is doing. In this respect, I can reassure noble Lords that my department has worked and continues to work closely with the Cabinet Office and teams across Whitehall in ensuring coherence across the range of government priorities that will be addressed in the integrated review.
The Government are of one mind that the National Security and Investment Bill will provide a key tool in enabling the UK to tackle its long-term security concerns and pursue its priorities. It will strengthen the Government’s powers to protect the country from hostile or harmful activity and enable them to prevent hostile parties gaining control of entities or assets to cause harm to our national security. The Bill would give the Secretary of State carefully calibrated powers to address concerns around acquisitions with the flexibility to respond to changing risks and a changing security landscape. In particular, the regulation-making powers in the Bill allow us to keep pace with threats as they emerge, including by enabling us to update the sectors covered by mandatory notifications.
In the delivery of this regime, the Secretary of State would be supported by a well-funded investment security unit that will co-ordinate considerable expertise from across government, including, of course, from the security services. The Government will therefore ensure that the powers in the Bill would be used to maximum effect to protect the nation’s security and would complement the aims of the integrated review. I hope, therefore, that the noble Baroness, Lady Hayter, recognises that committing in legislation that one area of government policy will align with another connected area would be novel, as I have demonstrated. She will, I hope, agree that it is unnecessary. While I understand the objectives of the noble Baroness, for the reasons I have set out I am not able to accept these amendments. I hope, therefore, that she will feel able to withdraw Amendment 2.
I have a received a request to speak after the Minister from the noble Lord, Lord Fox.
During that comprehensive answer, I think I heard the Minister say something and I would like to test whether I understood correctly. In explaining why people should not be concerned that certain parts of infrastructure are not included in the list, I think I heard the Minister say that the Bill’s call-in power is economy-wide. That suggests to me that the list of 17 issues is irrelevant because everything is on the list. In other words, anything can be called in, whether it is on the list or not. So, the list is merely indicative, but the exhaustive list is the entire economy. Could the Minister explain whether that is the correct interpretation of what I just heard?
If the acquisition in question poses a risk to national security, yes, there is the general power, but the point I was making is that, with regard to areas of political and national infrastructure, there are also separate powers in different pieces of legislation that would help to protect in those areas.
First, I thank everyone for their contributions, which I found extremely helpful and thoughtful. In particular—this will not surprise the Minister—the Minister confirmed that it would be possible to call in any threat to democracy or anything like that. I am sorry he did not feel able to answer on when exactly the integrated review will be published, but we live in hope.
I was a bit disappointed that the Minister said that he did not want to define national security because it was long-standing government practice not to. My heart sank at that point, thinking that the Minister must have a better reason. Luckily, he did and he gave us answers other than, “It’s always been done that way”, which always seems to me a really bad answer. I am not saying I was completely persuaded by his answer, but it is a thoughtful and useful way of thinking about how we approach this. I hope it is not just because the Government would fear a JR if there are words that could be challenged over whether something should or should not have been brought in.
My fear is about the difference between the list and the call-in power. As the list will be mandatory, people will know what they have to do. Where investors, researchers or companies will probably have the biggest fear in respect of the call-in power is that they will not know in advance. I hope that we will come to the possibility of either safe harbours or a quick turnaround—though that does not get over the call-in power—because that seems the area of greatest uncertainty. We will probably have to return to that. In a sense, it is the same issue when it comes to critical national infrastructure. I guess I should leave it to those far more experienced in infrastructure to know whether those comments are helpful.
We heard a thoughtful and challenging response to the amendment from the noble Lord, Lord Lansley. If I understood him correctly, he suggested that we start at the back end: we discuss the assets; we discuss the acquirer; we look at the definition of control—which is the end part of the Bill—and use that to define national security in the front part of the Bill. I am bemused by whether that is the right way round; it may be, but by the time we have defined it, we may have got to it. It seems an odd way round to do things to have a Bill that has “national security” in its title and then to have to work through “Well, if it is that sort of asset owned by that sort of people to that sort of percentage” to decide that it comes into the category of national security. However, I want to read more carefully what the noble Lord said because the elements appear to be there, but it seems slightly upside down. The noble Lord also said:
“We know that Ministers are going to have regard … to that kind of issue.”
If we do, what is the harm in writing them down? He may know that Ministers would have regard to those issues, but will everyone else know what they are?
I have a lot more to think about having heard the wisdom expressed today. It is possible that we will want to come back to this issue on Report—maybe in a more refined way; I am sure that those who have read the Commons debates carefully will have noticed that my words were not all of my own drafting. I thank everyone who has contributed—more sincerely, perhaps, than in other debates. I beg leave to withdraw the amendment.
Amendment 2 withdrawn.
3: Clause 1, page 1, line 11, leave out “or contemplation”
My Lords, I thank my noble friend the Minister and his officials for his briefing and help. I suppose I should thank him also for his letter of 18 minutes before the start of this debate, but that has been explained adequately, so we look forward to reading that in depth. I also thank others who have been helpful on this amendment and the Bill, particularly friends from the BVCA, the ICAEW and Herbert Smith.
I think we all have a common purpose here; we all know what we want to achieve, and this is not a party-political matter. We all recognise that, last year, there was £170 billion of FDI into the UK. We have been so consistently successful in the UK at FDI that we frequently, if not for a decade or so, come second in the world league tables. We all need to do what we can not to damage our reputation as a country that is easy to invest in, with clarity and the rule of law not subject to the power of lobbying and political whims. I believe that there is unanimity in that respect.
The Bill must strike a balance between national security on the one hand and economic growth on the other. At present, it needs amending by amendments such as mine and those of fellow Peers if it is to strike that balance. Funnily enough, I read Isabel Hardman’s book over the weekend, Why We Get the Wrong Politicians. In it she quotes, anonymously, an MP who says, “You can ram Bills through in the Commons, but it’s much harder in the Lords.” I do not want to let her down.
I declare my interests. I am the senior partner of Cavendish Corporate Finance, which specialises in selling businesses, typically private businesses. Nearly all our clients are SMEs, so I have a lot of experience there. Sixty per cent or so of our buyers of our clients’ businesses are based overseas, the principal country being the United States of America, but they have included pretty much most industrial developed countries of the world, including in Asia. Cavendish is, of course, part of finnCap, the AIM nomad broker. So I have worked hard to encourage overseas investment. I was lucky enough to find myself on the business trip to China with David Cameron a few years ago.
Hastily moving on to avoid my noble friend Lady Noakes’s accusation of a Second Reading speech in disguise, I want to talk about the amendment. It is a probing amendment, as I am not sure how a Secretary of State can determine or know that anyone is contemplating a bid other than through some very sophisticated mind reading. I think the intention here is to allow the clause to be the mechanism under which a buyer can go to the Secretary of State and make a voluntary notification. It is a sort of trigger for a trigger event, as I understand it, but it is somewhat worrying that, under subsection (4)(b) of Clause 1, the Secretary of State then goes and gives notice to the target, so suddenly the target is aware of some purchaser’s contemplations.
The White Paper at paragraph 52 sets out that parties in contemplation of a trigger event could, and in some instances should, notify Her Majesty’s Government, but I do not think it envisaged it the other way round, as it has emerged in the Bill. The way it is worded, it allows the Secretary of State to contact a purchaser and say, “I have reason to suspect that you are contemplating an acquisition”, or even a very small, 15% stake, in a UK business in a very widely drawn range of sectors, and that means that a call-in notice is issued.
I can see that this could be abused. What if a journalist notifies the Secretary of State that they think that a company is contemplating a transaction which, depending on your definition of contemplating, the potential purchaser could not really deny? That sets off a whole train of events, essentially forcing the hand of the potential purchaser or pushing them back into their shell as they then have to deny contemplating it. I can see boards of overseas purchasers saying, “We don’t really want to prepare a position paper on a UK target, as even contemplating it means that the UK Secretary of State can demand that we disclose this”, or management of a UK target wanting to flush out perceived, possibly hostile, buyers who they are worried might be interested in their company simply telling the Secretary of State that they think an acquisitive company is contemplating buying or investing in them, which sets the whole process going somewhat prematurely.
Can we have an explanation for that choice of wording, and perhaps a tightening of the clause to stop abuse and, most importantly, provide us with some clarity? According to my dictionary, contemplation is defined as, among other things, religious meditation, so let us hope that praying that one day you might be lucky enough to own a particular UK company does not lead you into big trouble. I beg to move.
My Lords, we are grateful to my noble friend Lord Leigh of Hurley for his amendment, which is a helpful exploration of this issue. I rather enjoyed the way he introduced it as well, although I must say that the MP who was quoted by Isabel anonymously was clearly not in government in coalition.
I have an amendment of my own in this group; I am grateful to the noble Lord, Lord Bilimoria, for signing Amendment 8 in my name. I shall talk to that amendment and to Amendments 3 and 4, tabled by my noble friend, and leave Amendments 9 and 10 to others, although I think that both add a little to probe the way in which Ministers propose to structure their statement.
Amendment 8 is designed to clarify what constitutes the Secretary of State becoming aware of a trigger event. In the absence of a further definition, a Secretary of State might claim not to be aware in circumstances where any reasonable person would say, “You should have been”. It is a belt-and-braces operation.
What does it mean? I looked to the relevant comparator in the Enterprise Act. The equivalent, in Section 24 of that Act, is whether something has been made public, which is defined as:
“means so publicised as to be generally known or readily ascertainable”.
I simply borrowed that language. Amendment 8 would not say that those are the only circumstances in which the Secretary of State becomes aware, but the Secretary of State should not be able to claim that he was not aware in circumstances that have generally been made public. The purpose of this amendment is to explore what “becoming aware” really means.
Reverting back to Amendments 3 and 4 and the question of “or contemplation”, I think the drafting derives, if it derives from anywhere, from Section 33 of the Enterprise Act 2002 and the question of a merger reference. It is when the Competition and Markets Authority
“believes that it is or may be the case that … arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation”,
so contemplation exists in statute.
The guidance issued by the Competition and Markets Authority on this, published most recently in December 2020, said that “at phase 1”, which colleagues will recall is the earliest investigatory phase,
“the CMA will generally consider that ‘arrangements are in progress or in contemplation’ for the purposes of section 33 of the Act if a public announcement has been made by the merger parties concerned.”
When my noble friend defines “contemplation”, he does so accurately, but that is not how the Competition and Markets Authority has interpreted “contemplation”. It means somebody firmly considering such a thing, which Ministers may well be thinking of in this context, but it is important to make that clear in the guidance.
The Competition and Markets Authority and the Enterprise Act do this for mergers, which are defined acquisitions. Here, we are talking of a much wider scope of acquiring activity in relation to intellectual property, technology, assets, land and minority stakes. A merger control has bitten on 15% or thereabouts, in certain circumstances, but it is a much wider breadth of activity. If contemplation of such acquisitions is to be included, Ministers at the very least have to define it in the guidance in a way that corresponds to the way in which “contemplation” has been interpreted by the CMA for mergers.
My Lords, this group contains a range of amendments aimed at improving certainty which I broadly support. In particular I favour the removal of the expression “contemplation” because it is a broad expression that in my understanding, if it is not reinterpreted through guidelines, could range from not even a twinkle in the eye to serious preparations.
When I looked at this, it seemed that the first expression of “arrangements are in progress”, followed later on in the clause by
“which, if carried into effect”,
is already quite broad because it poses the notion that the “arrangements” do not have to be substantial enough to have an effect yet, only if carried through. That seems to cover quite a preliminary range of stages. Even if the Minister does not accept that proposition of deletion, is there case law that can point to what “contemplation” means? The noble Lord, Lord Lansley, has provided some useful indicators. I thought about “in contemplation of matrimony to a given individual”, which is accepted in wills as a means to overcome a negation of a will through marriage, but that will itself is a legal document defining intent. That would not necessarily be the case for just a random contemplation.
From my various adventures as a patent attorney I know better the interpretations of “serious preparations” or “effective and serious preparations”. They are used in patent and trademark law, which has received attention and clarification—or rather verification—in courts. If we have to use something, I prefer to use something akin to those terms, although this shows that it is quite difficult to define when a line is crossed.
As has already been raised, the intention of “contemplation” or anything else could be clarified by guidelines, but if that route is needed, is it not just simpler to delete “contemplation” and explain in guidelines what “arrangements are in progress” is intended to cover? To me, that sounded exactly like what the CMA had done: it had taken “arrangements are in progress” or “contemplation” as one and the same thing and then defined that, which implies something much further down the track than simple contemplation. I am therefore on the side of those who think that the wording just looks too vague, and if it has precedent elsewhere, it needs to be clarified that it does not mean anything more substantial. The CMA has pointed the way to showing that the word is not very much use.
I also support Amendment 8 relating to publication, which aims to give some certainty about when the Secretary of State can be regarded beyond doubt as having been aware of a trigger event. As the noble Lord, Lord Lansley, explained, that reflects the wording of the Enterprise Act and it would help to reduce unnecessary notifications.
Lord Vaizey of Didcot. No? We will come back to him. I call the noble Lord, Lord Clement-Jones.
My Lords, it is a pleasure to follow some of the early speeches in this group today. Noble Lords have already started to unpick some key elements in the Bill and have shown how much further explanation and guidance is needed. I will come on to Amendments 3, 4 and 8 in a minute, but, given the absence of the noble Lord, Lord Vaizey, I will speak first to Amendment 9.
As it stands, given the Bill’s very broad definitions of “trigger events”, “qualifying entities and assets” and “control” of entities and assets, businesses are not clear as to those transactions which require notification and those that do not. Although the Bill is retrospective, the Secretary of State will publish a Statement only after it comes into effect, so there will be little clarity for some time. Probably the word that will be most overworked during the passage of the Bill will be “certainty”, but that is exactly what we are all looking for as we proceed. The first person who used that phrase was my noble friend Lady Bowles, but I entirely agree that we must strive for that. If we are not careful, we will have significant overnotification of irrelevant transactions by businesses in order to avoid the risk of penalties for non-notification or subsequent call-in. As a former practising lawyer, I think I can testify to that.
Continuing with my fishing analogy, this is very much about the extent of the net, and it is important that clarity of the kind that is contained in Amendment 9 is given. The amendment put forward by the noble Lord, Lord Vaizey, which I signed, seeks to ensure that the Government provide effective guidance to organisations in order to minimise the volume of voluntary notifications and avoid legitimate business activity being otherwise discouraged. I very much hope that the Minister will take that on board as an attempt to create greater certainty regarding trigger events.
As regards Amendments 3 and 4, the noble Lord, Lord Leigh, is entirely right to probe the meaning of “contemplation”. We had very interesting speeches from the noble Lord, Lord Lansley, and my noble friend Lady Bowles. I do not know whether the Secretary of State has to achieve some kind of nirvana before understanding what is about to happen, but I think “in progress” is a much more solid phrase. I very much take the point which has been developed in this small debate on this group that guidelines will be crucial, but we ought at least to start from the point where we understand what that phrase means. If there are precedents that the CMA uses, let us try to bring them on board. At the start of this process, we need to hear from the Minister exactly what he believes it to mean.
On Amendment 8, a number of the time limits which apply to the exercise of the call-in power are expressed by reference to the date on which the Secretary of State became aware of the relevant trigger event. It is important, as the noble Lord, Lord Lansley, said, that investors have legal certainty about how that date will be determined in order to be clear when the relevant period starts to run. As the noble Lord, Lord Lansley, also explained, it is based on a very good precedent in the Enterprise Act, and the Secretary of State will be treated as becoming aware of the trigger event if it has been publicised such as to be generally known or readily ascertainable, including through publication in a national newspaper or the London Gazette. I very much hope that in order to create the certainty that we are all looking for in the Bill the Minister will carefully consider the amendments in this group.
My Lords, there are very wide powers in the Bill, and the amendments in this group are sensible and proportionate and go some way to reining in the extent of those powers. Other noble Lords have spoken extensively about Amendments 3 and 4, which I fully support. When I first focused on that language, I simply could not believe that the Government would have drafted the basis of calling in being the Secretary of State thinking that somebody else is thinking about something. My noble friend Lord Leigh of Hurley has set out the very dangerous consequences that could have for prospective transactions.
I am grateful to my noble friend Lord Lansley for explaining the link under the Enterprise Act to how the CMA operates. My view is that we should not simply rely on guidance to make an unsatisfactory formulation in legislation work better. I do not believe that “in … contemplation” is the right place to start, and guidance which will go some way to reversing what the ordinary understanding of “in … contemplation” means is not a satisfactory way forward.
I also agree with my noble friend Lord Lansley’s Amendment 8, given that the Bill, as has been pointed out, gives the Secretary of State time limits that start to run from when he becomes aware of transactions. It is just not reasonable for him ever to claim that he has no knowledge of something that is clearly in the public domain. I fully support that.
I also support Amendment 9, which the noble Lord, Lord Clement-Jones, spoke to a moment ago, because the Government need to consider the negative impact that the Bill is likely to give rise to. It is going to be very difficult to avoid the Bill having negative impacts on legitimate economic activity. It is absolutely right that the Secretary of State should actively consider that fact when he draws up his Clause 3 statement.
Like the noble Lord, Lord Clement-Jones, I believe that the volume of precautionary but unnecessary voluntary notifications is likely to be very significant, and it makes sense for the Secretary of State to ensure that his Clause 3 statement gives as many steers as possible to allow transactions to go ahead without having the Bill hanging over them. If the Secretary of State does not get this right it will result in the security and investment unit being overwhelmed by transactions, and that will do nobody any good at all.
The amendments in this group are soundly based and I look forward to hearing my noble friend the Minister’s response.
I will try the noble Lord, Lord Vaizey again. Lord Vaizey of Didcot?
Yes, I am definitely here. I am sorry that I did not realise that I had to unmute myself, but I will not detain the Committee with my farcical debut in tabling amendments to a Bill. I will simply say how pleased I am to be in this group of amendments with the noble Lord, Lord Leigh, and how much I enjoyed his introduction to his amendment seeking to delete the word “contemplation”, which I have been delighted to support.
As my noble friend made clear, we are all here to serve a common purpose, which is to tease out of the Minister his thinking on the wording of the Bill. The Minister may well come back with a slam-dunk justification for “contemplation”. One of the advantages of the delayed entry of my contribution is the arguments put forward by other Members of the Committee about that amendment. It seems that it boils down to whether the Minister thinks that “contemplation” has a religious, business or technical meaning. If it has a technical meaning, it seems perhaps important that that is teased out in these proceedings to help people in the future.
As far as my own technical amendment is concerned—and I was delighted as well that my technical ineptitude meant that it was much more ably introduced by the noble Lord, Lord Clement-Jones—it seeks to echo some of the points that I made at Second Reading. Most of us who have taken an interest in the Bill and have discussed it with numerous trade bodies and City lawyers are aware that the Government’s estimate of the number of notifications under the Bill as drafted is somewhat low. We can expect thousands of precautionary voluntary notifications to come about, at least in the first instance.
More importantly—and what the amendment in my name and that of the noble Lord, Lord Clement-Jones, seeks to deal with—is that the Bill will start to have a potentially deleterious effect on foreign direct investment. As the noble Lord, Lord Leigh, pointed out, we are second in the world in terms of foreign direct investment. We often proudly say that we have more of it than Germany and France combined, at least as far as Europe is concerned. Over time, more and more companies looking at potential investments and acquisitions may well start to shy away from the UK if they feel that they have to undergo certain additional hurdles.
No one of course is saying that we should not have a national security framework to protect our vital industries. But just as the Secretary of State under this clause is required in a very good way to give guidance on how he or she is exercising the call-in powers, it is important that a very real contemplation of the potential deterrent effect that the new regime may bring about is front of mind alongside the sectors and technical thinking lying behind acquisitions that might be called in. If this amendment were accepted down the line, it would ensure that future Secretaries of State kept this front of mind.
My Lords, I am second to no one in my admiration for the noble Lord, Lord Callanan, but I am quite glad that we have the other Minister in the hot seat for this one, the noble Lord, Lord Grimstone. I suspect that in his previous lives he has seen more of the rough and tumble than possibly the noble Lord, Lord Leigh, and the rest of us put together, so will appreciate the nature of the debate introduced by the noble Lord.
For my part, I have usually been on the home team, the one paying advisers such as the noble Lord, Lord Leigh, huge sums of money to do deals or sell businesses. He hinted at the mischief that could be made around this, and I am sure that the Minister will understand the nature of that mischief: it is pretty ruthless and pretty hard. This gives another tool to those who would wish to cause that mischief, and it is not in the interests of the Government or the wheels of commerce for that mischief to occur.
The noble Baroness, Lady Noakes, made a really important point. It is also in the interests of the Government to sift what comes across the Government’s desk; it does not behove the department to have tens of thousands of deals flowing across its desk. The Bill is designed to pick out the big problems and issues; it is not designed to deal with sacks of chaff that will come over as well as the wheat. It is important that the objectives of these amendments are taken on board by the Government. I am sure that there are many ways of doing that, and we look forward to the Minister contemplating how “contemplation” will be defined. What is the threshold? Is it the one suggested by the noble Lords, Lord Lansley and Lord Bilimoria—is it publishing? And even then, is it in the sense that the takeover panel would require a board to respond, or is it responding to a rumour? Then we are back into mischief territory again. Some sense of that, and of how the CMA has been able to negotiate this, would be helpful.
My noble friend Lord Clement-Jones, in his amendment with the noble Lord, Lord Vaizey, is right that we need some sense of guidance and help as to how this is going to work. I go back to the point that I made at the beginning. How will this thing operate? How will the unit work? The nature of some sort of pre-emptive process seems to take on board more than a unit could normally handle. The advice that the Government have been given by your Lordships is good advice, and I look forward to the Minister’s response.
I welcome the Minister responding to this group to his second Bill, this one under the auspices of the business department. I am sure that he will find it an enjoyable experience. In addition to Amendment 9 in the names of the noble Lords, Lord Vaizey and Lord Clement-Jones, I propose probing Amendment 10 to Clause 3(3), on further considerations. Amendment 9 seeks to ensure that the Government provide guidance to minimise the potential volume of voluntary notifications and any chilling effect that the Bill may have on legitimate business activity. Businesses need to be clear when transactions require notification and when it is not needed. There may soon be a time when the department could find this very useful as well.
In assessing the potential to generate unnecessary notifications, the CBI has estimated that the Government could receive up to 10,000 notifications a year. Does the Minister recognise this amount as an outcome? How have the Government calculated possible outcomes in relation to the numbers that have arisen in other countries’ experience in similar regime circumstances? I would go along with the precautionary interpretation by the noble Lord, Lord Clement-Jones. This will have resonance with later amendments probing the resourcing of the new investment security unit and turnaround timings for notifications.
Today the Government published a Written Ministerial Statement in response to the consultation on the sectors in the economy subject to mandatory notifications. The Statement includes the 17 sectors, with an estimate that less than 1% of all M&A activity will result in a notification to the department. Can the Minister relate that percentage to actual numbers and whether that includes all notifications, mandatory as well as voluntary, and the split between them, so that custom and practice could be identified as smoothly as possible?
My Amendment 10 is on the positive side, highlighting the need to show support for research and development capacity to grow in critical sectors identified by the new security regime. In examining domestic and future capacity in these sectors, the Secretary of State would want to champion innovation, the engine of the UK’s national growth and prosperity, and the role that could be played by small and medium-sized enterprises and start-ups. Policymaking does not need to be incoherent or vague. Does the Minister recognise that national security and industrial strategy could be closely connected? The Government could go further than calling in potential M&A activity and blocking hostile or inadvertent takeovers, and complement a robust industrial strategy that puts critical national infrastructure at the heart of government policy.
In the Written Ministerial Statement this morning, energy is identified as one of the 17 sectors that clarifies, to a large extent, Clause 3(3)(a). Can the Minister clarify the extent of the reference to energy, bearing in mind the urgency posed by the climate emergency? To reach net zero by 2050, much activity will be needed. As other speakers have commented, the Government have this afternoon issued the full consultation document, and many answers may be provided. The energy definition seems to be heavily focused on petroleum and gas. I am sure that the Minister will want to speak on nuclear capability. What about solar or the huge extension identified by the Government for offshore wind? Will the department wish to scrutinise all these areas to assess any protections needed? It is no wonder that there is widespread concern about the number of notifications. The statement points to the consultation response to the definition of satellite and space technologies. The response states that,
“almost all transactions in the UK space market could be covered.”
Similarly, the transport definition may focus on ports, harbours and airports. Should it not also include other transport infrastructure, such as EV infrastructure, which is also essential to meet the UK’s net-zero targets and the future of the automotive sector, not least Ellesmere Port and the development of battery production? Without any industry standards and clear regulations on cyber monitoring, we risk each individual charge point operator developing their own level of cybersecurity to protect their respective customers. The potential of vulnerability to hackers would be considerable.
I have not had sufficient time to consider whether these and other concerns are met in the inclusion of data infrastructure among the sectors. Will the Minister consider these points in his reply to ensure that the definitions are forward-thinking and cover all critical infrastructure interpretations?
My Lords, I extend my thanks to noble Lords for their invaluable contributions to this debate, which will allow me to clarify some important aspects of the Bill. It is a particular pleasure to be debating these matters with the experienced practitioners around the table, who have direct knowledge of these topics.
I speak first to Amendments 3 and 4, relating to when the Secretary of State can call in a trigger event, as tabled by my noble friend Lord Leigh of Hurley. These amendments would limit the use of the call-in power in respect of trigger events that have not yet occurred to those that are in progress. As drafted, as noble Lords have focused on, the Bill provides that call-in notices may be issued in relation to trigger events that are in progress or contemplation, as well as those that have already taken place. This ensures that potential national security risks can be examined at any stage of the process.
The National Security and Investment Bill draws on precedent in this approach. Under the Enterprise Act 2002, the Competition and Markets Authority and the Secretary of State may investigate mergers that are in progress or contemplation. To reassure my noble friends Lord Lansley, Lord Vaizey and Lady Noakes, this is a tried and tested phrase, and I will come back to that in a moment to elucidate further. Using this precedent ensures the NSI Bill is in good company. It would seem strange to limit the scope of intervention on national security if, through the Enterprise Act, an intervention is allowed on other public interest grounds where a merger is in progress or contemplation.
I said I would give some further details of this. The term “in contemplation” is not new. As I have already said, it features in the Enterprise Act 2002 and, importantly, the detailed guidance that has been issued by the Competition and Markets Authority. Let me give some examples of what this phrase means. First, a party may choose to notify the Secretary of State that they are contemplating a trigger event to get the certainty of the Secretary of State’s judgment. Secondly, a party may notify the Secretary of State that another party is contemplating a trigger event, such as if they have received, or become aware of, an offer to buy their business. We expect that in most cases, call-in notices will be issued following a notification, so these are likely not to be uncommon scenarios. Thirdly, a public announcement of a deal may have been made by one or more parties but not yet implemented. As noble Lords will be aware, there are certain publicity requirements for public takeovers, but this could also happen in relation to a private acquisition. Fourthly, a public announcement of a possible offer or a firm intention to make an offer may have been made, which would itself show that an offer was in contemplation.
Any decision by the Secretary of State to call in a trigger, even in contemplation, would, as with other uses of powers in this Bill, be subject to judicial oversight through judicial review. If the Secretary of State had merely found he had been able to read someone’s mind to know they were in contemplation of a transaction, that would be unlikely to satisfy the requirements of a judicial review. I hope I have provided sufficient explanation of the Government’s approach. It is a tried and tested phrase, which I would say is well known in the market. I hope my noble friend, therefore, feels able to withdraw his amendment.
I welcome Amendment 8 from my noble friend Lord Lansley, which seeks to partially define what is meant by the Secretary of State “becoming aware” of the publicised trigger event by replicating provisions in Section 24 of the Enterprise Act 2002. In relation to trigger events that have already taken place, the Secretary of State would only be able to give a call-in notice within six months of becoming aware of the trigger event. The Bill does not currently define what “becoming aware” means.
The Secretary of State will have a strong incentive to call in trigger events that might give rise to national security risks quickly after becoming aware of them, as he will want to address any risks that they present. Similarly, many parties will have a clear incentive to ensure that the Secretary of State is aware of their anticipated or completed trigger events so that they can achieve deal certainty. That is why we encourage parties to notify trigger events to the Secretary of State, rather than to wait for the trigger events to be detected and called in.
In general, we expect the Secretary of State’s market monitoring team to detect trigger events of interest. However, in a limited number of cases, providing for imputed awareness on the part of the Secretary of State where a trigger event has been publicised so it is generally known or readily ascertainable, may open up protracted arguments about whether the trigger event in question was adequately publicised.
I do not disagree that providing for imputed awareness on the part of the Competition and Markets Authority, as the Enterprise Act 2002 does in the context of merger control, is appropriate. But the NSI regime—this is an important point—will deal with a wider range and larger number of acquisitions, with no de minimis thresholds and a strong likelihood that many will not be comprehensively or accurately reported. This presents much greater scope for ambiguity, and for deals, particularly private transactions, to be publicised in ways that may still cause the Secretary of State to be unaware of the precise trigger event in question. This amendment therefore risks opening up the Secretary of State to greater challenge, while still allowing for substantial uncertainty for businesses and investors.
I will now speak to Amendment 9, tabled by the noble Lords, Lord Vaizey of Didcot and Lord Clement-Jones, and Amendment 10 from the noble Lord, Lord Grantchester, as both relate to the content of the statement under Clause 3. These amendments seek either to add to the non-exhaustive list of the aspects that the statement may include or otherwise to regulate what can be included in the statement.
I turn first to Amendment 10, in the name of the noble Lord, Lord Grantchester. I will put to one side his valid points about sector definitions, as we will return to that topic in a future group. This amendment seeks to require the Secretary of State to have regard to the domestic and future capacity of sectors to promote research and development, and innovation, and to protect national security when preparing the statement.
Supporting the UK’s innovative industries, and research and development, are priorities for the Government. However, the purpose of the Bill is to set up an investment screening regime that is concerned solely with the protection of national security. Therefore, the Secretary of State is able to consider innovation, research and development, and future capacity—very important topics though they are—only in so far as they are relevant to national security risk, when he carries out his functions under the Bill.
Amendment 9 seeks to add to the list of the aspects that the statement may include. Of course, the Government want to promote legitimate economic activity and to minimise unnecessary voluntary notifications. The purpose of this statement is to set out how the Secretary of State expects to use the call-in power. I am afraid that these amendments are not suitable for the statement. The statement looks forwards to future use of the call-in power, not to highlight actions already taken. It sets out how the Secretary of State expects to use the call-in power, and it is not intended to serve as an indicator of wider government action in relation to the regime. It is crucial that the acquirers can look at the statement and that it assists them in coming to a judgment about whether to voluntarily notify. With these points, I hope that noble Lords feel able not to press their amendments.
My Lords, I have received one request to speak after the Minister from the noble Lord, Lord Clement-Jones.
My Lords, I thank the Minister for that careful analysis, but I must admit that I am not wholly reassured as a result. I feel as though we have gone in a spiral of logic and I think we ended up where we began, in a cloud of uncertainty. In particular, I thought the Minister’s arguments on Amendment 9, that the statement was forward-looking not backward-looking, were very circular. It all depends on how the statement is constructed. It can be made both forward-looking and backward-looking simply in the way the Bill is amended. So the argument there was extremely circular.
I will read Hansard extremely carefully, but to me the question about the Secretary of State being unaware means that the Government have decided that the net is going to be extremely wide. We have assurances on the sifting process, but in the end everything falls in until it is thrown out. That, I think, is what worries quite a lot of us. The contemplation point may have some precedent, but the noble Lord, Lord Lansley, made the point that these transactions are not just mergers but intellectual property licences, know-how transfer, asset sales and a whole range of things. Is the merger regime fit for purpose for this broad range of transactions?
That is all I want to say at this stage. I thought the Minister valiantly tried to justify the current wording of the Bill, but I do not think he succeeded.
The noble Lord, Lord Clement-Jones, and I have had the pleasure of debating these matters at a meeting prior to this Committee, and I must confess that I was probably the author of the fishing analogy, which I may live to regret. The point is that when you are dealing with matters of national security, and these matters are so important, it is perfectly appropriate to use a large net to put the fish in, but then it becomes very important that the way your screening unit works removes fish from that net as expeditiously and efficiently as possible.
My Lords, I thank the Minister for his response. As the noble Lord, Lord Fox, pointed out, he almost certainly has much greater experience than all of us in this Room combined in advising on transactions. For the avoidance of doubt, sadly the noble Lord, Lord Fox, has not paid me any fees in any matter, as far as I am aware, but I travel in hope. I have to disappoint my noble friend Lord Vaizey, because it does not look like the Minister will accept his very first amendment in whole. On the other hand, I do not think he has provided a slam-dunk answer, as he hoped, to reject Amendments 3 and 4 in particular.
We are very lucky to have the benefit of my noble friend Lord Lansley’s experience and wisdom from the Enterprise Act 2002, and I accept that that is where it came from. However, I do not quite see why there should be a cut-and-paste approach. The CMA will be dealing with a relatively small number of mergers of largely public companies. This will be dealing with all sorts, from minority investments of a few thousand pounds in 15% stakes to IP and—forgive me—a completely different kettle of fish. Therefore, the last thing one wants to do is to have to rely on a traditional review to see this sorted out. That would be hugely expensive and singularly inappropriate for most of the transactions envisaged, which will be of a much larger volume than the CMA and the legislation were structured to deal with. I very much hope that the Minister will have a chance to reflect on this and that he will be persuaded in particular by the point made by the noble Baroness, Lady Bowles—arrangements in progress must be strong enough. I beg leave to withdraw.
Amendment 3 withdrawn.
Amendment 4 not moved.
5: Clause 1, page 1, line 18, leave out “void” and insert “voidable”
Member’s explanatory statement
This amendment, with others in the name of Lord Vaizey that substitute “voidable” for “void”, is intended to ensure that transactions are not automatically void. Instead, the Government would have power to declare a transaction (or parts of it) void if it gave rise to national security concerns.
Second time lucky. I am not aware that an amendment like this was tabled in the other place when the Bill was being considered. However, Amendment 5 and the subsequent amendments are fairly clear, in that they substitute the word “voidable” for “void”. The amendments are designed to ensure that transactions are not automatically voided if a company fails to comply with mandatory notification procedures. I hope to set out in my opening remarks why that should be the case.
As far as I am aware, the Government have tried to make it clear that they could retrospectively accept a notification, and therefore in effect ensure that a transaction was not voided, so this amendment seeks to realise what I think is the Government’s ambition. Amending the sanctions in this way would therefore be consistent with their position and would show that the power to unwind a transaction to make it void would be a last resort used only in the most exceptional of cases. I accept, of course, that it is important to have significant sanctions in place where a transaction subject to the mandatory notification obligation is completed without first obtaining approval from the Secretary of State, but such sanctions need to be workable in practice—they need to be credible. Treating such an error as to make a transaction automatically void—as currently envisaged in Clause 13—would in reality give rise to a host of practical difficulties that would make it unworkable in practice.
I also venture to suggest that the approach is inconsistent with other established regimes in other jurisdictions, such as Australia, the US and Canada, where a problematic transaction is not automatically void but the authorities are able to step in and issue unwinding orders for parts or all of a specific transaction. It would be far preferable to provide for a similar “voidable” power, giving the Government the power to declare such a transaction—or parts of it—void if it gave rise to national security concerns but not automatically making that the case. This would mean that the Government could consider the circumstances of each transaction and provide workable steps to take to unwind the transaction where that is considered necessary because of national security concerns.
Declaring a transaction void is effectively to treat it as if it never happened. However, the acquisition which has given rise to the exercise of the voiding may be part of a much wider transaction. For example, as part of the acquisition, the acquirer will have paid consideration to the sellers as well. Following the acquisition, the acquirer may have invested in the business, and third parties may have contracted in good faith with the acquirer in relation to the business. Declaring a transaction automatically void due to breach of the standstill obligation could result in a situation where several parties—many of whom may have had no culpability at all for the failure to notify—are left in limbo and may also suffer financial losses as a result. I submit again that the proposed approach seems unworkable in practice, which is implied in the Government’s own approach but not in the Bill.
Will the Minister also consider a situation where the parties to a transaction have selected a law other than English law as the governing law of the agreement? Is it possible that a foreign court would continue to treat a non-notified transaction as valid? Would that not lead to extraordinary uncertainty? While these provisions will have full force and effect in relation to acquisitions governed by English law, I do not see how they can apply if the transaction is governed by US or other law. I beg to move.
My Lords, this is the first time that I have spoken in this Committee, so I draw attention to my entry in the register of your Lordships’ House. I wish to speak to Amendments 41 and 44 in this group, which I have tabled with the support of the noble Lord, Lord Clement-Jones, for which I am extremely grateful. I am also grateful to the Law Society for its assistance.
The two amendments build on remarks made by my noble friend Lord Vaizey in moving Amendment 5. Amendments 41 and 44 are to Clause 13, which is entitled “Approval of notifiable acquisition”. I am afraid I have to argue that that title is, at best, ingenuous because, under the wording of the clause as presently drafted, there is no requirement for the Secretary of State to register his disapproval; instead, his silence is all that is needed. I argue that, from the point of view of providing certainty for investors, bankers and—last, but by no means least—companies, their management and employees, this is not good enough. Furthermore, this silence inhibits a proper degree of parliamentary scrutiny, making it more likely that cases can be slipped through under the radar. It will also prevent Parliament having the opportunity of examining how practice may be shifting as regards preserving the delicate balance that this Bill seeks to create and maintain between protecting national security and providing maximum safety for investors’ property rights.
We need the spotlight to be shone on those tricky areas so that decisions taken by the Secretary of State have to be justified openly and publicly. That is what Amendments 41 and 44 seek to achieve. Famously, TS Eliot wrote:
“This is the way the world ends
Not with a bang but a whimper.”
In this difficult policy area, a whimper is insufficient. I see no reason why in an open society the Secretary of State should not be under the maximum pressure to provide a clear, concise and public declaration of his decision and the reasons for it. Our society, together with our business and investment community, are entitled to no less, so I very much hope that the Government will be able to accept these two amendments.
My Lords, it is very difficult to follow the noble Lords, Lord Vaizey and Lord Hodgson, especially after the quotation from the noble Lord, Lord Hodgson, of which I think we must be very mindful. I support both in their very similar endeavours, particularly the noble Lord, Lord Hodgson, in his Amendments 41 and 44, which I have signed.
The case has been very clearly made that automatic voidness creates excessive legal uncertainty for investors and lenders. The proposed wording would mean no automatic voidness but a power of the Secretary of State to impose it. A voidable power would give the Government power to declare a transaction or part of it void if it gave rise to national security concerns and ensure that workable steps can be taken to unwind the transaction to the extent considered necessary. While it is clearly important to apply significant sanctions when a transaction subject to the mandatory notification obligation is completed without first obtaining approval from the Secretary of State, such sanctions must also be workable in practice. Treating such a transaction as automatically void, as envisaged in Clause 13, will give rise to a host of practical difficulties and is simply not workable in practice.
This approach is also inconsistent with other established foreign investment regimes, such as those of Australia and the US. It would be far preferable—and the argument has been very well made by the noble Lords, Lord Hodgson and Lord Vaizey—to provide for a “voidable” power, giving the Government the power to declare such a transaction, or particular parts of it, void if it gave rise to national security concerns. This would allow the particular circumstances of each such transaction to be considered and workable steps taken to unwind the transaction to the extent that this is considered necessary to address national security concerns. Amending the sanctions in this way would also be entirely consistent with the Government’s stated position that the power to unwind a transaction would be a last resort used only in the most exceptional of cases.
My Lords, the voiding of a commercial transaction that has already taken place is a massive penalty for those who have entered into the transaction. Parliament should be very wary of legislating in this way if it is not absolutely necessary. I believe that, as drafted, the Bill goes beyond what is necessary.
A transaction may not have been notified where the parties to it did not believe that they were covered by the legislation, perhaps relying on a misinterpretation of the statement that will come out under Clause 3 or perhaps a misunderstanding of advice received from the investment security unit about the transaction. These could occur in situations of good faith, yet the Act is capable of inflicting the penalty of voiding the transaction even in such an instance.
I do not doubt that voiding a transaction may well be the right result if the transaction really does engage national security, but even then it is not necessarily the case that every transaction should be voided. We have to understand that Clause 13 is one of the parts of the Bill that will drive unnecessary voluntary notification, which I know that the Government will wish to avoid. The amendments in this group are helpful and proportionate and I hope that the Government can accept one of the formulations.
My Lords, we have heard from a chartered accountant, a banker and a lawyer all in unanimity; it is very worrying. As I understand it, this approach is consistent with some regimes in certain countries. The idea of having a transaction fully voided would lead to many innocent third parties being in limbo. Would it not be better that a transaction or certain parts of it were voidable, as some parts of the transaction may not be in any way relevant to national security. That gives HM Government more flexibility. By being voidable, it allows for negotiation, discussion and parts perhaps to be voided and not the whole thing.
Once again, insisting that the transaction could be voided in legislation will simply deter overseas investors and buyers because it is a huge amount of uncertainty to have such a black and white separation. The amendments still allow for the dictum of the noble Lord, Lord Callanan, in respect of Clause 15 of non-notified acquisitions being able to be retrospectively validated rather than retrospectively invalidated. Giving the Government maximum flexibility seems a wise and good thing to seek.
I want to pick up where the noble Lord, Lord Leigh, finished: it seems almost punitively value-destroying to have a mandatory process. There will clearly be times when voiding will be the inevitable consequence, but there are others when a retrospective approval would be best for the country, the value, the shareholders, the employees and all the other third parties connected to that business. To lock the Government into auto-voiding seems unnecessary. It may be designed to put people off from not reporting in future but, by their nature, those who do not report probably are not aware of these sanctions, so it is unlikely to have that deterrent effect.
On Amendments 41 and 44, the “Waste Land” amendments, certainty comes up again, as predicted. All they do is ask for a clear signal rather than something simply not happening being the signal. The noble Lord, Lord Hodgson, raised external messaging, but such clarity would also help build a body of case law which would help future practitioners understand what they should and should not do. Having that case law and those examples clearly delineated by a full stop rather than the whimper that is currently enshrined in law would be a much better way of exposing such cases for the textbook.
I thank the noble Lord, Lord Vaizey, for these probing amendments relating to the penalty of deeming mergers and acquisitions void in the event of proper notifications and subsequent assessments by the Secretary of State not having taken place. The Minister will need to explain how this will work. Most of the amendments in this group focus on Clause 13, “Approval of notifiable acquisition”, in Chapter 3. Subsection (3) states that:
“A notifiable acquisition, in relation to which a final order has been made, that is completed otherwise than in accordance with the final order, is void.”
I appreciate the view of the noble Lord, Lord Vaizey, that there could be alternative outcomes to certain elements or aspects of any deal. Has the Minister considered whether the Secretary of State could publish guidance on how the mechanisms of deeming non-compliant transactions void would work in practice? Clarity for SMEs would be most helpful.
The ability for transactions to be deemed void where they have not been approved by the Secretary of State, have not been notified or are non-compliant with any final order could have large repercussions. Clause 15, “Requirement to consider retrospective validation without application”, and Clause 16, “Application for retrospective validation of notifiable acquisition”, raise the issue of retrospection in relation to the legally void provision. Could transactions that took place in the past, even up to five years previously, be immediately deemed void? If the first transaction in a chain were deemed void, that would leave the legal rights and entitlements of all subsequent transactions’ parties in total confusion. There could be conditions in a transaction that came to fruition or were exercisable over a length of time, with these events deemed the trigger events rather than the merger itself. Those elements would have had impact at the inception of any M&A activity. An impossible series of rights, entitlements and developments would have to be unwound, which would cause great legal uncertainty.
The noble Lord, Lord Vaizey, also raised the issue of other jurisdictions or cross-jurisdictions. Have these circumstances, among the many others, been considered in the provision of this power? What are the legal implications for the process where the possible imposition of a transaction to be void is under consideration? Have the Government made plans to publish guidance in this area, even though they may consider that circumstantial evidence may make such guidance highly speculative? Many speakers have found the provision impractical and unworkable.
My Lords, first, I apologise for my noble friend Lord Grimstone, who has had to attend a debate on Kenya in the Chamber. I am afraid you are stuck with me for this one, which is obviously disappointing for the noble Lord, Lord Fox. I thank all noble Lords who have contributed.
We understand the aim of this group of amendments, which is to convert the automatic voiding provisions in Clause 13 into powers to void. Further amendments in this group then seek consistency with associated provisions in the Bill. I thank the noble Lords, Lord Vaizey and Lord Hodgson, for bringing together this grouping. I will first address the purpose of the automatic voiding provisions, before turning to the amendments in detail.
Notifiable acquisitions are those that occur within the most sensitive areas of the economy—sensitive enough that the Secretary of State judges that he must be notified and must clear an acquisition to proceed before it can complete. As such, it is essential that there are clear incentives for compliance with the regime and that any national security risks arising from these sensitive acquisitions being completed without approval are mitigated, as far as possible. Noble Lords present will understand that any Government’s first preference in legislating to create requirements on persons, particularly where the matters relate to serious issues such as national security, is that compliance with such requirements is incentivised and that we do not merely rest on the threat of weighty enforcement.
The automatic voiding provisions in Clause 13(1) mean that there is no way around these requirements and that parties who wish to evade the requirements are unable to complete acquisitions which must be approved by the Secretary of State and have not been. This ensures that the regime mitigates a wealth of national security risks, without the Secretary of State ever being engaged. It is efficient and effective government, and a key tool in protecting our national security.
However, voiding is not a sanction; it is instead the logical implication of not complying with a mandatory regime that concerns only the most sensitive acquisitions. Clause 13(3) ensures that any notifiable acquisition in respect of which a final order has been made, which has been completed otherwise than in accordance with the final order, is also void.
I understand that the voiding provisions have raised some concerns, as outlined by my noble friend Lord Vaizey, that the unaware may be unduly or adversely affected, which would otherwise lead to significant costs for parties who are affected by voiding. I hope that I can offer them the following reassurance. First, those who have been materially affected by the voiding of an acquisition, including sellers and third parties, not just acquirers, may apply for retrospective validation of the acquisition using Clause 16. If a valid and complete application is received, the Secretary of State will have up to 30 working days to decide whether to issue a call-in notice. If he does not issue a call-in notice, for example if there are no national security risks involved, he must validate the acquisition retrospectively. The impact of retrospective validation is that the notifiable acquisition is to be treated as having been approved by the Secretary of State and is, accordingly, not void. Anyone materially affected by the voiding, including those unaware of the requirements, is therefore able to secure retrospective validation, such that the acquisition was always valid in law.
Secondly, there are concerns around what happens if a significant purchase of shares in a publicly listed company is caught by the provision. Usually, for significant purchases, parties are advised by a law firm of high repute. I can also assure the Committee that, where the acquisition involves a takeover, BEIS works closely with the Takeover Panel to ensure the there are no issues in the interaction with the takeover code.
Thirdly, there are murmurings that the voiding provisions might create uncertainty. I do not think that Clause 13 could be clearer and more succinct about the effects of not obtaining the approval of the Secretary of State before completing a notifiable acquisition.
Let me now respond to the heart of the proposition of the amendments in this grouping—that voiding should be exercisable as a power by the Secretary of State, rather than being automatic. I am afraid this raises a number of issues. It is, first, unclear why and when the power to void would be exercised. The Secretary of State is already able to order the unwinding or divesting of acquisitions, following assessment as part of the final order. Why would he need to void the acquisition if it can simply be unwound or divested? Would it be intended that the Secretary of State would decide whether to avoid the acquisition prior to the assessment? If so, on what basis would he make that decision?
Secondly, the power to void would be a significant, additional power for the Secretary of State, against arising by normal operation of statute. What would be appropriate for the Secretary of State to take into account as part of making any such decision? And what safeguards would there be on its exercise?
Thirdly, I am afraid the Bill does not function effectively with voiding being a power. It is not clear, even with Amendment 57, how a power to void would work alongside the power to make a final order or the retrospective validation process. In relation to the latter, for example, Amendment 57 appears to envisage the applicant applying for retrospective validation of an acquisition that is already valid.
Let me close by reassuring noble Lords that the UK is not alone in pursuing this approach. Our French and German neighbours both have similar automatic voiding provisions in their investment screening legislation. We are consistent in this with economies with similar national security concerns. To alter it would be to make our regime comparably less effective. I know noble Lords who have tabled these amendments have good policy as their motivation and good law as their objective. Therefore, I hope the points I have been able to provide them with assure them the Government are delivering these in the Bill as it currently stands. I hope, with these explanations, those noble Lords will choose not to press their amendments.
I have received one request to speak after the Minister, from the noble Lord, Lord Leigh of Hurley.
Although I mentioned it at Second Reading, I refer noble Lords to my entry in the register of interests. Also, as noble Lords have done throughout Committee, I thank all the trade bodies that have been so helpful in advising noble Lords on some of our amendments and, particularly, for me, Veronica Roberts at Herbert Smith Freehills. Just for the record, may I also say how delighted I am that it is the noble Lord, Lord Callanan, responding on my amendment rather than the noble Lord, Lord Grimstone? I had a touch of the noble Lord, Lord Grimstone, on my previous amendment, and now, to have the noble Lord, Lord Callanan, frankly, my cup runneth over.
I thank all noble Lords who have supported my amendment. Without wishing to pick any winners, I thought that the noble Baroness, Lady Noakes, put it most succinctly when she spoke of the automatic voiding penalty. She channelled her inner football commentator by saying the automatic voiding was a “massive penalty”. I think that is right. I also point to the noble Lord, Lord Leigh, who has been very good at introducing me to the mysteries of Lords amendments and has marshalled me extremely well. These amendments pose an unanswerable question to the Minister, because if they are accepted and a transaction can be made voidable, it can, by definition, be voided. It is just not automatic. It ensures voiding can apply where the Government think that is the only solution with a transaction that has not been notified.
In the real world, it is unlikely that a mandatory notification would not be made. The tenor of most of the speeches that have been made during the passage of this Bill is that the Government should expect far more notifications than they have estimated so far. The Minister is quite right to say that anyone transacting in the midst of a mandatory area is likely to have some high-powered lawyers advising them.
What I would say in response to the Minister’s excellent response to this debate is that there are certain points that I feel have not been addressed. One is obviously going back to the massive penalty phrase. If you void a transaction where it is part of a wider transaction, how do you go about unwinding it? Would there not be other, more suitable punishments than simply voiding the entire transaction? Indeed, as the Minister indicated, there will be plenty of people—shareholders, for example—who will be unduly punished by the automatic voiding provisions. Surely there must be alternative punishments.
However, by definition, given that you can effectively retrospectively apply to the Government if you have failed to comply with the mandatory notification requirements, you are, as my noble friend Lord Leigh pointed out, effectively making your transaction voidable. You are giving the Government the chance not to void the transaction, yet by introducing an automatic voiding penalty, the Government have precluded themselves from punishing the parties who failed to comply with their requirement for mandatory notification. Giving themselves flexibility by allowing themselves potentially to void a transaction also gives them the flexibility to impose other punishments.
There are other dogs that have not barked in this debate. In other amendments that we have been debating, previous legislation has been cited as an example that has guided the Bill—but there is no similar sanction, as far as I am aware, in any other business-facing legislation in this country. I hope the Minister will not mind me teasing him a bit at the end because I suspect I know—I think I am right in saying—where his sympathies lie in terms of the great debate of the past decade between Brexit and remain. Is there not an irony in him citing the great example of the French and the Germans but ignoring the far more practical Anglo-Saxon common-law tradition evidenced in the US, Canada and Australia? I beg leave to withdraw the amendment.
Amendment 5 withdrawn.
Before moving on, notwithstanding the successful last-second intervention by the noble Lord, Lord Leigh, I remind noble Lords that if they wish to speak after the Minister they should email the clerk. We now come to Amendment 6.
6: Clause 1, page 1, line 18, at end insert—
“(2A) For the purposes of this Act, the following shall not be taken into account when considering whether a trigger event may give rise to a risk to national security— (a) adverse effects on levels of employment in the United Kingdom, or a part thereof, except that adverse effects on the employment of one or more specific categories of employee may be taken into account,(b) the existence or extent of opportunities for persons resident or established in the United Kingdom to invest in, or make sales in or into, another jurisdiction, or(c) the protection from competition of business activities carried on in the United Kingdom or business activities carried on by persons resident or established in the United Kingdom, except to the extent that such business activities contribute materially to national security, or are likely to do so in the future.”Member’s explanatory statement
This amendment would clarify that certain factors—namely employment effects, reciprocal investment or trading opportunities, and the desire to protect UK business from international competition—cannot be taken into account in assessing whether a trigger event would give rise to a national security risk.
I am delighted to move Amendment 6 and I thank my noble friend Lord Hodgson of Astley Abbotts and the noble Lord, Lord Clement-Jones, for lending their support to this amendment. I also thank the Law Society of England for its help in drafting the amendment, and I very much look forward to my noble friend Lord Callanan keeping up his good efforts this afternoon in responding to this debate.
We have not so far succeeded in coming up with a definition of how to limit our understanding of a definition of national security, so I shall approach it by a different route, which is to try to understand, define and limit what constitutes a trigger event. In the view of practitioners, as expressed by the Law Society of England, this amendment is needed as it would ensure that “national security” in the Bill will not be conflated with other issues of political or industrial concern which cannot be seen to relate to security but would still be flexible enough to allow for genuine national security threats to be deemed to be trigger events. I suppose this relates to my noble friend’s earlier comment in summing up a previous debate when he said that trigger events or national security relate to the whole economy, not just parts of it.
The purpose of Amendment 6 is to understand what constitutes a trigger event that would be deemed to lead to or constitute a security risk. It is in terms of being critical to investor confidence in the United Kingdom that the new regime is seen to be focused clearly on national security concerns and free of industrial or electoral influences not relating to national security. Therefore, the Bill would benefit from a clause such as this, explicitly stating the factors that should not be taken into account in assessing whether a trigger event would give rise to a national security risk. I set out here that the factors that would be excluded would cover any,
“adverse effects on levels of employment in the United Kingdom”,
“the existence or extent of opportunities for persons resident or established in the United Kingdom to invest in, or make sales in or into, another jurisdiction”,
and the desire to protect UK businesses from international competition.
I accept that the amendment might not be necessary if we had established a definition for national security but, given that we have not achieved that, I am keen to press this as a probing amendment and include a clause such as this in the Bill, thereby making clear that certain factors such as employment effects, reciprocal investment and trade, and protectionist connections would not be deemed to be trigger events. With that brief explanation, I beg to move.
My Lords, it is a pleasure to follow the noble Baroness, Lady McIntosh of Pickering, with whom I am often in agreement—although, I am afraid, not in this case.
In my little over a year in your Lordships’ House I have noticed a strong tendency for Members to sign up to speak on amendments that they support and not those that they oppose. However, this has a clear and damaging effect, and slants the debate. Proponents get to put their case and the Government attempt to bat it away, often on merely technical grounds, and only one side of the argument is put. That sets the tone of the debate beyond just that day; it unbalances it. There is also the issue that, on Bills such as this, as a noble Lord said earlier, we often have an accountant followed by a banker followed by a lawyer. That is not a representative sample of society or opinion. It is for that reason that I signed up to speak on the amendment and express my strong opposition. I will be brief but clear.
The earlier groups of amendments on which I spoke, including Amendment 2, sought to define the national security on which the Bill seeks to allow the Government to act. The amendment does the very opposite by seeking to restrict the Government’s hand. The former amendments were “have regard to” amendments. This is a “shall not be taken into account” amendment. It is extremely ideological and seeks to assert the primacy of the market and the interests of business—which, by definition, given the nature of the Bill, is almost certainly big business, giant multinational companies—over what might be regarded as a key concern of the Government regarding employment. That is also, I would strongly argue, a national security issue—certainly a public order issue—with regard to Amendment 2.
The market is a human creation, not some natural process or action such as photosynthesis or the tides. To say that the market should have primacy over the well-being of society is a profoundly ideological argument that would have been very strange for most of the 20th century and reflects a particular neoliberal political position. Again, we are back to talking about investor confidence and the idea that we have to be a competitive nation—the very ideology that led us to the 2007-08 financial crash.
My Lords, I respect the opinions of the noble Baroness, Lady Bennett of Manor Castle, but she will not be surprised to find that I do not agree with a single word of what she said. I agree with the sentiments behind Amendment 6, but I expect that the Minister will say that the amendment is unnecessary because the items listed in it could never be considered to be national security considerations. If I am correct in that assumption, I hope that he will make a very clear Dispatch Box statement to that effect, with no hedging about or qualification.
The Bill goes against the instincts of many of us who value an open economy and welcome investment into the United Kingdom. Protectionism may well not be a motivation for our current Government, but who knows whether one day we might get a Government with quite different approaches and priorities? We need to make it as clear as possible in the Bill that the powers cannot be used to promote a policy of economic intervention unrelated to what we understand to be national security concerns. The wise electorate saved us from the prospect of a Government led by Mr Corbyn and Mr McDonnell in 2019, but we must never forget the danger that a Labour Government could well present with a statute such as this on the books, and I hope that the Minister will make very clear statements which will put beyond peradventure that the matters raised by my noble friend Lady McIntosh of Pickering could never be considered.
I put my name to this amendment, but somehow along the way I was left off the speakers’ list, so I am glad to have scraped back on again. My noble friend Lady McIntosh made the case for the amendment clearly and decisively, so I will merely sweep up and say that, at Second Reading, there was general agreement that we were seeking a balance between the fact that the country had to be protected from overseas powers gobbling up key companies in key sectors, yet at the same time keeping our economy open for inward investment, particularly in the tech sector, where we have such a worldwide reputation. We all agreed then, and agree this afternoon, that that is the difficult balance that we seek to strike.
Of course, once the Bill passes into law, Parliament’s opportunity to examine and, where necessary, recalibrate that balance will be limited, to say the least. When the noble Baroness, Lady Bennett of Manor Castle, talks about the dangers of the markets, I think she is headed in completely the wrong direction, with due respect. My concern about the Bill is about not markets but mission creep: that we will end up with the Bill doing nothing that was anticipated when it was first drafted.
Like my noble friend Lady Noakes, I have no doubt that the Minister and his officials will say they have a very clear idea of how the provision will be used, and there is no question of mission creep under the Bill. As we all know, Ministers, parties and policies change, and there are serious dangers if we do not accept some form of amendment such as this.
First, there is the issue of employment under paragraph (a). How easy is it to see a future Secretary of State, faced with some politically unhelpful headlines about unemployment following a potential takeover, being tempted to press the national security button to avoid some disobliging comments? Under paragraph (c), we should never underestimate the lobbying powers of big companies. Hell hath no fury like a big company that finds its market invaded by a smaller, nimbler competitor offering a better, cheaper product or service. The smaller competitor, perhaps growing faster than its internally generated funds can support, may need to find outside capital, and some of that outside capital may come from overseas—it is likely to. How convenient for the big company if it can lobby the Secretary of State to block funding for the growth of its successful smaller rival on the grounds of national security.
Those are just two examples where mission creep might occur; there are plenty of others. I hope the Government will understand that the purpose behind this amendment is to make sure that the Bill continues to do what it says on the tin.
My Lords, it was a pleasure to put my name to the amendment in the name of the noble Baroness, Lady McIntosh, because I think that I understand its intentions entirely. It is also a pleasure to follow the noble Baroness, Lady Noakes, and the noble Lord, Lord Hodgson, in their elucidation of what the amendment is about. I think the noble Baroness, Lady Bennett, has entirely misunderstood the essence of this amendment.
Earlier in Committee today we were trying to get some sort of definition of national security, and I think that the noble Lord, Lansley, in his inimitable way, managed to unpick that rather successfully. As far as national security is concerned, it is a mission impossible to try to carry everything in one bundle in a definition. This tries the other way on and, as the noble Lord, Lord Hodgson, said, it is designed to avoid mission creep. It is trying to make sure that the definition of national security is not used as a blanket term to cover damage to the economy and society. It has the huge benefit of simplicity; it tells us what is not in national security rather than what is in it. It clarifies that certain factors such as employment, reciprocal investment or trading opportunities, and protectionism will not be taken into account when assessing national security. If there was mission creep in the way that was described, it would undermine legal certainty and damage investor confidence in the way that we have heard from a number of noble Lords.
The Government have kept assuring us that this is not, in the words of the noble Lord, Lord Callanan, a national interest Bill but a national security Bill. That is exactly what this amendment is trying to ensure—that we do not have that all-encompassing national security definition used by lobbyists or others to try to bring things into the net. I have seen it happen in the United States. The CFIUS is absolutely that kind of spider-like operation that brings in all sorts of spurious transactions. I very much hope that we will keep this provision absolutely focused, and this amendment is a very good way of doing it.
My Lords, we support the approach of this amendment. As we have all made clear, the new regime must focus on protecting national security. The clue is in the title of the Bill. The definition of national security has to take best advice from across the Government about the threats and behaviour of our adversaries.
While I hope the Government will monitor the impact of the Act on technological investment, innovation and SMEs—which I hope a different part of the Government is actively supporting—those interests, along with employment, investment and competition, cannot and should not trump national security, albeit that I hope that the Government would consider mitigating any detrimental domestic impact of placing security first if that were needed.
Clearly, concerns about any political pressure, rather than any disregard for the issues listed, give rise to this amendment. The tone and the purpose of it are ones that we share.
I thank everybody who has spoken in this debate and thank my noble friend Lady McIntosh of Pickering for tabling the amendment. It seeks to clarify that certain factors, namely employment effects, reciprocal investment or trading opportunities and the desire to protect UK businesses from international competition, cannot be taken into account in assessing whether a trigger event would give rise to national security risks. I was surprised to see that the noble Baroness, Lady Bennett, and my noble friend Lady McIntosh are now differing on some things. That is most unusual; it is something to be encouraged for the future.
My noble friend articulates a reasonable concern here: that a regime used to screen investment for national security purposes could be used to screen investments more widely. Indeed, the shadow Secretary of State, in his opening speech at Second Reading in the other place, argued that the Bill should include an industrial strategy test—I was therefore surprised to see the noble Baroness, Lady Hayter, supporting this amendment.
As such, I have some sympathy with the aims of this amendment. I can, however, reassure my noble friend that the Bill is about protecting national security, nothing more and nothing less. The Bill does not set out the circumstances in which national security is, or may be, considered at risk. As I said on previous groups, this reflects long-standing government policy to ensure that national security powers are sufficiently flexible to protect the nation. The Bill also does not include factors which the Secretary of State must or may take into account when assessing national security risks. Instead, factors that the Secretary of State expects to take into account in exercising the call-in power are proposed to be set out in the statement that we have provided a draft of and is provided for by Clause 3.
The draft statement, published upon introduction of the Bill, includes details of what the Secretary of State is likely to be interested in when it comes to national security risks. This includes certain sectors of the economy, and the types of acquisitions that may raise concern. It does not currently state anything which the Secretary of State intends not to take into account with regard to national security. This is a conscious choice. If the Secretary of State were to start listing areas of the economy or types of acquisition that he considered unlikely to present national security concerns, I suspect that this would result in a long and dense document of little use. We judge that it is therefore more helpful for businesses and investors to set out where the Secretary of State is more, rather than less, likely to use the call-in power.
I understand, however, the concern that without a definition extraneous factors may be taken into account. My reassurance for my noble friend comes from the courts. Were the Secretary of State to seek to use the powers in the Bill for a purpose beyond national security, his decisions could be challenged in the courts through judicial review and could not be successfully upheld. It is with this judicial oversight in mind that the Secretary of State is constrained in delivering the purpose of the Bill. I am therefore confident that the Bill as currently drafted contains sufficient safeguards against inappropriate use of the regime, and that the Government are already providing a good amount of information for parties affected by the regime on its likely areas of focus.
I hope that my explanation, taken together with these points, provides sufficient reassurance to my noble friend, and that she therefore feels able to withdraw her amendment.
My Lords, I am most grateful to all those who have spoken in the debate, particularly my noble friend Lord Hodgson, and the noble Lord, Lord, Clement-Jones, for their eloquent support.
Like the Minister, I am slightly baffled by the sudden lack of support from the noble Baroness, Lady Bennett, with whom I have enjoyed a deeply cordial relationship. I obviously take issue with a number of issues to which she referred, not least setting out the importance to the economy of foreign investment, which is well established and repeated in the national security and investment government response published, I understand, this week. I also take issue with the fact that I am not a great expert on the financial crash, although I seemed to lose an awful lot of the small amount of money I had invested in the stock market. What is the saying about how to make a small fortune in the stock market? I have forgotten, but, anyway, that burnt my fingers.
I believe that the start of the financial crash was actually in the US, with the selling of mortgages, both in the US and here, for a greater value than the value of the property, and a lot of grief was caused as a result. I am pleased that my noble friend Lord Callanan feels that the Bill is still perfectly formed and fit for purpose, but I beg to differ. My noble friend referred to the statement in Clause 3, but we are told that the Secretary of State only “may” publish such a statement. Clearly, it would be immensely helpful to have such a statement at this stage, if possible, to give an indication of the direction of travel.
As indicated by my noble friends Lady Noakes and Lord Hodgson, and the noble Baroness, Lady Hayter, there are a number of reasons why the Minister is not keen to have a definition of national security, but it would be in the interests of practitioners to limit the understanding of what constitutes a trigger event that would lead to a national security risk. Our involvement is only in that we put the Bill on the statute book; it is for practitioners—whether solicitors, bankers, accountants or those of other professions—to understand how to apply it. The purpose of Amendment 6 is to make sure that we have greater certainty, as the noble Lord, Lord Clement-Jones, would say, of what forms a trigger event. I will consider and read carefully what my noble friend said in summing up and responding to the debate, but for the moment I beg leave to withdraw my amendment.
Amendment 6 withdrawn.
Clause 1 agreed.
Clause 2: Further provision about call-in notices
7: Clause 2, page 2, line 18, leave out “5” and insert “2”
Member’s explanatory statement
This amendment reduces the timeframe after a trigger event in which the Secretary of State can make a call-in notice from five years to two.
My Lords, Amendment 7 shortens the period in which the Secretary of State may give a call-in notice following a trigger event, under the provisions of Clause 2, from five years to two years. I am grateful to the noble Lord, Lord Clement-Jones, for his support.
It was interesting that, when giving evidence to the Public Bill Committee in the other place, on 24 November, Michael Leiter—perhaps related to Felix Leiter—head of national security and the committee on foreign investment at Skadden, Arps, the major US law firm, described the Bill as
“a rather seismic shift in the UK’s approach to review of investment.”—[Official Report, Commons, National Security and Investment Public Bill Committee, 24/11/20; col. 46.]
He stressed the importance of clarity in what was proposed, given the criminal penalties that are now being introduced and that there is no interim period for familiarisation.
This amendment and all the others that I have tabled, two of which I have already spoken to, aim to test both the clarity and, importantly, the practicality of the proposals that the Bill contains. I stress that practicality because, there can be a danger, when Bills like this are in Committee, of focusing on legal terminology and overlooking the flesh and blood consequences of the decisions that Parliament is about to take. I hope that the Committee will forgive me if I spend a moment on two real-life examples, because they give useful background to this and my other amendments.
Members of the Committee may be aware that I am chairman of the Secondary Legislation Scrutiny Committee of the House. In December 2019, our committee was notified of the laying and simultaneous making of two statutory instruments: SI 2019/1490 and SI 2019/1515. The full title of SI 2019/1490 is the Public Interest Merger Reference (Gardner Aerospace Holdings Ltd. and Impcross Ltd.) (Pre-emptive Action) Order 2019. The full title of SI 2019/1515 is the Public Interest Merger Reference (Mettis Aerospace Ltd.) (Pre-emptive Action) Order 2019. These were the first referrals under the new regime with reduced thresholds, and this was the very first time that the Government used pre-emptive powers; that is to say that they were seeking to stop a takeover before any offer was made, rather than reacting to an offer once made. These two statutory instruments therefore give us a glance into the world that the Bill takes us into.
I shall say a couple of words about the protagonists. Gardner Aerospace, the predator and potential acquirer, is based in Derby. It was acquired by Chinese investors in 2017 for some £300 million and has since made a number of acquisitions in the aerospace sector. Mettis Aerospace, one of the targets, is based in Redditch and has sales of £86 million, which is above the old threshold. It is substantially profitable—it made about £9 million of profit before tax—and has some 500 employees. Its customer list reads like a who’s who of world aviation and its two leading customers are Airbus and Boeing.
Mettis’s roots can be traced back to the early days of British aviation. For those who like a historical note to our debates, it produced the framework that held in place the bouncing bombs under the Lancasters flown by Guy Gibson and the men of 617 Squadron in their successful raid on the Ruhr dams in the Second World War. A few years later the company produced the fan blades for Frank—later Sir Frank—Whittle’s first jet engine.
Mettis is owned 25% by the management and 70% by a private equity firm called Stirling Square Capital Partners. The fund through which the investment is being made is based in Luxembourg. Stirling is based in London but, judging by its list of partners, has a strong orientation towards continental Europe. The investment will almost certainly have been made on behalf of third-party investors who have pooled their funds for Stirling to manage. Such investors may very well come from all over the world and this is unlikely to be their only investment in the UK, so if they perceive the treatment of any one of their UK investments as being inequitable, there will inevitably be a ripple effect on their readiness to invest in the UK generally. Mettis made it clear to the Competition and Markets Authority and the Government that it had not put itself up for sale. Gardner’s approach had not been sought and was regarded as being what in the trade is known as a fishing expedition. The outcome was that Gardner pulled away on 27 February, following a heavily redacted CMA report published on 13 February.
The story of Impcross is quite different. It is a much smaller company based in Stroud, Gloucestershire, with a turnover of only £11.9 million, so it would not have been eligible under the old thresholds. It lost money in the year to 30 June 2019, but only a small amount—£350,000—and, significantly, it is controlled by one person. Its accounts reveal a person of significant control, or PSC, holding between 50% and 75% of its shares. That has been built up over a lifetime and it would not be unreasonable if that director now wished to realise the fruits of his efforts. If the state stepped in to prevent that—we cannot be certain exactly what happened—without offering any alternative solution, it seems a hard moral choice. Either way, it all took a lot longer to resolve and it was only on 10 September that Gardner withdrew.
In speaking to Amendments 41 and 45 a few minutes ago, I argued that it was not good enough that, under the provisions in Clause 13, all the Secretary of State had to do to void an acquisition was to say nothing. For Mettis, this was not a problem: the company was clear that the approach was not welcome. For Impcross, there were 10 months of uncertainty with the Secretary of State appearing to set up a sword of Damocles but apparently never having to cut the string. That cannot be the right way to provide certainty for investors in the UK tech sector.
I have one final point. In our debate a moment ago on Amendment 6, tabled by the noble Baroness, Lady McIntosh, the Committee expressed concerns about the degree of parliamentary scrutiny of developing practice in this sensitive area. The two cases I have referred to were authorised by a statutory instrument. Statutory instruments are not amendable, and it would seem vanishingly unlikely that either House of Parliament would seek to reject one—the nuclear option—so any scrutiny of future practice will be at a very high level, and even that scrutiny will be ex-post. Both the above SIs were made and laid on the same day, 6 December 2019, at a time when Parliament was in any case not sitting because of the general election. It would be worthwhile if the Minister could confirm whether in this brave new world of these pre-emptive actions, each would still be the subject of a separate SI, so affording at least some degree of parliamentary oversight.
I turn now to the details of Amendment 7. I have tabled it because giving the Secretary of State the ability to unpick a merger or takeover after five years is to ignore the real world. Acquisitions are made with a view that two plus two will make five and that overall, they will be profit-accretive. In the event, that promise is often not achieved, but that is the idea that people set out with and to do that, changes have to take place at various levels.
First, the acquiring company will want to ensure that the financial performance of the two companies are managed on the same basis so that one company’s financial reporting systems will disappear. Secondly, it is inevitable that in any acquisition, there is extreme nervousness among the staff of the two companies about winners and losers in the new configuration. That nervousness can be reduced by an exchange of staff between the two companies, so that they get to know each other. Thirdly, it is unlikely that it will be cost-effective to maintain two separate research and development facilities, so they will be merged as one. Fourthly, marketing and sales teams are likely to be combined to broaden and deepen product range and market reach. Finally, it may be concluded that the new entity would be more effective and profitable if it operated from a single site, so one facility will be closed and the site sold.
Within five years, all of these steps could have taken place and if they had, the companies would be indistinguishable. I appreciate absolutely that the Government need some power to reach back where a case may have been slipped past them, but I argue that two years should be sufficient. At the same time, there is at least a likelihood of there still being a unit that is sufficiently independent to resume an independent life.
Members of the Committee may remember their days in primary school and the magic of mixing paints. If one mixed blue and yellow paints together then, suddenly and miraculously, one had green paint. That is in effect what one does with the merger of two companies: you mix a blue and a yellow company, and the result is a green one. After some time, and certainly after five years, the two constituent parts will be indistinguishable. That of course is vital, considering the position of investors who may find that they still own an investment which they thought had sold five years previously. I would argue that a maximum of a two-year clawback will provide a better balance between the interests of all the parties in this delicate area. If my noble friend is not inclined to accept the amendment, will he tell the Committee how his officials will undertake the practical challenges of separating the green paint into its original blue and yellow parts? I beg to move.
My Lords, I speak in strong support of Amendment 7, in the name of the noble Lord, Lord Hodgson. I am a former company secretary and legal adviser to a publicly listed company. I know from personal experience what it is like to wait for competition decisions, takeover panel decisions and for all the uncertainties of regulation external to the company as a result of its commercial activities.
Given that, I am entirely in sympathy as the noble Lord, Lord Hodgson, has set out what he calls the flesh-and-blood consequences of the two case studies that he put forward extremely graphically and well. Not least, he has hinted at some of the issues around statutory instruments and the level of scrutiny. There is little that I can add to what he has said about the undesirability of having a massive period of time within which a Secretary of State can act—up to five years. However, I would like to add to the practicality issues that the noble Lord has raised.
The longer a deal has been in place, the more difficult it will be to void or avoid—that is, unwind—a transaction. Unwinding a transaction after five years is a very long time in commercial terms. Thinking back to my own career, subsidiaries are sold, businesses are purchased and the commercial realities change over five years. It would be exceptionally difficult, even if it were possible, for a listed company involving public transactions to unwind those transactions.
It is not just a question of the undesirability and uncertainty of everything being kept in some kind of deep freeze if this goes through—you could not merge the paint colours in the way the noble Lord, Lord Hodgson, described or choose one over the other. You would have to keep them as separate entities, so commercially you would not be able to achieve any of the objectives you set out to. On the grounds of practicality, going from five years to two, as the noble Lord, Lord Hodgson, has so eloquently described, seems to be absolutely essential.
My Lords, I am glad to follow the noble Lords, who presented a compelling case that mergers of companies should not be sought to be unwound after five years. However, that is not how I interpret the effect of the legislation.
For Amendment 7, we have to direct ourselves to Clause 2 and the structure of Clause 2(2). It requires that a call-in notice given by the Secretary of State cannot be
“given after the end of the period of 6 months beginning with the day on which the Secretary of State became aware of the trigger event”.
Noble Lords will recall that I was interested in the question of when the Secretary of State “becomes aware”. My noble friends have so far rebuffed the idea that we can define “becoming aware” rather better.
In the case of a merger, particularly between listed companies, but between companies of the kind so ably described by my noble friend, the Secretary of State should become aware of it, because it would appear to be publicly known. The Secretary of State could become aware because the parties to the transactions could themselves provide notification to the Secretary of State. Either way, the question of five years does not arise. That arises only in relation to circumstances where the Secretary of State does not become aware.
It is not a matter of people being exposed to an uncertainty; they can remedy the uncertainty by notifying the Secretary of State. That is why we are going to get a lot of notifications and, to some extent, Ministers accepted that when they revised the number of notifications they are anticipating from the original White Paper, which I think was a few hundred, to about 1,800. I think that is partly anticipating that there will be such notifications.
The circumstances we are talking about are probably not mergers but the trigger events relating to assets. As we previously discussed, this involves quite a wide range of acquisitions of assets including technology, transfers of technology, intellectual property or even potentially land that people did not necessarily understand was sensitive. The five years is not an irrelevance because, as Clause 2(2) says, there is a five-year period which would apply in circumstances where the Secretary of State had not become aware of the trigger event.
At this point, I want to ask my noble friend a question. In so far as the trigger event relates not only to the acquisition and the entity or asset but to the understanding of the nature of the acquirer—I keep coming back to this question of who the acquirer is; we talked about it in the second debate—can the Secretary of State apply the five years in relation to the nature of the acquirer being somebody other than the person whom the Secretary of State thought it was at the point at which the Secretary of State became aware of an acquisition? That is when the five years really begins to bite and the uncertainty begins to become more manifest.
That is true not only because the acquirer might be somebody who the Secretary of State did not understand to be hostile but who turned out to be, but because when we get to Clause 10 and we understand the implications of Schedule 1, which Clause 10 brings in, a person may be held to have acquired an interest or right in relation to an asset or entity by virtue of things such as the fact that they are connected persons, they are in a common purpose or they have an arrangement, all of which might not have been evident in public or to the Secretary of State when the Secretary of State saw the acquisition in public material. Indeed, maybe he did not see it at all but became aware of this interest only at a later stage.
There is a reason for the five years being there, because two years is not very long in relation to these kinds of acquisitions. The Minister might entirely reasonably say that five years is not without precedent: there is five years in the French, Italian and German regimes. With this Government, if it is good enough for the Europeans it is good enough for us, as we often say. However, leaving that to one side, we have to be aware that understanding who is in a common purpose, what is the nature of arrangements that might not have been disclosed and what is their nature in relation to assets, not just mergers, gives one a reason to think hard about the circumstances in which the Secretary of State might have to intervene, even though a significant period of time has elapsed. For those reasons I am inclined to live with five years, on the strict understanding that, to get rid of uncertainty, people make a voluntary notification and then six months is the limit.
My Lords, it is always very interesting to follow the noble Lord, Lord Lansley. He is approaching this partly in a similar way to me and partly in a different way. I was, and still am, attracted to the notion of trying to get this time of uncertainty down from five years to two. Part of what I would say to the noble Lord is that, if it is going to take five years to work out who might actually have bought something, that is something we should look at in its own right. If you cannot work out whether somebody is hostile and they have had it for five years, you have missed the boat if it is a question of whether they have learned the technology and found out things you do not want them to find out.
I would be interested to hear from the Minister the reasoning behind the length of the period. It could not really be due to a workload of investigating, because one must presume some sort of steady state pipeline with adequate staffing, but how much of it is fear that something new is not recognisable as having a security application until some time later. That thought was going through my mind: was there fear about missing things? This goes back to one of the issues I flagged at Second Reading about sifting being done by the right kind of skilled people—those who have the right kind of applied science or engineering knowledge, plus knowledge of potential usage in national security fields.
I have to say, these things are not necessarily all that obvious. I have experience of working as a patent attorney in the field of defence. I have worked with people whose job it was to invent—put two and two together and have something inventive at the end of it. If you work in a field where those kinds of things are deemed inventive, you will be very short of the people who have that kind of knowledge because, for the main part, they will probably want to be involved in more interesting and economically useful things than participating in what seems to be an overwide fish-sorting process, as it has been termed. I am turning this back to the Minister. On volume, if you cast the net wide, will you have sufficiently skilled people to be able to do the sorting, or will you find that important fish get missed? Will you then be trying to do things to backtrack on what has not been done or give yourself more time to do things?
That is a slightly different take. I know that there are some safeguards in there, but five years is quite a long time to live with uncertainty. If that uncertainty comes about because of ownership, one should sort the ownership or shareholding issues; I am actually among those people who think that we should have a lot more transparency on those kinds of things.
My Lords, in his excellent intervention, the noble Lord, Lord Hodgson, started out by calling for clarity. We need some clarity on the wording of this part of the Bill because a number of different interpretations have emerged. I must confess, my interpretation is similar to that of the noble Lord; by the way, we would seem to be backed up by the Law Society, which took the same view. If the Government’s intention is something different, some different words need to be used to put that forward.
Assuming that, to start with, the intention was as the noble Lord, Lord Hodgson, set out, his counter to that was very clear. I have been involved in lots of what is known as integration, which involves bringing two companies together when one has bought another. Five years is well past the point at which you would find it very difficult to unmake that company. Indeed, the entire product life cycle in the sort of industries we are talking about here is probably about two years, so they will have marched through two and a half product life cycles by the time the five-year period expires.
In a way, I hope that the Government’s intention is more closely aligned to that of the noble Lord, Lord Lansley. If that is the case, I have similar thoughts to the noble Baroness, Lady Bowles. How long do you need to leave the stable door open before the horse has definitely bolted? To me, five years seems much too long for that bolting to occur; two years is probably long enough in that respect. However, if, on the other hand, the Government’s intention is to offer an opportunity for 20:20 hindsight—in other words, the world changes and, looking back over our shoulder, that deal five years ago now does not look like such a clever deal for the nation and we want to unmake it—that is clearly unfair on investors and others but might perhaps be fair to the country.
We need a real understanding of what the Government’s intention was, and the Government need to understand that their intention needs to be articulated in a way that the outside world can understand.
I welcome the probing of Amendment 7, in the names of the noble Lords, Lord Hodgson and Lord Clement-Jones, on the extent of five years in which the Secretary of State may issue a call-in notice once a trigger event has taken place.
The debate on how long this period may need to be and the reasons behind these decisions has been interesting. When the Government originally consulted on this, the period was much shorter. The Minister will need to answer why it has changed and been extended for such a long period, as well as the other questions raised. Indeed, five years is a far horizon in today’s fast-moving world—even if it is not long enough for some, often unpopular, Government to be able to continue in office.
Could this length of time threaten the policy stability of the economy across many sectors as well as give rise to unnecessary anxiety for businesses, especially in relation to retrospective elements previously discussed? However, the interpretation of Clause 2 may be that the Secretary of State is unaware of the trigger event but that the intentions of the parties have not materialised. The clause is rather unclear, and I appreciate the remarks of the noble Lord, Lord Lansley, in his interpretation. I would certainly welcome the Minister’s reply.
I thank my noble friend Lord Hodgson for his amendment, which intends to shorten the time limit for the Secretary of State to call in trigger events which have already taken place. The Bill as drafted allows the Secretary of State to call in trigger events up to five years after they have taken place. This ensures that the regime powers can be applied to completed trigger events which have given rise to, or which may give rise to, risks to national security but which have not been notified to the Secretary of State.
The length of five years is important to give the Secretary of State sufficient time to become aware of the trigger event and to make it difficult for the parties to keep the trigger event hidden. However, the proposed change from five years to two would make it easier for hostile actors to hide their acquisitions and effectively time-out the Secretary of State. It would increase the incentives to keep an acquisition quiet or inactive, as hostile actors would need to do so for only two years.
While not necessarily straightforward, this is clearly easier—both practically and financially—than keeping an acquisition hidden for a longer period. For example, if a hostile actor acquires an entity and intends to merge it with their existing operations, there are practical costs of not doing so within five years. They would not be able to merge IT, payroll, HR, et cetera, or take advantage of that entity and its assets. Likewise, if a hostile actor acquired an entity for its technology, that technology might well be obsolete in five years, so they would need to use their acquisition now to get the benefit.
In the Government’s view, five years strikes the right balance between creating a substantial disincentive for efforts to obfuscate and conceal relevant acquisitions while giving legitimate business certainty that they will not be called in after that period. Importantly, this approach puts us into line with our international partners. For example, in Germany a review may be initiated up to five years after the purchase agreement. It is in line with other countries, including France and Germany, and we believe that it is appropriate. Indeed, it is shorter than some partners, including the USA and Japan, which have no time limits. Further, a five-year reach-back period applies only to trigger events which have completed or which will complete after the introduction of the Bill, contrary to what some observers have suggested. That is to say that no acquisition which has been completed prior to 12 November 2020 may be called in under the Bill.
As helpfully noted by my noble friend Lord Lansley, in the Bill the five-year period is tempered by the requirement for the Secretary of State to call in a completed trigger event within six months of becoming aware of it. This further reduces the time limit for intervention and creates greater certainty for parties to a relevant acquisition. If there is doubt, parties should submit a voluntary notification to the Secretary of State. This will give them certainty on whether their trigger event will be called in.
Before I conclude, in response to my noble friend’s query relating to whether final orders can require the unwinding of acquisitions, that is very much within the scope of the power. The order, however, makes commands and may not deal with practical arrangements. How remedies are given effect will be for parties to finalise, subject to the requirements of the order.
My noble friend Lord Lansley asked about the nature of the acquirer. To clarify, the five-year backstop applies to the date on which the acquisition itself took place. Circumstances where the identity of the acquirer is not known until some time after the trigger event took place are precisely why the reach-back period might be important in certain cases. In circumstances where a notification was given and false or misleading information was given about the true identity of the acquirer, the Bill already provides that the Secretary of State can re-examine such cases.
With reassurance provided for business, knowing that we are acting in line with allies, and for the reasons I have set out, I hope my noble friend will withdraw his amendment.
I am grateful to my noble friend for her reply. I do not think I heard whether future pre-emptive actions under the new regime will be the subject of a statutory instrument or will just happen from the Secretary of State’s desk. Perhaps, she could answer how this or the other House will know what is happening.
I am grateful to everybody who spoke on this. It is obviously a tricky area. I am grateful to the noble Lord, Lord Clement-Jones. Undesirable, uncertain and impractical—I could not have put it better myself. I am grateful to the noble Baroness, Lady Bowles, for drawing attention to the question of the difference between two years and five years, and what will happen in that three-year period other than causing uncertainty among investors. The noble Lord, Lord Fox, raised very practical points.
Let me meet my noble friend Lord Lansley some of the way. I do not think that this will happen very frequently, but, like the noble Baroness, Lady Bowles, I am not convinced that the three additional years are really needed. The point my noble friend makes, which has certainly eluded the Law Society, is the interplay between the six-month trigger and the five years. In the tech sector, these companies grow like Topsy: they are nothing now, and they will be quite big very quickly indeed. You could have a situation where some event, ex post, could have been described as a trigger event but was not picked up as such at the time. It is unfair for people to have that uncertainty lasting for five years. The Secretary of State could say, “I never became aware of that, so I have more time to start the unwinding process, as long as it isn’t within the five-year period.” I see my noble friend’s point, and I accept that it is a rare occasion, but I still think there is something to be teased out about how the different pieces fit together, particularly in sectors of the market where very fast growth occurs.
I would be grateful if the Minister could tell me about the statutory instruments and how publicity of pre-emptive actions is to be provided.
Does the Minister wish to respond?
The Minister is saying she will respond in writing. Is the noble Lord, Lord Hodgson, withdrawing his amendment?
That was the indication.
Amendment 7 withdrawn.
Amendment 8 not moved.
Clause 2 agreed.
Clause 3: Statement about exercise of call-in power
Amendments 9 and 10 not moved.
Clause 3 agreed.
Clause 4: Consultation and parliamentary procedure
11: Clause 4, page 3, line 28, at end insert—
“(3A) If either House of Parliament resolves not to approve the statement under subsection (2), the Secretary of State may publish a new statement making any changes which appear to the Secretary of State to be necessary in view of the debates in either House of Parliament. (3B) A statement made in pursuance of subsection (3A) above is not subject to the requirements of subsection (1)(a) and (b).”Member’s explanatory statement
This amendment would permit an expedited process for making a new statement where this is required following a resolution not to approve a statement.
My Lords, I am particularly grateful that the Government agreed to group my amendment with their technical amendments, Amendments 12, 37 and 75. I do not propose to refer to Amendments 37 and 75, which are purely technical in nature. Amendment 12 is not strictly technical but relates to exactly the same part of the Bill as my amendment. We are considering Clause 4, and the Government in Amendment 12 are changing subsection (7), which states that the requirement for consultation could be satisfied by consultation carried out before the clause comes into force. The effect would be that not only that consultation but changes to the draft policy statement—such a statement was published at the same time as the Bill—in the light of the consultation can take place before the clause comes into force. That is perfectly reasonable.
My amendment looks at the case that arises under Clause 4(2), whereby:
“Either House of Parliament may at any time before the expiry of the 40-day period”,
that is, after the statement is laid,
“resolve not to approve the statement.”
Under those circumstances, the Government, as subsection (3) makes clear, “must withdraw the statement.” My working assumption is that the Government, having withdrawn a statement, would have to make a statement in the same way in which they have made previous statements—that is, engage in consultation, respond to the consultation and make such changes as are required—and then lay the statement again. That is unnecessary.
My amendment would provide that if a statement was not approved by either House, the Secretary of State should lay a new statement on the basis of making such changes as the parliamentary debates on the previous draft statement required. The Secretary of State would not have to go through a public consultation process or make changes in response to one. That is because the parliamentary objection to a statement may be particular. One can speculate on what that might be but I shall not do so in any way. However, if something led one House of Parliament not to approve a statement, a particular and significant change would be likely to be required. If Ministers make that change, as the amendment would require them to do, they should be able to lay that statement directly. The 40 days would continue to apply because all that would happen would be the resumption of the same process in relation to a new statement.
I hope the amendment means, from the point of view that it does not in any way impinge on the parliamentary scrutiny, that a statement could be in place sooner. That is important because a whole range of things flow from the fact that a statement has been not only published but approved. I hope that Ministers may see merit in the amendment. I beg to move.
My Lords, I broadly support this amendment, although I am also interested in what happens after a statement is declined by Parliament. Statements take effect immediately and things already done under them are not revoked, even if Parliament votes one down, and I did not think that it was entirely clear whether there was anything to stop a new statement being made immediately, because the Secretary of State is under an obligation only to conduct
“such consultation as the Secretary of State thinks appropriate”.
Could they consider that it is appropriate to do none if there has been something tantamount to an exactly equivalent previous consultation?
My question, therefore, is: what currently would prevent an identical or near-identical statement to a rejected statement being relaid immediately or is it just that it is against convention? I am not sure whether convention necessarily always holds any more but I am not the best on these constitutional things. If you need Amendment 11, I am all for it. It is a good thing to have something that makes such a rapid retabling respectable, and it may also mean that it is less challengeable and in general it might also imply that other mechanisms of rapid relaying are not possible. Can the Minister explain to me what the relaying process is and what are the limitations that are imposed by the obligation to consult but only to the level that the Secretary of State thinks appropriate? However, if we need Amendment 11 and it positively does something, I will support it.
My Lords, in the spirit first put forward by my noble friend Lord Vaizey, I would like to tease the Minister at this point, if I may. Clause 3 states:
“The Secretary of State may publish a statement for the purposes of this section if the requirements set out in section 4(1) are satisfied”,
and now we have government Amendment 12, which amends Clause 4 to state that responses to the consultation may be required to be pursued through. What is the situation, if one might occur, if the Secretary of State chose not to publish a statement? Does the Bill permit that in this regard, and what would be the circumstances in which the Secretary of State may decide not to publish a statement?
My Lords, as the noble Lord, Lord Lansley, said, government Amendments 37 and 75 are technical and Amendment 12 covers the ground of Amendment 11, so I will speak to the latter. I am broadly supportive. Clearly, this is an issue about “may”—my noble friend Lady Bowles and the noble Baroness, Lady McIntosh, asked the same question. If “may publish” means “may not publish”, where are we in this process, given that the statement is such an important part of setting out the modus operandi of the whole Bill? This is quite an important area.
I support Amendment 11 but it will be important to listen to the Minister’s response to decide how this might go forward in the next stage. I believe that some degree of accountability should not be left as an option to the Secretary of State; there should be an obligation on the Secretary of State to make that statement and, as the Government have said, to have the ability to remake it.
My Lords, we welcome the Government’s Amendment 12 to make changes to the sectors statement in respect of feedback from stakeholders. Can the Minister confirm whether all the suggested changes that come back in that consultation will actually be published?
I will make a comment about the document that has arrived in front of us today because, in a sense, it gives a very good description of how good consultation works—never mind the timing; we have made that point—in relation to the degree of change that looks as if it is going to happen as a result of conversation on that particular issue. However, it then feeds into what happens if, had this been the statement, changes were wanting to be made. For example, what we have heard today, as a result of some very good consultation, is that the definition of AI has been narrowed significantly to focus on three high-risk applications: identification of objects, people and events; advanced robotics; and cybersecurity.
The interesting thing is what happens after you have had a consultation that has got the Government to rethink and that may then have other implications. In this case, with those changes, does this change the Government’s estimate of the number of notifications that that might give rise to, in relation to the change in definition? It is that sort of issue that might come up, and it would want the dialogue that I think is being referred to in the amendment, in relation to whether there is a second stage—if it is turned down, so to speak—about having to go on further. As such, how we handle the feedback is about both the transparency of what has come back in and the full implications of any changes that that has made.
We keep coming up with the figures where, even though the Government have increased the assumption of how many notifications there would be—less than 1% or so—the CBI and other commentators feel it would be much greater. As such, that degree of dialogue is needed in relation to consultation over these very big issues. Some assurance about the results of such a consultation, as well as a second stage, seems very helpful, along the lines in the amendment.
On the Government’s Amendment 75, it would be interesting to know what advice led to the change—we are not questioning it but wondering why it has been made—to extend the regulatory power from a notice or serving an order to include all documents as well. It would be helpful, certainly to me and possibly to other Members of the Committee, to know what other types of additional documents will thus be added to this regulatory power—could the Minister spell that out?
First, I thank my noble friend Lord Lansley for his Amendment 11. With the permission of the Committee, I will speak first to the three minor technical amendments that the Government wish to make to the Bill: Amendments 12, 37 and 75. Briefly, before I begin, I reassure the Committee that the Secretary of State must lay and publish a statement before using the call-in power.
Amendment 12 is to Clause 4, which concerns consultation and parliamentary procedure for the statement pursuant to Clause 3, in which the Secretary of State sets out how he expects to use the call-in power. At present, Clause 4 enables the Secretary of State to meet the requirement to carry out such consultation as he considers appropriate, in relation to a draft of the statement under subsection (1)(a), before Clause 4 is commenced.
However, it does not make it clear that the Secretary of State is able to make any changes that he considers necessary in view of the responses to that consultation under subsection (1)(b) before the clause is commenced. Amendment 12 clarifies this point, ensuring that stakeholders will be able to see a revised draft statement before it is laid before Parliament.
Amendment 37 is to Clause 11, which provides an exemption for certain asset acquisitions which would otherwise be trigger events. Subsection (2), however, provides that assets that are either land or are subject to certain export controls should not fall within the exemption, and subsection (2)(b) sets out the relevant export control provisions. One of these provisions, Article 9 of the Export Control Order 2008, was revoked on implementation period completion day as a result of EU exit by Regulation 4 of the Export Control (Amendment) (EU Exit) Regulations 2019, with which I am sure all Members are very familiar. The amendment would remove the reference to this revoked provision from Clause 11.
Amendment 75 is to Clause 53, which enables the Secretary of State to make regulations, subject to the negative resolution procedure, prescribing the procedure for giving notices and serving orders under the Bill. At present this clause enables the Secretary of State to specify how a notice or order must be given or served, but does not make it clear that these powers are intended to extend to all documents given under the Bill. The amendment would clarify that point, ensuring that the Secretary of State has the power to make regulations in Clause 53(1) in relation to the procedure for service of documents for all the different types of notices, orders and other documents under the Bill. These are relatively small tweaks to the Bill, and I hope that the Committee will see fit to agree to them.
Amendment 11 was tabled by my noble friend Lord Lansley, and I will begin by briefly setting out its context. Clause 4 sets out a consultation requirement and parliamentary procedure for a statement about the exercise of the call-in power which must be published before the Secretary of State may issue a call-in notice. It requires the Secretary of State, before publishing the statement, to carry out such consultation as he thinks appropriate in relation to a draft of the statement, to make any changes to the draft that appear to him to be necessary in view of the responses, and to lay the final statement before Parliament.
My noble friend’s amendment seeks to clarify the process by which the Secretary of State may publish a new statement if either House resolves not to approve the previous version that he lays before Parliament. The apparent stumbling block that the amendment seeks to remove is that the Secretary of State is under a duty to carry out such consultation as he thinks appropriate in relation to a draft of the new statement, and make any changes to the draft that appear to him to be necessary in view of the responses to such consultation. However, I point out that the Secretary of State must carry out such consultations as he “thinks appropriate”, according to Clause 4(1)(a).
The Bill therefore provides the Secretary of State with some measure of flexibility in deciding whether, for how long and how widely the draft statement should be consulted on. Therefore, the Bill as drafted does not in appropriate circumstances prevent the Secretary of State from publishing a new updated statement, reflecting the debate in Parliament, almost immediately without first undertaking a consultation if he does not think that a consultation is appropriate.
In short, while my noble friend’s amendment seeks to ensure that a new statement may be laid speedily if either House resolves not to approve the previous version, the Bill as drafted already allows for this. I am grateful that he has afforded me the opportunity to make the functioning of this clause clear. Therefore, in the light of the explanation that I have been able to provide, I hope that he will feel able to withdraw his amendment.
My Lords, I am grateful to all noble Lords who have participated in this short debate. It is quite helpful just to focus on the question of making a statement because, if one looks back at Clause 1(6), it clearly states:
“The Secretary of State may not give a call-in notice unless a statement has been published (and not withdrawn) for the purposes of section 3.”
Although the word “may” is used in Clause 3, all it means in practice is that, if the Secretary of State chooses not to bring any of this into force, he would not publish a statement—but if he wants to issue call-in notices, he has to publish a statement. My noble friend the Minister is right in the sense that he must do this for the system to operate. The words I want to focus on, however, are “and not withdrawn”. If either House of Parliament resolves not to approve a statement, he must withdraw it. At that moment, the Secretary of State can issue no further call-in notices. My noble friend says the amendment is unnecessary because the Secretary of State has the power to consult only as he thinks appropriate.
We do not know under what circumstances one of the two Houses of Parliament may resolve not to approve a statement or what it may require of the Secretary of State for a statement to pass both Houses. If, as I assume, it is a matter of substance on which the public believe they have a right to be consulted—because there would be a significant change in policy—then I think my noble friend is wrong. I do not think it is possible that the Secretary of State would get away with simply re-laying the statement and engaging in no public consultation. It would be subject to judicial review and he would lose, because he is required to consult on a statement and he would not have done it. The only way would be if he had specific legislative cover, which is what my amendment is intended to provide. If he has to consult, we are talking eight weeks plus the time necessary for laying the statement thereafter, but eight weeks at the very least—not having the power to issue a call-in notice for eight weeks—is not advisable.
The only point I make to my noble friend before I beg leave to withdraw my amendment is that writing legislation is like writing a contract: we should not look at it in terms of everything going well but should ask what happens when it all goes wrong. What happens when one of the Houses of Parliament really takes against some part of this statement? If the Government need to compromise in a matter of substance and policy to get a statement through one of the Houses, they should not take up the time necessary for a consultation but should negotiate with the House—and this amendment would allow them to do that. It is in my view a desirable, if not necessary, backstop power. However, I beg leave to withdraw my amendment.
Amendment 11 withdrawn.
12: Clause 4, page 3, line 38, leave out “requirement in subsection (1)(a)” and insert “requirements in subsection (1)(a) and (b)”
Member’s explanatory statement
This amendment ensures that as well as carrying out the consultation on the statement about the exercise of the call-in power, the requirement to make changes to the statement in view of the responses to the consultation may also be met before this section comes into force.
Amendment 12 agreed.
Clause 4, as amended, agreed.
Clause 5 agreed.
Amendment 13 not moved.
We now come to the group beginning with Amendment 14.
Clause 6: Notifiable acquisitions
14: Clause 6, page 4, line 11, after “may” insert “following consultation with relevant stakeholders”
Member’s explanatory statement
This amendment would impose a duty on the Secretary of State to consult relevant stakeholders when making regulations as specified.
My Lords, Amendment 14 in my name came about as a result of my working closely with the Law Society of Scotland. I am very grateful to the society for drawing to my attention the fact that, on the present reading of Clause 6, the Secretary of State may make regulations without any further consultation in that regard. The reason for the amendment is that this consultation provides an additional layer of scrutiny by all interested parties. The requirement on the Secretary of State to consult will help to ensure openness and transparency of the Secretary of State’s actions. Imposing a duty to consult will ensure that any draft statutory instrument is exposed to critical comment from stakeholders, which may improve an instrument and help to avoid difficulties when it comes to progressing through Parliament.
All this assumes that the Government will actually pay attention to consultation and the results. It is felt that the provision as drafted gives the Secretary of State very wide discretion to amend the scope of notifiable acquisitions as per the present drafting of Clause 6(5). This can have far-reaching consequences, not least because, as set out in Clause 6(6), it may be used to extend the scope of notifiable acquisitions to acquisitions of qualifying assets. In particular, I want to put on record that Clause 13 states that where a notifiable acquisition takes place without the approval of the Secretary of State, this transaction will be void, although under Clause 15(2) and (3) the defect can be cured retrospectively.
This amendment addresses a concern that there will be a lacuna in relation to the impact on third parties. In particular, if the qualifying asset in question is land, and if it were to be established that a transaction had been void and that the ownership or other interest in the land had not been properly transferred, questions of liability may arise. This could be the case, for example, in relation to environmental or insurance liabilities. Although it appears that the third party would have an action under Clause 16, we are concerned that this could be both burdensome—that is the Law Society expressing its concern—upon that third party and unnecessarily complicated. There is also concern that it might not resolve all the relevant problems.
I welcome my noble friend to her speaking position, for once, this evening; I hope that this is not just paying lip service to diversity. If the Government are not minded to accept this amendment, can she say what the purpose is of introducing regulations at what would be quite a late stage and without having consulted at all with interested parties or stakeholders?
My Lords, I fear I might have missed a trick here. I think we have two quite different amendments and I should have been smarter and disaggregated Amendment 94 from Amendment 14. I apologise to the noble Baroness, Lady McIntosh, that I am not going to speak to Amendment 14, although I firmly believe that my noble friend Lord Bruce of Bennachie will speak to it later. I will speak to Amendment 94 in my name and that of my noble friend Lord Clement-Jones.
Under Clause 6 the Secretary of State has great power to make the regulations concerning how this Bill will work. The Secretary of State can specify the description of the qualifying entity for the purpose of identifying a notable acquisition. He or she can amend the circumstances in which a notifiable acquisition takes place or does not take place, exempt acquirers with specified characteristics from the mandatory notification regime and make consequential amendments to other provisions of the Bill. These will be set before Parliament using the affirmative procedure. This was confirmed by one of the other documents that was circulated just before our proceedings began today.
For the commencement of the regime, the Secretary of State intends to make regulations only to specify the sectors subject to mandatory notification—that is, the 17 sectors we have already referred to elsewhere in this debate. This covers the activities of the entities of both sectors which give rise to an elevated national security risk. In the Government’s own words:
“Mandatory notification of certain types of transactions in 17 key sectors will ensure that the Government is informed of potential acquisitions of control or ownership in these particularly sensitive areas”.
As we have heard, using this list they will take action to investigate and mitigate any national security risk. The list is central to the workings of this regime. Therefore, so is the making and updating of it.
For the avoidance of doubt, and possibly to bore the Committee, I want to put on record the length and breadth of this list. It includes advanced materials, advanced robotics, artificial intelligence, civil nuclear, communications, computing hardware, critical suppliers to government, critical suppliers to the emergency services, cryptographic authentication, data infrastructure, defence, energy, engineering biology—which has now been commuted to synthetic biology—military and dual use, quantum technologies, satellite and space technologies, and transport. We heard from the Minister that in fact the Secretary of State can extend beyond this list if he or she feels it appropriate.
The so-called slimline version was published today, as mentioned by the noble Baroness, Lady Hayter, who has just popped out. She referred to the artificial intelligence sector which has been “slimmed down” to the identification of objects, people and events, advanced robotics and cybersecurity. The underlying software for that is going to be machine learning, and therefore that includes all artificial intelligence. While on the face of it this has been narrowed down, the reality is that if a Secretary of State so chose, anything involving machine learning could be dragged into this process. We need to be very wary of this list, which can be expanded and changed over time.
I expect that the Minister will choose to represent the proposed use of the affirmative procedure in the Bill as meaningful parliamentary scrutiny, but in truth the list can be amended by this and any subsequent Government as they please. For one thing, Parliament cannot amend statutory instruments, and for another, this House has voted down affirmative statutory instruments just four times in the past 70 years. That is nearly as long as my noble friend Lord Clement-Jones has been alive. As the Constitution Committee noted in its 2018 report The Legislative Process: The Delegation of Powers:
“Without a genuine risk of defeat, and no amendment possible, Parliament is doing little more than rubber-stamping the Government’s secondary legislation. This is constitutionally unacceptable”.
Affirmative statutory instruments do not constitute meaningful parliamentary scrutiny. This Government, or any subsequent Government, are effectively free to amend that already long list of technologies at will, so we need some sort of genuine democratic process. I am indebted to my noble friend Lord Sharkey; he proposed a very similar amendment to the Medicines and Medical Devices Bill, and I have ruthlessly plundered his thinking as it is just as apposite to this Bill.
As noble Lords know, there is a delegated legislation procedure that allows for significant parliamentary scrutiny. To the Government, it is known as “exceptional procedures”, and to Erskine May, in part 4, chapter 31.14 as the “super-affirmative procedure”. Erskine May characterises it as follows:
“The super-affirmative procedure provides both Houses with opportunities to comment on proposals for secondary legislation and to recommend amendments before orders for affirmative approval are brought forward in their final form … the power to amend the proposed instrument remains with the Minister: the two Houses and their committees can only recommend changes, not make them.”
Amendment 94, in my name and that of my noble friend Lord Clement-Jones, follows this pattern; it is more generally based on the variant of the procedure used by the Government of the day in the Public Bodies Act 2011, so it is not a stranger to government. It refers to the Secretary of State’s regulation-making powers and includes the long list of technologies that I have just read out.
First, the Secretary of State must lay before Parliament a draft of the proposed regulations and a document explaining them; secondly, he or she must request a committee of either House whose remit includes science and technology and business to report on the draft regulations within 30 days; thirdly, in proposing a draft statutory instrument containing the regulations, the Secretary of State must take into account any representations, any resolution of either House and any recommendations of the committee to which the draft was referred. After the expiry of the 30-day period the Secretary of State may lay before Parliament regulations in terms of the original or the revised draft. The Secretary of State must also state what representations, recommendations or resolutions were given in the 30-day period and give details. He or she must also explain any changes made in a revised draft. After that, the normal affirmative process continues.
I expect the Minister to marshal the full force of her department in resisting this amendment. She will repeat that the use of the affirmative procedure provides sufficient parliamentary scrutiny, although, as I have said, that scrutiny is a chimera. Secondly, she will contend that it is cumbersome and time-consuming. My response is that if the issue is so urgent that a change in the law is required to address a deal that is in progress, the department has failed, the unit designed to anticipate these issues has missed its mark, and the change will have been a knee-jerk and ill-considered reaction. In any case, the horse will likely have bolted. The Minister is better directed to serious technology foresight over time than relying on this undemocratic stable door.
The affirmative procedure, as proposed for this vital list of technologies, is not meaningful scrutiny, but the super-affirmative procedure set out in Amendment 94 is. I might have misspoken on the committees, so I refer to the amendment itself on those committees. I look forward to the Minister’s response and to being sure that we will get some movement when we get to the next stage of the Bill.
My Lords, I support Amendment 14, tabled by the noble Baroness, Lady McIntosh, to which I added my name just too late. I also support the more detailed Amendment 94, tabled by my noble friends Lord Fox and Lord Clement-Jones, but as my noble friend Lord Fox has spoken at length and my noble friend Lord Clement-Jones follows me, I will leave them to expand on it, as has already been done. There is a connection, although I accept that there are distinct differences.
Amendment 14 and others that I have tabled reflect concerns that I raised at Second Reading, which have also been drawn to my attention by the Law Society of Scotland. Given the importance of financial services to Scotland and the contribution that Scottish financial services make to the UK economy, surely it is wise to ensure that relevant stakeholders are consulted in advance of any regulations. That is especially important given the importance of the professional services that underpin financial services and draw on different qualifications and traditions within Scotland.
The concerns that are being widely raised across many of the amendments to the Bill are directed not at its purpose, which is broadly supported, but at the possibility of it being applied too widely, with Ministers having too much discretion and with players in the market having inadequate information with which to make decisions and judgments. We are talking about people who have no particular intention to threaten national security but might inadvertently find themselves compromised in doing so.
I see Amendment 14 as trying to avoid unintended consequences or confusion that could prejudice investments made in good faith. As my noble friend Lord Fox has said, the Government can by regulation add new sectors to those designated as covered by the Bill. They can also expand on the definitions within the sectors. So surely it is appropriate that any such changes should be subjected to the same consultation as has been carried out to date with the 17 sectors so far designated. Why would you introduce new sectors or substantially modified ones and not apply the same level of consultation?
There remains a concern that investment transactions may be carried out in good faith, as I have said, without the intention or realisation of a national security dimension. It may therefore not be notified, as people may not feel there is a need to do so. However, if it is subsequently referred or called in and found by the Minister to be in breach, the transaction could be void, and we have had that debate already.
In the circumstance of, say, a land transaction, an area where the Law Society of Scotland has a particular concern, land being transferred could leave significant uncertainty in the air. Land issues have caused problems in Scotland in recent years. For example, landowners—lairds—often made land available for community use in the past, such as for a schoolhouse or cottage hospital. You may argue that that was generous— [Inaudible]— the community appreciated the benefit. Unfortunately, in those cases, formal conveyance did not always take place and, in more recent years, people who have acquired the title to the land have secured financial gain by putting charges on those who acquired the school, building, hospital or what have you and have made a nice little packet. You may say that that has nothing to do with national security, but it shows the problems when there is any confusion in the transfer of land.
Indeed, if I may briefly digress, the mountain from which my title is derived—Bennachie—for 60 years had people, smallholders, living on it on what was common land until, in a land grab, surrounding landowners simply seized that land and gave themselves the title, even though it had been held in common before, and evicted the squatters. We have had some controversial land decisions, but we are more concerned about legitimate transfers of land for environmental, recreational or financial purposes where because, for example, the landowner acquiring or disposing is not a UK citizen or is an institution that the Government may have suspicions about, it could lead to a problem.
Most people engaged in those transactions will look to professional services for appropriate advice. If those professional services have been part of the stakeholder consultation on any changes to the regulations or the detail of them, they will be able to provide transparency and legitimate advice to avoid those kinds of problems arising. That relieves the Minister of a problem and embarrassment and removes the possibility of otherwise legitimate investments being compromised or withheld because of a lack of clarity.
The conclusion I suggest to the Minister is that consulting with relevant stakeholder, when any legislation is being amended or introduced is to the mutual benefit of all players, including the Government and national security. We are talking about a relatively small number of clearly identifiable stakeholders, not a mass of agencies. The Government know who they are and they know who they are. It can be done quickly and efficiently, and the net result is that concerns that were raised would be headed off at the pass. They would not occur, so that we would not finish with legislation that leads to the threat of voiding contracts that in no way compromised national security, but somebody felt that they might have done. Sellers and buyers need clarity on the law; consulting relevant stakeholders will help to achieve this.
My Lords, there are distinct common factors in both these amendments. The proposers do not believe that the current way of approving regulations under Clause 6, purely the affirmative procedure, is satisfactory. That is because of the importance of the regulations under Clause 6. As we heard, they underpin the necessity for mandatory notification for certain types of transactions in 17 sectors and they can be changed. We heard, particularly from my noble friend Lord Fox, that the definitions of these sectors are highly complex.
My noble friend took the example of artificial intelligence, a technology I have taken considerable interest in. As he explained, machine learning technology permeates almost every single sector and every use for both consumers and businesses one can think of—fintech, edtech, regtech, you name it. Artificial intelligence permeates those, and the new description of the AI sector published in the government response today states:
“In narrowing the definition, the definition now provides further clarity for businesses and investors”.
However, the definition still covers:
“the identification of objects, people, and events; advanced robotics and cyber security.”
That is pretty broad.
The policy statement published today is also extremely helpful in emphasising the importance of Clause 6 regulations. The policy statement says:
“Under Clause 6, the Secretary of State has the power to make regulations to:… a) specify the description of a qualifying entity for the purpose of identifying a notifiable acquisition; …b) amend the circumstances in which a notifiable acquisition takes place … c) exempt acquirers with specified characteristics … d) make consequential amendments of other provisions of the Bill resulting from provisions set out in paragraphs (b) and (c).”—[Interruption.]
I hope that I am having some impact on the Minister, my Lords. The policy statement goes on to say:
“For the commencement of the regime, the Secretary of State intends to make regulations only to specify the sectors subject to mandatory notification.”
I underline “only” because you would have thought that was significant enough in itself. This is obviously a self-denying ordinance, but it is not a very large self-denying ordinance when you are dealing with the intricacies of those 17 sectors.
My noble friend Lord Fox has rightly quoted the Constitution Committee’s 2018 report The Legislative Process: Delegated Powers, which talked about the rubber-stamping of the Government’s secondary legislation. He also referred to my long life, and in my already long life I have been responsible for overturning a statutory instrument. The Blackpool casino was very much wanted by the citizens of Blackpool, so the SI for east Manchester was defeated by three votes in the House of Lords, and one of those votes was from the Archbishop of Canterbury—the former Archbishop of Canterbury, I am glad to say. It was I who put the Motion, and we passed it by three votes to deny the Government the right to build the casino in east Manchester. Unfortunately, the Government never came back with a proposal for Blackpool, and that is a sad piece of history. I do not know why they did not; it would have been a great place to build a casino.
However, that does show that, on a simple proposition, it is possible to have an effective debate. When you are dealing with 17 sectors and 111 pages of text, which are going to be the subject of this regulation, that illustrates that the form of affirmative resolution proposed in this Bill is not fit for purpose. This kind of super-affirmative procedure means that there would be a genuine debate on the regulations and the 17 sectors and their extent.
I have huge sympathy with the amendment of the noble Baroness, Lady McIntosh, because of course one wishes to see consultation among stakeholders. In an ideal world, one would like to see both that and the super-affirmative resolution. But, to be frank, consultation is not the same as, or a substitute for, proper parliamentary scrutiny. These are crucial regulations, and it is right that they are opened up for full debate in this way. I am probably going to embarrass the noble Lord, Lord Lansley, by saying that he said earlier we will have some debates about the sectors—well, not really, unless this amendment is accepted.
My Lords, as we have just been hearing, these notifiable acquisition regulations are significant and require proper oversight, not just from both Houses of Parliament but also from experts involved, and with the opinions of those experts being made available to legislators. It will obviously be important to ensure that the stakeholders to be consulted are knowledgeable and, if I may say it, at the cutting edge of technology.
On Clause 6, the Government state that, for the commencement of the regime, the regulations will, as we have just heard, specify only sectors subject to mandatory notification, but that can be kept under review, and the regulations could be amended. The question, therefore, is, what would need to change for those regulations to be amended? How will the Secretary of State go about that, and how will it come back in a useful form along the lines suggested? This is particularly important—and I refer to advice I have had from the Wellcome Trust. Noble Lords will know that this is the world’s biggest medical charity, putting an enormous amount of money into very early research and start-ups. It says that Clause 6(6) of the Bill, which will be covered by this proposal, is of major concern, because it raises the potential for the control of assets to be brought into the mandatory notification regime by the regulations that we have been discussing. It is worried that Clause 9 defines qualifying assets so broadly that the mere use of ideas, data or software of industrial, commercial or other economic value would be captured. Anyone with experience of IP will immediately understand why that is concerning.
There is the issue of things being suddenly brought in. In the particular case of Wellcome, it could conflict with Wellcome’s approach to research, publication and open access—for example, giving a publisher the right to publish an academic’s results first. This open licensing could conflict with the requirements here. Wellcome has talked me through this and, although it is not there the moment, it would be if it were altered so that this was covered by the mandatory rather than the voluntary. The feeling also is that this possibility could have a chilling effect on research collaborations, especially if significant fines were extended to cover completing a notifiable acquisition of an asset without approval.
In the area of IP, of course, this would anyway be quite hard to quantify. While expanding the mandatory notification regime to assets may be a worthwhile step for easily identifiable strategic assets, such as land, the application to ideas and information could be extremely problematic. There is also the issue of the 15%, although it is not referred to in these amendments. For Wellcome, the overlap of that very low-capture area with the possibility of other things being added to the list causes it concern. I hope that, in light of that, the Minister will agree to meet me and the Wellcome Trust, because it would be better if we could capture and sort out these worries at this stage, rather than when the Bill becomes an Act. This is, as noble Lords know, an organisation well experienced in exactly the areas we are talking about, so I think its advice would be of considerable help to the Government, as well, as I say, of trying to get rid of the problem before it emerges.
My Lords, I welcome Amendment 14 from my noble friend Lady McIntosh of Pickering, and Amendment 94 from the noble Lords, Lord Fox and Lord Clement-Jones, which overall seek further consultation and scrutiny on Clause 6 regulations. Perhaps I may say at the outset that we would be delighted to meet the noble Baroness, Lady Hayter, to discuss the concerns of the Wellcome Trust, which, as she said, is a world-class research organisation and worth hearing.
Perhaps I may begin by clarifying for the benefit of the Committee that while acquisitions of land are in scope of the call-in power, they are not in scope of the mandatory regime. Acquisitions of land, as with assets more widely, are expected to be called in only very rarely.
I turn first to Amendment 14, tabled by my noble friend Lady McIntosh of Pickering. It would require the Secretary of State to consult relevant stakeholders before making any regulations under Clause 6. Those regulations are of significance as they define the scope of the mandatory notification regime. As such, the Secretary of State has already consulted on sectoral definitions for the qualifying entities proposed to be in scope of the mandatory regime, and further engagement is planned with particular sectors in advance of turning these definitions into draft regulations. Again, I echo my noble friend’s apologies that the information on sectoral scope arrived only as we came into the Committee. The consultation was extensive and lasted from November for eight weeks. We received 94 responses and have not yet finalised all the sectoral definitions. Further targeted engagement to refine these definitions will be made in advance of laying regulations. The Secretary of State will therefore undertake consultation where appropriate.
I can reassure my noble friend Lady McIntosh and the noble Lord, Lord Bruce of Bennachie, that, given the importance and potential complexity of any future regulations under Clause 6—defining and bringing new advanced technology sectors into the regime, for example—it is difficult to foresee many instances in which consultation of relevant stakeholders will not be required. As such, there is no need to create a requirement in statute to cater for this. Public law duties already create the right incentives.
The second amendment to Clause 6, Amendment 94, proposed by the noble Lords, Lord Fox and Lord Clement- Jones, would require the Secretary of State to lay before Parliament a proposed draft of any regulations made under the clause for 30 days before the draft regulations themselves are laid and are subject to the approval of both Houses. Amendment 94 would also require the Secretary of State to identify a committee to report on the proposed draft regulations and then himself report on his consideration of the committee’s recommendations. The Bill as drafted provides for regulations made under Clause 6 clause to be subject to the affirmative resolution procedure.
While I take the points made by the noble Lord, Lord Fox, that these statutory instruments cannot be amended, they can be declined, as we have seen a small number of times in the past. This ensures an appropriate balance whereby the mandatory regime can be quickly updated should new risks to national security emerge, while still giving Parliament appropriate oversight by requiring it to approve the regulations.
In its report on the Bill published on 22 February, the Delegated Powers and Regulatory Reform Committee concluded that,
“there is nothing in the Bill to which we would wish to draw the attention of the House.”
So, although I was in some way surprised to see the noble Lords’ amendment tabled in relation to Clause 6, in disagreement with the judgment of the committee, we can agree that the powers of the Bill are necessarily drawn widely in order to make the process more efficient. I believe that the committee recognised the careful balance that the Bill strikes in Clause 6 and other clauses between allowing the Secretary of State the flexibility to ensure that the regime is effective in protecting our national security while providing sufficient opportunity for parliamentary scrutiny and input.
I welcome the opportunity to discuss this matter further with noble Lords. However, for the reasons I have set out, I cannot accept these amendments and ask that they be withdrawn or not moved.
My Lords, I have received two requests to speak after the Minister: from the noble Baroness, Lady Hayter, and the noble Lord, Lord Clement-Jones.
My Lords, I thank the Minister for her response but I do not think that she has quite got to grips with the full concern about this. It is not so much that there has not been consultation about the current sectors; there has been an extensive consultation and the Government have come back with their views and have explicitly said that they may change them even further. Yet they are still going to return to Parliament with a pure affirmative process. It is not as if parliamentarians will be able to change it. The stakeholder discussion and consultation is going forward as she said, but there is no guarantee that when that set of regulations is passed there will be proper debate in the House, nor will there be thereafter if the sectors are changed and made more specific, less specific, added to—whatever. There is no guarantee that consultation will take place.
The Minister said that there are the right incentives. That is a bit thin. If that is the guarantee of government consultation, it is not very solid, and even then, Parliament is entitled to have a view about the width of those sectors in the light of changing circumstances. It might have different views about new risks emerging, to use the Minister’s phrase. Therefore, it would be entirely legitimate to have that debate if those regulations were revised. The Minister has not got the nub of the concern in all of this.
I anticipated the Minister’s answer on the subject of time, and 30 days is 30 days, but the Government have shown that they are relatively adept. If there really was a national security emergency requiring quick action using other means, a statutory instrument with a debate in Parliament would act as a plug. My noble friend Lord Clement-Jones made the point that there is such significance, particularly around this list but also around the other elements of Clause 6, so I hope that the Minister will read Hansard and at least find some way of moving towards the very valid arguments that she has heard today on both amendments.
I thank all those who have spoken on both amendments. The noble Lord, Lord Fox, will recall that we had a lengthy debate about the super-affirmative procedure during the passage of the UK Internal Market Act. I deeply regret that we did not go down the path of that procedure, for reasons that I gave. My noble friend the Minister cares passionately about Wales, and I hope that she will care equally passionately about Scotland and will be prepared to meet with me to bring these matters forward, because I do not accept that it is enough just to have regard to the public law requirements.
The Law Society of Scotland has identified three ways in which these regulations could move the parameters forward which I would like to discuss on a wider basis with her. While an official in the department said that it is not expected at this stage that those three areas will be covered, it is not excluded that that will happen in the future. I want to come back to that, but for the moment, I beg leave to withdraw the amendment.
Amendment 14 withdrawn.
That concludes the work of the Committee this afternoon. I remind Members to sanitise their desks and chairs before leaving the Room.
Committee adjourned at 7.29 pm.
(1 month ago)Lords Chamber
My Lords, this Bill represents a major upgrade to the Government’s powers to screen certain acquisitions on national security grounds. Through the new investment security unit within my department, the new regime provided for by the Bill will act as a vital new tool in the Government’s armoury to protect national security in a rapidly changing world. The UK’s current powers to intervene when mergers or acquisitions pose national security threats date from the Enterprise Act 2002. Apart from some limited exceptions, businesses must have a UK turnover of £70 million or meet a share-of-supply test for government intervention.
The world is of course a very different place now compared to when the Enterprise Act received Royal Assent in November 2002. When it comes to investment, we are seeing novel means to undermine the UK’s national security that go beyond traditional mergers and acquisitions and the reach of our current powers. The case for action in this area could therefore not be clearer.
The Government have carefully considered these reforms over time. We first published a Green Paper in October 2017, followed by a White Paper in July 2018. We have further considered what powers are necessary to reflect the modern economic and investment landscape in the UK. The Bill before us today is the culmination of all that work.
However, none of the provisions in the Bill change the Government’s position when it comes to foreign investment into the UK. Simply put, the UK economy thrives as a result of foreign direct investment. Since 2010-11 over 600,000 new jobs have been created thanks to more than 16,000 foreign direct investment projects. Inward investment stimulates economic growth in every part of our United Kingdom. In 2019-20 over 39,000 jobs were created in England thanks to FDI projects, with over 26,000 over those jobs coming outside London.
We have designed the regime with business in mind. For the first time, timelines for assessments will be set out in law, not decided by the Government on a case-by-case basis. This will give businesses certainty about the length of the assessments that they are subject to, and the Government will be able to revisit decisions only in exceptional circumstances.
The Bill brings our approach into line with many of our closest allies, including the United States, Canada, Australia, France and Germany, but it does not represent any change in our appetite for investment coming into this country from overseas. I will now go through some of its main provisions. Chapter 1 of Part 1 of the Bill provides for a “call-in” power that the Secretary of State will be able to exercise if he reasonably suspects that a trigger event has taken or may take place that could give rise to a risk to national security. Any decision to use that call-in power could follow the receipt of a notification from parties, or could be a proactive choice on the part of the Secretary of State if an unnotified acquisition meets the relevant criteria.
The call-in power must be exercised within six months of the Secretary of State becoming aware of an acquisition, and within five years if he was not made aware of it. However, the five-year limit does not apply to acquisitions subject to mandatory notification. The scope of the call-in power applies to trigger events taking place from 12 November 2020—that is, the day following the Bill’s First Reading in the other place. This is to ensure that no acquisition can be accelerated to avoid scrutiny while the Bill is making its way through Parliament.
Before the call-in power can be used, the Secretary of State must lay a Statement before Parliament setting out how he expects to exercise the power. The Secretary of State published a draft of such a Statement when the Bill was introduced in the other place. I must be clear to the House that the criteria for use of the call-in power are deliberately tightly drawn on the grounds of national security, and the Government have no intention to widen this to introduce any further “public interest” criteria.
Chapter 2 of Part 1 sets out the trigger events that are subject to the scope of the call-in power. There are broadly two types of trigger events: first, the acquisition of control over entities such as companies, limited liability partnerships and trusts; and, secondly, the acquisition of control over assets, including land and intellectual property.
In respect of entities, the Bill sets out situations where the acquisition of certain levels of shares or votes constitute trigger events. I will not set out the individual thresholds to the House now, but broadly speaking they correspond to the ability of parties to pass or block types of company resolution. The Bill also retains the concept of “material influence” over an entity, as used in the Enterprise Act 2002, as a trigger event for the purposes of the Bill.
When it comes to assets, trigger events occur when parties are able to use a qualifying asset or to direct or control how it is used. Chapter 2 also sets out instances where notifying the Secretary of State of some acquisitions in certain sectors is mandatory. Again, I will not explore each one in detail, but the Government have been careful to ensure that only those scenarios where parties can reasonably self-assess whether their acquisition qualifies are captured.
Parties involved in acquisitions that do not meet the criteria for mandatory notification, but which believe that they could pose a national security risk, will be encouraged to submit a voluntary notification to the Government. The Secretary of State will need to take a decision on whether to call in an acquisition for a full national security assessment within 30 working days of accepting a notification, or instead let it proceed. Once he has taken this decision, he cannot revisit it unless false or misleading information has been provided.
To ensure that mandatory notification continues to work as envisaged in the future, the Government propose taking a power to be able to update the situations where notification is mandatory. The power would also allow the Government to exempt certain types of investor from mandatory notification requirements.
In terms of the sectors where some acquisitions will be subject to mandatory notification, the former Secretary of State published a consultation alongside the Bill introduction on the statutory definitions of the proposed 17 sectors. That consultation closed on 6 January of this year. We have had a good number of responses and I thank all of those who took the time to provide valuable insights. We are now working hard to respond to that consultation and to bring forward draft regulations for consideration as the Bill goes through this House.
I would like to stay with mandatory notification for a minute or two longer. Chapters 3 and 4 of Part 1 set out the mechanics of mandatory notification and the consequences of proceeding with a notifiable acquisition without clearance from the Secretary of State. Put simply, if parties proceed with such an acquisition, it has no effect in law. The Government recognise that this approach represents a harsh deterrent to parties that do not comply, willingly or otherwise. I will make just two points on this. First, it is vital for our national security that parties are strongly disincentivised from trying to avoid scrutiny by this regime. This is even more pressing in the sectors of the economy where the notification of certain acquisitions is mandatory. Secondly, affected parties will have recourse to apply to the Secretary of State for retrospective validation of such acquisitions, as set out in Clause 16.
Clause 15 also obliges the Secretary of State to either call in a non-notified mandatory acquisition or retrospectively validate it once he becomes aware of it, if no national security risks arise. Clause 17 obliges him to retrospectively validate a non-notified acquisition if it is called in and subsequently cleared to proceed. The Secretary of State cannot, in other words, simply allow an acquisition to remain void once he becomes aware of it: he must take action, either to grant clearance and retrospectively validate it, or impose remedies. It has to be this way around: that is to say that non-notified acquisitions should be able to be retrospectively validated, rather than retrospectively invalidated.
The remainder of Part 1 provides for a voluntary notification mechanism whereby parties can formally submit a notification to Government. As with mandatory notification, once the Secretary of State has taken a decision to let an acquisition proceed, he cannot revisit that decision unless false or misleading information has been provided. The Government are committed to giving parties clarity when it comes to this regime and voluntary notification is a key part of that. The Bill also provides for information-gathering powers for the Secretary of State to be able to come to fully informed decisions. There are also safeguards on the use and disclosure of such information.
I turn to Part 2, which provides for the assessment process and any remedies following a call-in. The Bill provides for an initial assessment period of 30 working days once a call-in notice has been given, with an additional period of 45 working days. A further voluntary period is possible if certain criteria are met. I believe this represents a significant improvement on the current process under the Enterprise Act 2002, whereby the Secretary of State sets the assessment timetable on a case-by-case basis. For the first time, timelines for assessment will be set out in statute so that investors can build them into their own plans.
In the course of the assessment period, the Secretary of State may wish to impose interim orders to mitigate any national security risks that could arise as he undertakes this investigation. Such orders could be imposed, for example, to stop or prevent parties doing certain things that they would normally do prior to completing an acquisition, such as exchanging sensitive information. At the end of the assessment period, the Secretary of State must either give a final notification to allow the acquisition to proceed, or a final order if he believes that national security risks could arise as a result of the acquisition. All orders must be kept under review and parties are free to request that they are varied or revoked.
The Secretary of State will be supported in making decisions by the investment security unit which, as I said earlier, is being set up within my department. This new unit will be fully resourced to manage the administrative process for screening notifications and undertaking national security assessments. It will draw on expertise from across government and from the security services. If noble Lords permit, I will go through the rest of the Bill a bit more swiftly as I know there are many who wish to speak in this important debate.
Part 3 provides for a range of offences, along with associated criminal and civil sanctions, although I expect criminal cases in relation to offences committed under the regime to be exceptionally rare. Parties will, of course, have recourse to judicial review in relation to certain decisions made under the regime. Parts 4 and 5 of the Bill contain a number of miscellaneous provisions. Clauses 54 to 56 provide for smooth and timely information sharing when relevant between the Government and overseas public authorities, HMRC and the CMA. These are important clauses to ensure that time is not lost to administrative red tape and that information is appropriately handled.
Clause 61 provides for an annual report to Parliament, which will provide details of the number of notifications received, the number of call-in notices given and the sectors of the economy where they were served, among others. I will return finally to the fundamentals of the Bill before us. It is imperative for any Government to have the tools they need to protect national security in what is a rapidly changing world. This Bill will keep the British people safe. I beg to move.
I thank the Minister for introducing the Bill. He will be pleased to know that, as he will have gathered from its passage through the Commons, the Opposition are fully supportive —we might even say “at last”. We will, however, be wanting to make a few changes to ensure that it works even better than the Government envisage.
Today’s debate, not unusually for your Lordships’ House, will bring together an experienced group of speakers with expertise in industry, defence and security. I particularly look forward to the maiden speech of my noble friend Lord Woodley, who will speak from his own knowledge of the field. Some of his former trade union members, whom he represented, worked in defence sectors and thus played their role in the defence of the realm.
We hardly need to repeat that national security is the number one priority for any Government. We welcome the changes the Bill makes to ensure that investment, whether in companies, land, assets or know-how, never jeopardises our security. Our only surprise, as my honourable friend Chi Onwurah pointed out in the Commons, was that the impact assessment
“regrets that national security is an area of market failure requiring that the Government do something about it.”
As she said about that quite astonishing claim:
“National security is not a private concern first and a Government afterthought second. National security is the first reason for Government. It is not undersupplied by the market; it is outside the market altogether.” —[Official Report, Commons, 20/1/21; col. 998]
Putting that to one side, we welcome the new and updated regime for intervening in business transactions that might raise national security concerns. We applaud both the requirement for automatic pre-acquisition referrals in some areas, as well as a voluntary notification system and the ability to call in acquisitions of sensitive entities and assets where it is thought they need a national security assessment.
I do, however, wonder whether sufficient thought has been given not just to tangible or IP assets but to the brain power which is vital to dealing with the security threats of today. It is not simply a matter of retaining domestic control over key assets, but also of ensuring that we grow and nurture the skill sets needed for this rapidly changing technology, where we need ability and domestic capability here in the UK. Could the Minister reflect on this when he comes to reply? Could he also comment on whether crucial national infrastructure is likely to be covered in the automatic notification part?
The Bill as it stands should be capable, subject to some issues over capacity which my noble friend Lord Grantchester will address when he winds, of protecting vital security interests. Our questions are twofold. First, they are about the security capability and cross-departmental working within BEIS. Secondly, they are about parliamentary scrutiny, which appears woefully thin.
Much of the business department’s work is to foster and promote inward investment, for the best of reasons. The UK has twice the direct foreign investment of France or Germany. That is good for our economy but potentially risky for security. Because of that dual responsibility, it is surely challenging to give the business department almost the opposite role to that of a cheerleader for investment: to check and sometimes prevent such investment. Indeed, it almost looks like a potential case of moral hazard. Can the Minister confirm that, at least, there will be strict Chinese walls within the department?
Perhaps even more fundamentally, it is hard to see how the Minister’s department can be close enough to departments dealing with land use, defence, supply chains, higher education, foreign relations, transport, science and medicine to be fully aware of what is happening across those areas. Traditionally it has been the Cabinet Office that handles such significant cross-departmental or multiagency working.
Having looked carefully at the draft Statement setting out the three types of risk to be considered by the Business Secretary—the target risk, a trigger event, and the acquirer risk, according to the Minister—it is clear that while judgments as to degree of ownership or control of a business fall within his department’s expertise, some of the other security judgments listed, such as the hostility of a particular state or knowledge of our security services, are not among those traditionally made by business specialists. The backgrounds and expertise of the advising personnel will need to be drawn from across other departments, and many of them will require high-grade security clearance. The decisions taken will be serious and could impact on our international and diplomatic relations, including with close allies.
I recognise that this remit has been with the business department to date, but the increased remit of the Bill—the sheer number of cases and their increased sensitivity—makes the future quite different from what was correct in 2002. Is the Minister therefore confident that the passing on of intelligence and advice from around Whitehall will work smoothly in the new set-up?
Allied to the nature of this work is my second question, which is about whether the Bill allows for adequate parliamentary scrutiny of the decisions which will fall to the business department. A strong case was made in the Commons for the Intelligence and Security Committee to be given an explicit role in scrutinising the working of the Bill; indeed, its chair spelled out very clearly how it was well within the committee’s terms of reference to handle it.
The response of the Minister in the Commons was rather disappointing, to say the least. He said that the Intelligence and Security Committee could ask for extra information or invite the Minister to attend if it wanted. However, as a Nobel laureate commented
“they do not know what they do not know.”
Indeed: the committee will not know what it has not been told until and unless it sees a report. The Intelligence and Security Committee, with its security clearance, would be able to do a proper job on behalf of Parliament in seeing how these powers are—or indeed are not—being used.
We need therefore to amend the Bill, along the lines suggested in the Commons, to ensure that reports are made to the Intelligence and Security Committee. Perhaps the Minister could reflect on whether this would be best achieved via a government amendment.
We welcome the Bill, which, as I said, is in some ways sorely overdue. We will scrutinise it seriously and call for changes to be made, particularly in relation to parliamentary scrutiny and ensuring that the new unit has the skill set, working methods and resources to ensure that its decisions are timely, cross-departmental and forward-looking, so that it safeguards our future security. I look forward to working with the Minister as we take the Bill through the House.
I too thank the Minister for his comprehensive introduction. I declare an interest as a member of the advisory board of the corporate finance faculty of the ICAEW, whose members comprise business owners, advisers to business and investors.
I believe that there will be little argument during the Bill’s passage about the principle involved of protecting national security. There will, however, be considerable debate about its scope and practical operation. Foreign investment is crucial to UK businesses and the economy. On these Benches we accept that it is important to put in place legislation to protect against national security risks posed by such investment. But this is a major change from previous provisions under the Enterprise Act, and must be done in a way that is workable and does not deter productive investment.
The Government have argued that it is necessary to give the Secretary of State greater powers to scrutinise investment in the UK, considering the technological, economic and geopolitical changes that have taken place over the past 20 years. However, the scope of the Bill and of the Secretary of State’s powers risk being far too broad, while lacking any industrial strategy to frame them or any clear geopolitical focus. Indeed, there is no definition of what constitutes national security.
How too will the Bill fit within the integrated review? Ministers have made it clear that the Bill is about the protection of national security, not national interest—but where does national security end and economic or commercial security, or critical infrastructure, begin? Will there be overlap between regulators, such as between the ISU and the CMA?
There is also the retrospectivity, which goes back to November and could already be having a chilling effect on inward investment and causing uncertainty in the investment community, not least in pension funds. For such funds the investment environment is crucial, and as a university chair I am only too well aware of the concerns expressed by USS. As the largest private pension fund in the country, its concerns should be taken very seriously. Arguably even more importantly, as the Russell Group has pointed out, the Bill could have a potentially damaging impact on university/business collaborations.
Many of my noble friends will focus on these issues in today’s debate. The key elements needed to achieve the balance required of the new regime will be achieved by pre-empting and mitigating the inevitable risks for the market by setting out a clearly defined scope. The Government have engaged in a long—some would say leisurely—process of Green Paper and White Paper consultation leading up to this Bill over the past three and a half years, but there is still a great deal of uncertainty around how it will work in practice.
The current sectors, as set out in the consultation, are incredibly broad. For instance, in respect of AI, the development of which I am reasonably familiar with, the definition is so wide that it captures any company developing any kind of application involving machine learning or deep neural networks.
We look forward to seeing the outcome of the promised consultation during the passage of the Bill, but we need to considerably narrow the width of the sectors captured. This in itself would not resolve the fact that many, if not most, technologies have both civilian and security uses, which potentially opens every deal to challenge. Taking dual-use biotechnologies as an example, how do we manage national security concerns without stifling innovation?
We also need to question the low thresholds adopted for market share and turnover, and the generous time given to the Secretary of State to intervene—especially given the Secretary of State’s quasi-judicial powers.
We need to reduce uncertainty to a minimum. Even a mandatory notification system for transactions means instituting an open pre-consultation process with market participants. In particular, it is essential, as the ICAEW has emphasised throughout, that the investment security unit publishes meaningful market guidance notes akin to the practice notes published alongside, but not as part of, the takeover code.
The Bill includes the requirement for the ISU to publish an annual report, but formal guidance will be much more useful, and, as they say, it is an important way of dealing with asymmetry of information among the investment and advisory community. A particularly good example will be in respect of trigger events that involve securing influence or control over qualifying intangible assets, such as know-how and intellectual property. It is possible to gain access to intellectual property through means other than ownership, so the question is: how might those intangible assets be applied in ways that could prejudice our national security in some way? The new unit may initially assess that on a case-by-case basis, but it will need to quickly come to establish a basis of precedent for its decisions. Along with the corporate finance community, I believe that the requirement for market guidance notes should be incorporated in the Bill.
All this means properly resourcing the ISU, which will need to determine which of some 1,000 to 1,800 transactions are to be analysed: 70 to 95, it seems, although many think this an underestimate. This compares to just 12 acquisitions reviewed under the Enterprise Act’s national security provisions since 2002. Otherwise, this will result in a huge number of mandatory notifications, which will overwhelm the new unit. The bottom line is that we need to make sure that a proportionate and last-resort approach is applied to government scrutiny of, and intervention in, these transactions.
In addition, given the low turnover thresholds involved—I have noted the Commons debate—many of us are concerned about the impact on SMEs. The impact assessment suggests that “80% of transactions” in the scope of mandatory notification under the Bill would involve SMEs. However, the assessment failed to consider the costs faced by the acquired companies or the impact on funding for start-ups.
However much we try to circumscribe the Bill, it will not always be possible to reduce uncertainty and risk. It will depend on the culture of the ISU to a great extent as well, so, when considering the Bill, we should heed the warning of John Fingleton, former chief executive of the Office of Fair Trading, in his recent article in the Financial Times. We must not let this Bill become an investment killer; it needs to be very clearly targeted and proportionate. I look forward to the debate and the Minister’s reply.
I remind the House of my interests as recorded in the register.
I am instinctively against all forms of protectionism, including those that apply to inward investment. Our current minimalist framework, set out in the Enterprise Act 2002, with a few recent tweaks, has served us well. As my noble friend the Minister has reminded us, the UK has benefited considerably from inward investment: UK companies with foreign direct investment links accounted for over 30% of UK employment and 40% of GVA, according to the latest detailed analysis by the ONS. Our investment partners, led by the US, are very largely from similar open democracies.
However, I agree with the noble Baroness, Lady Hayter, that the security of our nation is the top priority for any Government, and that is why this Bill has my support. It is our duty as Parliament to ensure that the Government have the powers they need to keep us secure.
Most investments are undertaken with a sound commercial logic, but we know that not all investment is driven this way. In particular, it is right to question the investment motives of organisations within states that do not share our values—or, to put it more directly, assets that are important for our security should not fall under the influence of China or Russia—and a few other states, although they do not on the whole have the resources to make significant acquisitions. I support the Government having powers to achieve that.
At the same time, we must ensure that the Government’s powers are proportionate to the threats and that they do not have unintended consequences. This is especially important in the context of the major economic renewal that is necessary as we deal with the pain inflicted on our economy by the Government’s lockdown policies.
I have some reservations about the Bill, which I look forward to exploring further in Committee. The first—which has been mentioned—is about whether the wording of the Bill gives the Government a secure armoury. It is firmly framed in terms of “national security”, but that is not defined in it, and there are no powers in it to do so. I believe that this is too important to be left to the courts. Instead, the Secretary of State will make a Statement about how he will use the power to call in transactions, including the sectors to be targeted, but Parliament’s involvement is only via the negative procedure. That feels weak.
I also have a concern that the Government’s current view of “national security” is insufficiently comprehensive. The Government are consulting on 17 sectors on which they plan to focus the new powers. While that sounds like a lot, the list does not coincide with the separate list of critical national infrastructure, drawn up by the Government’s Centre for the Protection of National Infrastructure. In particular, I cite water and financial services: two quick ways to bring the country grinding to a halt are a lack of clean water supplies and the failure of payment systems. Why would the Government not want to be notified about potential takeovers of major players in these industry sectors as well?
I am concerned about the Bill’s impact on investment in both large and small companies—this has already been mentioned. I fear that the necessary power to block transactions that are undesirable on national security grounds could have a traumatic impact on investment transactions more broadly, and indeed I fear that the UK may lose its reputation as a good place to invest.
It will obviously be necessary for all the mandatory notifications to be handled efficiently, but the volumes will be critical to this. The impact statement has some very wide ranges in terms of the number of transactions that need to be handled, and the Government have very little idea about the volumes of asset rather than share-based transactions, which will come within the ambit of the Bill.
I am absolutely sure that, if there is any possibility of a transaction being within the scope of the legislation, lawyers will recommend notification; the penalties involved make this a no-brainer. If you add to that precautionary voluntary notifications, There could be very large volumes of notifications and they will not be confined to the early days, as people get familiar with the topic, because the risks to transactions will remain throughout the life of this legislation. We will need to explore in Committee how best to ensure that the system is not overwhelmed, with resultant harm to investment activity generally.
The core purpose of this Bill is good, and that is why I support it, but it will need careful scrutiny in Committee to ensure that the balance is right between protecting the UK’s security and growing the economy.
My Lords, business investment will be central to shaping our competitive and dynamic economy. I am attracted to this Bill because it is a further building block in defining the country we are becoming in a new-look UK. After passing through the parliamentary labyrinth, the Bill should ensure that the UK remains one of the world’s top destinations for foreign investment, which is achieved by maximising its attractiveness for investment, while safeguarding our national security. The Government are setting out our stall with clear messaging of being a force for good, and they are setting an example to the world that we are not just open for business but mindful of standards and accountability.
Care should be taken, however, that safeguards do not unintendedly hamper UK competitiveness or limit investment that does not pose a national security risk. I concur with what the noble Lord, Lord Clement-Jones, said. The mandatory reporting regime for transactions should be narrow and based on evidence of real risk, and should not result in unintended consequences.
The Government’s call-in power under the Bill will be proportionate, sufficient to address any residual concerns that could arise in relation to transactions involving active or passive infrastructure. There are challenges, however, regarding the call-in power, which provides for the Secretary of State to call in transactions triggered by a person gaining control of a qualifying entity or qualifying asset that is considered to give rise to a national security risk. A significant extraterritorial impact also arises from the drafting of Clause 7(6), as these call-in powers could be construed to apply to every export deal from the UK to overseas. Understandably, UK exporters and overseas customers will want to mitigate the risk of call-in by the UK Government, so removing ambiguity from the scope of the call-in power is important—all the more reason to ensure that extraterritorial reach does not become an inadvertent consequence of any ambiguity in the drafting and interpretation.
As things stand, the likelihood is that UK exporters, particularly in sensitive sectors such as defence or military dual-use, will err on the side of caution and seek additional clearances from BEIS for such transactions in addition to making standard UK export licence applications. This interpretation of the Bill could lead, in practice, to a significant annual increase in the volume of voluntary notifications as the means of mitigating the risk of, and uncertainty over, future call-in on national security grounds. I venture, therefore, the need for a targeted amendment to this primary legislation, and for statutory guidance from BEIS, to remove uncertainty.
If I might express this differently: our proposed amendment to the primary legislation could be to the effect that where qualifying assets are authorised for export through the Export Control Act, a transaction or acquisition is automatically exempt from call-in and/or the voluntary notification regime.
Moving on to intellectual property issues, IP licences and assignments are a fundamental offering in business transactions and are inextricably linked with technology offerings both within and outside the UK. The UK export control regime already serves as a robust former national security screening regime for IP assets. Adding a parallel or second national security review under this NSI regime seems unnecessary. Would the Minister be minded to clarify the interplay between these two regimes? If this is the intention behind the Bill, the department will need to publish clear guidance to explain this extraterritorial reach and the interplay. This could bring technology platforms, sales, in-service support contracts with existing foreign customers and in-country technology transfers of capability—whether under Government-to-Government arrangements or in direct sales to a foreign Government or government-controlled entity—into the scope for call-in by the Secretary of State. Such proposals and resulting contracts will be subject to, and conditional on, stringent UK export control licensing processes in addition to any applicable pre-clearances through the MoD Form 680 process, which requires companies to obtain approval from the MoD to release information or equipment classified “official sensitive” and above to foreign entities.
Clauses 7 and 9 will also catch IP offerings that form part of offset transactions related to prime contracts with overseas Governments. This bring licences, assignments and transfers of IP into scope. Clause 7 defines qualifying assets as including
“ideas, information or techniques which have industrial, commercial or other economic value”.
“trade secrets … databases … source code … algorithms … formulae”
and “designs”. Clause 7(6) further provides that IP assets are in scope only if they are used
“in connection with … activities carried on in the United Kingdom, or … the supply of goods or services to persons in the United Kingdom.”
Clause 9 states that
“a person gains control of a qualifying asset if the person acquires a right or interest in, or in relation to, the asset and as a result the person is able … to use the asset, or use it to a greater extent than prior to the acquisition, or … to direct or control how the asset is used, or direct or control how it is used to a greater extent than prior to the acquisition.”
Would the Minister comment on these aspects in his response or, at least, commit to a considered response in writing?
In conclusion, the Bill is a good starter for 10.
My Lords, I too welcome the Bill and congratulate Her Majesty’s Government on bringing it forward.
At the beginning of each day this House sits, our prayers recognise the delicate balancing act we have to perform. On the one hand, our precious democracy depends on the public wealth, peace and tranquillity of the realm. It is this social capital, this trust, this commitment to the common good, which sets people free to go about their business and allows for innovation, trade and wealth creation. This is fundamental to all we do. On the other hand, our prayers acknowledge that sometimes malign forces at work will look for opportunities to take advantage of us, and we cannot ignore, as the prayers put it, the enemies of the state, which we pray will be vanquished and overcome.
This balancing act has to be maintained, as we have left the European Union and are seeking to establish the role we want to play in the world—the global village. We know that there is strength in collaboration and in sharing information and technology for the sake of the whole world. We want to maximise this, as has been mentioned, in our universities in particular, which are one of our huge success stories. How can we set these groups free to capitalise on all the opportunities ahead? The development of the Covid-19 vaccines is a classic example of the benefits we get when we work collaboratively across the world. Nevertheless, we have to make sure emerging technologies and science are harnessed for the common good and not exploited for the military, economic or political ends of those seeking to undermine what is, nowadays, a fragile democracy, as we see threats in various parts of the globe.
In the past few days, Members of this House have been struggling with questions of how we use our legislative clout and moral leadership as we stand up and defend human rights. I take the Minister’s assurance that the Bill will be tightly defined. Nevertheless, we are going to be operating in a world where horrific stories of the persecution of the Uighurs, the Rohingyas and Christian minorities in places such as China and Myanmar immediately come to mind, which is why I hope, as we work on the details of the Bill, we will come back to the wider context in which we are set.
Some nations are not slow to use their economic power to further their own aims. Think, for example, of the Chinese increase in tariffs on Australian wines last November. We are aware that previous Governments supported Chinese foreign investment, potentially leaving critical national infrastructure under a regime that seems to be diverging further and further from our values and everything I hope we will stand for in the future.
As the Bill works its way through its various stages in this House, I know a number of us will be pushing for clarification in several areas. As the noble Lord, Lord Clement-Jones, noted, there is a need for more careful definition of what we mean by “national security” and which areas are simply “national interest”. We need to do that so that we do not hinder people. There is a danger that the notification process, as others have put far more eloquently than I can, could introduce more red tape and delay at a time when we need our entrepreneurs, especially SMEs, to be agile, nimble and exploiting opportunities more widely.
Despite the promise of an annual report, we need to look at the extent to which Parliament will be able to scrutinise what is going on. We know that in periods of transition, as we have seen in our ports and at customs, we can sometimes be overwhelmed suddenly and get backlogs that harm us. There are vital issues here about making sure there are adequate resources to help this scrutiny go forward.
I will close by saying that I hope that the Bill ushers in a larger conversation about strategic industries within the UK. Perhaps one of the enduring lessons of the pandemic is that when a global crisis comes along, solidarity can quickly go out of the window, as each nation looks after their own. Free trade is important and can bring prosperity but it can leave poorer nations vulnerable. It is important that, should another large crisis occur in the future, we are not only resilient and able to avoid shocks; we also need to think about wider areas such as food security, medicines and access to resources in order to safeguard strategic industries and ensure that we are prepared for what feels like an increasingly vulnerable world that we are living in. I look forward to working on the Bill with others in this House.
My Lords, I thank the Minister for his introduction and remind the House of my interests, as registered. Thus far, the Bill has enjoyed qualified support from all sides of both Houses during its passage through Parliament. However, I confess some concerns about its scope. For instance, I share the concern expressed by the noble Baroness, Lady Noakes, that essential elements of our critical national infrastructure appear to be inexplicably missing from the coverage of the Bill.
However, today I want to focus on one general point that I believe may prove potentially dangerous for our economic well-being and, ultimately, our national security. I refer to the Secretary of State’s assertion that the Bill strikes the right balance between encouraging inward investment and protecting national security. That remains an assertion since, inevitably, at present it remains untested and unproven. It can and will be affirmed only by successful implementation.
Colleagues from all Benches have offered several amendments intended to ensure a successful outcome of that balance: all thus far have been defeated. I say to the Government that in due course they may find that their victories on this are proved pyrrhic, so I hope that they will be more open-minded to some of these constructive amendments in the course of our following debates. There are some areas where we can agree. We can surely agree that in a networked world it has become clear that a qualifying entity or asset of concern can no longer be defined just by the size of the venture, its market share or its direct involvement in the defence sector. It is right also that the threshold for concern, the “trigger event”, is changed and that consideration extends for a five-year window.
Yet the threshold for change is no easy matter. Colleagues on all Benches are right to raise questions about basic definitions—not least for “national security” —which made filling the scrutiny gap helpful rather than a hindrance to the intended legislative outcomes. We should proceed with care. Now is not the time for the United Kingdom to hamper productivity gains.
Vaccine nationalism has given us a taste of how counterproductive any isolationism can be. Likewise, many of our most severe national security challenges are global. If “build back better” and “levelling up” are to support a “global Britain”—all slogans at the forefront of the Government’s mind—then imposing disproportionate and unaffordable costs on the wellsprings of productivity will be most unwise. Large organisations may absorb these transaction costs, but networks of small and medium-sized enterprises, not to mention start-ups trying to scale up and, above all, the universities from which these arise, will struggle to absorb such transaction costs.
It is not so much the land or tangible assets that are the problem. It is that amorphous third category of qualifying asset—ideas. Those will be the hard cases. If we are wise, we should track the implications of the Bill back to our universities. The evidence over decades is clear. It is not financiers, nor the entrepreneurial state per se that catalyses innovation-driven productivity —it is our universities. You have only to look at the genealogy of our biggest unicorns to see how much they owe to universities, both directly and with ideas created from research, and in enabling start-ups to scale up with highly educated workers. Ultimately, our security rests on a productive economy. Everything flows from that, and that has to be innovation driven.
The Government’s consultation listed 17 sectors, 15 of which covered almost all growth areas in which SMEs, start-ups and universities catalyse the uptake of innovation. Asking them to master the tracking of dual-use, beneficial ownership or agents of influence seeking to take control is a tall order indeed. If our future productivity is not to experience a severe chill, the sector-specific guidance offered by BEIS’s new investment security unit will have to come with much support from competent staff and adequate resourcing to support SMEs and other organisations or networks unable to fully or adequately provide them themselves. It would be wise too, as several noble Lords have mentioned, for the unit to be properly scrutinised.
If these things are not done, the potential for harm may be hard to overestimate, making a nonsense of the assertion that a proper balance between national security and productivity has been struck. In short, we cannot ignore the evolving security risks and the Government are right to address them in this Bill, but we need to be able to handle them in a pragmatic and proportionate way. Otherwise, in the long run, that would be a real threat to our national security.
My Lords, I really do have to declare some interests in the context of this Bill. I am the senior partner of Cavendish Corporate Finance, which specialises in advising owners of SMEs on their exit, typically by trade sale or to private equity. I started Cavendish some 30 years ago, and mergers and acquisitions has been my line of work for some 35 years. My business has grown, as nowadays entrepreneurs frequently start a business specifically to grow it and then sell it after a few years, to let another organisation take over with different skill sets as the business outgrows its original founders. In days gone by, family businesses were just that—kept in families for generations. Although I have sold an eighth-generation family business, that is very unusual. Years ago, selling out used to have negative connotations; today, it is seen as mark of success and to be applauded. As a result, SMEs have flourished in the UK, accounting for over 95% of enterprises and some two-thirds of employment.
The UK is seen as a world leader in facilitating new businesses to start up and grow. Much has facilitated this explosion in entrepreneurial flair. Recent Governments have made it easy to start a business, and the combination of relatively low regulation, easy access to finance, and a can-do attitude—unique in Europe—has prevailed. I only hope that the Government do not bring it all to a crashing halt by increasing capital gains tax rates in the Budget next month, but that is not a subject for today.
What is for today is to recognise that FDI here has been a tremendous success. We are consistently second or third in the world, and have long been the first in Europe—and those investors can choose to invest anywhere in the world. When they are asked why, one reason cited is our high standing in the World Bank index of ease of doing business; that includes our flexibility in the labour market, which is second to none. I am looking forward to the maiden speech of the noble Lord, Lord Woodley, who may address that subject.
Another really important aspect, and top of many investors’ lists, has been our rule of law. Investors are hugely attracted to the unique UK legal system, and one of its key features is certainty. We may be about to lose that key plus point.
Many speakers here will, like my noble friend Lady Noakes and me, instinctively want the Government to push for economic growth through market freedom, allowing business to flourish away from government interference. Indeed, I am the chairman for the Lords of the Campaign for Economic Growth. Our president is my noble friend Lord Young of Graffham—a role model for many of us—and we see the dilemma that the Government face, brought into sharp focus by the issues concerning 5G and Huawei.
Economic decisions taken for political reasons rarely lead to good results. As we see in this Bill, the definitions are hard to determine. Few companies are in one sector alone; they are in many. Large numbers of acquisitive, seemingly British companies, particularly those backed by private equity, are in fact technically owned by funds based in Guernsey. Uncertainty in investment leads to only one thing: an increase in the return demanded as compensation, so lowering the price, as a result of the risk factors, and of course lowering subsequent tax revenue.
We can readily observe overseas investors stalling transactions at the moment, just to see where this is going. Why risk investing in a UK company if, when the company becomes so successful that it attracts overseas interest, the process to sell it is hampered, and may even be barred, thus reducing its value? I say “may” even be barred, because it will not be possible to give certainty. Warm words might come from this Government, which have been rightly trusted by business, but this legislation will give less competent and less business-friendly Administrations in the future—they might occur—the power to make life difficult for investors from a particular country that they just do not want to make welcome in the UK.
A former Trade Minister told me this week that he wanted to see 10 Downing Street look at every piece of new legislation through the prism of an SME. Is it helpful or is it unhelpful? This Bill is not helpful—or at least, aspects of it are not helpful. So I hope that BEIS, under its new excellent Secretary of State, will table some of the amendments that were discussed in the Commons, and were suggested by organisations such as the corporate finance faculty of the Institute of Chartered Accountants, of which I had at one point the honour to chair.
The proposed investment security unit may well be swamped: there are some 10,000 M&A deals every year. I cannot see how anyone could have made the estimate of up to 1,830 referrals a year—what an odd number. In any event, how can people possibly know? We need to look at really good precedent models like the Takeover Panel, whose appeals committee I served on, which gives guidance, help and advice to ensure an efficient market. Its practice notes could be emulated, and we must have a fast-track pre-clearing system, together with a big hike in the thresholds and the creation of sensible white-list exemptions to avoid a massive crunch in transactions.
We need much greater clarity on what is national security, and fast problem-resolving mechanisms, with a recognition that some industries, such as cybertech, will have real dual-use issues, whereby a small proportion of their business might be caught, thereby prejudicing their chance of attracting investment, as the exit will be hampered.
The UK has a proud reputation as an excellent place to invest and do business. The phenomenal growth of fintech in the UK did not happen by chance. Look at the people running these businesses, and look at where the money has come from. They have chosen the UK as they believe in the UK as a country with a mindset for standing back and letting business get on with generating wealth for our citizens. Let us not disappoint them.
My Lords, the National Security and Investment Bill has a number of provisions: a separate national security screening regime, a broadening of the range of investments in scope, a statutory requirement for parties to notify relevant transactions in the most sensitive areas of the economy, and a new process for business investors supported by a call-in power to enable the BEIS Secretary of State to assess deals that may give rise to national security risks. The Bill allows for a retrospective call-in decision for up to five years, with criminal sanctions attached, and a predictable statutory process.
The CBI, of which I am president, supports the principle of the legislation in protecting national security, which will always be a priority. However, the current drafting makes the practical application of the Bill difficult for business. It could lead to additional burden, complexity at a micro level and, potentially, an unintended deterrent to investment at a macro level.
We heard from a wide range of businesses and members who share concerns about the Bill in its current form, from technology and digital to facilities management, to pharmaceuticals, to higher education, to financial services and to defence. There is a concern for a broad subsection of the business community. For example, the Russell Group says that if reporting under either the mandatory or voluntary regimes leads to delays or concerns from the business community over its ability to do business with universities, this could harm its members’ ability to attract investment to all parts of the UK in future.
With no set de minimis thresholds for transactions caught by the legislation, there is a risk that a high volume of notifications will inadvertently represent relatively low-risk activity driven by a maximalist approach from legal teams and counsel. The extraterritorial nature of the provisions of the Bill means that many transactions involving target suppliers supplying goods and services outside the UK will be caught in the notification requirements. Against a backdrop of the maximalist approach in business, there is a real concern about the Government’s capacity to process the projected number of notifications while the regulation is in its infancy.
According to the CFIUS annual report, 231 notices were filed with the US investment screening regime in 2019, with 113 resulting in subsequent investigation. The Government currently estimate that there will be up to 1,800 annual notifications under the regime, and there is concern that the true predicted estimates could reach up to 10,000, although the Government say that the number of transactions called in would be no more than 100. Can the Minister confirm that?
To allow for greater efficiency in the system, the UK might wish proactively to utilise the benefits of a white-list process for countries and/or companies. That could be incorporated through future trade deals if the legislation provides flexibility. However, this investment regime should not have the unintended consequence of deterring foreign investment just when the UK needs to increase its attractiveness to foreign investment, and just as we have come through the pandemic and established the UK as an independent trading nation post Brexit.
We are the second or third largest recipient of inward investment in the world. We have always been a gateway to the European Union, and we need to continue to be a gateway, including for foreign direct investment. The requirements for mandatory reporting in 17 sectors across the economy will vastly increase reporting requirements for business, damage the competitiveness of key sectors such as the tech sector, which relies on investment in start-up and scale-up, and create an impossible workload for British officials.
Companies across key sectors of the economy, from finance to universities, are also concerned that the UK regime is more onerous than its equivalents in the US, France, Germany and Australia, with more stringent thresholds for transactions and less clear guidance in areas. I ask the Government: have they carried out clear benchmarking and taken the best of all other existing regimes before coming up with our legislation now?
We should not forget the SMEs, which do not have the legal departments to wade through the complex provisions of the Bill. We want to work with business, and direct engagement with the Business Department has so far been very good. The Government have shown a willingness to consider targeted changes to the Bill, to ensure that business can help to make it a success.
I will run through a few of these changes, which could include a de minimis; making sanctions for transactions for mandatory filing that has not been made more workable; reducing the extra-territorial application of the call-in power; and introducing a fast-track process for less risky transactions, clarifying the time limits on the exercise of the call-in power. That could include creating checks and balances beyond the threat of judicial review, such as appraisal from an expert panel drawn from Whitehall and industry, introducing detailed guidance for investors. When qualifying assets are authorised for access for export through the UK Export Council regime, consideration should be given to exemption for the call-in. Further changes could ensure that for key sectors there is scope for the mandatory regime to be as clearly and narrowly defined as it is for those sectors that are of material interest to national security. There should be clarifications that IP provisions would not mean that companies exporting sensitive goods with de facto transfer of IP would not need to double report, if they had already received an export licence.
The City of London has given feedback and commented that the Bill represents a significant expansion of the UK’s FDI regime, given that since the Enterprise Act intervention regime was introduced in 2002, nearly 20 years ago, there have been just 12 interventions on the basis of national security. It appears that a new regime will see a large increase in the Government’s workload. Once again, the City of London said that it seems to be a much stricter regime than those brought in by other countries, including the USA, Australia, Japan and many in Europe. City sources also said that they recognise that it now sits alongside the new Office for Investment, a unit designed to attract high value and strategic FDI into the UK.
To conclude, the University of Cambridge—I declare my interest—says that it stands ready to work with the Government to protect Britain from emerging national threats by hostile foreign actors. The university understands and fully supports the dual thrust of the Bill materially to expand the Government’s ability to manage risk and foreign investment on national security grounds while avoiding adversely impacting the UK’s economy, global competitiveness and attractions as a forum for inward investment. However, it is concerned about the possible adverse impact of some elements of the Bill on higher education and the rest of the business sector.
My Lords, it is a great honour and privilege to join your Lordships’ House and speak in this debate today. Turning to the subject of the Bill, I believe that critical national infrastructures should be controlled and operated in the public interest, and certainly not run for private profit or sold off to corporate investors in a way that jeopardises jobs, safety and the security of the British people.
Before I continue, I thank noble Lords on all sides of the House, all officials and staff for their very warm and hospitable welcome. I also extend sincere thanks to my two distinguished supporters, my noble friends Lord Collins and Lady Blower. I also thank Jeremy Corbyn, for giving me the opportunity to enter this illustrious House, and Gordon Brown, for giving me the encouragement to accept a peerage.
I understand the privilege that I have been given; I also understand poverty. I was born in Wallasey on the Wirral and had a humble upbringing, with my parents fighting to put food on the table each day for me and my sisters in our two-up and two-down house, with no hot water and an outside toilet. They were often unable to pay the rent. Free school meals were a must in those days to feed us kids. Shamefully, as many in this House recognise, 60 years on, the need is as great today. On a lighter note, if I ever see prunes and custard again, I will give up the will to live.
As a merchant seaman at the age of 15, I travelled to most areas of the Far East and beyond, watching the exploitation, poverty and child abuse. The unfairness in our world, at home and abroad, had the most profound effect on me. It helped to create my moral compass and the progressive politics that have driven my life ever since. I became a workers’ representative at Vauxhall Motors in Ellesmere Port, a shop steward and convener, and the last general secretary of Britain’s most famous union, the Transport and General Workers’ Union and a creator of Unite the Union.
Personally negotiating and working with many of the world’s largest companies, CEOs and Ministers, particularly in the automotive and manufacturing industries, has been great. Yes, we had our disputes, but I spent more time working for and with companies for investment, protecting jobs and plants, than we ever did fighting each other. I have always said that I have known many good bosses, but I have never known a generous one.
While we have many good examples in the Bill we are debating, particularly those given by the noble Lord, Lord Leigh, privatisation and outsourcing have all too often become a blight of our lives, leading to the fragmentation of services, operational inefficiencies and the short-termism culture that puts the interest of shareholders before the interests of workers and the wider public. Privatisation has failed again and again. We recently witnessed this with the failure of the part privatisation at the Atomic Weapons Establishment, responsible for no less than the design, manufacture and support of warheads for the United Kingdom’s nuclear weapons, which had to be brought back under direct control of the Ministry of Defence. Need I say more?
At least the Bill represents recognition from Ministers that there is an over-riding public interest in stopping essential assets from falling into the hands of nefarious interests. The general thrust of the Bill is to be welcomed, and I look forward to debating the details as it completes its passage.
It gives me great pleasure to follow my noble friend Lord Woodley’s maiden speech and welcome him. While growing up, I am sure very few, if any, of our friends would have ever believed that we would end up here in your Lordships’ House. I have known Tony for many years, through my time at the GMB and his at the Transport and General Workers’ Union. We all know, and we have heard, how proud Tony is of his time as a shop steward, a union officer and general secretary of TGWU, and now Unite.
However, there are a couple of interesting, even surprising, activities that he does not often shout about. He is rightly very proud of his role at Vauxhall Motors Football Club where, as chairman, he has led a committed team in developing the facilities. The club has a new all-weather pitch—a number of pitches—and a new club house. Thousands of children and young people have got involved and played on those football pitches at Ellesmere Port. Forty-seven teams compete in the league from the age of five upwards—it is a real community.
Tony has been involved in the Cuban Five or Miami Five campaign for many years. Not many of us can say that we have been involved in a prisoner swap, never mind one that involved the Pope, our Prime Minister and the US President. In late 2014, the prisoners’ release and exchanges, including Jewish American prisoner Alan Gross, were all secured during the end of a 16-year campaign, and we saw for a short time a step change in the Cuban-US relationships. Tony, welcome to the House.
Turning to today’s debate, I would like to focus on two issues: first, the importance of clarifying national security and, secondly, accountability and oversight. Before I do, allow me to make a few introductory remarks. Safeguarding our national security has always been critical to our nation’s future, but never more so than now. I support the Bill, which strengthens the powers of the Government to intervene when corporate transactions threaten national security. However, I believe that the Bill would be strengthened by a number of amendments, which I am sure will be forthcoming from all sides of the House as it passes through. The scale and sophistication of national security threats have materially increased since the current limited screening regime was introduced by the Enterprise Act back in 2002. Importantly, the Bill follows—if not offers a little UK catch-up—similar moves by many other countries, as outlined by the Minister in his introduction.
Turning to how the Bill should clarify national security, it gives sweeping powers to the Secretary of State but does not give any statutory guidance on the meaning of national security. Surely it would be sensible to include guidance on factors that would be captured by national security, outlining references to critical national infrastructure and economic security specifically. Such guidance would also provide much needed clarity for business.
Although the Bill is aimed at all investments—not just foreign investments—foreign companies, sovereign wealth funds and other international finance vehicles seeking to invest in companies and projects could pose a particular threat, whether that is relevant to critical infrastructure, personal data or cutting-edge technologies. The decline in democratically accountable Governments is highlighted by the Democracy Index, which recently stated:
“The global score of 5.44 out of ten is the lowest recorded since the index began in 2006.”
This is a real cause for concern. Any investment, not just critical national infrastructure, should automatically raise a red flag.
As we heard earlier, Part 3 of the Bill gives the Secretary of State quasi-judicial powers by allowing them to act as the key decision-maker for all decisions under the new regime. As we have heard, BEIS has previously been a cheerleader for Huawei and others, overly open to investment and pro-market to an extent that requires meaningful checks and balances. I do not believe that the Bill as drafted offers these. One option would be for a cross-departmental body to oversee the call-in powers. I listened to the Minister talk about the investment security unit in his introduction but I am not sure that that was clear, as my noble friend Lady Hayter outlined in her introductory remarks. Some further clarity on that would be much appreciated.
Finally, I worry that the Bill does not go far enough on takeovers, mergers and acquisitions outwith the realm of national security. For years the Government have refused to do more to protect growing UK companies so that they are less likely to be taken over, asset stripped or gutted by overseas businesses—which are often anti-trade union. Developing a robust takeover regime is essential if we want firms in our key sectors to grow and provide good jobs here in the UK. It is notable that we are coming into line with other countries on national security but not on takeovers; given the economic impact of coronavirus and potential corporate vulnerability, the case is now stronger, not weaker. The Bill is a missed opportunity to bring forward a comprehensive industrial strategy to help businesses to recover, grow and create jobs.
My Lords, I hope I am coming through loud and clear now, otherwise we will have to give up. I welcome the maiden speech of the noble Lord, Lord Woodley. I am very pleased that I am now able to follow him.
The right reverend Prelate the Bishop of St Albans posed the moral dilemma of how we trade with the world while standing up for human rights and democracy. I have no direct interests to declare, but I have been a long-time supporter of expanding our relations with China. I say this because the Bill is being interpreted in the media and among policy analysts as mainly aimed at China. I remember, not so long ago, Conservative Prime Ministers extolling a new “golden age” of trade, investment and collaboration with China. We need a very clear statement of where we now stand in these matters. Are we at the start of a new cold war with China? What range of inward and outward investments will this legislation bite on? Will there be guidance on what goods and services will be covered? Will there be national security implications that bite on third countries and trading blocs with which both we and China have relations? We need clarity on this.
My other interest is in the space industry. I act as spear carrier to my noble friends Lord Fox and Lady Randerson, who lead from the Front Bench on these matters for the Liberal Democrats. I am also a member of the all-party space group, and my son is a space engineer working for a Franco-German satellite company in Munich. Last week, I attended a round table with companies involved in the space industry. Concern was expressed about the implications of the Bill for both companies and universities, and about where this legislation draws the line on collaboration and joint working. I am old enough to remember when Britain last tried to go it alone in space with Black Arrow and Blue Streak, and I worry about the extent to which this legislation is a dangerous step away from international co-operation in space. It has even been suggested that this legislation will mean that security and military considerations will dominate future space policy.
It is a reflection of where we are going that in the last century, at the height of the Cold War, the US and the Soviet Union were able to co-operate on the international space station and multinational space flights, yet today US law prevents collaboration in these fields with China. The outcome could well be that the next boots on the moon have “Made in China” on them. During the 20th century we were able to de-escalate the Cold War with a series of treaties. Should we not be pressing ahead with international treaties to prevent the militarisation and weaponization of space?
On a broader front, I have been concerned with the number of bodies—from international infrastructure investors to the City of London, the Russell group of universities and the Law Society—which have raised concerns that will need to be explored in Committee, including the expansion of bureaucracy implied by the Bill.
I have no doubt that the Bill will pass. But during its passage through the House I hope we will stress-test its proportionality and explore where it will take us, both in space and other sectors, and assess the chilling effect it will have on relations with those with whom we wish to trade and co-operate.
I thank noble Lords, and I thank the technicians for getting me in touch.
My Lords, the Bill addresses the real concern of the need to safeguard UK national security and reflects the changing nature of threats to that. Indeed, there is much concern now about the rise of China, as my noble friend Lord McNally has just noted. There are clearly both opportunities and threats here. The debate over Huawei reflected this concern, as did Chinese involvement in our energy infrastructure. The concern that our technology might be stolen is also a huge area.
Devising a legal structure that deals with these potential threats has clearly been a challenge. The Law Society of Scotland points out that:
“It is a complex task to create a system which will balance the need to maintain an open business environment and promote fair competition with the need to protect national security.”
There is a real risk that the Bill will constrain investment into the United Kingdom—as the noble Lords, Lord Leigh and Lord Bilimoria have just said—at a time when, post Brexit, that is necessary, or that the EU might regard us as protectionist and penalise us. Clarity and transparency are therefore clearly vital.
As my noble friend Lord Clement-Jones and the right reverend Prelate the Bishop of St Albans pointed out, national security is not defined, and this therefore leaves much in the hands of Ministers. Difficult as it will be, a definition is surely required. There is huge scope in the 17 sectors which fall under the Bill. Given all the other pressing matters that the Government will have to deal with post Brexit and post coronavirus, their unit is likely to be overwhelmed. On this point, I agree with the noble Baroness, Lady Noakes—a rare event for me. Companies and their lawyers are indeed likely to err on the side of caution and refer themselves in. The Government have probably made a gross underestimate of the number of cases they will need to assess here. The Government have said that they will bring detail through secondary legislation, but that is itself concerning, as this is presented to Parliament on a “take it or leave it” basis.
As for where we see security challenges, we have already seen concern during the pandemic about overreliance on China; for example, for PPE. Who would have thought that cotton could be seen as a national security question? We must add in the Foreign Secretary’s recent announcement that businesses must, rightly, examine their supply chains and not source from the labour camps of Xinjiang or other centres of human rights abuses. We cannot rely on such appalling sources. Given that much PPE may have originated there, the challenge becomes even clearer.
The integrated review of the defence and security of the United Kingdom should surely have preceded this legislation, so that we could see what the Government think are the major threats facing the country: whether cyber, pandemics or other threats. Will the noble Lord tell us when that review is now expected, so that we can look at it alongside the Bill? The pandemic and Brexit have indeed shown us the risks of outsourcing as much as we now do.
How does the Bill sit with any industrial strategy? As my noble friend Lord Clement-Jones noted, we need that too, to understand better the key areas in the UK economy and the threats to them. In 2012, when my right honourable friend Vince Cable drew up his industrial strategy, he emphasised the biosciences. Investment in the Crick Institute, Oxford, Cambridge, Imperial, and elsewhere was increased, and that has paid off in spades in this pandemic, where we have led the world in genomics, vaccine research and much else.
We understand that the integrated review will also emphasise the UK as a science or bioscience power. Tackling climate change must also be part of that, for the UK but also globally. However, we also know that these are areas where China intends to excel, and surely has the resources to do so. China has disproportionate control, for example, over the minerals required for electric vehicle batteries and wind turbines. So, are these areas where our security is at risk? If so, how will the lines be drawn? How will our universities and research centres be impacted by the Bill, as others have asked? The Russell Group points out that they drew in investment worth over £1 billion in 2018-19, and they are concerned about the scope of the Bill, about uncertainty and delays.
This is a challenging area. There are, indeed, new threats to the UK that were not anticipated when the Enterprise Act was passed in 2002. The balance between encouraging investment and maintaining security needs to be carefully considered. As other speakers have said, there are questions here whether the structures proposed will manage adequately to support that investment while also defending national security. I therefore look forward to the Minister’s response.
My Lords, let me say at the outset that I welcome the proposition that underpins the Bill—the proposition that we need to act to protect our critical national infrastructure from the possibility of malign actions by external agents operating under the cover of legitimate businesses. We live in an era when those who wish us ill will not confine themselves to traditional forms of confrontation; they will seek to exploit weaknesses in the fabric of our social and economic structure. Technological advances bring with them exciting opportunities to do new things, or to do old things in new ways, but unfortunately, they also introduce new vulnerabilities, and the more complex and interconnected society becomes, the more vulnerable it is to shocks. It is this vulnerability that we must address.
The proposed involvement of Huawei in the UK’s 5G network certainly brought the issue to the fore, and although there were some exaggerations on both sides of the argument, people were right to be worried about the involvement of a foreign Government—the claim that Huawei is a private company free from any influence of the Chinese Government is, frankly, risible—in such a crucial part of our infrastructure. So, in my view there is certainly a serious problem that needs to be addressed. The question is how well this Bill contributes to that process. It is, I think, a good starting point, but we need to take care that it does not end up being more of a hindrance than a help.
I return to my central point: those things that advance the capabilities of our society introduce new vulnerabilities. However, the reverse is also true: those things that introduce new vulnerabilities also advance the capabilities of our society. The free flow of ideas, inward investment, the introduction of new business processes; all these things contribute to the health of our economy, to the opportunities within society and, indeed, to aspects of our national security. So, in constraining a laissez-faire approach—and it does need to be constrained—we must be careful lest we do more damage than we prevent. Our constraints need to be carefully balanced and well targeted, which of course begs the question of how we decide on that balance and on the appropriate targets.
Key to that is our definition of national security and our judgment of how far it needs to be applied to business questions. In thinking about this, we should realise that in our world, there is no such thing as perfect protection. We cannot foresee, let alone protect against, all eventualities. We will make mistakes, since error is a fundamental part of the human condition, and these will undoubtedly come back to haunt us. With that in mind, we should take as our aim not the complete elimination of danger but the creation of resilience.
Resilience depends, in part, upon redundancy. In order to provide such redundancy within critical sectors of our society, we may well need to broaden, rather than narrow, the involvement of overseas companies and inward investors. We must be careful that, in seeking to exclude potentially malign actors, we do not also deter those whose involvement would actually improve our national security. Resilience also depends upon agility, the ability to react swiftly and decisively to changing circumstances, or to challenges that we did not or could not foresee. The potential danger lurking within the Bill is that it could create a rather sclerotic bureaucratic process. Taken together, the mandatory and voluntary schemes are likely to result in a flood of applications. If the mechanisms set up to implement the measures in the Bill become clogged with endless paperwork and ponderous deliberations, we risk a situation where the focus is on process rather than results. Nothing could be further removed from the kind of agile, responsive system that we need. We would not only hamper innovation and flexibility within business, we would also increase, rather than reduce, the risk of a successful attack by a potential and perceptive enemy.
For me, the Bill is not about principle but about practice. How will applications be triaged so that effort is focused on the true risks? How will judgments be reached that strike the appropriate balance? How will they be monitored in a rapidly changing world, and how will they be adapted to take account of such changes? My concern is that government departments are not traditionally good at responsiveness and agility. It seems to me that the composition of the investment security unit within the Department for Business, Energy and Industrial Strategy will be an important factor in this regard. If it operates as a fairly standard departmental committee, I fear we will not see the outcome intended in the Bill. To what extent will the new unit draw in external expertise from both the business and security sides of the equation? To what extent will it be able to maintain a long-term view of issues? Will it be able to form a cumulative picture of risk, rather than just looking at each matter on an individual basis? How will its work be audited, assessed and reported?
I support the Bill, but before it is passed into law, I believe we need some firm assurances that the mechanisms and processes set up to give it effect will be fit for purpose in this complex and dynamic world.
My Lords, it is a pleasure to speak in this important debate on a critical piece of legislation and to follow the noble and gallant Lord, Lord Stirrup. I also welcome the noble Lord, Lord Woodley, to the House and congratulate him on his maiden speech.
There can be no dispute that the powers in this welcome Bill are absolutely essential to protect this country from hostile forces that would undermine our national security. The legislation has been a long time in gestation. The current statutory basis for the scrutiny of takeovers is the Enterprise Act 2002 and our partners have long since updated their legislation to bring it into line with the massive technological and other advances of the past 20 years. It is high time that we did so, too.
The powers in the Bill should be used only on the grounds of national security and not for intervening for wider economic purposes or, of course, political reasons. I ask the Government to clarify how they intend to ensure that that will indeed be the case if “national security” is not defined in the Bill. While protecting national security, we need at the same time to ensure that we do not unnecessarily hinder foreign investment through uncertainty and unnecessary extra administrative burdens. The United Kingdom has always attracted considerable foreign direct investment and my own area, Northern Ireland, has one of the highest proportions of FDI per capita of regions in the United Kingdom outside London and the south-east. The Bill is the National Security and Investment Bill—I stress “and Investment”. It is important that there is proper balance between protecting national security on the one hand and making sure that the United Kingdom remains fully open for business and foreign investment on the other.
The new investment security unit in the business department that has been mentioned a number of times will be crucial to the smooth operation of the new regime and must be properly resourced from day one. We have been told that there could be up to 1,800 notifications a year, although the voluntary notification system could result in a much higher level of work than is currently anticipated. In the early days at least, many companies are bound to seek reassurance, which could lead to the authorities being swamped. People will err on the side of caution. I understand that at present there are about 60 notifications a year to the Competition and Markets Authority, for example. Will the Government ensure that staffing levels will be sufficient, and will the staff and officials in the unit have the training and the technological and other resources to cope from the outset? If there is a greater level of notifications, resources will have to be increased rather than there being any extension of the administrative timelines for the declaration of notifications.
Particular attention, as has been said by other noble Lords, needs to be paid to the situation of small and medium-sized enterprises. Under the previous regime, a business to be acquired must have a UK turnover of more than £70 million and the merger must meet a minimum 25% market threshold. That meant that sensitive smaller companies were not covered. I totally accept that nowadays it is not the size of the business that should be the test of whether threats may be posed by foreign investment, so it is right that the Government take powers to intervene in the case of smaller businesses. But they must ensure that that does not threaten investment in small firms and stifle their growth.
It is expected that small and medium-sized enterprises will now make up some 80% of the transactions under the new regime, so steps should be taken to provide timely guidance to SMEs in particular about the impact of the new regime. It may be that the Government should consider setting up a special unit to engage with smaller and medium-sized companies to help them negotiate the new rules, and they should certainly keep that under review and monitor how the new rules are affecting that sector.
No doubt, many of these issues can and will be explored more fully in Committee but I add my welcome for the principles of the Bill and there should be no question about getting this legislation on to the statute book as soon as possible.
My Lords, I welcome the Bill. It has been a long time in coming. I intend to look at the context of the Bill and its genesis. Over a decade ago, when I was working in the MoD, we saw newspaper reports that 90% of cyberattacks on the UK came from one house in Shanghai. This Bill is largely about Chinese influence being embedded in our critical national infrastructure and that is why we should concentrate on China. I wish the Chinese people well but the Chinese Communist Party is pursuing a policy of hegemony and aggrandisement. The noble Lord, Lord McNally, agreed that this has been generated by China.
I will cite a few examples. The Chinese have been building military bases on reefs built out of concrete on islands in the South China Sea, which they now claim to have territorial waters around. The belt and road initiative, which is eight years old or thereabouts, was welcomed by the media and, seemingly, western Governments. But, in fact, China has been buying up Africa, Sri Lanka and elsewhere with its belt and road initiative. I was in Ethiopia 15 months ago, where there is a brand new airport in Addis Ababa. Ethiopia may find that some of these debts do not get repaid but that is for another day. Over a decade ago, we knew about Chinese reverse engineering whereby they get hold of sophisticated technology and military equipment, work out how to build the stuff themselves and then use western secret technology against us. I hope we understand that now the scales have fallen from our eyes at last. Charles Parton of the Royal United Services Institute, speaking to the Commons Committee on the Bill, described the Chinese Government as pursuing a policy of “civil-military fusion”. That sums it up.
As we can now see, we can believe reports about Chinese treatment of the Uighurs, which perhaps we denied for some time. There are BBC reports today about systematic rape. We know about organ theft [Inaudible] million people. We can see what is happening in Hong Kong, where the Chinese are breaking the terms of the joint declaration, a legally binding international agreement. We can see the military threat to Taiwan and, I fear, the chance of war. We can see Chinese moves to building a military and commercial empire, and using threats and economic muscle against, for instance, Australian wine exports after that country dared to criticise the Chinese and suggest that the virus came from Wuhan.
I support the Bill for those reasons because our national security is under threat. The Government have got the message rather late—Huawei being excluded from 5G is a particular point that I raise—but it is not six years since Xi Jinping was entertained here and declared the UK to be the best Chinese partner in the West. Indeed, George Osborne said that this would be
“a golden decade for the UK-China relationship”.
Today, Manchester University has cancelled an agreement with a Chinese electronics technology company because of that company’s involvement in surveillance in Xinjiang. Ofcom has—again, this day—revoked the licence of Chinese broadcaster CGTN because the company is
“ultimately controlled by the Chinese Communist party.”
Although Cambridge University has helpfully sent us all a briefing paper saying how important Chinese money is to it, I should have thought that the exposure by the noble Lord, Lord Moore, of Jesus College and others in Cambridge and their close ties with China would have shamed it a little, at least.
Surely nobody can doubt any more the unfriendly intent of China. The genocide amendment of the noble Lord, Lord Alton, two days ago showed that the House of Lords understands that the behaviour of the Chinese needs, at the very least, close examination. Sadly, the EU has just signed a huge trade agreement with China, which is regrettable. Yes, we want inward investment, as my noble friend Lady Noakes said, and economic growth. We want to trade with the world, including China, but we need to protect ourselves and peace first, and the Bill goes some way towards doing that. I know that Governments do not always get legislation right, so we will watch the progress of the Bill, and amendments will certainly be needed as it progresses, but its spirit is correct and I support it.
My Lords, first, I congratulate my noble friend, no longer in his place, on his maiden speech. I have to say, though, that Jeremy Corbyn is not my cup of tea, but clearly my noble friend Lord Woodley is a decent fellow, because he is an ex-sailor.
For several years, a number of us have been concerned about the impact of inappropriate takeovers and dual ownership of firms that were key to our critical national infrastructure and essential sovereign capability of cutting-edge research, technology, and equipment production and control. Some seven years ago, the ISC became very aware of this, and it was clear to it that national security issues around investment decisions were not properly being taken into account, so it said to the Government that they should take some action. I am therefore pleased to see this Bill progressing through Parliament. The legislation is vital to protect the UK’s security across a range of areas.
Having waited seven years for the Government to bring forward legislation, it is beholden on us and them to get it right, and there is one rather large hole in the Bill: there is no proper oversight by Parliament. In Clause 61, there is provision for an annual report to this House, but that report will contain the bare minimum of detail. The Minister has told the other place that the BEIS Select Committee will provide further oversight, and indeed that is the case when it comes to the economic aspects of decision-making. The BEIS Select Committee cannot see detailed classified national security material and, by their nature, decisions made under this legislation will require deep engagement with sensitive material and a clear-eyed understanding of the possible conflict between encouraging business and protecting our national security.
There is currently no provision for oversight of national security material on which decisions will be taken. The ISC was established in 1994 to provide exactly that oversight: to examine matters that Parliament could not, because they are too sensitive to be discussed in public. It is therefore surprising that the Bill, as drafted, does not provide for oversight by the ISC. The investment decisions that the Bill covers are currently taken, in modified form—as has been mentioned by a couple of previous speakers—by national security elements within the Cabinet Office. Therefore, they are within the purview of the ISC. As these decisions will move to BEIS, that oversight will now be removed, so the Bill is in fact a step backwards.
During the passage of the Bill through the other place, it was proposed that the ISC should receive an annual report on the sensitive issues covered by the Bill. In response, the Minister said that the ISC could always request that information from his department. That is, frankly, not good enough. As my colleagues on the ISC have already noted, without statutory provision for routine ISC scrutiny in the Bill, there is a possibility that, no matter how well intentioned this Government may be, future Governments may refuse to provide such information to the ISC. The Minister had already argued in the other place that the ISC’s remit does not extend to oversight of BEIS work, which undermines his later claim that the ISC can request information.
Therefore, unless the Minister says something to change my view, I intend to submit an amendment that would expand the current reporting requirements to include reporting to the ISC, incorporating details of the national security decision-making process into the existing annual report in Clause 61, allowing the Secretary of State to redact those matters from the report laid before Parliament and instead provide them to the ISC by way of a secret annexe. I hope the Minister will acknowledge that this is a constructive approach, in that it would lessen the burden upon the new BEIS investment security unit. If, for some extraordinary reason, the Minister is unable to accept this, the alternative would be to assure this House that the work of the new unit will be brought within the remit of the ISC by including it within the memorandum of understanding that sits underneath the Justice and Security Act.
It is critical that there is oversight of matters that Parliament itself cannot oversee. This House should not be passing legislation that allows for action in the name of national security without providing for oversight of that action.
My Lords, I, too, congratulate the noble Lord, Lord Woodley, on his excellent maiden speech. I welcome this Bill to ensure that our national security is better protected. For too long, it has been far too easy for foreign interests to take over and strip this country of vital companies, as was mentioned by the noble Lord, Lord McNicol. Concerns were also expressed by the noble Lord, Lord West. As noble Lords have identified, some of these interests represent hostile Governments and entities; others do not, but the impact on some crucial sectors and the ability of this country to protect itself are just as severe.
Our previous attempts to intervene on grounds of national security have been woefully inadequate, dating back most recently to the Enterprise Act 2002 and the limited role of the Competition and Markets Authority. Forget about hostile state actors, for a moment. Under this legislation, we lost defence giant GKN and satellite firm Inmarsat. We face losing British chip giant Arm in a £30 billion takeover and a buyout of security firm G4S, which is a government contractor at prisons and nuclear power stations. Another UK defence giant, Cobham, was sold in January 2020 to US equity firm Advent, despite security concerns. As noble Lords know, Cobham is a world leader in air-to-air refuelling. Lady Nadine Cobham, daughter-in-law of the firm’s founder, rightly said that such a sale would never have been allowed by the US, France or Japan.
The UK has been behind the curve in protecting sectors vital to our national security from foreign takeover. Take the United States: CFIUS, the Committee on Foreign Investment in the United States, was established back in 1988. It has a history of actively blocking takeovers that are deemed not in the national interest. A federal inter-agency committee, it is chaired by the Secretary of the Treasury. Additional members of CFIUS include the Secretaries of Homeland Security, Commerce, Defense, State, Energy and Labor, the Attorney-General and the director of the Office of Science and Technology Policy. The Americans take this very seriously. Perhaps Her Majesty’s Government should take a leaf out of the Americans’ book and set up a similarly high-powered co-ordinating committee. An underresourced investment security unit in the Department for Business, Energy and Industrial Strategy, as proposed in the Bill, is hardly the same.
We are not only well behind the US, but behind the EU. The EU is to beef up investment screening rules to block foreign takeovers of European companies tied to national security. Agreed last March, this came into effect in October. The European move was stimulated by Germany’s experience, back in 2016, after the successful bid by China’s Midea Group for industrial robotics specialist Kuka, which prompted a national outcry.
The UK has been slow to wake up to the dangers. Her Majesty’s Government’s national security risk assessment identified the threat in 2015, only after it had been pointed out in Parliament’s Intelligence and Security Committee report, published two years before. At that time, the ISC investigated Huawei’s involvement with BT and the potential threat to our critical national infrastructure, or CNI. The vulnerability of our CNI, including our communications and national grid, represents one of our greatest security challenges. A debilitating attack on our national grid could cost thousands of lives and billions of pounds. There can be no energy security for the UK where the possibility of interruption to our energy supplies remains.
As one senior nuclear engineer, who has spent decades in the industry, told me, there is no way a country could prevent a foreign-designed or foreign-operated civil nuclear power station from having the means to control it embedded in its systems. We would simply never know. You have to be pretty sure you know who your friends are when it comes to that sort of investment in the UK’s nuclear sector. The ex-diplomat Charlie Parton, who was quoted earlier, said that the Chinese follow a policy of “civil-military fusion”, where it is difficult to see where the state ends and the private sector begins—or vice versa. They are not the only ones globally.
I have a couple of points on the Bill itself. I do not agree with those in the other place and in your Lordships’ House who have talked about amending the Bill to include a definition or framework of national security. The Government must have maximum flexibility to meet any security challenges as they arise. We cannot legislate now for the threats of the future and it would be foolish to attempt to do so.
Secondly, the proposal for an annual report to the Intelligence and Security Committee, as well as to the House itself, is a good idea. Dr Julian Lewis, chair of the ISC, rightly pointed to what would otherwise be a scrutiny gap, as was mentioned earlier by the noble Baroness, Lady Hayter, and the noble Lord, Lord West. With proper scrutiny, however, this legislation cannot come too soon.
My Lords, this Bill is about intervention when there is a transfer of control that puts at risk our security, and possibly vital supplies and critical infrastructure. I recall concern about vulnerability in the Economic Affairs Committee’s 2017 inquiry and then report, The Price of Power, regarding electricity markets. Indeed, concerns do not have to relate to hostile foreign Governments, and that raises questions about how geographic lines will be drawn for the purposes of this Bill and what part trade agreements play. Will measures under the Bill constitute security measures that trump trade and investment agreements? How far is the Bill directed at not losing technology and R&D capacity more generally, given that undertakings during takeovers are often useless?
The Bill before us has one basic element, the notion of a trigger event relating to control, and then it is rather like a puzzle book. Has the Secretary of State got every possibility covered? Schedule 1 is particularly entertaining to try and design around, but what does it really mean in practice? One thing seemingly left out is an export-only manufacturer. I suppose that export licences would cover security issues, but could that not still be a loss of knowhow? While on that subject, why are licences or intellectual property rights not explicitly mentioned in Clause 7, and perhaps other choses in action—or are they “things in action” nowadays?
If one accepts the “trigger” notion, it becomes an exercise in how to make it work and where the burdens lie. For one thing, it will require people with a wide range of knowledge, including in cutting-edge science and engineering, to do the scrutiny. Notifications will hit at a rate of more than four a day under the Government’s estimate, and may be much higher if there are lots of precautionary submissions. How much time does the Minister consider it takes an individual to scrutinise technology and understand the ramifications? How much reliance depends on the notifier, and what level and volume of information and data will be needed in a notification? A real problem is not where it is already known that there are security implications, but where that is a theoretical potential.
I have experience of battling over secrecy restrictions on patent applications, when key words would trigger a secrecy order because that was all the designated official could understand. Words with dual use implications such as “radar”, “laser” or “spread spectrum” in their time almost always gave spurious, annoying triggers—spurious because when it was known that there were security implications, that was made clear in advance, and annoying because it would be several months before the “all clear” from the MoD review would come back. An insecticide that could be nerve gas famously slipped through. Can we be assured that arts graduates will not be in charge of analysing scientific information? Let us hope that that is a thing of the past, but the scope of this framework Bill has raised concern from universities faced with how to comply with yet unknown notification requirements and the implications of delays when there are short timescales for concluding competitive contracts with sponsors for research.
The unfiltered sectoral scope is presently staggering. Looking at the list of materials, which is of particular interest to me as a solid-state physicist, apart from it being huge, I wondered how on earth people would know at early-stage developments whether something was notifiable if there had not been a specific notifiable type of target use? When designing materials to provide protection in car crashes, would their use in armaments always spring to mind? How early does speculative usefulness count? “Speculative” is a difficult concept in an academic world that demands hard evidence to substantiate claims.
Call-ins do not commence until there is a statement about how powers will be exercised. It is expected that the statement will narrow things to a more manageable scope, but Clause 1(8) says that statements are not actually limiting. Will the Minister confirm that that is meant as an emergency power rather than a regular fallback?
Once the Bill passes, there is a Damocles’ sword over everything in the 17 sectors, which is a problem for businesses needing to plan ahead for investment sources. The statement is all important and I would like to know more about it. Is it to be one big statement covering everything or is it going to be staged in some way, and why does Parliament get a vote only at the end, with no advance consultation or ongoing oversight of any kind? This is an instance where information on the scope of the statement is vital before legislation is passed and before consultation on a draft statement. Can the Minister give an example of what is envisaged in any area to enable a feel for the type of narrowing or detail under consideration? I am not against the notion of interventions, but the Bill should be more than notion and compulsion, and I hope that it is possible to include more direction and balance.
My Lords, I am glad to have the opportunity to contribute to what is already an interesting debate. I am grateful to my noble friend the Minister for his introduction because it has helped us to see the Bill’s shape very well. I also welcome the noble Lord, Lord Woodley, and look forward to his contributions to our debates on this Bill and in the future.
I was a member of the Standing Committee on what became the Enterprise Act 2002. I do not think that we lacked an understanding at that time, in the wake of the terrorist attack in 2001, of the nature of the emerging risks of asymmetric and unconventional threats to this country. The point is that the Enterprise Act is limited since it relates to qualifying mergers, and of course to some extent it is a post hoc regime when what we need is something that gives people clear notice of and predictability about the nature of any intervention. The scope and the need for these interventions under this legislation is warranted and I support the Bill.
My noble friend the Minister said that there are, as it were, complementary or parallel regimes in other countries. Actually, they are different, and what is being proposed here by the Government for this country is better. For example, the EU regulation relates essentially to the screening of investments across a wide range, but of course, that is not limited to national security. It includes, for example, the media sector because that concerns national security and public security, and it drifts into public order. The fact that we are focused on national security is important. Indeed, one can see from the way the scheme is implemented in France, where it is focused on foreign ownership, that it also drifts into strategic autonomy, which is the new phrase of the moment in the European Union.
We might want to be more autonomous in terms of our supply chains, but this is not the mechanism for doing that. This Bill is about national security and it is rightly focused on that—“project defence”, as my noble friend on the Front Bench referred to it. If we want resilient supply chains, we must have mechanisms which focus on that, but let us not confuse them with the proposition that these necessarily represent a threat to our national security; let us focus on these things separately. For example, promoting foreign direct investment remains an objective that we all support, and the Office for Investment within the Department for International Trade is a welcome step in that direction.
We have a series of distinct purposes with distinct regimes. I will not go on at length because many noble Lords have already helpfully illustrated where we need to look in Committee, particularly at how the regime is going to work. I shall mention some points that I think will be important.
The first is that we have to think about how this regime interacts with all the others. How does it interact with the public interest regime, for example? My noble friend talked about the financial services sector, and of course there is a public interest intervention regime under the Enterprise Act as well, and there is the question of how the competition regime is to work. We want to secure ourselves against risks, but we do not want so to diminish competition as to harm consumers.
We need to look at other regulatory regimes. For example, we need to look carefully at the question of critical infrastructure in the water industry and the utility regulators.
A number of noble Lords have referred to SMEs. If indeed literally 1,000 or more SMEs a year are having to make notifications, we have to think very hard about how we look after their interests and help them through the process.
A number of noble Lords have mentioned the higher education and university sector. The relationship between the kind of technologies that we are dealing with here and higher education and research and development is an important interaction that we need to understand.
That brings me to the point that a number of noble Lords have talked about: defining national security. In this respect I think I agree with the noble Lord, Lord Truscott. We cannot define national security directly but it is already the case in the Bill that, if one looks at the consultation on the specified descriptions, the 17 sectors and how they are described—I have to say, a document that exceeds any other in including terminology that I do not understand—and asks whether there would be a risk if control of all these assets, technologies, activities and infrastructure were to pass into the hands of hostile actors, then by definition you have defined national security. You do not need another definition because it is already there in the Bill.
My final point is that I entirely agree with the noble Lord, Lord West of Spithead. What he proposes in respect of parliamentary oversight on the security aspects of this is absolutely right, and I hope the Government will listen positively to what he had to say.
My Lords, that was an excellent maiden speech by my noble friend Lord Woodley. I have no interests to declare but I note that vested interests on all four sides of the House have been well out in force today, and I encourage the Minister to stand firm on this issue during the passage of the Bill, to which I give my full support. It has been a long time in gestation.
I have fully supported many of those Tory MPs concerned in recent years in a very vocal way at the activities of Huawei in the UK and elsewhere in the West. I have never believed a word of the Huawei PR machine operating in Westminster. There is a pattern, and you can see it now, around Burma and China: when you strip away the covers, you find that the revolutionary guard, the army and the Communist Party actually own the companies and the capacity of the country. Free trade is a good, but it is one that needs looking after. It is the very openness of the West that is used against us by those who seek to oppose and undermine our way of life. How far we go in protecting our openness by clamping down is a paradox. In my view, the Bill is a step in the right direction.
I welcome the speed with which the Government are operating now that the Bill is with us—it is less than three months since the Bill was introduced and published on 11 November. I fully accept that, to protect the economy, it was not possible to publish well in advance the sectors of the economy where notification to the Secretary of State was required. I hope that definitions of the sectors will be well-defined, so as to avoid loopholes emerging. I await with interest, as will others, the secondary legislation that will list the sectors in detail.
I also think attention needs to be paid to the mainly London-based blue-chip accountants and legal firms that facilitate foreign investments, particularly those where it is going to be found that they fall down on national security items. A fortune has been made by some of these companies in recent years, but they operate under the cloak of respectability, and that needs stripping away. The Bill needs to be operating as soon as possible.
If I may just turn around the title of the Bill, I think we need a Bill to encourage investment in manufacturing as a means of enhancing national security. If the noble Lord, Lord Heseltine, had made it to Prime Minister, we would have had such a Bill a long time ago. Yes, I approve of foreign investment in the UK—after all, we do a lot of it overseas—but we need more homemade investment to give our economy greater security. I am not for turning the clock back to, say, the 1960s and 1970s, when I worked in UK-owned factories making and exporting things that we no longer make or export, but the shift against manufacturing at home has gone too far. We should pull some of it back, particularly from areas without the rule of law, such as China.
Remarkably, with the Covid crisis, the manufacture of PPE is being pulled back from abroad—relating to national security, when one looks at it that way—and that is a step in the right direction. Obviously it has been born out of the tragedy of the virus, but it ought to be part of our national plan. We have plenty of land for new premises, by the way; only 12% of England has been built up, so there is no argument that we do not have the space, and we certainly have the people. I hope the Bill can make a difference.
A figure in one of the briefings caused me to go back and check an issue that a previous speaker has mentioned: only 12 transactions have been reviewed on national security grounds since 2003 under the current regime, whereas in table 1 in paragraph 83 of the Bill’s impact statement, the estimate is that between 1,000 and 1,830 transactions are expected to be notified in a year. As a previous speaker pointed out—who had loads of interests to declare, although I am not criticising him—1,830 is a very peculiar figure. It could have been from 1,000 to 2,000. You cannot be that precise in these circumstances. The point is that this is serious work compared to what has happened in the past, so it will need key resources. The Minister has to convince the House that the resources will be there.
My final point is that I agree entirely with my noble friend Lord West of Spithead regarding oversight. There is a big gap here. The Bill is a step backwards, leaving it to the BEIS team. The ISC must be involved; it is clearly fit for purpose. My noble friend’s suggestions —there were more than one—are very positive, and I hope the Minister’s response is equally positive.
My Lords, I add my congratulations to the noble Lord, Lord Woodley, on his distinguished if somewhat combative maiden speech.
I congratulate the Government on bringing forward the Bill. It raises some fundamental principles, standing as it does at the intersection between the needs of the nation on the one hand and the rights of the individual on the other. The fact that respect for individual property rights in this country stretches back for getting on for 400 years should not be underestimated as a factor in making the country an attractive investment destination, as my noble friend Lady Noakes pointed out, and it is one that we fiddle with at our peril.
I have a second reason to congratulate the Government. I chair the Secondary Legislation Scrutiny Committee of your Lordships’ House. Early last autumn, we scrutinised the two regulations that are referred to on page 4 of the excellent Library briefing on the Bill, one lowering the thresholds and the other extending the range of categories laid down in the Enterprise Act. Our committee was pretty concerned because we felt that important decisions like that ought to be in primary legislation and were not appropriate for secondary legislation. The Government response then was that primary legislation would come forward when time allowed, and I have to say that my committee was not entirely impressed with that reply. So it is good to see that the Government have acted promptly, and I congratulate my noble friend.
Having complimented him, I was at this point going to give him a mild kicking. I was going to say that it contrasted unfavourably with the slow response to the undertaking that he gave to the House last June about pre-pack legislation, but only half an hour or so ago, at 3.25 pm, a letter from his department pinged into my inbox—he no doubt thinking that I was going to raise this—and I now have to read the letter before I can let the kicking commence.
I go back to the Bill. Of course I understand the macro risks to our national security and I agree that we have to have adequate safeguards in place against them, but in my remarks I want to focus on what may be the practical implications if this Bill does not provide a clear, balanced and stable policy framework. In doing this, I draw the attention of the House to my career in private equity as an adviser, investor, director and chairman.
As the Government have removed the turnover test and extended the categories covered, the number of companies that fall within the provisions of the Bill has grown exponentially. Investing in early-stage companies is, as they say, a tough paper round. Out of 10 investments, probably at least half will fail, two or three will limp along, known in the trade as the living dead, and one, or if you are lucky, two will provide the reward to compensate for the money lost on the others. To get sufficiently attractive returns, the individual company will almost certainly have had to expand overseas. The UK market alone is not really large enough, and that brings the company to the attention of overseas investors and Governments.
Noble Lords can see where I am heading: just as the investors are about to reap their reward, the Government step in with a call-in notice. That is not just devastating to the investors, who the noble Lord, Lord Rooker, was slightly dismissive about; it will be a huge shock to the operations of the company itself. Markets being markets, as my noble friend Lord Leigh of Hurley pointed out, they will react as the new regime beds down and begin to price in the risk. Due diligence schedules will be amended to include a new inquiry as to whether the company operates in one of the designated sectors. As a result, those sectors, in which we in this country probably wish above all to encourage investment, may find it more expensive to obtain funding.
Much can be done to offset this if the Government can provide maximum certainty about what lies ahead—and I was glad to hear my noble friend’s remark that they understand this. As we go into Committee, I hope that we can discuss more about what constitutes national security, what constraints there are to be on the Government adding more sectors, the need to publish codes of practice on the Government’s detailed approach and to ensure that they are updated frequently in the light of experience and, last but not least, as many noble Lords have said, the need adequately to staff the investment security unit to meet the 30-day deadline—and with an estimated 30-plus references a week, that will be no easy task.
In my last minute I shall make two small points. In our discussion so far, we have tended to talk about successful companies, but there will be unsuccessful companies in the designated sectors which may find that a foreign investor is the only port in the storm. What is the policy response then? Is it to provide the necessary funding from the public purse under Clause 30, to let the company collapse and disappear or to allow the foreign takeover to go ahead?
Finally, in my last 30 seconds, the House should be aware that under this new regime we will be considering not just professional investors and managers but family businesses, men and women who after a lifetime of effort involving considerable sacrifice in building up a successful business now wish to reap their rewards. Under the provisions of the Bill, the Government could prevent the sale of such companies. Will Clause 13 provide compensation for a lifetime’s work in those circumstances?
My Lords, the Bill has arrived in this House from the other place unamended, and across the House there has been general recognition of the need to reform takeover and investment rules to take account of national security considerations. However, for the Bill to be effective and proportionate it needs a clear statement of government strategy on what comprises national interest and security. At the moment, the provisional list of sectors is a catch-all and needs more detail. The Law Society of Scotland has stated reasonably that the Bill should be clear and that definitions of national security and details arising should not be left to secondary legislation. Without clarity, businesses and investors will face uncertainty about whether an acquisition or an investment in an influencing stake should trigger a referral, as other noble Lords have already stated. Should the fact that a foreign agency has a stake or qualifying interest in a UK-based company in any of the key sectors be, of itself, a reason for referral? The Law Society of Scotland and others believe that with a lack of clarity the number of referrals could be high, and that has been raised by a number of noble Lords.
There is also concern that, as the briefing states, almost anything purchased could conceivably be employed to attack national security. Examples are computers, drones, cameras and HDMI cables. So a medium-sized contractor preparing to start a contract could find itself subject to a referral, so delaying the contract and leading to extra costs and potential penalty clauses. This could even arise out of a malicious complaint from a competitor.
The society also highlights issues with Scots law relating to securities. This could be resolved if Clause 8 were amended to make it clear that nothing is triggered where the party taking security does not factually take control. Will the Minister consider this as failing to do so could specifically deter investment in Scottish companies?
There are also concerns that the possibility of referral could have an impact on the investment management industry, which is also important to the Scottish economy. The Institute of Directors, while accepting that the Government’s powers to intervene in the economy on grounds of national security need to be robust, is concerned about politicisation if the law is not clear. It is concerned that there will be a huge increase in workload, with real burdens on SMEs and that this, in turn, could, as the IoD puts it, have a chilling effect on investment.
Writing in the FT John Fingleton, former head of the OFT argues that the Bill goes far beyond measures introduced elsewhere in terms of its scope and in the measures that it introduces, including calling in deals up to five years after they were concluded. The Bill is also retrospective and applies to deals concluded the day after it was published, yet deals that may be affected can be referred to a new investment and security unit. Can the Minister say how that will be established and resourced because, as many noble Lords have said, the workload could be enormous and the specialisation should be very specific?
Both Fingleton and the IoD are concerned that, as the legislation is framed, it could lead to political lobbying for intervention with the possibility of Ministers using subjective, topical, political criteria. With this amount of uncertainty, there is a real danger that potential investors in UK businesses will be deterred and will look elsewhere. Many successful small and medium-sized businesses look for foreign investors to enable them to grow. They may find it harder if they are in one of the key sectors. The time and delay for an adjudication could be a decisive factor in preventing new investment or urgent refinancing or restructuring.
The current UK Government have been driven by their determination to deliver Brexit. The fall-out from the TCA will be felt for many years. What is not clear at home or abroad is what the Government’s strategic objectives are for the UK’s trade and investment future. Where is the industrial strategy? They have decided that our geography is not a prime asset. Why else would we tear up market access in Europe for as yet unquantifiable access to markets on the other side of the world? We have world-class universities and research and areas of technical excellence. I do not suggest that the Government should pick winners, but surely a strategy for building our economy based on our strengths and actively seeking international partnerships is a reasonable task. Of course, security threats may not be anticipated, and the Government need to be able to act when we are threatened, but a clearer set of criteria would balance national security against the need to keep Britain open for business.
In that context, I want Scotland to continue to offer an attractive location for inward investment. It is key to building a modern economy, developing new skills and improving the balance between the public, private and mixed sectors. We can be in the forefront of 5G, AI and quantum computing as well as biosciences and space and science technology, which was mentioned by the noble Lord, Lord McNally. Brexit presents bumps in the road, but uncertainty over Scottish independence could create roadblocks. Let not this Bill become another obstacle to investment. If it is clear, targeted and proportionate, it can protect our national security and investment promotion, and I hope that when it leaves this House it will do precisely that.
My Lords, I join other noble Lords in congratulating the noble Lord, Lord Woodley, on his arrival in the House. He commented powerfully on the failure of privatisation. They are remarks I welcome and to which I will circle back.
Two Greens are speaking in this Second Reading. My noble friend Lady Jones of Moulsecoomb will talk about the national security aspect of the Bill and I will speak on the investment part. My noble friend will focus on the major, long-identified threats of the climate emergency and the nature crisis, with its many linked dangers, including that of pandemics. On those and other issues, as the noble Baroness, Lady Northover, noted, it is nonsensical that we are debating this Bill while still awaiting the integrated review. I want to focus mainly on the investment part of the title and on another element of national security—poverty, inequality and how the finance curse contributes to them.
There is increasing academic focus on the importance of giving macroprudential regimes a sense of social purpose, including in respect of national security. Excellent work is being conducted at the University of Sheffield, particularly by its Sheffield Political Economy Research Institute, known as SPERI. We have an oversized, overactive, extractive financial sector. A SPERI report conservatively put the cost of the finance curse between 1995 and 2015 at £4,500 billion. That has to be seen as a threat to our national security. Money that could be strengthening our society is lost, as is control over a commodity as essential to a modern society as water or air. The finance curse is built on a sector that, as we learned in 2008, is as fragile and dangerous as an oversized dictator’s statue teetering on an inadequate, narrow pillar.
The other security threat lies in the extractive processes. There are huge and widely acknowledged issues of corporate culture and priorities, as well as regulatory loopholes and blind spots which allow financial funds and senior corporate management to loot companies and hollow out balance sheets. As a society and as a Parliament, we have lost control.
This issue arises particularly in the context of this Bill, where we are talking about investment by foreign companies in foreign states. We might hope that some pressure could be put on domestic companies to act in socially responsible ways by directing at least some of their funds to things we need to keep society running. They have, after all, to exist in this country, even if they seldom keep their profits here. The same constraints do not apply to foreign investors. While we know that a huge percentage of profits from even UK investment ends up in offshore tax havens, we can be sure that those profits will not help us where there are foreign owners.
I want to focus briefly on the nature of a curse—be it finance or resource. We look around the world at nations often identified as suffering from resource curse, such as the Democratic Republic of the Congo, Venezuela, Iraq and South Sudan. They have huge problems of national—and internal—security. Oil is sucked out of their rocks. Our society is milked for cash. Meta-analyses of the resource curse show there is nothing inevitable about this. The quality of governance, the rule of law and the functioning of democracy are crucial to prevent it. Which is where we come back to this law—and the comments of the noble Lord, Lord Woodley.
In the UK, through continuing decades of privatisation, we have sold off the family silver. We are now down to the rather small teaspoons. When, in 2016, the people showed that they wanted to “take back control”, that reality was hidden, but the Government no longer have flamboyantly presented fictions about Brussels to hide behind. When they champion “Singapore-upon-Thames”, they will be held responsible for the consequences. Noble Lords working on this Bill, but particularly the Government, might want to focus on that.
My Lords, it is a pleasure to follow the noble Baroness, Lady Bennett of Manor Castle. I welcome the noble Lord, Lord Woodley, to the House and congratulate him on his maiden speech.
The aim of this Bill is to reform the way in which inward investment into the UK is investigated to ensure that hostile Governments or other entities do not use it to undermine the UK’s national security. It follows calls for reform, including from the Intelligence and Security Committee of Parliament, to which the noble Lord, Lord West of Spithead, has already referred.
The purpose of this Bill is to prevent international economic crime impacting on major businesses in the UK, but a lot more bureaucracy and resources will be required to execute its provisions. Combined with the provisions in the Financial Services Bill, it will give the Government more legislative teeth with which to address economic crime and corruption. But will the legislation actually benefit businesses and university research? We are still in the Covid pandemic and it will take some time to come out if it.
The Government have argued that these powers are necessary because of the resurgence of state-based threats to national security and the risk of UK businesses being controlled by entities with close ties to hostile foreign Governments. It is important to stress that inward investment and global competitiveness should not be compromised as a result of these new measures, which are undoubtedly the result of private Chinese interventions in the digital sphere. We need to be open for business and to have a continued inward investment platform. As the noble Lord, Lord Dodds of Duncairn, has already mentioned, in Northern Ireland we rely significantly for our manufacturing and business sectors on foreign direct investment. We also work directly with the universities on technology transfer. It is important that those industries are not impacted or undermined further by these proposed legislative developments, because it would have major repercussions for our fragile jobs sector. Our fragile business economy—particularly the aviation sector—must not be further threatened. High-level research must be encouraged and supported.
I want to concentrate on several areas. First, we need to increase parliamentary scrutiny of how the Secretary of State may use the powers in the Bill. This has been referred to during debate on the various stages in the other place. Businesses need clarity about how the powers in the Bill would be used and the definition of national security. We also need to ensure that this is not straight-down-the-line protectionism. There needs to be a mechanism for greater reporting to Parliament about the use of the powers. The Intelligence and Security Committee should have a role. The Secretary of State should publish guidance about the Bill and the regulations made under it within six months of it being passed. Will the Minister ensure that government amendments come forward in Committee or on Report to address the need for greater parliamentary scrutiny?
It is also important that small and medium-sized businesses are not undermined. There is a fear that the notification process could become burdensome on such businesses, which would now fall within the scope of the new regime. The possible impacts on businesses of the new regime must be properly assessed, and legislative measures put in place to ensure that they are mitigated. Will the Minister commit to protecting small and medium-sized businesses in this way?
I turn to the position of universities which host incubators and start-ups. University research and innovation are vital for the UK. They have close links with inward investment and the business and industrial sectors. This must not be compromised as a result of these new legislative measures.
Like many other noble Lords, I have received a briefing from the University of Cambridge, which is involved with the business sector, especially with university technology transfer. I hope that the Minister and his colleagues in BEIS will find some solutions to deal with those issues.
Let us remember that national security has been invoked in the past in the context of Northern Ireland. This led to a major demolition company losing a big contract, with investment and job repercussions. All these issues must be addressed. We need to achieve a balance in the contents and proposals of this Bill.
My Lords, it is a pleasure to take part at Second Reading. I declare my interests and congratulate the noble Lord, Lord Woodley, on his maiden speech. I am supportive of the Bill and wholly supportive of the comments of my noble friends Lady Noakes and Lord Leigh of Hurley. It is right that we salute innovators, founders and entrepreneurs, those who produce something where nothing existed before. They deserve all our gratitude.
We have the right environment for investment in this nation. The policy environment and the rule of law make the UK an excellent place for inward investment, and indeed, there is no contradiction. Our national prosperity is inextricably and rightly linked with our national security. In my comments I will cover definitions, the notification regime, the ISU and some associated points.
On definitions, we have a national security Bill with no definition of national security. Without broadening the scope of the Bill, does the Minister agree that a broad definition of national security would be helpful here, without taking it to the extent of other nations, where yoghurt producers and bottled-water manufacturers can come within scope of critical national assets? Similarly, it is right to note where national security and national interest come up against one another and sometimes overly overlap. We have seen in recent times, when the pressure was on, Australia reducing the quantum for referrals in its regime to zero. Similarly, with share ownership under the French regime, it has gone from 25% to 10%. These changes are at least interesting.
As for the notification regime, I am a supporter of the identified sectors—but there are difficulties, as other noble Lords have pointed out. Artificial intelligence, for example, is not a vertical sector or even horizontal, but more a coming ubiquity, and how it is dealt with is central to what is within this Bill. Similarly, on the numbers of referrals—12 in the past 18 years under the previous regime—as other noble Lords have commented, with 1,000 to 1,830, if you apply a multiple to that you will probably get closer to the level of referrals that will occur. Can the Minister say why a business would not refer, for want of certainty?
Similarly, on the impact assessment setting out those numbers, there does not seem to be any basis on which those numbers have been arrived at. I worry that, although it is positive that the information required for notification has dropped by two-thirds, microbusinesses are included, which could cause an unnecessary burden for them. We already have a significant scale-up problem in this nation.
On the ISU, there are questions about its digital capability, level of budget and number of personnel. It could, in reality, through notification, suffer from swampification. We have already seen this with the National Crime Agency. Can the Minister tell us what is being done about those 100 people in terms of their skills, their security clearance and their deep knowledge of the technologies involved?
With retrospection, we see a five-year period. Five years is quite a way from what was originally set out in the Green Paper and the White Paper. As for the overall intent of the Bill, I am supportive, of course. However, in Clause 7 most corporate entities are covered, but there seems to be a loophole in terms of individuals. No matter how small it is, is that a loophole that the Minister would consider closing? On oversight, I agree entirely with the noble Lord, Lord West, that there needs to be an addressing of this democratic accountability deficit, and the ISC is the proper place for this to occur.
In conclusion, we have a good Bill. Does the Minister agree that with delicate, nuanced and proportionate amendments, we can make it a great Bill for national prosperity, national interest and national security, for today and for all our tomorrows?
My Lords, I, too, welcome my noble friend Lord Woodley to our House, and I thank the Minister for a comprehensive introduction to the debate. My only disappointment was that he sounded almost apologetic when he should be proud to be introducing this Bill to the House. Like my noble friend Lord Rooker, I was interested in the number of declarations of commercial interests by a number of speakers in this debate. I declare that my only interest is that of national security.
I welcome this Bill. It is long overdue, and I fear that we may already be too late in some areas. We may be closing the stable door after a few of the horses have bolted. At the risk of being labelled an “old leftie”, I felt much safer from assaults on our vital infrastructure a few decades ago, before the frenzy of privatisation, particularly during the Thatcher era. We were, for example, at the forefront of all aspects of nuclear technology, including electricity supply, when it was in public ownership. The United Kingdom built the world’s first nuclear power station and was at the forefront of the production of material for civil and military use when it was in public ownership. We felt secure because the United Kingdom Atomic Energy Authority, the Central Electricity Generating Board, the South of Scotland Electricity Board and the immensely innovative North of Scotland Hydro-Electric Board were all in public hands and in no danger of takeover by hostile investors.
Similarly, our telecommunications, railways and water supply, all key infrastructure, were all publicly owned and therefore by definition secure. The blitz of privatisation has resulted in all of them—except, thankfully, water in Scotland—being potential prey to hostile interests. The desire among a few of those who are already wealthy to increase their personal wealth has put the vast majority of the population at risk. It has certainly helped the billionaires, but the workers have not been helped to a great extent. Even some of our defence installations are being sold off, and government buildings in Whitehall are the target of the private investors. I have more faith in Governments, even this Government, to look after our national interests than I do in Capita or G4S. So, unlike some others, I am not inclined to ask for a watering-down of the powers in this Bill. Indeed, such strong action is long overdue.
When I was a member of the Intelligence and Security Committee, I became increasingly aware of the threats to our infrastructure, not just from Russia, China and other countries, but also from non-state interests. As others have said, the ISC, in its report, called for action as far back as 2013, so the delay is regrettable. Some investments may well have been made in anticipation. Thankfully—I commend the Government for this—some interim strengthening has been made by secondary legislation. I also understand and accept that not all these discussions should be in the public domain as we move to protect the interests of our people, because of the sensitivity.
I agree with those who have suggested that a wider definition of national security might be necessary to take account of technological changes—particularly in relation to the internet and social media—and the expanding range of hostile interests. I am disappointed that the Minister seemed to rule this out, even in his introduction. I hope he will think again.
Finally, I agree with Dr Julian Lewis, the chair of the Intelligence and Security Committee, my friend and colleague Kevan Jones, who is a member of that committee, and, of course, my noble friend Lord West, in their view that the ISC should clearly be closely involved in the oversight of this. The committee has the membership and the modus operandi to make it appropriate to undertake this task. Since this House is represented on the ISC by my noble friend Admiral Lord West, we can be assured that our interests are well represented there. I strongly support his proposed amendment, and I hope that the Minister will say that he accepts it in principle and that we might even get a government amendment to that effect.
I end where I began by expressing support for the Bill. I hope that we can get it into law without any delay.
My Lords, the aim of the Bill is to reform the way inward investment in the UK is investigated to ensure that hostile Governments or other entities do not use this to undermine the UK’s national security. The Intelligence and Security Committee of Parliament actively called for this reform. The Bill would give new powers to the Secretary of State to call in acquisitions, including takeovers, to assess any risk to national security. The Bill would remove the existing business turnover thresholds, meaning that small and medium-sized enterprises could be subject to a national security assessment under the new regime.
The Bill would also establish a mandatory notification regime for certain sensitive sectors of the economy. Under this new regime, any acquisition would need to be registered with the Secretary of State. The Bill would also establish a voluntary notification regime, whereby parties to an acquisition would need to be registered with the Secretary of State. The Bill would also establish a voluntary notification regime, whereby parties to an acquisition not already covered by the mandatory regime would be able to notify the Secretary of State about the potential risks to national security. The Bill sets out the procedures for how a national security assessment would be conducted and resolved.
The Government have argued that these powers are necessary because of the resurgence of state-based threats to national security and the risk of UK businesses being controlled by entities with close ties to hostile foreign Governments. They have argued that the Bill strikes the right balance between encouraging inward investment and protecting national security. In this globalised world, there are many rewards and risks, types of money, and companies registered in tax havens that will hide those companies’ real owners.
My concerns are mainly about the tenders issued by the Government for defence materials. These are international tenders and it is obvious that price cannot be the only consideration unless the Government are certain that whichever company wins the tender is open to scrutiny about who is the ultimate owner and controller of the winner. I submit that where our defence sector is concerned, the Secretary of State for Defence must have full powers to reject the winner of the tender if there is any doubt about its the ownership or integrity.
My Lords, I too welcome the Bill. It follows on from the Financial Services Bill and the Trade Bill, and all of them follow on from the Brexit Bill. I know it is unusual, but I thank in particular my noble friend Lord Callanan on the Front Bench. He has been involved in all these Bills and frankly his work output is quite exciting to say the least.
Our nation has a clear determination to build our economy worldwide. As one who has lived and worked in south and south-east Asia, I find this period very stimulating. On the Bill specifically, I welcome the powers to call in and the extension to small and medium-sized enterprises. I have a small question: am I right to assume that “small” includes partnerships? I am also not clear what the linkage is with the City of London Corporation, particularly in the remembrancer’s department—that is the corporation’s legal side—and those commercial lawyers specifically dealing with international trade and inward and outward investment. That is something we can look at in Committee.
I have looked at the sensitive areas—all 17 of them. I wonder why the pharmaceutical and chemical industries are still not there. In addition, unsurprisingly as an ex-pilot, I wonder why aviation is excluded. If I added these three there would be 20, but at the moment all 17 will be watched over by this new investment security unit in the Department for Business Energy and Industrial Strategy. That is quite a challenge for those civil servants. I question what we are doing about having a closer link with the Foreign, Commonwealth and Development Office. Our embassies and high commissions could be our eyes and ears if they are properly briefed and if, at the coalface of wherever our representatives are, there is somebody senior who is properly briefed.
I note that there was concern in the Commons, particularly from the chairman of the Foreign Affairs Committee. He tabled new Clause 4, which would have added a framework of factors that the Secretary of State would have to consider when assessing a risk to national security. The chairman of the Intelligence and Security Committee also expressed concern and stated that there was a “scrutiny gap”. Have the Government reflected on the new clause, which was unsuccessful in the Commons, or certainly on the concerns raised? If so, will Her Majesty’s Government respond with their own amendment?
The Government are enthusiastically championing free trade. That is really good and exciting, but I have just one word of warning. There was considerable discussion on the Trade Bill on whether we should not trade with people allegedly committing genocide. The first reaction to that is: yes, correct. However, there are all sorts of allegations of genocide and we need to tread carefully. Far more frequently we have issues of alleged human rights abuses. We had that in the Overseas Operations (Service Personnel and Veterans) Bill and other Bills. Here in the UK we often see groups of former asylum seekers who seek to get back at the country where they were before with extensive lobbying against that country and any involvement with it. Yes we must have our own high standards, but we must take care not to be overinfluenced by every vested interest or pressure group. Equally, we must avoid a quagmire of mandatory and voluntary notifications, as highlighted by the Global Infrastructure Investor Association. Having said all of that, this is a hugely important Bill for the future of our nation.
My Lords, we were all delighted to hear my noble friend Lord Woodley’s maiden speech. I welcome him to your Lordships’ House, and I suspect noble Lords will find him a unique and distinctive voice in this House in the years to come.
I declare my interests as chair of the new National Preparedness Commission, which brings together business, government, academia and civil society, with a purpose of promoting better preparedness in the UK for a major crisis or incident.
The last five years of political discourse have been supposed to be about “taking back control”, allowing this country to make its own decisions and operate independently of other nations—the Minister may recall some of those discussions. However, this is a time of rapid geopolitical change, as US pre-eminence gives way to a multipolar world. China is emerging as a dominant economic power, and the noble Lord, Lord Robathan, described the process by which it is strengthening its world role by ostensibly benign investment. Russia is using hybrid means to maximise its influence, and there are, of course, other nation states that are potential hostile actors. As such, we have little Britain in the world, surrounded by powers that may not be entirely benign.
There is no use taking back control if that independence is a fantasy because other nation states have the ability to control your infrastructure. As the noble Baroness, Lady Noakes, says, such matters as our water supply or financial payments system are not included in the definition of the critical national infrastructure—but we would very rapidly notice if they were compromised or damaged in any way. Of course, it is not just ownership but what goes into the infrastructure: the components. This brings us to Huawei, to which my noble friend Lord Rooker referred, as did the noble and gallant Lord, Lord Stirrup. However, as the latter pointed out, this Bill does not address the concerns that many people had about Huawei.
We have to recognise that we have a growing reliance on ever more complex and interconnected systems, which creates vulnerabilities, as, in critical services, new systems are overlaid on top of legacy systems in a way that, in some cases, is now almost impossible to disentangle and beyond the experience of many of those responsible for running and maintaining them. This creates its own risks, even before you consider the possibility of external threats being placed at the heart of such complex systems and potentially being manipulated by overseas interests.
Therefore, the Bill is necessary but not necessarily sufficient. Clearly, mechanisms in it need to be proportionate and speedy; I am sure your Lordships’ House will return to this in Committee. Similarly, security issues need to be reviewed by the Intelligence and Security Committee, as my noble friends Lady Hayter and Lord West have said. This has to be written into the Bill, so why is it not there? I hope that, when he responds, the Minister will be able to reassure us that this will be corrected by the Government without this House having to intervene.
The other side of this is: we must not stifle research and innovation. However, we have to recognise that cutting-edge research may be precisely the areas where security is most important, so balancing inward investment in that research needs to be looked at very carefully in the context of security and what that cutting-edge research could deliver.
When he introduced the Bill, the noble Lord, Lord Callanan, reminded us of the importance of inward investment, but, of course, with that, there is a form of dependency. If we are talking about a nation that is able to “take back control”, we do have to look at these issues, at that form of dependency and at the potential infringement of our security.
My noble friend Lord McNicol talked about the need for an industrial strategy. He is absolutely right: we need to balance our need for external investment with our national security, which means that we need what is fundamentally an holistic and systemic approach to the security of our infrastructure and to inward investment. If having an explicitly named industrial strategy is a step too far for the Minister, perhaps he will at least acknowledge that our approach to these questions should be holistic and systemic. He could tell your Lordships’ House how this will be done and who will be responsible for delivering that balance. I am not sure that this Bill provides such an approach, but it is a useful start and step on the journey to taking back control in a meaningful sense.
My Lords, it a great pleasure to follow that tour de force from the noble Lord, Lord Harris. I pay tribute to the noble Lord, Lord Woodley, on his excellent maiden speech—I know from having served with him in the other place that he will be a formidable addition to your Lordships’ House. I also pay tribute to my noble friend Lord Callanan for all his incredible hard work over many years on so many different trade Bills and trade issues.
I think all of us in this House welcome the National Security and Investment Bill. I recall when I was a Minister looking at the potential implications of the takeover of some of our leading companies by companies from states which were perhaps not aligned with our interests and considering how on earth we would deal with that situation. Of course, I was the Minister who looked after, as it were, Huawei when it was still part of our infrastructure system, so national security is an issue that I have taken a great interest in.
It is quite right to echo what the noble Lord, Lord Harris, was saying. We find ourselves in the 2020s in a very different situation from the one we were in perhaps 30 or 40 years ago, in that state actors are now able to use corporate entities to prosecute their foreign policy. It is quite right that we are effectively looking at updating the Enterprise Act and creating a framework for national security.
Clearly the balance has to be struck between ensuring that hostile actors do not intervene with some of our greatest companies while not putting off much-needed inward investment. I refer to my entries in the register of Members’ interests before I continue with my arguments. It is quite clear from the many excellent speeches during this debate that the Government are now well aware of where the most vigorous analysis of the Bill will take place.
Many noble Lords have made the point that the Bill is drafted in a relatively relaxed fashion at the moment. One can see the combination of civil servants wanting to give Government Ministers the maximum flexibility to react to situations which they perhaps cannot anticipate colliding with very highly paid lawyers who will not want to be sued by their clients and so will give them robust advice to report each and every transaction to the new unit.
Therefore, I think that the bizarrely accurate figure cited by the Government of 1,830 referrals is a woeful underestimate of what is likely to happen when the Bill becomes law. I agree with noble Lords who have said that we are looking at something like 10,000 notifications a year, at least in the first instance. I also share the concerns of those who see normal day-to-day activity, such as research and development partnerships, being caught by this legislation, although I acknowledge, again to echo what the noble Lord, Lord Harris, was saying, that the role of universities in our national security is a crucial one that requires some scrutiny. I also share the concerns that the routine purchase of assets, such as software licences, could also inadvertently fall within the scope of the Bill. The general point has also been made that there is not yet a clear definition of national security in the context of the Bill.
I want to use my time in the Second Reading debate to highlight three issues that I hope to be able to concentrate on in Committee. The first is the proposed sanction of automatic voidness for transactions that are completed in breach of the mandatory filing requirement. It is my contention that significant sanctions should certainly apply in these circumstances, but I understand that there is considerable concern among investors about the practical difficulties that arise if the proposed approach is adopted.
I understand that the Government’s position is that the French have a similar system but I understand, certainly in my discussions with experts in this field, that the French system is much more flexible. It seems perfectly sensible to echo what happens, for example, in Australia and the US, so that we have a flexible system of sanctions even when somebody has not complied with a mandatory reporting requirement, so that we will get to a point where the Bill will, I hope, incorporate a voidable power instead of a mandatory voiding.
The other issue is the proposed extraterritorial application of the Government’s call-in power to non-UK companies. Again, this power is out of sync with similar regimes in France, Spain, Germany, Canada and Japan, all of which restrict their transactions to involve targets registered in their jurisdiction. Finally, there is significant concern that the Bill will have a deterrent effect on investment in the UK tech sector, with many of the 17 sectors specified in the Bill being very widely drawn.
I hope that in the short time allotted to me I have highlighted three important areas, which have been highlighted elsewhere. I will not yet get on to the need for parliamentary scrutiny by the Intelligence and Security Committee, which will, I am sure, come up in Committee.
My Lords, I thank my noble friend Lady Bennett for flagging up that I will be speaking about our environmental crisis. I very much enjoyed her speech, particularly the bit about offshore tax havens: that is something that the Government really ought to mop up very fast, because we lose so much money through them.
Several noble Lords have mentioned that it is odd that a Bill titled the National Security and Investment Bill does not even attempt to define or provide any example of what is meant by “national security”. I think the noble Lord, Lord Clement-Jones, was the first to mention that, right at the beginning. Business types might say that not having a definition might be bad for business, because it makes things uncertain. My concern is that it could also be applied far too narrowly, so that the Government do not take the important actions needed when problematic takeovers and mergers are proposed.
We are in a climate and ecological emergency. Parliament has declared this already. Some will try to argue that the Bill should not stray into other issues, such as nature, biodiversity and the environment, but that would be to completely misunderstand the threats we face. The climate and ecological emergency will affect our national security, and global security, for this century and beyond. The Dasgupta review, for example, has warned that humanity must:
“Ensure that our demands on Nature do not exceed its supply”—
its sustainable supply, that is. Greens talk about that quite a lot, but somehow the message does not get through. Dasgupta also says that we should adopt different metrics for economic success. That is obvious, because if we are destroying nature, we have to take that into our calculations. Lastly, it says we must:
“Transform our institutions and systems”.
A changing climate will affect everything and put us at war with nature. Rising sea levels will capture large tracts of territory all across the world. Drought will starve populations and spread wildfires. Habitat loss will inflict genocides on millions of species that can never be recovered—and, of course, uncertainty, resource scarcity and hoarding will cause stresses and create mass migrations and military conflict. This shows us how important climate and nature is to our survival.
If we faced this existential threat from any human or country, it would be blindingly obvious that was a national security issue. But I worry that because it is seen as more esoteric and ethereal—perhaps a bit fluffy—the Government will not use their power to ensure that business and investment is controlled to protect against the huge risks we face. These are not soft issues; they are the hardest and most significant challenges facing our nation and humanity as a whole. The Government must start understanding their role in interfering with ecologically damaging business ventures. We cannot worry about Huawei’s risks to the world wide web when we give a free pass to the thousands of businesses that threaten the world’s web of life.
Undoubtedly, this needs global co-ordination beyond the UK Government. I would be overjoyed if the Minister would give us some plans to address this—for example, by leveraging our presidency of the G7 and COP 26. It would be absolutely incredible and wonderful if we could go into COP 26 with a plan for how to deal with this and get other countries to sign up to it, and understand the danger that we all face.
However, we do not need to wait for global agreement. Our Government should be acting unilaterally as well as bilaterally. The security of our earth impacts the security of all its nations and we have to stop the ecocide. I have two questions for the Minister. First, will he please define national security? Secondly, how does the climate emergency come into that?
My Lords, I welcome the noble Lord, Lord Woodley, and congratulate him on his maiden speech. I also congratulate my noble friend the Minister on so ably introducing the Bill, with its ambitions to control foreign investment. I welcome the Bill in the broad and in principle, but I would like to highlight a number of points that I wish to explore during its passage.
The United Kingdom has a long and proud tradition of being open to foreign investment. What assessment have the Government made of the impact on foreign investments within the remit of the Bill, especially in terms of British technology and manufacturing sectors?
Both the Law Society of England and the Law Society of Scotland have highlighted a number of issues: in particular, why there is no definition in the Bill of national security. Also, the remit of the Bill is very loose and broad. While I appreciate that this is to be refined by secondary legislation, my noble friend the Minister will appreciate that we have very limited powers to review and scrutinise secondary legislation.
I welcome the consultation; I notice that transport is included within that. However, why have the Government proceeded with the Bill without the results of that consultation being known, processed and put before the House? I understand that the Government will put more detail in the secondary legislation, particularly on the transport aspects. But, once again, there is limited scrutiny over that secondary legislation, whereas if it was on the face of the Bill—as the 17 original sectors are—that would give us more powers to scrutinise and discuss this through its passage.
Like my noble friend Lady Noakes, I would like to ask specifically why the water sector is not covered. The provision of water to households and businesses is a strategic matter. It seems an oversight that it has not been included in the remit of the Bill. There may be a good reason for that, and I should be delighted if my noble friend the Minister would share that with us today.
In principle, I welcome the scope of the Bill and the opportunity we have today, and through its passage in Committee and further stages, to scrutinise it. The full remit of the Bill and particular definitions need to be properly understood. I welcome the opportunity that the passage of the Bill will provide in that regard. With those few remarks, I wish the Bill a fair wind today.
My Lords, following the last speaker, I will have to be very inventive in saying anything that is worth saying. First, I congratulate the noble Lord, Lord Woodley, on coming into the House and wish him good luck. We look forward to hearing his views. I will start with his views, given the nature of the national security issue. I will confine myself to the old-fashioned definition of national security, and not the one about biodiversity—I have only six minutes.
National security is something which, if you define it, you lose. It is one of those things you have to keep very general and as undefined as possible, because people will find ways around any definition that is given.
Software rather than hardware is the nature of warfare now. Russia is able to undermine American security, or any kind of security. It no longer has superior weapons; it has superior hackers, and hackers make the difference. It is not manufacturing industry that makes the difference any more; it is not the space race, as the noble Lord, Lord McNally, was saying. We were all quarrelling about Huawei, because what Huawei does by way of software for 5G is going to make more difference to national security than anything solid. So, while I welcome this Bill, it is cast very much in the old mould, when manufacturing industry was important and people used to aggress on each other through it.
I also agree that we should not do anything that restricts the entry of foreign investment into this country. The noble and gallant Lord, Lord Stirrup, said, “Well, if the Bill creates problems, it creates problems, but there are good things and bad things and we should welcome bad things as well as good things because they interact on each other.” Ideally in a Bill of this sort, the first clause would say that national security means whatever the Government decide it means and the second clause would say that the Minister will do whatever the Minister thinks it is essential to do. We would have a good ISC that would keep guard on the Minister and we would make sure that there was parliamentary scrutiny on secondary legislation—but, of course, that is not possible.
The nature of warfare has changed so much that the next war, when it happens, according to an article in yesterday’s Times, is bound to be nuclear. There are now so many nations with nuclear power that it is hard to predict which way it will go. So, given that sort of background, we have to be inventive and cautious.
I will say one more thing. The importance of universities is overwhelmingly larger than it used to be. The commercial arms formed by universities are important, but so are the reasons students come to universities. Here again is a dilemma. We ought to have open immigration of foreign students, because you never know where a bright man or woman will come from. Their knowledge is useful because they interact and things are created. At the same time, we must be very careful that, in regulating universities, we do not kill research. To give one example: the entire nuclear programme was triggered by a bunch of absolutely unpractical theoretical physicists leaving Europe and going to America. They created the first atom bomb, because all they could do was nuclear physics, which was completely unpractical. So nowadays it will be the universities that determine whether we can fight wars efficiently or not.
So, while this Bill is very welcome, the way it is implemented and the way the Secretary of State restrains herself will depend very much on how intelligent, rich and flexible a definition of national security we have. I say to the Government, “Don’t put it on paper. We trust you. Just have a parliamentary committee that will keep tabs on you—and, those two things being given, the rest will follow.”
My Lords, I thank the noble Lord, Lord Desai, for cheering us all up with predictions of nuclear war. I also congratulate the noble Lord, Lord Woodley, on his maiden speech, and welcome him. Like the noble Lord, Lord Harris, I hope that his distinctive voice will be heard on a regular basis.
No Peer has stood up and said that the pretext of the Bill is wrong—because no one would. But at the end of his speech the Minister said categorically, “This Bill will keep the country safe.” Actually, I think it is the implementation of some of the principles within the Bill that might help keep the country safe; that would perhaps be a less ambitious statement. It is your Lordships’ job—all of us together—to try to make sure that the law of unintended consequences does not overtake the good intentions of the Bill. That will be the challenge, and that should be our purpose.
As the noble Baroness, Lady Noakes, pointed out, there is already a more laissez-faire way of dealing with security issues that the Secretary of State has had for some time—but this Bill proposes a substantial change of gear. That, I can only presume, has been sparked by the Government’s view of a changing geopolitical situation. In fact, it would help the Bill if the Government set out how they see the geopolitical landscape—in other words, what is inspiring this change of gear.
My noble friend Lord McNally suggested that we might be entering a cold war with China. What is the Government’s view on that? With that kind of analysis, understanding the Bill would become a much easier task for the rest of us. As many noble Lords have said, there is no definition of national security. The noble Lord, Lord Desai, made that point, as did the noble Lord, Lord Lansley, and I shall make an observation on that later.
On the wider strategy, we are already seeing elements of what I would call mission creep. The questions that this debate, and the subsequent legislative process, will have to answer are: how much agency do the Government want to exercise in the market, and how do we ring-fence genuine security concerns from a given Secretary of State’s wider industrial economic plans—or do we want to? How can we be sure that future Governments and Secretaries of State will not be more ambitious, or more interventionist, in using the powers that this Government have decided to put in place? That is a big challenge, because it addresses not just what one Secretary of State says, but the future.
As we know, the Bill puts the onus to report on businesses, and on research and finance organisations, and reduces the trigger levels to report transactions. It introduces costs—it must do—and it slows things down; I will come to that later. It also brings smaller transactions into scope than would previously have been the case. It is mildly retrospective and, unlike comparable regimes, it captures domestic transactions and does not include an exemption list.
As noble Lords have said, there are many respectable external voices suggesting that the Bill as drafted could, or would, inhibit investment, and put at risk innovation funding. There is also the scope of the Bill. As we have also heard, there is a separate document outlining 17 sectors of technology, ranging far and wide. Some would like them to range further and wider. There is a consultation, as the Minister set out, and we are looking forward to seeing that more focused document, because it will be very important for the progress of the Bill that we see it.
The list of technologies is extraordinarily wide. Frankly, it would cover almost anything, and we need to see what the focused version will say. But, given that the list is amendable by secondary legislation, and also given the risk that others are very reticent about challenging the secondary legislative process, this is, in effect, a blank cheque. We should also note that, as the noble Lord, Lord Clement-Jones, observed, most technologies have dual use—civilian and security use. This opens up many deals to challenge, which might not be necessary. So this calls into question the methodology, and comes back to the point made by the noble Lord, Lord Lansley, about security risk.
Basically, the Government are seeking to build a comprehensive list of everything—every possible technology—using language that few of us understand. That may be good or it may be bad; we do not really know. So this requires an immense amount of forethought to make the list comprehensive, and it also raises speed bumps in front of all sorts of innocent deals going forward.
The key here is what the technology would be used for. What harm could it cause, or what would losing access to that technology prevent the United Kingdom doing? There is a more methodological approach to this than simply listing everything that could possibly harm us, because that is not possible.
Looking forward, how are the Government going to weigh up the need for the scale-up of technologies? Scale-up organisations need an injection of funds on a regular basis, and delay will be a problem. What is the Government’s view on losing control of this technology—potentially to an ally? For example, is it okay for a US company to buy a UK business and carry this technology off to the United States? I have experience with this, and repatriating the technology to the UK after it has been in the US can and has been stopped by the US Department of Defense. This is not a matter simply of China or Iran; it is a matter of technology moving among our allies as well. We need to understand the Government’s view on these kinds of transfers.
We heard from my noble friend Lady Bowles about how this fits in with free trade agreements. Do clauses in FTAs allowing free market activity override the Bill? If the Bill overrides the FTA, what price an FTA? Overall, what is the principal concern here to the Government? Is it losing access, losing control or handing access to someone we do not like—or is it a formula of all three? How does this work? How does the Bill discriminate between each of these?
Then we have the mechanics of reviewing the deal. The CMA is carved out of this, and a new unit is being set up. How will they work together? Who will guide the market on this process, and how? A previous speaker was very clear about the need for this. As noble Lords have said, there will be at least 30 deals a week—actually, it will be more than that—over 17 different complex technology sectors. How is this unit going to handle, sift and manage these sectors? How big will the unit be? What is the budget? What will its relationship be with other organisations across the sector? We need to understand the mechanics of this operation.
The Bill gives the Secretary of State great power to intervene in the market, and it is unclear which of all the assets will be within scope. Universities in particular have a great deal of concern, as the noble Lord, Lord Desai, just mentioned. There is a lot to be said around universities—how they will work with research deals and through scale-ups—as I have already said. It is quite clear, post Brexit and as we are coming through Covid, that the market is very nervous. How will the Government make sure that the essential flow of the right sort of investment into technology continues?
The Bill is being launched into a vacuum. The integrated security review is not there yet; as I have said, we need a better picture of the geopolitical outlook. Furthermore, there is no solid marker on genocide, and we are already hearing it come up here. The Government should and could have allotted time to deal with that in a separate Bill, and they are reaping the whirlwind of not doing that. Of course, there is also no industrial strategy. I firmly believe that work on one is necessary—not so that this Bill can enact industrial strategy but so that there is a separate process. People who want to have an industrial strategy are not wishing it upon this Bill now. It is well past time that that discussion was had.
It is inside this vacuum that the Secretary of State will exercise these new quasi-judicial powers, currently with no meaningful parliamentary scrutiny. Free from strategies and unfettered by the nature of regimes, this is a blank cheque. This debate has to work out the constraints for how it will operate. The investment community, space industry, venture capitalists, universities and lawyers—lots of people—have raised legitimate concerns today. Yes, there was a consultation and, yes, there has been some movement, but there is generally much further to travel before the Bill achieves what the Minister set out at the beginning: to make the United Kingdom safer.
I start by thanking everyone who has spoken in today’s excellent debate. It reminds me just how extensive the array of expertise present in the House is, especially from the security, defence, technology and business sectors. I join colleagues in congratulating my noble friend Lord Woodley on his maiden speech. My noble friend Lord West welcomed him as a fellow sailor; I welcome him to your Lordships’ House as a fellow Evertonian. I look forward to his further contributions during the Bill’s passage.
As my colleague and noble friend Lady Hayter said in her opening reply to the Minister, national security is Labour’s top priority, as it should be the first and foremost task of any Government to protect their own citizens. That is why Labour strongly welcomes the Bill and agrees that it is necessary. Inward investment is crucial for businesses across the UK and our economy. It is also crucial that the UK Government have the correct powers in place to scrutinise and intervene on business transactions that could have implications for our national security. It is essential that the balance of the Bill is correct to ensure that it does not deter foreign direct investment, while being certain that national security is protected.
Nevertheless, it is regrettable that, once again, Ministers have acted too slowly in bringing forward these changes. They have acted slowly in comparison with other countries, including the US, Germany and France, all of which have already taken steps to update their legislation in line with evolving security threats. In Committee in the Commons, Charles Parton of the Royal United Services Institute—many have quoted him—said that
“the Government have not really been attending to the problem with the attention that they should, given the nature of the threat, particularly from the Chinese”.—[Official Report, Commons, National Security and Investment Public Bill Committee, 24/11/20; col. 5.]
The Government have acted slowly in relation to technological change. It was only last year that artificial intelligence was added to the relevant section of the Enterprise Act. The Government have been somewhat behind the curve in recognising this critical sector, explicitly highlighted by the takeover of DeepMind by Google. Naturally, they have acted slowly again on this Bill. Last January—a year ago—the noble Viscount, Lord Younger, promised that the Government would soon be
“publishing a draft national security and investment Bill, to strengthen the Government’s powers to investigate and intervene in business transactions … to protect our national security”.—[Official Report, 9/1/20; col. 438.]
But this—and any pre-legislative scrutiny, as argued for by the Secondary Legislation Scrutiny Committee—never happened. This slowness might have implications for our national security, so we are ready to help the Government pass this legislation as soon as possible and will work on this Bill with all colleagues around the House to achieve this.
I turn now to the Bill. Labour will be seeking assurances in some critical areas. During the debate, a number of common themes have emerged, perhaps five main ones: the scope and meaning of national security with enterprise policy; the investment security unit workload and the implications of the process on business; competitiveness, risk and agility; intangible assets, IP and algorithms in a networked world, not forgetting fintech. My noble friend and colleague Lady Hayter mentioned an important fifth theme highlighting how we will look for improvements in scrutiny and a greater role for Parliament’s Intelligence and Security Committee. This was echoed by my noble friend Lord West. We need to have proper oversight of security issues, to which my noble friends Lord Rooker and Lord Foulkes added their cogent comments.
Returning to the themes, most importantly, Labour will be probing to make sure that the new investment security unit to be set up by the Bill will have the capacity to handle its workload and is properly resourced to help small businesses through the challenges they may face. It is hard to overestimate the extent of this challenge for the new unit. It will have to respond to a large volume of notifications within the tight timeline set out in the Bill. The impact assessment estimates that more than1,800 notifications will be made each year, and many speakers have wondered how imaginary this number is.
During an evidence session in the Commons, the head of national security for the financial firm, Skadden, Michael Leiter, said:
“I am concerned that no Government are ready for that rate of change.”—[Official Report, Commons, National Security and Investment Bill Committee, 24/11/20; col. 41.]
A submission from the Russell Group of universities—I thank the group for its briefing—states: “Research institutions and businesses across the globe require regulatory environments that allow deals to be concluded at pace.” The investment security unit will have to track the development of fast-moving and highly complex technologies, and monitor each of the listed markets. The Secretary of State will have to take decisions on the advice of the unit, which can be challenged in court in the context of highly sensitive information and its wide-ranging powers. The unit will need to develop policy, practice and precedent to provide clarity and certainty to a wide swathe of the economy.
In Committee, it will be important to consider how the new unit is to be sufficiently resourced, have the right skills to monitor a fast-moving landscape and be able to turn cases around fast enough not to hold up possible investments. Many speakers, notably the noble Lords, Lord Bilimoria, Lord Hodgson and Lord Leigh, have defined the Bill as “difficult for business”. We need to probe whether the unit will be sensitive enough to assist SMEs which themselves might not have the capacity to deal with the increased administrative burden being introduced by this new regime. We believe that a specific SME engagement division within BEIS may be needed to assist and support SMEs through the national security screening process. A reporting requirement on the Secretary of State is needed on staff resourcing for the unit.
Another critical consideration will be how cross-departmental working will be assured via the unit, as this will not happen if it is merely siloed away within a department. This cross-departmental independence could be enhanced, as the Minister said in his opening remarks, through representation of all the relevant departments, Armed Forces personnel, and security and foreign policy expertise. It is interesting to note that the Office for Investment was set up only two days before the Bill was introduced to the Commons. How will this cross BEIS-DIT body work with the investment security unit to ensure overall effectiveness and focus? The Office for Investment will need to inform the department on my third and fourth themes of competitiveness and modern intangible assets, as well as the ISC on security implications. The impact assessment states that
“Geopolitical, economic and rapid technological changes are producing an evolving national security landscape.”
Focusing on geopolitical changes, how will the Bill’s measures fit in with the soon-to-be-published integrated review, of which national security will be a key component?
That will lead us to probe again why the definition of “national security” has been omitted from the Bill —the first and foremost theme throughout the debate. Ministers will argue that there needs to be flexibility—a point on which we are not totally unsympathetic. Nearly all speakers examined the implications of that oversight. The Commons considered that a way forward might be provided by a framework scoping key features, while determining national security and flexibility on a case-by-case basis. We will examine how these possible solutions can be made more transparent, as this will be very important for business.
Finally, although it is important legislation, the Bill does not provide the basis for a more active industrial strategy. However, it suggests it and presents a further opportunity for considerations to be made on bringing forward a more comprehensive industrial policy to support and grow British businesses. My noble friends Lord Rooker, Lord Woodley, Lord McNicol and Lord Foulkes all drew attention to the potential benefits of the enhanced security that this might bring. Let us not make this a missed opportunity. Considering the current levels of unemployment, there is a need to encourage businesses to rebuild and create jobs as the country emerges from the pandemic.
My Lords, I thank all noble Lords for their contributions on this important Bill. There is clearly a wealth of expertise on this subject across the House and, as is usual in your Lordships’ House, we have had a thorough and engaging debate, with thoughtful speeches coming from all corners of it.
I start by congratulating the noble Lord, Lord Woodley, on his excellent maiden speech. It is a pleasure to see him in his place today, and I am glad that he has chosen this debate to make the first of what I am sure will be many well-informed contributions. I am glad, too, to have his support for the Bill.
I was contemplating what I had in common with the noble Lord, despite our obvious political differences. We are both from the north, him being from the north-west and me from the north-east; we are both football fans, the noble Lord being a fan of Vauxhall Motors, while I am a fan of Newcastle United; and of course we both have reasons, although different ones, to be profoundly grateful to Jeremy Corbyn. I wish him well, as I do Vauxhall Motors, which, it seems, was on a fine run of form before being stopped in its tracks by the latest national restrictions. Listening to the comments of the noble Lord, Lord McNicol, it seems that his all-weather football pitch would be particularly appropriate on a day like today.
I will do my utmost to respond to as many as possible of the issues raised, but, as always, my door is open to anyone who wishes to discuss the Bill further as it goes through the House.
I thank the noble Baroness, Lady Hayter of Kentish Town, and the noble Lord, Lord Grantchester, for the constructive tone in which they delivered their speeches. I am glad that a sort of consensus is emerging across the House that the Bill is the right step forward. I even find myself in the very unusual position of having the support of the noble Lord, Lord Rooker, and that self-declared old lefty, the noble Lord, Lord Foulkes—two of my most trenchant critics on other pieces of legislation. These are indeed strange times. I reassure the noble Lord, Lord Foulkes, that I am indeed proud to introduce this Bill, so he can put his mind at rest there.
I turn, first, to the concerns expressed about the investment security unit being within my department and its potential caseload—a point raised by the noble Baroness, Lady Hayter, and other noble Lords, including the noble Lords, Lord Reid of Cardowan, Lord Dodds of Duncairn, Lord Bilimoria, Lord Rooker and Lord Bruce. I assure them and the noble Lord, Lord Grantchester, who also raised it, that the unit will not work in isolation from the rest of government and will not in any way compromise on its duty to put national security first.
When it comes to the operation of this regime, we will not have informational barriers with other government departments. We will work closely with them to ensure that we use skills and experience from right across government. We will, though, have appropriate walls in place with those responsible for promoting investment —some walls but not others. Indeed, other departments and the security services are actively contributing to the design of the unit, thus ensuring that the plans for it take a cross-governmental approach. We have worked closely with our allies around the world on how to create an investment screening process fit for the 21st century.
I reassure noble Lords such as the noble Lords, Lord Bruce, Lord Fox and Lord Rooker, that the unit will be fully resourced to ensure that the Government provide a slick and predictable process for all parties involved. Officials will have a mix of national security, business and casework experience. The noble and gallant Lord, Lord Stirrup, spoke forcefully about the importance of having that mix of expertise, and my noble friend Lord Holmes emphasised that important point.
On the caseload for the investment security unit, I stress that the Government expect a fraction of acquisitions across the economy to be affected by the new regime. Once it beds in and investors become familiar with the process, we expect the number of notifications to decrease further. Of the transactions notified, we expect that fewer than 10% will face a detailed national security assessment and, of those facing one, only a small proportion will likely result in government intervention. We have been clear that businesses and investors will be encouraged to come to the investment security unit in advance of any formal notification, allowing for early discussions with officials about deals, although any final decision will be for the Secretary of State.
A number of noble Lords raised concerns about the impact of the regime on business investor confidence, including in relation to small and medium-sized businesses —a point made by the noble Viscount, Lord Waverley. Among those who also spoke on that issue were my noble friends Lady Noakes, Lord Leigh of Hurley and Lord Vaizey, the noble Lords, Lord Clement-Jones, Lord Reid, Lord Bilimoria and Lord Bhatia, and the noble Baronesses, Lady Bennett of Manor Castle and Lady Ritchie of Downpatrick. The Government are committed to making the regime work for business. We have already published guidance for business on GOV.UK that sets out how the process is intended to work.
Noble Lords are entirely reasonable to expect further high-quality guidance from government to help businesses and investors navigate the regime. My noble friend Lord Hodgson of Astley Abbotts was right to raise that point. On the issue of prepacks, I am pleased that he received my letter in time for this debate and I look forward to further discussions. I know that he has strong views on that subject. That is why we will bring forward further guidance well in advance of commencement to give businesses as much clarity as is meaningfully possible on how the regime will function in practice. We will work directly with businesses and their representative organisations to make sure that we get that guidance right.
More broadly, the Government will never stand in the way of innovative, high-potential businesses setting up in the UK. Our record demonstrates that. Our investment in the British Patient Capital fund has attracted £1 billion of venture capital investment to date and we will continue to invest. By investing alongside the private sector, British Patient Capital aims to support £7.5 billion-worth of investment for British businesses. We have also announced a £7 billion investment in R&D over five years as a first step towards our target to raise total R&D investment to at least 2.4% of GDP by 2027 and 3% in the longer term.
Many noble Lords spoke about introducing a definition of “national security”, including my noble friends Lady Noakes and Lady McIntosh of Pickering, the right reverend Prelate the Bishop of St Albans, the noble Baronesses, Lady Northover, Lady Ritchie of Downpatrick and Lady Jones of Moulsecoomb, the noble Lords, Lord Fox, Lord Clement-Jones, Lord Reid of Cardowan, Lord McNicol of West Kilbride and Lord Bruce, and my noble friend Lord Holmes of Richmond. The Bill does not set out the circumstances in which national security is or may be considered at risk. That reflects long-standing government policy to ensure that national security powers are sufficiently flexible to protect the nation. National security risks are multifaceted and constantly evolving. What may not constitute a risk today may do so in future. I am glad that my noble friend Lord Lansley and the noble Lords, Lord Truscott and Lord Desai, recognised that point. The ability of the Secretary of State to safeguard national security would be limited if the Bill set out the circumstances in which national security is, or may be considered to be, at risk. By defining what national security is, we would, of course, also define what it is not. This could have grave implications and deliberately show hostile actors where the Government could not intervene. It would also have unintended consequences for other national security legislation.
The noble Baroness, Lady Hayter, and the noble Lords, Lord Grantchester, and Lord West of Spithead, spoke eloquently on the issue of parliamentary scrutiny with a particular emphasis on a role for the Intelligence and Security Committee in overseeing the work of the regime. I am grateful for the discussion that we had with the noble Lord, Lord West, last week.
As I set out in my opening remarks, Clause 61 provides for an annual report to Parliament, which will be crucial in ensuring parliamentary scrutiny of the work of the investment security unit and the broader functioning of the regime. The Government will very much welcome the Intelligence and Security Committee’s review of the annual report. There are of course no restrictions on the committee requesting further information from the unit or the Secretary of State. Parliament will also be able to scrutinise the Statement, as was mentioned by the noble Baroness, Lady Bowles of Berkhamsted.
The former Secretary of State laid a draft of the Statement on introduction in the other place and we would, of course, welcome Parliament’s views on its content. We will carefully consider these views and look to reflect those in the next draft of the document, which will be published for formal public consultation, where the Statement can be fully scrutinised.
Many noble Lords spoke about the sectors subject to mandatory notification, including how they interact with other critical national infrastructure sectors. Considered arguments on this point were made by my noble friends Lady Noakes and Lord Naseby, and the noble Lords, Lord Clement-Jones, Lord Reid, Lord Woodley, Lord McNally, Lord Truscott, Lord Rooker and Lord Foulkes. The list of proposed sectors covered by mandatory notifications has been carefully developed across government, with input from all relevant departments and from the intelligence agencies. Put simply, the Government have sought to identify the sectors where certain types of acquisition could give rise to the greatest risks, while balancing this against the need to minimise the burdens on business.
As I set out in my opening remarks, we are working hard to bring forward regulations in time for your Lordships’ consideration. Some sectors, including water, as raised by my noble friends Lady Noakes, Lord Lansley and Lady McIntosh of Pickering, are part of our critical national infrastructure. However, the Government consider that other safeguards provide sufficient protection to not require their inclusion in the mandatory notification sectors. In the water sector, for example, water supply and sewerage licenses are granted by Ofwat based on an assessment of a potential operator’s managerial, financial and technical competencies. Regardless, the Secretary of State will be able to call in acquisitions of control across the economy where the legal test is met. As such, not being in a mandatory notification sector does not mean that acquisitions of control over water, financial services or other critical sectors are exempt from the regime altogether.
Given some of the appalling news around at the moment, it was right that many noble Lords spoke forcefully about human rights—my noble friend Lord Robathan, for example—particularly the situation in Xinjiang. As noble Lords will be aware, the Foreign Secretary made a Statement in the other place setting out a series of measures that the Government are taking in response. The Government are gravely concerned about the human rights situation in Xinjiang. There is growing evidence of large-scale forced labour in the region, alongside the use of extrajudicial political re-education camps and severe pressure on religion and culture. We have been clear that we want a mature approach to China and that we must work together to address global challenges, but we will never hesitate to stand up for human rights as a force for good in the world.
Finally, a number of noble Lords raised the question of the effect of the regime on academia and universities, citing concerns raised by the Russell group. These included the noble Lords, Lord Clement-Jones, Lord Reid of Cardowan, Lord Bilimoria, Lord Desai and Lord Grantchester, and the noble Baronesses, Lady Bowles of Berkhamsted and Lady Ritchie of Downpatrick. I assure them that my officials have been engaging closely with the Russell group; we will continue this engagement as the Bill goes through the House to ensure that universities have smooth engagement with the new regime where necessary.
I thank all those who have spoken today and reiterate what I said in my opening remarks: this Government will always be absolutely committed to the free flow of trade and investment. The Bill does not change that; rather, it is a vital upgrade to our current powers that will keep the British people safe. I look forward to discussing it further in Committee but, for now, I commend it to the House.
Bill read a second time and committed to a Grand Committee.
(1 month, 2 weeks ago)Commons Chamber
[Relevant document: Oral evidence taken before the Defence Sub-Committee on 14 December 2020 on Foreign Involvement in the Defence Supply Chain, HC 699.]
Consideration of Bill, not amended in the Public Bill Committee
New Clause 1
Impact on academic research spin-off enterprises
‘(1) Within one year of this Act being passed, the Secretary of State must lay before Parliament an assessment of the Act’s impact on academic research spin-off enterprises.
(2) The assessment under subsection (1) must be reviewed at least once every five years.’—(Stewart Hosie.)
This new clause would require the Secretary of State to assess the impact of this Bill on academic research spin-off enterprises.
Brought up, and read the First time.
With this it will be convenient to discuss the following:
New clause 2—Report on impact on Small to Medium Enterprises—
‘Not later than 18 months after the day on which this Act receives Royal Assent, the Secretary of State must lay before Parliament—
(a) a report setting out the impacts the Act has had on Small to Medium Enterprises and early-stage ventures, and
(b) guidance for Small to Medium Enterprises and early-stage ventures on complying with the provisions of this Act.’
This new clause would require the Government to produce a report setting out the impacts of this legislation on Small to Medium Enterprises and early-stage ventures, and to produce relevant guidance.
New clause 3—Grace period for Small and Medium Enterprises—
‘For the purposes of section 32, a person has a reasonable excuse if—
(a) the entity concerned is a Small to Medium Enterprise;
(b) this Act has been in force for less than six months.’
This new clause creates a grace period whereby – for alleged offences committed under Section 32 – Small to Medium Enterprises would have a ‘reasonable excuse’ if the alleged offence was committed within the first six months after the Bill’s passage.
New clause 4—Framework for understanding national security—
‘When assessing a risk to national security for the purposes of this Act, the Secretary of State must have regard to factors including, but not restricted to—
(a) the potential impact of the trigger event on the UK’s defence capabilities and interests;
(b) whether the trigger event risks enabling a hostile actor to—
(i) gain control or significant influence of a part of a critical supply chain, critical national infrastructure, or natural resource;
(ii) conduct espionage via or exert undue leverage over the target entity;
(iii) obtain access to sensitive sites or to corrupt processes or systems;
(c) the characteristics of the acquirer, including whether it is effectively directly or indirectly under the control, or subject to the direction, of a foreign government;
(d) whether the trigger event adversely impacts the UK’s capability and capacity to maintain security of supply or strategic capability in sectors critical to the UK’s economy or creates a situation of significant economic dependency;
(e) the potential impact of the trigger event on the transfer of sensitive data, technology or potentially sensitive intellectual property in strategically important sectors, outside of the UK;
(f) the potential impact of the trigger event on the UK’s international interests and obligations, including compliance with UK legislation on modern slavery and compliance with the UN Genocide Convention;
(g) the potential of the trigger event to involve or facilitate significant illicit or subversive activities, including terrorism, organised crime, money laundering and tax evasion; and
(h) whether the trigger event may adversely impact the safety and security of UK citizens or the UK.’
The new clause provides a non-exclusive framework of factors which the Secretary of State is obliged to have regard to when assessing a risk to national security.
New clause 5—National Security Definition—
‘When assessing a risk to national security for the purposes of this Act, the Secretary of State must have regard to factors including, but not restricted to—
(a) the potential impact of the trigger event on the UK’s defence capabilities and interests;
(b) whether the trigger event risks enabling a hostile actor to—
(i) gain control or significant influence of a critical supply chain, critical national infrastructure, or natural resource;
(ii) conduct espionage or exert undue leverage over the target entity;
(iii) obtain access to sensitive sites; or
(iv) to corrupt processes or systems.
(c) the characteristics of the acquirer, including whether it is effectively directly or indirectly under the control, or subject to the direction, of a foreign government;
(d) whether the trigger event adversely impacts the UK’s capability and capacity to maintain security of supply or strategic capability in sectors critical to the UK’s economy or creates a situation of significant economic dependency;
(e) the potential impact of the trigger event on the transfer of sensitive data, technology or potentially sensitive intellectual property in strategically important sectors, outside of the UK;
(f) the potential impact of the trigger event on the UK’s international interests and obligations, including compliance with UK legislation on modern slavery and compliance with the UN Genocide Convention;
(g) the potential of the trigger event to involve or facilitate significant illicit or subversive activities, including terrorism, organised crime, money laundering and tax evasion; and
(h) whether the trigger event may adversely impact the safety and security of UK citizens or the UK.’
This new clause establishes factors which the Secretary of State must have regard to when assessing a risk to national security.
New clause 6—Dedicated Small to Medium Enterprise support—
‘(1) Within 3 months of this Act receiving Royal Assent the Secretary of State must set up, a specific division focused on engagement with Small to Medium enterprises (SMEs) engaged in any provisions of this Act.
(2) The division must focus on four functions—
(a) providing updated, efficient and accessible guidance specific to SMEs on compliance with the terms of this Act;
(b) engaging with SMEs in advance of formal notification that can allow efficient notice and assessment periods, including through use of regulatory sandboxes where beneficial for innovation and national security;
(c) providing regular engagement with and assistance to SMEs throughout the assessment periods for SMEs;
(d) seeking to deliver prompt, proportionate resolution of complaints by SMEs relating to the provisions of this Bill;
(e) monitor the impact on access to investment for SMEs and report to the Secretary of State.’
This new clause would require the Secretary of State to set up a Small to Medium Enterprise (SME) engagement unit to assist and support SMEs through the national security screening process.
New clause 7—Reports to the Intelligence and Security Committee of Parliament—
‘(1) The Secretary of State must, in relation to each relevant period—
(a) prepare a report in accordance with this section, and
(b) provide a copy of it to the Intelligence and Security Committee of Parliament as soon as is practicable after the end of that period.
(2) Each report must provide, in respect of mandatory and voluntary notifications, call-in notices, and final orders made under this Act, details of—
(a) the jurisdiction of the acquirer and its incorporation;
(b) the number of state-owned entities and details of states of such entities;
(c) the nature of national security risks posed in transactions for which there were final orders;
(d) details of particular technological or sectoral expertise that were being targeted; and
(e) any other information the Secretary of State may deem instructive on the nature of national security threats uncovered through review undertaken under this Act.’
This new clause would require the Government to publish an ‘Annual Security Report’ to the Intelligence and Security Committee of Parliament.
Amendment 3, in clause 3, page 3, line 10, leave out subsection (4) and insert—
‘(4) The Secretary of State must review a statement published under this section within one year after the publication of the first such statement, and thereafter at least once every 5 years.’
This amendment would require the Secretary of State to review the statement about exercise of call-in power to be reviewed one year after they are made, and once every five years thereafter.
Amendment 1, in clause 6, page 5, line 3, at end insert—
‘(10) Notifiable acquisition regulations must be reviewed one year after they are made, and once every five years thereafter.’
This amendment would require notifiable acquisition regulations (including which sectors are covered) to be reviewed one year after they are made, and once every five years thereafter.
Amendment 6, page 5, line 3, at end insert—
‘(10) Notifiable acquisition regulations must bring broadcast, print and social media companies within the scope of the mandatory notification regime.’
Amendment 2, in clause 8, page 6, line 38, at end insert—
‘(8A) The fifth case is where a person becomes a major debt holder and therefore gains influence over the entity’s operation and policy decisions.
(8B) For the purposes of subsection (8A), a major debt holder is a person who holds at least 25% of the entity’s total debt.
(8C) The sixth case is where a person becomes a supplier to the entity of goods, services, infrastructure or resources to such an extent that the withholding of the supply would seriously undermine the entity’s ability to continue its operations.’
This amendment would mean that a person becoming a major debt holder or a major supplier would count as a person gaining control of a qualifying entity.
Amendment 4, in clause 30, page 20, line 3, after ‘period’ insert ‘or any calendar year’
This amendment would make it mandatory for the Government to inform Parliament if financial assistance given in any financial year, or in any calendar year, exceeds £100 million.
Amendment 5, in clause 54, page 33, line 42, at end insert—
‘(aa) whether the law of the country or territory to whose authority the disclosure would be made contains provisions and prohibit any use or disclosure of the information contrary to subsection (4),
(ab) whether the Secretary of State considers that disclosing the information to that authority would in itself pose a threat to national security, and’
This amendment would add to the list of factors the Secretary of State takes into consideration a sub-clause to ensure that a country or territory making a disclosure request has sufficient safeguarding in place to prevent any action that would be considered unlawful in the UK.
Amendment 7, in clause 61, page 36, line 20, at end insert—
‘(m) the average number of days taken to assess a trigger event called in under the Act;
(n) the average number of days taken for acceptance decisions in respect of mandatory and voluntary notices;
(o) the average staff resource allocated to the operation of reviews of notices made under sections 14 and 18 over the relevant period;
(p) the number and proportion of notices and call-in notices concerning the acquisition of a Small to Medium Enterprise; and
(q) in respect of the transactions stated subsection (p), the sectors of the economy in relation to which call-in notices were given.’
This amendment would require the Secretary of State to report on the time taken to process notices, the resource allocated to the new Unit and the extent to which Small to Medium Enterprises are being called-in under the new regime.