National Security and Investment Act 2021 (Monetary Penalties) (Turnover of a Business) Regulations 2021
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Lord Callanan
That the Grand Committee do consider the National Security and Investment Act 2021 (Monetary Penalties) (Turnover of a Business) Regulations 2021.
Relevant document: 13th Report from the Secondary Legislation Scrutiny Committee
The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)
My Lords, in moving that the draft National Security and Investment Act 2021 (Monetary Penalties) (Turnover of a Business) Regulations 2021 be approved, I will speak also to the draft National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021, which were laid before the House on 6 September this year. The commencement date for both SIs is 4 January, which is the same date as the full commencement of the National Security and Investment Act 2021.
Before I turn to the detail of the SIs, I will say a few words to remind the Committee of the purpose of the National Security and Investment Act and why it is vital for the UK’s security. The UK economy thrives as a result of foreign direct investment. Over the past 10 years, more than 665,000 new jobs have been created as a result of more than 18,000 foreign direct investment projects. However, as I am sure your Lordships will agree—and indeed as the House demonstrated through its agreement to the Act—an open approach to investment must include appropriate safeguards to protect our national security and the safety of our citizens.
The NSI Act therefore provides the Government with updated powers to scrutinise and intervene in acquisitions to protect national security, as well as to provide businesses and investors with the certainty and transparency they need to do business in the United Kingdom. The Act establishes a call-in power for the Secretary of State to scrutinise qualifying acquisitions, a voluntary notification option for firms which wish to gain clarity on whether the Secretary of State will call in their acquisition, and—the subject of these regulations—creates mandatory notification requirements in 17 sensitive sectors of the economy where it is considered that national security risks are more likely to arise.
Starting with the draft maximum monetary penalties regulations, this SI sets out how the Secretary of State will calculate a business’s turnover when calculating monetary penalties resulting from non-compliance. We generally expect compliance with the Act to be high and the need for the Secretary of State to issue penalties to therefore be rare, but it is important that the Act comes with sufficient deterrents to non-compliance.
This SI is laid under the delegated powers pursuant to Section 41 of the Act. Sections 32 and 33 create offences of completing a notifiable acquisition without approval and failing to comply with an interim or final order. Both these offences can result in the imposition of a monetary penalty.
The maximum fixed penalty that can be imposed on a business for an offence under Section 32 or 33 is the higher of 5% of the total value of the turnover of the business and £10 million. The maximum amount per day for a daily rate penalty that can be imposed on a business for an offence under Section 33 is the higher of 0.1% of the total turnover of the business and £200,000.
With these regulations, we have ensured that global turnover is taken into account when calculating the total turnover, so that no efforts to get round the penalties—for example, through changing accounting approaches—will be successful. These are important and well-balanced regulations, necessary for the effective functioning of the NSI Act.
Turning to the notifiable acquisition SI, which was of some interest to your Lordships during the passage of the Act, the SI has also been noted by the Secondary Legislation Scrutiny Committee as an “instrument of interest”. These regulations specify descriptions and activities of qualifying entities, the acquisition of which must be notified to the Secretary of State—a notifiable acquisition. Acquisitions in scope of mandatory notification that complete without the approval of the Secretary of State will be void and therefore have no effect in law. These are important changes to the UK’s investment screening system and sectoral expertise has been vital to ensure that mandatory notification is proportionate and targeted. The Government have therefore taken great care and time to get these regulations right.
Alongside the introduction of the NSI Bill in November 2020, the Government ran an eight-week public consultation on the proposed descriptions of the 17 areas of the economy referred to in the draft regulations, after which the Government published revised definitions in March. The Government then undertook further targeted engagement with stakeholders in these key sectors—such as communications, data infrastructure and synthetic biology—to refine and narrow the proposed descriptions to provide businesses and investors with further clarity.
As the Minister for Small Business, Consumers and Labour Markets did in the other place, I place on record the Government’s appreciation of the extensive input we have had from across sector organisations in helping to develop these regulations. They strike a careful and appropriate balance between ensuring that our national security is safeguarded and keeping the number of businesses caught by the mandatory notification requirements to a necessary and proportionate level. In addition, these regulations allow parties themselves to identify objectively whether they are in scope of mandatory notification or not.
In addition, to monitor the impacts on businesses and investors, particularly small and medium-sized enterprises, the Government have chosen to include a shorter three-year post-implementation review within the SI, instead of the more standard five-year period. The Government engage on a daily basis with a wide range of businesses to help them understand the requirements of the Act, and we will of course continue to do so. Furthermore, extensive guidance across all 17 areas of the economy specified in these regulations will shortly be published to further assist parties in understanding the effect of the requirements on their planned activities.
In conclusion, these are detailed and technical statutory instruments which give effect to the purposes of the NSI Act. They have been carefully developed and tested to ensure that they give maximum clarity to businesses, while allowing us to protect the UK’s national security. I commend the draft regulations to the House.
Baroness Bowles of Berkhamsted (LD)
My Lords, I thank the Minister for introducing these statutory instruments. As has been said, they follow on from the National Security and Investment Act 2021 that we concluded earlier this year. Indeed, most of the things that could be said were said during those proceedings. The basics of what is covered by these instruments, such as the level of fines, was set out in the Act, but how turnover is calculated for the purposes of the fines is now laid out in more detail. As has already been explained, the maximum fixed penalties for offences are the higher of 5% of the total value of the turnover and £10 million, or a daily amount that is the higher of 0.1% of the total turnover and a cap of £200,000.
Clearly, it is important to define how turnover will be calculated for the purposes of fines, and I am glad to see that it is globally based—indeed, I think we were told that that was the intention. Whether the formulations actually laid out are right remains to be seen. I hope that, if they do not work, they will be adjusted, and that the Secretary of State will be prepared to intervene and overrule—as he can—on the companies’ turnover calculations, should they be unrealistic or if there have been manoeuvres to minimise exposures, which can be different from just accounting measures and moving things around globally if it covers the creation of special companies, subsidiaries and a whole gamut of things that will probably be beyond everything that we could list now.
I also have a reservation, which I think I expressed during the Bill proceedings, concerning whether the maximum fines have been set too low. As they are presently fixed, the percentages will bear down in totality more heavily on SMEs, which will tend to fall under the percentage calculations, than on large, international businesses, which will hit the maximum and be able to enjoy—if that is the way to phrase it—a cap. I am sure all noble Lords hope that the penalties do not need to be used all that often and that, as the Minister said, it is rare. Nevertheless, there must be a strong deterrent; it cannot be seen as a risk worth taking. The fact is that I can think of some deals where £10 million is not a lot in the scale of things and given the charges that are levied by advisers. In my view, the cap, if there is one, should be proportionate. I hope that the Government will hold on to that thought, and perhaps the Minister can say what thinking there has been in the Government and the department around that.
Obviously, it is unrealistic to expect the Government to revise figures that have only just been passed in the Act, but under Section 41, it is possible to vary them. Could the Minister explain how such adjustment possibility is viewed, looking forward? Will it be used simply to adapt to inflation or, as I have suggested, will it be used if the deterrent is, as it turns out, not quite strong enough for the largest multinationals?
I turn to the second SI and the specification of qualifying entities. The definitions contained in the schedules have been refined in response to stakeholder feedback following the consultations which took place as the Bill was proceeding and subsequently—all of them have been refined, which is good to see. The outcome seems to have been broadly welcomed, with more focus and narrowing but also some occasional broadening. However, I gather there are still some industries with concerns about them being too broad. Perhaps it is a case of saying that not every possibility is covered. The challenge there is the make the reserve call-in power both functional and reasonable, without making it look like it has become protectionist.
It is in fact difficult to understand the legislative detail, how and why the various changes have been selected, and who has been listened to, as the contributions are not available for scrutiny; we cannot really scrutinise that aspect of the job. It is almost certain that large companies and their advisers will have been the most active. I am not criticising that involvement in any way; they have both the resources and the expertise to keep on top of the job and their input is valuable. However, can the Minister inform me how suggested changes are then back-tested, in particular for small businesses, and whether what fits the larger businesses and comes as advice from lawyers and other advisers fits across the piece?
Overall, the situation is that we must accept the assurances that efforts have and are being made to get things right and that the Government and the department will do their best to issue advice and assist companies. It is of some comfort that the review period has been shortened, as the Minister said, to three years, rather than the usual five.
In the debate in the Commons, the Minister said that the investment security unit in the department will be able to offer advice and give forewarning, and the Minister here has said similar things. I would like to know a little more about how that works, especially for SMEs. Is there helpline advice, separate from guidance, and can it be relied upon, or is it the case that there will inevitably end up being a larger number of precautionary notifications than are really needed, because that is the point at which you can get some definitive feedback? Will the Government be able to publish what has been positively cleared and other advice given once it is no longer time sensitive to a prospective deal? I recognise that it cannot be done in real time, but will something of that nature happen retrospectively?
Finally, as I have already referenced, the Secretary of State is given powers to call in other transactions not covered by the 17 sectors. I am conscious, as I said, that it is necessary to demonstrate that the UK is an open economy, but on the other hand, recent experience with Covid, Brexit and other geopolitical issues has drawn more attention to security of supply. Will there be a capacity and appetite to monitor transactions generally and take action where needed? What other measures are being taken around issues of greater security of supply?
Lord Lennie (Lab)
My Lords, I thank the Minister for outlining the regulations. I say at the outset that the Labour Party also supports these necessary instruments. Taken together, they provide for the operation and running of the NSI Act and the provision of a safeguard for the UK. The SIs identify, as we have heard, 17 sectors in which national security could be at risk—the so-called sensitive sectors—and establish how the Secretary of State would establish the worth of each business when calculating the value of monetary returns it would be required to make. The offences cover both completing an acquisition without approval and failing to comply with a final order when required to do so, with resultant penalties, as we have heard, of £10 million or 5% of turnover, whichever is the greater, or a daily rate of 0.1% or £200,000.
However, there appears to be no effective early warning system or method to forewarn businesses considering acquiring a business that they may be in breach of these regulations. Have the Government considered putting such a system in place to alert businesses that they may risk putting themselves in breach by continuing with an acquisition?
The current thinking about the destination of the funds raised by this instrument is that they will go to the consolidation fund. Surely more creative thinking is possible, such as using them for the specific purpose of funding start-ups and innovators to help build up UK resilience. Is this set in stone, or could the Government reconsider the destination of the funds and ally them to the problem that the instruments are designed to prevent?
As the noble Baroness, Lady Bowles, said, there is also some concern about the breadth of what is captured by this legislation; in particular, the biodiversity sector believes that the definition is cast too wide and covers industries not associated with security matters. Could the Minister look at the concerns raised by the biodiversity sector to be sure that the reach of the regulations is only as broad as is necessary and not more widespread than it needs to be?
Some concerns have been raised about how the Government engaged to build these better regulations. For instance, when considering issuing guidance to particular sectors, which the Minister said would happen shortly, he should be aware that SMEs do not have access to large legal firms to advise them on these matters and therefore require straight, clear guidance rather than obscure, legalistic wording. Can he explain this process to the Government when they are issuing such guidance?
Finally, do the Government believe that food security forms part of national security? I ask because they have shown little interest in the recent takeover of Morrisons, which will in turn undoubtedly act as an encouragement to others to consider similar purchases in this country.
While we support the regulations, they require a more muscular approach in some areas while in others a lighter touch is required. Getting this balance right is tricky but important to the UK’s inward investment programme and opportunities.
Lord Callanan (Con)
My Lords, I am grateful to both noble Lords for their valuable contributions to this debate. I will endeavour to respond to the points that were made; first, to those made by the noble Baroness, Lady Bowles of Berkhamsted, and then to those made by the noble Lord, Lord Lennie.
In response to the points made by the noble Baroness, Lady Bowles, about the maximum monetary penalties, some businesses may argue for the lowest possible turnover, for obvious reasons, and it is important that the Secretary of State retains the flexibility to set what would be a reasonable and effective fine. Of course, in all decisions the Secretary of State must act reasonably under public law duties, so it does not exactly give him a free pass. However, I am very happy to provide the noble Baroness with reassurance that, if there is any disagreement between the Secretary of State and the business that would be subject to the penalty, it will be for the Secretary of State to determine the relevant turnover in question.
In regard to the noble Baroness’s point about whether penalties are set too low—I do not often get to hear that criticism—the largest penalties are up to £10 million or 5% of turnover, whichever of those is the higher amount. I am sure the noble Baroness will appreciate that, to any business, £10 million is a substantial amount of money. However, as a civil financial penalty, it is only one of the possible forms of punishment. The noble Baroness will be aware that criminal sanctions are also available, and those criminal penalties may well include a prison sentence of up to five years, so we are satisfied that the appropriate disincentives exist to flouting the regulations.
The noble Baroness referred also to some of the sector definitions. I am happy to reassure her that we have engaged extensively on them in a number of different ways. We have changed the descriptions and amended them in communications with regard to qualifying entities carrying on activities in the UK. For critical suppliers to government, two of the five limbs of the definition set out in the government response were amended, and we made some changes in data infrastructure. We clarified some of the infrastructure activities with regard to energy, and, on suppliers to the emergency services, some of the limbs of that definition were amended and narrowed to provide an objective list of activities, as well as in the field of synthetic biology.
On points raised by the noble Lord, Lord Lennie, with regard to the funds, as was discussed—these points were also raised in the other place on 20 October—any funds received will go to the consolidated fund, as is standard practice. However, the noble Lord will be aware that we have a wide range of support schemes for businesses in other areas, particularly for establishing new technology.
On publishing the details of clear cases, we are of course required under the Act to publish an annual report setting out the numbers and sectors of cases that are notified and cleared. To ensure that mandatory notification works proportionately and that the Act is future-proof, the Secretary of State will of course keep this under constant review and will seek to amend the list of acquisitions that would be in scope in the future through additional secondary legislation to reflect evolving national security risks and technological changes. The noble Lord will be aware that, following the practice of previous Governments, we have never defined what national security is, and he will also be aware that of course I cannot comment on the additional case that he mentioned.
Both these SIs are essential for the effective operation and running of the NSI Act and for the provision of a safeguard for the United Kingdom. The Government have ensured that the proposed descriptions within the notifiable acquisition regulations will enable potential acquirers to self-identify for the purposes of the mandatory notification requirement.
The noble Baroness, Lady Bowles, also raised the point about communication and the possibility of a helpline. We do not think that that is necessary; officials remain available in the investment screening unit within BEIS for consultations, if necessary, on a confidential basis with businesses both large and small, if anybody is unclear about a particular acquisition. Advice is being provided at the moment and will be provided in future to any business that wants to call or email the team responsible for leading this. Sectoral expertise has been a vital part of the development of these regulations, and we have taken great care and time to get it right.
In response to the comments that the noble Lord, Lord Lennie, and the noble Baroness, Lady Bowles, made about available support for SMEs, as I said, we continue to engage directly with businesses around the NSI Act. I have done a number of consultation meetings, and I know that officials have done a lot as well. The first tranche of detailed guidance has already been published to assist businesses, investors and advisers in understanding the Act to comply with its requirements. We have established an expert panel, which I have met with on a couple of occasions, as well as officials, which includes business representative organisations, higher education bodies, investment associations and law societies, all of which will have an interest in having these provisions correctly interpreted. They are giving us constant and detailed feedback on the draft guidance and ensuring that the guidance is fit for purpose.
Our second tranche of guidance will be published ahead of regime commencement—as I mentioned, the regime will commence on 4 January—to continue to aid the interaction of parties with the new investment security unit and to ensure compliance, including on how to submit a notification form and guidance around notifiable acquisitions. We are also holding a communications campaign, which will focus on delivering teach-ins and guidance to a wide cross-section of businesses and organisations to build understanding of the Act in the United Kingdom and internationally. The Government have conducted targeted and extensive engagement with organisations which are most likely to be affected by the Act, including companies that invest or acquire entities in the 17 mandatory sectors.
Tailored explanatory materials have been sent to around 100 industry bodies and mandated areas of the economy, 70 major law and financial services firms, 36 international investors and 550,000 businesses via Companies House. We have taken great care to reach small and medium enterprises through associations such as the Federation of Small Businesses, British Chambers of Commerce and the CBI, which, taken together, have networks of something like 580,000 businesses.
I hope that I have been able to provide sufficient clarification and assurance to both noble Lords who spoke on this, and I commend the draft regulations to the Committee.