National Security and Investment Bill (First sitting)
Tuesday 24th November 2020
(3 years, 4 months ago)
Public Bill CommitteesRead Full debate National Security and Investment Bill 2019-21 View all National Security and Investment Bill 2019-21 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 24 November 2020 - (24 Nov 2020)
The Chair
Before we begin, I have a few preliminary points to make. Please switch electronic devices to silent. Tea and coffee are not allowed during sittings. Members can sit in any seat marked with a “please sit here” sign. That includes the side tables and the Public Gallery, although Hansard colleagues have priority on the side tables. Members sitting in the Public Gallery should stand by the microphone to my right.
We will first consider the programme motion on the amendment paper. We will then consider a motion to enable the reporting of written evidence for publication, and then a motion to allow us to deliberate in private on our questions, before the oral evidence sessions. In view of the limited time available, I hope we can take these matters without too much debate. I call the Minister to move the programme motion agreed to yesterday by the Programming Sub-Committee.
The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Nadhim Zahawi)
I beg to move, Date Time Witness Tuesday 24 November Until no later than 10.30 am The Royal United Services Institute Tuesday 24 November Until no later than 11.25 am Sir Richard Dearlove KCMG OBE Tuesday 24 November Until no later than 2.45 pm The Centre for International Studies, London School of Economics Tuesday 24 November Until no later than 3.30 pm Skadden, Arps, Slate, Meagher & Flom LLP Tuesday 24 November Until no later than 4.15 pm The Institute of Chartered Accountants in England and Wales Tuesday 24 November Until no later than 5 pm The Investment Association Thursday 26 November Until no later than 12.15 pm Slaughter and May Thursday 26 November Until no later than 1 pm Professor Ciaran Martin, the Blavatnik School of Government, University of Oxford Thursday 26 November Until no later than 2.30 pm Herbert Smith Freehills Thursday 26 November Until no later than 3.15 pm Simons Muirhead and Burton Thursday 26 November Until no later than 4 pm Chatham House Thursday 26 November Until no later than 4.30 pm PricewaterhouseCoopers
That—
(1) the Committee shall (in addition to its first meeting at 9.25am on Tuesday 24 November) meet—
(a) at 2.00 pm on Tuesday 24 November;
(b) at 11.30 am and 2.00 pm on Thursday 26 November;
(c) at 9.25 am and 2.00 pm on Tuesday 1 December;
(d) at 11.30 am and 2.00 pm on Thursday 3 December;
(e) at 11.30 am and 2.00 pm on Thursday 8 December;
(f) at 11.30 am and 2.00 pm on Thursday 10 December;
(g) at 9.25 am on Tuesday 15 December;
(2) the Committee shall hear oral evidence in accordance with the following Table:
TABLE
(3) proceedings on consideration of the Bill in Committee shall be taken in the following order: Clauses 1 to 10; Schedule 1; Clauses 11 to 58; Schedule 2; Clauses 59 to 66; new Clauses; new Schedules; remaining proceedings on the Bill;
(4) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 11.25 am on Tuesday 15 December.
It is a pleasure to serve under your chairmanship, Mr Twigg, and to serve with colleagues on this important Bill Committee.
Question put and agreed to.
Resolved,
That, at this and any subsequent meeting at which oral evidence is to be heard, the Committee shall sit in private until the witnesses are admitted.—(Nadhim Zahawi.)
Resolved,
That, subject to the discretion of the Chair, any written evidence received by the Committee shall be reported to the House for publication.—(Nadhim Zahawi.)
The Chair
Copies of the written evidence that the Committee receives will be made available in the Committee Room. We will now sit in private to discuss lines of questioning.
The Chair
We will now hear oral evidence from the Royal United Services Institute. Before calling the first Member to ask a question, I remind all Members that questions should be limited to matters within the scope of the Bill and that we must stick to the timings in the programme motion. The Committee has agreed that for this sitting we have until 10.30 am. Will the witness introduce themselves for the record? [Interruption.] I am going to suspend the sitting for a few moments to see whether we can sort out the technical problems that we are having. This is not the first time; even the Prime Minister had problems yesterday.
The Chair
Q
Charles Parton: Thank you for inviting me. I am Charles Parton. I was, for 38 years, a diplomat, mostly with the UK, but for five years with the European delegation until the end of 2017. My area of work has largely been on China and, in the last decade, on the politics of China and the Communist party. I was an adviser to the Foreign Affairs Committee of the House of Commons on two of its recent China reports. I continue, since leaving diplomacy, to study what the Communist party is doing and the relevance of that to our UK policy.
Chi Onwurah (Newcastle upon Tyne Central) (Lab)
Q
Charles Parton: I would not profess to be an expert on individual cases, but I would like to make some general response to your excellent question. The first point to make is 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, although others may be relevant too. I do not think that there is the structure for actually assessing the degree of the threats; I think that 12 cases since 2002 is very few indeed, when you look worldwide at the Chinese programme for technology acquisition, both under and over the table. That in itself shows that there has been insufficient attention paid to the issue.
The delay in the Bill is also regrettable, because the threat has been fairly clear for some time. I would urge the Government, first, to research the question, which is the one you asked, of to what degree in the past have the Chinese in particular bought up technology companies, the acquisition of which was greatly against our interests? That work could and should be done.
I am an associate fellow at the Royal United Services Institute, which has a team that has been looking through technology at a number of questions, but it could quite easily divert that team to look at this question, which needs China expertise and the ability to search through a lot of open data, which it has. I am not a member of the Government, but I am not aware that the Government have done that sort of research to establish the full degree of the problem.
From the point of view of the threat—if you will excuse me, as this is the first question, for putting a little bit of context to it in terms of the China thing—it is undoubted that there is nothing wrong with investment. In fact, that is extremely good. We want as much investment and good relations with China as with everyone else, but we need to recognise that there is a values war going on. I have written an article about that, which came out in the Conservatives’ China Research Group report a week or so ago.
This is not a cold war, because China is very important to us for trade, investment and many global goods, and it is a science and technology power, but we should not underestimate the degree to which Xi Jinping and the Communist party intend, as Xi said to the first politburo meeting, to get the upper hand against western democracies. He talks about us being hostile forces and about a big struggle all the time. When you add that to his policy of civil-military fusion—using civil in the military context—and the fact that he has set up a party organisation specifically to push that forward, and the change in investment policy away from things such as property, football clubs and other things, very much towards benefitting China and its technology, we have to be a lot more careful than we have been in the past.
The first step for that is to do the research. I am not aware of a really good assessment of just how much technology has been bought, the targets and so on. Maybe the Government have one—I don’t know—but I do not think that they do.
Chi Onwurah
Q
I was particularly interested in the civil-military fusion, if you like, of China’s technology ambitions. Could you say a little more about how the Chinese see nascent technologies that are indirectly critical to downstream industries that supply our national security? I am trying to understand how, if you like, we differentiate between industrial strategy and technology to ensure that we have leading defence and national security capabilities. Is there a distinction that we can make there? Do we need to do further research, as you suggest? Do the Chinese make that kind of distinction? Do we need to address some elements of our industrial capability when we consider national security?
Charles Parton: We should widen this not only to companies, but to academia, if I could come back to your question from this angle. We have the phenomenon at the moment of Chinese companies, one might say, hiring our academics, in one way or other, to do scientific research on their behalf. Some of that is probably something that our defence establishment and security establishment would be pretty upset about if they were aware of it.
It is quite difficult to distinguish some of these and to know about them all, but a few weeks ago The Daily Telegraph did a story on, I think, Oxford University and Huawei’s commissioning of research. I think there were 17 projects. I looked at those, and I am not a technologist by any means, but some of them rang certain alarm bells. If you are researching, on behalf of the Chinese, drone technology, cryptography, gaits— Gait is very important for gait recognition. We have facial recognition and voice recognition, but in circumstances where people are wearing masks or there is bad weather, gait is an absolute identifier. Again, are these bad technologies? Well, there are perfectly good civilian uses for them, no doubt, but there also military and surveillance uses. I think we need to be very clear on what our academics, as well as our companies, are doing.
To give you another example, if you go on the website of one of the top Oxford mathematician professors, he has now retired and set up a company with a base in Shenzhen. He is an absolutely top mathematician and does the most abstruse things in cryptography. Should one of our top mathematicians be helping the Chinese in cryptography? Well, there are perfectly good and innocent uses of cryptography, I presume, for things such as banking and e-commerce, and there are perfectly not good uses of it, in military and surveillance and other things. I have no idea whether that is something we should be concerned about. On the face of it, it strikes me that we should be.
I think we need to broaden the scope—forgive me if this is outside the Committee’s scope; you are only looking at the Bill—because the whole question of defence of technology needs to be looked at, in terms of whether we are strengthening a hostile foreign power, but also let us not forget the reputation of British companies and universities. If you look at what is going on in Xinjiang, for instance, with the concentration camps there—activities that quite definitely meet the definition of crimes against humanity under article 7 of the International Criminal Court’s Rome statute, or article 2 of the UN genocide convention—should our companies and universities be helping with technologies that can be used to strengthen that surveillance and that repressive regime? What is the difference between that and South African apartheid or some of the other things that we have seen in the past? Increasingly, the excuse of, “Well, we didn’t really know what was going on,” has gone, and companies and academia will have to be much more careful of their reputation. I have slightly moved away from the nub of your question. Perhaps you could just push the tiller a bit and put but me back to the centre of it again.
Chi Onwurah
Q
Charles Parton: That is sort of way outside my technical expertise, but I would certainly say that one major criticism I have of the Bill is that you have to set up the right structure to be able to do that. I am not sure that the Bill’s putting everything in the hands of the Department for Business, Energy and Industrial Strategy and its Secretary of State is the right answer.
Let us take Huawei and the debate we had over the last couple of years, as well as the various flip-flops that have gone on. One might add flaps, as well as flip-flops, actually. There has been a big a division between the so-called economic and security Ministries. It is right that both have a say in the decision. Economic interests are very much at stake, but so are security interests. If you put everything into the hands of BEIS, which probably does not have the expertise on China—certainly not in the defence, security and surveillance realms, although not unnaturally, since its job is to encourage investment—you will perhaps find that the security and repression elements are not given sufficient weight, and more to the point, the perception will be that they are not given sufficient weight. We might therefore go back to this sort of business with Huawei, where there is a fight back and another fight back and so on.
What we actually need is an organisation that is made up of people on all sides of the debate and that has some real experts who actually understand what the technology means. One specific example I came across a year or so ago was a very interesting computer game. Fine. What is wrong with that? Well, I understand that it was then bought up by the Chinese and used to train fighter pilots. You cannot defend against everything, but you at least need some unbiased experts—a sort of, if I can use the words, Scientific Advisory Group for Emergencies—who would be there to advise, and then decisions would actually be accepted by all sides, not questioned.
On occasion, I am sure that questions would be put up to the National Security Council and the Prime Minister for decision if they were really important. However, the issue is often about very small companies with some very interesting technologies that have not been established. The Chinese are extremely efficient at hoovering around, finding them and buying them up early. I am not convinced that the structure and decision making of the whole process are right.
Nadhim Zahawi
Q
Charles Parton: I think what covid has done is expose the nature of the Chinese Communist party, in answer to your question. I hope that it has brought home to people the nature of the beast. Looking at what happened, China did not do so well to start with, and its people were pretty upset with it. China then used its external propaganda machine to right its domestic problem, pushing forward the line, “Look how badly the foreigners have done, and look how well we are helping the foreigners out of the mess,” while hiding the fact that it had allowed the virus to propagate so fast in the first place. To many people in democracies, that brought home the fact that the Communist party of China is prepared to use that against us.
Where the Chinese Communist party was unhappy with how countries were acting, it started to put them under pressure and made threats about the delivery of personal protective equipment or whatever. Australia is really taking it in the neck at the moment because it had the temerity to ask—perfectly reasonably—for an investigation of the origins of the virus, which is essential for scientific and preventive purposes. Look at the political pressure on Australia. There is absolutely no doubt that where the Communist party sees an opportunity to use whatever is going on at the moment, it will do so.
The question that I have continuously asked is this: to what degree is investment threatened by a country such as the UK, Australia or Canada standing up for its own interest? We are not actually attacking China, but we are saying, “Sorry, but we have our own interests and our own security. You wouldn’t allow the equivalent in your country, possibly rightly, and we are not allowing it here because we are defending our security, in this case.” To what degree is the tool of depriving someone of investment a real threat? I have urged in a number of papers that the Government look at that in dispassionate terms. The China-Britain Business Council recently put out a paper, but I would not describe it as dispassionate. That is for the Government to do. My own feeling is that the likely conclusion is that, on the whole, the threats are pretty hollow. Chinese investment is not done for charitable reasons.
Since 2017—the high point was 2016—China has cut back on investment. Beijing was getting pretty annoyed at the way money was seeping out not in line with its policies, but investment is now more tightly controlled and aimed at the acquisition of science and technology. To what degree are we vulnerable? This is not charity. Money is very cheap at the moment; it can be got at negative interest rates. It is not as though China is the sole source of money. It invests because it wants technology. Surely we have to look at that carefully and ask where is the mutual benefit. If it is mutually beneficial, fantastic, let us go ahead. Let us not be too brow-beaten by this thing—that if you do not do x or y, or if you do not take Huawei, we will hit your investment. I think, in practice, if you look at that and then look at some of the other threats that China has made over the years, including to your exports, all those have grown for all countries, although they had been in the diplomatic doghouse historically—certainly in the past; we will see about the future—but I think it is greatly exaggerated.
Nadhim Zahawi
I am grateful to you, Mr Parton. I do not want to hog the floor, as I am sure many colleagues want to ask questions. Thank you very much.
Stephen Kinnock (Aberavon) (Lab)
Q
Going back to your point about resourcing the investment security unit, can you give a bit more detail about what would be an ideal outcome from your point of view? Would it be that we need specificity in the Bill that key representatives and experts of the intelligence services, of the Ministry of Defence, of the diplomatic corps and of other agencies be formally named in the legislation, so we would have that reassurance that the body doing the screening had all the necessary breadth across the spectrum of both the economy and national security?
Charles Parton: That is a good question; it is not necessarily for me and I do not necessarily have the experience to lay down precisely how it works. For me, I think, first, that all those organisations you have mentioned—although others also on the economic side, such as the Treasury and BEIS—perhaps should be there to set the parameters of what needs to be referred. I think that, as a sort of preliminary filter, one would hope that there was an ability for most companies, and most universities as well, very quickly to put forward the deals or the pieces of work that they felt might be coming up against the parameters set by such a Government body.
For a quick decision, is the topic one that is suitable, or does it need a little more investigation? Should we be working with this organisation, or in some cases this particular Chinese academic or company, which may have links to the military or to the repressive regime? The experts, as it were, which means the SAGE-type committee, surely should be very quickly—companies and academics need to move quite quickly—making a preliminary estimation of whether this needs to be referred upwards to a Government Committee that wants to look at it in more detail.
I do agree with you that the range of interests needs to be representative if the decision is to be perceived by all sides as acceptable when it is eventually made.
Stephen Kinnock
Q
In the Japanese and German cases, they refer to national security including concepts of public order. I refer in particular to your comments about organisations out there in the marketplace, whether they are universities or businesses, needing to have clarity to know what needs to be referred and what does not. They need to know where the amber or red light is flashing, and where it is clearly a green light and not an issue. Would that be aided and facilitated if the Bill contained a definition of national security?
Charles Parton: It is a bit like defining terrorism. It is really quite difficult to be all encompassing. Sometimes, I am in sympathy with the Chinese legislation that adds at the bottom “and other offences” or “and other things”. I think it is quite difficult, even if people are convinced that they can effectively define that. It is not only national security; there is a question whether you are aiding crimes against humanity or the genocide that is going on in Xinjiang. I am using loaded terms there, but I think they are justified. There must be some mechanism for ensuring that those, too, are brought to bear, but I am not expert enough in legislation to be able to say, “Yes, we need a watertight definition of ‘national security’.”
Certainly, the Bill must convey to companies and academics the need to clear a range of topics. That will not be specific, but, at best, they must be encouraged to consult almost as a default, so that they are not caught out. The other question is, what happens if they don’t? What sort of sanctions are they under if they do not consult, when it is clearly something they should consult on, for reasons either of security or of repression and crimes against humanity?
Andrew Griffith (Arundel and South Downs) (Con)
Q
As a Committee considering this Bill, we will hear from a constituency that could sometimes trip over into Sinophobia, being against any form of engagement or trade with China. Looking at the economic development of that market and the opportunities that it presents, could you talk a bit about the non-risk-based categories, such as inert goods and household manufactured goods, which the Committee should draw a clear line around, and those categories that you have talked about, which are covered in the Bill and speak to a real national threat?
Charles Parton: Let me make the general point that I am sometimes accused of being anti-Chinese. I greatly resent that. I am anti-party, as anybody should be if they saw what it does in places like Xinjiang or Hong Kong. I am not anti-Chinese. I think the Chinese Communist party itself deliberately muddies the waters on that one and says, “You are anti-China,” when, actually, you are opposing the policies of the Chinese Communist party. That said, I began the session saying that we want investment from China, trade with China and good relations with China. China is a major player. This must not be a cold war. If America or China decides to pursue that, we must try to avoid it.
I always talk about the holy trinity of national security, UK interests and UK values. We should establish those with the Chinese and say, “Sorry, those are non-negotiable. Just as you sometimes come and say, ‘These are our core interests and we are not negotiating them,’ we have the right to do that too.” But beyond that, we want open trading relations and open investment relations. What is wrong with China buying London Taxis International? Nothing. If it wants to invest and that is mutually beneficial, great.
We want an open China as much as possible. We certainly want a much more level playing field than there is at the moment. China runs a series of negative lists and there is much on them, particularly in the area of services, which we would want opened up. We must press for that in conjunction with the Americans, the EU, Australia and all the other democracies that wish to trade with China. In many ways, that is in China’s interest. It is certainly in the interests of its people. A closed market, with China just relying on its own consumption—it is a big market—is not going to be good for China any more than it is good for us. I fully go along with that. I do not think we should be anti-China in any circumstances. That is, in a sense, racist. We should be anti-Communist party, or certain against its policies, but with the Chinese people, and in trading, we should maintain a perfectly normal relationship.
Matt Western (Warwick and Leamington) (Lab)
Q
Charles Parton: On the first question about academics, I am not sure whether this is about investment. I think that academics are in some ways a separate question, unless universities are setting up, as they do, companies, and are moving that way.
Matt Western
Q
Charles Parton: Where academia sets up a company, and that involves itself with China, yes, that should be under the purview of the Bill. There is a separate question about when Chinese companies hire or fund—whichever you like to say—UK academics to carry out a specific piece of research for them. Universities are working on that, and that is a very urgent question. Again, I think that a much stricter regime should be put in place to stop the seeping out of technologies that could be used in the military field or the repressive one. I am not convinced that that is there at the moment; I am sure it is not. That might be a separate question. It may or may not be one that requires parliamentary legislation—people who are experts on that can make up their mind—but some form of consultation with the Government, or perhaps a sanctions regime, needs to be put in place so that that does not happen.
On the question of intellectual property rights, China has a very rigorous campaign to get hold of our IP. Some of it is stolen through cyber, and I am sure our intelligence services and others are doing their best to combat that. I am not sure about the degree to which this Bill can act as a defence against Chinese abuse. It can certainly try to encourage companies to raise their own defences, but the UK has an organisation—the Centre for the Protection of National Infrastructure—that aims to put out that advice and help. I do not know whether it is strong enough in its actions and shield; that is outside my area of expertise. It is certainly there, but perhaps it, too, needs strengthening.
Nickie Aiken (Cities of London and Westminster) (Con)
Q
Charles Parton: I suspect that there is a limit as to how far down the line one can go, but where activity is still going on in the UK—that is to say, where UK individuals are still running that company in the UK on behalf of a friendly foreign country, and the company is later bought up—that should be covered by this Bill. Otherwise, you are absolutely right: you may find a company in Liechtenstein buying it; then the company gets bought by the Chinese, and the technology gets siphoned out. There has to be a defence against that.
If a company is bought by a friendly country and the technology is exported, and nothing is happening in the UK, then I cannot see how extraterritoriality would be applicable.
Simon Baynes (Clwyd South) (Con)
Q
I want to explore the extent to which the world—if I can describe it as one world—of academic consultants and private sector companies, to which you have referred, would agree with what you are saying. You refer to having a SAGE-like committee; is there a danger that, if you did have such a committee, it would actually have very divergent views?
I fully respect where you are coming from, but you made some quite hard-hitting comments earlier about crimes against humanity in the concentration camps, and questioning whether companies and academia should be involving themselves in aspects of China. You also referred to a top mathematician, who was formerly at Oxford University, helping China with cryptography.
I want to get a feel for the extent to which you think that your views are shared by academics, consultants and the private sector, and then feed that back into whether, if you did put together a SAGE-like committee—and I can see the sense in doing that—you might find it quite difficult to come to a consensus.
Finally, it must be quite difficult to judge exactly whether what is being developed—whether it be from an academic idea or from a corporate idea—will be helpful to the Chinese in a way that is detrimental to Britain, or is actually a perfectly sensible piece of research and development that could be of benefit to both countries.
Charles Parton: Can I take those three questions almost backwards, or certainly not in the order in which you have presented them? In terms of expertise within a SAGE-type community, those experts would not be making the political decision. They would be making the technical decision: “To what degree can these technologies be used in a military, as well as a civilian, context?” That is the advice that would be going up. It would then be for the Ministers on a committee to say, “Well, we judge that risk to be acceptable,” or “We do not.”
Of course, nothing is black and white in technology because, as the distinction between civil and military is increasingly eroded, it is quite difficult to know; there are many shades of grey here. A judgement has to be made on any particular technology—either “Sorry, we will have to rule that one out,” or “On this one, yes, there are some risks, and maybe we will come to regret it, but on balance, we will let that one through.”
On whether consultants, academics and others agree with my views on China and the nature of the regime, I think that depends, if you will excuse my saying so, on the degree to which they have studied China and looked at the issues. It is noticeable that those who read what the Chinese communist party says about itself tend very much to agree with what I say, or with the sort of views that I put out. Those who have other interests do not. Of course, there are some who I would say are captured, quite frankly, by the degrees of interference and other aspects that the Chinese United Front Work Department pushes.
There is a variety of opinion there, but I think that those who understand China and read what the party says—the party says an awful lot, actually, if you bother to read what it says; it is not a black box—are inclined very much to my views. Those views are: be careful, because it is not coming from the same angle as us, and has some very distinct and not very nice aspects to it. At the same time, it is a major economic power, a major science and technology power, and a major influence on the goods in the world, whether for health, development, peacekeeping or whatever, and we must get on with the country to the best of our ability. I don’t know if that answers your question fully; do come back.
Peter Grant (Glenrothes) (SNP)
Q
Mr Parton, the Bill looks primarily at direct investment by potentially hostile operators. Does it give sufficient protection against indirect control? For example, a company may be reliant on its bankers, who may or may not be based in a hostile territory, and who may rely on technology through a company such as Huawei; or a company’s ultimate owners and controlling party could be registered in an offshore tax haven, and it could be that nobody has any idea who actually owns that company. Does the Bill give sufficient protection against those kinds of threats through indirect influence and control?
Charles Parton: I am not a legal expert, but the Committee stage of the Bill needs to look deeply at that question. If there is any doubt as to who the ultimate owners are, that should be taken into account by whatever organisation makes the recommendation on whether a particular investment is acceptable. If we cannot follow through relatively easily back to the ultimate beneficial owners and users, that is a factor that needs to be weighed very heavily in the decision on allowing a particular, possibly sensitive, investment to go ahead.
Peter Grant
Q
Charles Parton: I have to say that that is outside my expertise, but I do think it is an extremely good and important question that could be researched relatively easily. Forgive me if I am pushing RUSI here, but I suspect that RUSI has the capability in one of its teams to do some data mining on that, and come up with an answer. It is a very important question, but I am not aware of any research, though there may be some, that goes deeply into that question. It is certainly one that should be followed up.
Andrew Bowie (West Aberdeenshire and Kincardine) (Con)
Q
Charles Parton: Again, I am not a legal expert, but it seems to set out the legal framework. It all very much depends on the structures and mechanisms, and the resourcing of them, that are set up to ensure whether the judgments about a particular company or a piece of academic research and the technology from them should be blocked or allowed through. I put it back to the Committee: if its detailed research, and the measures that go into the Bill, show that whatever organisation is set up is sufficient unto the job, and that the channels are there to ensure that all these small and sometimes obscure technologies are at least passed by it, that is a really important piece of work.
Andrew Bowie
Q
Charles Parton: I have not done comparative research on that, or done a paper on it. That is something that needs to be done by the Government. Perhaps they have done that. The impression that I get from discussions of this sort of question in the various fora that I mix in suggests that the Americans and Australians have taken a much more hard-hitting approach than we have. Again, it depends on what structure is set up by the British Government, and how it functions in line with the Bill. Forgive me for not giving you a full answer, but that is the sort of research that needs to be commissioned by the Government in order to make decisions on how to deal with that question.
James Wild (North West Norfolk) (Con)
Q
Charles Parton: The question of elite capture is very important and very topical. First, I have called for this in various papers that I have written. The Cobra committee that makes decisions on employment after political or civil service careers definitely needs strengthening. I am not sure of the degree to which work on that is going on; in fact, I do not think much is. Certainly neither the provisions, nor the exercise of those provisions, have been sufficiently rigorous. It is very much a question of lengthening the amount of time between leaving a particular post and taking up a job where, in some cases, you are laundering the reputations of some of these companies. If that period is too small and the criteria are too weak, there is a great risk of people, while still in office or still in post, saying to themselves, “I’d better not be too harsh on this, because in a couple of years’ time, I might be approaching these people, or they might approach me for a job.” That is pretty crude, I know, but it is perhaps easier to see in the case of a defence company. If you were in the MOD, say, and you had to make a decision, one hopes you would make it entirely in the national interest, rather than with a view to possible employment by whichever company might be bidding for a contract, but that is one area that needs strengthening.
The other area in all influence problems, of course, is that sunlight and transparency is the one weapon we have, but if a Minister, an ex-Minister or a top civil servant is running a consultancy company, and let us say Huawei is employing that company—I choose this example by sheer chance—that should be known. That should be declared, because if such people—who are still influential with their old colleagues, whether parliamentary, ministerial or civil service—are urging a certain line, as I have heard some urge, it may not be disinterested; in fact, it certainly is not in some cases. That needs to be made clear. Sorry, could you just repeat the second part of your question?
James Wild
Q
Charles Parton: Yes, but I think you have to be very happy and convinced that the Minister in charge is one whose future does not incline him or her to make a decision that is somewhat biased. It is not without precedent in the world, anyway, that some ex-Ministers have been under the influence of the Chinese Communist party for one reason or another, so you have to be quite careful about that, and it is a really important decision. That is why I would be more inclined to make sure it is very clear that it is not just within the purview of BEIS, because BEIS’s job is to push investment. That is perfectly fair, but there may be occasions—not now, but in the future—where people’s backgrounds, inclinations or futures incline them to be less than even in their judgment.
Stephen Kinnock
Q
Charles Parton: That is a very good question.
Chi Onwurah
Could I just add to that? That is an excellent point, but could you also say a little bit on how China responds to proposed takeovers that might implicate its national security, if those takeovers are allowed? How does it respond to that investment into its companies?
Charles Parton: Those are both good points. First of all, divide it into the state-owned sector and the private sector. In terms of the state-owned sector, the top executives of the big state-owned companies are appointed by the central organisation department of the party. That is the organisation that is, as Mr Kinnock has said, in charge of the nomenklatura: the top 3,000 to 4,000 party officials. Of course, a lot of state-owned companies are also owned at the provincial and lower levels, and there, too, the top executives are party members and beholden to the party. Let us not forget that most foreign investment by the Chinese is state owned, so it is not just a fair bet but a fair certainty that any state-owned enterprise investing is fully politically controlled.
When it comes to the private sector, Huawei has spent a large amount of its time insisting that it is a private company—I really do not care. And I do not really care that the national security law says that any individual or organisation must help the party or security organs when called upon. The brute fact is that, in the way the system is run in China, if the party tells you to do something, the only response from private business to an order is to say, “Certainly, Sir. How high do you want me to jump?” so this debate is entirely irrelevant. The party is now pushing committees into all private enterprises—foreign and local—and it would be a very unwise head of a private company who said, “No, Mr Xi Jinping. I don’t think so.” If nothing else has been shown by what has happened with Jack Ma, China’s second-richest person, and the Ant Group finance company in the last few weeks—there are, of course, financial risk reasons they might want to control Jack Ma’s Ant Group—it is, “Sorry, you are beholden to the Communist party.” That was a very fierce reminder of it.
In terms of this debate, I do not think we should be under any illusion that if a party says to a company about its technology or whatever, “Well okay, it’s all very well that you’ve got that, but we want it fed into our People’s Liberation Army organisations and science and technology system,” no company is going to say, “Oh no, that’s not right. We won’t do that.” For instance, when Huawei says, “If we were asked to do something against our commitments, in terms of what we do abroad, that would threaten security, we would not do that,” it is rubbish. They know that.
The Chair
I am afraid that brings us to the end of this part of the session. Mr Parton, I thank you on behalf of the Committee for your evidence and the clear, concise answers you gave. We must now move on to the next session. If Members want to take a comfort break for a couple of minutes, I am happy to do that.
The Chair
Q
Sir Richard Dearlove: I am Sir Richard Dearlove. I was in MI6 for 38 years. I was chief of the service from 1999 to 2004. Before that I was head of operations, and before that I was head of all the admin and personnel. In fact, I completed the building of the new headquarters and the move of the whole service into that. I retired in 2004 and became the Master of Pembroke College, Cambridge, where I was for 11 years. I am now chair of the board of trustees of the University of London and hold a number of other directorships and advisory roles. I still remain pretty heavily involved as a talking head on geopolitics and intelligence issues, and I have founded a small think tank, which is actually an educational charity in Cambridge called the Cambridge Security Initiative. That gives you in essence my colourful past.
Chi Onwurah
Q
Sir Richard Dearlove: Wow. That is a massive question. Bear in mind that a large part of my career related to the cold war. In that period, our main concern was the Soviet Union and the members of the Warsaw Pact. It was characteristic of that period that there were heavy controls, mainly exercised through NATO structures, to prevent strategic material from leaching, as it were, into the economies of the Warsaw pact. I will not go into all the mechanisms. Historically, one does not need to worry about those now, but it was very much an issue that was at the forefront of people’s minds during that period of the cold war. Bear in mind also—I think this is important in looking at the broader context of what you are interested in—that the Soviet Union had hugely sophisticated what’s called S and T operations: science and technology. A whole line of Soviet intelligence of the KGB was devoted to obtaining strategic material that would help the Soviet economy, particularly in the military industrial complex.
This is now in the public domain: in the mid-1980s, there was a major intelligence success, which, interestingly, was conducted by the French, but in which the UK had an important role. We completely dismantled, or learned, exactly what the Soviet Union and its allies were up to on a global basis. We knew before, but we did not know the detail to that extent, and what we learned was pretty shocking. That case has not been greatly publicised, but it was probably one of the most important intelligence cases of the cold war.
With the break-up of the Soviet Union and the disintegration of the Soviet empire, particularly the economic structures that bound the Warsaw pact countries together, in the West our attitudes towards those issues changed very significantly. There was a much more laissez-faire situation and, as countries broke away from the Soviet empire, an enthusiasm to trade with them without the same degree of control.
During that period, you had the emergence of China, which was still very much a regional power but with aspirations to become a global power. To short cut, we have now transferred to China the concerns we had about the Soviet Union and its allies, but the problem with China in some respects is much more serious than the problem with the Soviet Union, although that was bad enough. Charlie Parton, who was talking to you before, is an expert on China specifically. I am not, and my view is maybe more strategic, although I had a lot to do with China when I was head of MI6.
If you look back at the emergence of China as a regional power, from the very start—when Mao was still alive and was then succeeded by Deng Xiaoping—its intelligence community focused on China’s economic growth. It was not particularly interested in what we would see as strategic or political intelligence. There is a famous passage in Kissinger’s book on China in which he is talking to Mao and Mao says to him, “We’re not interested in your politics because we have our own ideological view of the world, and I don’t really care what our intelligence service reports about what’s going on in the west.” What he did not say, but what was quite clear because it became evident subsequently, particularly under Deng Xiaoping, was that the primary purpose of the Chinese intelligence machine outside China was to contribute to the economic rebuilding of China.
We in the West have been, over a longish period of time, pretty naive and had forgotten the fundamental dangers of having a close relationship with China. I am not anti-Chinese or a cold warrior. I understand—and this is the complexity that lies at the heart of this legislation—that our economies in the West are tied to China’s. They are intertwined in a manner that did not exist during the cold war between the United Kingdom and the Soviet Union. Of course there were economic links with the Soviets but essentially the relationship was one of separation. But that is not the case any longer. We are intimately engaged with the Chinese economy. Our enthusiasm––I am using “our” in the broadest sense of the West’s enthusiasm––to trade with China and to have a close relationship and to build that relationship is thoroughly understandable, but in the process we have let down our guard and we have been extremely laissez-faire, as it were, in our attitude towards the commercial threat from China.
I remember very well on one of my visits to the far east, when I was coming out of China through Hong Kong, talking to a British lawyer who had been head of a legal office in Shanghai for a long time. He said, “Richard, you have got to understand one thing about the Chinese attitude to us: they don’t understand win-win. All they understand is ‘We win, you lose.’” However intimate and successful your relations with China may be economically, if you are too successful, you can absolutely guarantee that the Chinese will transfer that success to themselves in their own economic structures, having allowed you to run successfully for a period of time.
What we now know and understand is that the Chinese are highly organised and strategic in their attitude towards the West and towards us. For example, some of the thousands of Chinese students who are being educated in Western universities, particularly in the UK and the United States, are unquestionably organised and targeted in terms of subjects––I am thinking more about graduates, PhDs and post-docs––looking at areas of strategic interest to the Chinese economy, and they are organised by Chinese intelligence.
We need to conduct our relationship with China with much more wisdom and care. The Chinese understand us incredibly well. They have put their leadership through our universities for 20 or 30 years. We in comparison hardly know anything about China because we just do not have that depth of knowledge and experience. You have people such as Charlie Parton and many wonderful Chinese scholars who understand intimately, in particular, the workings of the Chinese state, but they are rare individuals who are now massively in demand in trying to educate people about the problem that we have on our hands.
I am not one who is saying that we have to hold China at arm’s length. It is impossible to do that because they are so intimately involved in our economy, but we have to understand where we restrict their access, where we control their access and where we do not allow them to build strategic positions at our expense and literally take us for a ride. If you go back a little way, we were incredibly naive about this, which accounts for the position we got into with Huawei. It was completely ridiculous that we should even have been considering Huawei to build our 5G. That is probably why you called me. I was heavily involved in lobbying MPs through these various structures. I am delighted that the Government have now taken a grip on this issue.
The Chair
Thank you. I have no leeway to go past 11.25 am, so please can we keep questions as succinct as possible.
Sir Richard Dearlove: Sorry. That was a long answer, but it is precisely the question one should be considering.
Chi Onwurah
Q
You have talked about the relationship between the military-industrial complex, in the case of Russia, and economic development, specifically in the case of China. We have essential industries that are critical to our economy and there has been concern that BEIS is going to be overseeing the security implications. Where we have industries and technologies that are critical for national security, they are also critical for our economic security, so our national and economic security end up being linked. You have talked about some of those links in the case of Russia and China. How can we reflect those links effectively in the Bill? Do we need structures within BEIS, or outside BEIS, to identify and reflect the overlap between economic and national security?
Sir Richard Dearlove: This is a really difficult question. I am expressing the problem, not the solutions. You have to bear in mind that I spent my life as a poacher, not a gamekeeper, so my view of these problems is mirror imaging. I was an offensive intelligence officer, not a defensive one. I spent my life trying to penetrate Chinese intelligence, if you see what I mean.
The problem is much bigger than just national security; that is one of the difficulties. It leaches into the whole future of our economic competition with China. I do not like to talk about it, but some people use the phrase “a new cold war”. I do not subscribe to that. We have to find some other way of talking about this. They are very serious competitors who are beginning to edge along the path of enmity in the way they treat us on some issues—witness Hong Kong at the moment—so you have to have some sort of flexible scrutiny arrangement.
The reason this is so difficult to comprehend is that areas like climate change and energy policy, which are national security issues but not right on the frontline, are so big that, I think, China has a pretty disturbing agenda for us. They will encourage us to follow policies that they think are disadvantageous to our economy.
If you take their statements on things like climate change, which is relevant to what we are talking about, China is going to go on increasing its carbon emissions up until 2030, if we look at the figures and understand its policies. China is going to completely miss out renewables. When it has generated enough wealth and success in its economy, it is going to jump from carbon energy straight to nuclear and hydrogen. It will have the wealth and the means to do that. Renewables for the Chinese are going to be rather peripheral, because they will not generate the energy intensity that the Chinese economy requires. China has a road map in its head that is really rather different from ours and there is no question but that, competitively, our green agenda is going to put us at an even greater disadvantage to China, if you take a 30-year view of that.
There are some very worrying aspects of this. That means that if we are gaily allowing the Chinese to walk off with all sorts of bits of our economy, we are going to pay possibly a pretty high price for that over a long period. We need to take a strategic view of this. China certainly has a strategy, and at the moment we do not really have a strategy. We are beginning to realise that we have to have one, and maybe this Bill is a healthy first step in that direction.
You will need sub-committees of some sort, with flexible thinking and experts to advise on where these problems lie. The difficulty is also that we do not want to ruin our economic relationship completely with China. We still need to partner with it in areas that are advantageous to us and our economy as well.
Nadhim Zahawi
Q
Sir Richard Dearlove: My view would be that the annual report has as much transparency as possible, but you are probably going to require a secret annexe from time to time. It is a bit like the reports of the Intelligence and Security Committee, which I dealt with frequently as chief. They and we were keen that they should publish their reports, but there comes a point where it is not in our national interest that some of this stuff is put in the public domain. I would be pretty clear cut on that.
The Chair
I call Peter Grant, who will be behind you, Sir Richard, because of the social distancing rules we have in Committees.
Peter Grant
Q
Sir Richard Dearlove: Obviously, the threat scenarios shift and change. I think I accept that. Clearly, at the moment, what is driving our considerations is mainly China, but you are right. It applies to others—Iran, North Korea—and there may be other states.
A good example in the past, not a current one, is Pakistan. The Pakistani bomb built by A. Q. Khan—the Khan Research Laboratories—was created by sending 600 Pakistani PhD students to do separate bits of research in different universities around the world. That is the origin of our thinking on counter-proliferation, and it is another very clear example of where you have to have control from the security services. Now, I believe, we register PhDs in relation to the nationalities studying in certain areas.
The Bill should be able to accommodate a changing set of scenarios, and you are right to say that non-governmental organisations can become problematic. The proliferation issue, whereby Khan was trying to sell his technology to other countries, happened around the time of my retirement and the disarmament of Libya. That was all based on Pakistani technology, but there was a commercial network run by a family of Swiss engineers called the Tinners. This is an example of how dangerous things can be. The Tinner network had several semi-clandestine factories dotted around the world that were all making different parts for nuclear centrifuges. Okay, that network was eventually dismantled by the UK and the Americans, but the problem of national security goes into some pretty odd areas, and you are right to identify those as not necessarily just being China or, in the past, Russia. There are still aspirations on the part of certain powers to break the non-prefoliation treaty and become nuclear weapons states.
Mark Garnier (Wyre Forest) (Con)
Q
I am interested in your view on how the department that is proposed to be set up within BEIS to scrutinise this cuts across the Export Control Joint Unit, which is obviously a combination involving four Government Departments. Is that complementing it or contradicting it? Can they cut across each other? How do you see those two departments working together? They ultimately have the same aim, although they come from slightly different objectives.
Sir Richard Dearlove: I cannot give you a detailed answer to that question. From my experience, I would say that on some of these issues the co-ordination of Government Departments is one of the really big challenges, particularly when they ultimately have different objectives. The sophistication of our co-ordination mechanisms in the UK has not been highly developed, so we have run into problems in the past. My suggestion would be that this be given forethought rather than afterthought—that there is some arrangement to avoid those clashes of departmental interest.
Mark Garnier
Q
Sir Richard Dearlove: Yes, because they could be pulling in different directions. You have to have some degree of co-ordination. It is always better if these things are anticipated and something is put in place in advance, rather than scrabbling around to sort it out afterwards. I have seen that happen a lot.
The Chair
We are back to facing the front now, Sir Richard. Most members of the Committee wish to speak and I want to get everyone in, but I will have to cut them off at 11.25. Keep questions as succinct as possible.
Matt Western
Q
I am thinking of the consideration of investments from China in our nuclear power stations and other infrastructure networks. Something as simple as road traffic signals or rail infrastructure might break down if someone decided they wanted that to happen. Do you think the Bill does enough to recognise the unexpected areas of investment that a malign state might want to attack?
Sir Richard Dearlove: Probably not is the answer. The Bill should take account of the complexity of modern technology and the difficulties that we could run into in the future if we allow foreign entities to have a strategic piece of our critical infrastructure. Relationships can change over time and you can cause huge difficulties by throwing a switch and engaging a piece of software that is deeply embedded in something somewhere and causing a huge problem.
I do not want to be too alarmist, but Chinese engagement and involvement in nuclear power is another area of terrific concern and worry. It is not something that we should take at face value. We need to think very carefully about some of these issues. I would much rather have a French company building a nuclear power station than a Chinese company.
James Wild
Q
Sir Richard Dearlove: No, I was not. The first Huawei contracts were signed by BT in 2003 and, because BT was the primary provider, the relationship between BT and the intelligence community was, let us say, important; I will not go any further than that. BT was a successor to the General Post Office and, essentially, that was how the relationship came about.
At the time, people like myself were deeply concerned and shocked that we were signing deals with a Chinese company that looked to us to have strategic implications. Basically, as chief, I was not consulted. Basically, when I raised some questions, I was largely told, “It is nothing to do with you. These are issues we can control.” The relationship with Huawei took off without real consideration at the time that it would have a bearing on national security. I think that was extremely misplaced. I have written or said somewhere before that those of us who raised objections in 2003 were just disregarded.
James Wild
Q
Sir Richard Dearlove: I knew about the contract and said I thought it was completely inappropriate.
James Wild
Q
Also, do you think that although we need to look at the Bill as to what it does, we should also recognise that it does not solve all the problems and threats from hostile states—that the intelligence activity and other things we do to raise the cost of theft of IP need to be seen holistically across the piece, and that the Bill cannot solve all the problems?
Sir Richard Dearlove: The Bill is a step in the right direction. What is important about the Bill is that it raises parliamentary and public awareness of the issue. Everybody takes a big step forward in being sensitised to the problems in the future.
To be honest, I do not have any suggestions right now to add to the list, but I might look at that and see whether there are certain areas. For me, the Bill is almost a symbolic move—one that is long overdue and signals a change in attitude at Westminster and on the part of this and future Governments. It is a very healthy, pleasing and important development.
Stephen Kinnock
Q
“certain ‘critical’ elements of infrastructure, the loss or compromise of which would have a major, detrimental impact on the availability or integrity of essential services, leading to severe economic or social consequences or to loss of life.”
Would the Bill benefit from having that definition of critical national infrastructure embedded in the middle? Linked to that definition, should special measures be taken to raise our guard even higher when it comes to any kind of investment in our critical national infrastructure?
Sir Richard Dearlove: I would certainly see that as advantageous, because it defines a clear area where you start and from which you can make judgments about the involvement of foreign firms being given space or activity in those areas. That is not a bad idea at all, actually.
Simon Baynes
Q
Sir Richard Dearlove: I think we were over-enthusiastic about becoming a favoured trading partner with China. I am not going to name names, although I think I have done in one or two instances where, let us say, certain Ministers were incredibly enthusiastic and uncritical about building a commercial relationship with China. Part of that was driven politically, in that if we are going to not be a member of the EU, we need alternative relationships. I am not sure I would see it quite like that.
There has been a big emphasis on building a privileged position with China, which has led to people such as myself shouting from the sidelines and being pretty unpopular. For example, the 48 Group Club that the Chinese set up in the UK is extraordinary. They recruited a whole group of leading British business and political figures into that group who were designated cheerleaders for a burgeoning relationship with China. Huawei was an important part of that. The composition—the British membership of the Huawei board—was a very impressive line-up of people who were there to persuade us to drop our guard.
Anyway, I am glad that that is now largely history. A lot of the people who were involved are very keen to jump ship and be disentangled from those involvements. I am sure that, in time, the economic rewards that they were offered to go on to those boards and things were pretty significant. So the Chinese knew how to play us and that is why we got ourselves into this very difficult position on 5G.
Sorry, what was the second part of your question?
Simon Baynes
Q
Sir Richard Dearlove: On artificial intelligence, given that the UK is a leader in its own field, there are all sorts of aspects of AI and we would not want to allow the Chinese to buy those companies or take over the technology. There is no question but that the China dream that Xi Jinping has expressed is based on—let me put it like this—authoritarian technological supremacy and having a capability that dominates the global market in those areas. Huawei was definitely a step in that direction.
The critical areas are largely about the speed of technological advance and AI-related companies. We are very sophisticated in those areas, and the Chinese do not have a good record themselves of developing that sector without pinching it from the west—not to put too fine a point on it. The embargo placed on chip manufacturing by the Americans is a serious problem for China, because at the moment they cannot replicate that. I am sure that they will solve the problem themselves in due course. Of course, we have a certain dependence on them for certain things such as rare earth elements, so the quicker we can develop alternative sources, the better.
I am Cornish—I was born and brought up in Cornwall—and I see that one area where you might, using new technology, get rare earth out of the ground is Cornwall. I am devoted to the development of the Cornish economy, and I would love to see us making a real effort to develop Cornwall, for example, as a source of those elements, which is technically possible. It would be more expensive than buying them from China, but would be of huge benefit to our domestic economy. That is a good example of a sensitive area.
Andrew Bowie
Q
I was going to ask you a question I put to Mr Parton, although it is probably more relevant to you. How does what the Bill proposes compare with what is being done in other, comparable countries, such as our Five Eyes partners? Does it go as far as the Australians and the Americans, or are we still some way short of where we should be?
Sir Richard Dearlove: No, I think we will catch up. A very good example for us is Australia. They are hyper-dependent economically on their relationship with China, but the current Australian Government had the resolve to take a tough line on strategic issues, and they have suffered as a consequence. But their relationship with China will come back into balance, so the idea that you cannot be hard with the Chinese on these issues because it will prejudice a good trading relationship is rubbish.
The Chinese will probably respect you more if they know you mean business, they want a clear-cut relationship, and they see you have the legal means to impose that domestically, so they cannot just buy a high-tech company and walk off with the intellectual property, thank you very much. In the past, we have been so laissez-faire, it is ridiculous.
Chinese involvement in the oil industry is an interesting example too—I mean, look what they are doing now. They are doing deals with Iran and with Saudi Arabia on carbon fuel, exactly in the way I explained earlier. They are not going to cut their fuel emissions until they are ready to go for a nuclear-hydrogen economy, which they will have the means to do. We are sitting by and watching it happen, in a manner of speaking, and not worrying about the consequences for us.
One of my friends, who is a Chinese scholar, drew my attention—you will enjoy this, I think—to the 36 stratagems from the era of the warring states, which is 481 to 221 BC. I will mention three of the stratagems, because I think they are appropriate to the thinking of this Committee. Kill with a borrowed sword—that is, get what you can. Loot a burning house—bear that in mind in terms of taking advantage of the current pandemic. The third one is hide a knife behind a smile.
Sam Tarry (Ilford South) (Lab)
Q
Sir Richard Dearlove: You are talking about allied countries?
Sam Tarry
Obviously, if you are involved in global universities, for example, there will be some countries that we want to keep a much better relationship with, and whose students our intelligence services will have to monitor less.
Sir Richard Dearlove: There is definitely a graded difference in, let us say, our burgeoning relationship with India, but India can also raise some strategic security concerns for us. It has not always been entirely friendly, and bear in mind that it has quite a sophisticated weapons programme of its own. However, it would be wrong to treat India in the same way as you treat China; I agree that there is a gradation of treatment.
The Chair
That brings us to the end of the time allotted for the Committee to ask questions. On behalf of the Committee, I thank our witness very much for his time.
Before we finish, I want to read a message out to Members. I would appreciate it if Members did their best to arrive in the room a few minutes before this afternoon’s sitting starts at 2 pm, to ensure we can be seated in a socially distanced manner so that everybody remains safe.
Financial Services Bill (Fifth sitting)
Tuesday 24th November 2020
(3 years, 4 months ago)
Public Bill CommitteesRead Full debate Financial Services Bill 2019-21 View all Financial Services Bill 2019-21 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 24 November 2020 - (24 Nov 2020)
The Committee divided: - Ayes: 6 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 6 / Noes: 10 - Question accordingly negatived.
The Chair
Before we begin, I have a few preliminary points to make, some of which you will have heard before. Please switch electronic devices to silent; tea and coffee are not allowed during sittings and, again, I remind everyone about the importance of social distancing and thank you all for complying with that. The Hansard reporters would be grateful if Members could email any electronic copies of their speaking notes to hansardnotes@parliament.uk.
Today, we begin line-by-line consideration of the Bill. The selection list for today’s sitting is available in the room and shows how the selected amendments have been grouped together for debate. Amendments grouped together are generally taken on the same or a similar issue, and decisions on amendments do not take place in the order they are debated, but in the order they appear on the amendment paper. The selection and grouping list shows the order of debates; decisions on each amendment are taken when we come to the clause that the amendment affects.
If a Member wishes to press to a Division an amendment that is not the lead amendment in a group, it would be helpful to indicate that in advance. I will use my discretion to decide whether to allow a separate stand part debate on individual clauses and schedules, following the debates on the relevant amendments. We start with clause 1 and amendment 19.
Clause 1
Exclusion of certain investment firms from the Capital Requirements Regulation
Mr Pat McFadden (Wolverhampton South East) (Lab)
I beg to move amendment 19, in clause 1, page 2, line 21, at end insert—
“(7A) The Secretary of State must, within three years of this Act being passed, prepare, publish and lay before Parliament a report on the impact of the amendments to the Capital Requirements Regulation made by this section and Schedule 1 to this Act.
(7B) The report must assess the impact on—
(a) financial stability;
(b) competitiveness; and
(c) consumer risk.”
This amendment would ensure that, where departures from current capital requirements take place, the Government carries out a review of the impact on competitiveness and consumer risk.
Thank you for your chairmanship today, Mr Davies. With your indulgence, I would like to explain to the Minister broadly the approach we are going to take with these amendments. A number will be about reviewing, producing reports, parliamentary accountability and so on. Another number get into the accountability framework for the regulators and that “have regard to” list, and we will want to explore that quite deeply. Then there will be another set around the later parts of the Bill, relating to the savings provisions, the debt scheme and so on. That might help the Minister and the Committee to understand broadly where we are coming from when we move these amendments.
This first amendment, amendment 19 to clause 1, is in the first of those groups. Clause 1 exempts certain categories of investment firms from the requirements of the capital requirements regulation. This amendment explores what the effect of that might be and not only our right to know that effect, but our obligation to understand it. The reason we tabled this amendment is that capital, or the lack of it, was at the heart of the financial crisis. The banks that keeled over were over-leveraged and behaved as though a rainy day would never come. In fact, it is estimated that when the financial crisis hit, Royal Bank of Scotland, which was one of the biggest banks in the world at the time, was leveraged to a degree of about 50:1, so they had very little cushion of resilience for when more troubled times came.
The Basel II rules, which were in place at the time, failed to stop either the collapse or the public’s having to step in—through taxpayers and Governments around the world—to bail out the sector. Last week, when we were taking oral evidence on the Bill, I quoted Paul Volcker, the former Chairman of the Federal Reserve, who gave evidence in this House about a senior banker who had told him that his bank did not need any capital at all, that money could always be borrowed on the wholesale markets and that the banks could operate without capital. The crash proved that not to be true. The banks need capital. They need a cushion. That is not just their insurance policy, it is ours—it is the public’s insurance policy too.
Following the crash, the world’s regulators, whether in the United States, the UK or the European Union, set out to solve the problem of “too big to fail”, which has been characterised as privatising the profits and nationalising the risks, and developed a new set of capital requirements for banks and financial institutions. It was designed to make them more resistant to downturns. Those rules, on a global level, are set out in the Basel III process, now revised to the Basel 3.1 process, in the CRR and in the actions of national regulators. That is important, because the Basel rules should not be regarded as a maximum when it comes to the safety of our financial institutions. They should be regarded as a floor.
Most banks and regulators will say that today they hold significantly more capital against their loan books and that they are better equipped to handle a downturn or economic shock than they were 12 years ago. That is broadly true. Banks are better capitalised now than they were. However, they do not all like that situation, in truth. They will also say—I am sure that some banks tell the Minister and the regulators—that if only they did not have to hold so much capital they could lend more. They may well be saying that more loudly during the covid situation, when, as we see light at the end of the tunnel, we want to get the economy moving again. The smaller banks and new entrants will complain about being held to the same capital rules as larger and more established institutions. They will argue that that is a barrier to market entry and that it acts to reinforce the oligopoly in the UK where there are four or five major high street institutions, which it is difficult for new entrants to compete against. Other institutions will complain of being held to the same rules as deposit-taking institutions, which is part of the exemptions in clause 1, arguing that the character of their business is different.
Clause 1, as I have said, equips the regulator to respond to some of those points. We are not only onshoring, as it were, the capital requirements regulation, we are making provision, through the clause and other subsequent clauses, for the regulators to depart from it. Of course, departure from a common rulebook is a consequence of Brexit. Indeed, some might argue that it is the whole point. The clause allows it, and it is important that the Committee understands that the amendment would not prevent it. Neither does it seek to relitigate the referendum or to prevent the common rulebook to which we have subscribed for many years from ever being changed. That is not what the Opposition are saying. We are saying that, Brexit or not, and inside the EU or not, capital requirements still matter and they are there for a reason.
I would argue that for the UK the need for financial resilience is even greater than it is for most economies. We are a medium-sized economy with a huge financial sector. The consequences of that sector getting into deep trouble are potentially all the greater for our economy than for some others. Having a big financial sector is in many ways a great strength, of course. It brings employment, tax revenue and investment to the country, but it is a risk when it gets into trouble, as we found out in our recent history.
The other thing that we learned during the crash was how interconnected the system was. With so many institutions lending to and trading with one another, when one falls over the consequences for the whole system can be catastrophic. That old saying “The thigh bone’s connected to the knee bone” was certainly true during the financial crash, as it is of our interlocked and interdependent financial system. We therefore have a duty, at the very least, to be vigilant about capital requirements. They are, as I said, the public’s insurance policy against having to bear the costs of another crash or steep financial crisis. The changes that have been made since 2007 and 2008 through the CRR, the Basel rules and other steps are, as yet, untested. Yes, the regulators do conduct stress tests and scenarios about what would happen if employment rose to this level or GDP fell to that level, but these are inevitably not quite real-world exercises. They are as real as war games compared to the real thing.
All the amendment does is ask for a report from the Treasury after three years of the new regime. That report should cover the impact of any departure from the current capital requirements in three areas: financial stability, that is to say the overall health of the system, because we learned how interconnected it all was; competitiveness, which is built into the regulator’s aims in the Bill and is bound to be the argument for any changes to the capital requirement rules; and, importantly, consumer risk. If we are only thinking about the competitiveness of our financial institutions and not considering consumer risk, we have not learned from the financial crisis. That is the other side of the scales. We can make the system ultra-competitive by asking institutions to hold hardly any capital but that exposes the consumers and public to greater economic risk. That last point is crucial.
To recap, the amendment does not attempt to freeze the situation forever as it is now. It does not stop clause 1 doing what the Government want it to do. It does ask for a report on the consequences and broader issue of divergence from capital rules, should the regulator allow greater divergence in the future. We should not allow this regime to be set up and then opened up to all the banking and industry lobbying that is likely to take place without making sure we have a means of understanding the consequences of that. Given the importance of this sector for the UK economy, we should be careful of these consequences. By enshrining these in a report from the Treasury, we can ensure that Parliament and the public see the consequences of divergence. That is the purpose of amendment 19.
Alison Thewliss (Glasgow Central) (SNP)
It is a pleasure to see you in the Chair, Mr Davies. I rise to support the amendment. I think it is perfectly sensible that we make assessments and ensure that the changes the Government are putting in place are worth while and valid and that we keep a close eye on them, because of the very risks that the Labour Front-Bench spokesman set out. We cannot predict the future, but we can assess how things are going and make sure that neither consumers nor businesses are at risk. I support that very much and do not have much to add to his comprehensive speech.
Ms Angela Eagle (Wallasey) (Lab)
I repeat that is a pleasure to see you in the Chair today, Mr Davies—there will be a bit more of that as we make our way through the Bill. I support my right hon. Friend’s amendment, and want to tease out some of the Government’s intentions in this very technical Bill. We may not have known before 2008, but certainly know now, that highly technical things can be crashingly important if we do not keep a close eye on them. Given that we are now onshoring all these directives, and that the Government have decided, before the transition period is even over, in anticipation of changes to the capital requirements regimes, to diverge from what was put into UK law as part of the withdrawal agreement, I think the Minister owes us—I am sure he will be prepared to do this—a detailed explanation of what the Government perceive to be the advantages of diverging from rules that we had such a crucial part in writing when we were in the European Union.
It was certainly the case when I was a Minister, and I am sure it still is, that because of the relative size and importance of the financial services industry in the UK, our technocrats, if I can call them that, were always very involved in drawing up and agreeing the financial service directives that were in effect in the whole of the European Union. We used to have quite vigorous arguments with the European Union about the nature of some of that, given the slightly different culture that we have in the Anglo-Saxon world, if I can put it that way—the Minister knows what I mean—compared with some things that more routinely happen in the EU, and also because, frankly, our financial services sector is far larger than most financial services sectors within the EU and differs in its make-up. There were always these cultural issues.
However, in the aftermath of the financial crisis, there was widespread recognition and agreement—not only in the Basel III and 3.1 regulatory negotiations and how those agreements were put into EU law, which we are talking about now—about what had gone wrong; about needing to identify systemically important companies and make sure they were regulated appropriately, given the risk that under-capitalisation posed to the economies of countries in which those organisations were based; and about having rigorous and intrusive regulation to avoid some of the mistakes and traps that were fallen into in the run-up to 2008.
I am particularly interested in—I hope the Minister will explain it—how this will work, given that the Bill gives our regulators the power to change what has just been onshored to create a completely different system for investment firms, and then to take that forward in future regulation. We know that we have to be eternally vigilant to the way that companies evolve to respond to regulatory systems. If we end up fighting the previous battle, we will probably miss the next bubble. I would therefore appreciate it if the Minister—in commenting on the amendment, which is probing, in that sense—will explain how he believes that the regime that the Bill introduces will be able to respond to the challenges of the evolution of threats. Once the nature of what had been going on during the financial crisis was laid bare—a lot of it had been going on under the radar—one of the surprises was the connection between investment companies and banks, particularly the investment arms of banks. We discovered their trading of derivatives and the leverage they got out of those derivatives to make more money for themselves, more commission and more remuneration. Actually, a lot of what was in those derivatives was not sighted, and the regulation had essentially involved taking on trust the rating agencies’ assessments of what those derivatives were worth, without looking inside the packages.
The Economic Secretary to the Treasury (John Glen)
I would like to take this opportunity, at the beginning of the Committee scrutiny stage, to say what a pleasure it is to serve under your chairmanship, Mr Davies, and to consider this important legislation with all Committee members. I welcome the opening comments of the right hon. Member for Wolverhampton South East, who described how the Opposition will approach the eight sittings over the next two weeks. I also broadly acknowledge and agree with virtually all of the comments that he and the hon. Member for Wallasey made in respect of the history of financial services regulation, and I look forward to responding to the points made and to a wide-ranging and constructive discussion over the next two weeks.
As I set out on Second Reading, this Bill forms an important part of the Government’s wider strategy for financial services at this critical moment, as we approach the end of the transition period. I just want to say at the outset that financial services, as some of us know––I look particularly to the hon. Member for Glasgow Central who has been in multiple Committees with me over the last three years––is necessarily a complex topic with a sometimes impenetrable vocabulary of its own. I will do my utmost to ensure that, in speaking to the Bill and any Government amendments, my comments are as clear, accessible and accurate as possible. Please feel free to challenge me on this and if at any point Committee members feel that I have fallen short of that ambition, I look forward to trying to correct that.
Let me move to amendment 19. The Government are fully committed to ensuring that any delegation of responsibility to the regulators is accompanied by robust accountability and scrutiny mechanisms. Members referred to divergence and regard to consumer interests. The differentiation between different categories of firms depends on an assessment of eight systemically important firms that will continue to be the responsibility of the Prudential Regulation Authority. Amendment 19 seeks to add a requirement for the Secretary of State to publish a report within three years of this Act, including an assessment of the impact of amendments to the capital requirements regulation on financial stability, competitiveness and consumer risk.
The amendments to the capital requirements regulation tell only a small part of the story. The Bill amends the capital requirements regulation to remove Financial Conduct Authority investment firms from the scope of the banking regime. The more important story will be told by the FCA’s rules that implement the investment firms prudential regime. I want to be absolutely clear on the point about divergence. Obviously, as we get towards the end of the transition period, we will get to a point where we have left the EU and the provisions of alignment within the transition period. Therefore these measures reflect the reality of where we will be on 1 January. As the hon. Member for Wallasey said, the UK’s regulators, Ministers and officials played an instrumental role, given the size of the UK financial services industry, in shaping those regulations on an EU-wide basis. But it is surely only appropriate that, when we have left the alignment provisions of the transition period—and rightly so—we should look to actually govern and set the regulatory environment that suits the particular needs of our industry. The configuration of that industry, as was understood in the speeches that have been made, is different.
When the FCA does implement the IFPR, the Bill requires the FCA to demonstrate how it has regard to several considerations, which I shall set out now. First it must have regard to relevant international standards: Basel 3.1. That goes to the point about the relative standing of the UK. The right hon. Member for Wolverhampton South East made a point about the risk around individual firms lobbying for differentiated treatment. It is right that the regulators are responsive to the needs of the UK industry, but they are also accountable to those international standards––the relative standing of the UK––in addition to the current statutory objectives under the Financial Services and Markets Act 2000 to protect consumers and the integrity of the UK financial system.
This approach aligns with the March 2020 House of Lords EU Financial Affairs Sub-Committee recommendation to delegate more power to the regulators, underpinned by more and strengthened parliamentary scrutiny. We are delegating this to regulators because they have the technical expertise, not the Government. The Bill’s reporting provisions should provide the information that Parliament is seeking. This amendment would create a duplication of efforts by the regulator and the relevant Departments on undertaking such an assessment.
Ms Eagle
I want to come back on that and press the Minister on a couple of questions that, with all due respect, I do not think he answered in his response. Clearly, our amendment is a hook on which to hang a debate about transparency, so that we know what the regulators are doing, and about accountability, because, as I said earlier, if these organisations begin to respond to particular inducements, such as their own remuneration, they can cause risk to happen in a way that can be severely detrimental to consumers and entire economies, as we have seen in recent history. I think that, in the light of that, we are perhaps owed a little more of an explanation from the Minister—I am putting this gently—about what the approach of the regulators will be. The Minister can stand there and say, “The regulators are going to right-size regulation.” That sounds like a fantastic thing because of the very phrase that the Minister has used—“right-size”—but how are they deciding?
We clearly got the wrong size because of evolutionary behaviour to avoid regulation and increasingly risky behaviour in the global financial system in the run-up to the global financial crisis in 2008, which was caused by or began in the subprime mortgage market in America but which brought most of the—if I can put it this way—western-style banking systems close to ruin in the rest of the very interconnected economy because of what had been happening with derivatives. Therefore I wonder whether the Minister might be able to say a little more about the benefits of having the regime that he called right-sized regulation; why we might wish to move away from the current position so quickly after the transition period is over; and what he sees as the benefits of doing this. Refusing our amendment means that there will be no transparent analysis of the effect on the public domain, so we will not be able to discuss it.
I for one think it is important to get these very technical, dry regulations out into the open and to translate them, with the seriousness they deserve, into the potential implications that they present for all our constituents. Our amendment seeks to do that by at least having a transparent publication of these kinds of analyses. The Minister wants to keep it in the regulators’ ambit, in which there is not so much light, to be honest. It is highly technical, and it is hard for those on the outside to have a look inside to see what the implications are. I have hardly had any correspondence from outsiders on the Bill to help me through the long hours and sittings to come. That rather illustrates my point: that a light needs to be shone on this area, because of the risks if we get it wrong.
The Minister rightly wants to get it right, but surely it is relevant to hear from him and to have a bit of transparency, and to put something on the record now about how he sees the advantages playing out, as opposed to the risks. Will he have another go?
John Glen
I am very happy to have another go. The hon. Lady is at risk of suggesting that there is somehow a clumsy, rushed delegation to regulators and a risk that—in that delegation—the industry will influence regulators to right-size in a way that damages consumers. I draw her attention to the fact that the legislation gives the FCA responsibility to have regard to the impact on consumers, on the market and on firms—that is, the impact on themselves—of not having the appropriate capital requirements.
The right-sizing comment refers to the fact that the firms are currently bound by rules that align them to other institutions that are clearly functionally different. Nobody really believes that it would be right for there to be a prescriptive mandate from primary legislation on exactly how those technical rules and those capital requirements on a firm-by-firm basis should exist. The FCA has the right to reclassify firms and monitor that reclassification as firms evolve. The PRA will retain oversight of systemically important firms.
I contend that the Bill contains sufficient mechanisms to ensure public and parliamentary scrutiny of both the FCA and the Treasury through the draft affirmative procedure and the FCA reporting requirements. That combination of the FCA’s existing statutory duties and the “have regards” set out in the Bill cover the areas that amendment 19 seeks to address.
I make one further important point that goes to the heart of the wider regulatory framework. The future regulatory framework consultation that we launched on 19 October sets out over a 12-week period to look holistically at what should be the constitutional relationship between the FCA, the PRA, the Treasury and Parliament to embed an enduring accountability framework on a much broader basis. There will be another consultation subsequent to that. I anticipate that the response to the consultation might be, “Why haven’t you done this before?”. The bottom line is that the measures are required to meet international standards within an internationally determined timeframe of expectations. I declared on Second Reading that this is the first in a series of pieces of legislation, and I have always said so. This first piece of legislation sets the accountability framework for the initial measures.
Stella Creasy (Walthamstow) (Lab/Co-op)
I do not think any of us doubt the Minister’s intention to get this right and to recognise that these decisions have a consumer impact. The challenge, which I think we all see, is that it is one thing for the FCA to conduct a public consultation on high-cost credit firms, for example—he knows my specialist subject—but on something like LIBOR or the Basel regulations, which is less tangible but no less impactful, the argument he is making seems rather to strengthen the point the amendment makes about including consumer risk as one of the things to be reported on, because it does not immediately grasp people’s imagination until a catastrophe such as the last financial crisis happens. He says he envisages the FCA’s performing this role, so will he set out how he sees it performing that role if we do not say, “Actually, could we in a couple of years’ time get some information on how consumer risk has been identified and addressed in this process?”. That is harder to quantify, but no less important.
John Glen
I am very happy to respond to that point and I thank the hon. Lady for her comments. I recognise her expertise, particularly on high-cost credit, and I look forward to—I imagine—further amendments on that, perhaps next week.
The FCA will be required to publish an explanation of how having regard to the additional considerations that I have set out has affected the proposed rules that it comes up with. When the FCA makes those final rules, it will publish an explanation complying with them, as well as a summary of those new rules, aligned to the FSMA publication requirements.
The challenge here is a bit of a mismatch between the concerns that we have collectively in Parliament to maintain standards that will not allow a repeat of what the right hon. Member for Wolverhampton South East eloquently set out as the problem leading up to 2008 and to have regard to the enduring and ever-transforming consumer risks, which derive from rules and technical standards that we in this place are not well placed to deliver, given their design. What we must do subsequently with the future regulatory framework review—it is not some short, rushed exercise, but a deliberately open exercise of consultation to try to examine best practices—is to come up with something that gets that balance right between the direction that Parliament sets in primary legislation and the accountability to this place that will exist for our regulators, through the Treasury Committee and through potentially significantly enhanced accountability mechanisms.
However, setting out the enduring final framework of that relationship between the regulators and Parliament is the point of that consultation exercise. With respect to this measure, I believe that the accountability mechanisms set within it and the procedures set out will achieve the accountability that is necessary and appropriate at this stage.
The Chair
Before I call the shadow Minister, I say that one of his many qualities is that he is very softly spoken, which is not conducive to Committee Room 14 with social distancing in place, so I encourage him to speak up; I am sure that would be appreciated by all.
Mr McFadden
I am a softly spoken and moderate man; it has not always done me good, but I am on track here at the moment.
I want to respond to the Minister’s reasons for advising us not to press the amendment. I talked at the beginning about three pots of amendments, and it strikes me that there are really two or three pots of reasons why Ministers say no to amendments. The first is that the amendment is wrong or not competently written in some way. Pot two is that it has completely misunderstood the Bill and therefore is not just incompetently written, but actually wrong in its intent. Pot three is to say that it is covered anyway. Usually, if somebody is not going to say yes to an amendment, it falls into one of those categories. The Minister has gone for pot three today. He has not really argued that the amendment is wrong in its content or that there is anything wrong with the way it is written; he has argued that this kind of thing is covered anyway. There is a problem for us in accepting that.
Ms Eagle
Does my right hon. Friend agree that there is a fourth one, which is to say, “This should not be on the face of the Bill; we are going to do it, but we are going to put it in secondary legislation,” which of course is unamendable and usually rammed through this House in a way that makes scrutiny even harder?
Mr McFadden
My hon. Friend is absolutely right. Perhaps there is even a fifth one, which is, “Wait for the consultation on something else.” The problem with going for pot three and saying the amendment is covered anyway is that that concedes that it would be completely harmless and there would be nothing wrong if it were accepted. The Government are, in effect, agreeing with its intent and saying they will do it.
John Glen
As ever, the UK remains committed to the highest level of regulatory standards. The UK is also committed to better regulation—regulation that is fit for purpose and appropriate to the risks, size and activities inherent to UK firms. At present, investment firms are supervised by either the FCA or—for those that are systemically important—the PRA. However, both currently operate under the same prudential regulatory regime as banks, which is not appropriate for non-systemically important investment firms. Such investment firms do not typically grant loans or accept deposits, so the risks they face and pose are different from those of banks.
A new, bespoke regime is required for investment firms, and the first step in that process is to remove non-systemically important FCA investment firms from the relevant regulations for banks. That is precisely what clause 1 does: it sets out the necessary amendments to remove FCA investment firms from the scope of the capital requirements regulation. Only credit institutions and PRA-designated investment firms will remain under the CRR. That is appropriate, as systemic investment firms pose similar risks to financial stability as the largest banks.
Clause 1 also introduces a definition of “designated investment firm” that recognises that only investment firms that conduct bank-like investment activities may be designated by the PRA as systemic institutions. As such, commodity dealers, collective investment undertakings and insurance undertakings that are not bank-like are excluded from the definition. That reflects the EU’s approach. The remaining investment firms—all FCA investment firms—will be regulated under the new investment firms prudential regime, which I will turn to when we debate clause 2 and schedule 2.
Clause 1 also amends the Capital Requirements (Country-by-Country Reporting) Regulations 2013. The amendments are necessary to ensure that FCA investment firms adhere to tax reporting requirements that are consistent with the new investment firms prudential regime, and not with the current banking regime. For example, the smallest FCA investment firms will be exempt from the reporting requirements, which is in line with the IFPR’s more proportionate application of regulatory requirements on the smallest firms.
Clause 1 is merely a first step in the introduction of the investment firms prudential regime, but it is a crucial step. I therefore recommend that the clause stand part of the Bill.
Mr McFadden
I just have a couple of questions for the Minister. He described the rationale behind the clause, but can he tell us how many firms we are talking about? How many of the non-deposit-taking investment firms are likely to be exempt from the capital requirements regulations under the terms of the clause?
What is the Minister’s response to the point that my hon. Friend the Member for Wallasey and I have been trying to make about interconnectedness? He has advanced a reason as to why such investment firms should be treated differently, but how will the regulators cope with the interconnectedness of the system if companies are treated differently in that way?
Alison Thewliss
My concerns very much lie around the interconnectedness, because the system will be only as strong as the weakest part within it. If the weakest parts start to pull down everything else and make everything else unravel, we have a real problem on our hands.
My questions are about the monitoring of risk within the system that is being established. How can the Minister be certain that the risks are being closely monitored by the regulators, that the regulators understand the business that smaller firms are doing in their part of the market, and that the activities that those smaller firms are engaged in does not pose a risk to everything else? There is definitely cause for them to be monitored in order to have an eye kept on them, and to ensure that their activities do not cause wider risk. If attention is not being given to them, how can we ensure that their activities are above board and are not causing further risks anywhere else within the system?
How will the monitoring be scrutinised more widely by Parliament and others? The Treasury Committee gets the opportunity to question the regulators, but getting down to such a level of detail is not necessarily something that we would do. How does the Minister envisage Parliament having a role in that scrutiny in order to ensure that, should something happen or go wrong, we find out about it timeously rather than when it is too late to have any impact and when the whole thing has tumbled down?
Ms Eagle
Like the hon. Member for Glasgow Central, I am on the Treasury Committee. We have a very full programme. The hon. Member for Hertford and Stortford also shares the pleasures of being on the Treasury Committee. However, it would be very difficult for us to question the FCA with this level of granularity. Therefore, given the onshoring and the importance of this regime as it evolves, how does the Minister expect the transparency, oversight and accountability to be put in place going forward? Does he expect that to also include consumer authorities and the consumer interest, and will explain what he expects these companies to be able to do under this regime that they cannot do now?
John Glen
I am grateful for those questions, and I shall seek to bring some clarity. The right hon. Member for Wolverhampton South East asked me two questions about the numbers. I cannot give a specific number here, because it is fluid and would be something for the FCA to determine. I am sure the FCA would be very happy to give him an indication on that.
To the other point around interconnectedness, made by the hon. Member for Glasgow, Central as well, the classification will be based on the evolving nature of the activities, and this is something the FCA makes judgments on all the time. The PRA is responsible for eight systemically important institutions, covering Goldman Sachs and J. P. Morgan, among others, which are of a size and scale such that their interconnectedness means they are of systemic significance.
There are a lot of complex relationships between financial institutions. Therefore, as acknowledged by the hon. Member for Wallasey, as people who are technically capable of evaluating those interconnected elements, it is appropriate and in their interest to make those judgments, and that sort of decision making does go on currently.
The scrutiny process links back—I will not keep repeating it—to the point that the right hon. Gentleman made about the “Future Regulatory Framework Review”, which will look at the appropriateness in a situation where that scrutiny has previously happened at an EU level, through combined conversations, the Council of Ministers, work that is then is auto-uploaded to the regulators. What is the new mechanism to hold regulators accountable in a situation where they are given the task from this place? That would be the purpose of the extended regulatory review and future legislation. It may involve an enhanced role for the Treasury Committee, with additional resources to augment the expertise that already exists, but that is a matter for that consultation.
In answer to the question from the hon. Member for Wallasey about what I expect the companies will be able to do that they currently cannot, this comes back to some of the evidence we heard last week from the British Private Equity and Venture Capital Association, which says there is a wide family of firms with different activities. The question is: are the regulations as they apply at the moment—as fitted for 28 countries, where obviously some compromises were made—appropriate for the configuration of firms as they exist?
What I would expect to see is consideration given for capital requirements that match the actual profile of activities, notwithstanding the very legitimate points made around the interconnectedness and the risks associated with their broadest activities. I have stressed throughout the passage of this Bill so far, and I reiterate now, that the essential purpose of the Government’s approach is to ensure that we have the highest regulatory standards. Our reputation as a centre for financial services is based not on finding quick fixes that shortcut regulatory standards, but on finding something that fits the nature of our industry, aligned to international standards, that gives us the best opportunity to grow and prosper in a way that is safe and secure for consumers.
Question put and agreed to.
Clause 1 accordingly ordered to stand part of the Bill.
Schedule 1
Exclusion of certain investment firms from the Capital Requirements Regulation: consequential amendments
Question proposed, That the schedule be the First schedule to the Bill.
John Glen
Schedule 1 complements clause 1, in so far as it makes consequential amendments to the Capital Requirements Regulation 2013 and the Capital Requirements (Country-by-Country Reporting) Regulations 2013. For example, many of these consequential amendments remove references to the Financial Conduct Authority as the competent authority under the CRR in recognition of the fact that henceforth only the Prudential Regulation Authority will be responsible for regulating credit institutions and PRA-designated investment firms under the CRR. Taken together, these technical amendments achieve the aim of removing FCA investment firms from banking rules while keeping the most systemically important investment firms under the regulation and supervision of the PRA. I therefore recommend that the schedule be accepted.
Mr McFadden
I have just one question. The Minister mentioned country-by-country reporting, which we may come to at other points in the debate. Could he help the Committee by telling us what is covered in the country-by-country reporting? There is an ongoing and very live debate about what we expect multinationals to cover in country-by-country reporting in order to avoid tax arbitrage or transfers between countries that do not stand up to scrutiny. What are the things covered by country-by-country reporting in schedule 1?
Alison Thewliss
I just want to ask the Minister about the additional responsibilities in the schedule. When we took evidence last week, Sheldon Mills said:
“We can always do with more resources”.––[Official Report, Financial Services Public Bill Committee, 17 November 2020; c. 9, Q12.]
What further discussions has the Minister had about ensuring that the PRA and FCA are adequately resourced for these additional responsibilities? It is an awful lot of extra work. We are moving an awful lot of work over to them while they have covid and Brexit to look at too. I just wondered whether there had been any further detail about what additional resources might be available or required in the months and years ahead.
John Glen
I will come first, if I may, to the hon. Lady’s point about the resourcing of the FCA. It is resourced by a levy, which it determines. It is under review, but it is approved and set by the FCA. The hon. Lady has asked that question a number of times over the past 18 months. She is right to draw attention to the enormous pressure that the FCA is under, in terms of giving guidance about the forbearance measures for consumers and banks. That will be a matter for the FCA. I have six-weekly conversations with its chief executive officer. That is not a matter that he has raised with me, but it will be under review. I support it in what it needs to do to secure those resources.
The right hon. Member for Wolverhampton South East asked about the Capital Requirements (Country-by-Country Reporting) Regulations. They were designed to ensure that appropriate tax reporting regulations are imposed on firms regulated under the banking framework. They require firms to report relevant information on tax and revenue in each country that it has operations. An objective of the IFPR is to make regulations for FCA investment firms more proportionate to the risk, size and activities of those firms. That will be reflected in the country-by-country reporting. That will enable certain investment firms, such as the smallest FCA investment firms, to have reporting requirements consistent with their size and activities, and ensures that such firms are competitive. Furthermore, the smallest investment firms do not typically have overseas operations, making these requirement irrelevant for them. I cannot say any more about that at this point, but I am happy to follow up further if the right hon. Gentleman wishes to have information.
Question put and agreed to.
Schedule 1 accordingly agreed to.
Clause 2
Prudential regulation of certain investment firms by FCA rules
Question proposed, That the clause stand part of the Bill.
Mr McFadden
I do not really have substantial questions at this stage, because schedule 2 sets out the detail, and I think we will probably have an extensive debate on it.
Ms Eagle
The clause inserts a new part 9C into the Financial Services and Markets Act 2000, which forms the legal basis for the new regime that the Bill introduces for investment companies. We have been talking about the minimum amount of capital required. We have covered some of that, although we will get further into it when we come to the Basel 3.1 bits.
Will the Minister say a bit about remuneration policies? That is another issue that will be regulated. We know from what happened in the financial crash and the build-up to that bubble that remuneration policies formed a key part of the bad incentives that created the behaviour that caused the crash. How will the Government be dealing with the regulators about remuneration? What will the principles be? Getting the right incentives for remuneration is a key driver for behaviour, and behaviour is a key driver for activities in that area, as we know only too well. If we did not know that from 2008, we would know it from the Wall Street crash in 1929. It is part of a set pattern. How will the Government ask the regulators to deal with that issue?
John Glen
I am happy to respond to that. The risk that the hon. Lady sets out—that, broadly, this country will go down a route where we deviate significantly from the new established norms of the regulation of remuneration and the rules around rewards and bonuses and so on—is a matter for which the regulator has responsibility. It will be incumbent on the Government to look at evolving best practice and the appropriate way to bring continuity to such regulations in line with those highest standards.
It is not our wish to create deviation for the sake of it. We will continue to look at the market situation. The point has been made already that we have to be alert to evolving new practices. In the same way, I think the hon. Lady would acknowledge that, in the light of the last crisis, there was an evolution in business models with respect to high-cost credit. There is always a risk in the sort of environment that we are in now that there will be new developments. I cannot prescribe precisely how we will look forward, but we will look to adhere to global high standards, because the integrity of our reputation relies on it.
Ms Eagle
I thank the Minister for his indulgence. Clause 2 is also partly about enforcing regulations; there are references to fraud and criminal offences, which again we will come to in more detail later. Will he let us know whether fraud enforcement will be beefed up? We can have a great regulatory regime and redefine fraudulent behaviour, but if enforcement is not up to scratch, that will not really deter. This is area where, if enforcement is too weak, the rewards are very high and the risk of being caught and prosecuted or fined is very low. Can he give some reassurance on that point at this stage?
John Glen
I am happy to. The hon. Lady makes a fair and reasonable point. We have to maintain the highest standards of regulation. The FCA and the PRA are extremely well respected globally, but that does not lead me as the Minister to be complacent. We must continually be vigilant about whether those standards of compliance and intervention into non-compliance are sufficient and adequate. We will always seek to maintain that.
To return to the principle, these capital requirements for firms are extremely detailed and technical. The regulators have the right expertise to update them. They will have increased responsibility, but they will need to consider the principles set out in the Bill. We are following the advice of the House of Lords Financial Affairs Sub-Committee, which said that these delegations would be appropriate. The broader conversation about the direction of travel around what sort of framework we wish to have in the UK is not fully addressed at this moment, but there will be more to say in the context of the response to the future regulatory framework two-stage review and the legislation we bring forward subsequently.
Question put and agreed to.
Clause 2 accordingly ordered to stand part of the Bill.
Schedule 2
Prudential regulation of FCA investment firms
Mr McFadden
I beg to move amendment 20, in schedule 2, page 63, line, at end insert—
“(ba) the target for net UK emissions of greenhouse gases in 2050 as set out in the Climate Change Act 2008 as amended by the Climate Change Act (2050 Target Amendment) Order 2019, and”.
This amendment would require that, when making Part 9C rules, the FCA must have regard to the UK’s net zero 2050 goal and the legislation that has been passed in pursuit of this goal.
The Chair
With this it will be convenient to discuss the following:
Amendment 39, in schedule 2, page 63, line 5, at end insert—
“(ba) the likely effect of the rules on the UK meeting its international and domestic commitments on tackling climate change, and”.
This amendment would ensure the likely effect of the rules on the UK meeting its international and domestic commitments on tackling climate change are considered before Part 9C rules are taken.
Amendment 24, in schedule 3, page 79, line 29, at end insert—
“(ca) the target for UK emissions of greenhouse gases in 2050 as set out in the Climate Change Act 2008 as amended by the Climate Change Act (2050) Target Amendment Order 2019, and”.
This amendment would require that, when making CRR rules, the FCA must have regard to the UK’s 2050 net zero goals and the legislation underpinning those goals.
Amendment 42, in schedule 3, page 79, line 29, at end insert—
“(ca) the likely effect of the rules on the UK meeting its international and domestic commitments on tackling climate change, and”.
This amendment would ensure the likely effect of the rules on the UK meeting its international and domestic commitments on tackling climate change are considered before CRR rules are taken.
Mr McFadden
Amendment 20 focuses on the new accountability framework for the FCA set out in schedule 2. If anyone wants to follow the detail, I am referring to the list at the top of page 63 of the current edition of the Bill. Returning to my opening remarks this morning, we tabled a similar—possibly identical—amendment to the accountability framework set out for the PRA in schedule 3, but we will come to that in due course.
As the Bill stands, the accountability framework in schedule 2 asks the FCA to have regard to three things: international standards, which I do not think anyone would argue with; the relative standing of the UK as a place to do financial business, which can be interpreted in a number of ways, but could be summed up as a competitiveness criterion; and other matters, which may be specified by the Treasury. I ask the Minister, why were those three picked out of all the things that we wanted the FCA to have to regard to in this brave new world, where we are onshoring all this, and not others?
We take the view that this list is incomplete and could be usefully added to. The regulators have an expanded new task, between schedule 2 and schedule 3, of regulating this huge, globally significant financial services industry with a lot of new powers, so what should they have regard to when they do this? There could be a number of things added to this “have regard to” list. Perhaps the most obvious is the UK’s climate change goals, specifically the commitment to reach net zero emissions of all greenhouse gases by 2050.
Why do we want to add that in particular? There are several reasons. First, this is completely bipartisan. The Government are committed to it and the Opposition support it. It does not divide the parties in this House; it has multi-party support. Secondly, we are not asking for something that has not already been legislated for. It was legislated for on two important occasions in this House. We are not tacking on a new, previously undiscussed climate change commitment to the Bill. The legislative history of this, as hon. Members will know, is that the original goal of an 80% reduction in greenhouse gases by 2050 was legislated for in the Climate Change Act 2008 under the last Labour Government, which the Conservative Government changed to a commitment to net zero by 2050 through the 2019 order referred to in the amendment, so this has already been legislated for twice, once at 80% and now at net zero.
Stella Creasy
Is it not also important to recognise that some of the strongest drivers for reaching some of those emissions targets will come from the financial sector itself? For example, the move towards decarbonising pension funds has been hugely beneficial in promoting renewable energy. It makes sense to join the dots when it comes to our country’s financial objectives and our wider social and climate objectives.
Mr McFadden
My hon. Friend is absolutely right. Joining the dots is exactly what we should do. Of course, she is right that individual investment firms will make their own decisions on these things, perhaps sometimes pressed by pension fund members, consumer groups or trustees in some ways. We applaud firms that do that, but how much more powerful would it be if that was a goal of the regulators, set out in our own financial services legislation? It would be more powerful, because the UK has this huge financial sector, which has around it this cluster of expertise, which we refer to a lot—legal and accountancy firms and all the rest—and because our own domestic commitments can bend the power of that sector towards the net zero goals.
The amendment goes with the grain of what more and more firms and people in this sector are talking about. By including this change, we can take all the fine-sounding commitments on corporate websites and put them at the heart of our regulatory mission. It can mark out the UK financial services regulation as having a new post-Brexit mission. If asked what we want the UK financial services sector to do in this post-Brexit world—we debated divergence and capital rules and all the rest earlier—what would be a better answer than making sure that the power of this is bent towards us achieving net zero, and in so doing encouraging financial sectors elsewhere in the world to go down the same path?
Finance will play a huge role in whether or not we meet the target. I do not propose, Mr Davies, to go through what the Committee on Climate Change has said that we need to do to reach the target in great detail, because we would be here all day, but I want to give the Committee an idea of a few headings that will require enormous investment.
If we are going to achieve the target, we will need a quadrupling of the supply of low carbon electricity. We have done well on low carbon electricity in the UK, in the last 20 years or so. We have vastly expanded the provision of renewables that go into the grid, but even after doing well we need to quadruple that if we are going to meet the target.
We will need a complete automotive transition, from internal combustion engines to electric or other zero emission vehicles. Just a few days ago, the Prime Minister himself announced a new, more advanced target for the phasing out of internal combustion engines.
There will need to be a huge programme of investment in buildings and heating. Whether that is through heat pumps or hydrogen boilers, there will need to be a huge programme of retrofitting equipment to millions of houses throughout the UK.
There will need to be a large programme of afforestation, because remember this is net zero. It will not be that we never have emissions, but we will have net zero. One of the main vehicles, if you like, in absorbing the emissions that we are still responsible for is afforestation, so we will need a huge programme.
We will need changes in farming and food production. We have the return of our old friend, carbon capture and storage. That takes me back, because a decade ago, when I was sitting where the Minister is now, we were announcing carbon capture and storage. It was announced again last week. There might be Members here who are quite new to Parliament, such as my hon. Friend the Member for Erith and Thamesmead, the hon. Member for Hertford and Stortford and maybe others who were elected in 2019. I look forward to them coming back in 10 years’ time and debating a Bill where new carbon capture and storage has been announced. Maybe we will even have achieved it by then, who knows?
Alison Thewliss
Members may indeed remember carbon capture and storage well, because we were promised a huge project in Peterhead, ahead of the indy ref, which has not yet emerged.
Mr McFadden
The hon. Lady is quite young, so she might be here in 10 years’ time—
Mr McFadden
Perhaps it is not her ambition to be here in 10 years’ time. Carbon capture and storage is back. There are more things that we will have to do, but all of those headings will need finance, capital and investment. That will not all come from the state. It has got to be a combination of public and private investment, if the country is serious about this goal.
This is not an ordinary piece of legislation or A. N. Other Bill that we want to tack on to the regulatory framework. It is an overarching piece of legislation that will inform investment patterns and work production in a whole range of areas. It is one of the most significant pieces of legislation in this country since the end of the war. Perhaps we do not always realise that, but it really is, if one thinks about the list that I have gone through.
All of those things will take finance. It seems to me not odd to add this to the regulatory framework, but very odd that it has not been added already, particularly because the Government have made so much of the country being an international leader in the area, including asking the former Governor of the Bank of England, Mark Carney, to play a leading role. We absolutely welcome that.
Gareth Davies (Grantham and Stamford) (Con)
The right hon. Gentleman sets out very well the problem that our generation faces. I say that as someone who has worked in financial services and has a family member who also works in the sector. The right hon. Gentleman is totally right that the key to unlocking progress towards 2050 is through private capital, but will he not concede that the Government have already made significant announcements such as those on the green gilts, the long-term asset fund and the green homes grant? Many announcements that have been made will help to mobilise capital towards the goals that he seeks.
Mr McFadden
The hon. Gentleman is right and he goes for pot 3 in terms of my reasons. I repeat: the problem about pot 3 is that the reason not to accept an amendment is that it concedes that it is absolutely heartless to do so. He is absolutely right. The Government have said that they want the UK to be a leading player and they appointed Mark Carney, who is a champion of green gilts, I believe. I was pleased to hear the Chancellor’s announcement, because green gilts have been issued by other countries in the past year or two. They have often been oversubscribed, which shows an investor appetite for products geared to that end.
Let me put the point back to the hon. Gentleman. If there are new financial innovations, such as green gilts, that Governments can issue to finance the list of things I mentioned from the Climate Change Committee and if there is investor appetite, as there seems to be, for the limited number of green gilts that have already been issued, why on earth would we not put at the heart of the regulator’s mission that they should have regard to these goals and use them as a guiding principle, particularly as we are going into a post-Brexit world where we will be asked on many fronts what we are for now given that we have left an existing framework? It is particularly appropriate to add this proposal to the Bill. This will require investment and it cannot all be done by the state. It will require innovation in finance. We have mentioned green gilts but other kinds of saving products, investment products, bonds, loans and all sorts of instruments will all have to be geared to the necessary changes to meet the net zero target.
The final reason for the proposal is to stress the ambition of the target. Any one of the things that I read out would require a lot of ambition and a lot of investment. It is pretty hard to see how this can all be achieved if it is not an explicit goal of financial regulation.
To recap, the amendment seeks to make these changes in the least possible contentious way. We have not added a syllable or comma to anything that the Government have not already legislated for. All we are asking for is that the Government signal that they are taking their own legislation seriously by adding the net zero commitment, which the House has already legislated for, to the mission of the financial regulators. That seems to be a most uncontroversial and reasonable thing we can do in the post-Brexit financial regulatory framework.
Alison Thewliss
I support Labour amendments 22 and 24 and wish to speak to amendments 39 and 42 in my name and those of my hon. Friends.
I agree very much with the right hon. Member for Wolverhampton South East. Our amendments are trying to help the Government out. That is unusual but, in the spirit of cross-party consensus and doing things together to save the environment, that is perhaps how we should proceed. On 9 November, the Chancellor said that he wanted to lead the world in the use of technology and green finance. Unfortunately, the Bill somehow missed the boat. It is unfortunate that the Chancellor’s statement came just before the Minister made his Second Reading speech because the Bill would be the place to start with this ambition.
Abena Oppong-Asare (Erith and Thamesmead) (Lab)
I am delighted to speak in favour of amendment 24. In just 12 months, the UK will host and hold the presidency of the 26th UN climate change conference of the parties in Glasgow, where the world will be watching. The amendment shows that the UK means business on climate change and that the Government are putting in place their promise to join forces with civil society, companies and people on the frontline of climate action ahead of COP26. It has the support of all political parties, so this is in no way party political or controversial.
Last week the Committee heard evidence from the likes of the Finance Innovation Lab and Positive Money, which support the amendment. The witnesses mentioned that it would be helpful if the FCA could refer to the Climate Change Act when preparing secondary legislation. Will the Minister therefore consider putting in capital requirements for investment firms, introducing weighting on environmental, social and governance issues such as penalising assets that have climate risks? As we know, the Bill covers legislation on packaged retail and insurance-based investment products, which will bring the £10 billion market to the EU.
We also heard last week that the Bill could be improved further, with a key information document that investors receive when looking at PRIIPS to include disclosure on environmental and social governance issues, and to ask the FCA to ensure that happens. I am sure the Minister will agree that that would help the Prime Minister achieve his ambitious 10-point plan—it is certainly ambitious—for the green industrial revolution.
It is important to know that there is a drive towards greater ESG integration across the financial sector, which investors are pushing for as well. This is an opportunity for the Bill to be shaped more robustly, and it sends a really strong message that the UK takes climate change seriously.
As we sit here today, hundreds of young people are meeting virtually at the mock COP, ensuring that net zero goals are deliverable. I am therefore surprised that elements of the amendment are not already in the Bill, given the Prime Minister’s ambitious 10-point plan for a green industrial revolution, which will not be deliverable if we do not reinforce our commitment to environmental sustainability in the Bill.
The amendment, which I believe is rather reasonable, would lay the foundations for sustainable environmental infrastructure with substance. As mentioned by a number of colleagues, this is not controversial but something that we really need right now. Particularly as we are dealing with covid, we need to be thinking seriously about the environment. The only way we can ensure that this is delivered is by putting something in the Bill that requires firms and the regulator to step up on this issue.
We do not have time for delay. This is an opportunity for us to put our heart into the Bill and deliver what we have promised, and it falls in line with what all political parties have been asking for.
Stella Creasy
The shadow Minister is making a powerful speech. I take the point made by the Government side, but I always wonder: what about the counterfactual? What problem will there be if we do not put these things into legislation? What message would that send about what might be jettisoned if, God forbid, we had another crisis on a similar scale to this year’s? Action on climate change is something that we simply cannot afford to go slow on. The counterfactual on this is an important issue, because it gives us an opportunity to say that if we do not put it into legislation, we are sending a message that this might be an optional extra, rather than an integral part of our future as a country.
Abena Oppong-Asare
My hon. Friend makes a good point. The UK Government constantly say on their website that they plan to go further and faster to tackle climate change. As my hon Friend has mentioned, this is a perfect opportunity to ensure that this is implemented in the Bill. I am surprised, frankly, that it is not in there. All that we are asking for is a reasonable amendment that already falls in line with the Government’s objectives. It is not going to create any extra work. We need to think about the future, particularly if we do not take action to address climate change, because we are heading for difficult times and I am really worried about the future for younger generations.
John Glen
Let me say at the outset that the Government are fully committed to reaching our climate change aims both domestically and internationally. We have set our commitment to net zero in legislation. When I was listening to the right hon. Member for Wolverhampton South East discuss the range of interventions and announcements that the Government have made in recent weeks and pivot back to the good work done previously, this underscores the fact that looking at this through a bipartisan lens is probably the most effective way. The aims that we share should be supported by sectors across the economy, not least financial services, as the Chancellor set out in his recent statement to the House.
Amendment 20 would insert the net zero target into the FCA’s accountability framework for the implementation of the investment firms prudential regime. Amendment 39 is similar, as it would insert an additional consideration into the FCA’s accountability framework, requiring the FCA to have regard to the likely effect on the UK’s domestic and international commitments on climate change.
I fully support the intention behind these amendments, of course, but the aim of this measure is to enable the implementation of a specific prudential regime to apply to a specific type of firm. The current “have regards to” provisions in the Bill are those that the Treasury found to be immediately and specifically relevant and that reflect issues raised by industry. I think about our relative standing and the importance of considering and aligning with international standards. Those are the ones that also relate to the equivalence decision and are directly tied to the implementation of the IFPR.
As the Chancellor set out in his statement outlining the new chapter for the financial service in the UK, if we are to achieve the net zero target it will mean putting the full weight of private sector innovation, expertise and capital behind the critical global effort to tackle climate change and protect the environment. The Treasury and the regulators are already making ambitious strides to that effect, and Members have referred to the role of the former Governor, Mark Carney. I draw attention to the green finance strategy, which the Government published just 15 months ago, and to the work across a number of activities in the City on which I have been seeking to lead over the past three years. The green finance strategy is something that the regulators have actively supported.
Stella Creasy
Apologies; I did not realise the Minister was going to move on. He has made an incredibly powerful case for the importance of including such a commitment, and he has essentially said that the Treasury might look to include it. He said that it had looked only at the immediate and specific regulatory requirements. Of course, many of us believe that we are facing an immediate and specific crisis, so can he tell us why the Treasury has not already taken on the issue of climate change, given that he has made a case that it should be part of it? He has gone for pop No. 3 in the shadow Minister’s list. There might be a sixth option here, which is: “If we did not come up with it, we are not going to support it.” That would be rather short-termist, surely.
John Glen
I hope I would never be accused of taking such an approach. The reality is that I want the Bill to work most effectively. As I just said, the regulators are already taking into account climate change as a risk to the economy. The FCA/PRA climate financial risk forum and the Bank of England’s climate change stress test are alive and working, and I am confident that they will continue to consider climate change risk when making rules for the prudential regimes. In that context, we will look carefully at the need to add that specific additional reason. I have also stressed the work that is going on internationally. We should ensure that what we put in primary legislation is actually best practice and in line with the evolving consensus on how to deal with such matters.
I turn now to amendments 24 and 42, which make a similar set of changes to the Prudential Regulation Authority’s accountability framework for the implementation of the remaining Basel standards. As I have already said, the Government are already considering how best to ensure that the regulators and the financial sector can meet the commitments, and the Bill grants the Treasury a power to specify further matters in both accountability frameworks at a later data, which could potentially be used to add such a “have regard” in future, if appropriate. Therefore, after serious consideration, I respectfully ask the right hon. Member to withdraw the amendment.
Mr McFadden
The Minister is effectively saying that this is not the right time or place, but it is something that the Government will carefully consider. Given the things that have happened in politics in recent years, prediction is a dangerous game, but I expect that this is something that the Government will eventually decide to do, and I think they will make a virtue of doing it at that time. Indeed, I can see the Chancellor making the statement to the House of Commons right now, saying, “This new requirement for the Bank of England, for regulators, for the whole of Government, puts the UK at the heart of this shift to green finance and the achievement of tackling climate change.”
I agree with my hon. Friend the Member for Walthamstow that the more the Minister said he agrees with this, the more it begged the question of why he does not do it now; we have to start somewhere, and putting it in here would only encourage it being put in broader financial regulatory systems. We also have this consultation in the future regulatory framework; it might even be part of the conclusion to that. For that reason, I am minded to press the amendment today.
Question put, That the amendment be made.
National Security and Investment Bill (Second sitting)
Tuesday 24th November 2020
(3 years, 4 months ago)
Public Bill CommitteesRead Full debate National Security and Investment Bill 2019-21 View all National Security and Investment Bill 2019-21 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 24 November 2020 - (24 Nov 2020)
The Chair
Q
We will now hear oral evidence from Dr Ashley Lenihan from the Centre for International Studies at the London School of Economics. Thank you for joining us today. Can you hear me now?
Dr Lenihan: I can hear you now.
The Chair
Q
Dr Lenihan: First, let me thank the Committee for including me in today’s evidence-gathering session. My name is Dr Ashley Lenihan and I am a fellow at the Centre for International Studies at the London School of Economics, as well as an associate at LSE IDEAS. My research for almost 20 years now has focused on foreign direct investment and national security.
Chi Onwurah (Newcastle upon Tyne Central) (Lab)
Q
Dr Lenihan: That is an excellent question. To answer it, I will first step back for a second and say that the Bill is a very important step in the UK’s alignment with its closest allies on this issue, and especially the Five Eyes, because there is clear evidence that states are trying to use the market and companies over which they have control and influence to gain economic, technological and even military power in foreign investment. During times of economic downturn and crisis when asset prices are low, the opportunities for that type of behaviour increase. Hence, we have seen these modifications to regimes not only in the West, but outside the West as well.
I think one of the most important elements of regimes as they have evolved—especially among the Five Eyes, but among our NATO allies and even in Russia and China—is the move to ensure that review mechanisms have the institutional capacity and resources that they really need behind them. Part of this institutional capacity usually involves a multi-agency review body of some type.
There is always a lead organisation, and in the West—especially in the US, Germany and France—these tend to be in Treasury or in business or trade Ministries, and that lead body, like the Department for Business, Energy and Industrial Strategy in the Bill, receives the information and handles the day-to-day activity. However, in the US with the Committee on Foreign Investment in the United States, the idea behind having a multi-agency review body with multiple agencies and Departments across vast areas of Government is that you have the ability for regularised monitoring and feed-in from these agencies across the spectrum of possible threats, and you have dedicated staff within those agencies who have the necessary security clearances, training and specialised knowledge over time to keep an eye on potentially risky transactions and bring them to the awareness of the lead agency.
One of the key elements of CFIUS that has been very positive is that, as it has evolved, it has brought in more agencies, not less, so you have multiple opinions on the same potential transaction being brought to light and discussed before any decision needs to be taken by a Secretary or Head of State, depending on the question. In CFIUS, that responsibility ultimately lies with the President, but the idea is that you have had a multiplicity of views and, under the Foreign Investment Risk Review Modernisation Act—the most recent update of US legislation—you have an ensured national security risk assessment made by the head of intelligence on detailed investigations of certain transactions.
The idea behind this is that—hopefully—any decision made will be viewed by the public as one that is truly based on national security concerns because of the debate that had to take place behind the scenes. That lowers the risk of politicisation and intervention, and again heightens the possibility of actually catching risky transactions in a way that otherwise can be difficult.
One of the great examples of transactions in the US caught not originally in the regularised monitoring process, but by a CFIUS employee in one of the agencies, was the unwinding in 2011 of Huawei’s purchase of 3Leaf, which was a US-based cloud computing technology company that had gone bankrupt. The assets, employees and patents had been purchased by Huawei—bankruptcy assets were not consistently monitored by the regime at that time. The purchase was caught by a Government staffer who happened to notice on his LinkedIn account that somebody whom he knew, who had partially run 3Leaf, was now listed as a consultant for Huawei. That transaction had to be reviewed and retroactively unwound. At that point, of course, one must assume that the bulk of the damage had been done, but it goes to show the importance of having not just one agency looking at these cases and being responsible; a multiplicity is needed across the piece. If I have any concerns with the Bill, my primary concern would be that the institutional capacity and resources behind the review regime are not made clear.
Chi Onwurah
Q
In terms of your work on investments, and the investment regime, is there not a risk that it ends up capturing a host of investment transactions? I am particularly thinking of the burden and impact on our innovative tech start-ups. The likely definitions of the sectors to be involved include artificial intelligence and data infrastructure. Based on your experience of other countries’ introduction of new investment screening rules, have you found patterns in how similar changes have affected foreign direct investment, and potential trade deals, which is a topical subject? Do you have any thoughts on ways to mitigate the burden and impact, particularly on start-ups?
Dr Lenihan: The Bill is arguably broader in scope on call-in powers than some other foreign direct investment regimes—I would argue that these perhaps even include the US regime—because it does leave wide latitude for call-in powers. The Bill also covers trigger events that are initiated by all investors, both domestic and foreign, and that is truly rare among Western FDI review regimes that are focused on national security. Usually, the concern is to focus the regime on investments from foreign-owned, controlled or influenced entities. Domestic entities and acquirers that have, for example, ultimate foreign ownership or influence in some ways should be able to be caught by any well-institutionalised and resourced regime. I am not sure why it is that we do not actually see the word “foreign” in the Bill, even though it is supposed to be based on foreign direct investment. Perhaps that is a concern about potential domestic threats down the road, but either way, it will lead to a much larger volume of mandatory notifications than most other national security FDI regimes—the US, Germany, Australia and other countries. Almost 17 have made changes in the past couple of years, and these have increased and been modified since the covid pandemic.
I understand that the legislation may be written as it is to include domestic investors, perhaps to avoid appearing to discriminate against foreign investors. I would suggest that that is probably too broad a formulation for focusing on and identifying real risk. The EU framework for FDI screening encourages its EU members to adopt mechanisms that do not discriminate between third-party countries, but that does not mean that it takes the word “foreign” out of its legislation to target foreign investments as opposed to domestic ones. Part of that is about the volume of transactions.
One thing I would highlight is that FIRRMA expanded the scope of covered transactions to include non-controlling investments of potential concern, as well as any other transaction or arrangement intended to circumvent CFIUS’s jurisdiction. But because it has had more cases to review on a detailed level in the past two or three years than in its history, since 1975, a major element of that Act is, again, around staffing and resources. There is a specific provision in FIRRMA, which is very clear that each of its agencies needs to hire under-secretaries in each agency just to be dedicated to this task.
There are two elements. An inter-agency review team is needed. You need enough staff to actually handle and catch all the risks. You the need the proper resources to do so—the right access to the databases, the right security clearances, the right training. On top of that, the volume of mandatory notifications will be increased by the fact that this is not just focused on foreign investment. I do not think there is much you can do about the foreign cases that you will get. There will be a high volume of those, and you need to be ready for them, but it is an important national security risk that needs to be dealt with.
The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Nadhim Zahawi)
Q
Dr Lenihan: Personally, I think they are fine. I know that might not be a popular answer with some. Germany, France and even parts of the EU framework set up this five-year retroactive for cases. I think that that is at minimum important. Other countries, such as China, Russia and the US, do not place any limit on retroactivity. I would have to check up on Australia and Canada, but there have been cases that have gone beyond a year there. Under the original Government White Paper, the idea of having only a six-month period, whether or not you have been notified, is quite dangerous, because there have been cases that were well known where they have been caught after that point.
Some of my examples are from the US. The reason for that is that it is one of the longest-standing and most institutionalised regimes. It is also one of the most transparent, from which we know most about the cases that have gone through it. I have looked at over 200 cases of this type of investment over a seven-year period in the US, UK, Europe, China and Russia. One case that stands out in the US is the 3Leaf acquisition by Huawei, which was caught almost at the year mark. Another good example that went over the one-year mark would be the review in 2005 retroactively of Smartmatic, which was a Venezuelan software company, and its purchase of Sequoia Voting Systems, which was a US voting machines firm. Smartmatic was believed to have ties to Chavez. However, that acquisition completed without knowledge of CFIUS and it was not actually able to be unwound until 2007. At that point, you worry about what has happened, but at least you do not have the ongoing concern.
You do need flexibility. With the volume of notifications and the learning curve that the investment security unit will have to undergo, or whatever the final regime truly looks like, it will take time to get the team in place and get the knowledge and systems down, to accurately catch even the most obvious investments that are of concern. Dealing with the kind of evolving and emerging threats we see in terms of novel investments from countries such as China, Russia and Venezuela needs the flexibility to look at retroactively and potentially unwind transactions that the Secretary of State and the investment security unit were not even aware of.
One thing is that for mergers and acquisitions transactions, which are historically what have been covered under these regimes, across Europe, Australia, Canada, Russia, China and the US, all the systems that have been used—the M and A databases: Thomson ONE, Zephyr, Orbis—take training, but they only cover certain types of transaction. They do not cover asset transactions; they do not cover real estate transactions, which are of increasing concern, especially for espionage purposes.
It is going to take time, and I believe that flexibility really needs to be there. It can always be reviewed in the future, but I do not think that so far foreign investment has been deterred in any way in countries that have that retroactive capability. To limit the UK’s capacity to protect itself for some kind of strange feeling that we need to be perceived as being even more open than everybody else when under threat is not really wise at this time.
Matt Western (Warwick and Leamington) (Lab)
Q
Dr Lenihan: I do think the US system is the most institutionalised that we have, and the best at the moment. That being said, Germany’s system is very good; it has caught quite a bit. The German system has also been very good about regularly updating, changing and adapting its regulations as it sees new emerging threats to itself. They seem to have good feed-in across Government and they are exceptionally good at co-ordinating with other states in terms of information of concern.
In terms of national security review, Canadian and Australian systems are quite good. The problem with those systems is that they tend to do national interest reviews at the same time or in tandem with their national security reviews. Over the long term, including national interest in the regime has had an impact on how they are perceived in terms of their openness to foreign direct investment abroad. In the OECD’s FDI restrictedness index, Canada and Australia rank far lower than the US, the UK, Germany and France, and I think this is because of their inclusion of national interest concerns. Similarly, on the World Economic Forum’s global competitiveness index, they rank far lower. That does not provide investors with the type of clarity that they need. In general, we see that investors tend not to be dissuaded from investing just because there is a new foreign direct investment regime, as long as that regime is seen to have clear regulatory guidance, is transparent, and is applied consistently over time.
France sometimes gets quite a bad reputation for economic nationalism, but its review mechanism is also quite good at catching potential threats to national security. Japan is an interesting case. It has been so restrictive for so long that it is a little harder to compare with the other western countries. Its system has been tied in again to an overarching inward investment regime that has been restrictive towards foreign investment for other means beyond national security, so I find that country to be less of a comparator for these purposes. I hope that answers the question.
Simon Baynes (Clwyd South) (Con)
Q
I have found your comments particularly interesting, Dr Lenihan. My own background is in the financial world, where I was involved in cross-border M and A and quoted equity transactions. I fully accept the premise of the Bill, which I think is important and has to be put into effect, and I draw encouragement from what you are saying about other regimes, but I am still left wondering a little bit whether, in practice, it will be really quite difficult for us to put into effect. Your point about the necessity of expertise among staff is crucial. Having sat at the centre of the process, I recognise that the point you make about a huge amount of information flowing across, especially in respect of unquoted companies, is very important; often, there is not much established information in the public domain. That first point is very important. The second point is that there is a very complex mechanism of market sensitivity as well. I do not quite know how this system intervenes with that. Also, within the UK itself there is a culture of openness, which has been touched on before, and in some respects we are a very different country from the others, particularly given the strength of the City of London. We therefore have the ability to transact in a way that some other countries do not, and a different culture.
The other point I wanted to raise and to hear your comments on is that there is a danger of political interference. I know that that is not the intention, but it must be a hazard in this process. What happens if the Government get it wrong about a company? Could not that be interpreted as political interference rather than seeking to establish a security risk?
Dr Lenihan: I started my career in mergers and acquisitions in aerospace and defence M and A, in London. I think you make an important point: the UK has historically been the most open country to foreign direct investment on most indices and indicators. That perception is strong, and I do not think that that culture of open investment will or should change with the introduction of the regime. To the contrary, it actually gives you one of the best starting points that any country has to do this.
As I said, on the whole, in the Bill as written, and in the statement of policy intent behind it, it is very clear that the powers for review and intervention should be used only for an identified risk of national security, and not on the grounds of national interest. Regimes that are based only on national security, like that in the US but also Germany and France—even with a very different culture in many ways—have not seen a lowering of levels of foreign direct investment over time, because they have introduced, modified or kept these regimes up to date. It is because, on the one hand, the stable environment that they provide and that the UK will definitely provide for foreign investors, is far more attractive than any uptick in cost from having to get up to speed on a new regime; also, they are able to retain these global perceptions of openness to foreign investment and ease of doing business because of the way in which the rules are applied. As long as the rules are applied consistently, and with clear reasons behind their use, and applied consistently and transparently over time, it should be okay.
The Bill provides for a lot of regulatory guidance, which needs to come forward in a clear and very easily comprehensible and understandable manner. As long as that happens, it should be okay. Global Britain should still be the proponent of liberal economic values that it always will be, while also being able to demonstrate to itself and to its allies that it is able to protect itself from this type of investment.
Going forward, Britain’s relationship with many of its Five Eyes allies is going to depend on having a comprehensive regime of this nature that is used well. Under FIRRMA, under US law, for example, the UK is an exempt foreign investor in certain categories—one of three with Canada and Australia. It has been stated that for that to continue––it is going to be reviewed––it needs to have a regime to protect itself. We can talk about this later, but part of that is about the potential concern about not just the ability to share intelligence on these issues, but about acquisition laundering, export controls and all these issues that tumble on behind that can affect investment, trade and intelligence-sharing relationships over time. That is important.
The research evidence shows that foreign investment is not deterred unless there is a problem in how this is applied. There has been politicisation of cases; demonstrated proportionality of response is also extremely important. There are many cases in which a threat to national security can be mitigated by agreements and undertakings without needing to block a deal. When you look at the modern history of foreign direct investment intervention across Europe and the US––even if you look at Russia and China and how they behave––the preference is, where possible, to mitigate national security concerns through comprehensive agreements, and that can be done in a host of ways. It can be that you have a board of directors that is only UK nationals, or that you require divestment of a certain black box technology company to another UK company or a friendly allied country. Whatever it may be, historically, there has been a preference for that type of action to be taken. Vetoes of cases are actually quite rare since world war one, when we first really saw this type of issue pop up.
The concern is if we see the UK blocking deals where it could mitigate because a deal has become a political hockey puck. In today’s world, where this is something that is constantly discussed in the Financial Times and The New York Times, whereas it was not 15 years ago, any case has the potential to be discussed widely in the political debate. The question is how it is treated by Government and how other countries perceive that treatment. I know that I have used US examples quite a bit, but if you look at US-China investment, China still invests a lot in the US, even though it complains every time a deal is blocked or mitigated. The reason behind that is because this is a sovereign right under customary international law, and China does the same thing when it has the same concerns. It is only if a case becomes truly politicised that there is an issue.
To give you an example, in 2005 in the US, the case of Dubai Ports World and P&O, which was a takeover of a UK company, became overly politicised in the US system. It is one of the only real examples where it has happened, and that was because there were a few US lawmakers who had a completely different view of the risk and relationship of the US vis-à-vis the United Arab Emirates than the Department of State or the Department of Defence. That is quite rare but what ended up happening was US lawmakers seeking to block a deal when most reasoned professionals in the industry and in various Government Departments thought that any risk could be mitigated simply in a host of other ways.
In the case of overuse, overbalancing, misuse, politicisation, whatever you want to call this tool of economic statecraft, there was a momentary blip in relations between the US and the UAE. There was a momentary stalling of trade talks, change in the currency basket and some uncomfortable months, but the relationship was strong enough to survive and it usually is. This is not really an aspect of going to war. I think the key is proportionality in response, how it is applied, and it is about consistency and transparency. The Bill is well written in many ways, but how it is used can go any number of ways, so it is about how the UK uses it going forward.
The Chair
Thank you, Dr Lenihan. There are lots of Members wanting to speak and we have limited time, so I will try to get through some quickly. I will call Stephen Flynn, Mark Garnier, then Stephen Kinnock.
Stephen Flynn (Aberdeen South) (SNP)
Thank you for your comprehensive and helpful answers, Dr Lenihan. I would like to divert back to some of the comments that were made about the Bill on Second Reading, particularly relating to definitions, or a lack thereof, in relation to national security. I would welcome your thoughts as to whether the Bill should or should not have a definition.
My second question relates to the scope of the Bill, which you mentioned earlier. In terms of the consultation going on, 17 sectors have been identified. The glaring omission seems to be social media, but I would appreciate your view on whether artificial intelligence would cover off social media to a level that you would be comfortable with.
Dr Lenihan: Those are both really good questions that I hoped would be asked. If national security is that which seeks to maintain the survival of the state and preserve its autonomy of action within the international system, unfortunately that means that you cannot necessarily define national security in law without binding yourself in an inflexible way. What we have seen is that most foreign direct investment regimes of this nature all refer to national security. I do not know of a single one that actually defines it or limits itself to a particular definition. I could be recalling incorrectly but I have looked at over 18 of them and I have never seen a particular definition.
What you do see in regulations is guidance as to how national security risk might be assessed or examples of what could be considered a threat to national security. US guidance is helpful on this, in terms of how they put their regulations together. Some have argued that it is too comprehensive—it is a lot to read and provides the lawyers with a lot to do—but it is useful and has meant that the process of knowing when you might be triggering concerns is easy to navigate. I really do not think that the UK wants to define it in the Bill.
There was a US Government Accountability Office report in 2008 examining the foreign direct investment restrictions in 11 countries at that time. Each was determined to have its own concept of national security but none of them actually defined it. In 2016 the OECD did a similar report after a new resurgence of changes in laws, and it looked at 17 countries including Lithuania, Korea, Mexico and Japan, and they came to the same conclusion. The OECD has quite good guidance in general on this and they have not recommended that their countries define national security risk, but they have recommended regulations to help increase transparency around what could be considered a risk.
Regarding the sectors for mandatory notification, I think that is a very good question and one that it is difficult to grapple with in many ways, because the threat is emerging and changing at the very same time that technology is emerging, changing and interacting with our society in various ways. Various countries have been trying to deal with this. In the US, a final rule was just put out in relation to non-controlling investments and situations where you have certain mandatory notifications. A pilot programme was initiated in 2018 to try to define—as your consultation will, in many ways—the proper sectors using North American industry classification system codes, instead of standard industrial classification codes as the UK regulation does.
Whatever codes you use, though, the US found that they had an incredibly high volume of mandatory notifications and were not necessarily getting to the issue that they wanted to. They have changed that under the final rule, and now mandatory notifications in that classification are going to be defined [Inaudible.] and would come under certain US export control regimes. The idea behind that is that the US is doing a review of export control regimes, which will try to get to what foundational technologies might be of concern. I think that applies to your question about social media.
Social media is of concern because of the data, and data retention, involved in most social media. As I understand it, the sectors in the Bill will be kept under constant review and can be changed and updated as needed. That is important, and it might be worth doing a pilot programme.
The Chair
Dr Lenihan, I was trying to squeeze two more questions in, but I think it will probably be just one.
Mark Garnier (Wyre Forest) (Con)
Q
Secondly, it is worth bearing in mind that the Minister, Lord Grimstone, sits in both the DIT and BEIS. He is responsible for investment promotion. We are talking about more acquisitive types of investment, but do you see a potential conflict of interest between the ambitions of the Government to secure more investment into the UK and potentially having the wrong kind of investment?
The Chair
Sorry, Mark, but we have about 90 seconds for that to be answered. Please have a go, Dr Lenihan.
Dr Lenihan: I would suggest that the investment security unit and the unit that will handle the processing of this regime remain in BEIS. That is fine; however, it would be useful to set up in the Bill some sort of multi-departmental review body that contributes regularly, and that has staff in those Departments who monitor the risks in relation to this concern. As you say, the Department for International Trade will be able to monitor, find and catch risk that others—such as the Foreign, Commonwealth and Development Office, GCHQ and its new cyber unit—cannot.
It would seem very strange to not have a feed-in from intelligence agencies and the Ministry of Defence on a regular basis. If you set that up in an institution that is clear, at least to the outside world, about its composition and makeup, as opposed to having ad hoc feed-in over time, it would help with the perception of openness from the outside. It would also help to counter any claims of an individual or place being politicised or used for some other purpose by a particular Minister, because then they could give a balanced opinion for the Secretary of State in charge to make a final decision.
The Chair
Thank you very much, Dr Lenihan. That brings us to the end of the time allotted to the Committee for asking you questions. We are grateful to you for your time. Where members of the Committee wanted to ask questions and were not able to, I will try to give them a bit of priority on the next panel—or in another, if that is helpful.
Examination of Witness
Michael Leiter gave evidence.
The Chair
We come to our fourth panel of witnesses. We will hear oral evidence from Skadden, Arps, Slate, Meagher and Flom LLP and Affiliates. For this panel we have until 3.30 pm. Mr Leiter, I welcome you, and ask you to introduce yourself for the record.
Michael Leiter: Good afternoon. My name is Michael Leiter, and I head the national security and Committee on Foreign Investment in the United States practice at Skadden Arps. It is a pleasure to be with you this afternoon.
Chi Onwurah
Q
Michael Leiter: Thank you for the question; it is quite a good one. It is one that the United States has struggled with, as have other countries and their regimes. We suggest a couple of approaches. First, one piece that I think the Bill does quite well—although there is a countervailing concern that has to be addressed—is not having a de minimis threshold, in terms of dollars. The Bill is quite strong in that regard, because as you note in your question, just because someone acquires a start-up company for a relatively modest amount—a few million pounds—it does not mean that that company and that technology does not have, or will not have, very significant national security implications.
The flipside of that is, of course, that without the de minimis threshold, it becomes a far more difficult regime to manage. The volume can be much higher. It can potentially poison venture capital innovation. This is best balanced by not having a threshold for dollars, as you do with the no de minimis threshold, but then making sure that regulators have the ability to review these matters extremely quickly. The pace of investment in emerging technologies requires a very short timeframe. It is not like a large public company transaction, which has extended timelines. As long as one implements a very rapid review process and has the officials in Government to keep up with that potential backlog, I think those two interests can be effectively balanced.
Chi Onwurah
Q
Michael Leiter: This is very important. I was rather taken aback by two things about the Bill. The first is the projection of over 1,000 matters, going from the very, very few that the UK has traditionally had; this is an explosive increase in matters. I am concerned that no Government are ready for that rate of change. Even in CFIUS under FIRRMA, although there is not an increase in the overall number of long-form notices, in the short-form declaration process, there was an increase. That was relatively modest, an increase of about one third, so the US now reviews approximately 240 full cases, and about another 100 short-form.
When you talk about going from a few dozen to 1,000, you have to be very sure that you have both the resources and the expertise to process that. I would be concerned by that. Another case where your Bill goes much farther than anything I have seen, and certainly much farther than anything in the United States, is in encompassing not just acquisition and investment in businesses but acquisition and investment in supplies, goods, trade secrets, databases, source code and algorithms, so it is tangible and intangible objects, rather than businesses. That scale is very difficult to predict, and if one is more in the mood for incremental change, so as to see how a Government can handle change, including those elements poses some real risk for management.
Nadhim Zahawi
Q
Michael Leiter: I am honoured to have worked with the UK Government for 20-plus years on security issues, and over the past 10 years on economic issues. I certainly think you have the potential to strike that balance. In the US, traditionally, the CFIUS structure was a balance between the security agencies, which tended to want to restrict investment, and the economic and commerce agencies, which tended to want to encourage that investment. Certainly, in the case of China, we have seen massive decline in direct investment because of both Chinese controls and US controls: a tenfold decrease from 2016 to 2018. But as you said, the scale and strength of the US economy mean that global investors look to the United States no matter what.
I do not mean to make less of the UK in any way but, from a UK perspective, one has to be a bit more careful, because you simply do not have the scale that inevitably will attract investment. The US could be a rather poor place to invest, with lots of regulation, but people would still come because of the scale of the market. You don’t have quite that luxury. That is not to say that the UK has not for generations been an incredibly attractive magnet for investment, but whereas the US can err on the side of security, from my perspective, admittedly an American one, the UK might want to be a bit more careful about restrictive measures, because the size of the market is not in and of itself so inherently attractive that companies and investors must be in it. We have a bit of an advantage over you on this one.
Peter Grant (Glenrothes) (SNP)
Q
Michael Leiter: I was able to see part of Dr Lenihan’s excellent testimony, which was quite informative and good. First, to clarify, although the US does make distinctions for exempted countries—obviously those are the UK, Australia and Canada right now—that exemption is extremely narrow. It limits those countries only on mandatory filings, and only if investors from those countries fulfil a fairly rigorous set of requirements. So, although Canadian, UK and Australian investors were quite excited before CFIUS reform, when the regulations about excepted investors were promulgated, that has had a minimal effect on those countries. It is not a significant advantage. Those countries are still subject to CFIUS review in the vast majority of investments they make. Now, that gives only half the story, because clearly investments from those nations go through a much less rigorous review, and come out with much better results than those from countries where the US has a more strained security relationship.
On what I see in the Bill, I would say a couple of pieces about the excepted possibility. First, as I read the Bill right now, it covers investments from other UK investors—not even simply those outside the UK. If my reading is correct on that front, I have to say that is probably not wise. We have already talked about the significant increase you could have, based to some extent on mandatory transactions as well as some other factors, and I think trying to take a slightly smaller bite of the apple and not including current UK businesses in the scheme would be well advised.
To the extent one has open trade and security relationships with certain countries, lowering the bar for review to exempt them, or including things such as dollar limits and getting rid of the de minimis exemption, might well make sense. That is another way of making sure that the Secretary of State can focus on those areas you think are the most sensitive from a security perspective. Whether we like to do so or not, that can be aligned to some extent with the country of origin of the investor. It is not always perfect—one must often look below that, especially when dealing with limited partners and private equity—but it is a relatively easy way to reduce the load you may experience if all these measures were implemented.
Nickie Aiken (Cities of London and Westminster) (Con)
Q
Michael Leiter: Right now, it is a very robust list. In fact, I would probably err on the side of going in the other direction. I think this is a good list of 17, but what is critical is that these sectors gain further definition about what this actually means. Let me give you a quick example: artificial intelligence. I invite you to go online and try to find more than 10 companies in the world right now who are doing well and do not advertise their use of artificial intelligence in one way or another. It is one of the most commonly used marketing terms there is: artificial intelligence and machine learning, all to serve you in your area of work. If one interprets artificial intelligence as encompassing all those businesses, there will be a flood of reviews. Now, if one focuses on those companies not using artificial intelligence but actually developing artificial intelligence, I think the definition of the mandatory sector will make much more sense. That is an area where I think the US is still finding its way. As Dr Lenihan noted, the US began with a set of listed sectors where transactions were more likely to be mandatory. They eliminated that and now focus purely on export controls, but again, it is not that a company uses export control technology; it is that it produces export control technology.
That may be too narrow for your liking, but if one mapped out your 17 sectors as currently described to their widest description, I think there would be very little left in the UK economy, except for some very basic manufacturing and some other services that would not be encompassed. This is a very broad list and, again, I think it will take some time to tune those definitions so they are not overly encompassing. Again, if you look at data infrastructure, communications, transportation —at their extreme, that is quite a broad set of industry descriptions.
Sam Tarry (Ilford South) (Lab)
Q
Michael Leiter: Thank you for your question. I will do my best to provide some advice. I do so with some hesitation, because I readily accept from my experience working with the US and the UK that although we are related, we have two very different systems. The scale of our Governments and the scale of our private sectors are different, so one should always be very careful of trying to learn lessons from any other single country.
First, I would try to take this incrementally. This is a very big step and in trying to predict second-order and third-order effects of this—both the security effects, which may be positive, and the economic effects, which may not be as positive—I would tread carefully. I would start narrowly, then open up the aperture as necessary, rather than opening up quite wide and then narrowing it down.
Secondly, I think it will take some time, and not only to develop the administrative capabilities to handle this volume within the Government. I think you would have a significant amount of learning to do within your private Bar as to how this works, but also how to manage those voluntary filings. You are talking about including voluntary notifications across the economy, which I think is quite a sensible approach, but that requires a degree of collaboration between the UK security sector and the Secretary of State and the UK private legal Bar and commercial sector to understand where those national security threats and risks may lie. This is something that has developed in the United States over the past 20 years, but does not, in my view, yet exist fully in the UK.
Next, I would say that it is very important to consider how this should be applied for limited partners in private equity. Private equity plays a massive role both in UK and US investment and having clear rules about limited partners and the rights that may or may not implicate non-British ownership in those private equity funds is a very important step to take and one that should be clarified up front. It should not be approached without further clarification.
Lastly, I think it is important to build into the scheme the ability to evolve as technology evolves. I heard some of the questions about social media during the previous panel and it would have been very difficult to understand the sensitivities that are implicated by social media 10 years ago, or perhaps even five years ago. The ability for the review and notification to evolve with changing technology, access to data and new national security threats is critically important. The regime should be a living one that will evolve with those changed political or technological circumstances, not one that keeps still.
Sam Tarry
Q
Michael Leiter: Having worked with some of them, I think you have some outstanding individuals in some of the relevant Departments who can look at this matter. I believe that they will have to increase their interaction with the security elements of Her Majesty’s Government in a way that does not perhaps yet fully exist. The departments and agencies that I worked with while I was in the US Government were generally fairly separate from these sorts of investment review, and it will be necessary for training among those agencies to ensure that there is an understanding of the nature of acquisitions and investments in the private sectors in a way that security agencies do not yet fully understand it. Teaching the economic agencies about those security concerns will also be necessary. I think that the Government will need an initiative to make sure that there is a degree of integration across Her Majesty’s Government based on an understanding of those cross-fertilisations, which will take some period to take hold.
Andrew Griffith (Arundel and South Downs) (Con)
Q
Thank you for joining us, Mr Leiter. It is invaluable to have a practitioner’s perspective as we make legislation; that is something I would like us to do more often. I wanted to ask about your practitioner experience with respect to two things: first, the inclusion in the Bill of personal criminal sanctions and, secondly, its behavioural impact, from the point of view of attorneys and lawyers advising clients, on the likelihood of notification.
Michael Leiter: Let me answer that with two points. First, there is clearly an educational process when such a new regime comes into place for bankers, attorneys and business people. This regime will take some time for them to understand as well, but I think that the UK, like the US—I have already drawn some distinctions about the risk of reducing investment in both countries—remains overall one of the most attractive places to invest in the world. One of the reasons it is so attractive is that it has a strong rule of law and courts system, and clear legislation. In that regard, those who would come and invest in the UK very much understand the need to comply with these regulations, and criminal and civil penalties.
What we have seen in the United States is an appreciation, even if there was some initial shock at the scope of the review and what might be considered a national security concern, and a very robust understanding that we at the Bar and our clients have developed about the importance of these reviews and compliance with the legal regime that applies. I do not see any likelihood of, or reason for, the same not taking hold in the UK. I find that my clients are quite appreciative of the counsel we give them, whether it is related to the US or a UK foreign investment. Overall, I think that the concern tends be less about personal criminal liability, although such concern undoubtedly inspires some, and more about the ability to continue to have good, strong, open relations with regulators in the country in which business is being done. That is critical.
The second piece I would commend you on, which is much better than the US system, is that the Bill provides for a very full and complete review by your courts. That is quite positive, especially with the change that will have to be implemented by the Government. The fact that there is an ability to turn to the courts for review is central and important. As you may know, that is not nearly equivalent in the United States. The ability to pursue remedies in the courts in the context of CFIUS is actually quite narrow. On behalf of my clients, and for improvement of the system, I am quite jealous of your approach on this front.
Stephen Flynn
Q
Michael Leiter: I will take those in reverse order. You are absolutely right: the timing is often central to much of what goes on in the world of mergers and acquisitions. With respect to the effective five-year look-back with six months of notification, that is not dissimilar to what we have in the United States. It serves a very useful purpose in that it certainly incentivises parties to file voluntarily.
To the extent that one includes a voluntary notification regime, I think that it is very important to have some period of look-back. I do not have a strong view whether that should be four or five years, but I do think that look-back is important in a voluntary regime. Of course, in CFIUS, there is no statute of limitations at all, but in reality, we rarely see CFIUS going back more than one year, at most two or three. Again, I think that if everything were mandatory, this would not be required, because to the extent that one has a voluntary regime, it is perfectly reasonable to give the Government an opportunity to look back. Doing so also provides an important incentive for parties, because they will often calculate the likelihood of the Government coming and knocking on their door one or two years down the line. I think that a general approach makes sense.
With respect to the specific timeline for the reviews, your Bill mirrors not perfectly, but closely, the CFIUS approach. In most cases, that timeline works relatively well, but there are a few exceptions. First, in public company mergers and acquisitions, this is no problem. The period between signing and closing tends to be quite long, so the idea of 75 days is not problematic. Similarly, whenever you have a matter where there is a competition review, which of course encompasses many things—on our side, Antitrust and Hart-Scott-Rodino, and in the UK and EU there are separate regimes—that 75 day-period seems to fit relatively well, provides sufficient time for the Government do their review, and will not be problematic.
The place where I think this is more problematic—I apologise that I cannot recall the Member who asked the question—is in smaller-scale, early-stage venture investments. That is where deals can go signed to close within hours or days, and having that longer period could be quite disruptive. In that sense, to the extent that one is concerned with early-stage technology investment, these timelines can be problematic, and finding a window to get through that quickly is quite important.
Finally, with respect to the timing of implementation and the time that it will take to get up to speed, I think it is important to have this effectively phased. I know I have said this several times, but I think this is a rather seismic shift in the UK’s approach to review of investment. I am not saying it is a bad shift. I think it is a shift that is consistent with the United States and other allies in Europe, and Australia. I think it is going in the right direction, but it is very significant, so having some opportunity to make sure that both the private sector and the public sector are ready for that and understand the rules—that the sectors are defined in a clear way and that parties understand, especially in the realm of having criminal penalties—I think it is particularly important to do that.
I think there are probably ways, to the extent you are worried about a risk during that interim period that things are not being reviewed, of addressing that as well, with the look-back provision, or initially implementing things in a narrower or separate sense, but I would be a bit careful about not having some transition period, which allows, again, both the public and private sectors to adjust to this very significant change.
Stephen Flynn
Q
I am sorry to flip back again, but on smaller-scale early-stage ventures, we said this could be an issue, and again, I am sorry to pin you down: could it, or will it, be an issue? Where would you lean in that regard? Will we find that investors seek to go elsewhere with this a little bit more, where the timing is a little easier?
Michael Leiter: I think it will be an issue unless you are confident that small-scale, early-stage investors can have their transactions quickly reviewed within roughly 30 to 45 days. If it is longer than that, that will make the investment climate, I think, worse than other competing markets. I think that could have an impact.
On your first point, let’s face it, business always likes predictability, so you always want certainty, but deal makers have to understand risk and understand some uncertainty. That is inherent. I will say, it is not that the US has done this remotely perfectly. The US announced almost two years ago now that it was going to further define foundational and emerging technology that would then be subject to different levels of review under CFIUS. Here we are, almost two years later, and we still do not have that. The fact is that there has been uncertainty, and there will be uncertainty on your side as well. Having those definitions clarified as quickly as possible is good.
Do I think that a lack of clarity for three, four or five months about these sectors will suddenly stop investment in the UK? No. I don’t want to exaggerate it to that degree. You can try to pin me down, but the fact is this is all a matter of balancing, and there is no clear answer about when people will stop or start investing. More clarity is better. The faster there is clarity, the better, and to some extent, a lack of clarity will push people to look at other markets.
Stephen Kinnock (Aberavon) (Lab)
Q
Michael Leiter: Thank you for the question. The answer is that many regimes do draw such a distinction, which is generally a good thing, but there is an exception to that as well. This is important on two points, one of which I have already raised so I will not belabour. Understanding the ownership structure of private equity to understand how the Bill will or will not handle limited partners who are managed by a general partner at a fund is very important. That is a significant amount of investment, and clarity on that point is critical.
In the United States, for example, foreign limited partners in US private equity are fundamentally, overall, not considered for CFIUS. For foreign private equity investing in the United States, foreign limited partners are considered. Again, that is broad brush, but that is fundamentally how it works. With respect to sovereign wealth funds or state-controlled investments, there is a perfectly good argument that yes, the standard of review might be a bit more rigorous. In the United States, the way that works is that if a foreign Government-controlled entity invests in what is known as a TID business—one that that deals with critical technology, critical infrastructure or sensitive data—in the United States, and if they own more than 25% equity, that is a mandatory filing. So, it is increasing the likelihood of a mandatory filing if you are controlled by a partner.
Using such a standard makes sense. Right now, I do not believe the Bill provides many opportunities for that. You are already saying that, in the 17 sectors, all will be mandatory and there is no de minimis threshold. From that perspective, whether you are a sovereign wealth fund or not, it will be mandatory in a large scale of matters. You could of course say, with a dollar threshold such as you have now, that in the voluntary sector, if it was a state-sponsored entity, that would also be mandatory. I think there is some sense to that, but I would move slowly on that because, as I have noted several times, you are going to have a relatively high number of mandatory filings in the first place.
There is a second important piece to this, though, about whether you actually want to change it for Government-controlled entities. That is, especially in the case of China, but other countries as well, the distinction between state controlled and not state controlled is becoming less and less. Again, in some western democracies, it is quite clear whether it is a state-controlled entity, but to the extent a foreign Government can influence a private sector actor, that distinction starts to fade away, at least partially. Under your regime, it is not clear to me, other than expanding some voluntary into mandatory, how that will apply, and I think, to some extent, the distinction is losing some of its fineness.
Stephen Kinnock
Q
Michael Leiter: That raises two excellent points. First, yes, I think private equity is quite methodical about thinking of those restrictions. Whenever I deal with private equity in the Unites States, whether it is US private equity, foreign private equity or sovereign wealth funds, there is always a consideration of the way in which the business in which they are investing may be subject to a national security review and whether or not they will, even if approved, lose access to critical information, technology or other management control of the business in a way that would make it a less attractive option. From a US Government perspective, I think that is entirely appropriate; it is the entire purpose of the national security reviews.
It could affect the choices of private equity in the UK, but one still has to identify what the national security risk would be—and not just what the national security risk might be, but the extent to which, if the investment was allowed, the Government could still put in place restrictions that would eliminate or mitigate that national security risk. That leads me to make two very quick points.
First, there has been much commentary about defining what national security means. I would not welcome to go down that path; frankly, I think it is a bit of a fool’s errand. The Government will define national security as they may. Certainly, they should not overreach in extreme ways, but this is not one that I think legislative language is well tuned to trying to capture. That is not to say that it should not be limited in practice, but trying to capture it in legislative language is, I think, exceedingly hard. Again, it changes over time, depending on technology, access to data and other factors. One can imagine certain things that, before covid, we never would have considered to be issues of national security, but that are today. Capturing language for that is quite challenging.
The second piece is making sure that you have a good regime. We have been talking so much about screening, punishment and what falls into the bucket of review. There has been much less discussion here, and there is much less discussion in the law, about what mitigation and rules and enforcement there will be. If you permit a foreign investor to invest in one of these sectors and you put in place certain protections to protect British national security, how will you actually make sure that that occurs? It is wonderful to have these rules, but unless you actually have the regime and follow these things and ensure that there is enforcement and monitoring of them, you will have spent an enormous amount of time and money but actually not protected national security, so I think we should not give short shrift—[Inaudible]—deal is closed and approved but still being monitored by the Government for the very national security risk we are trying to protect against.
The Chair
We have to end this session at half-past 3, so I think that this will be the last question and it will come from Simon Baynes.
Matt Western
Q
Michael Leiter: I think your Bill does cover it. CFIUS would cover it in two ways. First, to the extent that a non-benign actor was behind the first transaction, CFIUS looks at the ultimate parent and whether it has been structured to evade review, so I think there is robust authority there. Secondly, the follow-on transaction itself would of course also be subject to CFIUS review, so I think you could catch it in the first instance or the second instance.
I think your Bill covers that. I will say also that I think the Bill is quite expansive and potentially problematically so. The US regime looks to see if there is a US business that is being acquired or invested in. That is a broad definition, but it still requires, generally, some physical presence, some people or the like. Your Bill does not seem to contemplate that, and specifically it says, “If the business simply provides supplies and goods to the UK or from the UK”. That is a very broad definition. It fundamentally means that if someone in London is buying something from a US business and it sends that to London—well, I read that as being covered by the Bill. That would actually be more expansive than CFIUS. It might, in that sense, give you greater national security protection, but I think it also may implicate a far more significant scale of transactions.
The Chair
Thank you very much, Mr Leiter. We are grateful to you for giving of your time so generously to assist the Committee.
Examination of Witness
David Petrie gave evidence.
The Chair
We now move to the next session. David Petrie is from the Institute of Chartered Accountants in England and Wales. Mr Petrie, would you be so kind as to enough introduce yourself for the record?
David Petrie: Good afternoon, Sir Graham, and thank you very much indeed for inviting me to give evidence to the Committee. My name is David Petrie, and I am head of corporate finance at the Institute of Chartered Accountants in England and Wales. My background is in corporate finance and mergers and acquisitions, for 10 years or so now in my current role at the ICAEW and prior to that with PwC. My experience includes advising on transactions, principally in the mid-markets, including private equity buy-outs, company sales and some infrastructure transactions. Prior to that I had a career in industry as well, so I have seen all sides of the fence on this, I suppose.
The Chair
Thank you very much. Before I move on to taking questions, I remind everybody that this session has to close by a quarter past four.
Chi Onwurah
Q
David Petrie: The Government have been very clear that the purpose of this legislation is to focus on protection of national security. The guidance notes they have issued, which accompany the Bill and are intended for market participants, are very clear on that aspect. I would suggest that probably all the factors you listed in your question extend beyond a simple matter of national security—if national security can be a simple matter; no doubt that this Committee has heard this afternoon about the difficulties associated with defining national security. Many of the factors that you set out there, important elements though they are to all stakeholders in a company, are not necessarily matters of national security.
I would also say that that for some of the companies that you mentioned there, while certain of their activities might well be included within the scope of this new Bill, it would be very difficult in certain instances to suggest that they had a direct impact on our national security. Of course, that would be up to the new investment security unit to determine, based on a full representation of the facts. If that unit was at all concerned, a procedure is set out in the Bill whereby it would be able to call for as much evidence as it felt was necessary in order to be able to reach a balanced determination on whether investment by an overseas entity did indeed constitute a real threat to our national security. I think that is the point here.
Chi Onwurah
Q
David Petrie: I have read the impact assessment, which included that example. It is a difficult situation, as described in the example. In accordance with the way that this new legislation is drafted and the number and extent of the sectors that are regarded as mandatory—the sectors in scope such that their operating activities would require a notification of the unit—the example set out in the impact statement would indeed require screening by the investment security unit. The Government would likely have the opportunity to review a potential acquisition in that software company.
I was struck by that example, in that it suggested that service had failed, or a malign actor had decided not to provide the necessary services to the airport. I think a broader question here is what might happen in reality. Those services would be procured through a commercial contract, which in turn would, presumably, be backed by insurance. If it were an absolutely critical service, I would expect that the airport would have a back-up system, whether power supplies or a parallel running system, as they do for air traffic control. There are commercial protections for the actual operating activities of critical infrastructure, which should work. It is difficult to protect against the actions of malign actors, but critical infrastructure already has systems and processes, and invests heavily in capital equipment, to ensure that there is not an interruption of supply. The question would be the extent to which ownership of that asset physically gave the owners of the shares the ability to get in and interrupt supply. That almost implies mechanical breakdown or some deliberate and malign disconnection. Again, companies have cyber-security systems in place to ensure that critical infrastructure does not fail.
The point you made was about whether suppliers of that sort of service to our critical infrastructure and their ownership should be subject to review. As the Bill is set out and as the sectors in scope are drafted—of course, the Government will consult over the next month or so on those definitions and whether they should be adjusted or whether they are as wide-reaching as they should be—a business like that would be captured. The investment security unit and, presumably, the security services would have an opportunity to review whether or not to allow that to go ahead.
Nadhim Zahawi
Q
David Petrie: I think a quasi-judicial review is really important and a part of the process, and then, if necessary, there is judicial review. I think the question cuts back to how many times that is likely to happen. We have to step back a little bit and recognise that that would be a situation where the parties to the transaction are challenging the Secretary of State’s decision as to whether or not this is in the interests of national security.
I would assume that if the sellers are British companies, they will probably have received what they feel are adequate assurances that it is okay to sell to an overseas acquirer, but the Secretary of State takes a different view, presumably based on evidence provided by our national security services. Ultimately, if there is a compelling body of evidence to suggest that a transaction should be modified or adjusted or, in extremis, blocked, it would be quite an unreasonable group of shareholders to disagree with that if the if the Secretary of State was applying the test as set out in the Bill, and indeed in the guidance note, that intervention is to be limited only to matters where the national security of this country is at threat.
That is quite different from the national interest. It is tempting—or possible, rather—in this debate to get sucked into questions about what we should and should not be doing in this country. That is not what this is about. The Government have been very clear to the investment community, and to British business more generally, about the purpose of this legislation. That is why, although markets and investors recognise that it will take a certain amount of time and effort to comply with a mandatory regime—the Government have been very clear about their purpose in introducing that—the market is generally favourably disposed towards it. We can see that it is unfortunately necessary in these modern times.
Stephen Flynn
Q
David Petrie: Perhaps I could deal with the second part of your question first, if I may, on the potential number of notifications that the new legislation is going to necessitate. The first point I make about that is that this new investment security unit will need to be very well resourced. A thousand notifications a year is four a day; I am just testing it for reasonableness, as accountants are inclined to do. That is quite a lot of inquiries. I note from the paperwork that the budget allocated to the new unit is between £3.7 million and £10.4 million. I do not know and cannot comment yet as to whether that is likely to be adequate. What I can say is that the impact statement also suggests that of those 1,000 or so transactions which are going to be subject to mandatory notification, only 70 to 95—the numbers set out in the impact statement—are likely to be called in for further review by the Secretary of State, where a very detailed analysis of those businesses and the potential target is going to be necessary.
As, I hope, has been echoed by other witnesses, it is going to be extremely important that this new unit can engage in meaningful pre-consultation with market participants—with British companies, finance directors, and investors and their advisers—so that they can get a pretty clear steer at an early stage as to whether or not this is likely to be subject to further review. If the unit operates in a way where it can give unequivocal guidance to market participants at an early stage and is open to dialogue—I understand from discussions with the Minister that this is the way the unit is being asked to operate—that would be extremely helpful.
I would say that that is about process, certainly, but I think it is also about culture. It has to be a balance, which is well achieved by the Takeover Panel, for example, in this country. You do not tend to approach the Takeover Panel unless you are well-informed and have done your homework—"Don’t bother us with stuff you ought to know” is the unwritten rule. But at the right time and place, I think it is important that there is an opportunity for market participants to be able to engage in a dialogue. The guideline where we put this “Don’t bother us with stuff you ought to know” question is going to shift. At the moment, we really do not know a lot about the way the Government are going to look at certain transactions. We do know which sectors and operating activities are in scope, but, again, we are not quite sure at what stage it will be right to consult and try and get clear guidance. This process will evolve.
I note that the Bill includes provision for the new unit to issue an annual report as to the number of transactions called in and the sectors they are in. That will be extremely helpful for market participants. An issue here, I think, is potentially asymmetry of information. In order to resolve potential asymmetry of information amongst the investment and advisory community, it would be very helpful that the unit is well resourced and able to engage in meaningful pre-consultation, but, by way of a third recommendation, it would also be extremely useful if it was able to issue meaningful market guidance notes, similar to the notes that accompany the takeover code. That would again be extremely helpful so that we can understand. It would help the market to be better informed. If, for example, the unit is receiving a lot of notifications that are not correctly filled in or with important details as to ownership missing, then it would helpful to have guidance notes as to what we can do to make sure this process works with more certainty, speed, clarity and transparency—these are the things financial markets need to see—to help us with that, beyond what has already been issued, which is very helpful, I have to say. As the market evolves, that would be extremely helpful.
Mark Garnier
Q
David Petrie: That is a very difficult question. We will find out—that is the answer to that. I think businesses working in sectors where there is a real threat to national security know that. They know that they are involved in weapons design or designing software that could have a dual use. In advising companies over the years, I have found that no one knows better than the company directors about the value of their assets and their business, both from a market perspective and to competitors or others seeking to gain access to their technology.
The Bill has been in discussion for some years now, and the advisory community is well aware of its existence and of the Government’s desire to put this legislation on the statute book, so I do not think there will be many corporate finance advisers for whom the Bill emerging last week was a surprise. I am very sympathetic to the points made about small companies falling under the provisions of the Bill, but I hope that it will be possible for them to complete what, in the first instance, is a five-page questionnaire—when completed, it could run to 20 pages or more—at a relatively low cost.
To my earlier point, I hope they are able to engage in formal and meaningful dialogue with the unit at the earliest possible opportunity by saying, “This is what we do, and this is what we are worried about.” They have to say, “We’re concerned about this. These are the people from whom we are hoping to attract investment to take the business to the next stage. How do you feel about our business, and how do you feel about the people we are talking to? How does the Government feel about xyz corporation?” I think that kind of steer would help remove a great deal of uncertainty from the circumstances that you have set out.
Simon Baynes
Q
David Petrie: On the question of tangible assets, it really depends on what we are talking about. Again, it was trailed in the White Paper and the Green Paper that assets would also be within scope, so it is not going to be a surprise. It depends very much on the nature of those assets. In a relatively small country, the ability to acquire land or other buildings—strategic assets—immediately next to a sensitive military installation is, presumably, now included within scope because people who know about these things think it ought to be. I think the investment community will have a degree of sympathy there.
With intangible assets, that is a much more difficult question. It depends on the extent to which ownership of those assets is necessary in order for a malign actor to have the control or the information that they might need. It is possible to gain access to intellectual property through means other than ownership, so the question here is, how might those intangible assets be applied in ways that might prejudice our national security in some way? Again, that is something that the unit is going to have to assess on a case-by-case basis.
It makes sense to include assets that could be sold separately, without the sale of shares in a business. Companies often do that. They may well sell a parcel of patents, or parcel up a division and sell it on because it is no longer core to their operating activities. That is understandable. The investment community will understand that. In short, it is not a surprise, and we are going to have to find our way through this on a case-by-case basis.
Simon Baynes
Q
David Petrie: That would be the most obvious example. There are things like industrial designs, blueprints or chemical processes that may not be subject to patents. It is typically those aspects of production and design that it is necessary to ensure would be in the scope of this kind of legislation.
Much of the discussion that has led to the publication of the Bill has been around the ownership of shares or of the business—as to whether that is actually the bit that malign actors might want to get hold of. That may not be what really interests them with the business. It may well be intellectual property or these other assets, which it is necessary to separately define. If they are able to get hold of those without buying the company, then it seems to follow that it makes sense to include that within the scope of this Bill.
Simon Baynes
Q
David Petrie: Yes. I don’t think anyone is suggesting that the job of this new investment security unit is going to be straightforward. In fact, we are absolutely not suggesting that. It is going to be absolutely essential for Government Departments to work together and, going back to my original point, for this unit to be extremely well resourced, to be able to respond quickly and appropriately to what is put before it.
Peter Grant
Q
David Petrie: This is an issue that is well recognised by the investment and advisory community. I think that, as you say so rightly in your question, the warning flags, flares or whatever they might be will already be going off if this is a particularly sensitive military asset that is being considered for acquisition. I think that the unit will be able to look first at the nature of the asset, and it will be apparent very quickly as to whether this is a very sensitive issue. If the acquirer is not a British public limited company, a British private company or one invested in by private equity, if the ultimate ownership is structured in a way that is not conventional—many companies are held through offshore companies for entirely conventional, obvious and transparent reasons for the investment community—and if there is something strange about that ownership structure that makes it extremely difficult to trace the ultimate ownership, it feels to me as though that would be one of the 70 to 90 cases that the Secretary of State would want to review in a lot more detail. Then, due and diligent inquiries would be made to try and understand the ultimate ownership of those holding companies. There would be lots of complicated diagrams drawn, no doubt, showing who owns which bit of what and who are the key individuals and shareholders. The answer would be that, I am afraid, this unit is going to have to keep digging until they get to the bottom of who are the ultimate shareholders.
The Bill is drafted in such a way that you do not need to own much in the way of shares—or there are provisions included within it such that if an entity or individuals, or individuals reporting elsewhere, have control or influence over those holding companies, that in itself would be something we would be concerned about. The Bill includes provision for that because we know, and I believe the security services are well aware, that the equivalent of layering is used for acquisition of these sorts of businesses, or people have certainly tried to do that. So, it is going to be a matter of hard work and digging to get to the bottom of who really owns and controls those entities.
Peter Grant
Q
David Petrie: I suspect that would be the corollary of that, yes. We are probably dealing with a relatively unusual set of circumstances here. It rather assumes that the shareholders of the British company are absolutely determined to sell or take investment from an entity where its ultimate ownership is quite difficult to identify. We are dealing with quite an unusual situation—not unprecedented, certainly, but relatively unusual. I do not know what resources the new unit will have at its disposal, but given that this is relatively rare and is a question of national security, I would expect that the Secretary of State would ask it to use whatever resources are necessary to gain the information it needs.
I hope—again, we will see—that the closed doors process for the judicial review, should it come to that, would enable national security to be protected, so that if there were some other breaches as a result of the investigation, or if explaining how we found out what we know caused a breach in national security elsewhere, that problem could be resolved. I am comfortable—I think that would be the right expression—that those difficulties can be dealt with in circumstances in which the absolute preferred option for the company is to take investment, but I have to say that I think those circumstances would be relatively rare.
Sam Tarry
Q
David Petrie: Yes, I have. The Government have been very clear about the need to bring this legislation on to the statute book, and they have done so through the Green and White Papers. When consulting on the White Paper, they sought opinion from a very broad spectrum, including business groups, businesses, the investment community and so on. They have set that out in the response to the consultation.
The next consultation is the one on the sectors within the scope of the mandatory regime, and the next month or so is going to be a very important stage in this process. Defining those sectors in a way that market participants understand and that does not trigger manifestly unnecessary notifications is going to be very important, and we look forward to engaging in that process, as does the legal and investment profession and British business.
Sam Tarry
Q
David Petrie: Yes, that is an important consideration. I hope that if small businesses have limited resources, that is recognised by the new unit, and that smaller businesses are able to have an open dialogue with it, and can say, “This is what we do, and this is what we need the money for. We are going to need it quite quickly because we are running out of money.” If the unit is able to give unequivocal guidance very quickly, that would be very helpful.
I would also say that the new unit should not treat the 30-day turnaround for a mandatory notification as the target. The target should be to respond as quickly and efficiently as it can, and in such a way that does not cause difficulty or distress for small and medium-sized companies. A five-page form for a small or medium-sized company seeking investment for a UK or a relatively straightforward overseas entity is not a terribly burdensome obligation. I hope that it will be possible for them to find their way through that at relatively low cost.
The Chair
I do not think there are any more questions, so once again I thank you, Mr Petrie, for generously giving your time to assist the Committee.
David Petrie: Thank you.
Examination of Witness
Chris Cummings gave evidence.
The Chair
We welcome Chris Cummings, the chief executive of the Investment Association. Mr Cummings, would you be so kind as to introduce yourself for the record?
Chris Cummings: Thank you for the opportunity to appear in front of you. My name is Chris Cummings, and I am the chief executive of the Investment Association. We represent UK-based fund managers, an industry of some £8.5 trillion used by three quarters of UK households today. We own roughly a third of the FTSE.
Chi Onwurah
Q
Chris Cummings: Thank you; that is such a pertinent question. Before I address the substance of it, I want to try to describe the work of many of my members, which is broadly portfolio investments. They seek not to acquire a company but to invest, taking a very small stake—a fraction of a percent—of those companies. That provides an opportunity for those companies to receive the investment they are looking for, and enables us as investors to invest in a company, an industry or a whole sector in order to generate a return for the investors whose money we are managing. They tend to be pension funds and insurance companies—institutional investors.
Of that £8.5 trillion I mentioned that we manage, about 80% to 85% comes from institutional investors; the other 15% or so comes from retail: people on the high street saving in individual savings accounts and so on. Our view on the Bill is about how we can continue to do our work to help finance companies in the UK and internationally with the investment collateral that we can bring to bear. We do that in the two major parts of the market: listed companies and unlisted companies.
Perhaps I can address the point you made about small and medium-sized enterprises. We make investments in unlisted companies—of course, small and medium-sized enterprises are not listed organisations—by developing an understanding of sectors and industries. We look for individual institutions that we regard as high-performing—that is, high-performing over a long period of time, because we are patient investors, tending to take a long-term view, unlike colleagues in other parts of the industry, who are more high-frequency, or looking at a two to three-year earn-out period. To help us do that, we need two things. The first is legal certainty around the investment climate here in the UK, so that we understand the rules of the game, so to speak. This particular Bill is helpful in establishing greater clarity about the rules of the game; we do have one or two caveats, but it is helpful. The other is publicly available information, such as analysts’ reports—the type of thing that we as investors would look to receive and interrogate, and on the back of which we would then make an investment decision.
We are really looking for whether the Bill helps make the UK more attractive; whether it helps us funnel savings into productive investment that can help companies grow, create jobs and so on; and whether it is adding to the legal certainty of our investments. You are right to ask about SMEs; our members who invest in higher-growth companies are really keen to make sure that the process is as friction-free as possible, and that there are no surprises. Being very clear about a pre-notification regime is especially important to us, as is something like the five-year review period that could come after a deal has ended. Certainty about those 17 sectors is particularly important as well. That is why we have wanted to maintain a really close dialogue with the officials—the team that has sponsored this Bill—to make sure that no inadvertent barriers have been erected to us deploying that investment in the right way.
One of the suggestions we would like to commend to this Committee is something we have seen work particularly well in Japan, which considered a similar raft of legislation: a blanket exclusion for investment—not for takeovers, obviously, but for portfolio investment, where the investment industry wants to support unlisted or listed companies, and it is clear that there is not a desire to take them over, involve ourselves in the management of those firms, seek a position on the board or secure the intellectual property, but where we are just performing the role of long-term investor. That has been judged as being outside the scope of the legislation, but we commend that to the Committee as a practical step that takes forward the principles of the Bill and secures the “investability” of the UK’s investment landscape.
Chi Onwurah
Q
Chris Cummings: Forgive me: I noticed that I missed the point about mergers and acquisitions. We regard the pre-approval facility that officials have mentioned—I believe the last witness mentioned it, as well—which is a way in which the team responsible could be approached ahead of a deal being put together, as a very sensible, practical step forward, as long as confidentiality was absolutely rigorously maintained.
In terms of definitions, we find the Japanese definition quite attractive, and again we commend it to the Committee. It clearly differentiates out investors such as the ones we represent, who are looking to provide capital for a company and share in its success for the benefit of the investors whose money we manage, but are not seeking to take an active role in the management of those companies. We are not looking to put somebody on the board; we are not looking to intervene directly in day-to-day management decisions. Our relationship is with the board chairman and so on, in order to engage in a constructive and strategic discussion, but we stop short of securing assets or taking an active role in management. That is a system that works well.
Turning to our caveats, I mentioned the five-year review period. We undoubtedly recognise the spirit in which this legislation is drafted, but Governments change, as does public opinion. The strength of this Bill is that it is focused around national security. Perhaps a definition of national security may go a little further in helping investors as well, because we could not really strike upon a catchy, well-turned phrase that defined national security, and have a reluctance to move away from national security; we would hate to see the Bill being widened into more public interest ability.
A final point to note would be the interplay between this legislation and the Takeover Panel, which has a different and distinct role to play. The notification percentages are slightly different: it is 25% in the Bill, and 30% in the Takeover Panel, so ensuring that there was no accidental misalignment would be most useful.
Nadhim Zahawi
Q
Chris Cummings: When it comes to a clarification point around national security, this is similar policy-intent-driven legislation to what we have seen in other emerged markets, such as the US, Germany, France and so on. We do not find that it is out of step with other developed markets. In other jurisdictions—I will take the US as an example—the legislation has started small and then grown as people have become familiar with it. The UK, perhaps because we feel we are playing catch-up—that is not for me to say—has started on a larger scale first. That is why there are queries around scope and around the durations. We look forward to engaging with the definition of the 17 sectors to ensure it is as specific as possible, and to ensure that we understand the operation. We would like to hear from officials and colleagues in ministerial positions on how they see it working in practice, so that the investment community is really clear that the rules of the game have not changed, and that the UK really is as attractive as we want it to be for incoming investment.
As I mentioned, we represent UK-based investment managers, but of course, those organisations are headquartered not only across Europe, but in other parts of the world, particularly the US. We are managing pension scheme money not only for UK savers and pensioners, but from other parts of Europe and places as far-flung as Brazil. If we as investors were looking to make an investment in UK plc, we would need to be clear about where head office was, and where the money was coming from. All those things could be either pre-approved or ruled in court as quickly as possible to ensure that there is not a missed beat in attracting the investment that we all want to see.
Nickie Aiken
Q
Chris Cummings: As for particular strengths, we feel that the aspects that deal evidently with national security are strengthening a regime that needed some modernisation.
On the protection of intellectual property, one of the key areas—it is absolutely essential for us as investors—is knowing that if we are investing in a particular company, we are doing so because, depending on the market and sector it is in, we feel that the intellectual property is clear, maintained and protected by clear legal contracts, and that if something goes awry, we, as investors, have recourse to legal sanctions.
There is much in the Bill to be commended. In terms of areas of weakness—forgive me; I feel I have touched on these—it is about ensuring that, as investors, our position is clear and understood. In investing in a company, when doing that not to try to take it over or seize the reins, it is to provide more of a long-term investment to support the company’s development. We do not feel that quite comes through in the way the Bill has been written at the moment. It has been written, rightly, for takeovers. We do not want to be hit by ricochet —by accident—in wanting to continue to support UK plc and find that new barriers have been erected that prevent us doing that, simply because this part of the investment landscape had not been completely thought through. That is a caveat, rather than a point for deep consideration.
Nickie Aiken
Q
Chris Cummings: That is something we are looking forward to engaging with. When you first hear it, 17 sectors sounds like quite a lot, but having worked through the 17 sectors and looked at some of the draft definitions, I think that each one is justifiable.
We would be keen to point out a few things to the Government. First, the greater the specificity around the definitions, the better. Secondly, we should not rush to change the sectors by adding to them too quickly. Investment needs a degree of stability, and legislative stability most of all.
Thirdly, in consulting with industry and thinking about the operations and practice, I would ask to have industry expertise around the table. We found time and again working with officials—they are hugely valuable, talented individuals, but do not come from a commercial background, almost by definition, although some do—that having the commercial insight, we can play a role in nudging in the right area, to ensure that nothing is hard-coded that would prevent a deal because the nuance has not been appreciated. Having that industry insight would be a big step forward, if it could be accommodated.
Peter Grant
Q
Chris Cummings: With any new piece of legislation, and certainly one of this character and this far-reaching, investors will always want to understand the motivations that led to it being introduced, how it will work in practice and whether we can give case studies as quickly as possible to prove that it does work in this way.
The important thing—I cannot stress this enough—is how it gets spoken about by Ministers. That enduring political support for investment carries such weight with investors. More than the words on the page, what matters is how it is presented—how Ministers then talk about the desire to continue to attract investment and how they make themselves available to investors.
All major economies, because of the covid-19 crisis, are seeking new levels of investment, whether for individual corporates or infrastructure investment, let alone Government debt. We feel very strongly that the UK has a tremendous story to tell. Introducing new legislation such as this at a time when, bluntly, we are looking for more investment to come into the UK, will require a degree more explanation. The way it has been phrased so far, as national security and almost as a catch-up activity with other developed jurisdictions, is fine. However, if Ministers make themselves very much available to investors to explain how this will work, and make a bonus of the pre-authorisation facility, so that if investors are troubled that an investment they are considering could attract attention, there is an ability within 30 days —that is a really important point: within 30 days—to have it pre-approved and then stood by, that will go a long way in the investment community.
As you can tell, we will have to paddle a little bit harder, but that has the potential to be a short-term explanation for a long-term gain. Potentially, that is fine, but I say again that we hope Ministers will seize the opportunity to explain this to investors, the course will be set and we will not see further iterations or scope creep from national security to other sectors, which then becomes a little more worrisome.
Peter Grant
Q
Chris Cummings: Forgive me, but it is obviously not my role to advise future Ministers on attitudes they may take. I can simply say, from an investor’s point of view, that we prize stability, predictability and accountability beyond all things. Making sure that the rule of law applies and that there is no handbrake turn in policy direction matters hugely. Investment is being sought by every economy around the world, and it would be a very rash Minister indeed who decided to unpick something that is a great strength of the UK and one of our global competitive advantages: a system based on the rule of law and an approach to policy making that is entirely transparent and accountable to Parliament, which gives the investment community great confidence that the UK retains its position as being one of the safest places in the world to invest in.
From our perspective, that accounts for one of the reasons why our investment management industry here in the UK is globally pre-eminent. The UK is not only the largest investment centre in Europe; we are bigger than the next two or three added together. Only the US is a bigger market, and that is because of its substantial domestic scale. When it comes to international investment, the UK is streets ahead of its competitors. We would very strongly urge any parliamentarian, and certainly any Minister, to think twice before taking actions that would have a lasting consequence for our international reputation.
Simon Baynes
Q
Thirdly, to what extent do hedge funds represent members within your organisation? Obviously, they have greater capacity, or greater natural affinity, for investing in smaller companies—not always, but in certain cases. They might actually fall within the remit of the triggers, so I do not quite see how we could implement the blanket exclusion, if from time to time there are exceptions to the exclusion.
Chris Cummings: Thank you for asking me to clarify; I apologise that I was not as clear as I should have been. The hedge fund community has a representative organisation. It is a splendid one that can do a tremendous job in speaking for them, and I would not put myself in that position; I would not try to speak for them. We have members that invest substantially through private markets into smaller and unlisted companies. Again, it comes down to intention. The intention is not to invest in such a way as to take over the company and to seize the reins; the intention is to make an investment that is in the strategic direction of the company, to support its growth.
I am trying not the use the term “passive investment”, because we are anything other than passive when it comes to investing, but it is an approach that is designed to support the company, rather than to change dramatically the company’s ownership or direction, or to land one of our members on its board—in effect, they would then be part of the management and governance of that company. I hope it is more than a subtle definition; it is a distinction with a real difference. That is part of why we think it is an important distinction to make.
Other jurisdictions have been through similar experiences. The Japanese example is so relevant, because it is only a year or so ago that the Japanese Government were considering very similar legislation. As a result of consultation, they came up with the approach that we are suggesting: to exclude the activities of investors, insurance companies and so on, because it is around the intentionality—not wanting to take an active role in the management or to change the company’s direction, but to support through investment rather than to seek control.
The US has a similar modus operandi. It is not quite as framed in the legislation as it is in Japan—again, just through history. The approaches that we have seen in Germany and France also nudge in the direction that I am describing, so there are parallels. The Japanese experience is the closest match that I can offer the Committee, but we will continue to do further investigations and to feed in ideas through the Bill’s stages and through the consultation on individual sectors.
Simon Baynes
Q
Chris Cummings: Certainly, we are keen to see those smaller and medium-sized companies get access to as much growth capital and investment as they need. Part of our enthusiasm for this piece of legislation, and indeed others, is that it is an opportunity to re-excite the UK public about the opportunities for equity—for shareholder participation in fast-growing companies. That is partly why we are so keen to work with your Committee and others to communicate the message.
Perhaps a clearer distinction could be found for the difference between listed and unlisted companies. That is perhaps where we could focus our attention more, on explaining—I am not sure that “blanket exception” is quite the right language for me to use because that seems to be a one-and-done exercise and perhaps there would be more to it than that—but focusing the attention on the listed sector, where it is much more obvious that we as investment managers are investing for the long term rather than seeking control over the company. I hope that would allay some of the concerns that you rightly mention.
Matt Western
Q
Chris Cummings: You rightly raise the question of scale and resources. It is one of the things we have been consulting our members on, and having discussions with others, to try and get a better view of what the notification process would be, who would notify, who would then respond, the scale of the team in the Department that would be exercising due diligence in the applications and whether the system could cope. Bluntly, what would concern us deeply is having a 30-day notice or turnaround period that the Department regularly missed, because that would then create a shadow over this particular piece of legislation. It would gum up the works and, frankly, none of us would wish to see that.
Looking at how the regime works at the moment, with very few notifications, there seems to be a scale difference between where we are today and what the legislation proposes. We would like to hear more from Ministers on how they are going to address that and what the processes would be. There have been discussions about a portal, a very brief form of five pages or so that would be easy to complete, but I think a degree more of reassurance on that point would not go amiss—as would the confidentiality. There is so much around any investment process and the acquisition process that has to remain entirely confidential, that investors would require and would be looking for reassurance that these conversations could be held in the strictest of confidence and that nothing would appear until the right time. In terms of scale and resources, it is a point that we share your interest in.
I was making a note of the point you raised on transactions, but could you repeat that part of the question? Apologies.
Matt Western
Q
Chris Cummings: Thank you, and apologies again for omitting that. This is something that we, as the investor community, have been observing for the last few years at least, looking at the different requirements that Governments have tried to put on acquiring companies—Kraft Cadbury and so on, through to SoftBank—and seeing what has happened there, and the role that the takeover panel has been asked to play to police or report on those activities.
The intent behind the Bill at the moment seems to be for national security to preserve intellectual property in that R&D capacity here in the UK. If that is going to be seen through, transparent and accountable mechanisms need to be clarified in the Bill, on how that will work in practice, what resources will be in place to measure, monitor and report it, to whom it would report, and any sanctions that would be applicable afterwards. Those are definitely areas that we feel deserve further scrutiny.
From our point of view, as investors, the last thing we want is to invest in companies where we feel the IP is protected and the R&D facility is well known to us, but where within one, two or three years there has been either a change of management or further changes that mean that IP has been moved or duplicated elsewhere. That is a very legitimate concern.
The Chair
If there are no further questions, I thank you very much on behalf of the Committee for giving your time and assistance, Mr Cummings.
Ordered, That further consideration be now adjourned. —(Michael Tomlinson.)
Environment Bill (Twentieth sitting)
Tuesday 24th November 2020
(3 years, 4 months ago)
Public Bill CommitteesRead Full debate Environment Act 2021 View all Environment Act 2021 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 24 November 2020 - (24 Nov 2020)
The Committee divided: - Ayes: 5 / Noes: 9 - Question accordingly negatived.
The Committee divided: - Ayes: 6 / Noes: 9 - Question accordingly negatived.
The Committee divided: - Ayes: 5 / Noes: 9 - Question accordingly negatived.
The Committee divided: - Ayes: 5 / Noes: 9 - Question accordingly negatived.
The Chair
This may be entirely disorderly, but to give the shadow Minister time to collect his thoughts, I am delighted to be able to advise the Committee that my first grandson, Frederick Evelyn Gray Barker, was born this morning at 6 o’clock. [Hon. Members: “Hear, hear!”] That is something that can go into Hansard and it can be put on his nursery wall.
Clause 130
Extent
The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs (Rebecca Pow)
I beg to move amendment 231, in clause 130, page 116, line 31, at end insert
“except that section (Use of forest risk commodities in commercial activity) and Schedule (Use of forest risk commodities in commercial activity) (use of forest risk commodities in commercial activity) extend to England and Wales, Scotland and Northern Ireland.”
This amendment provides that NC31 and NS1 extend to England and Wales, Scotland and Northern Ireland.
The Chair
With this it will be convenient to discuss the following:
Government new clause 31—Use of forest risk commodities in commercial activity.
Government new schedule 1—Use of forest risk commodities in commercial activity.
Rebecca Pow
May I be the first to congratulate you on becoming a grandfather, Mr Gray, and to welcome Frederick to the world? He has arrived on a really auspicious day for our global footprint. I hope that he will be very proud when he is a bit more grown-up and reads in Hansard what his grandpa said—hopefully he might just read long enough to read this speech as well. I think that he will be rather proud also that his grandpa was part of this Committee.
Rebecca Pow
I am delighted to discuss amendment 231, new clause 31 and new schedule 1. Consumers in this country are increasingly concerned that they are contributing to environmental destruction overseas, and they are right to be concerned: almost 80% of deforestation is caused by agriculture, including produce that we use here in the UK. Globally, half of all recent tropical deforestation was the result of illegal clearance for commercial agriculture and timber plantations. Shockingly, the figure increases to 90% in some of the world’s most biodiverse forests, including parts of the Amazon.
We will be the first country in the world to legislate to tackle this illegal deforestation by setting a framework of requirements on business. Businesses will be prohibited from using forest risk commodities produced on land that was illegally occupied or used. They will be required to establish a due diligence system for regulated commodities to ensure that their supply chains do not support illegal deforestation, and will have to report annually on that exercise. If businesses do not comply, they should be subject to fines. The measures will extend across the whole of the UK, so that we can work across our nations to tackle illegal deforestation.
As the first country in the world to legislate on this issue, we want to continue to lead the way internationally. Therefore, the measures also require us to review the law’s effectiveness every two years. The review will set out any steps that we intend to take as a result, ensuring that we will take action if we do not see progress. The enabling powers in the framework allow us to adjust certain aspects as deforestation patterns change and technology advances.
The law before us today is not only a win for the environment. It is a win for UK consumers, who will have confidence that the food they eat and the products they use have been produced responsibly. It is a win for responsible businesses in the UK, which will no longer be undercut by those who do not follow the rules. And it is a win for our international partners in producer countries, because this approach will deliver for trade and economic development as well as for the environment. We have seen that in Indonesia, where the introduction of a timber licensing scheme meant that confidence in the provenance of its timber grew, leading to an increase in trade. The value of Indonesia’s worldwide exports of timber products doubled from $6 billion in 2013 to nearly $12 billion in 2019.
Richard Graham (Gloucester) (Con)
As the Prime Minister’s trade envoy for Indonesia, I had the great pleasure of working closely with colleagues from the Department for International Development and in our embassy in Jakarta on helping the Indonesians to find a solution to what was a significant problem for them. Does the Minister agree with me that this measure shows what the UK can do abroad on our environmental policies, as well as at home?
Rebecca Pow
I thank my hon. Friend so much for his intervention, because he is right to point that out. I must applaud him for the work he did with the UK Government. It was a tricky issue. Timber is an important export for Indonesia, but that must not come at the expense of cutting down its precious rainforests and other forests, with all the knock-on effects that brings for the wider environment. We have the solution for timber, with sustainable timber regulations sorted out, and we are now working on other products. My hon. Friend is right to point out how beneficial that can be all around, with the knock-on effects, and I thank him for that.
As a result of that work in Indonesia, the amount of money made went up, as I said, and deforestation rates were three times lower in areas producing timber covered by the scheme than in other areas, so it worked all around. That shows how driving demand for sustainable products helps not just the people there but nature and the climate—it is an all-round win.
I assure the Committee that the Government intend to move swiftly to bring legislation forward and will lay the necessary secondary legislation shortly after COP26, which we will hold in Glasgow next November. We will consult again to gather views as we develop secondary legislation, and Parliament will have the opportunity to scrutinise many of the regulations.
Dr Alan Whitehead (Southampton, Test) (Lab)
At the risk of incurring your wrath, Mr Gray, I will add my congratulations to those of the Minister on the birth of your grandson. I observe that your grandson shares a name with an esteemed public servant in my city of Southampton, and I trust he will live up to the achievements of that individual even if he does not indeed pursue a great career in environmental conservation and management, which perhaps would be appropriate to today’s proceedings. That is all I am going to say.
The Chair
Order. I am most grateful to everyone, but no more congratulations. Thank you. But he was born in Brighton, just down the road from Southampton, so pretty close by.
Dr Whitehead
There we are: the coincidences are raining on each other now.
The Government new clause and new schedule represent a tremendous step forward in action not only in the UK but, as the hon. Member for Gloucester said, abroad. That demonstrates how we can reach beyond our shores in environmental protection and action, as well as in due diligence for conservation, environmental management and climate change purposes. The Opposition wholly welcome these measures. However, why were they so late in coming?
I think we can claim we nudged the Government a little in that direction, because our due diligence new clause, which we will discuss later, is about the wider subject that the Minister mentioned in her remarks and points the way. We hope that the Government will go beyond forestry products and into other areas. We tabled our new clause, which substantially anticipated the Government’s action, before Parliament went into recess for the lockdown. Can the Minister reflect on why these measures were as late as they were? In her opinion, did the nudging of not only Labour but also a large number of national and international environmental groups, who banded together to develop the due diligence way of doing things, have a substantial hand in making sure—albeit a little late in the day—that these new clauses came into being? It was just in time because the Bill will now have these clauses in it, and I hope they will fully survive the rigours of the Bill’s passage through the House and come to be a substantial part of it. I think it will be a very welcome and progressive part of the Bill.
Rebecca Pow
I welcome the fact that the Opposition are in agreement and welcome this. Nobody in their right minds would think this is a bad idea. I welcome that and we do share a good relationship, so I thank them for that. Yes, the amendment was tabled and we all listened to it, and indeed we had plenty of people on our side pushing for it as well. This is a global issue. Let us tackle it together globally, which I think the hon. Gentleman will agree is what we are doing.
Ruth Jones (Newport West) (Lab)
While we are singing from the same hymn sheet and all in harmony, would the Minister agree with over 90% of respondents to the public consultation—there were 63,000 respondents, which is a fantastic result— who felt the legislation could go further and that local law should be strengthened?
Rebecca Pow
A great deal of consultation went into this and all of those views were looked at, and then it was considered what would be the best and most positive way forward. Tackling this issue is not straightforward and requires dealing with other governments around the world. One has to tread a careful path, and I believe we have come up with a really workable solution.
To answer the comment by the hon. Member for Southampton, Test about why we did not do this more quickly, the consultation took a long time and we had to take into account a great many views and discussions. We must remember that a lot of this originated from the work done by Sir Ian Cheshire and the Global Resource Initiative. We referenced that way back in March, when I was being asked why the Government were not doing this fast enough. We had the GRI’s summary and we were working up how we could continue to work from its recommendations. That is where we engaged with so many NGOs, particularly the Royal Society for the Protection of Birds and WWF, because they are valued partners with a great deal of experience. They have been helpful in inputting into what we have come up with. I hope that is helpful to the shadow Minister and I think we will have a bit more discussion about this later, but I will leave it there.
Amendment 231 agreed to.
Clause 130, as amended, ordered to stand part of the Bill.
Clause 131
Commencement
Dr Whitehead
I beg to move amendment 2, in clause 131, page 117, line 21, leave out “on such day as the Secretary of State may by regulations appoint” and insert
“at the end of the period of six months beginning with the day on which this Act is passed”.
This amendment seeks to prevent the Secretary of State from choosing not to enact parts of the Bill. Currently multiple provisions including the whole of Part 1 (environmental governance), Part 6 (nature and biodiversity) and Part 7 (Conservation Covenants) could never be enacted, even after the Bill has received Royal Assent.
The Chair
With this it will be convenient to discuss the following:
Amendment 151, in clause 131, page 118, line 2, leave out “on such day as the Welsh Ministers may by regulations appoint” and insert
“at the end of a period of six months beginning with the day on which this Act is passed”.
Amendment 152, in clause 131, page 118, line 23, leave out “on such day as the Scottish Ministers may by regulations appoint” and insert
“at the end of a period of six months beginning with the day on which this Act is passed”.
Amendment 153, in clause 131, page 118, line 29, leave out “on such day as the Department of Agriculture Environment and Rural affairs in Northern Ireland may appoint” and insert
“at the end of a period of six months beginning with the day on which this Act is passed”.
Dr Whitehead
The amendments all essentially say the same thing, but face towards different Secretaries of State. They refer to the back of the Bill, which we are now considering. I recommend to those Members who perhaps have not ventured to look at the backs of Bills to any great extent in their time in this House to have a good look at the back of this Bill and any Bill that comes before the House. If hon. Members are on Committees on future Bills, it is always worth having a look at the back of the Bill to see what is intended for all the legislation that has been drafted and discussed assiduously. What I mean by that is that the back of the Bill is where things actually happen or do not.
For this Bill, it is more than important that what we have discussed and made passionate speeches about actually happens, and the provisions come into force in good time, so that our intentions are carried out. The problem with intentions on many occasions is that they are not actually reflected on the back of the Bill. What happens is that the ability to implement a part of the legislation is reserved to the Minister by regulation. For people who want to take their search of the back of the Bill seriously, the statute books apparently include a large amount of legislation which just has not been enacted—a complete education Bill, for example, from a while ago. None of it has been enacted, because what is on the back of the Bill has simply not taken place.
I mentioned earlier the Office of Gas and Electricity Markets regulations and the Energy Act 2013. Why is that important? Well, part 5 of the 2013 Act, as hon. Members will recall, was about the designation of a statement on policy for Ofgem, concerning the environment and climate change. We tabled an amendment suggesting that the Government should press Ofgem to revise its mandate to ensure that it has the environment and climate change at its heart. What hon. Members might be surprised to know, and I do not recall if it was specifically mentioned when we moved that amendment, is that already in legislation is a complete section of a Bill—not just a clause—saying that the Government should introduce a strategy and policy statement requiring Ofgem to have an environmental and climate change brief.
That was agreed by a similar Committee to this one, thinking in 2013 that that was going to happen. It has not happened, simply because, on the back of the Bill is a provision that section 5 of the 2013 Act comes into force when the Secretary of State by regulation decides. Ofgem has never had such a brief in its armoury because Ministers have simply declined to implement that bit of the 2013 Act. They have sat on their hands and not carried out the work necessary to implement it. We are trying to ensure that those important parts of this Bill, which we have laboured mightily over, come into force and do what we think they will do in reasonably good order.
Rebecca Pow
I support the shadow Minister in urging me to look at the back of the Bill. What goes on at the back of a Bill is the powerhouse, and I have become terribly interested in that. One must look at the back of the Bill, as he says. I must say, however, that I think he is being terribly negative. First, these measures will be in legislation. Secondly, the strength of feeling about improving the environment is now so strong, not just among our super keen Committee members, who are stalwarts in this area, but among everybody out there—we only have to look at Twitter. I want these measures as much as he does.
I thank the hon. Member for the raft of amendments on the same point, which would have the effect, six months after the Bill receives Royal Assent, of commencing all the remaining provisions of the Bill that can be commenced by the Secretary of State, Scottish Ministers, Welsh Ministers and the Department of Agriculture, Environment and Rural Affairs in Northern Ireland.
That one-size-fits-all approach would cause very serious problems when the Bill is implemented following Royal Assent. For example, if the amendment were to be accepted, it would very likely delay the establishment of the Office for Environmental Protection by nine months. We have already launched and concluded a recruitment campaign for the chair of the OEP. Far from not doing anything, we have already started, and I hope the hon. Member will commend that.
Many parts of the Bill will be at least partially commenced much earlier than six months after Royal Assent, and other provisions will need at least in part to be commenced somewhat later, requiring further evidence gathering and public consultation, for example. That is not to mention the impact on local authorities. We will have to work very carefully and closely with them, because they are absolutely key to implementing quite a number of measures, not least in terms of biodiversity, as well as the waste measures.
I assure the hon. Member that the Government have not brought this vital piece of legislation to this House only for it to languish uncommenced in a cupboard. He gave an example of another piece of legislation. The Bill will not be like that, particularly not after all the time that has been invested in it. It has gone on for the whole year of my life as the Environment Minister. It has come and gone, and it has returned, and it is the stronger for it. It is certainly not going to languish.
We are setting ourselves legally binding targets under part 1 of the Bill, and we will need all the tools later in the Bill to support the delivery of those targets. The targets are legally binding—that is what the Bill says. Work is already going on with many organisations and the Department to work out how we will devise the targets, what the best targets to start with would be, and what later targets would be. An awful lot of work needs to go on—consultations, further detailed guidance and then new regulations—as I am sure the hon. Member will appreciate.
As we have said, we will bring forward at least one target in each of the four priority areas as well as a target for fine particulate matter, PM2.5, by the Bill’s 31 October 2022 deadline. All that work has to take place before that. Every time I speak on air quality—the hon. Member will understand this point—we are being held to account. We need to do this and we will do it. He asked whether we would trigger any of the work and the measures. We published the targets policy paper on 19 August, detailing the roadmap for delivering the targets.
I hope the hon. Gentleman will agree that we are demonstrating that this will not be a Bill that sits in a cupboard getting dusty. Ministers in devolved Administrations need a measure of flexibility in commencing the provisions in many parts of the Bill as well. Other parts of the Bill can safely be commenced on Royal Assent or two months later. Hon. Members will know that that is the customary approach for Bills. Therefore, the commencement of provisions in the Bill already strikes the right balance between automatic commencement and providing the necessary flexibility to Ministers. I hope that clarifies the position, and I ask the hon. Member to withdraw the amendment.
Dr Whitehead
We do not want to divide the Committee on the amendments. I welcome the Minister’s enthusiastic intimation that she has no intention that this Bill should sit on a covered shelf. I am sure she is right on that, given her commitment so far to making this Bill work, and the effort that she has put into ensuring that we move forward. Indeed, I welcome her indication that action has already started on ensuring that these provisions work. However, that does not undermine the fundamental point about the legislation, namely that it is possible for Ministers who are less dedicated than she is simply to sit on their hands. That is the central concern behind our amendments. I strongly take on board her point that she is not a Minister who is going to sit on her hands.
I wonder whether she has considered the green Cabinet Sub-Committee as part of her approach. I am not sure whether she sits on it, but if she or a colleague of hers does, she might take the opportunity gently to remind the Ministers in the Department for Business, Energy and Industrial Strategy that they also have a responsibility to implement legislation, and that the fact that they have not done so has a substantial effect on some of the things that we want to do in this Bill. She might take the opportunity to say, “Get on with it—seven years down the road, you ought to have implemented this.”
Rebecca Pow
The hon. Gentleman makes a very good point. I was not specifically going to comment on that, but I am sure he will agree that as a result of the Bill, other Departments will have to look at what they do on the environment. Many already do, but there will now be much more of a requirement that they do so. Does he agree that one reason why we must bring forward a lot of these measures, particularly on diversity, is that they will dovetail with the new agricultural land management system? It is important that the two schemes work together.
Dr Whitehead
I very much take on board the fact that the Bill is primarily about DEFRA, but it cannot work properly unless all other Departments play their part in ensuring that that happens. That point is very well made, and it underlines my request for the Minister to have a quiet word with another Department to suggest that it does as she intends, as far as this Bill as this concerned, with its areas of responsibility in relation to environmental and climate change outcomes. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 131 ordered to stand part of the Bill.
Clause 132
Transitional or saving provision
Amendments made: 63, in clause 132, page 119, line 38, leave out “the National Assembly for Wales” and insert “Senedd Cymru”.
See Amendment 28.
Amendment 64, in clause 132, page 119, line 39, leave out “Assembly” and insert “Senedd”.—(Rebecca Pow.)
See Amendment 28.
Clause 132, as amended, ordered to stand part of the Bill.
Clause 133 ordered to stand part of the Bill.
New Clause 4
Memorandum of understanding
“(1) The OEP and the Committee on Climate Change must prepare a memorandum of understanding.
(2) The memorandum must set out how the OEP and the Committee intend to co-operate with one another and avoid overlap between the exercise by the OEP of its functions and the exercise by the Committee of its functions.”—(Rebecca Pow.)
This new clause requires the OEP and the Committee on Climate Change to prepare a memorandum of understanding, setting out how they will co-operate with one another and avoid overlap in the exercise of their functions.
Brought up, read the First and Second time, and added to the Bill.
New Clause 24
Guidance on OEP’s enforcement policy and functions
‘(1) The Secretary of State may issue guidance to the OEP on the matters listed in section 22(6) (OEP’s enforcement policy).
(2) The OEP must have regard to the guidance in—
(a) preparing its enforcement policy, and
(b) exercising its enforcement functions.
(3) The Secretary of State may revise the guidance at any time.
(4) The Secretary of State must lay before Parliament, and publish, the guidance (and any revised guidance).
(5) The OEP’s “enforcement functions” are its functions under sections 29 to 38.’—(Rebecca Pow.)
This new clause provides that the Secretary of State may issue guidance to the OEP on the matters listed in clause 22(6) (OEP’s enforcement policy). The OEP must have regard to the guidance in preparing its enforcement policy and exercising its enforcement functions.
Brought up, read the First and Second time, and added to the Bill.
New Clause 25
Species conservation strategies
‘(1) Natural England may prepare and publish a strategy for improving the conservation status of any species of fauna or flora.
(2) A strategy under subsection (1) is called a “species conservation strategy”.
(3) A species conservation strategy must relate to an area (the “strategy area”) consisting of—
(a) England, or
(b) any part of England.
(4) A species conservation strategy for a species may in particular—
(a) identify areas or features in the strategy area which are of importance to the conservation of the species,
(b) identify priorities in relation to the creation or enhancement of habitat for the purpose of improving the conservation status of the species in the strategy area,
(c) set out how Natural England proposes to exercise its functions in relation to the species across the whole of the strategy area or in any part of it for the purpose of improving the conservation status of the species in the strategy area,
(d) include Natural England’s opinion on the giving by any other public authority of consents or approvals which might affect the conservation status of the species in the strategy area, and
(e) include Natural England’s opinion on measures that it would be appropriate to take to avoid, mitigate or compensate for any adverse impact on the conservation status of the species in the strategy area that may arise from a plan, project or other activity.
(5) Natural England may, from time to time, amend a species conservation strategy.
(6) A local planning authority in England and any prescribed authority must co-operate with Natural England in the preparation and implementation of a species conservation strategy so far as relevant to the authority’s functions.
(7) The Secretary of State may give guidance to local planning authorities in England and to prescribed authorities as to how to discharge the duty in subsection (6).
(8) A local planning authority in England and any prescribed authority must in the exercise of its functions have regard to a species conservation strategy so far as relevant to its functions.
(9) In this section—
“England” includes the territorial sea adjacent to England, which for this purpose does not include—
(a) any part of the territorial sea adjacent to Wales for the general or residual purposes of the Government of Wales Act 2006 (see section 158 of that Act), or
(b) any part of the territorial sea adjacent to Scotland for the general or residual purposes of the Scotland Act 1998 (see section 126 of that Act);
“local planning authority” means a person who is a local planning authority for the purposes of any provision of Part 3 of the Town and Country Planning Act 1990;
“prescribed authority” means an authority exercising functions of a public nature in England which is specified for the purposes of this section by regulations made by the Secretary of State.
(10) Regulations under subsection (9) are subject to the negative procedure.’—(Rebecca Pow.)
This new clause gives Natural England the function of producing species conservation strategies and makes related provision.
Brought up, read the First and Second time, and added to the Bill.
New Clause 26
Protected site strategies
‘(1) Natural England may prepare and publish a strategy for—
(a) improving the conservation and management of a protected site, and
(b) managing the impact of plans, projects or other activities (wherever undertaken) on the conservation and management of the protected site.
(2) A strategy under subsection (1) is called a “protected site strategy”.
(3) A “protected site” means—
(a) a European site,
(b) a site of special scientific interest, or
(c) a marine conservation zone,
to the extent the site or zone is within England.
(4) A protected site strategy for a protected site may in particular—
(a) include an assessment of the impact that any plan, project or other activity may have on the conservation or management of the protected site (whether assessed individually or cumulatively with other activities),
(b) include Natural England’s opinion on measures that it would be appropriate to take to avoid, mitigate or compensate for any adverse impact on the conservation or management of the protected site that may arise from a plan, project or other activity,
(c) identify any plan, project or other activity that Natural England considers is necessary for the purposes of the conservation or management of the protected site, and
(d) cover any other matter which Natural England considers is relevant to the conservation or management of the protected site.
(5) In preparing a protected site strategy for a protected site, Natural England must consult—
(a) any local planning authority in England which exercises functions in respect of an area—
(i) within which any part of the protected site is located, or
(ii) within which a plan, project or other activity that Natural England considers may have an adverse impact on the conservation or management of the protected site is being, or is proposed to be, undertaken,
(b) any public authority in England—
(i) that is undertaking, or proposing to undertake, a plan, project or other activity that Natural England considers may have an adverse impact on the conservation or management of the protected site,
(ii) the consent or approval of which is required in respect of a plan, project or other activity that Natural England considers may have an adverse impact on the conservation or management of the protected site, or
(iii) that Natural England considers may otherwise be affected by the strategy,
(c) any IFC authority in England which exercises functions in respect of an area—
(i) the conservation or management of which Natural England considers may be affected by the strategy, or
(ii) the sea fisheries resources of which Natural England considers may be affected by the strategy,
(d) the Marine Management Organisation, where—
(i) any part of the protected site is within the MMO’s area, or
(ii) Natural England considers any part of the MMO’s area may otherwise be affected by the strategy,
(e) the Environment Agency,
(f) the Secretary of State, and
(g) any other person that Natural England considers should be consulted in respect of the strategy, including the general public or any section of it.
(6) In subsections (4) and (5), a reference to an adverse impact on the conservation or management of a protected site includes—
(a) in relation to a European site, anything which adversely affects the integrity of the site,
(b) in relation to a site of special scientific interest, anything which is likely to adversely affect the flora, fauna or geological or physiographical features by reason of which the site is of special interest,
(c) in relation to a marine conservation zone, anything which hinders the conservation objectives stated for the zone pursuant to section 117(2) of the Marine and Coastal Access Act 2009, and
(d) any other thing which causes deterioration of natural habitats and the habitats of species as well as disturbance of the species in the protected site, in so far as such disturbance could be significant in relation to the conservation or management of the protected site.
(7) A person whom Natural England consults under subsection (5)(a) to (e) must co-operate with Natural England in the preparation of a protected site strategy so far as relevant to the person’s functions.
(8) The Secretary of State may give guidance as to how to discharge the duty in subsection (7).
(9) A person must have regard to a protected site strategy so far as relevant to any duty which the person has under—
(a) the Conservation of Habitats and Species Regulations 2017 (S.I. 2017/1012),
(b) sections 28G to 28I of the Wildlife and Countryside Act 1981, or
(c) sections 125 to 128 of the Marine and Coastal Access Act 2009.
(10) Natural England may, from time to time, amend a protected site strategy.
(11) The duty to consult a person under subsection (5) also applies when Natural England amends a protected site strategy under subsection (10) so far as the amendment is relevant to the person’s functions.
(12) In this section—
“England” has the meaning given in section (Species conservation strategies);
“European site” has the meaning given in regulation 8 of the Conservation of Habitats and Species Regulations 2017;
“IFA authority” means an inshore fisheries and conservation authority created under section 150 of the Marine and Coastal Access Act 2009;
“local planning authority” has the meaning given in section (Species conservation strategies);
“marine conservation zone” means an area designated as a marine conservation zone under section 116(1) of the Marine and Coastal Access Act 2009;
“MMO’s area” has the meaning given in section 2(12) of the Marine and Coastal Access Act 2009;
“public authority” has the meaning given in section 40(4) of the Natural Environment and Rural Communities Act 2006;
“sea fisheries resources” has the meaning given in section 153(10) of the Marine and Coastal Access Act 2009;
“site of special scientific interest” means an area notified under section 28(1) of the Wildlife and Countryside Act 1981.” —(Rebecca Pow.)
This new clause gives Natural England the function of producing protected site strategies and makes related provision.
Brought up, read the First and Second time, and added to the Bill.
New Clause 27
Wildlife conservation: licences
‘(1) In section 10 of the Wildlife and Countryside Act 1981 (exceptions to section 9 of that Act), in subsection (1)—
(a) in paragraph (a), omit the final “or”;
(b) at the end insert “or
(c) anything done in relation to an animal of any species pursuant to a licence granted by Natural England under regulation 55 of the Conservation of Habitats and Species Regulations 2017 (S.I. 2017/1012) in respect of an animal or animals of that species”.
(2) In section 16 of that Act (power to grant licences), in subsection (3)—
(a) in paragraph (h), omit the final “or”;
(b) at the end insert “or
(j) in England, for reasons of overriding public interest”.
(3) In that section, after subsection (3A) insert—
“(3B) In England, the appropriate authority shall not grant a licence under subsection (3) unless it is satisfied—
(a) that there is no other satisfactory solution, and
(b) that the grant of the licence is not detrimental to the survival of any population of the species of animal or plant to which the licence relates.”
(4) In that section, in subsections (5A)(c) and (6)(b), after “two years,” insert “or in the case of a licence granted by Natural England five years,”.
(5) In that section, in subsection (9)(c), after “to (e)” insert “or (j)”.
(6) In the Conservation of Habitats and Species Regulations 2017 (S.I. 2017/1012), in regulation 55(10), for “two years” substitute—
“(a) five years, in the case of a licence granted by Natural England, or
(b) two years, in any other case.”’ —(Rebecca Pow.)
This new clause makes provision relating to licences granted under regulation 55 of the Conservation of Habitat and Species Regulations 2017 and section 16 of the Wildlife and Countryside Act 1981.
Brought up, read the First and Second time, and added to the Bill.
New Clause 31
Use of forest risk commodities in commercial activity
‘(1) In Schedule (Use of forest risk commodities in commercial activity)—
(a) Part 1 makes provision about the use of forest risk commodities in commercial activity,
(b) Part 2 makes provision about enforcement, and
(c) Part 3 contains general provisions.
(2) Regulations under the following provisions of Schedule (Use of forest risk commodities in commercial activity) are subject to the affirmative procedure—
(a) paragraph 1;
(b) paragraph 2(4)(c);
(c) paragraph 5 (except for paragraph 5(2)(b) and (5));
(d) paragraph 7;
(e) Part 2.
(3) Regulations under the following provisions of Schedule (Use of forest risk commodities in commercial activity) are subject to the negative procedure—
(a) paragraph 3;
(b) paragraph 4;
(c) paragraph 5(2)(b) and (5).”—(Rebecca Pow.)
This new clause inserts NS1 and specifies the Parliamentary procedure for making regulations under that Schedule.
Brought up, read the First and Second time, and added to the Bill.
New Clause 1
The environmental objective
‘(1) The environmental objective is to achieve and maintain a healthy natural environment.
(2) Any rights, powers, liabilities, obligations, restrictions, remedies and procedures arising from this Act must be enforced, allowed and followed for the purpose of contributing to achievement of the environmental objective.’—(Dr Whitehead.)
This new clause is intended to aid coherence in the Bill by tying together separate parts under a unifying aim. It strengthens links between the target setting framework and the delivery mechanisms to focus delivery on targets.
Brought up, and read the First time.
Question put, That the clause be read a Second time.
Daniel Zeichner (Cambridge) (Lab)
I beg to move, That the clause be read a Second time.
Fleur Anderson (Putney) (Lab)
The clock is ticking: we are only five weeks away from the end of the famous implementation period. This amendment seeks to freeze that in time and say that in five weeks’ time there will be no regression or diminution in any protection afforded by any environmental standard effective in UK domestic law. Surely that is the most important part of the Bill. At least we could say that the Environment Bill is being brought forward to replace, renew and look beyond all the environmental protections that we will not have when we are not an EU member: that we will do better than that—or at least, not regress. If the amendment is not agreed to, we are worried that we will not have that safeguard.
The Government have frequently stated their desire to improve the quality of our environment and protect our existing environmental standards. Why, then, do they stop short of enacting an unambiguous and binding requirement not to regress on existing rules, as would be enacted through the amendment? This is not about staying tied to EU rules. As the shadow Minister says, we are not re-enacting Brexit at all; rather, we are ensuring that the UK rules get better and better over time and are protected from deregulatory pressure.
Non-regression is an exciting and emerging norm of environmental law, and we need to harness its potential. That requires a positive trajectory for environmental standards, with the ultimate goal of progressively improving the health of people and the planet. There is a precedent, as was mentioned, in other international laws and instruments. Non-regression can be found explicitly in international instruments, such as the 2015 International Union for Conservation of Nature draft international covenant on environment and development, the 2017 draft global pact for the environment and the 2018 Escazú agreement, which mirrors the Aarhus convention for the Americas. It is important to mention those because there is precedent. We cannot say that such a provision is unnecessary and does not need to be done. It should be added to the Bill.
To underscore why we, as the Opposition, feel so strongly about the issue, one need only look at how much the UK’s environment has benefited from the EU framework that the Bill is replacing. In the 1970s, we pumped untreated sewage straight into the sea, but EU laws and the threat of fines, as well as good enforcement, forced us to clean up our act. Now, more than 90% of our beaches are considered clean enough to bathe off. I have yet to hear a meaningful reason why the Government would not at least commit to the new clause. To say that it is not necessary is just bluster and evades the issue, and it is just not good enough.
If we are to put our money with our mouth is, the new clause should be added to the Bill, especially because it would match our ambition as we host COP26 next year. It would be a meaningful legal commitment to non-regression, and in turn a powerful endorsement of the Government’s stated ambitions to be world leaders on environmental matters. It would create an authoritative platform from which the UK could seek to improve global green governance. There is nothing to lose by adopting the new clause and everything to gain.
Rebecca Pow
I thank the hon. Members for Cambridge and for Putney for their input. The hon. Member for Cambridge seemed to suggest that my optimism and enthusiasm are negative assets, but I would never even have started my journey to this place if I had not had such optimism and enthusiasm; I am sure the same could be said of every Member here.
I vowed all that time ago that I would engage with environmental issues should I ever make it to Parliament. Lo and behold, here we are discussing the Environment Bill. I know that the hon. Gentleman is very passionate about the environment, and I like to think that he is just teasing me, because he knows that while I and my colleagues are in office, we will stand up for everything in the Bill. We hope that future Governments will do the same, because that is the purpose of the legislation.
The new clause, which aims to tie the UK to EU law at the end of the transition period, is unnecessary. To put it simply, we have left the EU and we should not bind ourselves to the legislative systems of the past. The Government made it very clear that the UK will continue to be a global leader, championing the most effective policies and legislation to achieve our environmental ambitions. I believe that we have demonstrated that even today with the due diligence clause. We will continue to improve on our environmental standards, building on existing legislation as we do so.
Ruth Jones
The Minister is making some interesting points, but does she agree that this is not about staying tied to the EU’s apron strings but about UK rules getting better and better? The new clause provides us with a baseline to improve on.
Rebecca Pow
The hon. Lady leads me neatly on to say that the UK does not need the EU to improve the environment; our high regulatory standards on environmental protection are not dependent on EU membership. Rightly, one could say that over the years we have taken on board standards, such as those governing sewage in water, but we have actually influenced a lot of European policy. Now we are going further. We often led the way, as members of the EU will acknowledge.
To continue with the same approach as the EU is not good enough. I know that many members of the Committee are well aware of the damaging effects of some EU policies, in particular the common agricultural policy. The thought behind it was good, but the environmental consequences are not necessarily to be lauded. That is why we now have this great opportunity to change it, as we must. We will do better.
Lest everyone always thinks that the EU offers some gold-plated system, let me give some examples of where we have already gone ahead of it. For a start, we were the first major economy to legislate for net-zero emissions by 2050. Another good example is the UK’s landfill tax, which is one of the highest in Europe and has been effective in reducing waste disposal and increasing recycling. The UK has also introduced one of the world’s strictest ivory bans to protect elephants from poaching, whereas the EU has yet to legislate on that. Similarly, our clean air strategy has been applauded by the World Health Organisation as an example for the rest of the world to follow.
I must also mention the UK’s microbeads ban, which shows the power of the Back Benchers who worked on it; just the other day, my involvement and that of many others was cited in the Chamber. That ban came into effect in 2018, but the EU did not move to introduce an equivalent ban until a year later. Those are just a few examples, not to mention our recent ban on single-use plastics—plastic straws, drink stirrers and cotton buds—coming into force in October 2022. We are ahead in many cases.
There are concerns about non-regression, but surely, after we have sat here for weeks going through the Bill with a fine-toothed comb, it is obvious that we have a real, detailed framework of targets, monitoring and reporting. We are then to be held to account on whether the improvement is actually occurring: Parliament will be able to scrutinise. There will be a closer watch on these things than ever before, which is a good thing. The Secretary of State is required to report to Parliament every two years on what is happening on the environmental front internationally—to look at the new environmental laws being introduced, sift through them and work out which ones would benefit us.
Dr Whitehead
Would the Minister at least agree that nothing in the new clause suggests that we should be pegged to EU law, as we were in the past? It simply says that a snapshot should be taken at the point of departure, so that there is something to stand on when it comes to things that we wish to carry out in the future. Far from pegging us back, it actually supports the sort of thing the Minister is suggesting.
Rebecca Pow
We have reached that point already. We have been in the EU, so have had all the same laws. We are not going to sweep them all away, but we will build on them. When that review of international law is done, the EU laws will also be looked at.
I think we have covered what the hon. Member for Cambridge is asking for. On the SI points—I am very interested that the hon. Gentleman has looked at that report about the SIs—I should say that, three to five years after Royal Assent, the responsible Department must submit a memorandum to the relevant Commons departmental Select Committee, published as a Command Paper. The memorandum will include a preliminary assessment of how the Act has worked in practice, relative to objectives and benchmarks identified during the passage of the Bill and in supporting documentation.
The Select Committee, or potentially another Committee, will then decide whether it wishes to conduct a further post-legislative inquiry into the Act. Perhaps we should send that to the authors of that report, because perhaps they were not aware of it. I think it is really helpful, and I hope that it helps.
I have not yet mentioned the OEP, which will help to uphold our standards as well. It will be absolutely essential, ensuring Governments are held to account for the environmental performance I mentioned before. All that goes further than the EU’s environmental governance framework, with stronger binding remedies available to the courts and a wider scope to hold all public authorities to account on the environment. It is much wider.
Our sovereign Parliament must be able to fully realise the benefits of regulatory autonomy in order to take action on improving environmental protections in the future. To support parliamentary scrutiny of our ambitions, the Bill contains provisions in clause 19 that allow Parliament to hold the Government to account on delivering their commitments to improving environmental protections, and where a new Bill contains environmental provisions, the Ministers in charge of that Bill—who will potentially be Ministers in other Departments—will be required to make a statement confirming whether it maintains the level of environmental protection in place at the time of the Bill’s introduction. I hope that has been helpful, and I ask the Opposition if they now might withdraw the new clause.
Daniel Zeichner
I do not think the Minister will be surprised to hear that I am not convinced and will not be withdrawing the amendment. The reason we are not convinced is that there is nothing wrong with optimism, but it has to be tempered by realism, and frankly, as we have seen at the very top of this Government over the past few months, optimism does not always produce results. Looking at the state of our economy, I suspect that we are facing a hard winter and the pressures that will be put on environmental protections will be intense. It is not unreasonable for us on the Opposition Benches to once again remind Government Members about comments made by the current Prime Minister and previous Conservative leaders. The green crap is still the green crap, as far as some are concerned—[Interruption.] That was said by a Conservative Prime Minister.
Rebecca Pow
I ask the hon. Gentleman to withdraw that remark and stop referring to that. We have moved echelons from there, and it is really unfair that this keeps being dredged up by the Opposition, who themselves do not have a great record on the environment. Does he agree?
Daniel Zeichner
The Minister might well wish it had not been said, and I wish it had not been said, but it was.
Richard Graham
On a point of order, Sir George. Is it appropriate in this Environment Bill Committee, where we are discussing serious issues, for a Member, however well intentioned, to raise a supposed quote by a former Prime Minister from several years ago, which he certainly never heard—none of us heard it—in language that is arguably not particularly parliamentary?
Daniel Zeichner
The point I am making is that all Governments will face a dilemma and a pressure when it comes to economic imperatives and environmental protection. We have seen as much in the response to questions I raised about the impact of the planning White Paper, which have not been addressed by the Government. I understand why they have not been addressed—because they are not addressable. There is a tension, and the question we are asking is: when those pressures come—as they will—is this legislation strong enough to protect our environment? The Minister says it is; I say it is not, and that is the difference. I am sure the hon. Member for Gloucester appreciates the point I am making, because it can hardly be denied that there is a tension. If he thinks there is not a tension, that is great, but that is a different world from the one I am living in.
The non-regression issues go beyond the EU question. The point we are making is that a worldwide set of negotiations will continue, hopefully in a more positive way with the new American Administration, and non-regression will be part of those wider discussions. Exactly as my hon. Friend the Member for Southampton, Test has said, this new clause does no more than establish a baseline from which we believe we should be moving, and we see no reason to not put it in the Bill.
I hear what the Minister says about the review and revision clauses that were in the transposed legislation, but I gently say that when that comes up, it will be a very big piece of work, given the number of statutory instruments we have been discussing. In fact, as I think most of us appreciate, once we start digging into them, it often opens up a cornucopia of riches in terms of issues to look at, and we see that what looked like a very simple transposition is actually extremely complicated. We think non-regression is really important, and that is why we intend to press this new clause to a Division.
Question put, That the clause be read a Second time.
Dr Whitehead
I beg to move, That the clause be read a Second time.
This new clause concerns well consents for hydraulic fracking: cessation of issue and termination. Hon. Members may ask themselves, “What has fracking got to do with this Bill? Why is there a new clause about fracking when we are talking about other issues entirely?” I would contend that fracking, or potential fracking, is central to many of the issues that we have discussed. The current fracking regime and whether or not wells are being fracked cut across, potentially considerably so, the Bill’s protections and provisions relating to the natural environment, biodiversity and various other issues. There are a number of worrying issues relating to how fracking is carried out, how its consequences are dealt with, and how its by-products come about and are or are not disposed of.
I am sure that hon. Members will have access to a fair amount of information about the fracking process and that they will be aware that, as far as this country is concerned, it has not got very far. The Cuadrilla well in Preston was paused on the grounds that it caused earthquakes when the fracking process began. Although the then BEIS Secretary, the right hon. Member for South Northamptonshire (Andrea Leadsom), used a provision to direct that that particular drilling company should not proceeded, that provision also allowed for corners to be cut on standards, so that it could get going with the fracking process. The standard relating to seismic disturbance was only a small part of the substantial environmental consequences to which the widespread introduction of fracking would give rise.
Mercifully, fracking is not used substantially in this country, but it is in other countries. When I visited Texas some time ago, I went to Austin, which is right in the middle of the fracking industry, in the large, relatively easy-to-access basin that covers a lot of Texas and in which a lot of fracking wells have been drilled. As we came into the airport, we could see ahead of us what looked like a moonscape. There was a large number of circular pads with extraction equipment covering the landscape as far as the eye could see. It also glinted in the sun, inasmuch as attached to those fracking pads were a number of what looked like ponds or small lakes. It looked like a landscape of lakes, but it was not. It was a landscape of tailing ponds associated with the fracking pads, and in which were placed the results of the fracking process—the fracking fluid that had been used to blast the rocks apart, which contained substantial chemicals to assist in that process. If they were to be produced in this country in the quantities suggested—at least 10,000 or so cubic metres of fluid per fracking pad—they would be classed as hazardous waste and would need to be disposed of very carefully. There are actually very few hazardous waste sites in this country that can take that kind of waste. The solution in the United States was that, on some occasions, they injected the waste back down into deep basins, which is not ideal. Alternatively, they just kept it on the surface in tailing ponds on the landscape. That could be the future for us, if we were to develop fracking to any great extent.
As I say, we have had only two goes at fracking in this country so far. They happened to be in two areas of the UK that contain the seams from which gas can be extracted through the fracking process. One is the Bowland shale in the north-west of the country, which happens to encompass the Lake District national park. The other is across the Weald and into South Downs national park, an area of outstanding natural beauty that goes across Sussex and into Hampshire. If we had a substantial fracking industry in the UK, wells would be drilled in those two concentrated areas. There would be a concentration of wells in that precious landscape, possibly like the concentration that I saw in Austin, Texas.
The Infrastructure Act 2015 placed restrictions on where fracking can take place, but it did not have a great deal of traction in this country. Modern fracking can proceed by diagonal drilling; it does not have to involve drilling down. An interesting discussion emerged about the extent to which parts of the country could be declared to be surfaces on which fracking should not take place. The Government of the day identified some areas of outstanding beauty and national parks as areas where fracking should not take place, but all people need to do is set up a fracking plant right on the boundaries of a national park and drill diagonally.
Fleur Anderson
Does my hon. Friend agree that if the new clause is not agreed to and fracking is not stopped, that will undermine a lot of the biodiversity and ecosystem protection elsewhere in the Bill? It is bad for the climate, the environment and pollution, and local people do not want it either.
Dr Whitehead
I thoroughly agree with my hon. Friend about a regime of substantial fracking. All that has happened at the moment is that fracking has been paused. All the infrastructure requirements and legislation allowing fracking on a reasonably unrestrained basis are still in place, so it is more than possible that a future Government, or indeed this Government, might decide that they no longer wish to pause fracking. Everything is ready to go. As she said, this raises the question not only of what happens to the fracking fluid but of the escape of fugitive emissions between the well being produced and the gas being conveyed. Indeed, it is the practice, when fracking has been completed, to have a so-called flare-off to clean the well’s tubes, as it were. Enormous amounts of gas mixed with elements of the fracking fluid are released into the atmosphere and simply flared.
We understand that fracking sites will have multiple wells drilled with a very large amount of transport involved, with traffic coming to remote countryside areas, the levelling of an area several football pitches wide to make the pad, and a host of other things that result in environmental despoliation in pursuit of fracking. There are also the long-term consequences when the well is depleted: will it be re-fracked? If it is depleted, will it be properly capped off? One of the problems in Texas now is that the fracking wells have not proved to be as bountiful as had been thought––what a surprise––and several have simply been abandoned with little done to cap them off. There can be a regime for doing that properly, but in the countryside where the fracking has taken place, there is continuing danger and concern in respect of surface water and water in seams underground.
Ruth Jones
My hon. Friend is making a powerful point. Does he agree that it is the unforeseen consequences that are so dangerous with fracking? We do not know what we do not yet know. In the mining industry near my constituency, we have mountain-top villages that are at risk of subsidence because of the extensive mine workings underneath. We need to be very careful about what we wish on future generations.
Dr Whitehead
That is an important point. These things do not appear and simply go away. An example of something that does appear and then go away is onshore wind. When the turbine’s life is up, it can simply be taken away. That is an advantage of that form of power, but this form of power leaves in its wake enormous environmental scars and a substantial legacy of worry for the communities in which it has taken place, even after it has finished its life. If the well is to be properly exploited, there is the potential legacy of re-fracking on several occasions when all that stuff starts again to keep the well producing. It is a grubby, dirty, environmentally unfriendly, legacy-rich business that we surely should not be inflicting upon ourselves in pursuit of something that we should leave in the ground anyway.
In an era when we say that our dependence on fossil fuel will greatly decrease—indeed, companies such as British Petroleum have said that they will cut down substantially the amount of oil that they get out of the ground, and that they will move into different areas—it does seem strange for us to be encouraging an activity that involves trying to locate the most securely fastened bits of climate-damaging hydrocarbons from the soil, blast them out of solid rock and bring them to the surface to use for fossil fuel activities. As far as this is concerned, I think the watchword is, “Just leave it in the ground.”
That is why we have given the Bill an opportunity to include protection against that happening—and, indeed, protection against the conflict that I believe exists between the Infrastructure Act 2015 and this Bill, in terms of which permissions override which protections, particularly as far as fracking is concerned. We have an opportunity to set out in the Bill that no well consents will be given, and that fracking will not take place in this country. The new clause essentially says that the Oil and Gas Authority will not issue well consents, with all the consequences that I have set out; and that permits that have been given should lapse over a period of time and the work should not be undertaken.
This is a serious issue for the future of our environment and for environmental protection, and we have the ability, literally at the stroke of a pen, to put it right in this Bill. We can put it beyond doubt that—no matter whether there is a pause, whether there are concerns about earthquakes, or whether there are concerns about the environmental consequences of wells drilled in particular places—we will grasp the issue firmly by the scruff of the neck and say, “No more. We are not doing this. It is not good for our environment, and we won’t have it anymore.”
I hope that hon. Members across the Committee will join us in making sure that that is part of the clean, safe and enjoyable environmental future that we all want to strive for, by agreeing to add the new clause to the Bill.
Rebecca Pow
In the last 25 minutes, we have been all the way to Texas and back, we have been up north and we have been all over the place. I thank the hon. Member for Southampton, Test for his proposed amendment. The Government continue to recognise the importance of natural gas as a source of secure and affordable energy as we aim to reach net zero emissions by 2050. Natural gas still makes up around a third of our current energy usage, and we will need it for many years to come, even as we decarbonise. I know that the shadow Minister has a great deal of knowledge and interest in the energy sector, but I am sure he understands that.
The Government have always been clear that the development of domestic energy sources, including shale gas, must be safe for local communities and for the environment. With regard to fracking and shale gas development, the Government have taken a science-led approach to exploring the potential of the industry, underpinned by world-leading environmental and safety regulations. In addition to a traffic light system to monitor real-time seismic activity during operations—with a clear framework of stopping operations in the event of specified levels of seismic activity—the Government also introduced tighter controls over the shale gas industry through the Infrastructure Act 2015.
A well consent is essentially permission to drill an oil or gas well, and it is required from the Oil and Gas Authority before an operator can explore for oil and gas onshore in the UK. All well consents issued by the OGA on or after 6 April 2016 contain a further requirement for operators to obtain hydraulic fracturing consent from the Secretary of State for Business, Energy and Industrial Strategy before carrying out any associated hydraulic fracturing. That consent ensures that all necessary environmental and health and safety permits have been obtained before activities can commence.
The current definition of “associated hydraulic fracturing” is based on the approach taken by the European Commission, which I am sure the shadow Minister welcomes. Using that definition sets the right balance between capturing hydraulic fracturing operations and not capturing techniques used by conventional oil and gas operations, or more widely in the water industry, where processes such as acidisation are commonly used to clean wells after drilling.
The Environment Agency reviews any proposal involving the use of acid on a site-specific basis before deciding whether the activity is acceptable. The agency’s regulatory controls are in place to protect people and the environment, quite clearly. If the proposed activity poses an unacceptable risk, a permit will not be granted.
We have had such an eloquent description of what goes on in the US. The hon. Member for Southampton, Test paints a very clear picture of that lovely trip—although, it was probably not all that lovely, seeing that moonscape. Comparisons are not necessarily helpful because, of course, in the UK we have an entirely different regulatory system. Construction standards in the UK are robust and regulators have the tools to ensure that the risk of pollutants entering groundwater is minimised.
The EA also assesses the hazards presented by fracking fluid additives on a case-by-case basis and will not allow hazardous substances to be used where they may enter the groundwater and cause pollution. The EA has the power to restrict or prohibit the use of any substances where they pose an environmental risk. The shadow Minister touched on hazardous waste and flow-back fluids, which include fracking fluids. They are deemed to be mining waste and require an environmental permit for management onsite. Disposal of flow-back fluids must be at a regulated waste treatment works, which are also regulated by the EA. Shale gas operators must demonstrate that where any chemicals are left in the waste frack fluid, it will not lead to pollution in groundwater. I think it is quite clear that we have a very tight system already in place, which will address many of the issues raised by the shadow Minister.
Let us move on to what has happened recently, when I was involved as a Back Bencher, as were many colleagues. The Government announced in November 2019 that, although any application would be considered on its merits, in the absence of compelling new evidence, they will take a presumption against issuing any further consents for hydraulic fracturing for shale gas extraction, creating a moratorium.
The Government set out their position in full via a written statement to the House on 4 November 2019, and we are satisfied that the current regulations ensure that appropriate safeguards are in place. We therefore have no plans to repeal sections 4A and 4B of the Petroleum Act 1998, as inserted by section 50 of the Infrastructure Act 2015, and nor will we direct the OGA to withhold well consents that include provisions for associated hydraulic fracturing.
There are no plans to turn the moratorium on shale gas extraction into a ban. The moratorium will be maintained unless—this is absolutely crucial—compelling new evidence is provided to address the concerns about the prediction and management of induced seismicity. Such evidence is, it must be said, yet to be presented. I therefore respectfully ask the hon. Gentleman to withdraw his amendment.
Dr Whitehead
The Minister has kindly and gently made quite a good case on our behalf. She has confirmed what we have said: in the UK, we are not talking about an end to or a ban on fracking, or indeed a resiling from the circumstances under which fracking was set up as an activity in the UK. The word “moratorium” means a pause; it does not mean the end of anything. It can be a more or less lengthy pause, as the Minister suggested, but it is still a pause, so the way is open for fracking to come back to this country if, as the Minister said, the circumstances permit that.
I agree with the Minister that the regimes in this country and in the US are not the same. The moonscape near Austin that I mentioned is a worse-case scenario—that is true—but even in the early applications for fracking in this country, there was pressure on the Government to cut corners. There were applications for tailing ponds, however briefly they would have been in place. A number of the environmental issues around fracking that I have mentioned would come to this country—not to the same extent as in the US, but they certainly would be part of the fracking process were it to recommence.
There are other differences between the US and the UK in terms of who owns the surface of the land. In this country, the Queen effectively has a hand in the ownership of the surface of the land, while in America, people can buy the rights to what is underneath someone’s land, drive a truck on to it and start drilling, because they have the right of access through the land to what is underneath it. That is not the case in this country. Indeed, as the Minister set out, the Infrastructure Act 2015 introduced a number of constraints on what can and cannot be done, and what cannot be done is along the lines of exactly what is done in America. The Government have nevertheless put forward, in a number of papers that they have published, a prospectus on how much fracking there would be in this country and where it would be undertaken. That would have a substantial impact on the environment in a country that is nothing like Texas.
Texas is enormous and, as everyone knows, this country is not. Not only is this country not enormous, but the shale to frack is specified as being concentrated in particular parts of it. Those areas, as I have emphasised, cover some of the most precious and beautiful parts of our country, and we should really go out of our way to preserve them and ensure that they continue, as much as possible, in their present state.
Daniel Zeichner
I beg to move, That the clause be read a Second time.
To some extent, this is part 2 of a discussion that we had a little earlier. The new clause was tabled by my hon. Friends the Members for Bristol East (Kerry McCarthy) and for Leeds North West (Alex Sobel), former Committee members who have now gone on to other, greater things—perhaps not greater, but different. I am delighted to move it on their behalf. Opposition Members give it our full support.
My hon. Friends were very far-sighted, in the sense that they tabled the new clause before the Government came up with their own proposals. However, the new clause goes further, which is why we believe it is worth pursuing. I will go back to why this matters. Greener UK tells us that about 28% of the UK’s overseas land footprint—nearly 6 million hectares—is in countries at high or very high risk of deforestation and which often have weak governance and poor labour standards. At the same time, about 1.6 billion people depend directly on forests to secure their livelihoods. The food and everyday products that we buy could be destroying habitats for endangered wildlife and impacting livelihoods overseas. This is a big issue, which I think we all agree on, on the basis not only of the discussion this morning but of those facts.
The new clause would create a duty on the Government to publish draft due diligence legislation within six months of this Bill receiving Royal Assent, consistent with our earlier discussion, covering all environmental and human rights risks and addressing the impacts associated with the activities of specified bodies, including within business, finance and public authorities. It is the human rights risks and finance issues that we particularly add to the earlier discussion. The new clause would require any goods placed on the UK market to have fully traceable and transparent supply chains and to not cause adverse environmental and human rights impacts, including deforestation, forest degradation and ecosystem conversion and degradation.
Since the new clause was first tabled, as the Minister mentioned earlier and as my hon. Friends have also referenced, there has been a consultation on whether the UK Government should introduce a new law designed to prevent forests and other important natural areas from being converted illegally to agricultural land. As the Minister reported, there is strong support for action, with 99% of respondents agreeing that there should be legislation to make forest risk commodities more sustainable. The Government were good to their word and have introduced new schedule 1 and the associated clauses, which we discussed and agreed to earlier. However, we think this new clause would go further. Its scope is wider, which means it would have a greater impact and would do more to tackle what we sadly see as our complicity in deforestation.
The evidence base is there. The Global Resource Initiative taskforce recommended back in March that:
“The government urgently introduces a mandatory due diligence obligation on companies that place commodities and derived products that contribute to deforestation”—
whether that is legal or just illegal under local laws, which is an important distinction—
“on the UK market and to take action to ensure similar principles are applied to the finance industry.”
The financial industry can be supportive in those markets. That, again, goes further than new schedule 1.
We think that a mandatory due diligence framework would formalise and obligate responsible practices throughout the UK market-related supply chains and could ensure comprehensive accountability and help prevent deforestation and other global environmental damage. The Government are right to set their sights high. We had discussions earlier about how ambitious—or not—the legislation is. We think we should be world leaders; the problem is that we are not entirely convinced that this does enough.
Greener UK says of what we have already agreed in the Bill:
“This does not accord with the urgency needed to tackle deforestation and falls short of the government’s ambition for a world leading approach.”
That is the view of the major environmental organisations. They also think—and we reflect this point—that there should be more dialogue, both with themselves and others who understand how the processes emerge. They are also concerned that, because this was a late addition to the Bill that came in through a Government amendment, it would have been helpful to have produced more detailed explanatory notes as to how it should work. They have a range of detailed questions, which I will not trouble the Committee with this morning. However, it suggests to me that there is more work to be done and that our new clause would help with much of that.
We hope the Government will go further in future, but it is striking that, Greener UK draws a comparison between the due diligence system and the approach taken to the EU timber regulation, which we have brought across through secondary legislation. It thinks that our approach is weaker by comparison.
That feeds into my overall sense of what is happening with the Bill: sadly, the rhetoric is good but the delivery and actuality is weaker. We wish to make the Bill stronger. Again, this is an important point for us so we want to divide on it, but I want to hear why the Minister thinks we should not be strengthening in that kind of way.
Rebecca Pow
I assure the hon. Gentleman that we are already one step ahead and, in fact, voted to include the world-leading legislation in the Environment Bill this very morning. We are making more progress than any other country. I understand his sentiments but, yet again, he is being negative about the enormous step we are taking.
Our amendments will help us protect the world’s most precious forests. They will allow us to set mandatory requirements on businesses that use agricultural commodities associated with deforestation. As we have said before, there are other regulations that deal with timber; our amendments will deal with other products where trees are cut down to grow crops such as palm oil, soya, rubber, beef and the associated leather, and cocoa. The hon. Gentleman will agree that those are crucial crops to be looking at as we proceed, and that that will make a genuinely big difference. We have heard the great example of what happened in Indonesia when timber was tackled. The same thing could happen with other crops in reducing the cutting down of forests. I have seen some of those on my travels.
Our framework is designed to work with Governments around the world, who are the custodians of the world’s precious forests, by requiring businesses to ensure that commodities they use have been produced on land that is legally occupied and used. I have pointed out previously how so many countries are not even adhering to their own legislation, so that is the crux of where we are placing our intentions. Our amendments will become part of the Bill now, allowing us to act quickly on this important issue, as opposed to within six months of Royal Assent, as in the new clause.
The hon. Member for Cambridge mentioned the consultation, which had a fantastic response. It highlighted that we need to act urgently, which is why we are taking action. That is in line with the recommendation of the Global Resource Initiative to introduce due diligence legislation. That is what we are doing urgently, as was called for. We are listening to feedback and I reassure the Committee that we intend to move swiftly to take forward this legislation, laying the necessary secondary legislation shortly after COP26. We hope that our setting this path will be a big talking point at COP26, potentially encouraging others to follow.
The hon. Gentleman made a sound point on human rights. We agree that, in some circumstances, there is a relationship between commodity production and human rights. It does not necessarily follow that the best solution is to tackle those two issues at the same time. Tackling human rights abuses requires an approach that is tailored for that purpose, rather than through the narrow lens of the subset of commodities, examples of which I have just listed, chosen for their impact on forests.
The Government support the United Nations guiding principles on business and human rights—an internationally agreed framework for addressing human rights risks in all kinds of business activities. Those principles encourage businesses to adopt due diligence approaches and to address any negative impacts, where appropriate. The UK was the first state to produce a national action plan for the guiding principles, and we have already announced measures to strengthen the approach of the UK’s Modern Slavery Act 2015, as part of that plan. I am sure the hon. Gentleman is fully aware of that really important step.
The hon. Member for Cambridge touched briefly on finances. I want to clarify that the due diligence legislation is designed for a specific purpose, which is to ensure that companies in the UK are not using products that have come from illegally used or occupied land. We anticipate that information included in the reports published by the regulator will provide data, which others, including the finance sector, can use, thus helping inform investors of the extent to which the companies they invest in are involved in illegal deforestation. That is the way in to what the hon. Gentleman was addressing. I hope that is helpful. I will wind up and ask the hon. Gentleman, in the light of my assurances, to withdraw his proposed new clause.
Daniel Zeichner
Frankly, I do not think that the Government are one step ahead, given that our proposal was tabled long in advance and is far more extensive and far reaching. I heard what the Minister said, and I know she is very proud of what is being done. We just need to go further.
I gently point out that I am not the one saying that what is being done is not achieving what was hoped for. It is many environmental organisations, some of which the Minister cited earlier. I suspect she will find that the debate will continue. No one is saying the matter is easy; it is complicated and difficult, and this has to be done in some cases through international negotiation. We understand and appreciate that, but we believe it is better to be more optimistic and ambitious.
Again, I heard what the Minister said on the linkage to human rights, but the evidence is pretty clear that environmental degradation and disrespect for human rights go hand in hand. That is why we believe the new clause would give a sensible way forward. On that basis, Mr Gray, we will divide the Committee.
Question put, That the clause be read a Second time.
Ruth Jones
I beg to move, That the clause be read a Second time.
As we approach the end of Committee stage of this important Bill, I rise to speak to new clause 7, which appears in my name and those of my hon. Friends here in the Committee Room, but also, more importantly, those of colleagues from right across the House. This is a cross-party new clause and an important addition to the Bill; I hope Ministers will recognise that it will simply enhance the scope and reach of the Bill and take it closer to being fit for purpose.
The new clause calls on the Secretary of State for action and leadership, introducing a requirement for them to maintain,
“a register of the end use of all recycled waste created, collected or disposed of in England.”
As things stand, only voluntary policies exist for monitoring the end use of recycled material, and that approach fails to provide sufficient data to understand recycling rates and end markets.
Like many Opposition colleagues, I commend the Environment, Food and Rural Affairs Committee on its recent inquiry into food and drink packaging. It was a thorough and comprehensive review and I hope it will influence what we do and how we do it. As part of that review, the EFRA Committee highlighted the lack of data, stating:
“In order to make evidence-based policies and assess their impact, the Government needs access to reliable data. It is shocking that it does not know how much plastic packaging is placed on market in the UK, nor how much is really recycled. ”
A new end use register for recycled waste would improve existing data. That is important, because it would mean that the Government—whichever Government, of whichever party—were able to deliver evidence-based policies and to better understand the end use of recycled material. The information gathered from and by the register that this new clause provides for could help to improve transparency, reduce waste and, in turn, increase public confidence in the recycling system.
That confidence is a key point, and I want the Minister and her colleagues to think about it. We will not get the buy-in we need from residents across England if we do not ensure that we can point to crude, hard facts. As Greener UK pointed out in a typically helpful and comprehensive briefing, that public confidence has been
“damaged by growing awareness of waste exports”—
I have spoken about those previously, for instance in the Sri Lankan debacle—
“and confusion caused by inconsistent recycling schemes across England.”
In other words, the new clause would help any Minister with responsibility for recycling to get the job done, and it would help to ensure that our country takes all the steps necessary to tackle the climate emergency and preserve our planet.
Rebecca Pow
I thank the hon. Lady for the new clause and join her in thanking the EFRA Committee; the Committee does a lot of really helpful inquiries, and the waste and packaging one helps to add to the weight of knowledge and information. As hon. Members will know, I was on that Committee for a long time, and one does feel that the recommendations that come out of those inquiries are often useful and can help in that whole mix of listening, consulting and reporting.
The Government are absolutely committed to monitoring waste throughout its journey by improving the data captured on the generation, treatment and end use of waste. As I have said numerous times, I am keen to see improved transparency in where waste is ending up and to make that information more accessible to and usable for businesses, regulators and Government as well as the public. As the hon. Member said, people do want information and to understand, and that is why our labelling requirements—another measure introduced through the Bill—will be so helpful.
Waste tracking is reliant on largely paper-based record keeping, making it difficult to track waste effectively and providing organised criminals with the opportunity to hide evidence of the systematic mishandling of waste. That is why clauses 55 and 56 provide the regulation-making powers needed to introduce mandatory electronic waste tracking across the UK. The powers, which I know the green NGOs will welcome, will enable us to monitor waste through its entire journey from production to end use. The hon. Member was slightly critical about some of the NGOs’ comments, but actually those measures met with a great deal of positivity. The clauses will enable us to track all controlled waste and waste from mines and quarries, and that will include information on waste that is being recycled as well as on products and materials produced from waste.
I am pleased to confirm that we will consult on the design of a waste tracking system next year and that the consultation will address both access to and use of waste tracking data as suggested by the new clause. I therefore do not consider it necessary to introduce a separate clause placing a duty on the Government to launch a specific register for the end use of recycled waste, as that would duplicate effort for both public authorities and businesses.
The new clause would place a further duty on the Secretary of State to introduce the measures in England only, but clauses 55 and 56 give us the necessary powers to establish a system that covers the whole of the UK. We are working closely with the devolved Administrations—that includes the Scottish Government —to develop that. While I support the intention behind the new clause, I consider it unnecessary and ask the hon. Member kindly not to press it.
Ruth Jones
I am glad that the Minister agrees with the comments of the EFRA Committee about the lack of hard data. That is why we need a register, and that is why we tabled the new clause. I am also glad that she acknowledged the importance of ensuring we bring the public with us. Public confidence is so important; otherwise, they will not buy into any new recycling schemes.
The Minister mentioned mandatory electronic waste tracking, which is to be welcomed. However, the new clause is not about having an either/or system; it would enhance the system. The register would be a useful addition to that electronic waste tracking system.
Rebecca Pow
Is the hon. Member aware—I touched on it in my speech—that local authorities already collect and report data on their waste and many publish information about recycling performance? Information reported to local authorities is published, including on the destination of recyclable material where available. Does she agree that one does not want to put extra burdens on local authorities when they are already dealing with a lot of what she is arguing for?
Ruth Jones
I thank the Minister for her comments. The problem is that we have a voluntary code with some taking part and others not. That is the issue. No one wants duplication of anything, but we do want to reinforce and enhance the current system so that we have a coherent and comprehensive system across England and—she mentioned the devolved nations—for all areas.
The Minister mentioned the public consultation, and I take that on board. My only worry is that such consultations have been known to be a cause for people to drag their feet. We urge her to ensure that the consultation is speedy, with suitable results at the end of it. I will not press the new clause, so I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
The Chair
I suspect that no one wishes to move new clause 8, unless I hear to the contrary.
Rebecca Pow
On a point of order, Mr Gray. New clause 8 is the weeds one, tabled by my hon. Friend the Member for Chatham and Aylesford (Tracey Crouch). I know she has a great interest in these things, and we acknowledge that. As a gardener, I am a great weeds person—a weed is just a plant in the wrong place—and I thank her for her continued work on pollinators.
The Chair
The Committee has already sent the hon. Member for Chatham and Aylesford our warmest and best wishes in the current circumstances, and we can add the Minister’s words to that.
Financial Services Bill (Sixth sitting)
Tuesday 24th November 2020
(3 years, 4 months ago)
Public Bill CommitteesRead Full debate Financial Services Bill 2019-21 View all Financial Services Bill 2019-21 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 24 November 2020 - (24 Nov 2020)
The Committee divided: - Ayes: 5 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 5 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 5 / Noes: 10 - Question accordingly negatived.
The Chair
We now continue the line-by-line consideration of the Bill. I think everyone is okay with all the normal announcements about social distancing, Hansard and tea and coffee. The Clerks have told me that you have to ask my permission to remove your jackets, so I can unilaterally grant everyone permission to strip off—to remove their jackets if they so wish. As you know, we may debate amendments together when that is logical, but the votes on them will not necessarily be in the same sequence.
Schedule 2
Prudential regulation of FCA investment firms
Mr Pat McFadden (Wolverhampton South East) (Lab)
I beg to move amendment 21, page 63, line 5, in schedule 2, at end insert—
“( ) high standards in social practice and corporate governance including pay, adherence to equalities legislation, transparency and corporate responsibility, and”
This amendment would require that, when making Part 9C rules, the FCA must have regard to high standards in social practice and corporate governance including pay, adherence to equalities legislation, transparency and corporate responsibility.
The Chair
With this it will be convenient to discuss amendment 25, page 79, line 29, in schedule 3, at end insert—
“( ) high standards in social practice and corporate governance including pay, adherence to equalities legislation, transparency and corporate responsibility.”
This amendment would require that, when making CRR rules, the FCA must have regard to high standards in social practice and corporate governance including pay, adherence to equalities legislation, transparency and corporate responsibility.
Mr McFadden
Thank you for your chairmanship, Dr Huq. Your initial instructions threaten to make the proceedings a lot more interesting than this morning’s. We will not take them too literally when it comes to how much clothing we remove.
Like amendment 20, on which we concluded debate this morning, amendment 21 relates to schedule 2 on page 63 of the printed Bill. It is designed to ensure that the regulators have regard not only to environmental regulations, which we tried to press this morning, but to social and governance considerations.
Committee members who have anything to do with the sector or industry will know that the letters ESG—environmental, social and governance—come up a lot. I am sure that, like me, the Minister does lots of roundtables, meetings and so on, and he will be struck by the enthusiasm with which City voices are speaking about ESG. We dealt with “E” this morning when discussing amendment 20; amendment 21 is about the “S” and the “G”.
The agenda of prioritising those things goes with the grain of what investors and fund managers say, at least, they are doing of their own accord. However, we believe that adding it to the Bill and the regulatory framework would put regulatory force behind these trends, which already exist with varying degrees of enthusiasm in the investor world.
The Chair
Order. I think you were told this morning that if you crank the volume up a bit, it is better for the recording.
Mr McFadden
I apologise, Dr Huq; I shall try to speak up.
There are many fine-sounding statements about ESG principles on corporate websites. Some of the toughest money management companies in the world are now telling us that it is no longer just about quarterly or annual returns, but about long-term sustainability. We are told that investors do not want to be making money on the back of poor governance or shoddy or illegal working practices; they want their investments to be in companies and projects that are sustainable for the long term and are run in the right way.
With your indulgence, Dr Huq, I will illustrate that with an example that has been in the news recently. I want to consider what these corporate statements were worth in the case of the clothing firm boohoo. When The Sunday Times exposed the shocking conditions in boohoo’s supply chain back in July, including paying workers in the supply chain well below the minimum wage and serious fire risks in the factories in which the clothes were made, the company commissioned an independent review of the supply chain. That was chaired by Alison Levitt QC; she reported in September. She found that the allegations about the supply chain were
“not merely well-founded but substantially true”.
On the corporate governance side of things, her findings were damning. Her report says:
“No member of the Board I interviewed mentioned that the responsibility for what is happening in the supply chain derived from the duty of the company’s officers to act in the best interests of all the shareholders.”
In other words, the board did not understand that it was not in the interest of their own shareholders to allow a supply chain in which these illegal practices were taking place. Ms Levitt was effectively concluding that the board did not know it was their duty—or that if they did know, they did nothing about it.
Ms Angela Eagle (Wallasey) (Lab)
Does my right hon. Friend agree that the lack of effective enforcement is also an important factor in boards’ thinking that the risk may be worth taking? Lack of effective enforcement has been a feature of the last 10 years, as enforcement authorities have been starved of funding and retreated further and further from the frontline, where these practices are going on.
Mr McFadden
My hon. Friend is absolutely right. The point I am making in moving the amendment is that, although there are arguments to be made about enforcement and minimum wage inspectorates and so on, there is another side to the issue: the considerations for investors in these companies and the role of regulators. That is what the amendment is about.
Following Ms Levitt’s report, my hon. Friend the Member for Leicester West (Liz Kendall) wrote to all of boohoo’s main shareholders—the list reads like a “Who’s Who” of blue-chip City firms: it includes Jupiter, Fidelity, Invesco, BlackRock and Standard Life Aberdeen. None of those firms—with one notable exception, which I will come to—has taken meaningful action. They talk about engaging and following the situation closely, but only one has actually followed through. All the firms have on their websites very fine-sounding statements about ESG, corporate governance, social considerations, sustainability and so on—indeed, some have set themselves up as champions of those causes.
Let me come to the exception to the rule on that list: Standard Life Aberdeen. It has sold all its shares in boohoo and is clear about why. In a letter to my hon. Friend the Member for Leicester West, the Standard Life Aberdeen chairman Sir Douglas Flint says that the firm had been concerned about the supply chain for some time and that
“Our patience with the company’s responses on the issue had been diminishing during the last year. That patience evaporated this summer with the company’s response to the media allegations and that is why we took the decision to sell our remaining shareholding.”
Standard Life Aberdeen is run by serious people. It is a very reputable, important financial management firm and it has decided to act in accordance with its ESG principles and wants to uphold them. What the story shows is that too many companies do not and that often it is just words.
Our amendment seeks to put some regulatory force behind the upholding of these principles. Firms say that they want to uphold them, but, as the story shows, too often that is not the case—action is wished away with talk of engagement and monitoring the situation and all the rest of it. The amendment would make the regulator have to have regard to the exploitation of workers and make upholding high social and governance standards a hallmark of the UK financial services industry. In that way, we would not just depend on good people such as Sir Douglas Flint and on companies that are the exception to the rule; we would send a clear signal to the whole investment industry about the kind of response that we want to see. Otherwise, the fear must be that, although there will be plenty more warm words and mission statements, they will be of little comfort to someone working in an overheated factory and earning £3 or £4 an hour—about half the minimum wage—and that, when the story is exposed and the exploitation is no longer hidden, the investors in the company that is ultimately responsible will not do anything about it.
I ask the Minister to imagine the signal that such a regulatory duty could send. Not only would there be a minimum wage law, as there is now, but the UK’s supercharged, empowered regulators would have social and governance considerations at the heart of what they do.
We have had many debates about standards and what would happen in the UK after Brexit on this issue. Time and again, the Prime Minister has said that he does not want a race to the bottom: he wants the UK to uphold high international standards and there is absolutely no reason to think that our departure from the EU should be any threat to rights of work or any considerations like that. This amendment is a chance to prove that and put it at the heart of financial regulation.
The truth is that companies are much more likely to take such considerations seriously if their investors are tapping them on the shoulder and saying, “Why aren’t you doing that?” It is clear that Standard Life Aberdeen tried to do the right thing for a time with boohoo and eventually got so exasperated that it divested itself of its shares in the company. That is what we want to see more of from major investors and shareholders. It is not happening enough at the moment. The fine words on corporate websites are not matched enough by that kind of action.
Adding what is in the amendment to the regulators’ “have regard to” list and the accountability framework in the Bill would send a powerful signal about the character of post-Brexit financial services. That is why we have tabled it today.
Alison Thewliss (Glasgow Central) (SNP)
It is a pleasure to see you in the Chair, Dr Huq. I rise to support the amendments tabled by the Labour Front Bench. It is really important to hold financial services firms to account; the example of boohoo given by the right hon. Member for Wolverhampton South East is a perfect example. Standard Life Aberdeen really should not be the exception rather than the rule. All financial firms should take their duty seriously, look all the way through their supply chains and act responsibly. It is clear that if the carrot of “doing the right thing” is not working, we need further means to hold companies to account.
The amendment is one of those that make me ask myself, “Why wouldn’t the Government want to do this? Why wouldn’t the Government want to support these things? Whose interests do they serve if they do not want to put this in the Bill?” The Scottish National party feels strongly that, although ESG is not the end of the movement towards a fairer, more sustainable future, it is certainly a vital part. We support the growing trend in the private sector towards greater corporate responsibility. By taking a greater stake in the communities where they operate, firms can become partners for social progress.
I was struck by the evidence given by Fran Boait in the session last week. She said:
“The Bill sets the direction, and it needs to integrate the needs of the wider economy, social responsibility, the environment and thinking about how we set a direction that is different from the one that led to the global financial crash”.––[Official Report, Financial Services Public Bill Committee, 19 November 2020; c. 112.]
The amendments set a good example of that change in direction and responsibility, and of the strong message that the Government need to send out.
To an extent, we have been able to do that in Scotland. We have promoted social responsibility in corporate culture, not least through actions such as the Scottish business pledge. We welcome a wider framework, which would encompass the financial sector and encourage them to do their bit. The partnership between the Scottish Government and business is based on boosting productivity and competitiveness through fairness, equality, environmental action and sustainable employment. It is a commitment to fairness, with businesses signing up to mandatory elements of the Scottish business pledge such as paying the real living wage—not the pretend-y living wage that the Government like to promote: the real living wage, as set by the Living Wage Foundation—and closing the gender pay gap, which has slipped during covid and may well fall back.
Stella Creasy (Walthamstow) (Lab/Co-op)
We should put on the record that the gender pay gap has not slipped but has been abandoned as a commitment by the Government. I hope the Government will rethink that quickly, given the importance of the case that the hon. Lady makes. It has not slipped—it has gone.
Alison Thewliss
I meant more that the actions of businesses had slipped, but the hon. Lady is correct to point out that the Government have abandoned that commitment as well. I was going to go there with that point. If companies are not held to account, that slippage will become irreversible. Companies have worked so hard to try to bridge that gap, and going backwards really is unacceptable.
By bringing those elements together, companies across Scotland have shown that they can improve productivity and competitiveness and build sustainable growth in a way that achieves fairness, equality, opportunity and innovation. We have the UK’s highest proportion of living wage employers in Scotland because the Scottish Government made that commitment. That is what we can do with the limited powers that we have. If we were to put into legislation here far more responsibility and accountability, it would certainly move that agenda forward.
In addition, we believe that moves such as increasing worker representation on company boards, which is commonplace among our more productive, investment-rich European competitors, would promote much greater social responsibility among companies that had that representation, as would increasing the representation of women and minority communities on public and private sector boards.
Scotland is on track to ensure that all public sector boards have a 50/50 gender balance due to the statutory targets that we put in place. We would support similar UK legislation for the private sector, because if these things are not in place, it will take a very long time before we see any meaningful change. The evidence shows that it is good for companies and organisations to do that, because they do better when they better represent society.
It is important that we make sure that companies are held to account in this way. The amendments tabled by the official Opposition are good and sound. I am interested to hear why the Minister thinks that they are not good ideas worthy of pursuit.
The Economic Secretary to the Treasury (John Glen)
It is great to be under your chairmanship again, Dr Huq. I thank the right hon. Member for Wolverhampton South East and the hon. Member for Glasgow Central for their comments.
The right hon. Gentleman opened with a depiction of the appalling situation with Boohoo, the Levitt review and the challenge of securing widespread adherence to higher standards of corporate governance. He mentioned the actions of Sir Douglas Flint from Standard Life Aberdeen, with whom I have worked closely during the last three years.
Many of the particular aspects of that case are beyond the scope of the Bill, but the right hon. Gentleman uses it to illustrate the reasons why he tabled the amendments, which would introduce a new “have regard” in the accountability regime to which the Prudential Regulation Authority and Financial Conduct Authority would be subject when implementing the Basel standards and the investment firms prudential regime respectively. The amendments would require the PRA and FCA to consider higher standards in social practice and corporate governance when making new rules under the Bill.
It is unclear from the wording of the amendments whether regulators would need to look at their own best practices or those of the firms they regulate. Regardless, I fully support the intention behind the amendments. Indeed, I have chaired the asset management taskforce over the past three years: we have had 10 meetings with industry representatives, including Catherine Howarth, whose responsible investment charity ShareAction has done some significant work on stewardship and how we can get better transparency across the whole of the ESG agenda. Indeed, I believe that our report on that will be produced imminently.
There is no doubt that the regulators are committed to the highest levels of equality, transparency and corporate responsibility. For example, the UK has some of the toughest requirements on bonus clawback and deference in the whole world. The Government, working with the regulators, were also world-leading in the design of an accountability regime for senior managers in the industry; sequentially, over the past three years, that has extended to more and more parts of the financial services industry.
FCA solo-regulated firms are expected to have undertaken a first assessment of the fitness and propriety of their certified persons by 31 March 2021. The senior manager and conduct regime, implemented for all banks, building societies, credit unions and Prudential Regulation Authority-designated investment firms in 2016, was extended to cover insurance firms in December 2018 and most other FCA-regulated firms by December last year.
However, the track record of our regulators should not make us shy away from making them legally accountable for upholding the highest standards going forward. The fact is that the regulators, as public authorities, are already subject to the requirements under the Equalities Act 2010, as are businesses across the UK, including firms within the scope of the PRA and FCA remits. They already have existing powers and duties under the Financial Services and Markets Act 2000, which is being amended by this Bill, in respect of pay, transparency and principles of good governance. In fact, they are already responsible for making rules on remuneration under these two prudential regimes.
I recognise that when I think about the City, there are significant elements that need more work. For the past while, I have been responsible for the women in finance charter. I am currently conducting a series of challenges to the CEOs of banks, looking at what they are doing to address, beyond the targets, a pipeline of talent, so that there are better opportunities for more women to reach the executive level. I will speak more about that later this year.
Sound governance is necessary to support the regulator’s primary objectives of safety and soundness, market integrity and prevention of harm; a new legal obligation in this space would only be duplicative and redundant. It would likely conflict with existing obligations on the regulators in exercising their duties to ensure the sound governance of regulated bodies, creating confusion over whether these vaguer concepts conflict with the regulator’s general objectives.
I do not believe that this Bill is the right place for such changes, but there might be other routes to reassert how important we think these matters are. The Government are currently considering the policy framework in which the regulators operate through the future regulatory framework review, which I mentioned this morning and on Second Reading. I would welcome right hon. and hon. Members’ engagement on this important question—I really would. The matters that the regulators need to have regard to as part of this Bill reflect considerations immediately pertinent to these specific prudential regimes and, I believe, provide the right balance.
Abena Oppong-Asare (Erith and Thamesmead) (Lab)
I am really happy to put forward amendment 25, because it will require that, when making capital requirements regulation rules, the FCA must have a high regard to standards in social practice and corporate governance, including pay, adherence to equalities legislation, transparency and corporate responsibility.
We know that best practice corporate governance results in social and economic gains, and that is something the Government are particularly passionate about. Companies that persist in treating climate change solely as a corporate responsibility issue, rather than a business problem, are running a risky business and stand to lose out.
We have seen businesses turn the need to tackle climate change into successful business opportunities. For example, BrewDog, the world’s largest craft brewer, will remove twice as much carbon from the air as it emits every year, becoming the first carbon-neutral brewery. If companies can already shoulder this social responsibility and incorporate it into a successful business model, there is no reason not to hold all businesses to the high standards our country needs to tackle imminent social and political issues.
Climate change affects every facet of everyone’s lives. The effects of climate on companies’ operations are now so tangible and certain that the issue demands a strategy and leadership from the Government. Government intervention has worked before, and it will work again, particularly through amendment 25. Take the Equal Pay Act 1970, for example, which was mentioned previously. Business and civil society converged, and companies with over 250 employees were made to publish data on pay gender discrepancies, resulting in a win-win scenario. Excellent work is now being done to tackle this further and understand racial, gender and environmental concerns, which are intricately linked. We have to follow civil society’s work on equal pay and extend the reporting to data collections on the grounds of racial equality and environmental equity, because our actions will be futile if our evidence is not fertile.
There is no one-size-fits-all approach to climate change: each company’s approach will depend on the particular business and strategy. What we are calling for in this amendment is for the Government to support and enable employers to publish an action plan to tackle climate change and social inequalities, including initiatives to mitigate climate-related costs and risks in client value chains. Jesse Griffiths, the CEO of the Finance Lab, had some important advice for the Committee last week. He said:
“I think that the absolutely fundamental issue with regards to the Bill is that it is an opportunity to put social and environmental purpose at the heart of both the regulation and the duties of the regulators.”—[Official Report, Financial Services Public Bill Committee, 19 November 2020; c. 113.]
Environmental engagement is economic effectiveness, and this amendment will improve the economic health of our businesses and the environmental health of our country.
The amendment would also ensure that regulators can act in accordance with social needs, and ensure that businesses maintain corporate responsibility while still thriving in a competitive marketplace. When the Government asked Ruby McGregor-Smith to review the diversity pay gap, I welcomed that initiative. Campaigners have moved mountains in terms of identifying the profitability, both social and economic, of deepening our commitment to diversity and opportunity of wealth and health creation for all. In McGregor-Smith’s review, “The Time for Talking is Over, Now is the Time to Act”, she highlights how for decades, successive Governments and employers have professed their commitment to racial equality, yet we see that vast inequalities still exist. We must ensure this does not happen with our commitment to environmental stability, and the amendment will help ensure that.
Racial equality, gender equality and environmental stability can never be achieved unless we understand the ways in which they are intricately linked. As Ruby says, the time for talking is over, and I am sure that all the young people participating in the mock COP as we speak agree. I know that I mentioned this earlier about young people, but they are important: they are our future, and we really need to take them into consideration. With 14% of the working-age population coming from a black or minority ethnic background, we know that employers have to take control and start making the most of our talent, whatever their background.
The point stands out when looking at the pay gap for disabled people in the UK. In 2018, the median pay for non-disabled employees was £12.21 an hour, while for disabled employees, it was £10.63. The Minister mentioned earlier that he sat on the asset management taskforce—
Abena Oppong-Asare
Chaired—apologies; I have bad hearing. He gave examples of shared actions and how to get better transparency, and mentioned that regulators are already committed to higher transparency. I am sure he agrees with me that businesses need to be held to account. The amendment will also help to create an environment that nourishes talent equality and protects our natural habitable environment.
The amendment basically brings huge financial, environmental and social rewards. Companies must realise they cannot ignore those issues anymore. However, we know that most companies will act only when they see a reason to do so. What we need is less talk and more action.
John Glen
I have listened carefully to the points made by the hon. Lady, who touches on a wide range of subjects, some of which I responded to in my response to the shadow Minister. I would just say that a number of initiatives are under way and intensifying. Just a few hours ago, I launched a piece of work with the Corporation of London on social diversity, a taskforce to bring people together to look at what we can do to improve access to financial services. That follows the work that we have been doing and that former Minister Mark Hoban is doing with the Financial Services Skills Commission. I mentioned the work of Women in Finance, but there are a lot of other pieces of work that my colleague the Exchequer Secretary is also looking at in her dual role as Equalities Minister.
I made clear in my response a few moments ago that I believe the provisions we have already give the regulators significant licence to operate in this area and, although I do not rule out any changes subsequently, I believe at this time that the amendments should be resisted.
Stella Creasy
The challenge that the Minister has with these instruments is exactly the issue around the gender pay gap. We were told that that did not need to be written into the legislation, because there would be a commitment. As we have seen this year, that commitment has not been absolute. It has been abandoned by the Government.
The Minister has said that he agrees with those commitments and the issues that the shadow Minister has raised, and that they might be put into legislation. Does he recognise that, for those of us who are committed to those high standards, the point of such amendments is to put it beyond doubt that they will actually happen? As we have seen, if we do not put them beyond doubt, it is tempting for future Administrations and future regulators to remove or weaken the protections.
John Glen
I thank the hon. Lady for those points. As public bodies, it is clear that the regulators are answerable and accountable to Parliament, and I have explained how that will be enhanced, but they are also subject to legal duties to publicly consult on the new rules and to how Parliament wishes to scrutinise them. I recognise the point that she is making, but I believe that putting that obligation into legislation in that way would not immediately lead to the outcome that she supports. Across those areas of completely legitimate aspiration, many of which I share in an identical form, this is something that we would need to look at in the round following the regulatory framework review.
Alison Thewliss
I appreciate the work that the Minister and other Ministers are doing in this area, but does he accept that he if puts it into the legislation, he might actually have less work to do, because everybody will then be obligated to do it, rather than him having to ask nicely?
John Glen
Unfortunately, I do not share that view. Given the arguments that I have made about the complications that it would bring, because of the overlap with existing provisions, I do not think that would be the right way to go. I am very sympathetic, however, to many elements of the speeches made concerning the aspirations that we should have to improve the overall quality of corporate governance and behaviour across the City.
Mr McFadden
I am sure that the Minister is completely genuine when he says that he supports this agenda and the aims behind the amendment, but anyone who has followed the issue over the years will realise that we have had taskforces galore on it in the City. We have had taskforces on women on boards and on diversity; now we have a new one on social mobility. I wish that well but, after all those taskforces, do those in the top jobs in this sector—the real pool of decision makers—reflect the country as it is today?
Mr McFadden
Of course they don’t. We cannot conclude that, for all the taskforces and all the well-meaning, great people who have been involved in them, they have made enough progress.
This is not just a British agenda by the way. I read in the news the other day that the upper echelons of German industry are having exactly the same debate about whether to mandate quotas on boards for so many women and about the broader equalities agenda that my hon. Friend the Member for Erith and Thamesmead referred to.
Stella Creasy
If we are recognising that, it is worth noting that other nations that we compete with have already put gender quotas into legislation and beyond doubt, so we are behind our economic competitors. Ultimately, as we all know, the point about such regulation is that it would also make us more competitive. Blasting through the discrimination that has stopped us doing it would help our economy as well as our society.
Mr McFadden
My hon. Friend is absolutely right. For those reasons, we made specific mention of equalities legislation in the amendment.
It comes down to one’s view of the difference between encouragement, taskforces and all that, and legislation. This amendment is not particularly prescriptive. It calls for high standards of social and corporate governance. Hon. Members might say, “How do you define ‘high’?” and so on, but it is no less defined that talking about the relative standing of the United Kingdom as a place for internationally active investment firms to do business.
Once we have been through two or three of these debates, we begin to see a pattern in the way that the Committee works. I find myself a bit unconvinced that voluntary action will do this. There is not just an opportunity but a duty on us to start to define the post-Brexit financial services sector and what its characteristics will be. I want to put a few teeth behind all the fine words we have heard about the commitment to high standards, having no race to the bottom and all the rest of it. I always remember the plea of the former Chancellor, George Osborne: anybody in politics should be able to count. I look around the room and I can count, but I still want to press the amendment to a vote.
Alison Thewliss
I beg to move amendment 38, page 63, line 5, in schedule 2, at end insert—
“(ba) the likely effect of the rules on trade frictions between the UK and EU, and”.
This amendment would ensure the likely effect of the rules on trade frictions between the UK and EU are considered before Part 9C rules are taken.
The Chair
With this it will be convenient to discuss amendment 41, page 79, line 29, in schedule 3, at end insert—
“(ca) the likely effect of the rules on trade frictions between the UK and EU, and”.
This amendment would ensure the likely effect of the rules on trade frictions between the UK and EU are considered before CRR rules are taken.
Alison Thewliss
One of the things that concerns us most about where we are going with Brexit is the risk of trade disputes. We need only look at how one dispute can overspill into another, such as the overspill from Airbus/Boeing into Scotch whisky and cashmere—it is not very wise to spill Scotch whisky on cashmere. Our amendments are therefore sensible. They strengthen what is already in the Bill.
Proposed new section 143G(2) to the 2000 Act states that
“the FCA must consider the United Kingdom’s standing in relation to the other countries and territories in which, in its opinion, internationally active investment firms are most likely to choose to be based or carry on activities.”
Proposed new section 143G(3) states that
“the FCA must consider, and consult the Treasury about, the likely effect of the rules on relevant equivalence decisions.”
That adds further consideration to the impact on trade frictions.
Mr McFadden
I will speak briefly in support of the amendment. I think it adds an interesting new angle to our considerations on the schedule. There is quite a lot in the schedule about the UK’s standing as a place to do business. Proposed new section 143G(1)(b) to the 2000 Act talks about the
“relative standing of the United Kingdom as a place for internationally active investment firms”.
Proposed new section 143G(2) says that
“the FCA must consider the United Kingdom’s standing in relation to the other countries and territories in which, in its opinion, internationally active investment firms are most likely to choose to be based or carry on activities.”
None of us has argued that those are not completely legitimate considerations. Of course we want to consider our standing in relation to other countries, but that is different from the trading aspect.
The amendment points out that decisions can be taken that are facilitated by the Bill, for example on divergence, which we have discussed and will discuss further, and those decisions can have one impact on competitiveness but a very different one on the ability to trade. That is particularly important when this equivalence decision is still on the table. I think these amendments on considering our trading position usefully add to the job description of the regulators, which should be about not just competitiveness, but market barriers, market access and our ability to trade into other countries. Considering both of these proposals would be a good addition to the “have regard to” list set out in schedule 2.
John Glen
It is a pleasure to respond to the hon. Member for Glasgow Central and the right hon. Member for Wolverhampton South East. The hon. Members for Glasgow Central and for Aberdeen South propose to introduce a new “have regard” for the FCA and PRA when making rules for the new investment firms prudential regime and implementing the Basel standards respectively. That would require the regulators to consider the likely effect of their rules on trade frictions between the UK and the EU, as the hon. Lady set out.
Again, I understand and share the ambitions for frictionless trade between the UK and one of our biggest trading partners, the EU, but, as I am sure the Committee will understand, I am not able to discuss the details of our ongoing negotiations. We want a free trade agreement outcome with the EU that supports our global ambitions for financial services, and we have engaged with the EU on the basis that the future relationship should recognise and be tailored to the deep interconnectedness of those relationships across financial markets. The EU has made it clear that it does not support such an approach. We remain open to future co-operation with the EU that reflects our wide, long-standing, positive financial services relationship, and we will continue to engage in a constructive manner.
The regulators do not have oversight beyond their financial services remit. It would therefore be highly disproportionate to require them to assess the impact of their rules on all trade matters, covering goods and services. Furthermore, trading partnerships with overseas jurisdictions are the Government’s responsibility, not the regulators’. We consider that regulators should not be asked to go beyond the scope of their capabilities and duties. We have already discussed the capacity of the regulators; the amendment would really go beyond that.
We agree that financial services firms care about the UK’s relationship with overseas jurisdictions, which has a real impact on them. That is why the accountability framework that the Bill will introduce already requires regulators to consider the likely effect of their rules on financial services equivalence granted by and for the UK. Financial services equivalence will be the main mechanism underpinning financial services relationships between the UK and overseas jurisdictions. I believe therefore that the accountability framework, as proposed, meets the aim of the hon. Member for Glasgow Central.
In addition, the amendments focus solely on the relationship between the UK and the EU. That is obviously a matter of enormous concern, but we need to make legislation that accounts for the future. Equivalence or trade in financial services considerations must relate to all jurisdictions. It is crucial that we recognise that in the context of financial services firms, which often have a global footprint and global operations. That also reflects the UK’s present and future ambitions.
The accountability framework recognises the importance to UK firms of our relationship with overseas jurisdictions in financial services matters, while upholding broader international obligations. The Bill already supports the intentions behind the amendment, and for that reason I ask the hon. Lady to withdraw it.
Alison Thewliss
I would prefer to press the amendment to a vote because it fits well with the other parts of the Bill. Asking the FCA to consider the UK’s international standing with other countries aligns with other areas in which it is taking on wider roles, and the amendment reflects that. Regulators should have regard to the wider impact of their decisions and to problems that their rules might cause to trade between the UK and the EU, which could be quite significant. It seems wise to put that in the Bill so that the regulators are mindful of it in the decisions that they make.
Question put, That the amendment be made.
Mr McFadden
I beg to move amendment 22, in schedule 2, page 63, line 10, at end insert—
‘(2A) The FCA must not make Part 9C rules unless—
(a) a draft of those rules has been submitted for scrutiny by a select committee of either House of Parliament which has a remit which includes responsibility for scrutiny of such rules, and
(b) any such committee has expressed a view on the draft of those rules.’.
This amendment is designed to enhance the accountability framework for the FCA by requiring it, prior to making Part 9C rules, to submit a draft of those rules for scrutiny by a relevant Parliamentary select committee before making any regulatory changes.
The Chair
With this it will be convenient to discuss amendment 26, in schedule 3, page 79, line 35, at end insert—
‘(2A) The PRA must not make CRR rules unless—
(a) a draft of those rules has been submitted for scrutiny by a select committee of either House of Parliament which has a remit which includes responsibility for scrutiny of such rules; and
(b) any such committee has expressed a view on the draft of those rules.’.
This amendment would enhance the accountability framework for the FCA by requiring it, prior to making CRR rules, to submit a draft of those rules for scrutiny by a relevant Parliamentary select committee before making any regulatory changes.
Mr McFadden
We slightly change tack with this amendment. We have had some discussion of the “have regard to” list in the schedule, but the amendment covers a different aspect, dealing with the relationship between the enhanced role that regulators are to be given under the Bill and the role of Parliament. There are two important aspects to the role. First, in which way should Parliament be involved? Secondly, when should Parliament be involved? By that I mean, at what point in the regulatory process is it appropriate to have parliamentary involvement?
On Second Reading and several times today, the Minister has encouraged us not to look at the Bill in isolation but to see it as part of a process of reform, possibly involving other such Bills in the future. This may be only the starter and, if hon. Members are really lucky, they could be invited back here next year for the main course—who knows? In particular, he has asked us to look at the Bill alongside the consultation document on the future regulatory framework review, which was published a month ago. That document, which is I think 30 to 40 pages long, has a whole chapter devoted to accountability, including parliamentary accountability.
To anticipate the Minister’s response to the amendments, of course the document does not yet reach conclusions because it is a consultation inviting responses. In the part about parliamentary accountability, the document sings the praises of the Select Committee system and the Treasury Committee in particular. My hon. Friend the Member for Wallasey had to pop out, but we have at least another three members of the Treasury Committee in the room, and I am a former member of it. There is no doubt that it is an esteemed Select Committee, which we all accept does a great job in this House, but the work of that Committee is very stretched. It has to cover a huge amount of business: not only banking and financial services more generally, but taxation, fiscal policy and everything else that the Treasury does.
I do not want to be unfair, but when I read that part on parliamentary accountability, I found it hard to escape the conclusion that it was written to give the impression that not a lot should change—the system we have at the moment is just tickety-boo; it is just fine. The underlying assumption seems to be that we can take this huge exercise in onshoring—this large-scale set of regulations, directives and all the rest of it—expand in a very significant way the role and remit of our regulators, and just tack that on to the present framework. I hope the Minister does not think I am being unfair, but that is the impression that I got when I read the future regulatory framework review.
Stella Creasy
As this is my first speech, let me say how fantastic it is to serve under your chairmanship, Dr Huq—none of us ever says anything other.
I rise partly to presage what I am sure the Minister knows is coming, given our previous correspondence on my concerns about existing financial regulation in this country and where the voice of the consumer is heard in that. I am sure he has looked avidly at some of the new clauses that I have tabled, which seek to get at that and which I note will come much later, in the shape of new clauses 15, 18, 21 and 23.
The shadow Minister has set out clearly how amendment 22 reflects those concerns. Again, where in the new financial regulatory regime being brought in by the Bill will the voices of our constituents be heard? The shadow Minister has focused on the consequences of leaving the European Union and the lacuna that will be created in terms of financial regulation by the Bill if we do not have that clear commitment with the Treasury or any other financial body to look at Select Committees and the role they might play. I want to focus on the other end of that telescope and what it has been like to seek to give consumers voices within the existing regulatory framework, what lessons that might offer us in the future regulatory framework and why involving Select Committees might be a way forward.
I am sure the Minister would say that working out how we make sure our constituents are heard is a work in progress. We talked this morning very strongly about the impact of financial regulation on people’s everyday lives, the financial crisis and what could be learned from that. Many of us will have seen among our constituents people whose lives were decimated when financial institutions were found wanting and how that has driven the concerns about consumer protection in the wider work of the FCA. My concern as a Member of Parliament who has long had an interest in personal debt in this country has been about how that conversation is part of those bigger questions.
As I mentioned this morning, often we look for specific issues when it comes to consumer voice and financial regulation. On the wider impact, it is almost a given that somehow regulators will think about consumers. The reality is that over the past six or seven years of having the Financial Conduct Authority that has not always been the case. The Bill gives those regulatory bodies more powers. As the shadow Minister has pointed out, it removes one of the mechanisms for consumer voice through the democratic process within the European Union. Therefore, it is right that we ask how we replace that and whether there are gaps in what has happened to date that mean it is even more important, when asking whether the financial regulators are living up to the issues we might want them to have regard to, that that consumer voice is being heard in that process.
Amendment 22 is an eminently sensible idea to say, “Hang on a minute, where there had been previous scrutiny and challenge from democratic institutions, we need to replicate that within the UK Parliament.” It comes from that perspective of saying that it is in everyone’s interest to have that check and balance because it has been of benefit under the previous regime and, under that regime, there has been too narrow a consumer voice. I am not going to prosecute that argument in full today, because I am going to save it for the Minister for the new clauses that I have put down and how I think he can do that. I can see his disappointment already. However, I argue that it is worth looking at where the Select Committee process can add value to financial regulation in this country because, so clearly, it is our constituents who have paid the price when financial regulation has not looked at consumer risk and has not been able to ask questions before a crisis happened.
Many of the issues that our Treasury Committee, for example, as one body that may be involved in this, has looked at have come from our constituents raising concerns and a recognition that something might be on its way. Many of us would argue, and I suspect the Minister would agree, that sometimes regulators have been slow to react because they have been trying to balance the needs of the industry with questions about whether interference might cause more harm. The amendment is a way of getting that right, of having a place where those conversations could take place around financial regulation with a regulator that now has much more extensive powers than previously. It is a way of making sure that, as a democracy, we have a space where we can raise those concerns before problems happen.
When we get to the new clauses I have tabled, one of the concerns I will raise is where we see other regulators—in particular, I think of the financial ombudsman having to intervene where our financial regulators have not been able to do their job around supporting and protecting consumers, and so the ombudsman has picked up the pieces. Under the model we have coming forward in this Bill, it is not clear to me, without the involvement of Select Committees, where those conversations could take place, apart from with the financial ombudsman. Again, we are waiting until institutions potentially fail and organisations can pick up the pieces for that consumer voice to be heard.
Alison Thewliss
I very much agree with the proposals brought forward by the official Opposition. I congratulate them on their drafting and having found a way to put these amendments forward. Our attempt at this comes in new clause 32, and I will discuss that a bit further when we eventually get to it.
I agree that it is vital that there is scrutiny of these institutions and these powers. It is surely unacceptable that the Government have made so much play of taking back control from the EU only to hive it off to regulators because it is far too terribly complicated for us parliamentarians to worry our sweet heads about. That is not acceptable. That is not the way that it works in the European Union, and it certainly should not be the way Westminster operates. We should trust ourselves and our colleagues slightly more to do that scrutiny. If European parliamentarians, some of whom are now in this place, can do it, we can certainly look at a way that this can be done and that accountability can be taken for these powers.
I agree with those who have said that the Treasury Committee is stretched in its business. Having had a brief discussion yesterday in our pre-meeting about the sessions to come in the weeks and months ahead, I can tell the Committee that those sessions are already very full, running at two sessions in most weeks. We are certainly being kept very busy with all the important things our constituents bring to us, the responsibility the Committee has to scrutinise the Government and all the other things the Committee wants to do. The logic of setting up a new Select Committee to examine these things is certainly very compelling to me, because it will need that specialist knowledge in addition to the heavy burden of work it might have.
I noted that the hon. Member for Hitchin and Harpenden (Bim Afolami) made a very good plug for this on Second Reading. I think his feeling is that it helps out the Government to have this additional scrutiny. It helps everybody see what is coming, prepares the ground and tries to make decision making better, which should be in the Government’s interest—trying to get to the right thing for all our constituents and for the financial services sector as a whole.
So that is important, and we should have no less of a role in all this than MPs currently have. I draw the Minister’s attention to the evidence given to the House of Lords EU Financial Affairs Sub-Committee, whose reports I am sure he is an avid reader of, for International Regulatory Strategy Group, which also recommends enhanced parliamentary accountability and scrutiny. Its suggestion is a new system of Committee oversight in not just the Commons but the Lords, as we suggest in new clause 32.
The group has a series of principles it thinks such oversight should stand to, such as it being cross-party and apolitical—those are the principles of Select Committees, but it is important that we look at this. It mentions the ethos of the Public Accounts Committee in the way it goes about its business in scrutinising regulatory authorities. It also believes that oversight needs to be authoritative and expert, building up expertise within Committees, that it needs to be risk-based and mainly ex-post, and that it should be open to stakeholder input, which is incredibly important. We all know Select Committees do that; they take evidence and they have good records of bringing in expertise and evidence from people, but they need to be able to use that evidence in a practical way to inform the best strategy and best way forward as we take these powers back.
I very much recommend to the Minister the evidence given by the IRSG. What is he doing to meet this challenge of the “accountability deficit”, as the Finance Innovation Lab put it? We cannot have a situation where more powers are coming back, yet we give them away. That is certainly not what was promised on the side of any Brexit bus, and it should not be the way we go forward. As the honourable grandee, the hon. Member for Walthamstow, said, it stores up a risk that we do not see something coming, that we have not identified a problem on the horizon and that we all end up in a bit of a crisis because we did not have the opportunity to scrutinise properly, to look at the regulations as they come forward and to ensure we do what is best for our constituents and the wider economy. There is logic in having some form of Committee to look at this, in whichever format the House wants to bring that forward. It is essential that that scrutiny exists and that it is at least as good as what was done in the European Parliament.
John Glen
I am very pleased to address the points raised by the right hon. Member for Wolverhampton South East, the hon. Member for Walthamstow and the hon. Member for Glasgow Central. I have listened carefully to what they had to say, and their remarks go to the heart of the distinction between the provisions of the Bill that we are scrutinising in Committee and the broader questions around the future scrutiny mechanism, and the necessity to ensure that we do not undermine the legitimate and appropriate scrutiny by Parliament of our regulators.
It is critical that we ensure sufficient accountability around the new rules of the UK’s financial sector. Capital requirements for firms are extremely detailed and technical. It is right that we seek to utilise the expertise of the regulators to update them in line with international standards.
In return for delegating responsibility to the Financial Conduct Authority, this Bill requires it, under proposed new clause 143G of the Financial Services and Markets Act 2000, to publish an explanation of the purpose of its draft rules and of how the matters to which it is obliged to have regard have influenced the drafting of the rules. The Bill introduces a similar requirement for the Prudential Regulation Authority, under proposed new clause 144D of the Financial Services and Markets Act.
These matters concern public policy priorities that we consider to be of particular interest to Parliament. I have looked carefully at the amendments proposed by the right hon. Gentleman, and the amendments envisage Select Committees reviewing all investment firms prudential regime and capital requirements regulation regulator rules before they can be made. Under that model, Parliament would need to routinely scrutinise a whole swathe of detailed new rules on an ongoing basis. That is very different from the model that this Parliament previously put in place for the regulators under the Financial Services and Markets Act, where it judged it appropriate for the regulators to take these detailed technical decisions—where they hold expertise—within a broader framework set by Parliament.
It should not go unnoticed that, if Parliament were to scrutinise each proposed rule, the amendment does not specify a definite time period in which any Committee must express its view on them. That could bring a great deal of uncertainty to firms on what the rules would look like and when they would be introduced. That makes it more difficult for these firms to prepare appropriately for these changes. Ultimately, there is currently nothing preventing a Select Committee, from either House, from reviewing the FCA’s rules at consultation, taking evidence on them and reporting with recommendations. That is a decision for the Committee.
My officials have discussed this amendment with the regulators, and they have agreed that they will send their consultation draft rules to the relevant Committee as soon as they are published. The FCA and the PRA both have statutory minimum time periods for consultation and will take time to factor in responses to consultation—so this is not a meaningless process—providing a more than reasonable window within which the Committee can engage the regulators on the substance of the rules, should it desire to.
The Government agree that Parliament should play an important strategic role in interrogating, debating and testing the overall direction of policy for financial services, while allowing the regulators to set the detailed rules for which they hold expertise.
Before I conclude, I would like to address the point the right hon. Gentleman made concerning the document that was published a month ago on the future regulatory framework, and to address the supposition he very courteously made that, somehow, the Government believed that everything was fine and little needed to change.
The purpose of this extensive consultation is to do what it says: to consult broadly to ensure that, through that process, the views of industry, regulators and all interested parties and consumer groups are fully involved, such that, when we then move to the next stage of that process—I would envisage making some more definitive proposals—it would meet expectations on a broader and enduring basis. This Bill is about some specific measures that, as I explained earlier this morning, we need to take with an accountability framework in place, but I do not rule out any outcome.
The right hon. Gentleman made some observations about the prerogative of Government over mandating Parliament and Select Committee creation. I think we are some way away from that. We want to do these things collaboratively and end up with something that is fit for purpose, and I recognise the comments he made about the resourcing of such Committees with respect to the role they would play.
I do believe that this scrutiny process, as set out in the Bill, is extensive, and, for the reasons I have given, I again regret that I must ask the right hon. Gentleman to withdraw this amendment.
Mr McFadden
I cannot resist the irony of pointing out that the Government are resisting what could be termed the “take back control” amendment and do not want to add it to the Bill. There are many illustrious Members of this House we could name this amendment after; they have been arguing to take back control for many years.
The Minister said that the amendment would cause a lot of uncertainty; that it might be too much work; that it might require a Committee—whichever Committee it was—to look in too much detail at rules, when it would probably be more concerned with the broad direction. He also pleaded with us to allow the consultation to play out.
There is a serious point at the heart of this about the sovereignty agenda. There will be some kind of consequence at some point, possibly a backlash, that will draw attention to how this is done and the new powers that the regulators have. At that point, people will ask, “What was Parliament doing? What role was Parliament playing?”
John Glen
I beg to move amendment 1, in schedule 2, page 76, line 31, leave out “143O(4), (6) or (8)” and insert “143O(3), (6) or (8)(b)”
This amendment corrects a cross-reference to new provisions inserted by Part 1 of Schedule 2.
This is a technical amendment that corrects a cross-reference from section 395 of the Financial Services and Markets Act 2000 to new section 143O, as proposed in schedule 2.
Amendment 1 agreed to.
Question proposed, That the schedule, as amended, be the Second schedule to the Bill.
John Glen
Investment firms have a significant role to play in enabling investors to access financial markets, but the current prudential framework that applies to FCA investment firms was made for banks, which is why we need a new bespoke investment firms prudential regime. Schedule 2 contains relevant provisions that enable the FCA to implement a tailor-made prudential regime for non-systemic investment firms.
The new regime will set out new capital and liquidity requirements that will ensure that firms can wind down in an orderly way without causing harm. The right hon. Member for Wolverhampton South East and the hon. Member for Walthamstow are rightly concerned about consumer harm, so I draw their attention to the fact that the FCA will have to set those requirements in relation to the risks that firms pose to consumers, as well as the integrity of the financial system.
The FCA will also be required to make rules for parent undertakings of investment firm groups, because appropriate regulation and supervision are as important at the group level as at the individual firm level. Parents, as heads of the group, should be held responsible for the prudent management of the group.
It is right that specific rule-making responsibilities should be delegated to the FCA as an independent expert regulator, but those responsibilities must come with enhanced accountability. Schedule 2 requires the FCA to have regard to a list of important public policy considerations when making its rules in relation to the new investment firms regime, including any relevant international standards and the relative standing of the UK as a place for internationally active investment firms to carry on activities. To support scrutiny, the FCA will need to report publicly on how its consideration of those matters has affected its decisions on the rules in relation to the IFPR.
The FCA will also have to consider the impact on financial services equivalence, both by and for the UK, and consult the Treasury on that. Consulting the Treasury ensures that the FCA has appropriate accountability for technical choices that might have an impact on firms, while recognising that the Government retain responsibility for international relations and therefore equivalence. These three considerations are those that we have deemed to be immediately pertinent to the new investment firms prudential regime today.
However, as I have mentioned previously, the accountability framework is meant to reflect the changing context. That is why the Treasury will have power to add additional considerations, which would be done following discussions with the regulators and industry, and following parliamentary scrutiny. That is the overall framework that will allow greater scrutiny and transparency, and provide the direction the FCA will take in implementing the new regime in the UK, while rightfully leaving the detail to the experts.
In the longer term, any wider deregulation will need greater debate and the proper scrutiny of Parliament. The Government intend to address that part through the future regulatory framework, as I have discussed, which is now out for consultation. I therefore recommend that that this schedule stand part of the Bill.
Question put and agreed to.
Schedule 2, as amended, accordingly agreed to.
Clause 3
Transfer of certain prudential regulation matters into PRA rules
Mr McFadden
I beg to move amendment 23, in clause 3, page 4, line 31, at end insert—
“(9A) The Treasury must, within six months of making any regulations under this section, prepare, publish and lay before Parliament a report setting out—
(a) the reasons for the revocation of the provisions of the Capital Requirements Regulations being made under the regulations;
(b) the Treasury’s assessment of the impact of the revocation on—
(i) consumers;
(ii) competitiveness;
(iii) the economy.”
This amendment is intended to ensure the Treasury reports to Parliament on the impact of divergence from CRR rules.
In debating this amendment and this clause, I am hoping the Minister will be able to explain the relationship between this clause and clause 1. Clause 1 specifies the certain type of investment firms to which CRR rules need not apply, and he was at pains to say that that was a specific, targeted approach, but clause 3 looks to range very widely on the Treasury’s powers to revoke aspects of the capital requirements regulation.
The list in clause 3(2), on page 2 of the Bill, has many different headings, including business lends such as mortgages, retail investments, equity exposures and so on. Without getting into the detail of the technicalities of the Basel rules, not all capital is treated as equal. A pound is not just a pound. It depends against which line of business it is weighted. For example, financial institutions will argue that mortgages pose a particular category of risk, probably quite low risk, compared with another line of business where they may be lending against business loans, commercial property or some other activity. The Basel rules do not judge all these activities equally and they apply what are known as risk weights to them.
The clause allows the Government pretty sweeping powers, as far as I can see, to depart from and to revoke aspects of the capital requirements regulation, against all these different types of business. I would be very interested for the Minister to set that out and clarify it.
Through this process, the capital ratios are allocated. Again, I draw the Committee’s attention to the important paragraph (m) at the bottom of page 3 of the Bill, the leverage ratio. That is described in the notes on clauses as the “backstop.” I hope that that term does not cause too much excitement in the Committee. Like all backstops, it is there in case the list from paragraph (a) to paragraph (l) does not prove sufficient.
This particular backstop of the leverage ratio casts aside all this stuff about risk ratings. It takes the whole lending book and the whole lending business, and says that a certain proportion of capital must be held against the whole thing. It is a bit of an insurance policy in case the risk ratings do not do the job. It is true that the risk ratings are where this is open to all kinds of lobbying, as people will say that one line of business is less risky than another.
At the core of this is a debate between regulators who must consider the safety and resilience of the system as a whole, and individuals who will argue that if only they did not have to hold all this capital, they could lend more, stimulate more economic activity, and so on. That is the debate that takes place. Without wanting to go over all the ground that we covered this morning, the amendment asks for a report on the degree to which the divergence—the leeway powers, as we might call them—will be used, and the Treasury’s assessment of the impact on the economy. As I said this morning, we believe it is important that such a report should consider the impact on consumers, because they do not want to be on the hook for decisions that allow capital levels to fall too much, thereby weakening the resilience of the financial institutions in question.
This is a “lessons learned” amendment. It is important that the debate about capital ratios does not take place altogether in the dark—that it is exposed to what my hon. Friend the Member for Erith and Thamesmead called the daylight of scrutiny—and that we do not hear just from financial trade bodies. If they all genuinely have no intention of lobbying for a less safe system, have no desire for a race to the bottom and want the highest possible global standards on regulation, they have absolutely nothing to fear from this amendment. It does no more than ensure that we have reports from the Treasury on what happens when these powers are passed to UK regulators, and what happens if the divergence that is facilitated in clause 3—in this long list on pages 2 and 3 of the Bill—takes place.
Alison Thewliss
I agree very much with what the right hon. Gentleman has said. It is important that we are kept up to date, in the absence of other scrutiny mechanisms. At the very least, within six months of Royal Assent, we should find out the impact of any revocations. The point was well made about consumers, because in many ways they are very far away from where this Bill is, and they may not see any issues that are coming up. It is important that we, as parliamentarians, are sighted on what those issues might be and have some degree of scrutiny over what happens with the regulations.
Stella Creasy
We are talking in quite abstract terms, but it is worth remembering that when Fannie Mae and Freddie Mac fell apart in America, consumers were the first to feel the repercussions that were felt around the world. This financial regulation comes in in the aftermath of that, because it is still going on. There are still people and families who are paying the price for what happened in the financial crisis. This is not about reheating and repeating the arguments about who caused the financial crisis. It is about recognising that consumers in all our constituencies paid the price, first and foremost.
As others have said, when we think about financial regulations, it can feel quite technical, distant and obscure because of the language we use, but let us remember back to those days. Many years ago, when I first came into Parliament, we were dealing in 2010 with the aftermath of the financial crisis, and it was a very painful crisis for many. Everybody asked why we did not see what was happening. Why did we not see it coming? How could we not have seen that banks were over-leveraged? How could we not have seen that mortgages were being resold in the subprime market? The truth was that it was a closed shop, so everybody was marking each other’s homework and saying, “I am sure this will be fine.” This seems to me the mildest of amendments, simply asking whether we have the information to ensure that such an occurrence could never happen again, when we are talking about something as simple as the capital requirements that banks and financial institutions should have. After all, that is exactly what happened in 2008: everybody leveraged each other, so the capital was gone, and when the roundabout stopped, it was our constituents who paid the price. I know by now, on the first day, that Ministers will think we are a broken record, but to ask the Treasury simply to provide that information and to look at it from a consumer perspective does not seem an unfair thing to do, given the history and the legacy of this that we have seen for so many in our constituencies.
John Glen
In addressing this amendment, I want to start by saying that the Government are fully committed to ensuring that this greater delegation of responsibility to the regulators is accompanied by robust accountability and scrutiny mechanisms. To pick up on the point made by right hon. Gentleman about clauses 1 and 3, they amend the existing banking framework for different reasons. Clause 1 only removes FCA investment firms from the CRR. Clause 3 enables the implementation of Basel standards for the remaining firms, credit institutions and PRA investment firms by enabling the Treasury to revoke parts of the CRR that relate to Basel. That is so that the PRA can fill the space with its rules.
Amendment 23 seeks to add a requirement for the Treasury to assess and report on the impact of its revocations of the capital requirements regulation on consumers, competitiveness and the economy. However, I would argue that the emphasis is in the wrong place. The Treasury will only make revocations to enable the introduction of the PRA’s rules. A stand-alone assessment of the provisions being deleted would not provide meaningful information for Parliament—it is unnecessary. Those revocations are to be subject to the draft affirmative procedure, so they will be explained to Parliament and Parliament will be able to debate their appropriateness before they are made.
I agree with the principle of scrutiny, but the emphasis should be placed on the PRA’s rule making, and that is what this Bill does. The Bill includes provisions requiring the PRA to publicly report on how it has had regard to upholding international standards and relative standing in the UK, as well as facilitating sustainable lending. Those are in addition to the PRA’s existing statutory objectives on safety and soundness of financial institutions and its secondary competition objective, so they overlap with the areas that the amendment attempts to address.
The provisions in this Bill sit alongside existing provisions in the Financial Services and Markets Act 2000, which require the PRA to publish a cost-benefit analysis alongside its consultation on rules. That will provide Parliament and the public with the information required to scrutinise the PRA’s actions. Therefore, the current provisions in the Bill, combined with those existing provisions in the Financial Services and Markets Act, already ensure that the information that Parliament is seeking will be in the public domain. The hon. Member for Walthamstow asked me to set out a vision, almost, for the conduct regulator with respect to the future operating environment. To some extent, that is deferred to the future regulatory review, but I will give her my view because this goes to the core of the future of financial services. We need an environment in which the regulator is accessible to consumer concerns. I recognise the work that she has done and the shortcomings that she perceives with the regulator’s current dynamic. We need Parliament to be at the heart of scrutinising its activities. The legislation would give it an obligation to report, but then we need meaningful scrutiny from Parliament.
The challenge is based on the work that the hon. Lady did after 2010—we came into Parliament at the same time—after which there was a rapid evolution in business models and new types of things. That is why I am delighted that Chris Woolard is doing a high-cost credit review and looking at some of the areas that she is engaged in, such as buy now, pay later. He is looking at that urgently so that we do not make the mistakes of the past and do not face some of the emerging challenges, in terms of behaviours—[Interruption.] She smiles. I suspect that she is not completely convinced by what I am saying about the provisions. We are resisting the amendment because in the narrow confines of what we need to achieve, with respect to the translation of these directives appropriately at the end of the transition period, that is distinct and different from an enduring solution. I look forward to her contribution to the regulatory framework review, because that will drive a meaningful discussion about how we achieve the sort of accountability that she and I want and think should be enhanced.
Stella Creasy
I am sure the Minister will have some delightful conversations about the regulatory framework that will keep many people wide awake for hours to come, but the two are not mutually exclusive. This amendment and this debate are about capital holdings.
Does the Minister recognise that what I said about what happened in 2008-09 is directly linked to this? We need to keep a tight eye on this, especially because of the global context in which it is happening. We cannot protect our economy and our constituents without some form of scrutiny and control. The Minister said that it is important to have parliamentary involvement, but he has just refused an amendment that would have brought the Select Committees into the process.
I am struggling to understand why in this instance, with this amendment and this requirement of the Bill, given the role of the FCA in overseeing capital requirements, the Minister feels that it would not be important to have the data, so that we are not in a position in which that subprime lending happens again in a different guise. If we have learned anything—this is not just about the high-cost industry—it is that these models evolve. It is like water: exploitation in the system will find a way through unless we have robust procedures. It is possible to have both this report and a regulatory framework; the two are not mutually exclusive. If there is not a reporting provision, the Minister leaves a gap until one is in place.
John Glen
This legislation provides the regulators with the responsibility and the reporting obligation to Parliament. What the hon. Lady has done is make an explicit relationship between conduct failure and capital requirement decisions. Decisions about the overall framework for accountability for the regulators are embedded within this Bill. The point of disagreement between us is whether there are sufficient obligations, in terms of reporting and scrutiny, for these narrow measures. We obviously disagree. I am trying to signal that, more broadly, on the wider issues of the future dynamic among Parliament, the Treasury and regulators, there is scope for significant review, and appropriately so given the changing nature of where these regulations are coming from. I do not have anything else to say.
Mr McFadden
The Minister said that he does not want to accept the amendment because he thinks it is in the wrong place. I would find that a little bit more convincing if I really thought he would accept it if he thought it were in the right place, but so far today, Members on the Government Benches have steadfastly voted against this kind of reporting back and reviewing of things to do with the capital rules, as well as the other amendments tabled. I am sure that the Minister has read the whole amendment paper, and will have seen that I have tried to come at the same issue from a number of different angles and different timetables. This morning, we pressed to a Division an amendment asking for a report after three years, which was defeated. I will not press this one, Dr Huq, but we will be coming to other, similar amendments very soon. I therefore ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
John Glen
The 2008-09 financial crisis led to significant economic hardship. Since then, post-crisis regulatory reforms set by the Basel Committee on Banking Supervision have supported financial stability, which underpins our economic prosperity. We in the UK intend to uphold our international commitment to the full, timely and consistent implementation of these reforms, alongside other major jurisdictions, and clause 3 creates the space in legislation for the financial regulator—the Prudential Regulatory Authority—to implement the remaining Basel standards. Like our approach to investment firms, our intention is to delegate the responsibility of implementing these to the PRA with enhanced accountability, as I have described. This is the right thing to do: the PRA has the technical expertise and competence to implement these post-crisis reforms as they should be implemented.
However, in delegating this responsibility, this Bill ensures that checks and balances are in place. First, clause 3 ensures that we transfer only some elements of the capital requirements regulation, or CRR, to the PRA, and that the extent of the Treasury’s powers to delete will be constrained to those areas of the CRR that are necessary to implement the Basel standards and ensure the UK upholds its international commitments. Secondly, this clause ensures that the deletions the Treasury makes take place when it is clear that adequate provision has been made by the PRA to fill the space. Those deletions will also be subject to the draft affirmative procedure, providing the opportunity for Parliament to scrutinise the Treasury’s actions. The clause also allows the Treasury to make consequential, supplementary and incidental deletions to parts of the CRR. This is to ensure a coherent regime across the CRR and other PRA rules, amounting to a clear prudential rulebook that industry can follow.
Further, clause 3 enables the Treasury to make transitional and savings provisions to protect cliff edges from the deletion of certain provisions on the operations of a firm. This will allow the Treasury to save permissions already granted by the PRA, to modify capital requirements and avoid the need for firms to reapply for those permissions under new PRA rules where they are being replicated in the rulebook as a result of the Bill. This clause is essential to the delivery of our international commitments, and I therefore commend it to the Committee.
Mr McFadden
I do not want to force the Minister to go over the same ground again and again, but I am just trying to fully understand this. He used a phrase something like “the clause allows for departure from the CRR in order to implement Basel”, if I have understood him correctly. I am not trying to be obtuse, but I want him to explain fully to the Committee what that means. Why do we have to “depart” from the capital requirements regulation in order to implement the Basel rules? On the face of it, the list contained in clause 3 is a very wide list of things from the CRR that the Treasury is taking powers to revoke, and I am therefore trying to fully understand what the effect of this clause is. Is it just to implement Basel, or does it give a wider, ongoing power to the regulator to change capital ratios against these lines of business that are set out in the amendment? I genuinely want to understand that.
My second question is about the potential impact on risk weightings and how capital ratios can look. There is a potentially perverse effect here—almost a mathematical one. Because these things have risk weightings attached to them, if the regulator makes a decision to reduce that weighting—from 50% to 40%, for example, or whatever it is—but the bank still holds the same amount of capital against that stream of business, it has the effect of making the bank look more safe and secure, even though it does not have any more capital—even though nothing has changed.
John Glen
I thank the right hon. Gentleman for his points. On the first point about why we are deleting what we are deleting, we are deleting elements of the capital requirements regulation to the PRA so that it can implement the provisions of capital requirements II, which the EU is commencing, in the appropriate way for our firms—that is basically it. The EU is on a journey of implementing CRR II, and we need to do what is appropriate for our firms, as I have discussed.
John Glen
The future in terms of the evolving rulebook of the EU and other jurisdictions and how we seek to do that here will be subject to the future regulatory framework. We cannot anticipate the future evolving regulatory direction of new directives that have not yet been written elsewhere. What we have to do is to build the right framework for origination of rules in the Treasury and from the regulators, with the right accountability framework in place.
The problem we have conceptually in this discussion is that we are coming out of an embedded relationship in which we have auto-uploaded stuff that we have discussed, crudely, elsewhere. We have a legacy set of issues over which we have not had complete control this year that we are obliged to implement, but as we approach the end of the transition period, we have to make provision for things that actually make sense and we want to do anyway, in an appropriate way.
The driver of the right hon. Gentleman’s remarks— I understand why—is this desire to scrutinise the appetite for a sort of ad hoc, and I do not mean to be pejorative, but almost opportunistic, divergence, when what we are trying to do is to enable the regulator to do what is appropriate for a set of entities that will not naturally conform to the enduring direction of travel of the CRR II within the EU, because of the different nature of our firms and, as we have discussed, the different treatment of capital that is appropriate, given what they are actually doing vis-à-vis banks.
Secondly, he asked some detailed questions about risk weight.
Mr McFadden
Before the Minister moves on to the potentially perverse effects, does clause 3 simply give the regulators the powers to implement Basel 3.1, or does it give the regulator broader powers to change risk weightings against those lines of business in ways other than under Basel 3.1?
John Glen
My understanding is that the licence to operate given to the PRA is to make it consistent with Basel 3.1, in the context of the evolving rules that are being implemented elsewhere, but the notion that there is a single downloadable format of the Basel 3.1 rules in every single jurisdiction is a false proposition. Every regulator in different jurisdictions will do that in different ways. It is important, therefore, that whatever decisions they come to around the specific decisions on different entities will be published and scrutinised, such that it could be justified against the international standing and the other factors that we have put in place as a meaningful accountability framework.
I am probably close to the limit of my capacity to answer further on this point, but I am happy to reflect further and to write to the right hon. Gentleman and make it available for the Committee, to clarify anything that would be helpful to the Committee.
Question put and agreed to.
Clause 3 accordingly ordered to stand part of the Bill.
Clause 4 ordered to stand part of the Bill.
Clause 5
Prudential regulation of credit institutions etc by PRA rules
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
New clause 1—Annual review of the CRR rules—
“(1) The Secretary of State must, once each financial year, prepare, publish and lay before Parliament a review of the changes to CRR rules made by the PRA in the relevant financial year.
(2) The review must include an assessment of the impact of any changes to CRR
rules on—
(a) consumers;
(b) competitiveness; and
(c) the wider economy.”
This new clause would require regular reviews of any departures from the current regime of capital requirements.
Mr McFadden
This is my third attempt to get the Government to commit to reporting on the impact of these measures. Clause 5 and the accompanying provisions in schedule 3 insert new part 9D into the Financial Services and Markets Act 2000. This new part 9D will empower the PRA to make changes to capital requirements regulation rules. Schedule 3 also sets out the accountability framework, which we have discussed quite a lot throughout the day.
New clause 1 is an attempt to understand and explain the effect of changing these rules. It calls for an annual review to be published of changes to the CRR rules and their impact on consumers, competitiveness and the wider economy. As with similar amendments, all of this is an attempt to ensure that we do not simply pass all these powers from the EU to UK regulators without having processes in place, making clear what the changes we are making do and giving Parliament a proper voice in debate over these matters.
As I have said in relation to other amendments that, as things stand, unless we strengthen the parliamentary side of this, we could end up having less input to these issues in the future than we do at present. All these capital rules are there for a reason. We have thrashed it out today. It is important that we have proper transparency and a full understanding of the consequences if we depart from these rules in a significant way in the future.
My hon. Friend the Member for Walthamstow described these amendments as mild. I think they are mild. None of them say even that we should not have any of these departures. They simply ask for some process to understand the effect of them, which is open to Parliament. That is what new clause 1 would do.
John Glen
I really respect the right hon. Gentleman’s approach to this. It is very constructive. I accept his frustration with what I am saying, but I do respect his patience with me through this process. Each time, I will try to justify what we are doing.
This Bill enables the implementation, as the right hon. Gentleman understands, of the Basel standards. That will be done by deletion of parts of the capital requirements regulation that need to be updated, so that the PRA can make those Basel updates in their rules. As a result, we will see a split in this prudential regime, perhaps temporarily, depending on the end result of the future regulatory framework across legislation and regulatory rules.
The regime is already split in this way to an extent, with some rules for firms set directly by regulators and others contained in retained EU law or law that has originated in this Parliament, and it will continue to work in this way. However, we will seek to ensure that this is done as effectively as possible through clause 5. Clause 5 ensures that cross-references between legislation and PRA rules work properly on an ongoing basis. It also requires the PRA to publish an explanatory document outlining how it all fits together. Finally, the clause introduces schedule 3, which contains further detail to ensure that the regime works. As the elements contained in the clause help to ensure a workable framework for the UK to remain Basel-compliant, I recommend that the clause stand part of the Bill.
New clause 1 seeks to add an annual reporting requirement, as the right hon. Member for Wolverhampton South East said, for the Government to carry out and publish a review of PRA rules that implement the Basel standards, including an assessment of the impact of changes to the rules on consumers, competitiveness and the wider economy. The Bill will require the PRA to demonstrate how it has regard to several considerations: the international standards that it seeks to implement, the relative standing of the UK and the ability to finance businesses and consumers sustainably.
However, I regret that the amendment has the potential to duplicate the PRA’s reporting duties. I respectfully contend that this additional annual reporting requirement is not necessary, because through the Bill the PRA will also be required to publish a summary of the purpose of the rules it makes when implementing the Basel standards and an explanation of how it has complied with its reporting duties. Furthermore, the Financial Services and Markets Act 2000 already requires the PRA to make an annual report to the Chancellor on its activities, including on the extent to which its objectives have been advanced and how it considered existing regulatory principles in discharging its functions. The Chancellor must lay that report before Parliament.
I therefore question whether the proposed review would really provide much more insight than what the current reporting arrangements already achieve. I have myself checked whether there are no reporting requirements and we are entering some sort of wild west environment, but I do not think that that is the case. The amendment duplicates efforts that are already in place. Ultimately, to require the Treasury to undertake such an assessment would undermine this delegation and the regulator’s independence. I therefore ask the right hon. Gentleman not to move the amendment.
Mr McFadden
The Minister has given a pot 3 defence. I apologise for using that in-joke from this morning’s session; I am happy to explain it to you later, Dr Huq. A pot 3 defence means that it is already covered. It is my pleasure not to move the amendment.
Question put and agreed to.
Clause 5 accordingly ordered to stand part of the Bill.
Schedule 3
Prudential regulation of credit institutions etc
Alison Thewliss
I beg to move amendment 40, in schedule 3, page 79, line 25, after “activities” insert
“in the UK and internationally”.
This amendment would ensure the likely effect of the rules on the relative standing of the United Kingdom as a place for internationally active credit institutions and investment firms to be based or to carry on activities are considered both in terms of their UK and international activities before Part CRR rules are taken.
This is quite a modest amendment. The Bill is supposed to ensure that Scotland, the City and the rest of the UK remain internationally competitive but robustly regulated, as the sector and everyone beyond a few marketeer ideologues are looking for. The amendment seeks simply to ensure that the FCA has regard to the standing of the UK as a base for financial firms that operate internationally. It is a kind of reflection amendment. It is common sense. It is really a drafting amendment. There is not terribly much more to it.
John Glen
As I have said, the UK is committed to maintaining its high standards. We heard during evidence sessions last week that these high standards will not hinder the UK’s ambition to remain an attractive place to carry out business. None the less, the Government want to ensure that our regulators have specific regard to these ambitions, particularly for international businesses, which bring jobs and innovation and, I believe, improve our economic prospects and prosperity.
The amendment aims to ensure that that is the case, and I welcome the intention, but I reassure the Committee that the Bill as drafted will deliver that. I highlight in particular to the hon. Member for Glasgow Central that subsections (1)(b) and (2) of proposed new section 144C to the 2000 Act requires the PRA to
“consider the United Kingdom’s standing in relation to the other countries and territories”
that could affect where international firms
“are most likely to choose to be based or carry on activities.”
I believe that that is adequate to address the concerns that have been raised.
Alison Thewliss
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr McFadden
I beg to move amendment 27, in schedule 3, page 80, line 8, at end insert—
“(7) The PRA must, at least once every five years, review the provisions of this section.
(8) The Treasury must lay before Parliament a report setting out—
(a) the outcomes of this review; and
(b) any changes the Treasury proposes to make as a result of this review.
(9) The Treasury may by regulations make any changes identified in subsection (8)(b).
(10) Regulations under subsection (9) may not be made unless a draft has been laid before and approved by a resolution of each House of Parliament.”
This amendment would ensure there is a review of the accountability framework for regulators once in each Parliament and give it a role in approving subsequent changes to the accountability framework.
This will be my last attempt. I have tried to get reviews after six months, one year and three years; this is the attempt at once in every Parliament. Of all the mild amendments, this has to be the mildest. Once in every Parliament, we are asking for the PRA to review the provisions of proposed new section 144C in schedule 3, and for the Treasury to lay before Parliament a report setting out the outcomes of that review and any changes that it proposes to make as a result. I really think it reasonable to expect that as a minimum, given the sensitivity and potential combustibility of the provisions, which is why we have tabled the amendment.
John Glen
On a human level, I have found this process quite challenging, because my instincts are to try to accommodate the right hon. Gentleman when he sounds so reasonable and plausible. The amendment seeks to introduce a requirement to review the PRA’s accountability framework for Basel implementation and, as he said, it would require the PRA to conduct a review every five years, which is the least demanding of his requests today.
It is right to ensure that the accountability framework is fit for purpose and up to date. Indeed, that is one of the aims that we want to achieve through the Bill: flexible and agile regulation. The Bill’s purpose is to enable the implementation of the Basel standards, and the international deadline for Basel 3.1 reforms is 1 January 2023. By 1 January 2023, the bulk of Basel-related rules made as a result of the Bill should therefore already be published. The accountability framework that the Bill introduces for the PRA to make rules to meet Basel requirements relates only to the implementation of the specific so-called Basel 3.1 rules and does not relate to the ongoing prudential regulation of financial service firms that is being considered by the future regulatory framework review. The review is consulting on the important split of responsibilities between Parliament, Government and the regulators now that the UK has left the EU.
Reflecting the wisdom of the right hon. Gentleman with respect to the value of reviews, in that context a five-year review would clearly be appropriate. However, in the current context, it would be inappropriate to ask the PRA to report on an Act of Parliament given that the Bill already includes a more appropriate reporting requirement for the PRA, as set out in proposed new section 144D, that is adapted for the CRR rules. That requirement is to publish an explanation of how the matters in the accountability framework have impacted on the PRA’s rules whenever it consults on and publishes final rules to implement Basel. That will directly attend to the logic and rationale for what it has done.
The amendment would also add a new power for the Treasury in relation to the accountability framework. The Treasury already has a similar power in the Bill to add additional matters for the PRA to consider. The power proposed in the amendment goes further, allowing the Treasury to amend the list, including removing matters from it. It is not clear to me why the Treasury should ever remove, for example, the requirement for the PRA to have regard to the Basel standards. Such matters are immediately pertinent to the prudential regime and would have been agreed by Parliament through the Bill process. Therefore, the existing provisions in the accountability framework already appear to achieve the aims intended in the amendment in the best way possible and, as such, do not need to change. For those reasons, I regret to ask the right hon. Gentleman to withdraw the amendment.
Mr McFadden
Is the Minister saying that if there were a Basel 3.2 or a Basel IV process—that is quite likely, because at some point there will be a revision to the capital rules because things change and the system has to evolve—somehow the part 9D provisions cannot be used? Are they only for Basel 3.1? That is the implication of his response. I would have thought that giving the regulator powers over all those areas would be applicable to future Basel revisions and not just this one. In other words, we are not making a regulatory snapshot; we are creating a movie. This is a genuine question: the part 9D rules must be applicable to any future revisions of the Basel process, too. If so, there is a strong case for a once-in-a-Parliament review of how that is going.
John Glen
Those rules will have regard to future Basels. The reporting mechanism we have and the accountability to Parliament when those rules are published is more immediate and comprehensive. My contention is that a five-year provision would be out of date because we would have done it by then. That is why I am apprehensive about the right hon. Gentleman’s suggestion.
However, within the context of the future regulatory review—I cannot be bound on the outcome of that, because it is genuinely consultative—and what would be the appropriate reporting, there is a difference between short-term reporting on a particular measure or decision and a more fundamental review of the strategic dynamics of the relationship between the regulators, which we have seen evolve over decades. On the principle, there may be the need to have something like that. I am straining to be positive and constructive in my engagement with the right hon. Gentleman.
Mr McFadden
The truth is that there is no science about what is exactly the best timetable for reviewing these things. I am not pretending that one of the various timescales that we have mooted is perfect, and there is probably a legitimate debate to be had about that. However, as the Minister has just confirmed that we have given the regulator the power to make rule changes regarding future Basel changes on an ongoing basis—I am sure he is right about that—having a review and a report on this once every five years is a reasonable timescale to say what the impact of these things has been. I therefore wish to push the amendment to a Division.
Question put, That the amendment be made.
John Glen
I beg to move amendment 2, in schedule 3, page 84, line 19, leave out paragraph (b) and insert—
“(b) section 144D (explanation to accompany consultation on rules);
(c) section 144E(1) and (4) to (7) (exceptions from sections 144C and 144D).”
This amendment corrects the explanatory words in a list of provisions that apply to section 192XA rules that are not CRR rules.
This technical amendment corrects a reference to words contained in parentheses to make it clear that those words apply only to proposed new section 144D to the 2000 Act, and it adds the correct words in parentheses to the references in proposed new section 144E. The words in parentheses explain the scope of the clause.
Amendment 2 agreed to.
Schedule 3, as amended, agreed to.
Clause 6
Power to amend the Credit Rating Agencies Regulation
Question proposed, That the clause stand part of the Bill.
John Glen
The Basel standards include rules relating to credit assessments—also called external ratings—which some firms use to assign risk ratings. Risk ratings are used to determine the minimum amount of capital that must be maintained by a firm, and the right hon. Member for Wolverhampton South East has already drawn attention to this matter.
In the UK, credit ratings agencies, or CRAs, that issue credit assessments are regulated by the credit ratings agencies regulation, and the changes needed to the CRA regulation to implement Basel are minor. Consistent with the 1 January 2023 international deadline, however, the PRA has yet to issue its rules implementing the Basel 3.1 reforms, and it makes sense to consider changes to the CRA regulation as part of the wider 3.1 package of changes. Therefore, the clause gives the Treasury a power to amend the CRA regulation while requiring it to consider the Basel standards when that power is exercised. That confirms our intention to use the power only to implement changes stemming from Basel. The changes to the CRA regulation will help to ensure that the UK is fully Basel-compliant.
Mr McFadden
I have a couple of questions, because credit rating agencies did not cover themselves in glory in the financial crisis, so I want to be clear about what clause 6 does and does not do with regard to them. How does the credit rating agencies regulation regulate them at the moment, and how will that be altered by the provisions in clause 6? For example, does clause 6 deal with the situation where a credit rating agency charges a fee to those who are asking for a rating and with the potential conflicts of interest involved in that process? That played out in the financial crisis, as anyone who has watched the movie “The Big Short” will have seen. The clause does talk about the regulation of the credit rating agencies, so I wonder if the Minister could explain a bit more how they are regulated and how that would be altered by the clause.
John Glen
I am happy to do my best. In terms of the changes and why they are not set out in the Bill, the changes that need to be made to the CRA regulations stem from “Basel III: Finalising post-crisis reforms”—the Basel document—which is part of the most recent Basel 3.1 package of reforms. Most of those have not been legislated for in the UK or the EU, and it makes sense to consider changes to the regulation as part of the wider implementation of the 3.1 package, which will be done through the future rules. They will be consulted on prior to the deadline.
The power to amend the regulation will be used solely to implement Basel 3.1. There are a number of minor amendments contained in that “Basel III: Finalising post-crisis reforms” document of December 2017. The two eligibility criteria that credit rating agencies need to satisfy are added. The power in clause 6 safeguards that intent as it requires the Treasury to have regard to the standards rather than making other amendments for unrelated reasons.
In terms of the other limited changes made in schedule 4 as part of the implementation of the UK regime equivalent to the EU’s second capital requirements regulation, they again relate to earlier Basel III standards. I do not think I can answer with enough specificity to do justice to the right hon. Gentleman, so I think I will need to write to him on this matter.
In what I have said, I hope that I have explained the confines and drivers of the reform; the powers that we are giving to the regulator; and the consistency with which they will be exercised to the Basel 3.1 proposal. I have previously spoken about accountability for that. I need to write to the right hon. Gentleman to give more clarity, and I am happy to address the issue at further stages in the Bill’s passage.
Question put and agreed to.
Clause 6 accordingly ordered to stand part of the Bill.
Clause 7 ordered to stand part of the Bill.
Schedule 4
Amendments of the Capital Requirements Regulation
John Glen
I beg to move amendment 32, in schedule 4, page 89, line 11, at end insert—
“11A (1) Article 500d (temporary calculation of exposure value of regular-way purchases and sales awaiting settlement in view of COVID-19 pandemic) is amended as follows.
(2) In the heading, omit ‘Temporary’.
(3) In paragraph 1, omit ‘until 27 June 2021,’.”
This amendment removes the time limit on the availability of the derogation under Article 500d of the Capital Requirements Regulation.
This is a minor amendment. In 2017, as I mentioned, the Basel Committee on Banking Supervision introduced favourable treatment for firms in how they calculate the leverage ratio. The EU was due to introduce that treatment through its second capital requirements regulation on 28 June 2021. Given that the revised calculation will reflect the leverage of a transaction more appropriately, and at the same time increase the capacity of an institution to lend and to absorb losses amid the covid-19 pandemic, the EU brought this provision forward through a derogation to the first capital requirements regulation that is currently in effect. The UK supported that approach. This derogation is time-limited in the EU to 28 June 2021, as that is when the relevant EU CRR II comes into force, which will put in place the new permanent provisions on leverage ratio.
As the Committee will be aware, the European Union (Withdrawal) Act 2018 provides that EU law, as it is in effect at the end of the transition, will continue to apply in the UK. This means that the first capital requirements regulation as it exists on 31 December will remain in place in the UK until it is amended by this Bill. That means that the derogation would also cease to have effect in the UK on 28 June 2021, because we will have adopted it on the terms that it is now live in the EU. The UK has not legislated a date by which to update its prudential regime in this Bill, because it is most important that our regulators get the rules right and have enough time to consult and finalise them, and also to minimise disruption.
The UK is targeting 1 January 2022 for firms to have implemented the PRA CRR rules. This decision was made after introduction of the Bill, in response to industry concerns about the general volume of regulatory reform in 2021. I referred earlier to the future regulatory framework review. The first stage of that was a piece of work that the Treasury did with industry and the regulators following Chancellor Hammond’s work 18 months ago, which sought to rationalise and understand the range of regulatory interventions that were ongoing.
UK financial services providers would have to revert to the previous rules from June for a period of approximately six months, which would be costly for industry and inconsistent with the EU regime during that period. This amendment therefore removes the time limit on the derogation, so it will remain in place until the new permanent provisions are in place in the UK, giving clarity and certainty, and not seeking to cause disruption. That is why I ask hon. Members to accept this amendment.
Mr McFadden
Can I ask a question about this? The Minister said that the leverage ratio had been changed so that institutions could lend more. I assume that means it is being reduced as a temporary measure during the covid crisis. He then said that, while at EU level that was to be for six months, the UK had not decided when such a change should end. The implication is that we are allowing a reduction in the leverage ratio without an end date. That is potentially very significant in terms of the discussions that we have had about capital today.
I appreciate that it is late in the afternoon and all the rest, but having listened to the Minister, and given how sensitive this issue of leverage ratio is—how can I best put this?—I would be grateful if he could undertake to write to the Committee with more detail on how this will operate. A permanent or long-term reduction in the leverage ratio would be a very big regulatory decision and would be precisely the kind of thing that we have been talking about all day, and precisely the kind of thing that we have been saying should have proper reports back, which those on the Government Benches have been resisting all day. I would like to find out more about what exactly this means and how long it will last for.
John Glen
To the right hon. Gentleman’s point, the UK has not legislated a date by which to update the prudential regime in this Bill, because it is most important that our regulators get the rules right. On the amendment made for the covid crisis that we have aligned to, which essentially ends next year, he is asking about the potential for us not to end it and therefore to be at odds with the prevailing new situation in the EU after 28 June.
John Glen
Well, whatever the enduring reversion environment is in the EU following the end of this special measure. I will be happy to write to the right hon. Gentleman on that, but the key point is this: it would not be appropriate for the UK to determine where we would be beyond 28 June in advance of the regulator’s looking at those matters, when at the same time the EU’s definitive position at the end of June is not yet known. I will write to him, because I recognise that he is saying that he is apprehensive about the fact that we will have an apparent 18-month period from next June until January 2022 where we are at odds with the prevailing norms, and that is a risk. If I have understood him correctly, I am happy to address that point.
Mr McFadden
I am grateful to the Minister, but it is not an EU alignment point that I am making. He is right that, yes, this has arisen because of a disalignment with the EU, but my point is not that we have to always look at this through the lens of being aligned with the EU on capital requirements. I am talking about a public safety point; I am talking about a UK regulator taking a view on the leverage ratio, not necessarily in the light of what the EU is doing after June, but precisely because of all the points we have been making about the importance of capital after the financial crisis.
John Glen
I am happy to restate what I said. We have inherited an environment and indeed we have been obliged—quite reasonably—to absorb into law where the EU has got to at the end of the transition period. My point is that, in order to get the right enduring solution for our capital requirements for the UK, as it is in the UK, we have to allow a regulator to do that work.
The point the right hon. Gentleman is making is about the potential deviation of that enduring solution, and the gap between its implementation and the capital requirements that are normative globally, next June. I will undertake to clarify how we consider, in essence, the trade-off between that potential deviation and the disruption to firms. However, what I have tried to convey throughout today’s proceedings is that our desire is not to deregulate or to deviate from international norms, but to set out a UK framework that is necessary and appropriate for the institutions that exist in the UK.
Environment Bill (Twenty First sitting)
Tuesday 24th November 2020
(3 years, 4 months ago)
Public Bill CommitteesRead Full debate Environment Act 2021 View all Environment Act 2021 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 24 November 2020 - (24 Nov 2020)
The Committee divided: - Ayes: 5 / Noes: 9 - Question accordingly negatived.
The Committee divided: - Ayes: 5 / Noes: 9 - Question accordingly negatived.
The Committee divided: - Ayes: 5 / Noes: 9 - Question accordingly negatived.
The Committee divided: - Ayes: 5 / Noes: 7 - Question accordingly negatived.
The Committee divided: - Ayes: 5 / Noes: 8 - Question accordingly negatived.
Fleur Anderson (Putney) (Lab)
I beg to move, That the clause be read a Second time.
I am honoured to be called to speak about this important new clause. Indeed, it is so reasonable that at this stage of this iteration of the Environment Bill Committee, the seventh day, this might be the new clause that is agreed by all its members. We are not setting specific targets; we only ask that targets be set. We are not saying how they should be measured; we are just saying that measurements should be done. It is a new clause, surely, that must be agreed by all.
The issue is not only of concern to constituents across the country and to members of the Committee, it is a huge concern to my constituents. More than 200 people have taken the additional time and effort to write to their MP about animal welfare issues, from testing to warfare experiments and sentencing. I have long believed that the UK should lead the world with high animal welfare standards. I am proud that the UK banned cosmetic testing on animals back in 1997 and extended that to cosmetic ingredients in 1998. I was one of those who had been campaigning since the 1980s for that. We have made some good progress and agreeing on the new clause and putting it into the legislation would entrench those gains and make sure we go further.
It is welcome that animal testing practices have improved and advanced greatly over recent years, and non-animal methods for research have also developed and improved over time. However, I remain concerned at the lack of transparency around animal testing project licence applications, as well as the continued permissibility of severe suffering as defined in UK law. Again, the new clause does not aim to be entirely prescriptive about the conclusions of that—it leaves that for secondary legislation—but it asks for it to be included and considered.
Animal testing is not the answer to protecting people and the planet from potentially harmful chemicals. Tests on animals are unreliable and their value is increasingly being questioned in scientific literature. It is a matter of corporate pride for many businesses to say that they have animal cruelty-free products, because that is increasingly what the public wants.
There are better ways to ensure chemical safety and better assess risks to environmental and human health while also reducing and eliminating the cruel suffering of animals in laboratories. Cruelty Free International estimates that since 2006 more than 2.6 million animals have been used in chemical tests across the EU, including the UK, with many more tests planned. The UK reports conducting more animal tests than any other country in Europe. EU chemical legislation—the REACH legislation—already discussed in Committee, has resulted in a huge increase in the use of animals in European and UK laboratories. Now is our chance to be better and to provide that world-leading legislation. We need a proactive plan to reduce and replace chemical tests on animals. If the UK is serious about its commitment to animal protection, the Government must adopt a forward-looking Environment Bill that moves away from cruel and ineffective animal testing and write into law a target-based, science-led strategy for reduction and replacement.
The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs (Rebecca Pow)
I agree with what the hon. Member for Putney wants to achieve in new clause 9. Just like her, I am an animal lover. As a former chair of the all-party parliamentary group for animal welfare, I think I speak for everyone on the Committee in terms of being animal lovers. The UK was consistently one of the strongest voices in the EU, applying downward pressure on animal testing—I am sure the hon. Lady is well aware of that—including changes to REACH to enforce the use of alternatives. The UK’s presidency of the European Council in the late 1990s was one of the driving forces behind the reform of the chemicals regulations and we referred to that in a previous session. We are continuing with that clear aim now that we have left the EU, and we are already enshrining the last resort principle as one of the protective provisions in the Bill. Under article 138(9) of REACH, the Secretary of State will also be under a duty to review the testing requirements on reproductive toxicity within 18 months of the end of the transition period. That review must be carried out in the light of the objective of reducing the use of animal testing.
In addition, the powers in schedule 19 of the Bill to amend REACH would enable us to build such targets into REACH, if that were felt to be appropriate. Any amendment would have to be consulted on and to be consistent with the aims and the principles of REACH as set out in article 1, including that we must maintain a high level of protection for human health and the environment, seek alternatives to animal testing, and that REACH is underpinned by the precautionary principle. I believe that would be the better route, if we conclude that targets are desirable. For those reasons, I hope that the hon. Lady will withdraw new clause 9.
Fleur Anderson
I thank the Minister for looking into the issue and for some assurances that targets could be included in future, and that we will be seeking alternatives. I note the concerns and considerations that we all want the same thing, which is stronger animal welfare. I am disappointed that we will not agree on this matter this afternoon, but I will not press it to a Division. I beg to ask leave to withdraw the clause.
Clause, by leave, withdrawn.
New Clause 10
OEP: Penalty notices
‘(1) If the OEP is satisfied that a public authority has failed to comply with a decision notice, the OEP may, by written notice (a “penalty notice”) require the public authority to pay to the OEP an amount in sterling specified in the notice.
(2) When deciding whether to give a penalty notice to a public authority and determining the amount of the penalty, the OEP must have regard to the matters listed in subsection (3).
(3) Those matters are—
(a) the nature, gravity and duration of the failure;
(b) the intentional or negligent character of the failure;
(c) any relevant previous failures by the public authority;
(d) the degree of co-operation with the Commissioner, in order to remedy the failure and mitigate the possible adverse effects of the failure;
(e) the manner in which the infringement became known to the OEP, including whether, and if so to what extent, the public authority notified the OEP of the failure;
(f) the extent to which the public authority has complied with previous enforcement notices or penalty notices;
(g) whether the penalty would be effective, proportionate and dissuasive.
(4) Once collected, penalties must be distributed to the NHS and local authorities to be used for pollution reduction measures.
(5) The Secretary of State must, by regulations, set the minimum and maximum amount of penalty.
(6) Regulations under this section are subject to the affirmative procedure.”—(Dr Whitehead.)
This new clause would allow the OEP to impose fines.
Brought up, and read the First time.
Dr Alan Whitehead (Southampton, Test) (Lab)
I beg to move, That the clause be read a Second time. This proposed new clause was originally put forward in the names of my hon. Friends the Member for Swansea West (Geraint Davies) and for Leeds North West (Alex Sobel), who no longer sit on the Committee. With our names added, we certainly support the sentiment.
The proposed new clause contains a simple proposition relating to the Office for Environmental Protection and its functions. Hon. Members will recall that we have had substantial discussions about the extent to which the OEP has powers to make its functions work well. It is a question of giving it not just general authority but enforcement powers, notices and so on, which we have debated. As the Bill stands, although the OEP would have a number of powers concerning notices and the ability to bring court proceedings, it would not have the power to levy fines.
That argument is sometimes raised where a no-fine outcome is concerned, when the question arises regarding the bodies on which the OEP would levy fines. That would, by and large, be public authorities. The argument then runs about what it would mean to levy a fine on public authorities. I remind hon. Members that that was not the case before we took powers over from the EU, in running our own environmental importance. Nor is it something that other agencies do not have as shots in their locker.
The clean air regime, for example, allowed the EU Commission the power to levy fines on infracting countries. In the case of clean air regulations, there was a suggestion that the fines that the EU authorities had the power to levy could be applied to infracting local authorities that were not adhering to clean air regulations. Indeed, there was quite a to-ing and fro-ing between the Department for Environment, Food and Rural Affairs and local authorities, because it was suggested that authorities that had been identified as infracting, and therefore needed to draw up clean air plans, would bear the brunt of the fines, rather than the UK Government. The UK Government were the public authority that was infracting, but they had passed on their infraction responsibilities to other public authorities, so those public authorities would be fined. That was a real issue with regards to clean air just a little while ago, but it has not been passed on to the Office for Environmental Protection, which would be the agency in that instance with UK powers.
Similarly, Ofgem has considerable powers to fine companies that do not undertake proper management of their customer bills or their responsibilities for energy supply. Indeed, a considerable number of fines have been levied, running to millions of pounds, on energy companies. Ofgem has that clear and workable power to levy fines, but the OEP does not.
We are saying that the OEP should have the power to fine. Indeed, the new clause would give it that power. The other part of the problem is what the agency would do with the fines once they have been collected—is it not just a circular process? The new clause states that, once collected, penalties must be distributed to the NHS and local authorities to be used for pollution reduction measures. The fines would be recycled, but in a positive way for environmental management and improvement.
Having that power to fine, and being able to publicly state that authorities had been fined, are potentially strong weapons in the OEP’s locker, not necessarily because the fines would be punitive in their own right, but because they would be a mark against that public authority and because, through the transfer of the fine payments, the sins of that public authority would be effectively transferred into positive action on environmental improvement in other areas.
We think the new clause is a sensible, straightforward measure that would generally improve the efficacy of the OEP. The fact that nothing like it was thought about emphasises the general theme that we have been talking about in Committee of the power, independence and force of the OEP being downgraded through a number of Government amendments that have been made as we have gone through the Bill. This would be one back for the OEP, so I hope the Committee will view it in a favourable light.
Rebecca Pow
I thank the hon. Member for the intention behind tabling the new clause. The Government completely agree that effective enforcement of public authorities’ compliance with environmental law is vital. That is why we are establishing the OEP to hold public authorities to account, as we have clearly talked about many times in Committee. However, in our domestic legal system it is unnecessary to make specific provisions for fines to achieve that.
Fines play an important role in the EU infraction process, as the hon. Member points out, but only because the Court of Justice of the European Union is unable to compel member states to take a specific course of action through a court order. It is the only penalty that it has in its armoury. It is therefore reliant on the significantly less effective approach of penalising the member state until they take some form of remedial action, although the UK has never been fined for an environmental infraction.
Richard Graham (Gloucester) (Con)
My hon. Friend is making a strong case as to why it is much more effective that the OEP works with public authorities to try to make the sort of environmental improvements that everybody here wants to see, rather than acting as a fining mechanism. Does she agree with me that on this occasion unfortunately the Opposition have confused trying to replicate a European measure with a much better way of doing things here in the UK?
Rebecca Pow
I thank my hon. Friend for making my case for me. A great deal of thought has gone into it, which I was going to come to at the end. The shadow Minister suggests that this has not been thought about; I think those were his exact words. To reiterate what my hon. Friend said, this has been thought about in great detail, to come up with a system that will be better at solving problems and improving the environment than the one the EU has on offer.
Furthermore, the Committee might wish to note that this new clause would give the OEP powers that even the European Commission does not have, so it cannot claim to be ensuring equivalence between the OEP and the European Commission. The European Commission cannot fine a member state government, only the Court of Justice of the European Union can do so, a point that really needs clarifying with the shadow Minister. As I have already mentioned, we have stronger remedies than the CJEU. It would be wholly inappropriate for the OEP to directly impose fines. Effectively that would mean the OEP could prematurely sanction public authorities, without reference to the courts, and with no appeals mechanism for the public authority to challenge the decision.
Ruth Jones (Newport West) (Lab)
Does the Minister agree that enabling the OEP to issue penalty notices would help to give its investigatory work a degree of clout, and serve as a meaningful contribution to efforts to improve public authorities’ compliance with environmental law?
Rebecca Pow
I do not think the OEP is going to have any problem at all operating its clout. We will have a new chairman and a supporting board, and that will be their raison d’être. They do not need fines. In fact, I wrote an exclamation mark as I thought it was a bit of a joke when I saw that the shadow Minister had suggested that the OEP should become a funding body. That would be a significant expansion in its scope, and not consistent with its role as a watchdog to hold Government to account.
In summary, the OEP’s enforcement framework has been designed to resolve cases as robustly, quickly and effectively as possible. The powers already available to the courts to grant and enforce remedies make a system of fines unnecessary. I therefore ask the hon. Member to withdraw the new clause.
Dr Whitehead
I thank the Minister for that response. There are arguable cases. What we want to see as an emphasis on enforcement is a matter of opinion as to what is most effective, rather than a fundamental discussion about having a power or not. I remind the Minister that we had a debate about the fact that OEP appears to be pushed further away from its ability to go through the courts by the debate on who should decide whether something was a serious breach, and the role of the OEP and the Minister in that. At the very least, this idea, that the OEP could introduce penalties in its own right, would be a step to rectify that particular problem.
I take what the Minister has to say about the extent to which there are, at least in principle, reasonable methods of enforcement as far as the OEP is concerned. It is not a wholly unreasonable point to make that that should not necessarily include fines. However, this is a route worth considering, and it may be that, as the OEP develops and we see how it manages to enforce things, the idea of fines might be revisited. I do not intend to press the clause to a vote this afternoon, so I beg to ask leave to withdraw the clause.
Clause, by leave, withdrawn.
New Clause 12
Duty to follow recommendations
(1) A “public authority” must follow the course of action set out in a recommendation made by the OEP in a report issued under sections 25 or 26 unless the public authority has determined that there are reasons of public interest demonstrating that it is not necessary for it to do so in order to comply with the law.
(2) If the authority does not follow a recommendation, it must publish a report setting out the reasons for not doing so and set out what alternative course of action it proposes to take.
(3) In this section public authority carries the same definition as in section 28(3). —(Dr Whitehead.)
This new clause requires a public authority to whom the OEP has issued a recommendation to normally follow that recommendation.
Brought up, and read the First time.
Dr Whitehead
I beg to move, That the clause be read a Second time.
Interestingly, this new clause comes at the same point from a slightly different direction. On the basis of what the Minister had to say just a moment ago, she might consider how this clause might work in enhancing the ability of the OEP to secure importance in an appropriate and robust manner.
The new clause—and I shall not dwell on it great length—requires a public authority to whom the OEP has issued a recommendation to normally follow that recommendation. That is an onus in law, on the public authority, to follow the course of action set out in the recommendation made by the OEP. There can, of course, be exceptions to that, and there may be circumstances in which an authority considers it does not have to follow a recommendation. However, if that is the case, the new clause provides that it should publish a report setting out the reasons for not doing so and, positively, what alternative course of action it proposes to take.
The new clause would considerably enhance the power of the recommendations of the OEP as the default position would be that an authority should follow its recommendation; it could not get away with saying “Well, we don’t particularly want to do that. There are reasons for this; trust us—don’t worry. We don’t have to do it”. Instead, it would have to go public on why it could not do it, and it would have to publicly say what alternative course of action it would take, rather than taking no action.
This does not go down the fine route, but it does go down the enforcement route in a different way—a potentially equally important way—and I would be interested to hear the Minister’s thoughts on this particular way of further enhancing the enforcement credibility and robustness of the OEP.
Richard Graham
I am slightly concerned about the trend of the hon. Gentleman’s line of thinking, which is very authoritarian and along the lines of “Let’s have the courts say as a default that the police are normally always right; that the county council are normally always right on issues of child welfare and so on.” That is not the way that this country operates; we believe fundamentally in freedom and an objective decision by the courts on the rights and wrongs of a particular case. Surely there is no reason why the OEP should be some sort of magical exception to that overriding rule.
Dr Whitehead
If the hon. Member for Gloucester were pursuing a principled position on that, he would have to undo the whole structure of regulation in this country to ensure the freedoms and the way of life that he suggests that we should follow, because that is what regulators by and large do—they quite often produce regulatory decisions and regulatory outcomes that apply to those who are being regulated. I gave the hon. Gentleman the example of Ofgem, which levies fines on bodies that appear to transgress what Ofgem has decided as a regulator. That is not a court action but relates to how the regulator works and how those who are supervised by that regulator are expected to behave. There is a direct relationship between those two, and that is the case with a range of other regulators in all sorts of other areas. For example, the hon. Gentleman will be aware of Ofcom’s regulatory activities on a number occasions, and those of Ofwat.
I am not suggesting an exceptionally authoritarian proposal that comes out of thin air in a desire to regulate people beyond what they can bear. It is based on the relationship between the regulator and the regulated and their respective actions. Normally, those who are regulated should do what the regulator suggests should happen. To me, that is not akin to the Stasi going in to everyone’s life and regulating their private thoughts out of existence. What is proposed is a reasonably standard regulatory process, as carried out on a agreed basis in this country.
Daniel Zeichner (Cambridge) (Lab)
As ever, my hon. Friend is developing an interesting argument. I suspect that in some ways it goes back to where our regulatory frameworks first emerged. He and I are probably of an age to remember those discussions, which originally arose around some of the privatisations of public authorities. A regulatory framework grew up and it was initially intended that it would melt away because the market would weave its magic. Of course it quickly became apparent that we did need regulatory authorities. Does he agree that, over the past 20 to 30 years, we have had an emerging regulatory structure that is quite different from how it was originally envisaged?
Dr Whitehead
Indeed, Mr Gray; I will not be too far tempted on to the history of regulation and privatised industries and how that has worked out, other than to say that the checks and balances of the regulator are an important part of the process. What the new clause proposes does not depart from that practice, and I really do not agree with the suggestion that it is somehow following an authoritarian course.
I have been tempted to make a lengthier speech on the new clause than I intended by the interventions from the hon. Member for Gloucester, so I will not say any more at this stage, but I hope that the Minister will react favourably to the new clause.
Rebecca Pow
I thank the hon. Member for Southampton, Test for tabling the new clause because it allows me to provide some detail on the OEP’s scrutiny function as well as its interactions with Government and public bodies.
The new clause refers to recommendations made under clauses 25 and 26, which cover the OEP’s scrutiny of the Government’s environmental improvement plans and targets, as well as the implementation of environmental law. Many of the OEP’s recommendations, if implemented, are likely to require changes to law and policy, and those changes need to be carefully assessed alongside many other considerations. The responsibility for making changes to policy as well as introducing changes to legislation lies firmly with the elected Government, not an independent body. That was highlighted in the interventions by my hon. Friend the Member for Gloucester.
I also want to use this opportunity to explain how the OEP will interact with Government and public authorities with regard to its scrutiny function. In terms of the OEP’s report issued under clause 25, it will be addressed to the Government, as the Government are ultimately responsible for delivery of the environmental improvement plan and targets. Clearly, public authorities will help Government meet their objective of improving the natural environment, but, when the OEP makes recommendations as to how progress could be improved, Government are best placed to determine how, and by whom, those recommendations should be implemented. That is particularly important because it is the Government, obviously, who have the statutory duty to respond to the OEP’s recommendations, and are therefore held accountable. The Government must respond to the OEP’s reports; they must publish the reports and lay their responses before Parliament. That means that the Government will be held to account for their actions by the OEP, Parliament and the public.
Ruth Jones
The Minister has talked about the OEP holding the Government to account. How will it do that, as it will be part of the Department for Environment, Food and Rural Affairs? It will be appointed by the Government, and will, surely, be hand in glove with the Department. It is very difficult to say that it will actually be able to hold the Government to account.
Rebecca Pow
I will not go into a huge amount of detail in my answer, as it was all covered in the early stages, but I could send the hon. Lady a page on how and why the OEP will remain independent. It will be an utterly independent body, and the Secretary of State has to be mindful of the independence of the OEP; that is a crucial part of some of the detail written into the Bill, and, if she wants to be referred to those sections, I am sure that we could clarify those with her.
Clause 26 enables the OEP to assess how environmental law is implemented; it is not simply about compliance with—or deviation from—the law, but will be more about whether the law is effective and delivering its intention. The OEP will seek information from public authorities to undertake this duty but, again, its findings will be addressed to Government, and only Government are required to respond.
This will work as one big machine, and local authorities will clearly play an important part; that is not to say that public authorities cannot implement any of the OEP’s recommendations which are applicable to them, if appropriate. However, this is very different from the suggestion that public authorities must comply with the OEP’s recommendations unless they publish a report justifying an alternative approach.
For those reasons, I ask the hon. Member for Southampton, Test to withdraw the new clause.
Dr Whitehead
I thank the Minister for her reply. She will not be surprised to know that we do not entirely go along with all of it, but I appreciate what she has said. Indeed, it may be that her remarks are taken into account when we discuss the next new clause. On that basis, I have no intention of pressing this to a vote, and I beg to ask leave to withdraw the clause.
Clause, by leave, withdrawn.
New Clause 13
OEP register
“(1) The OEP must maintain a register of communications between it and Ministers (or government departments).
(2) The OEP may omit from the register communications which it considers trivial or otherwise unlikely to be of interest to the public.
(3) The OEP must publish the register.” .—(Dr Whitehead.)
This new clause requires the OEP to keep a public register of correspondence with the Government.
Brought up, and read the First time.
Dr Whitehead
I beg to move, That the clause be read a Second time.
This is an innocuous-looking new clause, but it is potentially quite important. Indeed, we think it should be an important part of the process, precisely because of what the Minister just said in response to the suggestion from my hon. Friend the Member for Newport West about the stated and apparent independence of the OEP, as far as the Department is concerned.
The new clause simply states that the OEP should maintain a register of communications between it and Ministers or Government Departments. Obviously, there is a statement in that clause to say that trivial things—such as the Minister ringing up to ask whether they had a spare sandwich—should not be included in the register, but significant communications between the OEP and Ministers should be recorded in the register, and that register should be published.
What that would mean, quite simply, is that there would be on the record a transparent adumbration of the occasions on which there has been conversation between Ministers and the OEP. While obviously it is not suggested that the record should go into detail on what the communication was—it is not a public record to that extent—it would show the extent to which the OEP was acting independently or the extent to which it might be under duress, shall we say, from ministerial quarters in its doings. If the Minister is serious in what she says about the independence of the OEP, despite some of the apparent constraints placed on its independence in the Bill, I would have thought she would welcome the new clause as a pretty good way of enabling us to see on the table what was going on and enabling the OEP, if it needed to, to show that it had been placed under pressure by Ministers. If, indeed, it was placed under pressure by Ministers, that pressure would be in a public place, it would be seen by all and it could therefore be remedied.
Rebecca Pow
I thank the hon. Member for the new clause. I share his interest in ensuring that the OEP acts transparently in the exercise of its functions. That is why we have created, in clause 22, a duty on the OEP to have regard to the need to act transparently. We have also required the OEP, in clause 38, to make public statements when it carries out various enforcement activities. In carrying out the duty in clause 22, the OEP would normally make information about its work publicly available—perhaps the shadow Minister has missed that element.
However, there may be certain situations where it is inappropriate and unhelpful for it to do so. There is a difference between what is in the public interest and what might be of interest to the public or to some members of the public. In particular, the OEP will need to communicate with public authorities, including Departments, in the exercise of its scrutiny and enforcement functions. Those communications will require a degree of confidentiality if the OEP is to engage effectively and productively on sensitive issues with public authorities, and avoid prejudicing possible enforcement action. The effect of the new clause might be to remove that necessary confidentiality from the OEP’s interactions.
The new clause would require the OEP to maintain a continuous running commentary on its communications with Ministers and their Departments, which would be administratively burdensome and a poor use of resources, given the other provisions we have included in the Bill on transparency, reporting and public statements. The hon. Member asked whether ringing up to order a sandwich should be recorded. That is a good point, because it is not at all clear in the new clause what exactly the register would have to contain. Is it the full text of the communication? Potentially, if one was having to record everything, one would have to record those things as well. It is just a small point.
Richard Graham
The Minister is making a very good case for the new clause being entirely redundant. I am surprised that the hon. Member for Southampton, Test, whose judgment is often very sensible, really considers that creating a register of communications, with all the arguments about what might be considered trivial or not trivial, is a good idea when setting up the very important Office for Environmental Protection. Does the Minister agree that this is another new clause that we should move on from swiftly?
Rebecca Pow
I could not agree more. I thank my hon. Friend for clarifying that point, because he is absolutely on the money—not that the OEP is a fundraising body, of course.
There is nothing in the Bill, of course, to prevent the OEP from setting up a register of significant communications should it choose to do so, but we do not believe that it should be required to do so as a legal obligation. It is, after all, an independent body. To clarify how independent it is, I should say that it will obviously be operationally independent from the Government and governed by the non-executive members appointed through the regulatory public appointments process.
On the question of the OEP potentially deciding it wants to set up a register, I should mention that the Office for Budget Responsibility has a register similar to that proposed by the hon. Member. That is not a statutory requirement; rather, the OBR produces it of its own accord, and we believe it must remain for the OEP to decide how to fulfil its duty to have regard to the need for transparency. The new clause is somewhat inappropriate and unnecessary, and I ask the shadow Minister to consider withdrawing it.
Dr Whitehead
I am not sure that I will any more, actually. The Government’s suggesting that the Committee should move swiftly on because they do not particularly like an Opposition new clause does not strike me as full participation in the spirit of what we are supposed to be doing—that is, we, the Opposition, get the opportunity to put amendments forward, they are discussed and answered properly, and then we move on. That is what I hope will happen with this new clause.
I am not sure whether the Minister is saying that, if the OEP thinks it would like to set up a register—sandwiches notwithstanding—of its communications with Ministers and to publish those communications, Ministers would be happy to go along with that and would not in any way seek to impede it. Alternatively, is the Minister saying that because she thinks the correspondence and communications between Ministers and the OEP must take place in an air of confidentiality, she would discourage the OEP from doing that if it wanted to?
The new clause would clear that up; it says there should be a register. Its subsection (2) states that the OEP does have discretion, and the word “may” creeps in:
“The OEP may omit from the register communications which it considers trivial or otherwise unlikely to be of interest to the public.”
That is what you might call a sandwich clause. It does not need to put that stuff in; it merely needs to maintain a register to indicate the general degree of communication that is going on and how that communication is working.
Rebecca Pow
To clarify, there is nothing in the Bill that prevents the OEP from setting up a register. I cannot reiterate any more than I already have that it is an independent body: if it decides it wants to set up a register, that is purely up to the OEP. I reiterate again that we do not believe that that should be a legal obligation on the OEP—after all, it is an independent body and it will think through these things for itself.
Dr Whitehead
That was not quite the question that I asked the Minister. What I asked was: if the OEP did decide to set up its own independent register, what would Ministers have to say about its being a transactional register—not a register of independent actors, but a register of things happening between people, including Ministers?
Would the OEP be encouraged to do that by Ministers? Would Ministers be happy to go along with that if the OEP did it? Alternatively—we would probably never find this out because we would not know what the communications were—would Ministers say, for the reasons the Minister has outlined, “That is a pretty bad idea, OEP. You don’t really want to be doing that. We might say, in theory, that you are able to set up your own register, but we as Ministers seriously discourage you from doing it.”
We would be considerably comforted if the Minister said this afternoon that not only could the OEP set up its own register, but she would positively encourage it to do so, in the interests of transparency and of ministerial communications being as public as possible.
Cherilyn Mackrory (Truro and Falmouth) (Con)
I am just trying to clarify something. We have had various debates on the independence of the OEP and now the hon. Gentleman is asking Ministers to give their pre-emptive influence as to whether the OEP should do one thing or another. It might just be me, but I find that the Opposition amendments and new clauses are trying to pre-empt the OEP’s own terms of reference, which it will decide for itself.
Dr Whitehead
What I was doing was engaging in a bit of what-iffery. The Minister came back to me and said that the OEP could set up its own register, if it wanted to do. That is not what we want to do in the new clause; we just want a register to be set up—that is quite clear and straightforward. The OEP would have some discretion over what it consisted of, but the register would be there on the table for public record. That system operates in a lot of other legislatures and jurisdictions, to a greater or lesser extent. It does not bring the world tumbling down; it brings transparency.
Rebecca Pow
To back up the strong point made by my hon. Friend the Member for Truro and Falmouth, would the hon. Gentleman agree that the whole point about the OEP is that it is an independent body and Ministers cannot encourage it? That is the whole point of its independence.
Dr Whitehead
That is indeed absolutely what we hope will happen and what the new clause is intended to underpin. The Minister, I think, has just made a further point in favour of the new clause—the effect of her words often goes considerably beyond what she thinks. That is very good and positive.
I do not wish to say too much more about the new clause. I have been tempted by interventions to go down particular routes, but I emphasise the simple, central point. This is about fresh air, light and transparency, and actions taken by public bodies, for the public good, being available to the public. It is as simple as that. The fact that there would be a requirement does not put any constraints on anybody’s actions; it simply makes sure that the light of transparency is properly shone, and is guaranteed to be shone. That is what the public would expect to happen in the case of an independent body that nevertheless appears to have close relations with the Government, in terms of its independence.
The Chair
I am unclear as to whether the hon. Gentleman is seeking to divide the Committee.
Dr Whitehead
Sorry, Mr Gray. I have been goaded beyond endurance in this particular debate, so I ask for a Division.
Question put, That the clause be read a Second time.
Dr Whitehead
I beg to move, That the clause be read a Second time.
Let us see how we get on with this one, Mr Gray. Again, this is a very simple new clause; I thought the last one was simple, but there we go. It places an environmental responsibility on Ofwat—in the same way, I talked a while ago about what does not happen at the moment, but I sincerely wish would happen, with Ofgem.
The new clause sets out that the director general of water services, who is mentioned in the Water Industry Act 1991, which was put in place before modern Ofwat came into being—the director general of water services now works closely with Ofwat on regulation of the water industry—and the Minister, which is effectively Ofwat,
“contribute to achievement of any relevant environmental targets set under the Environment Act 2020.”
It would mean that any targets for water companies would have an obligation attached to them: that Ofwat must work towards those targets.
This is an important point for water regulation and, indeed, any other form of industry regulation. What regulators do is based on a brief from the Government about their overall activities. Even though it is independent, the regulator will, to a considerable extent, ensure that what it does is guided by that overall requirement.
If, for example, the general direction is simply to go for value for money for customers, important though that is, and if that is the guiding light for that particular regulator, it will stick by that at the expense of other considerations that could balance it out in the interests of, for example, environmental targets.
The new clause seeks to balance what the regulator is doing on those targets. It is quite proper that it should have an interest in the targets. Surely that is one of the aims of the targets in the Bill—to ensure that we are working together to get them achieved. If important parts of the water industry are not bound into seeking to achieve those targets, that weakens the overall push forward.
The new clause is not authoritarian. It is not trying to get anything done that should not be done. It simply tries to make sure that everyone is bound together in making sure that the targets work well in the water industry.
Rebecca Pow
The Government recognise the hon. Member’s intention that the water industry should play its role in achieving targets set under the Bill, particularly in the priority area of water, but I do not believe that the new clause is necessary, given the legislative requirement to achieve long-term environmental targets.
Clause 4 will place the Secretary of State under a duty to ensure that the targets set under clause 1 are met. At least every five years, the Government must review their environmental improvement plan and, as part of that, must consider whether further measures are needed to achieve its targets. The Government must also periodically review its long-term targets set under the Bill, alongside other statutory environmental targets, to consider whether meeting them collectively would deliver significant environmental improvement in England.
In addition, both the Secretary of State and Ofwat are already placed under environmental duties by section 3 of the Water Industry Act 1991, which was referred to by the hon. Member. Section 2A of the Water Industry Act 1991 enables the Secretary of State to set out strategic priorities and objectives for Ofwat, which we have already heard about, as it relates to water companies, wholly or mainly in England, through a strategic policy statement. In preparing that statement, the Secretary of State must already have regard to environmental matters. In future statements, those matters could include targets set under the Environment Bill.
The existing legislative framework, together with provisions in the Bill, are therefore sufficient to ensure that targets, including water targets, will be achieved. While the duty to achieve targets rests with central Government, of course public authorities, including regulators, will have their role to play. As I have pointed out, the legislative framework already in place, plus the provisions in the Bill, should drive us towards ensuring that targets will be achieved. Therefore, I ask the hon. Member for Southampton, Test to withdraw the new clause.
Dr Whitehead
The new clause specifically talks about targets, and in the 1991 Act targets did not exist. While it is true that there are general environmental obligations in that Act, they do not relate to the Bill’s aims in terms of its targets. We have already discussed that. The Minister implies that it is more than conceivable that the general framework relating to environmental considerations could be nudged towards targets, when those are in. To some extent, it is a question of looking at whether Ofwat is doing the right thing, as those targets come in.
Rebecca Pow
There are other areas that will help towards this. We need a whole range of levers to meet the targets, but the targets will be set through the Environment Bill. Thinking is already going on about the relevant targets for water and they are priorities for me, so we are moving on that.
A river-based management planning process, which the Environment Agency is currently revising, will also be a key measure and stage in identifying some of the other levers that will be needed to complement the powers over the regulatory stuff, as well as the targets in the Bill. Does the hon. Gentleman agree?
Dr Whitehead
Since I have only just heard that, I am not sure I can completely agree with it. The Minister is suggesting that there is a mesh of things there already, which could lead towards moves unpinning the targets. I hope the Minister is right about that process. I am not absolutely sure that they are as strong as we might like them to be in terms of what the new clause suggests, but I am sure that the Minister would be able to review that position, if it turns out that, once those targets are set, the mesh is not strong enough to impel those regulators in the direction that should be taken.
On that basis, and with confidence in the Minister’s powers of persuasion for future arrangements, I beg to ask leave to withdraw the clause.
Clause, by leave, withdrawn.
New Clause 15
Reservoirs: flood risk
“(1) The Secretary of State must make regulations to grant the Environment Agency additional powers to require water companies and other connected agencies to manage reservoirs to mitigate flood risk.
(2) Regulations under this section are subject to the affirmative procedure.”—(Fleur Anderson.)
Brought up, and read the First time.
Fleur Anderson
I beg to move, That the clause be read a Second time.
I speak as a representative of a constituency that is no stranger to flooding. In Putney, we regularly have very high tides along the river. There is even a “high tide club” of car drivers who had not realised that the water was going to come, and found themselves water logged and stranded. People love to go and take photos of them, but it is not very good for the drivers.
I rise to speak in favour of the new clause, which has an unusual range of support—perhaps it will be the first that attracts the support of the whole Committee. I hope that all Committee members have noticed that it has the support of the Conservative hon. Members for Colne Valley (Jason McCartney), for Shipley (Philip Davies) and for Calder Valley (Craig Whittaker) and the SNP hon. Member for Falkirk (John Mc Nally), alongside my hon. Friends the Members for Bristol East (Kerry McCarthy), for Leeds North West and for Halifax (Holly Lynch). I pay tribute to my hon. Friend the Member for Halifax for all the work she has done championing the use of reservoirs and reservoirs management in mitigating flood risk for communities.
This Environment Bill will mean more collaboration between water companies to deliver the infrastructure we need and ensure that we have clean and plentiful water, now and for decades to come. That is in the bag. This new clause takes the Bill further in strengthening the powers of the Environment Agency to manage reservoirs to mitigate flood risks.
My hon. Friend the Member for Halifax introduced a private Member’s Bill on this issue last year, as a result of many years of conversations and learning between agencies, including the Environment Agency, water companies and local authorities for the area of Calderdale, about what will really help to stop communities being at risk from flooding.
Currently, the legislation that underpins water companies and their regulation has a focus on mitigating drought risk rather than flood risk.
The new clause seeks to redress the balance, as is only appropriate. Reservoir management is vital to mitigation of the damage and havoc that floods can wreak on communities such as those in Calderdale, and trials of flood management are already under way in such areas as Thirlmere in Cumbria and the reservoirs in the upper Don valley. We know that it will affect reservoirs across Wales and Scotland, as well as Wessex in England.
Ruth Jones
It is a pleasure to speak in support of new clause 15 and to follow my hon. Friend the Member for Putney, who made so many powerful points in her speech.
I want to start by paying tribute to my hon. Friend the Member for Halifax, who has long campaigned for action to protect communities vulnerable to flooding and for the Government to act to mitigate the risk of flooding in her constituency and across England.
She has been joined by a number of Members, including my hon. Friend the Member for Barnsley East (Stephanie Peacock), who I know supports the action to which the new clause would give effect.
On 1 May 2019, the Opposition forced the Government to agree to the UK Parliament becoming the first in the world to declare an environment and climate emergency. It was the right thing to do, and that declaration and the necessary action to tackle the emergency have underlined every word uttered by the Opposition in Committee and, importantly, influenced every single amendment and new clause. Earlier this year, we saw storms Cara, Dennis and Jorge demonstrate the reality of the climate crisis and showed that more extreme weather will happen more often and with devastating consequences for jobs, lives and communities. I saw the impact water damage can have on communities. Newport West itself had minimal damage, but we saw considerable flooding in our parks and green spaces. Sadly, other parts of south Wales were severely impacted—the Rhondda Cynon Taf area in south Wales was the scene of 25% of the UK total of homes damaged by the floods in early 2020—and there was also significant damage in places such as Shrewsbury and other small towns on the banks of the River Severn. So this is real. It is important that we get to grips with the dangers the water poses and look to adopt a policy of prevention, because that is better than cure.
I am deeply concerned by the deep, long-term cuts to Natural England and the Environment Agency that have seriously undermined their ability to tackle the environment crisis and deal with the impact of the climate emergency. That is important to note, because new clause 15 seeks to enhance the powers and reach of the Environment Agency, and we cannot do that without acknowledging the huge hit to its finances, abilities and reputation inflicted by the Government. The new clause is a focused, clear and coherent attempt at mitigating risk, but would also show that the House is determined to respond to the climate crisis, as well as to lead our way out of the many problems caused by water damage and flooding.
The amount of homes at risk of flooding has more than doubled since 2013, reaching an approximate total of 85,000 homes, so we need a joined-up approach across regional water authorities, local government and regulators to provide a single flood plan for an area to manage flood risk and better co-ordinate the response to flooding. That is why the new clause is important. It is about more than just preventing flooding from reservoirs: it should look to identify opportunities where existing and proposed reservoirs could be used to provide flood storage capacity and other benefits.
The damage caused by water has destroyed lines and, in some devastating situations, has taken lives too. This afternoon, we need to make sure that the new clause passes, because I am sure the Government share our ambition to ensure that this is enshrined in law.
Richard Graham
I rise very briefly, to my Whip’s dismay, to comment because the points raised by the hon. Member for Newport West have a lot of merit to them, as the Minister will agree. In particular, the hon. Member is not far away from the same river that has frequently flooded my own city of Gloucester, most notably in 2007. It is worth noting that we do have something called the Severn Partnership, which brings together the MPs the whole way along the river—around 40 of us—to work very closely with, for example, Shropshire County Council, the Environment Agency and other important stakeholders. Indeed, it is very important that it is a cross-border partnership, talking closely with colleagues in Wales and the authorities there.
The key point, which I am sure the Minister will touch on, is that I am not convinced the Secretary of State needs to make regulations granting the Environment Agency these additional powers. However, I do think that it is incredibly important for the Secretary of State, and his or her Ministers—the Minister in her place has already done this—to show huge commitment to encouraging and working with all those partners in order to resolve a fundamental problem in this country, which is that half of it has too much water and has floods, and the other half has too little and has droughts. If we could store water high up, in the Welsh or Shropshire hills, and avoid flooding in places such as Gloucester, we could then transfer it by pipe all the way down to Thames Water, and make a turn at the same time, which would be good news for all concerned. I am sure that the Minister will explain why she agrees with the principle but does not necessarily see the point of the amendment.
Rebecca Pow
I thank all hon. Members who have contributed to the debate, and particularly the hon. Member for Putney for sharing her experiences of flooding. Clearly, my sympathies lie with anyone who has experienced flooding. I saw it for myself at first hand when the Somerset levels flooded.
I want to reassure the Committee that flood risk management is a top priority for this Government. I fully recognise the desire to look at all the options, but this Bill is not the place for new flood management legislation. There are currently over 200 reservoirs operated by the Environment Agency that are used for flood risk management, and that are deliberately kept low in order to maximise the amount of rainwater they can store.
Water company reservoirs have a different purpose and play a significant role in ensuring that we have ready access to water whenever we want and need it. Indeed, water companies have statutory duties, enforceable by Ofwat and the Secretary of State, to maintain secure water supplies, under the Water Industry Act 1991. That is a key point to highlight, because the security of water is so essential. This primary purpose of water companies must be considered first, before any additional duties are placed on them, even if those duties would help with flood risk management.
However, there is nothing to stop a water company using its reservoirs for flood risk management purposes and as a risk management authority. Under the Flood and Water Management Act 2010, water companies have a duty to co-operate with all other risk management authorities, including the Environment Agency. I am aware that some water companies across the north of England have undertaken trials to explore how and where this approach might offer the most benefits. Those trials have shown some positive results, but they have also identified some risks, such as prolonged dry weather, which need to be fully understood.
We should not forget that not many months ago we were facing a potential drought in the north-west, and everyone was on the phone to the water Minister. That was exacerbated by unusually high demands for water, because of the hot weather and changes in people’s behaviour and routines during the pandemic, with more people using hosepipes to fill paddling pools, wash their cars and water their gardens. Similarly, in the summer of 2018 the country dealt with very dry and warm weather, with water companies experiencing high demand. We must pay as much attention to the problem of too little water as we do to too much. Indeed, as the hon. Member for Newport West highlighted, we should expect more frequent extremes of weather as a result of climate change, so that all impacts on this situation.
There is a formal agreement between the Environment Agency and Yorkshire Water in relation to Gorpley reservoir, which demonstrates that, through effective partnership working, such agreements between the different water bodies and organisations can be secured locally. I therefore believe that local agreements and partnership working form the most appropriate approach. My hon. Friend the Member for Gloucester highlighted the Severn Partnership, which involves a whole range of bodies working together, including local authorities and all the MPs representing constituencies up and down the valley. That is proving to be something of a model in driving forward the whole issue of water infrastructure, how to get water from A to B, and how to deal with the demand. That has been a voluntary arrangement.
As I have said, flood risk is a top priority for the Government. We have published our flood and coastal erosion risk management policy statement, which sets out our long-term ambition to create a nation that is more resilient to flood and coastal erosion risk.
The hon. Member for Newport West touched on funding. From 2021, the Government will double investment in flooding to £5.2 billion in the next six-year capital investment programme for flood defences. That investment will better protect 336,000 properties from flooding. Additional funding of £200 million over six years will help 25 local areas to take forward some much wider innovative approaches to improve flood resilience and coastal erosion. That touches on the whole issue of water supply.
Fleur Anderson
I thank the Minister for all those points and for her impassioned argument in favour of the new clause. The change in water use under covid has been recognised. It has been seen in London, where fewer people are working in the city and more are working at home. Better powers granted under the Bill, and local management plans, would make it possible to respond to those changes.
The Gorpley reservoir partnership is a great model of how to work together, as is the one in Calderdale that led to a private Member’s Bill last year and to this new clause. The new clause seeks only to put into legislation what is seen to be good practice. This is a top priority of the Government, so it should be in the Bill. Why would it not be? I absolutely agree that the security of water is very important, but we are asking for balance with flood mitigation.
The new clause would give specific powers to the Environment Agency and would provide joined-up legislation across the Government. The Minister has talked about the top priority of flood mitigation; the new clause balances that with the top priority of a world-leading Environment Bill. This is the right place for the new clause, so I seek to divide the Committee on the motion.
Ruth Jones
I beg to move, That the clause be read a Second time.
I rise to speak to new clause 16 in my name and those of my hon. Friends the Members for Southampton, Test, for Cambridge, for Erith and Thamesmead (Abena Oppong-Asare), for Bristol West (Thangam Debbonaire) and for Brighton, Kemptown (Lloyd Russell-Moyle). The new clause is a specific and targeted addition to the Bill, and I do not intend to speak on it for long.
As colleagues will know from our recent discussions on waste and recycling, it is important that we act as comprehensively as possible and that we show real leadership on these important issues. For us to take these matters seriously—actually and theoretically—we need the Bill, when it leaves Committee, to be made up of a comprehensive plan backed by a coherent agenda that will deliver real results now and into the future. I hope the Minister recognises that the new clause will do nothing other than enhance the scope and reach of the Bill, taking it a great deal closer to being fit for purpose.
The Minister and Government Back Benchers will know that we have not sought to divide the Committee for the sake of it in recent weeks. Truth be told, all our amendments are worthy of a vote and of being added to the Bill. Alas, the Minister and her loyal colleagues have put paid to any chance of those additions. I wish to press new clause 16 to a vote, however, for a number of reasons, the most important being that people out there need to know that although efforts to make recycling fit for purpose, to tackle waste and to fight the climate emergency head on in England were on the table, they were all rejected. I would be delighted if the Minister rose to inform the Committee that she will accept the new clause and, even at this late stage, I urge her to scrap her notes and do just that.
Rebecca Pow
The hon. Lady will be pleased to know that I will not be recycling my notes just yet. I thank her for tabling new clause 16, which seeks to ensure that the Secretary of State must take account of the requirements of the waste hierarchy when considering all matters relating to waste and resource efficiency. Organisations that produce or manage waste in England and Wales are already legally obliged to comply with the waste hierarchy duty, as set out in the Waste (England and Wales) Regulations 2011—the hon. Lady is perhaps not aware of that.
The Environment Agency is responsible for enforcing that in England. Government policy in this area has, for a long time, been developed with the principles of the waste hierarchy in mind, and that commitment was affirmed in our resources and waste strategy in 2018—an excellent strategy that I urge the hon. Lady to read—which sets out our plans to move away from an inefficient “take, make, use, throw away” model, to a more circular economy that keeps products and materials in use for as long as possible. We discussed that at length in many of the earlier waste clauses.
We intend to ensure that waste is prevented in the first place and that we recycle as much as possible once waste is created. Measures in the Bill have been developed with the waste hierarchy as our guiding light. At the top of the hierarchy, clause 50 and schedule 7 allow for regulations to be made about resource efficiency requirements, to drive a shift in the market towards products that last longer and can be reused and repaired more easily, as well as towards those that can be recycled. Those regulations would be used, for example, to require fitted furniture to be easy to disassemble and reassemble, or for parts to be easily repaired or replaced. The hon. Lady is absolutely right: the public are really welcoming of such measures.
Our producer responsibility powers in clause 47 and schedule 4 can be used to help to prevent products or materials from becoming waste. By imposing obligations on food producers, for example, we can hold them responsible for surplus food and food waste. That is a huge step forward: collecting food waste but also urging people not to create so much waste in the first place.
Our other producer responsibility powers in clause 48 and schedule 5 will also help prevent waste by making producers accountable for the full cost of managing their products at the end of life. I honestly believe that that will be a game-changer in terms of the amount of waste created. As I have mentioned before, that will encourage businesses to reduce the amount of packaging that they use and to use reusable and recyclable packaging, so that less waste is produced.
Clause 54 will ensure that we make recycling simpler for households, by stipulating a consistent set of materials that must be collected from all households and businesses in England, which, as I have just mentioned, will include food waste. I can therefore reassure the hon. Lady that we do not need the new clause, having touched on everything that she raised. She said that she intended to press the new clause to a vote, but surely I have convinced her that that really is not necessary.
Ruth Jones
I thank the Minister for those helpful comments and for raising the awareness of the importance of the 2011 legislation and the other relevant legislation which, of course, is compulsory bedtime reading on this side of the Committee.
We have discussed at length the importance of the cyclical nature of recycling, but it is so important that we begin to break it down. As the Minister rightly said, it is not just about the end product, but the starting point and how we ensure that products, when they are first created or built, are designed so that they can be fully recycled. My hon. Friend the Member for Southampton, Test spent a great deal of time explaining how car parts can be broken down and used again in different ways, and we all took that on board.
Rebecca Pow
Perhaps the hon. Lady did not register the producer responsibility, which will put the onus on the person who invents and designs the product in the first place. They will remain responsible for the cost of that product through its life and where it ends up, so that will make them think, “Goodness, I don’t want to be responsible for that, so I’ll think about how I design it in the first place,” and that will reduce waste. Maybe she missed that.
Ruth Jones
I did not miss it, and I am perfectly clear about the producer responsibility. However, I am also clear on the need for public co-operation, because all recycling and waste management begins at home. We must ensure that we have the public on board. Although we are talking about the waste hierarchy, we need to ensure that the public out there in the real world understand fully what is expected of them. We need to make it easy for them, which means that they must have clear instructions—hopefully universal instructions rather than different authorities doing different things, confusing people. On that basis, I am sorry to disappoint the Minister, but I am going to press this new clause to a vote.
Question put, That the clause be read a Second time.
The Chair
With this it will be convenient to discuss new clause 19—Duty to prepare a Tree Strategy for England—
“(1) The Government must prepare a Tree Strategy for England as set out in subsection (2) and (3).
(2) The strategy must set out the Government’s vision, objectives, priorities and policies for trees in England including individual trees, woodland and forestry, and may set out other matters with respect to the promotion of sustainable management of trees in these contexts.
(3) The Tree Strategy for England must include the Government’s targets and interim targets with respect to—
(a) the percentage of England under tree cover;
(b) hectares of new native woodland creation achieved by tree planting;
(c) hectares of new native woodland creation achieved by natural regeneration;
(d) the percentage of native woodland in favourable ecological condition; and
(e) hectares of Plantation on Ancient Woodland (PAWS) undergoing restoration.
(4) The Government must keep the Tree Strategy for England under review, and may, if they consider it appropriate to do so, revise the strategy.
(5) If the Government has not revised the Tree Strategy for England within the period of 10 years beginning with the day on which the strategy was last published, they must revise the strategy.”
The aim of this new clause is to ensure that the Government prepares a tree strategy for England. It will ensure that the Government has to produce targets for the protection, restoration and expansion of trees and woodland in England.
Dr Whitehead
Hon. Members will recall that we heralded the arrival of this debate on new clauses 17 and 19 a little while ago in our debates, when we drew attention to clause 100, which comes under the strange heading of “Tree felling and planting” because “planting” does not appear in the text of the clause. New clauses 17 and 19 are similar—new clause 17 has more detail in the numbers—and seek to ensure that a proper strategy for tree planting is in place and that that strategy bears some relation to the reality of the numbers that will be required if we are actually to have a real effect on this country’s emissions, particularly our net negative emissions as we go towards our net zero target, which the Minister and I have already mentioned in Committee on several occasions.
We all agreed that we were to move towards a net zero target for emissions by 2050, and trees play an incredibly important part in that net zero target, because they are nature’s almost perfect method of carbon sequestration. Particularly as trees grow from their sapling stage to their mature stage, they have a burst of sequestration. Fortunately for us, that burst of carbon sequestration as the new trees grow exactly coincides with the period ahead of us up to 2050, when we have to get to our net zero target.
Robbie Moore (Keighley) (Con)
Across the whole UK, there are about 17.6 million hectares of productive agricultural land. Does the hon. Gentleman therefore agree that it is about striking the correct balance? With the Prime Minister announcing 30,000 hectares for tree planting annually, does he agree that that will contribute towards reaching the target? It is about striking a balance.
Dr Whitehead
The hon. Gentleman is absolutely right and may well have anticipated my next comments. He referred to his miniature oracle—the mobile phone—to look up the number of hectares in productive use in the UK. In a tree strategy, it is important not to substitute productive land for tree cover if that can be avoided. We must ensure that marginal land, or land that is not in particularly productive use, can be afforested, and that land that is in productive use or has a high yield can continue to operate on that basis. We should not try to sequester land that could be used for other purposes to put trees on.
On the overall target, we must ask ourselves—indeed, the Committee on Climate Change has asked itself—whether it is possible to get that number of trees on the land in the UK, bearing in mind the constraints that the hon. Gentleman mentioned. The answer is yes, absolutely, it is possible. The Forestry Commission and Forest Research have done a lot of research on the amount of marginal land in the UK that could have forest cover without impinging on grade 1 agricultural land, national parks, areas of outstanding natural beauty and so on. The answer is that roughly 5 million hectares are available in England for that sort of activity. There is land available.
A tree strategy would have to take account of the point that the hon. Member for Keighley made about what land was available and how it might be afforested, as well as the incentives that might be needed to do that because a lot of that land is in private ownership and some might be purchased for forestation and made available to the public. Other land could be made available through covenants, which the Minister mentioned. But overall, the purpose would be to ensure forestation that increases overall forest cover while making room for the various things that need to be done on the land up to 2050.
I want to come to the 30,000 hectares, which the hon. Gentleman mentioned and which we have recently heard about in the press. One is not entirely clear what that figure means. A blog from the DEFRA press office on 12 June was headed—I am not sure about the grammar here—“Tree planting on the up in England”. Actually, it talked about tree planting not being particularly on the up in England, because not only have present targets been missed by up to 70% in recent years, but although total new planting in 2019-20 was indeed up, it was only up to 2,330 hectares, which is a tiny proportion of what is required annually to get anywhere near that figure by 2050.
Indeed, the figure very much squeezes the definition of what has been planted by taking into account the total number planted with Government support over the last three financial years and those hectares that the Department thinks have been planted without support—because people like planting trees. It suggests that total new planting, taking into account everything in the UK—Scotland and England as well—comes to about 13,000 hectares altogether. Therefore, even by squeezing the statistics as hard as we can, we still get a pretty low version of that tree planting figure.
Nor is it clear from that press release whether the 30,000 hectares of trees that we hear mentioned is an annual tree planting target or a target up to 2025. It states that
“tree planting in England increased last year but was below the rate needed to reach the manifesto commitment to plant 30,000 hectares of trees across the UK by 2025.”
That is very different from 30,000 a year. If the target is indeed 30,000 a year, that goes some way towards beginning to meet what the Committee on Climate Change has said is the imperative for planting up to 2050, but only halfway. We would probably need to plant about 50,000 to 60,000 hectares a year if we are to reach Committee on Climate Change target.
That is why the new clause sets out targets with particular percentages, because that is the key point: the percentage of land in the UK under woodland or forest cover, now and up to 2050. That is what the target effectively works around. We also need to understand clearly that the target has to be met between Governments, because half of the UK’s new trees were planted in Scotland last year and a substantial amount of the overall UK forest cover target would have to be met there. Therefore, not only would the target have to relate to English planting; it would have to relate to mutual action and discussions between the UK Government and the Scottish Government—and indeed the Welsh Government and the Northern Ireland Assembly—about what is to be done on tree planting in the UK as a whole. As a matter of interest, Wales comes somewhere between Scotland and England in terms of its percentage of forest cover. Northern Ireland is very bad in its forest cover, so there are further areas to be made up in that context.
Fleur Anderson
I feel as though this is the tree strategy support group part two. As my hon. Friend the shadow Minister said, we talked about it in our discussion of clause 100, which was very disappointing. For anyone reading this debate in Hansard, I recommend that they go back and discover the length and breadth of clause 100, which is headed “Tree felling and planting”, but talks only about tree felling.
New clause 19 is specifically about a tree strategy, tree planting and tree conservation. As I said last week, putting an English tree strategy on a statutory footing is key to delivering the commitments in the 25-year environment plan alongside which the Bill sits. My hon. Friend has been through the many reasons why we need this strategy. It is therefore hugely disappointing to those who have a stake in our woodlands—and knowing how much the Minister is a tree person—that the Bill fails to deliver one. There have been no new clauses from the Government to set right this gap in the Bill. In the previous sitting, I heard several Conservative Members rightly praising and waxing lyrical about the Woodland Trust’s work, about which they were very appreciative. Despite their admiration, however, they have seemingly ignored exactly what the Woodland Trust has called for, which is contained in new clause 19; the new clause has the Woodland Trust’s full support.
I note and appreciate what the Minister said last week, namely that the long-awaited and much talked-about tree strategy is under production and will be launched in the spring of 2021. Given how long this Bill Committee seems to be going on, that feels very close. The tree strategy contains what the Government believe are ambitious commitments, and we all look forward to it. I welcome that, and I hope that the Government will listen carefully to the submissions made to their consultation. However, by refusing to give an England tree strategy a statutory footing, the Government risk seriously undermining their progress.
We know that there is a long way to go. Without a provision such as new clause 19, there is no formal way in England to set targets for a tree strategy. The new clause offers the opportunity to correct this, and it will ensure that the England tree strategy has the status it needs to protect, restore and expand trees and woodland in England. It is amazing; there were almost 3,000 submissions to the Government’s consultation from Woodland Trust supporters, and many wanted an England tree strategy to be put on a statutory footing. Supporting the new clause would ensure that their voices were heard and make the strategy’s targets meaningful, binding and much more likely to achieve their effect. The Woodland Trust has said:
“The amendment is strongly consistent with the Environment Bill’s aims of restoring and enhancing green spaces. It also complements the existing tree clauses, and reflects recent legislation in Scotland, important given the UK wide focus on increasing tree cover as part of the UK’s global climate and biodiversity commitments.”
As my hon. Friend the Member for Southampton, Test has outlined, this really is a no-brainer.
We can learn from other countries that have put tree strategies into legislation and reaped the rewards. I have been careful, in looking at the Bill, to find out which other countries have brought in similar Bills. Have they introduced environmental legislation, and what have they learned from it? What good practice do we want to take from countries that have gone before us, with similar legislative and regulatory bodies, and what has not worked out very well for the environment? We do not have time for second chances when it comes to the environment.
I will take one example from Norway. We might think of Norway as a massively tree-covered country that does not need any help, but its 2005 Forestry Act was brought up to date to promote sustainable forest management, taking into consideration important environmental values, wildlife habitat, the storage of carbon and other essential functions of forests. Norway’s 2009 Nature Diversity Act ensured that forestry regulation complied with the legislation contained in that Act. Norway put forestry regulation on a statutory footing. It was probably littered with “musts”, and had hardly any “mays”—I can picture it now.
The success of Norway’s model and accompanying legislation speaks for itself. In 1920, Norwegian forests consisted of approximately 300 million cubic metres of standing timber. Today, the volume of standing timber is soon expected to exceed 1 billion cubic metres. It was on a downward trajectory, but it has tripled since the second world war, enhanced by the legislation that Norway has put in on a statutory footing.
New clause 19 is a “no regrets” commitment. I urge colleagues to reconsider their opposition to it, to stand up for trees and to stand up for the ambitious scale of tree planting and conservation that we need to meet our carbon targets, that we need for biodiversity and our own mental health, and that the public overwhelmingly want.
Rebecca Pow
I would like to think that the shadow Minister was going to branch out and not press this new clause to a Division.
I share everybody’s desire to deliver on a tree-planting commitment. The Government are mindful of that and are not wasting time. We are working to increase planting across the UK to 30,000 hectares per year by 2025—the figure which has been quoted and which is in line with the CCC recommendations. We are taking those recommendations extremely seriously. Forestry is devolved, so we are working closely with the devolved Administrations to meet that commitment. To increase planting in England, we have announced a £640 million nature for climate fund. In our England tree strategy, which will be published in early 2021, we will set out further plans for how a lot of the money will be used to fuel all the tree planting we need.
New clause 17 would set a UK-wide target, but as I just said, forestry is devolved, so the Bill is not the place to establish targets for the UK overall. The shadow Minister quoted some statistics—from a blog, I think—about 2,300 hectares of planting. That was an England-only figure for 2019; it was part of UK-wide planting of 13,400 hectares. Our manifesto commitment is to a UK goal, but the Bill is not the place to establish UK targets.
The new clause also proposes a specific England-only target, but significant woodland cover targets in legislation would have a major impact on land. Ours is a small island and therefore we have a limited resource for planting. It is not helpful to make comparisons with a country such as France, which is five times the size of the UK and has a much smaller population. I applaud what the Norwegians have done, but they have terrain that is much more suited to growing trees and, to take up the point made by my hon. Friend the Member for Keighley, they have fewer choices to make about prime agricultural land. We must and will strike a careful balance on where we put the trees.
Extending our 2025 commitment to 2050 would result in 17% tree cover, which is an enormous increase, but the new clause proposes 19%, which would require us to think seriously about the possible extent of woodland cover and how it would affect our prime agricultural land and land for housing and so on. I am sure the shadow Minister is completely aware of that. In a policy paper this summer, we set out our intention to explore whether legislative tree-planting targets would be appropriate under the target-setting procedure in the Bill. Before that process is complete, we should not set specific targets in legislation. Setting potentially unachievable targets, as proposed in the new clause, could lead to trees being planted in the wrong places for the wrong reasons, which could harm food production and sensitive habitats, or even increase carbon emissions. There are lots of things to consider.
New clause 19 proposes a duty to prepare a tree strategy for England and sub-sectoral targets. We know that a major increase in planting is needed—nobody denies that, and it is a manifesto commitment. That is why we have launched the consultation on a new England tree strategy. The strategy will be published in 2021; it will set out a clear vision, objectives and policies for trees in England, covering trees, woodlands and forests. There was great involvement in the consultation and some interesting ideas and proposals were advanced.
Daniel Zeichner
I appreciate the Minister’s great enthusiasm for trees. Will she join me in supporting and celebrating tree charter day, which is this Saturday, and congratulate the young plantscapers of Mayfield Primary School in Cambridge, who created a tree hanging especially for me to celebrate it?
Rebecca Pow
Of course I would like to celebrate that. I commend the school for its work. It is a brilliant thing to engage young people in nature and everything about trees, including ancient trees. That can only bring benefits to people’s lives. Well done to them for engaging.
Dr Whitehead
The Minister, as she has managed to do on several occasions, presents a powerful speech in favour of a proposition from the Opposition, and then says, “Well, it is not necessary and should not be supported.”
We can all agree that the Minister is a powerful advocate of trees; she has been for a long time and I do not doubt for a minute that she will continue to be so. I hope she appreciates that that is how I characterise myself. However, she also said—we are to take this on trust—that the Government are undertaking a review of trees. I hope they are, and that they will in due course produce something that will, among other things, lead to a considerable increase in tree planting in the way that I have described and the way in which she would advocate. However, as my hon. Friend the Member for Putney said, none of that is statutory. Now is absolutely the right time to make sure that there is a statutory provision to frame the way forward.
I urge the Government to accept the provisions of new clause 17, which sets out the sort of targets we should adopt. They could be incorporated into a statutory strategy that the Government might produce. I think we are creeping towards agreement not only on how this should be done, but on the imperative to achieve or get close to those sorts of targets—the sort of thing the CCC was talking about—to ensure that we really make a difference as far as trees in the UK are concerned, subject to all the considerations that the Minister mentioned.
We want to ensure that any target is achieved in a sustainable way, without prejudice to other forms of land use in the UK, and in this case in England. Indeed, the Committee on Climate Change discussed in its report what sort of land uses should be maintained in the UK. It was very clear that we should not do something that undermines something else, but should try to move forward with a unified strategy that gives room for crop land, grassland, rough grazing and forestry, and that takes into account the fact that we are an densely populated country—one that, I would add, has succeeded in chopping down pretty much every tree in sight over the past 500 years. We have reflected on the change in land use that has come about as a result.
I recall mentioning a little while ago that the New Forest, which is near me, is a changed landscape. It is called the New Forest, but it is actually a substantially non-tree landscape that has been changed by humans over time, and the habitat has changed as a result. In and around the Minister’s constituency, there was a broad swathe of lowland forest and hilltops without trees on them. That is why a number of the dolmens, menhirs and standing stones are in their positions: they were ways of guiding people across forest areas to get to different places because the country was so heavily forested. We have wiped all that out over successive generations.
I do not think it is a case of trying to fit in a few trees to make enough progress on the margins while the rest of the country remains treeless. We need a wholesale project of restoring the tree heritage that Britain once had, while ensuring that that tree heritage can live alongside the other uses that we have brought about. That is a complicated thing to achieve.
Rebecca Pow
Given that the hon. Gentleman wants all this tree planting, does he welcome the great Northumberland forest, which is expanding forestry right across the landscape in the north-east, and the fact that we are kickstarting the planting of the new northern forest with a £5.7 million investment? I think he is agreeing with everything that I have said. We have said that we are ramping up tree planting to meet the advice of the Committee on Climate Change.
The Chair
Perhaps you can answer briefly, Dr Whitehead. It has been quite a long debate so far.
Dr Whitehead
Indeed. Yes, not only do I welcome those forests but I positively embrace the fact that they are being established. When we look at the older midlands forests that have arisen around Sherwood, we can see how more tree plantation can sit in the landscape alongside other uses. That is exactly what is being tried in the northern forest at the moment, so I understand and welcome that.
New clause 19, however, just says, “Get on with a tree strategy. You can put all these targets in it, but it has to be statutory so that we make sure it works properly.” I do not wish to press new clause 17 to a Division, because I accept that it includes targets that, although I think they are very important, the Minister may think might be mediated by other factors. However, it is important that we put on record that there should be a statutory tree target in the Bill and that we should get on with that strategy now. I will therefore put new clause 19 to a Division, to test whether the Committee agrees with that notion. I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
New Clause 18
Policy statement on environmental principles: effect
“When exercising any function of a public nature that could affect the achievement of—
(a) any targets set under sections 1 or 2;
(b) interim targets set under section 10; or
(c) any other targets that meet the conditions in section 6(8)
public authorities must act compatibly with and, where appropriate, contribute to the achievement of those targets and the implementation of the environmental improvement plan.”.—(Daniel Zeichner.)
Brought up, and read the First time.
Daniel Zeichner
I beg to move, That the clause be read a Second time.
After the drama and passion of the trees debate, I am happy to inform you, Mr Gray, that the next few new clauses are a touch drier and return to issues of environmental law and the philosophical underpinnings of the Bill. They are important none the less.
New clause 18 would introduce a new duty on all public authorities to ensure that all levels and arms of government play their part in achieving the environmental targets. The new clause would give the air quality, water, waste and biodiversity targets we established at the outset real relevance and meaningful drive from day one, and it would bolster the effects of clause 4. Our concern is that, as it stands, the Bill does not require or sufficiently clarify the need for action across all levels of government and other public bodies.
I will give one example, on air quality. Although part 4 of the Bill provides welcome new powers for local authorities and some useful clarification of their existing responsibilities, it does not do enough to ensure that a comprehensive approach is taken across all levels of public decision making; in fact, it rather risks putting the burden of responsibility solely on local authorities. As we know, air pollution does not respect boundaries, and action by local authorities alone will not be enough to tackle all the sources of air pollution. The new clause would help to spread that burden across central and local government and other significant public bodies in this space, requiring them to contribute to providing solutions on a national and regional scale. We fear that, without something like this, progress will be too slow. The same would be true of the other priority areas as well.
We will not push the new clause to a Division, you will be pleased to hear, Mr Gray, but we would like to hear what the Minister has to say about how those targets can be achieved, which we all want, without this kind of wider environmental duty.
Rebecca Pow
The legal obligation to achieve the long-term target set by central Government properly rests with central Government, and it is for central Government to create the right natural policy frameworks in which other public bodies can best contribute to our environmental goals alongside their own priorities and legal obligations. We will report annually on the implementation of the environmental improvement plan, on improvements in the natural environment and on progress towards the targets, which will provide an opportunity to identify how these national policy frameworks are contributing to environmental improvement. The Office for Environmental Protection will respond to the Government’s annual report with its own independent report. That covers everything that I have been pointing out from the beginning about the whole process of monitoring and reporting.
Where necessary, the Government could change these national policy frameworks, as we are doing through the Bill by making improvements to the local air quality management framework; the hon. Gentleman touched on air, but this measure, already outlined, will do exactly that. Changes would need to be made, following proper consultation with affected bodies, having due regard to the environmental principles policy statement. Local authorities, as I said, have an important role to play in delivering environmental improvement, including through some of the measures in the Bill. Long-term, legally binding targets will set the trajectory for driving long-term improvements in our natural environment.
Public authorities, in particular local authorities, have an important role to play in delivering these improvements, and measures in the Bill will help to drive that action on the ground. For example, the nature section of the Bill strengthens the existing biodiversity duty under the Natural Environment and Rural Communities Act 2006. Public authorities will have to act to conserve and enhance biodiversity, while taking account of local nature recovery strategies. We have covered all that in great detail. There will be a groundswell from the bottom up; local authorities will be hugely involved.
Clear accountability at central Government level provides clarity and avoids additional burdens on hard-working public bodies. Were the new clause to be accepted, the shadow Minister would be placing many more burdens on local authorities. We are at pains to make sure that we do not overburden them, but what they do is an essential part of the whole system, with the Government up there at the top, being held to account and playing their role. I think the hon. Member for Cambridge said he was not going to press the clause. If that is the case, I thank him for it.
Daniel Zeichner
The Minister is right; we are not going to press the motion, but I would say that I think we are repeating some of the arguments we had on earlier clauses. We are somewhat sceptical that the Minister’s noble hopes will be realised. I entirely agree that the Government are expecting a lot from local authorities, but we think that it is not only local authorities that will have to step up. I hear what the Minister says and we shall see how it plays out. I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
New Clause 19
Duty to prepare a Tree Strategy for England
“(1) The Government must prepare a Tree Strategy for England as set out in subsection (2) and (3).
(2) The strategy must set out the Government’s vision, objectives, priorities and policies for trees in England including individual trees, woodland and forestry, and may set out other matters with respect to the promotion of sustainable management of trees in these contexts.
(3) The Tree Strategy for England must include the Government’s targets and interim targets with respect to—
(a) the percentage of England under tree cover;
(b) hectares of new native woodland creation achieved by tree planting;
(c) hectares of new native woodland creation achieved by natural regeneration;
(d) the percentage of native woodland in favourable ecological condition; and
(e) hectares of Plantation on Ancient Woodland (PAWS) undergoing restoration.
(4) The Government must keep the Tree Strategy for England under review, and may, if they consider it appropriate to do so, revise the strategy.
(5) If the Government has not revised the Tree Strategy for England within the period of 10 years beginning with the day on which the strategy was last published, they must revise the strategy.”.—(Dr Whitehead.)
The aim of this new clause is to ensure that the Government prepares a tree strategy for England. It will ensure that the Government has to produce targets for the protection, restoration and expansion of trees and woodland in England.”
Brought up, and read the First time.
Question put, That the clause be read a Second time:—
Daniel Zeichner
I beg to move, That the clause be read a Second time.
After the Government’s majority was slashed at the last vote, I am hugely excited. If only there were a Liberal Democrat bar chart to hand, we could see the swing. I am quite excited about new clause 20 and I am glad the Committee has come back to life. I am so sorry that some hon. Members failed to witness the excitement.
The new clause brings us back to the discussions that the Minister and I had about the state of nature. We think that we need to turn the Government’s rhetoric into reality by setting out a target for reversing the decline of nature, in time to play a leadership role as we head to COP15. COP15 is delayed—it would have been happening about now—and is now set for late spring next year, in Kunming, China. The hope is for a new set of global goals for 2030 to replace the 2020 Aichi biodiversity targets, which, as we all know, the world has sadly not done too well on.
I think we can all agree it is vital that the next decade sees much more success than we have managed collectively to achieve in the recent past. As a driving force of the Leaders’ Pledge for Nature, which commits to reversing biodiversity loss by 2030, the UK is in a really good place to be a key advocate for leading on these matters. The Bill contains a framework for setting long-term legally binding targets, but it seems to us that the timeframe does not sit comfortably with the 2030 goal. New clause 20 would require the setting of a state-of-nature target that takes account of what needs to be done domestically to contribute to improving the global state of nature.
Looking back at the document on environmental targets from late August, we see that, interesting reading though much of it is, it seems almost like at discursive paper. In my city we are familiar with interesting, discursive papers, but this goes back to the may/must argument. There are plenty of fine intentions, such as:
“Natural England is currently working on a programme to improve monitoring of our protected sites”
That is great, but it is not necessarily mean that it is doing something.
The paper also states:
“A legally binding target for Marine Protected Areas could complement and bolster this on-going work.”
And, sadly:
“Trends show that overall, species populations have declined over the last 40 years. Whilst these losses have slowed down, there is still work to do.”
That simply describes a state of decline.
The document continues:
“Our most comprehensive species data is about the abundance of species. Using this, we could set a target”.
They could set a target, or they might not. It continues:
“It will be difficult to predict how species populations will change over time—including as a result of implementing new policies—as we consider whether to develop a target or targets for species.”
That is all worthy stuff, but it is not the stuff of leadership.
On habitat restoration, the paper states that
“the Environment Bill lays the foundation for the Nature Recovery Network that will complement plans for a new Environmental Land Management scheme.”
Again, that is a description of an aspiration. Frankly, we know how difficult it will be to do some of this stuff. The document states:
“We are currently developing an indicator to directly monitor.”
As I say, it is all aspirational stuff and, I am afraid, all too vague.
The section on nature finishes by saying:
“We are currently undertaking the following steps to increase planting in England”—
this goes back to trees—
“developing a new England Tree Strategy…developing plans to deploy the £640 million Nature for Climate Fund”.
That is all part of a wish list, but it really does not add up to a leadership strategy.
We think the strategy needs to be much stronger and more ambitious. New clause 20 would signal the intention to set a target in domestic legislation. That would allow us, in advance of next year’s very important international summit, to set a lead such that we would truly be able to say that we were world leading. Frankly, that section of the paper seems a bit fluffy to me.
Rebecca Pow
As the hon. Gentleman knows, the UK is committed to playing a leading role in developing an ambitious and transformative post-2020 framework for global biodiversity under the convention on biological diversity. The UK Government already support a global target to protect at least 30% of the global ocean by 2030, and 32 countries have joined our global ocean alliance in support of the target. We really are forging ahead on this issue. At the end of September, the Prime Minister committed to extend that commitment to land—indeed, the hon. Gentleman referred to that.
Together with the European Commission and Costa Rica, the UK was instrumental in crafting the leaders’ pledge for nature, a leader-level voluntary declaration that was launched at the United Nations General Assembly on 28 October. The pledge sets out 10 urgent actions to put biodiversity on a path to recovery by 2030. If that is not ambitious, I do not know what is.
Our international aims on biodiversity must be underpinned by credible action at home—the hon. Gentleman is absolutely right about that. Indeed, it is something that I keep saying as the Minister. Following agreement of the post-2020 framework, we will publish a new strategy for nature in England that will outline how we will implement the CBD’s new global targets domestically and meet our 25-year environmental goals for nature at the same time. We recognise the importance of setting legally binding targets to support our ambitions. As the hon. Gentleman knows, the Bill includes a requirement to set at least one long-term, legally binding target in relation to biodiversity, as well as targets for air quality, water and resource efficiency, and waste reduction. Our recently published policy paper on environmental targets sets out the areas under consideration for targets, including on species and habitats. So there could and will undoubtedly be myriad targets in future years that will affect the space of biodiversity to which he refers.
The Government will determine the specific areas in which targets will be set via the robust and transparent target-setting, monitoring and reporting process that the Bill sets in train. Advice from independent experts will be sought during the target-setting process, and stakeholders and the public will also have an opportunity to provide input as to what they think is the right level. Targets will be based on scientifically credible evidence, as well as economic analysis. We do not want to prejudge the specific targets that will emerge from this process. Indeed, scientists and academics very much support this thinking and way of operating. I have made it clear that there is enough in the Bill without the proposed new clause, so I ask the hon. Gentleman—who, as ever, makes an eloquent point—to withdraw it.
Daniel Zeichner
On this occasion, I am afraid I will have to disappoint. The Minister has wheeled out a veritable forest of aspirational opportunities, but we think that the Bill needs to be clearer in its ambition. If that were the case, we would be in a stronger position going into COP26 next year. I suspect this debate will continue over the coming months, but in the meantime we would like to put our position on the record by forcing a Division and—who knows?—perhaps a great victory.
Question put, That the clause be read a Second time.
Dr Whitehead
I beg to move, That the clause be read a Second time.
The proposed new clause concerns collaboration with the various devolved authorities and Governments of the UK. It sets out a number of things that need to be done, but I suspect the Minister will say that they are already in the Bill. I hope she will give us good reasons for why what is in the Bill allows for that co-operation to take place. If she can do that, I am sure this particular proposed new clause will not go to a vote.
Rebecca Pow
I thank the hon. Gentleman for giving me the opportunity to reiterate this Government’s strong commitment to a strong Union and to strong co-operation among the four nations in respect of the devolution settlements. How the OEP and equivalent bodies in the devolved Administrations co-operate will be a prime example of that. Co-operation between the OEP and equivalent devolved bodies is fundamental to ensuring that cross-border issues and matters that concern both devolved and reserved environmental law are dealt with effectively. However, the proposed new clause would not achieve this desirable objective.
First, the proposed new clause would place an absolute, unilateral duty on the OEP to co-operate with equivalent bodies in devolved Administrations. That would be an imbalanced and disproportionate approach, particularly as the specifics of environmental governance arrangements are yet to be confirmed across the Union. Secondly, effective co-operation requires flexibility and agency, something that the proposed new clause’s over-specific definition of co-operation would prevent. The Bill already requires the OEP to consult devolved environmental bodies on environmental governance matters that would be of relevance to them. That is covered and I hope the shadow Minister will welcome that.
Dr Whitehead
I am sure the Minister will thank us for giving her the opportunity to read out that pellucid note, which puts on the record the intention to, through the OEP, collaborate fully with the Governments of the UK. I therefore beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
New Clause 22
Application of environmental principles
“(1) A public authority must apply the environmental principles in section 16 in the exercise of its functions.
(2) In this section ‘public authority’ has the same meaning as in section 28(3).”—(Daniel Zeichner.)
This new clause requires public authorities to apply the environmental principles.
Brought up, and read the First time.
Daniel Zeichner
I beg to move, That the clause be read a Second time.
New clause 22 takes us back almost to the beginning of our deliberations and to environmental principles. The December 2018 policy statement on environmental principles set out five important principles in law: integration, prevention, precaution, rectification and polluter pays. There has been wide discussion in this area, including a lot of work by the Environmental Audit Committee, which came up with about 55 recommendations. Here we are, at the tail end of our discussions about the Bill, going back to some of those points. Concerns have been raised by environmental lawyers through Greener UK. After all this discussion, their view is that the Bill
“does not yet provide an adequate route to ensuring that those important legal principles fully function to achieve”
the aims set out by the Bill.
This is important because, when matters are tested in court, this is what people will look at. Much more learned people than me have pored over these issues and these are some of the conclusions they have come to. They feel that clauses on environmental principles have not changed much since the December 2018 document. Despite discussions in pre-legislative scrutiny and on Select Committees, the expert conclusion is that the Bill
“does not maintain the legal status of environmental principles as they have come to apply through EU law.”
That is, of course, one of the crunch issues of the entire discussion around the Bill.
I will not go through in detail the fine points that they make, but they do say that
“environmental principles have been binding on all public authorities including in individual administrative decisions. This legal obligation on all public authorities to apply the principles, whenever relevant, will be undermined through the bill.”
That is a strong concern, which reflects our continuing worry that, despite the ambitions, rhetoric and optimism displayed by the Minister, when we dig down into the detail of the Bill, we see that it does not provide the same level of protection that we have enjoyed before. Sadly, that takes us back. I am sure the Minister will disagree, and we will listen to the reasons why, but we will not press this to a Division.
Rebecca Pow
The Government are fully committed to ensuring that environmental protection sits at the heart of the policies that we will bring forward. However, the new clause would place significant—I would say huge—burdens on Government and public authorities, without adding any additional environmental benefit. Moreover, the Government already implement these considerations in other ways. Central Government develop strategic environmental policies and set the strategy and approach for any key decisions taken by public bodies. It, therefore, makes sense for the new environmental principles duty to sit with Ministers.
To use the example of a planning application for a shed, it seems wholly unreasonable for a public authority to be obliged to prove the principles have been considered, when the strategic framework, in such case the national planning policy framework, should embed these expectations. To be clear, strategies set by central Government, such as the NPPF, will have been developed in line with the principles policy statement. Placing a legal duty on Ministers to
“have due regard to the policy statement”,
as we have done in clause 18, enables the provision of clear guidance to Departments to ensure an efficient policy-making process.
The policy statement will set out the details on the application and the interpretation of the principles. This would not be clear if the duty were directly on the principles themselves, as primary legislation cannot go into the necessary detail. In a similar vein, the proposal to alter the environmental principles duty from “have due regard” to “must apply” would be extremely burdensome and would have unintended consequences.
The new clause would also extend the scope of the principles duty from being limited to policy making to covering all functions administered by all public authorities, which would result in a massive, unnecessary burden. The new clause would create a significant additional and excessive burden on public services, while duplicating existing provisions, without any clear environmental benefit or purpose.
I think the hon. Member for Cambridge touched on the lowering of standards relating to the EU. The EU only has principles and it does not have a policy statement to explain how to use them. We have taken a big step further than that and it is much clearer, I would say. I hope that gives this complicated process a bit of clarity. I ask him to withdraw his amendment.
Daniel Zeichner
On this occasion, I am happy to oblige, not least because I suspect we will want to go away and look very carefully at the Minister’s words. I think there is quite an important set of issues here. We are not necessarily convinced that this strengthens our environmental protections. A planning application for a shed was a slightly unfortunate example to give, given that under the proposals in the planning White Paper, there will be whole swathes of the country where no planning application will be needed in future at all. That is exactly the force of our arguments. While we remain concerned, we will not pursue it any further this evening, because 20 minutes to 5 is not the time for this. I beg to ask leave to withdraw the clause.
Clause, by leave, withdrawn.
Ordered, That further consideration be now adjourned. —(Leo Docherty.)