Grand Committee

Monday 2nd December 2024 Grand Committee

Monday 2 December 2024

Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2024

Monday 2nd December 2024 Grand Committee

Considered in Grand Committee

15:49

Moved by

[Lord Hunt of Kings Heath]

That the Grand Committee do consider the Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2024.

[The Minister of State, Department for Energy Security and Net Zero (Lord Hunt of Kings Heath) (Lab)]

My Lords, the draft order was laid before Parliament on 22 October. The UK Emissions Trading Scheme, the UK ETS, was established under the Climate Change Act 2008 by the Greenhouse Gas Emissions Trading Scheme Order 2020, otherwise known as the 2020 order, as a UK-wide greenhouse gas emissions trading scheme contributing to the UK’s emissions reduction targets and net-zero goal. The scheme is run by the UK ETS authority, a joint body comprising the UK Government and the devolved Governments. Our aim is to be predictable and responsible guardians of the scheme and its markets.

We have brought forward this SI to enable several important changes and improvements to the scheme. It resets the UK ETS cap to be in line with the top of the net-zero consistent range. The cap sets a limit on how many allowances can be created over the trading period, which runs from 2021 to 2030, and in each year. That level reduces over time to drive down total emissions. When this scheme was established, the cap for the legislated period of the UK ETS, from 2021 to 2030, was set at 5% below the UK’s expected notional share of the EU ETS cap for the same period. However, this was not consistent with the UK’s net-zero trajectory for the traded sector. This instrument brings the overall UK ETS cap in line with our net-zero target and carbon budgets under the Climate Change Act.

This statutory instrument also reduces the industry cap, which is the total number of allowances which can be made available to existing installations for free, if no cross-sectoral correction factor mitigation is applied. This SI reduces the absolute level of the industry cap while increasing its proportion of the overall cap. While the share of allowances set aside for this purpose will increase from 37% to 40%, the reduction in the overall UK ETS cap means that the industry cap will fall. That will help to mitigate the risk of carbon leakage across participating sectors while maintaining an effective incentive to decarbonise.

The statutory instrument creates a flexible reserve of allowances for maintaining market stability and sufficient carbon leakage mitigation. In addition to allowances specifically created for this reserve, unallocated free allowances from the industry cap and designated free allowances that are returned by operators due to changes in participant eligibility or activity level reductions will also stock the flexible reserve. The flexible reserve can be used to increase allowance supply for market stability purposes, if the cost containment mechanism is triggered. The flexible reserve can also mitigate application of the CSCF through a uniform reduction to all eligible existing participants’ free allocation if the eligibility for free allocation exceeds the industry cap.

Under current legislation, carbon dioxide released through flaring in the upstream oil and gas sector is included in the UK ETS, as it is within the scope of the regulated activity of combustion. This SI introduces CO₂ released through venting in the upstream oil and gas sector into the scope of the UK ETS for installations already covered by the scheme. That means that such emissions will also be subject to a carbon price.

The controlled processes of venting and flaring can sometimes be essential for safety purposes. They are also used in more routine situations where the oil and gas hydrocarbons are unable to be used, exported or reinjected without the CO₂ being removed. The removed CO₂ can then be released in the process of flaring, when waste gas—including the stripped-out CO₂, as well as combustible elements—is ignited, or venting, where unignited gas is released through a vent. The legislation will remove a perverse incentive whereby operators could routinely vent gas that contains carbon dioxide without it being subject to a carbon price, even though it would, if flared, constitute reportable emissions for the purpose of the scheme.

In line with the original policy intent, the instrument extends legislative amendments made by the Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2023 to Northern Ireland. The amendments include capping aviation free allocation at 100% of emissions, clarifying the treatment of carbon capture and storage plants, and amendments to free allocation rules for electricity generation.

In 2022, a memorandum of understanding between the UK Government and the Swiss Government was signed, setting out the intention to include flights from the UK to Switzerland in the UK ETS. Flights from Great Britain to Switzerland were brought into the scope of the UK ETS on 1 January 2023 by the Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 3) Order 2022. The statutory instrument before us extends the scope to cover flights that depart from an aerodrome in Northern Ireland and arrive at an aerodrome in Switzerland.

On enforcement and penalties, scheme regulators are responsible for enforcing compliance, including operational functions such as issuing penalties. The statutory instrument makes a number of amendments to the levels of scheme penalties to ensure consistency and proportionality of enforcement for all operators. It also introduces a new deficit notice, with an associated penalty, to strengthen enforcement of the fundamental scheme obligation to surrender allowances equal to an operator’s annual emissions.

Finally, this instrument makes several corrections and clarifications to existing legislation. The changes follow appropriate and comprehensive consultation with stakeholders. In the Developing the UK Emissions Trading Scheme (UK ETS) consultation in 2022, the UK ETS Authority considered proposals on changes to the rules for sectors covered by the UK ETS to ensure that more greenhouse gas emissions were covered by the scheme, along with changes to the cap.

The authority’s response to this consultation was published in two parts: in August 2023 and July 2023. A majority of respondents agreed with the UK ETS Authority’s proposals on creating a flexible share reserve of allowances; on bringing venting in the upstream oil and gas sector into the scope of the ETS; and on the addition of a new penalty and deficit notice. Several respondents expressed concern regarding the reduction of the cap and the changes to the industry cap.

An assessment of these responses informed the decision to set the cap at the top of the net-zero consistent range. Between 23 February 2024 and 8 March 2024, the UK ETS Authority ran a targeted consultation on the minor penalty amendments. The responses to this consultation were in broad agreement with the proposals or noted that they were not affected by them. The authority’s response to this targeted consultation has been published in advance of the laying of this statutory instrument.

In conclusion, the changes in the draft order will deliver on commitments made by the UK ETS Authority and improve the operation of the scheme. The alterations to the UK Emissions Trading Scheme will support its role as a key pillar of the UK’s climate policy. They show that we will take action to extend and improve the scheme where necessary. I beg to move.

[Baroness McIntosh of Pickering (Con)]

My Lords, I thank the Minister for setting out the contents of the instrument so concisely but comprehensively. I support it but have a number of questions. Obviously, the issue of flaring would arise if the Government were to introduce a policy of fracking—hydraulic fracturing. Can the Minister confirm that the Government have a moratorium on fracking? It was a very real issue in North Yorkshire when I was still a Member of Parliament there; it caused real concern among the locals. It would be interesting to know the answer because flaring would be an issue there.

Secondly, I see that an impact assessment has not been prepared on this occasion because it is not a regulatory provision, but in fact one was done already in 2023, and before that in 2020. Can the Minister confirm that the costs in light of the change to the cap will not be deemed wildly different from the results of those impact assessments in 2020 and 2023, which I understand were different in nature in each case?

It is interesting that the Minister, the instrument and the Explanatory Memorandum refer to the amendment to include flights from Great Britain to Switzerland within the scope. Why was this excluded in the first instance? Were there no flights from that airport? Have they suddenly increased in capacity? Out of interest, which flights are included? In the normal scheme of things, would all major airports and flights to the European Union and Switzerland be included? I imagine they would be, but it would be helpful if the Minister could confirm that.

16:00

There is a lot of talk about methane escaping, and the farmers come under the cosh because of livestock production. But I imagine that most of the methane escaping in the form of emissions comes from landfill. To what extent does the order before us cover aspects of landfill? How do the Government propose to reduce methane escaping from landfill or to capture it and use it as a resource?

Decarbonisation is covered in the order. Can the Minister confirm that the Government are not looking to include offsetting as part of emissions trading and the decarbonisation process in a way that could be very harmful for farming? I am thinking in particular of the building of solar panels. I know we have discussed that, but the debate will not stop; this is only the start of the debate. I would extend it so that, for productive farmland of grades 1 and 2, it should not be tolerated to have solar panels on such land, and neither should there be the planting of trees in inappropriate places. This is happening now.

We raised with the outgoing Minister in the Conservative Administration the issue of bid money being spent through capital investment from finance houses, and potentially oil companies, to offset their carbon. Technically this is decarbonisation, but, particularly in the north of England, it is having profoundly worrying impacts on land use and land production.

I am keen to see the order pass, but answers to these questions would help with my greater understanding of the background.

[Earl Russell (LD)]

My Lords, in the main, I support the changes that this statutory instrument enables to the previous scheme. It resets the UK ETS cap to be in line with the top of the net-zero consistent range. The cap is the limit on how many allowances can be created over the trading period, which runs from 2021 to 2030, and in each year. The cap is set to reduce over time to drive down total emissions. When the scheme was established in 2020, the cap was set at 5% of the UK’s expected notional share of the EU ETS cap. The statutory instrument now brings the overall ETS cap in line with our net-zero target and carbon budgets under the Climate Change Act.

I was a little confused on one point. Why has the previous scheme come to be so out of line with the UK net-zero trajectory for the traded sector? Was it really a question of our leaving the EU and its schemes and setting our own national standards, or is there something else going on? An explanation on that would be appreciated.

The SI reduces the industry cap, which is the total number of allowances that can be made available to existing installations for free. The SI reduces the absolute level of the industry cap while increasing its proportion of the overall cap. The share of allowances set aside for the purpose increases from 37% to 40% but the reduction in the overall UK ETS cap means that the industry cap will fall. It is argued that this will help to mitigate the risk of carbon leakage across participating sectors, while maintaining an effective incentive to decarbonise.

We welcome that this SI expands the scope of the ETS to the venting of CO₂ in the upstream oil and gas sector for installations already covered by the scheme. This means that such emissions will also be subject to a carbon price. The SI removes what is described as a perverse incentive whereby operators could routinely vent gases that contain carbon dioxide without being subject to a carbon price, even though they would, if flared, constitute reportable emissions for the purposes of the scheme. It also extends the scope to cover flights departing from aerodromes in Northern Ireland to arrive at one in Switzerland. My understanding is that this change reflects the return of the Northern Ireland Assembly and its ability to consider legislation.

The SI makes a number of amendments to the levels of the scheme penalties to ensure consistency and proportionality in enforcement for all operators and introduces a new deficit notice. It makes several corrections and clarifications to existing legislation following consultations in August 2022 and July 2023, mainly on small penalty amendments. It also reflects a reduction in the cap on allowances and strengthens enforcement and penalties for non-compliance, including by introducing a deficit notice. It accounts for a reverse price for stability during excessive market volatility.

What actions are the Government taking to improve the monitoring of venting and flaring? Do they hope to bring forward plans to move that forward or are they sticking with the date previously announced? What estimates do they have of the associated costs of upstream venting and flaring that this SI might impose? While we welcome that the proposed changes will bring in a cap consistent with net zero, we call on the Government to do more to support a just transition, particularly for the North Sea oil and gas sector, to ensure that companies have adequate resources and help, particularly training, for their staff to transition to other industries.

What other industries and sectors are the Government considering bringing under the ETS and what are their plans to do so? Are there any plans for further convergence with the EU ETS on carbon leakage? Do the Government feel this could help stop further carbon leakage? Finally, I note that there was no impact assessment for this SI, though I understand that the Government conducted a number of consultations. Can the Minister say why?

[Lord Offord of Garvel (Con)]

My Lords, I support this instrument. This order will expand the scope of the UK Emissions Trading Scheme to include carbon dioxide venting in the upstream oil and gas sector. It will introduce deficit notices to allow regulators to penalise operators for failing to surrender allowances by a set date and makes technical changes to penalties. There is no doubt that climate change is an issue that any Government need to take steps to tackle. That is why the Conservative Government introduced the UK ETS, to ensure that businesses monitored, reported on and surrendered allowances in respect of their greenhouse gas emissions. We are glad that the Government recognise the benefits of the scheme and are taking steps to continue to use it.

However, this Government have prioritised their climate policy above financial and economic concerns. While we understand that there must be trade-offs to reach our net-zero targets, I caution them on raising taxes consistently on the North Sea oil industry—they are now running at 78%. This could put significant costs on companies already navigating a complicated regulatory environment. We must remember that net zero by 2050 does not mean zero hydrocarbons. We will still have about 25%. However, as this ETS will provide support by removing venting and flaring, we can have clean hydrocarbons. We must also consider the impact of the hydrocarbon companies in investing in renewables and the people required in the transition to net zero.

With that being said, I will ask the Minister one question that was left largely unanswered in the other place, to do with the impact of the carbon price rise to £147, as highlighted by NESO. What will the impact be on employment, industry and households, and will there be an impact assessment on those key areas?

[Lord Hunt of Kings Heath (Lab)]

My Lords, I thank noble Lords for their general support for the order, which is much appreciated. I will seek to respond to the points raised but will follow up if I am unable to answer everything.

Clearly, the emissions trading scheme is a key pillar of our climate and net-zero policy regime. It sets a cap on emissions in the sectors covered—currently around a quarter of the UK’s emissions. In doing so, it guarantees that the sectors will reduce their emissions in line with our net-zero target. We see maintaining a strong UK ETS playing a key role in making Britain a clean energy superpower, delivering our mission of secure and clean electricity by 2030, and having a positive impact on bills.

I very much take the point about the impact on industry. In relation to the North Sea, in particular, I understand that noble Lords are concerned to make sure that the transition is as effective as possible—something that we are very much committed to doing.

On the point of the noble Earl, Lord Russell, regarding ETS expansion, we see the scheme continuing to remain a key driver of decarbonisation. Our intention is to expand it further. We have recently consulted on proposals to expand the scheme to energy from waste incineration. We are also currently consulting on expansion to maritime operators and on a regulatory framework for integrating non-pipeline transport for carbon capture, usage and storage. We are exploring options to build the UK ETS into the world’s first integrated market for carbon emissions and carbon removal; subject to consultation, our intention is to include engineered greenhouse gas removals. We see that as supporting the new technologies we will need to meet net zero while providing a sustainable path for industry to decarbonise and to encourage that process.

To refer to the impact assessment and the question from the noble Baroness, Lady McIntosh, I think I can reassure her on fracking. We have no intention to permit fracking. As for the impact assessment, it was published alongside the decisions in the response to the report on developing the UK ETS authority. We stand by that assessment as the best assessment of the implications of our policy changes, and therefore we do not think it necessary to do any further work in that area.

The noble Earl, Lord Russell, was right that, in the absence of the Northern Ireland Assembly, it was not possible to make changes to the UK ETS order that extended to Northern Ireland using an affirmative procedure. It is a very good thing that we have made progress in Northern Ireland and are now able to make that provision.

I should say too that the UK ETS authority agreed that the UK Government should amend the UK ETS auctioning regulations to give partial effect to the agreed policy of reducing the cap, and that the authority would pursue a legislative programme in line with the decisions and intentions made in the main UK ETS authority response, including for the cap, set out in the response for 2026 and beyond. As stated there, the authority is now taking the necessary steps to finalise that legislation, and the IA is being relayed alongside that legislation to support parliamentary scrutiny.

16:15

On the detail of the flights from Northern Ireland to Switzerland, this instrument extends the scope of the UK ETS to cover flights departing from an aerodrome in Northern Ireland and arriving at an aerodrome in Switzerland.

The expansion of the UK Emissions Trading Scheme’s scope to include methane from the upstream oil and gas sector is also being considered by the UK ETS Authority. We see this as a further incentive to reduce methane emissions from upstream oil and gas production by levying a carbon price on such emissions. In July 2023, the UK ETS Authority shared publicly in the government response to the developing the UK ETS consultation that this is under active consideration.

I say to the noble Earl, Lord Russell, that when the scheme was established, the cap for the legislated period of the UK ETS—2021 to 2030—was set at 5% below the UK’s expected notional share of the EU ETS cap for the same period. However, this was not consistent with the UK’s net-zero trajectory for the traded sector, so this instrument brings the overall UK ETS cap in line with our net-zero target and carbon budgets under the Climate Change Act. I know that he would not want to hold me responsible for what happened under a previous Government. Given the new commitment we have made to 2035, we will have to see how this relates to the scheme and, obviously, make changes if necessary.

The noble Baroness, Lady McIntosh, raised an important issue around waste. The UK ETS Authority has previously announced its intention to expand the scope of the UK ETS to waste incineration and energy from waste from 2026. This includes a two-year monitoring, reporting and verification transitional period from 1 January 2026 to 31 December 2027.

On the monitoring of flaring and venting, the legislation provides for a measurement-based approach for larger installations which will be able to keep track of vented CO₂ emissions as and when they occur. For smaller installations, it provides for a calculation-based approach which enables operators to use samples to calculate the amount of CO₂ being removed from the extracted oil and gas at different parts of the process; these can then be analysed on at least a weekly basis.

We estimate the associated costs for upstream oil and gas, because of the scale of emissions at 0.4 MTCO₂, to be minimal. We do not think it will place any organisation in financial difficulty. We have collaborated with the North Sea Transition Authority, which holds information about the financial status of oil and gas companies. My understanding is that all parties are satisfied that this policy will not have an impact on domestic supply.

On carbon leakage, a higher industry cap proportion will ensure flexibility over future decisions on the distribution of free allowances in the second phase of the free allocation review.

On alignment with the EU ETS, the UK recognises the importance of international co-operation on carbon pricing. As we transition to net zero, it is clearly important that we work across international borders to drive climate ambition, maintain competitiveness and minimise the risk of carbon leakage. Under the terms of the trade and co-operation agreement, the UK Government and the EU agreed to consider linking our respective carbon pricing schemes and to co-operate on carbon pricing. Noble Lords will know that, on his recent visit to Brussels, the Prime Minister made a joint statement with President von der Leyen. We will take this strength and co-operation forward; I am sure that this measure could be part of that. As market convenors, we do not comment on carbon prices.

I hope that I have responded to most of the points raised; I will follow up with noble Lords if I have not done so. I am grateful for their support.

Motion agreed.

Contracts for Difference (Miscellaneous Amendments) Regulations 2024

Monday 2nd December 2024 Grand Committee

Considered in Grand Committee

16:20

Moved by

[Lord Hunt of Kings Heath]

That the Grand Committee do consider the Contracts for Difference (Miscellaneous Amendments) Regulations 2024.

[The Minister of State, Department for Energy Security and Net Zero (Lord Hunt of Kings Heath) (Lab)]

My Lords, these regulations were laid before the House on 28 October. They form an important part of the Government’s commitment to accelerate the deployment of the low-carbon electricity technologies that are critical to achieving the Government’s clean energy mission.

The contracts for difference scheme is the Government’s main mechanism for supporting new low-carbon electricity generating projects in Great Britain. Contracts for difference are awarded through annual, competitive auctions where the lowest-priced bids are successful. The sixth allocation round, which ran earlier this year, was the largest round ever and more than double last year’s round held by the previous Government. It awarded contracts to 128 clean energy projects across Great Britain, capturing 9.6 gigawatts of renewable capacity and generating enough electricity to power the equivalent of 11 million homes.

We must, though, ensure its continued success and evolve the contracts for difference scheme to drive progress towards 2030. So, building on auction round 6, we want to update the scheme through this instrument to continue our march towards a low-carbon power system. We propose, first, to extend the option of phased contracts for difference to floating offshore wind projects and, secondly, to enable the eligibility of repowered onshore wind projects to apply for a contract for difference.

On the first point, the Government have committed to radically increasing the UK’s offshore wind capacity, including floating offshore wind. As an emerging technology with less than 250 megawatts of capacity deployed worldwide, the floating offshore wind construction process is yet to be industrialised. Floating wind projects are likely to have a slower buildout rate than established fixed-bottom offshore wind, for reasons including limitations on suitable port capacity and increased sensitivity to adverse weather.

Phasing in the contract for difference allows projects to be built in multiple stages. It was designed to provide support for early fixed-base offshore wind projects by mitigating the specific commercial risks inherent in offshore project construction. Extending this policy to floating offshore wind projects will allow for greater flexibility in the construction phase, allowing delivery to more realistic timelines and providing more certainty and confidence to the wider supply chain. This reduction in project risk will, in turn, increase investor confidence in the UK’s growing floating offshore wind sector.

On the second amendment—to enable repowering for onshore wind—our analysis suggests that approximately 1 gigawatt of onshore wind will come to the end of its operating life between 2027 and the end of 2030. Repowering can help ensure that renewable generation capacity is not lost from older projects. It also provides an opportunity to increase the renewable generating capacity of existing sites through improvements in technology and more efficient use of the site. Enabling access to the contract for difference for repowered onshore wind projects offers them revenue certainty, encouraging retention and expansion of existing capacity. This supports our ambition to achieve clean power by 2030 and make Great Britain a leading place for onshore wind investment.

We have ensured a balance between decarbonisation, consumer value for money and security of supply objectives by enabling repowering only for projects which align to the fundamental contract for difference case for intervention, including high upfront capital costs, and which have reached the end of their operating life. At this point, this applies only to onshore wind. These principles will help enable us to protect the consumer, ensuring we intervene only when and where needed and where it is cost-effective to do so.

The consultation for these policy interventions sought views and supporting evidence on specific changes proposed for allocation round 7. We received a range of responses from across industry, including developers, electricity traders and suppliers, businesses operating in the offshore wind sector, and consumer and environmental groups with an interest in the electricity sector. Most respondents agreed with implementing phasing for floating offshore wind and repowering for onshore wind. Respondents also provided input on how the department should implement these policies. The department continues to engage closely with industry in the development of contracts for difference.

The instrument facilitates the evolution of the contracts for difference scheme by amending two statutory instruments made under the Energy Act 2013. It amends the Contracts for Difference (Allocation) Regulations 2014 and the Contracts for Difference (Definition of Eligible Generator) Regulations 2014. The amendments will have two effects. First, they will expand the existing phasing policy to floating offshore wind projects. The allocation regulations will be amended to allow floating offshore wind contracts for difference units to be constructed in accordance with phasing rules. The second effect is to permit repowered projects to apply for a contract for difference. The contracts for difference scheme did not previously have a formal policy in relation to repowering applications. The amendments ensure that certain generators who repower eligible generating stations can be eligible for the contract for difference. They also remove barriers which would prevent repowering applications being made.

To conclude, we think this is an important step forward in delivering clean power. It builds on the existing success of the contracts for difference scheme, which is evolving to better reflect global market realities and drive progress towards clean power targets. I beg to move.

[Earl Russell (LD)]

My Lords, I rise to speak very briefly to this one. We are happy to support the amendment.

I have a couple of questions for the Minister. First, what measures are the Government taking to ensure that consumers continue to get value for money from these contracts? Secondly, is the Minister certain that the repowering process is treading the right path between getting value for money for the Government with these contracts, while not impeding further development of onshore wind energy?

[Lord Offord of Garvel (Con)]

My Lords, I rise to support His Majesty’s Government’s draft Contracts for Difference (Miscellaneous Amendments) Regulations 2024. These regulations will enable further construction of wind sites and will increase investment in the wind sector by increasing the options for using contracts for difference. The regulations will extend the option to phase projects under the contracts for difference to floating offshore wind and for repowering onshore wind farms, as well as allowing onshore wind projects to apply for contracts for difference.

We on these Benches recognise the importance of using CfDs in the renewable sector to allow for increased investment in projects that have high upfront costs but long lifetimes and low running costs. Investment must be at the core of our green energy plans to ensure their financial viability. As it stands, CfDs are the main scheme for supporting new low carbon electricity generation projects across the UK, and these measures will derisk the construction process for offshore wind and to repower onshore wind.

The Government introduced the CfD scheme in 2014 to support the UK’s journey to net zero and, by 2022, projects managed under contracts for difference generated the energy to power 7 million homes and mitigated over 5 million CO₂ emissions. Therefore, we welcome this Government’s continued use of these important and helpful schemes. We support the increased use of contracts for difference and, as such, support these regulations to increase the use of wind power to reach net zero targets while maintaining the importance of investment in the sector.

16:30

[Lord Hunt of Kings Heath (Lab)]

I thank noble Lords for their support, which is encouraging. I readily acknowledge that we are building on the work that the last Government undertook, and I think we are entitled to say that this has been very successful. It is very good to build on it.

I say to the noble Earl, Lord Russell, that obtaining value for money is clearly an important issue. The clearing price for ONW was £50.90 per megawatt hour, meaning that it was our second-cheapest technology after solar. We think that the repowering policy will likely increase the amount of ONW bidding into the contracts for difference. This will increase competitive tensions further—unlike the resulting lower bid prices, which should lead to consumer savings. Generally, as I said, upwards of 1 gigawatt of onshore wind is clearly due to reach the end of its operating life at the end of government support by the end of 2030. It makes sense that we try to ensure that this is extended.

To hark back to the nuclear question, we are obviously awaiting EDF’s formal announcement about an extension of life, potentially, for some of the existing nuclear power stations. I take this as a whole and, where it is right to do so, some support for extending the life of some of these operations is worth while.

Motion agreed.

Financial Services and Markets Act 2023 (Addition of Relevant Enactments) Regulations 2024

Monday 2nd December 2024 Grand Committee

Considered in Grand Committee

16:33

Moved by

[Lord Livermore]

That the Grand Committee do consider the Financial Services and Markets Act 2023 (Addition of Relevant Enactments) Regulations 2024.

[The Financial Secretary to the Treasury (Lord Livermore) (Lab)]

My Lords, these regulations will add four pieces of legislation, known as “enactments”, to the list set out in Section 17(3) of the Financial Services and Markets Act 2023, so that those enactments can be temporarily modified as part of the financial market infrastructure sandboxes.

A financial market infrastructure sandbox is designed to provide a regulatory environment in which existing legislation and regulation are temporarily removed or modified. Firms that participate in a financial market infrastructure sandbox are able to test new and developing technologies and practices that would otherwise be inhibited by existing legislation. If an activity in a financial market infrastructure sandbox is successful, the Treasury can make permanent changes to legislation—only after laying a report before Parliament.

The Treasury was granted the power to make provision for financial market infrastructure sandboxes by Section 13 of the Financial Services and Markets Act 2023, and the list of enactments that the Treasury can temporarily modify is set out in Section 17(3). The Treasury also has the power to add further enactments to this list, set out in Section 17(6) of the Financial Services and Markets Act 2023. This is because the testing of new technology and practices, by its nature, evolves over time, and the list of legislation in scope would likely need to be added to. The ability to add further enactments to the list is therefore a way of ensuring that the financial market infrastructure sandbox regime can be used to its full potential, ensuring that the testing of new technologies and practices can continue to take place as new legislative changes are identified.

This statutory instrument exercises the power set out in Section 17(6) of the Financial Services and Markets Act 2023 so that new enactments can be added to support two financial market infrastructure sandboxes; namely, the existing digital securities sandbox and the future private intermittent securities and capital exchange system—known as PISCES—sandbox. The digital securities sandbox will enable firms to test new and innovative technology across financial market infrastructure activities, while the PISCES sandbox will allow private companies to have their shares traded on an intermittent basis on a new type of stock market.

This statutory instrument will bring the following legislation into the scope of the power to make temporary modifications in future financial market infrastructure sandboxes: the Stock Transfer (Gilt Edged Securities) (CGO Service) Regulations 1985, which I will refer to as STRs; the Government Stock Regulations 2004, which I will refer to as GSRs; the Money Laundering Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, which I will refer to as MLRs; and Regulation (EU) 2017/1129 of the European Parliament and of the Council, also known as the prospectus regulation, which we inherited from the EU.

Temporarily modifying the STRs and GSRs will enable us to support a digital gilt issuance through the digital securities sandbox. The MLRs will be modified to facilitate an exemption from the MLRs crypto asset regime for digital securities sandbox participants; this is on the basis that digital securities sandbox activity will involve regulated securities and conventional anti-money laundering legislation will be applied. The new UK prospectus regulation will be modified as part of the PISCES sandbox so that prospectus requirements can be disapplied in favour of bespoke disclosure requirements in the PISCES sandbox.

I should note at this point that this statutory instrument does not make any temporary changes to the enactments themselves. Under the procedure stipulated by Financial Services and Markets Act 2023, this will be done as part of further negative SIs to be laid before Parliament, which will provide all the relevant explanatory information for the changes being made to each enactment. For example, the Government published a draft of the instrument that will set up the PISCES sandbox in November for public comment. Similarly, the digital securities sandbox has already been established by a statutory instrument laid last December, although changes to the MLRs will require a further statutory instrument.

In closing, this statutory instrument will make changes consistent with the powers established by the Financial Services and Markets Act 2023 and will support the continued development of the digital securities sandbox and future financial market infrastructure sandboxes, such as the PISCES sandbox. The Government believe that this will help support innovation through each of these financial market infrastructure sandboxes. I hope that noble Lords will  feel able to support these  regulations and their objectives. I beg to move.

[Baroness Kramer (LD)]

My Lords, the more times I read this statutory instrument—even after writing myself a cheat sheet on its alphabet soup of acronyms—the more I realise that I lack the expertise in the digital financial services and crypto space to really understand what is happening, the context and the implications. However, I have always supported the sandbox approach as a creative way for the regulator to understand innovations in financial services and how to appropriately regulate them.

This is a high-level SI that will, as the Minister said, be followed by detailed—although negative—SIs to address specific cases. I am a bit concerned that we will need to spot these cases in order to question them, but I have no intention of opposing the regulations before us today. PISCES is a slightly different issue but, frankly, without seeing the new prospectus regime, I have absolutely no idea how to comment on the changes contained in this SI.

I do, as always, have a few questions. First, I want to understand how this SI and what lies behind it ties in with the competition and growth objective. Are the Government taking the view that future growth in financial services is largely linked to digital business models, including blockchain infrastructure and crypto assets, and that shaping the FCA to be a benign regulator will make the UK a leading player in designing, holding, trading and marketing new instruments? Or are the Government concerned that digital and crypto create a new potential for market manipulation, mis-selling and money laundering, such that the FCA needs to find ways to counter, with different approaches to monitoring supervision enforcement? In other words, are the Government playing offence or defence? I would like to hear the Minister’s view.

Secondly, and related to that, with this instrument and the related activities, are we ahead of the curve, with the curve or behind the curve compared with other international regulators? I am afraid I do not have the global reach to understand, and it would be helpful if the Minister could tell us.

My lack of knowledge in this area led me to contact a friend in the industry to seek advice, and I was stunned by the response. In summary, I was told that the innovators who bring new and innovative models to the regulator’s sandbox are the smartest people in the room, but the regulator views the sandbox as a means to decide on monitoring procedures, compliance algorithms and approaches to enforcement. The innovators, by contrast, use the sandbox to identify the regulator’s points of weakness and then build them into their models to escape regulatory control. Innovators in the sandbox explore the regulatory perimeter, for example, to design products that will fall just outside; the mini-bonds are an example. They identify transaction sizes that will slip under the radar and coding approaches that will prevent multiple transactions that are essentially identical to be linked together and therefore escape both supervision and action. Those are just examples, but, increasingly, the industry seems to regard observing the intent of the regulator as purely voluntary. Does the Minister have any concerns that the regulator is outmanoeuvred, underpowered and underresourced?

I will end on my hobby-horse, which applies very much in these circumstances. Does the Minister recognise that, in this very fast-changing world, when so much is global and so much is digital, an effective whistleblowing system is absolutely vital, and our current system is a serious weakness?

[Lord Altrincham (Con)]

My Lords, it is a privilege to address the Committee on the Financial Services and Markets Act 2023 (Addition of Relevant Enactments) Regulations 2024. These regulations serve to bring various legislation under the remit of the financial market infrastructure—FMI—sandbox. The sandbox regime is an important part of the Financial Services and Markets Act, giving expression both to good prudential regulation and economic growth by supporting innovation.

As we heard, the regulations being transferred to the FMI sandbox are: the STRs, or stock transfer gilt-edged securities regulations 1985—the digital gilt area that is likely to be an enormous focus of the government team in the coming months; the GSRs, or Government Stock Regulations 2004; the MLRs, or Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017; and the UK prospectus regulation, Regulation (EU) 2017/1129 of the European Parliament and of the Council.

Since our departure from the European Union, the British Government have pursued an ambitious programme of reform to establish a regulatory framework that is better tailored to the strengths and opportunities in UK financial services. These regulations further enhance our ability to adapt and thrive in a competitive global financial environment. The instrument is more than a technical adjustment; it is a demonstration of our commitment to dynamic regulation in financial services and support for innovation. The instrument ensures that our laws continue to reflect the highest standards of probity and innovation while giving the financial services sector clarity and confidence.

As Conservatives, we believe in the power of free markets, tempered by fair rules and effective oversight. These regulations are a testament to that philosophy, and they ensure that the UK remains the jurisdiction of choice for global financial institutions and investors, which in turn helps the country secure tax revenues needed to fund public services. By updating and expanding the scope of the Act, we are aligning our regulations with emerging opportunities including advances in financial technology, green finance and digital assets—areas in which Britain has already established itself as a global pioneer.

The FMI sandbox scheme commenced under the previous Conservative Government and was a success, with the digital securities sandbox—the DSS—proving useful to business. Three of the pieces of legislation being brought into scope would facilitate activity in the first FMI sandbox, known as the DSS: the STRs, the GSRs and the MLRs. Bringing the GSRs and the STRs into the scope of the FMI sandbox powers under the Financial Services and Markets Act 2023 would facilitate the possibility of sovereign debt issuance, using distributed ledger technology, under the DSS.

16:45

Can the Minister respond to a couple of questions on timing and scope? Can he provide a timeline on the implementation of the private intermittent securities and capital exchange system—known as PISCES, as the Minister mentioned—sandbox, which, according to the Explanatory Memorandum,

“the government intends to establish in due course through secondary legislation using FSMA 2023 powers”?

Secondly, does the Minister expect that other sandboxes will be created? Can he outline to the Committee how these will be implemented and when?

These regulations will allow our financial services landscape, innovation and new technology to continue to be world leaders. We welcome the regulations, which build on the important work of the Financial Services and Markets Act 2023.

[Lord Livermore (Lab)]

My Lords, I am extremely grateful to the noble Baroness, Lady Kramer, and the noble Lord, Lord Altrincham, for their contributions and their support for this measure. The noble Baroness spoke about its complexity and the alphabet soup. I have huge sympathy for that perspective, I must say; as such, I will do my best to address the questions she asked. If I am unable to cover any of her questions, I will, of course, write to her.

The noble Baroness asked whether we are watering down regulation. I assure her that this instrument will not lead to the watering down of any regulation. All modifications in the DSS are intended to achieve the same regulatory outcomes while allowing for flexibility when new or developing technology or practices might meet the same outcomes in a different way.

The noble Baroness also asked about the changes to the prospectus regime for PISCES. I fully accept that she is unable, at this point, to comment on the detail. I can let her know that the Treasury intends to modify the prospectus regulation, which this SI is bringing into the scope of the FMI sandbox powers, and the Public Offers and Admissions to Trading Regulations 2023, which is already in scope of the powers, in order to ensure that placing shares on PISCES does not trigger a requirement to produce the prospectus.

The noble Lord, Lord Altrincham, asked about the timing of that. Further detail on how this will be done will be set out when the final SI is laid in May 2025; that will provide the legal framework for the PISCES sandbox. Similarly, the FCA intends to consult in due course on the processes for taking part in a sandbox and the rules that will apply to firms. Once the PISCES sandbox is established, it will be up to commercial firms to apply to the FCA to operate a PISCES platform.

The noble Baroness, Lady Kramer, asked about tokenisation. The use of tokenisation in digital assets has the potential to be genuinely transformative for financial markets. This could include improving existing processes by making markets more efficient, transparent and resilient. It is important, though, that markets are able to realise the benefits in a safe manner, preserving existing regulatory outcomes.

The noble Baroness asked about money laundering. Potential applicants to the digital securities sandbox will need to submit an application to, and be assessed by, the regulators. Even after activity in the sandbox is exempted from the crypto asset regime and the money laundering regulations, activity in the DSS will continue to be subject to the existing anti-money laundering regime for non-crypto markets. The DSS excludes unbacked crypto assets and is focused on regulated activities. The Government will lay in the new year a negative SI that puts in place the changes to the MLRs, and will provide further information and a de minimis impact assessment as part of that.

The noble Baroness also asked whether I consider the regulator outmanoeuvred and underpowered. As I think she would expect me to say, no, I do not accept or believe that.

Finally, the noble Lord, Lord Altrincham, asked whether the Government will bring more legislation into the scope of these powers. At the time these powers were granted to the Treasury under the Financial Services and Markets Act 2023, it was envisaged that additional legislation would likely be required to be brought into the scope of Section 17(3). This is because the testing of new technology and practices is uncertain, meaning that new issues that necessitate new legislation being brought into scope may be identified. Future FMI sandboxes may also have a different focus, again requiring changes to legislation not previously considered.

I hope that I have addressed all the points made. If not, as I said, I will write to noble Lords.

Motion agreed.

Road Transport (International Passenger Services) (Amendment) Regulations 2024

Monday 2nd December 2024 Grand Committee

Considered in Grand Committee

16:51

Moved by

[Lord Hendy of Richmond Hill]

That the Grand Committee do consider the Road Transport (International Passenger Services) (Amendment) Regulations 2024.

Relevant document: 7th Report from the Secondary Legislation Scrutiny Committee

[The Minister of State, Department for Transport (Lord Hendy of Richmond Hill) (Lab)]

My Lords, these draft regulations will amend existing domestic legislation to underpin the UK’s intended ratification of the regular and special regular protocol—I shall refer to it in future as the RSR protocol—to the Interbus agreement.

The Interbus agreement is a multilateral agreement that outlines the market access rules for bus and coach operators running occasional services, for example one-off holiday coach tours to, from, through and between its contracting parties. The UK became a contracting party to the Interbus agreement in 2021, having previously been a member when part of the European Union. In addition to the UK and the European Union, there are nine other Interbus contracting parties, including Ukraine, Moldova, Turkey and certain Balkan states.

The regular and special regular protocol—the RSR protocol—extends the Interbus agreement to cover both regular and special regular coach services. Regular services are timetabled routes while special regular services are timetabled routes for a specific category of people, for example school buses. I will refer to these types of journeys as RSR services. The RSR protocol was laid before Parliament as a Command Paper on 24 October this year. The International Agreements Committee welcomed the ratification of the protocol in its report of 20 November 2024.

These amending regulations are necessary to replace the temporary market access arrangements for RSR services between the UK and the European Union, which currently sit within the EU-UK Trade and Cooperation Agreement, or TCA. These will expire after 31 March 2025 as a consequence of the protocol having come into force for the EU, Moldova, and Bosnia and Herzegovina on 1 October 2024.

If this instrument is approved, the UK will be able to ratify the RSR protocol in early 2025 in order to bring it into effect for the UK from 1 April 2025. Without ratification, UK bus and coach operators would lose the right to run RSR services to the EU. They would also not be able to benefit from the right to run RSR services to other Interbus contracting parties that have ratified the protocol.

The instrument and our ratification of the RSR protocol will thereby allow UK coach and bus operators to continue to run RSR services to the EU without interruption. The key difference is that the treaty basis of these UK-EU arrangements will shift from the TCA to the RSR protocol. That requires consequential changes to UK legislation, which the instrument will implement. Ratification of the protocol will also enable UK operators to run RSR services to other non-EU Interbus countries that have also ratified the RSR protocol, the number of which is expected to grow over time.

The amendments will apply to legislation in both Great Britain and Northern Ireland to enable operators from all parts of the United Kingdom to continue running these coach and bus services internationally. The instrument includes amendments to the journey authorisation process for RSR services, as well as to offences to enable enforcement by the relevant authorities.

This instrument will revoke certain assimilated EU regulations from UK law, aligning entitlements of EU passenger service operators in the UK with those of UK operators in the EU. This instrument does not, however, affect the four additional rights secured under the TCA, including, most notably, rights that enable cross-border bus and coach services on the island of Ireland, which will continue.

The following provisions will remain even when the temporary TCA provisions expire. First, occasional services will still be permitted where they transit through one party to reach a non-contracting party to Interbus. An example of this is UK coaches that transit through the EU to reach Switzerland. Secondly, RSR services will still be permitted to start in one party and transit through the other party to reach a different part of the first party—in this case, Great Britain to Ireland to Northern Ireland.

Two important enduring provisions specifically relating to the island of Ireland will also remain. These will allow operators in one party to operate occasional services on the island of Ireland, picking up and setting down passengers on the territory of the other party. An example of this is a UK operator running a coach tour picking up and setting down passengers in either Northern Ireland or the Republic of Ireland. This instrument will also allow an operator from one party to undertake cabotage in the other party for RSR services running between Northern Ireland and the Republic of Ireland.

Approval of this instrument will enable the UK’s bus and coach operators to continue their international RSR journeys as they currently do, without a gap in market access provisions. Such a gap would be particularly sensitive on the island of Ireland. If approved, this legislation will ensure that the UK meets the required timescales outlined in the TCA, thus contributing to our positive and co-operative relationship with the European Union.

I turn to a summary of the instrument’s content. There are five key changes resulting from this instrument to note. First, it updates Great Britain and Northern Ireland law by including new references to the RSR protocol. These will replace references to the temporary RSR provisions in the TCA from 1 April 2025.

Secondly, the instrument updates existing references so that the other market access provisions of both the Interbus agreement and the TCA concerning international bus and coach services are retained. This will ensure that the range of additional access rights between the UK and EU will remain in effect. These include the right for occasional services to transit the EU to reach non-Interbus contracting parties, such as Switzerland, and, most notably, the special arrangements for cross-border services on the island of Ireland.

Thirdly, the instrument includes updates to transfer the treaty basis from the TCA to the RSR protocol for the authorisation process and documentation that operators must hold to run RSR services. This will allow current processes to continue once the RSR protocol comes into force.

Fourthly, the instrument updates existing offences and creates new ones to align them with the requirements of the market access arrangements of the RSR protocol. This will enable enforcement agencies in Great Britain and Northern Ireland to continue to take action against non-compliant international operators that breach these market access requirements when driving in the UK. Enforcement action includes the issuing of fixed penalty notices. In more serious cases, operators may be prosecuted and subject to fines if found guilty. The Driver and Vehicle Standards Agency has confirmed that it issued 32 on the spot fines to non-GB passenger service operators in 2023, including EU operators. These penalties will have been issued for enforceable offences, such as breaches of the drivers’ hours rules.

Finally, the instrument revokes assimilated EU Regulation (EC) 1073/2009 and assimilated Commission Regulation (EU) 361/2014 from UK law. These regulations governed the market access arrangements for international public transport services in the UK while the UK was part of the European Union. The practical effect of revoking these assimilated regulations is the removal of existing passenger transport cabotage rights for EU operators. This means that, from 1 April 2025, EU operators will no longer be able to use EU-registered vehicles to run coach services that both start and end in the United Kingdom. This will level the playing field for UK passenger transport operators, who are not able to undertake cabotage in the EU. It may also create opportunities for UK operators to provide such services domestically. However, the special provisions for the island of Ireland, including cabotage rights for passenger transport, provided under the TCA will not be impacted.

17:00

This instrument does not change any of the standards that our UK operators and drivers must meet when working on international routes. In particular, it has no bearing on the technical and safety vehicle standards that currently apply, nor on driver working time limits and qualifications required. The Interbus agreement requires contracting parties to apply the European agreement concerning the work of crews on vehicles engaged in international road transport—the AETR rules—or historical versions of EU legislation. Should any changes to these or other standards be proposed, they would first need to be considered by each Interbus contracting party and agreed unanimously. Only then, if agreed, would we seek to update domestic legislation.

On wider scrutiny, the Joint Committee on Statutory Instruments considered this instrument on 4 November and concluded that it did not need to be reported. The Secondary Legislation Scrutiny Committee raised no specific concerns about this instrument, although it noted it as an instrument of interest. The committee stated that, although this SI “maintains the status quo”, it makes two changes: first, the right to transit through the EU to reach non-EU countries that have ratified the protocol and, secondly, the removal of cabotage rights for EU operators within the UK.

In conclusion, if approved, the instrument will enable the UK to ratify the RSR protocol in early 2025. This will mean a seamless continuation of the UK’s international market access provisions for outbound and inbound passenger services after 31 March 2025, when the temporary TCA provisions expire. This is particularly important to ensure that cross-border coach services on the island of Ireland can continue. It will do this by putting in place the domestic legislative requirements needed to allow the treaty basis of these RSR market access arrangements to shift from the TCA to the RSR protocol when the temporary TCA provisions expire. Existing references to the Interbus agreement and TCA will also remain in place.

The instrument will revoke assimilated EU legislation, removing passenger transport cabotage rights for EU operators in the UK, which will level the playing field for UK operators. I hope noble Lords will join me in supporting these measures, and I beg to move.

[Baroness Randerson (LD)]

My Lords, I thank the Minister for his detailed introduction. There is a long background of negotiations on this legislation. The Explanatory Memorandum says that this SI

“will in effect maintain the status quo”—

that status quo was very hard fought in the days after the Brexit referendum. We have spent many hours in this Room debating the fallout from the detail of that situation.

Paragraph 5.4 of the Explanatory Memorandum says that the instrument will

“update the UK’s domestic … legislation by removing assimilated EU legislation”

on road passenger transport. Of course, UK bus and coach operators will continue to operate within the context of the framework of EU and international legislation generally. As the Minister said, there are three types of commercial bus and coach services: the occasional, the regular and the special regular services carrying specified categories of passengers, such as pupils.

It is good news that there is now a right for bus and coach operators to transport passengers through the EU to Moldova and Bosnia and Herzegovina. Are new signatories to the agreement likely to come on stream in future? This is a fairly limited market as it stands.

The key change in this SI relates to cabotage—the carrying of passengers in the UK by foreign-based operators. Paragraph 5.10 of the EM explains that international operators participating in the UK

“are currently permitted to undertake cabotage”

under assimilated EU law. This right is being removed. My second question is: how many services, roughly, are affected by this? How common is the operation of cabotage by EU operators? I assume that the answer is that it is not very common, because one thing that slightly surprised me was the fact that there was no consultation on this SI. I declare my interest as a member of the Secondary Legislation Scrutiny Committee. Is this an important new right, or is it a marginal benefit?

As always, it is in Northern Ireland that the really intractable questions arise, following the Brexit vote and its implications. I am pleased that Northern Ireland operators will be able to operate cabotage within the island of Ireland, and vice versa. That is the only logical thing to do. I recall that, a few years ago, when I was a member of the EU sub-committee, we took evidence from a bus operator—although not in relation to this specific issue, of course. The bus operator said that his scheduled service crossed the border 13 times from one end to the other. The proposal at the time, from some enthusiastic Brexiteers, was that Britain should flex its muscles post Brexit by changing our clocks in the spring and the autumn on a different day from the EU. Businesses in Northern Ireland, and indeed in the Republic of Ireland, were very exercised by the practical issues, and the bus operator pointed out how impossible his timetable would become if we operated in a different way with time zones.

This is possibly not an SI of the greatest significance, but it is nevertheless one to be welcomed because of the common-sense approach in relation to Northern Ireland and the fact that British operators will now be in the same commercial position as EU operators for cabotage.

[Lord Empey (UUP)]

My Lords, I have a question for the Minister about this generally positive instrument. It is about electronic travel authorisation. If a bus comes from Great Britain to the Republic and into Northern Ireland, electronic travel authorisation will be required, as I read it. Can the Minister confirm this? Many of us see this as a disincentive and an obstacle to tourism. People visiting Ireland from outside the EU and from outside Ireland need, as I read it, electronic travel authorisation to come into Northern Ireland—that is effectively a visa. Can the Minister confirm that? If he does not have the information available, he can write.

[Lord Moylan (Con)]

My Lords, I thank the Minister for arranging a helpful briefing with his officials this morning. This is, I imagine, one of those very rare occasions where I find myself more in sympathy with the proposal from the Minister than with the speech from the noble Baroness, Lady Randerson, who seemed determined to reopen all sorts of arguments about Brexit and who did what when.

This is, in my view, a sensible and necessary disentangling of our laws from the pernicious effect of EU legislation, so that we stand on our own feet with our own laws, making international agreements—such as the Interbus agreement—and adhering to, and adopting, in this case, its protocol relating to these coach services, which the Minister spelled out in considerable detail, with great clarity for such a complex subject.

The impact assessment for this instrument says that it has no impact and that that is the reason for not having any consultation. I welcome that; we should have more laws that have no impact. Most of the laws that set out to have an impact seem to have only perverse impacts and do not achieve what they are intended to at all. This one is deliberately intended to have no practical impact—with one exception that I will return to—because it seeks to maintain the existing situation but translate it into domestic law. As I say, this is not only desirable but necessary because the provisions of the TCA under which it operates will effectively expire at the end of March next year, as the other foreign parties join the Interbus agreement. So, on the whole, we welcome this instrument and are happy to support it.

On cabotage, it is of course possible—as the noble Baroness, Lady Randerson, said—that there is some diminution of immunity to British travellers as a result of that. The Minister has been asked a question, and I certainly do not know the answer to it, but he may. It is possible that certain services currently operating start in, say, Paris and go to Edinburgh, stopping along the route, collecting passengers and dropping them off. Those services will no longer be able to operate in that fashion—picking passengers up and dropping them off along the route—once these provisions come into effect, which in practice will be on 1 April next year. As I say, that could constitute a diminution in services.

However, it is interesting that the noble Baroness focused on that, because the counterpart to that is that British coach operators will not have those cabotage rights in the European Union. I would have thought and hoped that the Liberal Democrats would be more interested in promoting the interests of British coach operators travelling abroad than protecting the business model of foreign coach operators operating in the UK. However, that appears not to be the case: her focus is on the latter—she did not mention the others at all.

17:15

The other point I wanted to ask about relates to enforcement. The DVSA is charged with enforcing the provisions of this statutory instrument in operation. The Minister was good enough to give some information on the number of fines that have been issued. These on-the-spot fines are like fixed-penalty notices; they are accompanied by a fine that you can get back if you dispute the fixed-penalty notice—but they are, in effect, on-the-spot fines. If I heard him correctly, the number that the Minister gave was 32 fines in the last year, which seems potentially on the low side. He did not give the number of checks—that is, I did not hear him say how many checks were required to result in that number of 32. I am not demanding large numbers of stops on the road and coaches constantly being pulled over. I only ask that the Minister considers, especially given the new prohibition on cabotage, whether the enforcement resources dedicated to the implementation of this instrument are adequate. If he is confident that they are and can say that to the Committee, that would be helpful. Otherwise, we are happy in all respects to support this instrument as it goes forward.

[Lord Hendy of Richmond Hill (Lab)]

First, I thank noble Lords and the noble Baroness for their contributions. I will attempt to deal, either now or subsequently, with each of their points.

The noble Baroness, Lady Randerson, said that it was good news on the ability to travel to states beyond the European Union and asked whether there are more examples. The only information that I have is that Ukraine indicated in December 2023, at the last committee meeting of the Interbus contracting parties, that it was preparing to ratify the protocol. Of course, one hopes that the clarity these new regulations give will encourage other parties beyond the European Union’s geography to be interested.

The department has no information about the current level of EU operators using cabotage in the UK, which will cease, if these regulations are accepted, from 31 March 2025. I suspect that, in non-quantifiable terms, it does not occur very often but, as I know from my past life, this matter has been a subject of some concern for UK coach operators in terms of the imbalance of opportunity. I will come back to that.

The noble Baroness mentioned consultation. The Confederation of Passenger Transport, which is the bus and coach operators’ trade body in the UK, is aware of this matter and has no comments on it, which I think is satisfactory. Officials tell me that they will continue to be in touch with the CPT, as we call it, in order that they are fully abreast of what is going on. Of course, the noble Baroness is absolutely right that the principal effect is in Northern Ireland and the Republic of Ireland. I can well believe that there are occasional, regular or special regular services that cross the border numerous times, because of the border’s nature.

The noble Lord, Lord Empey, asked about electronic travel authorisation. I will write to him on that subject so that we are absolutely clear on whether it will still be required.

I was delighted to discover that the noble Lord, Lord Moylan, has some sympathy with me—long may that continue. He mentioned the impact assessment. He is right that the instrument will have little impact, but it is important that UK bus and coach operators have some certainty about their future. As I just pointed out, the forthcoming ban on performing cabotage in the UK being passed to EU operators is a matter that has exercised some of their minds. They will welcome this instrument; there is no doubt about that. There might be some dislocation to UK passengers as a consequence, but I say to UK operators that, if they welcome the correction of this imbalance, it will be up to them to make the effort to capture some of the traffic that might otherwise be lost.

Lastly, the noble Lord, Lord Moylan, referred to enforcement. I did not say how many checks the 32 on-the-spot fines applied to because I did not know at the time I read the speech. I will look at that further and ask officials to speak to the DVSA so that it and its vehicle inspectors can take an informed view about this change and look out for these operators. It is not hard to understand that there are some obvious places to do that. These operators will enter the country through ports, and I think that enforcement operations are thoughtfully devised so that inspectors catch the right people, at the right time, in the right way.

The approval of this statutory instrument will ensure that the UK’s bus and coach operators can continue running services internationally, as they currently do and, most importantly, without any disruption or interruption from 1 April 2025. It will enable the UK to fulfil its international obligations under the TCA by enabling the UK’s ratification of the RSR protocol, which will contribute to our co-operative and close relationship with the European Union. The statutory instrument is, of course, required now to ensure that we can ratify the RSR protocol in January 2025 to bring it into force so that it is ready after the temporary provisions of the TCA expire on 31 March 2025.

Motion agreed.

Proceeds of Crime Act 2002 (Search, Seizure and Detention of Property: Code of Practice) (Northern Ireland) Order 2024

Monday 2nd December 2024 Grand Committee

Considered in Grand Committee

17:22

Moved by

[Lord Hanson of Flint]

That the Grand Committee do consider the Proceeds of Crime Act 2002 (Search, Seizure and Detention of Property: Code of Practice) (Northern Ireland) Order 2024.

[The Minister of State, Home Office (Lord Hanson of Flint) (Lab)]

This debate relates to another statutory instrument that was debated in Committee on 11 November. I therefore will not go into too much detail on this instrument’s context but will briefly remind the Committee that it relates to the Economic Crime and Corporate Transparency Act 2023. This Act contained a wide range of reforms to reduce economic crime and increase transparency over corporate entities conducting business in the United Kingdom. This included reforms to enable targeted information sharing to tackle money laundering and remove reporting burdens on business. Additionally, the Act introduced new intelligence-gathering powers for law enforcement and reform of outdated criminal corporate liability laws.

The legislation also introduced reforms to keep pace with the use of emerging technologies to launder money and commit economic crime, including a new regime to tackle the use of criminal or terrorist crypto assets. The measure also introduced new search, seizure and detention powers when crypto assets are used illegally or for terrorist purposes. The legislation aims to remove criminal gains and disrupt the ability to use emerging technologies for illicit purposes.

I see a heavy Northern Ireland contingent here—it is like the old days, and I am very pleased to see colleagues here today. They will be particularly pleased to know that this debate relates to the order that came into force in Northern Ireland, as well as England and Wales. As of the end of October, across the United Kingdom as a whole the new powers have been exercised in over 90 cases.

I will not cover the content of the powers, as they were debated extensively by both Houses during the passage of the Bill, but will outline briefly the purpose of the instrument, which is to establish a code of practice. The code of practice being brought into operation by this statutory instrument is the search, seizure and detention of property code for Northern Ireland. Codes of practice determine and clarify the circumstances in which powers may be exercised to ensure that they are applied consistently and proportionately. This is vital, given the broad range of law enforcement agencies to which the powers can apply. The guidance on the exercise of the powers in the code in this order sets out clearly, I hope, the required powers to safeguard against improper use.

The search, seizure and detention code is made by the Home Secretary to guide the exercise of search and seizure powers in the context of criminal confiscation investigations for specified officers who operate in Northern Ireland. The order sets out the officers and the circumstances, and it gives strong guidance on reserved powers.

This draft instrument is required to complete the cycle that we started with the Economic Crime and Corporate Transparency Act 2023. It will ensure that all the necessary legislation is in place and that law enforcement can operate the powers proportionately and in accordance with the aim of the legislation. I expect and hope to get some questions from colleagues across the Committee, but I hope that that is a reasonably clear outline of the order and its purpose. I commend the statutory instrument to the Committee.

[Baroness Ritchie of Downpatrick (Lab)]

My Lords, I declare my registered interest as a member of your Lordships’ Secondary Legislation Scrutiny Committee, in which we considered this SI in some detail. I welcome my noble friend to the Front Bench. We well recall him serving as a Minister in Northern Ireland; in fact, I succeeded him in the Department for Social Development and I remember the handover meeting very well. The following day, he went off to be a Minister of State here.

I welcome this statutory instrument. It is important that we move to a normal society in Northern Ireland, that the proceeds of crime are adequately addressed and that people refrain from crime in Northern Ireland, where we have the association of crime with paramilitarism. They are two scourges in our society that must be eliminated.

I have certain questions for my noble friend. While this is a reserved matter, the code is to be published by the Department of Justice in Northern Ireland. When will it publish the code, and will it be by way of a statement in the Assembly? Maybe there has already been one. Is an assessment available of the success of the Proceeds of Crime Act 2002 in Northern Ireland? I realise that will require a detailed answer, so I would be content if my noble friend could provide one in writing. I note that there is no impact assessment; can he indicate why? Will the police resourcing of the implementation of the code come out of the Northern Ireland block grant? There is a little difficulty there in that policing resources in Northern Ireland, in both funding and people power, are gravely overstretched.

[Lord Empey (UUP)]

My Lords, there is obviously a conspiracy here: the people running the Football Governance Bill have obviously decided to keep us all occupied here so that we are not dealing with them. Perhaps we should go into the Chamber later and see if we can make a contribution.

There are two sides to this: the devolved issue and the national issue. I want to explore the interface between the two and ask whether, as the noble Baroness, Lady Ritchie, mentioned, there is a resource implication. In other words, are any additional resources required? With crypto assets and so on, we are dealing with very sophisticated people who have access to complicated software and things like that. Are we capable of dealing with that as quickly as we can?

17:30

Secondly, I want to establish that we do not leave a gap between the law that is applicable in Great Britain and the law that is applicable in Northern Ireland. We have enough of that as it is and, if there is any vacuum at all, criminal elements will take the opportunity to fill it. Are we satisfied that we are keeping pace?

Thirdly, what level of co-operation exists between us and, for instance, the European Union, the United States and other international bodies? These are worldwide crimes; they are not confined to any one country and there is a big international element to this. We could be doing joint operations between Northern Ireland and the Republic. Of course, HMRC has already pursued with the Irish authorities smugglers engaged in fuel laundering and so on, but, for these sorts of crimes, what level of co-operation exists between the authorities on both sides of the border, given that we have this division between devolved institutions and national bodies and additional communication and co-ordination are therefore required?

Obviously, one welcomes any process that updates our law to make life more difficult for criminals. It appears that this is basically a catching-up instrument that modernises the existing arrangements and brings them up to date. Perhaps the Minister could confirm that, as well as addressing the other matters I have raised, in his winding-up comments.

[Lord Browne of Belmont (DUP)]

My Lords, I support this draft instrument. It goes a long way in allowing the police and law enforcement agencies to seize and recover illicit proceeds of criminal activity. Unfortunately, in Northern Ireland the threat from terrorism remains at “substantial”. Paramilitary organisations remain active and many former paramilitaries are heavily involved in criminal activity. They are highly organised and sophisticated in their activities. As we have heard, they are well versed in utilising modern technologies to their advantage.

In particular, cryptocurrency has increasingly become involved in almost every criminal activity that matters to anti-money laundering and counterterrorism financing. Marketplaces on the dark web use cryptocurrency to facilitate the sale of drugs and unlicensed firearms, which provides a substantial monetary advantage to these criminals and paramilitaries. The Financial Conduct Authority’s marketing rules have brought crypto assets into the spotlight. Criminals can launder this money using clean intermediary pseudo-anonymous e-wallets and virtual private networks. Through a series of steps, they can withdraw cleansed funds, so it is important that the legal authorities have all the necessary powers to keep ahead of the criminals.

The measures contained in this order will go some way to combating illegal activity. Of course, as we heard from the noble Lord, Lord Empey, these illegal activities can operate across borders and worldwide. I therefore ask the Minister: has there been any consultation and is there any co-operation with the Garda Síochána in the Republic of Ireland? Again, are our law enforcement and police properly resourced to carry out this new order?

I believe that this revised code of practice relating to the search, seizure and detention of property meets the right to private and family life under the European Convention on Human Rights. I am sure that law enforcement will go about this in a proper manner, so I am pleased to support this order.

[Lord Morrow (DUP)]

My Lords, first, I apologise for my earlier indiscretion; I thought my phone was on silent but it was not.

I am looking at the extension of powers in relation to restraint orders. I hope that it is as good as what it says here; in fact, I would like it to be even better because, in the past, we have often been the victims. In saying this, I am not casting aspersions on anyone sitting here today, but we have been the victims of political restraints. We often find that, if it is not politically expedient for things to happen, they do not happen. I hope that, as a result of what we are hearing here today and this draft statutory instrument, that will not be the case.

In paragraph 13 of the code of practice, which is headed “Extension of powers in relation to restraint orders”, we are told—I have no problem with this—that this measure will align Northern Ireland more with the United Kingdom. As the noble Lord, Lord Empey, rightly said, we have too much unalignment at times. If this is implemented—it is a sincere piece of work—we can look to better days. In the past, in Northern Ireland, bordering the Republic of Ireland, there has always been this element of smuggling from one territory to another; some people have gotten very wealthy on it. I just hope and trust that, when this SI comes into force, there will be co-operation between the security forces on both sides of the border to bring this scandalous activity to an end.

In the past, in terms of government, there has been too much of us turning our heads and looking the other way; it is a feature that happens here. I trust that that is going to cease and that we will no longer have to tolerate an activity that, to put it mildly and succinctly, is illegal criminality—as well as everything that goes along with it—happening on our borders. I hope that this instrument will go some distance, if not the full distance; I would like it to go the full distance but, if it does not, I welcome the fact that, as is mentioned here, there will be a genuine effort to stamp these criminals out and take them out of activity, no matter whom that hurts. In the past, it has perhaps not been politically expedient to do that, so I ask the Minister to assure us that that will not be given any account as a result of this instrument here.

[Lord McCrea of Magherafelt and Cookstown (DUP)]

My Lords, I, too, will welcome the Minister’s reply. I regard him, as I have done for many years, as a friend; I am delighted, therefore, that he is here answering our questions. May I make a statement? First, it is so important to put anything that makes life more difficult for criminals on the statute book because no one should benefit from criminality, irrespective of where they may come from.

The truth is that criminals always seem to be ahead of the game and Governments always seem to be catching up. No matter how far you go, criminals’ skills and craft to carry on their criminal activity seem without bounds. Therefore, we have to do all we can to ensure that their programme is impeded.

The noble Baroness, Lady Ritchie, said that the code is not as yet drawn up, but I noticed that paragraph 5.7 of the Explanatory Memorandum says, “The codes require”. If they are not drawn up, how can they require? It says:

“The codes require an officer who is contemplating using the powers to consider the impact on the community in their use, balanced against the public interest and the benefit the use of the powers would add to the case”.


My noble friend Lord Morrow, mentioned that point. This is what concerns me because, as my noble friend pointed out, we had this scourge in the past: if it somehow impacted on a particular community, you did not act. People were therefore not only surprised by the authorities’ inactivity but annoyed because it seemed that they could act if it was a different community but, in a certain community, they did not. I want the Minister to assure me that, when it comes to this statutory instrument, no officer will be compelled

“to consider the impact on the community in their use, balanced against the public interest”,

because criminals do not care who they impact on. Therefore, we have to ensure that their programme is impeded and that the proceeds of their crime are taken.

Paragraph 6.1 of the EM says:

“POCA provides powers to recover the proceeds of crime”.


Can the Minister clarify where the proceeds of crime go when they are seized? Who benefits from the proceeds that are seized? Knowing exactly where the proceeds go is important.

The last thing I want to draw attention to is paragraph 7.2, which says:

“On the codes generally, law enforcement agencies’ responses requested clarification of certain definitions in the legislation and additional guidance on the practical operation of the powers to seize cryptoassets and related items”.


I would like the Minister to clarify whether these clarifications on the definitions were requested by the people who responded. Has proper clarification of certain definitions in the legislation and guidance been given?

Finally, it is right to say that the resource implication is so important, because we know that we do not have sufficient officers to carry out policing on the ground in Northern Ireland. We are well below the target that was said to be necessary to police Northern Ireland. I do not want resources to be taken from that and put into this; rather, money needs to be given to ensure that we have the proper agency to tackle those who carry on with criminal activity.

[Lord Hay of Ballyore (DUP)]

My Lords, I want briefly to bring noble Lords back to the whole issue of resources. I welcome this statutory instrument but I worry about resources. You will continue to hear the chief constable of Northern Ireland talk about the lack of resources. With these new powers, there certainly need to be additional resources.

As a former Minister in Northern Ireland, the Minister will be aware that these criminal gangs sometimes work fairly freely, not only in Northern Ireland but across the border. These criminal gangs will have all the resources they need to do what they are doing. Unfortunately, the different agencies that have to deal with them do not have the resources to do what they need to do. That is more of a worry than anything else. I keep coming back to the chief constable: most times when he is interviewed, he says, “No, I don’t have the resources within policing to do what needs to be done”.

17:45

The other issue is: has there been any dialogue between the Justice Minister in the Assembly and those in Westminster on this particular statutory instrument? That is important. Has there been any dialogue with the Executive, or at least with the Justice Minister? However, the new powers are certainly welcome. Anything that stifles the criminal gangs in Northern Ireland or elsewhere has to be welcome.

[The Earl of Effingham (Con)]

My Lords, His Majesty’s Opposition welcome this order, and we hope that it will allow the police in Northern Ireland to seize the property of criminals who abuse crypto assets, ensuring that Northern Ireland has the appropriate measures in place to tackle illicit financial activity.

This order brings into operation a revised code of practice relating to the search, detention and seizure of property in Northern Ireland, making it easier for the police there to take control of and recover crypto assets under the powers in Part 4 of the Proceeds of Crime Act. We request that the Minister provides the latest figures on the use of crypto assets in Northern Ireland. We need to ask: is there a specific problem related to crypto assets and criminal activity in Northern Ireland that he is aware of and that the order seeks to address?

Clamping down on the misuse and criminal use of crypto assets is an essential part of stopping crime in Northern Ireland. As much as we welcome this order, we must pose additional questions to further understand its scope. Can the Minister please outline roughly how many people he expects to receive a custodial sentence because of this order? How does the policy fit in with recent moves to release some criminals early? Finally, the Explanatory Memorandum notes that an agency

“requested that the definition of ‘control’ is given clear guidance”.

Will the Minister provide guidance on the use of this term in the legislation?

We welcome this order as a necessary evolution of our legislative response to economic crime, and we look forward to hearing the Minister’s responses to our questions.

[Lord Hanson of Flint (Lab)]

I am grateful to the noble Earl for his support for the order, and I will return to his questions in due course. I am also grateful for the contributions from the noble Lords, Lord Empey, Lord Hay, Lord Browne, Lord Morrow and Lord McCrea, and the noble Baroness, Lady Ritchie. It feels like old times. I have not been a Minister in Northern Ireland since 2007. I had two fabulous years there, and it is good to see that scrutiny of government continues as it did when I was in Northern Ireland previously. It was good to hear the points that were raised.

I remind colleagues and noble Lords that the purpose of this order is to provide a code of practice to ensure that guidance is given, on a reserve basis, to officers who exercise the powers under the Act, in order to give proper accountability for the use of those powers by those officers. Colleagues and noble Lords will know that that includes scope on the search and seizure powers and limitations on the exercise of powers. It also provides for seeking senior officer approval and it gives reasonable grounds for suspicion, refusal of prior approval, limitation on the exercise of powers by immigration officers and a whole series of measures that are designed, in that code, to put a framework around the operation of the powers under the Act.

I will answer noble Lords’ points in a different order, but I hope we will cover them all. The noble Baroness, Lady Ritchie of Downpatrick, talked about the date of implementation and the discussion with the Northern Ireland Assembly, as well as the impact assessment and the impact of the Act. The Northern Ireland codes came into operation on 17 July 2024. Those codes have been published and are available. Northern Ireland ran a public consultation on its code and any citizen or organisation in Northern Ireland was able to comment upon this code. The codes in Northern Ireland have been approved by the Northern Ireland Assembly on a cross-party basis.

The noble Baroness mentioned the impact of the Act. From April 2014 to the end of October, 90 cases have been exercised with this new power. Those figures are for Northern Ireland, England and Wales. I am not able today to give her and others a breakdown of the particular usage in Northern Ireland, as opposed to England and Wales, but the powers have been used 90 times. Noting what the noble Earl and other colleagues said, I say that the purpose of this order is to ensure that we take action against people who wish to use cryptocurrency for illicit criminal purposes. The code we are discussing is about putting in place the framework so that the powers are not open to challenge, so that there is clarity about how they are used and so that, when they are used, individuals have the ability to challenge them—but there is a legal back-up to ensure that, when bad actors are doing bad things, they cannot wriggle out of those bad things by saying that those powers were used improperly. That is the purpose of this code. I hope that answers the points made by the noble Lords, Lord Empey and Lord Browne, and others, but, if not, please feel free to intervene. Again, these powers were subject to wide discussion and consultation generally.

The noble Lord, Lord McCrea of Magherafelt and Cookstown, particularly raised what happens to the assets when seized. I am pleased to tell him that, when a court has been satisfied that the crypto assets are the proceeds of crime or are terrorist crypto assets, the asset holder—whoever that may be—will be permanently deprived of those assets. They will be sold and the proceeds will go into supporting the compensation of victims—that is an important aspect, to make sure that victims are at the heart of this—or they could be retained by the state and reinvested into tackling economic crime and countering terrorism downstream.

We want to stop the type of activity that is taking place. Seizing assets means that people are still trying to get some assets through. Hopefully, we can get to a position where this is a deterrent as well and stops people wishing to act with these assets. But, in the event that they do, that they are convicted and that there is an asset recovery regime in place, those assets will be used for the wider community at home.

A number of noble Lords asked about the impact assessment. We produced an impact assessment on the legislation, which was assessed and went through a number of routines—including on 11 November in this Room—and we finalised it very recently. I point out to the noble Earl and others that there is cross-party support for the legislation. It would have possibly gone through earlier had we not had the great event of the general election in July, which has propelled me from a quieter life back here. It also meant we had some delay in our cross-party discussions and agreements on the legislation.

We did not have a specific impact assessment on the powers in the code, but I hope they have been established in the way they have so that they can be operated and safeguarded. There was a consultation, which has come forward, although there was no impact assessment.

Another point noble Lords mentioned is the confiscation regime, which is largely for the Northern Ireland Assembly and devolved matters. I am repeating myself, but it is important to reflect on what we are discussing: the code is about how UK officials in immigration, Border Force or other named organisations in the code are held to account by a standard set by this House, the House of Commons and the UK Government on those devolved areas.

I think the points the noble Earl mentioned have been covered; if not, I am happy to reflect on Hansard in due course and any points that have been made by noble Lords and try to refer back to them. However, I think and hope there is a co-terminosity of agreement between us in this House, from His Majesty’s Official Opposition through to the Ulster Unionist Party, the Democratic Unionist Party and the SDLP in Northern Ireland.

We are trying to ensure that crypto assets under this legislation are deterred and, if they are found to be used for criminal activity, seized. There is a code of practice that monitors the use of officers for seizing those assets. If those assets are seized for criminal purposes, they are wound back into the community in a positive way. That sends a signal to both sides of the border in Northern Ireland in relation to the Administrations there that the use of crypto assets is not an acceptable way of financing criminal activity or terrorism.

I will check this outside of the Committee, but to answer the noble Lord, Lord Hay, there has not been any formal consultation with the Irish Government on these powers because they are for the Northern Ireland Assembly, under the joint leadership of the First Minister and the Deputy First Minister, the Justice Minister and the Home Office, under the leadership of my right honourable friend the Home Secretary. However, I believe they are not areas that would cause concern as they are entirely matters for within the confines of the United Kingdom, with different responsibilities between the two different agencies.

With that, I hope the Committee can accept the order. If I missed any points, I will reflect on Hansard and write. If anybody wishes to intervene on any point I have not made, please do so now. I can see my noble friend Lady Ritchie ready to bungee jump into action, so I will let her intervene.

[Baroness Ritchie of Downpatrick (Lab)]

I thank my noble friend the Minister for his very detailed answers. Could he indicate whether any discussions have taken place with the Minister and the Department of Justice in Northern Ireland? If not, will they take place on the implementation of the code and this SI?

[Lord Hanson of Flint (Lab)]

As the Minister responsible for this order, I have not had any discussion with Naomi Long or the Department of Justice on these matters, but I hope it will give some confidence to my noble friend to know that it is my intention to meet our counterparts in Northern Ireland. My right honourable friend the Home Secretary has, I believe, already met the First Minister and Deputy First Minister, and I intend to do the same. I have a potential visit to Northern Ireland planned for the new year to discuss areas of mutual co-operation. I will make sure that this issue is raised as one of many items on the agenda of any future meeting in January. With that, I commend this order to the Committee.

[Lord Empey (UUP)]

Will the Minister reflect again on the resources issue? If he does not have any material to hand, he could write to us, which I imagine would be easily achieved.

18:00

[Lord Hanson of Flint (Lab)]

Helpfully, I have had a chance to reflect on the points that the noble Lord made. I understand, genuinely, that it is important that agencies have the required resources to implement the new powers. That is why, as I mentioned earlier in response to questions, as well as to victims, there is the potential for the proceeds of crime to be recycled back into agencies under that system.

I cannot give the noble Lord a figure because, again, this is a relatively new area of work. Since April, we have had 90 cases; I do not know how many of them are reflected into Northern Ireland, but I have asked officials and I hope that we will be able to tease that out. I hope that I can reassure the noble Lord that today’s order is about a code of practice to put a box around the activities of people who might be using the Act, to enforce the areas of concern that we all have. I will reflect on the points he made and, if I can provide further information, I will of course do so.

Motion agreed.

Committee adjourned at 6.01 pm.