Queen’s Speech

Baroness Bowles of Berkhamsted Excerpts

Monday 16th May 2022 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I identify with the comments on constitutional matters led by the noble and learned Lord, Lord Judge, on Thursday. During Brexit legislation much was made of requiring primary legislation for future policy change, but such assurances are worthless. We had disappearing assurances on an even shorter timescale with the Trade Act, which legislated independence of the Trade Remedies Authority. Liz Truss then changed the primary legislation to overturn the TRA’s very first decision—a disastrous start reputationally all round.

I turn to the financial services Bill. Most of its procedures were front-run in the Financial Services Act 2021. Noble Lords on all sides were concerned about inadequate scrutiny. The Government said in their consultation response that they want Parliament to scrutinise and, sadly, the authorities in this House refused a sub-committee for financial services. I am very ashamed of that.

Although there is neither appetite nor capacity to replicate the intense EU level of scrutiny, there is no denying that the environment and dialogue it fosters is a resource for regulators as well as legislators. I am now hearing that our regulators are struggling with it, overwhelmed by their new powers, retreating to hugger-mugger with international regulators more, rather than creating the specific design for the UK that the Minister spoke of.

Solvency II will be a test. It was the invention of the then UK regulator—the FSA—taken to Brussels so that our industry would not be disadvantaged by stricter requirements. The UK bludgeoned France and Germany into legislation they hated. The UK Government and regulator bludgeoned UK rapporteur MEPs to do their bidding despite our reservations. Omnibus II corrected some but not all of the highlighted mistakes, including adding the matching adjustment.

At the time, the UK regulator sought more inflexible language than the Treasury or the final wording I negotiated. Now the PRA is actively choosing the inflexible approach. The new legislation will need to give an economically constructive steer, with scrutiny deep and frequent enough to expose monolithic and legacy-based thinking. To coin a phrase, “It’s the economy, stupid”—and that applies to the balance of regulation.

Legislation on audit reform has been relegated to draft, but various outstanding matters do not need legislation. Sir John Kingman said that the FRC should

“promote brevity and comprehensibility in accounts and annual reports”.

Instead, we have flawed standards, compliance to short timetables and “dog killer” reports dropping through letterboxes. The FRC has somewhat reformed itself, but there are still rotten patches. The worst is the Endorsement Board offshoot, which is dominated by individuals sourced from standard setters defending their legacy positions, who are used to marking their own homework and putting standards above the law.

I am not alone thinking this; the former ICAEW president Martyn Jones said the same presenting a well-received paper at this month’s British Accounting and Finance Association’s audit and assurance conference. What is needed above all else is for true and fair view, going concern and profits recognised for distribution to be applied and verified as it stands now in primary legislation, not overridden or obfuscated by the tertiary legislation of accounting standards.

I defy anyone to read the endorsement criteria assessment of IFRS 17 by the Endorsement Board or listen to its discussions and not notice the legacy thinking and gobbledegook used to justify the unjustifiable. Letters and emails that are coming to light show that private discussions are also happening which should be public. It is ripe for judicial review, not least because directors are more exposed after Brexit.

Under EU law, IFRS had primary legislative status. Accounts prepared according to it were deemed safe, even if there were differences to true and fair. That is in the Moore opinion, so relied on by the FRC and BEIS. There is now no primary law relating to standards, only tertiary legislation under the 2019 regulations No. 685. Can the Minister explain what extra steps have been taken in the light of this added risk for directors if standards are wrong?

National Security and Investment Act 2021 (Monetary Penalties) (Turnover of a Business) Regulations 2021

Baroness Bowles of Berkhamsted Excerpts

Monday 1st November 2021 Grand Committee

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)]

My Lords, in moving that the draft National Security and Investment Act 2021 (Monetary Penalties) (Turnover of a Business) Regulations 2021 be approved, I will speak also to the draft National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021, which were laid before the House on 6 September this year. The commencement date for both SIs is 4 January, which is the same date as the full commencement of the National Security and Investment Act 2021.

Before I turn to the detail of the SIs, I will say a few words to remind the Committee of the purpose of the National Security and Investment Act and why it is vital for the UK’s security. The UK economy thrives as a result of foreign direct investment. Over the past 10 years, more than 665,000 new jobs have been created as a result of more than 18,000 foreign direct investment projects. However, as I am sure your Lordships will agree—and indeed as the House demonstrated through its agreement to the Act—an open approach to investment must include appropriate safeguards to protect our national security and the safety of our citizens.

The NSI Act therefore provides the Government with updated powers to scrutinise and intervene in acquisitions to protect national security, as well as to provide businesses and investors with the certainty and transparency they need to do business in the United Kingdom. The Act establishes a call-in power for the Secretary of State to scrutinise qualifying acquisitions, a voluntary notification option for firms which wish to gain clarity on whether the Secretary of State will call in their acquisition, and—the subject of these regulations—creates mandatory notification requirements in 17 sensitive sectors of the economy where it is considered that national security risks are more likely to arise.

Starting with the draft maximum monetary penalties regulations, this SI sets out how the Secretary of State will calculate a business’s turnover when calculating monetary penalties resulting from non-compliance. We generally expect compliance with the Act to be high and the need for the Secretary of State to issue penalties to therefore be rare, but it is important that the Act comes with sufficient deterrents to non-compliance.

This SI is laid under the delegated powers pursuant to Section 41 of the Act. Sections 32 and 33 create offences of completing a notifiable acquisition without approval and failing to comply with an interim or final order. Both these offences can result in the imposition of a monetary penalty.

The maximum fixed penalty that can be imposed on a business for an offence under Section 32 or 33 is the higher of 5% of the total value of the turnover of the business and £10 million. The maximum amount per day for a daily rate penalty that can be imposed on a business for an offence under Section 33 is the higher of 0.1% of the total turnover of the business and £200,000.

With these regulations, we have ensured that global turnover is taken into account when calculating the total turnover, so that no efforts to get round the penalties—for example, through changing accounting approaches—will be successful. These are important and well-balanced regulations, necessary for the effective functioning of the NSI Act.

Turning to the notifiable acquisition SI, which was of some interest to your Lordships during the passage of the Act, the SI has also been noted by the Secondary Legislation Scrutiny Committee as an “instrument of interest”. These regulations specify descriptions and activities of qualifying entities, the acquisition of which must be notified to the Secretary of State—a notifiable acquisition. Acquisitions in scope of mandatory notification that complete without the approval of the Secretary of State will be void and therefore have no effect in law. These are important changes to the UK’s investment screening system and sectoral expertise has been vital to ensure that mandatory notification is proportionate and targeted. The Government have therefore taken great care and time to get these regulations right.

Alongside the introduction of the NSI Bill in November 2020, the Government ran an eight-week public consultation on the proposed descriptions of the 17 areas of the economy referred to in the draft regulations, after which the Government published revised definitions in March. The Government then undertook further targeted engagement with stakeholders in these key sectors—such as communications, data infrastructure and synthetic biology—to refine and narrow the proposed descriptions to provide businesses and investors with further clarity.

As the Minister for Small Business, Consumers and Labour Markets did in the other place, I place on record the Government’s appreciation of the extensive input we have had from across sector organisations in helping to develop these regulations. They strike a careful and appropriate balance between ensuring that our national security is safeguarded and keeping the number of businesses caught by the mandatory notification requirements to a necessary and proportionate level. In addition, these regulations allow parties themselves to identify objectively whether they are in scope of mandatory notification or not.

In addition, to monitor the impacts on businesses and investors, particularly small and medium-sized enterprises, the Government have chosen to include a shorter three-year post-implementation review within the SI, instead of the more standard five-year period. The Government engage on a daily basis with a wide range of businesses to help them understand the requirements of the Act, and we will of course continue to do so. Furthermore, extensive guidance across all 17 areas of the economy specified in these regulations will shortly be published to further assist parties in understanding the effect of the requirements on their planned activities.

In conclusion, these are detailed and technical statutory instruments which give effect to the purposes of the NSI Act. They have been carefully developed and tested to ensure that they give maximum clarity to businesses, while allowing us to protect the UK’s national security. I commend the draft regulations to the House.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I thank the Minister for introducing these statutory instruments. As has been said, they follow on from the National Security and Investment Act 2021 that we concluded earlier this year. Indeed, most of the things that could be said were said during those proceedings. The basics of what is covered by these instruments, such as the level of fines, was set out in the Act, but how turnover is calculated for the purposes of the fines is now laid out in more detail. As has already been explained, the maximum fixed penalties for offences are the higher of 5% of the total value of the turnover and £10 million, or a daily amount that is the higher of 0.1% of the total turnover and a cap of £200,000.

Clearly, it is important to define how turnover will be calculated for the purposes of fines, and I am glad to see that it is globally based—indeed, I think we were told that that was the intention. Whether the formulations actually laid out are right remains to be seen. I hope that, if they do not work, they will be adjusted, and that the Secretary of State will be prepared to intervene and overrule—as he can—on the companies’ turnover calculations, should they be unrealistic or if there have been manoeuvres to minimise exposures, which can be different from just accounting measures and moving things around globally if it covers the creation of special companies, subsidiaries and a whole gamut of things that will probably be beyond everything that we could list now.

I also have a reservation, which I think I expressed during the Bill proceedings, concerning whether the maximum fines have been set too low. As they are presently fixed, the percentages will bear down in totality more heavily on SMEs, which will tend to fall under the percentage calculations, than on large, international businesses, which will hit the maximum and be able to enjoy—if that is the way to phrase it—a cap. I am sure all noble Lords hope that the penalties do not need to be used all that often and that, as the Minister said, it is rare. Nevertheless, there must be a strong deterrent; it cannot be seen as a risk worth taking. The fact is that I can think of some deals where £10 million is not a lot in the scale of things and given the charges that are levied by advisers. In my view, the cap, if there is one, should be proportionate. I hope that the Government will hold on to that thought, and perhaps the Minister can say what thinking there has been in the Government and the department around that.

Obviously, it is unrealistic to expect the Government to revise figures that have only just been passed in the Act, but under Section 41, it is possible to vary them. Could the Minister explain how such adjustment possibility is viewed, looking forward? Will it be used simply to adapt to inflation or, as I have suggested, will it be used if the deterrent is, as it turns out, not quite strong enough for the largest multinationals?

I turn to the second SI and the specification of qualifying entities. The definitions contained in the schedules have been refined in response to stakeholder feedback following the consultations which took place as the Bill was proceeding and subsequently—all of them have been refined, which is good to see. The outcome seems to have been broadly welcomed, with more focus and narrowing but also some occasional broadening. However, I gather there are still some industries with concerns about them being too broad. Perhaps it is a case of saying that not every possibility is covered. The challenge there is the make the reserve call-in power both functional and reasonable, without making it look like it has become protectionist.

It is in fact difficult to understand the legislative detail, how and why the various changes have been selected, and who has been listened to, as the contributions are not available for scrutiny; we cannot really scrutinise that aspect of the job. It is almost certain that large companies and their advisers will have been the most active. I am not criticising that involvement in any way; they have both the resources and the expertise to keep on top of the job and their input is valuable. However, can the Minister inform me how suggested changes are then back-tested, in particular for small businesses, and whether what fits the larger businesses and comes as advice from lawyers and other advisers fits across the piece?

Overall, the situation is that we must accept the assurances that efforts have and are being made to get things right and that the Government and the department will do their best to issue advice and assist companies. It is of some comfort that the review period has been shortened, as the Minister said, to three years, rather than the usual five.

In the debate in the Commons, the Minister said that the investment security unit in the department will be able to offer advice and give forewarning, and the Minister here has said similar things. I would like to know a little more about how that works, especially for SMEs. Is there helpline advice, separate from guidance, and can it be relied upon, or is it the case that there will inevitably end up being a larger number of precautionary notifications than are really needed, because that is the point at which you can get some definitive feedback? Will the Government be able to publish what has been positively cleared and other advice given once it is no longer time sensitive to a prospective deal? I recognise that it cannot be done in real time, but will something of that nature happen retrospectively?

Finally, as I have already referenced, the Secretary of State is given powers to call in other transactions not covered by the 17 sectors. I am conscious, as I said, that it is necessary to demonstrate that the UK is an open economy, but on the other hand, recent experience with Covid, Brexit and other geopolitical issues has drawn more attention to security of supply. Will there be a capacity and appetite to monitor transactions generally and take action where needed? What other measures are being taken around issues of greater security of supply?

Electricity Capacity (Amendment) Regulations 2021

Baroness Bowles of Berkhamsted Excerpts

Wednesday 21st July 2021 Grand Committee

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, this is a set of changes to the capacity market system following a consultation. As a serial responder to consultations—although not in fact to the one relating to this—I must say that I am surprised by how few responses some get. In this instance, there were 38, although some were from trade associations, so, collectively, it covers more than 38 entities. But it still seems a low number, although, if I remember correctly, there have been fewer on some other electricity generation SIs.

I do not expect that the Minister can easily do anything about that, and there are so many consultations that I can understand if there is consultation fatigue—I have suffered from that myself—but it worries me if responses are obtained only from directly interested parties, important though they are. They are public consultations and the clue is in that name. The consultation informing this instrument seems to have received only one potentially non-industry submission from an individual respondent. Yet, as the Minister has explained, the capacity market is an important part of maintaining a secure and reliable electricity system and even this instrument is not devoid of public interest, as against producer interest, points.

Our capacity auction system is neutral in that all types of generation are included and, as the Explanatory Memorandum says at paragraph 7.2, and as the Minister has alluded to, the purpose of the payments is to,

“incentivise the necessary investment to maintain and refurbish existing capacity,”

and in some instances to support new-build projects. However, there is also a secondary market in capacity agreements and this instrument now breaks the link between the continuing existence of the original capacity agreement owner and the ongoing validity of capacity agreements that they have sold on.

I have some reservations about that change in that it might have perverse incentives to encourage overbidding for the purpose of secondary trading. It could be counterproductive to encouraging investment and, more to the point, knowing where that investment is to be made, and makes trading for cash more likely, which is not really what it was all meant to be about. For example, what pressures might there be from shareholders for certificates to be sold rather than for investment to be made?

Therefore, I am not entirely convinced that the public interest, which is substantial in terms of security of supply, is served by this. I can see that there may be arguments on the other side about maintaining the capacity that has been auctioned, and I should be interested if the Minister elaborated on those more fully and on what other mechanisms compensate for the fact that what was originally a kind of safeguarding mechanism has been removed.

Not surprisingly, the consultation responses agreed with the proposition. However, as I have pointed out, given that all those responses, bar one, have been entirely from industry and therefore from those who would benefit by it, either by way of enhanced secondary-market value of an agreement or from ongoing value irrespective of the status of the original owner, that is hardly a response that can be said to have the public interest uppermost.

I turn now to the reductions in the length of capacity agreements when a provider has breached obligations. I have no objection to the basic fairness of allowing appeals. I cannot help wondering how that might interact with a potentially lively secondary market and keep up with the obligations that attach to the traded certificates. I would welcome more explanation as to how that works. For example, can the Minister assure me that purchasing an agreement and obligation on the secondary market does not give, of itself, an excuse for non-performance or leniency?

The third change relates to allowing the delivery body to take into account changes in non-material errors in pre-qualification applications during appeals. This seems to be eminently sensible and I wonder whether that is, or can be, part of a wider approach within BEIS to a whole range of matters where non-material points or presentation prevent access to grants and other assistance, in particular for smaller entities. I note the value of the change to smaller entities, as explained in the memorandum. I would welcome that becoming a more general approach in BEIS.

I am interested to hear what the Minister has to say about the issues that I have raised and especially whether the effects on the trading changes will be monitored for any detriment and whether that may have been necessitated because of Covid, rather than the previously-existing steady state?

[The Deputy Chairman of Committees (Baroness Finlay of Llandaff) (CB)]

I will now call the noble Lord, Lord Grantchester, and after that I will call the noble Lord, Lord Bradshaw, again. It would be helpful if he could remain muted until he is called after the noble Lord, Lord Grantchester.

Office of the Whistleblower Bill [HL]

Baroness Bowles of Berkhamsted Excerpts

2nd reading
Friday 25th June 2021 Lords Chamber

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, it is a privilege to commence the winding up on this Second Reading of a Bill that has cross-party support. It proposes an office of the whistleblower, as recommended by the all-party group in its report. I congratulate my noble friend Lady Kramer, who has been a stalwart in this area for a long time. Mary Robinson, chair of the APPG, says in her foreword on its website that

“my personal interest in whistleblowing rests in my experience as a constituency MP where I am confronted with whistleblowers who have turned to me as a last resort.”

Many of us share that experience, and the heartbreak when we see the plight that befalls whistleblowers, as my noble friend Lady Kramer and other noble Lords have laid out. This Bill is needed.

Let us make no mistake: it is bad enough that whistleblowing is so often ignored and that harm continues to happen, but it is even worse that whistleblowers are victimised, cover-ups are increasing and millions, including public money, are spent on deliberately ruining the lives of people trying to serve the public interest. Seemingly, it can go on and on like that with impunity. It is not working in our regulators or in individual businesses; maybe it never will, because there are always vested interests and—including among regulators —perceived bigger issues, even if that “bigger issue” analysis is wrong.

My noble friend Lady Featherstone elaborated on the bigger issue example of Great Ormond Street Hospital, and my noble friend Lord Sharkey noted that Barclays CEO Jes Staley hired investigators to try to identify a whistleblower. He was fined mere pocket money by the FCA. Not only did that undermine the new senior managers and certification regime, but I have had discussions, including with people in the regulatory sphere, where the FCA has been defended on the grounds that “financial stability was more important” and you could not sack the boss of a big bank. That type of attitude is perhaps the most damaging systemic risk there is, and it is embedded throughout the public and private sectors. I cannot express my revulsion more that our beloved NHS has repeatedly spent huge amounts of money that should go on treatments to victimise and destroy people who sought only to make things better.

The APPG for Whistleblowing has brought out two great reports. The first summarises in its strapline just what I have said: The Personal Cost of Doing the Right Thing and the Cost to Society of Ignoring it. The second investigated how the system of employment tribunals is not working in favour of whistleblowers, who are outgunned in spending, frankly as a deliberate strategy.

The law is not working. It took a judge to challenge the narrow definition of an employee, and who should be covered, right up to the Supreme Court. If we really want to get the benefits to society that whistleblowers aim to deliver, we must take them seriously. The creation of an office of the whistleblower would do just that: where the call can be received by specialists, where the first response is not to question what powers a regulator might have to act, and where the right kind of advice can be given to whistleblowers concerning information, including how not to fall into traps that will subsequently lead to legalistic unpicking.

The companies and organisations on which the whistle is blown have all that legal paraphernalia at their fingertips; it is only right that the whistleblower should too. The beneficiary is the public good. We should not put a price on that, but as my noble friend has pointed out, the cost is likely to be covered by fines and prevention of the harms that so often fall on the public purse.

This is a simple and enabling Bill, and there have been great speeches supporting it today. I hope that the Minister has noted them and that he can come with good news, because this Bill is supported by research and evidence from the APPG, and it is so much more than a just a good idea.

International Accounting Standards (Delegation of Functions) (EU Exit) Regulations 2021

Baroness Bowles of Berkhamsted Excerpts

Tuesday 27th April 2021 Grand Committee

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, it is a pleasure to follow the noble Lord, Lord Sikka, and to agree with everything he has said.

Under what the Minister referenced as the principal regulation, Regulation 7 states that an international accounting standard may be adopted only if it is not contrary to the principle that accounts must give a true and fair view of the undertaking’s assets, liabilities, financial position and profit or loss. The same provision applies for consolidated accounts, taken as a whole, as far as concerns members of the undertaking. The Secretary of State is now delegating adoption power to the endorsement board; the board and its members are being exempted from liability for getting it wrong, unless it is in bad faith.

Some might find it strange that, while there is a consultation going on about the liability of auditors and company directors for getting it wrong, those endorsing the standards that can well be part of it going wrong are absolved, unless it is in bad faith—and I think that there is some of that about, or at least conflict of interest.

The Brydon review categorically said that accounting standards are forward-looking accounting estimates and judgments, and therefore cannot be true in the literal sense. This is quoted in the restoring trust in audit consultation, which also says that

“consideration of ‘true and fair’ needs to go beyond … compliance with the financial reporting framework”.

It goes on to say that the Government are

“not aware of any systemic issues”—

so let me give a few.

Accounts that are prepared on a going-concern basis require an audited assessment of whether a company is capable of being a going concern or not. If accounts contain unrealised gains, as allowed by IFRS, those gains are not cash and cannot be used to service debt, pay down debt, invest in other assets or make distributions to shareholders. How, then, can auditors sign off the accounts of a company as a going concern if the facts required to assess that position are totally masked by the standards? The incurred loan loss provisioning problem had that effect in banks that collapsed: losses were hidden and banks were not going concerns. Even now, the PRA makes adjustments to get to the true loss-absorbing values.

With the proposed new insurance standard IFRS 17, the issues go further than unrealised profits and credit is given to reduce liabilities not merely for unrealised gains but for anticipated future income, giving the appearance of capital. This cannot be proper accounting. These unrealised gains and this anticipated income cannot be used to service debt, pay down debt or invest in other assets, and nor do they have any value as collateral. No way is this true and fair, and anyone endorsing it would surely have to be nobbled.

This seems to aptly describe the UK Endorsement Board. Three were members of the former Accounting Standards Board, which has approved defective accounting standards in the past. Several were partners in accounting firms at the time that banks were collapsing. Mr Ashley, a former ASB member, was also a career KPMG partner, which the UK Endorsement Board website fails to note. Of course, KPMG was the auditor of Carillion and HBOS. In the case of former ASB member Ms Wallace, at least the website references her connection to PwC, the auditors of Northern Rock, but it is silent about her time at Arthur Andersen. The board includes another recent PwC partner, and a partner from Grant Thornton, which is currently defending itself in connection with the auditing problems of the collapsed Patisserie Valerie. There is no mention that board member Kathryn Cearns worked for the ASB and then for the law firm Herbert Smith Freehills which, as well as providing defence advice to PwC and KPMG, also instructed the ICAEW’s counsel to give the dubious true and fair legal opinions for the FRC, from which the Government eventually distanced themselves, as I discovered in FoIs. Liz Murrall, an employee of the Investment Association, and Paul Lee, a consultant to the Investor Forum, are also on the Endorsement Board, and both those organisations are dominated by insurance companies, the accounts of which will benefit from using IFRS 17.

Who is there to represent the public interest and act on the known lie that Brydon and the Government’s consultation acknowledge—that accounting standards alone cannot be true and fair? Who is there to represent the policyholders of insurance companies who, barring more government bailouts, will be the victims if accounting standards cause them loss? One could hardly wish for a more biased view, and no wonder they need protection from liability. This is a bad SI and we do not need this UK Endorsement Board.

Renewables Obligation (Amendment) Order 2021

Baroness Bowles of Berkhamsted Excerpts

Tuesday 23rd March 2021 Lords Chamber

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, I also welcome the noble Lord, Lord Kamall, to his place. It is not the first legislature in which he, the noble Lords, Lord Kirkhope and Lord Hannan, and I have sat, and indeed worked, together, albeit in our respective groups; I look forward to that happening again.

I turn to the order. It is good to see that renewable incentives have worked, as other noble Lords have said. It is also good to see that, in the wider scale of things, we can soon look forward to the tapering off of the schemes, as it becomes no longer necessary to keep on introducing incentives as renewable energy takes its place as a competitive source of energy.

This instrument will reset the balance of the cost of mutualisation so that it is shared between supplier and generator, broadly as it was when the scheme was introduced in 2005. I suppose I can also identify with the comments of the noble Lord, Lord Kirkhope, about how it was perhaps left a bit too long to rebalance and, therefore, it comes as a bigger shock when it happens. Since that time, costs have moved on and the balance is now falling more heavily on suppliers, so, if the cost balance is changed in the manner suggested in this order, suppliers are the winners and generators the losers.

The consultation was predictable, I suppose: the winners were in favour and the losers against. However, adding up the numbers, more seemed to agree with the Government: one supplier disagreed and five generators agreed, and, of the neutrals, three agreed and two disagreed, meaning that, by a net five, the ayes have it.

At the end of paragraph 7.6 of the Explanatory Memorandum, there is a suggestion that, by reducing cost to the suppliers, there will be less to pass through to customers. As the noble Baroness, Lady McIntosh, has indicated, what is passed through to customers is obviously of concern. This raises a question: where does the cost to the generators end up? Part of me cannot help but think that it somehow ends up with households, but could the Minister enlighten me about the effect of costs that now have to be absorbed by the generators?

I have no further pearls of wisdom to dispense on this, and I will not spend any more of the more than adequate time limit to say that, all things being equal and in the absence of any other information, it seems reasonable to restore the cost balance to that which was originally struck. I have no objections to this instrument.

Audit and Corporate Governance

Baroness Bowles of Berkhamsted Excerpts

Tuesday 23rd March 2021 Lords Chamber

[Lord Callanan (Con)]

Indeed, I have had extensive engagement with the profession, including the big four and a number of smaller companies, as we seek to progress the legislation.

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, in the RBS rights issue trial, Mr Justice Hildyard said that the purpose of Section 87A(2) of the Financial Services and Markets Act, concerning information to enable investors to make an informed assessment, had to be appropriate for the ordinary investor whose protection is the statutory objective. Does the Minister agree that the same logic must apply and be preserved in any changes to audit and capital maintenance statements? They are for the ordinary investor, not just expert users.

[Lord Callanan (Con)]

These proposals are to provide information to expert users and many of the ordinary readers as well. Therefore, both markets are to be fulfilled.

Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021

Baroness Bowles of Berkhamsted Excerpts

Monday 22nd March 2021 Lords Chamber

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, other noble Lords speaking in this debate have more extensive knowledge of the history behind these regulations. Although, like many members of the public, I might have spotted a sale of a business to a connected person and wondered whether it was wholly fair, I became engaged with this only relatively recently: when the opportunity presented itself during the passage of the Corporate Insolvency and Governance Act and the noble Baroness, Lady Neville-Rolfe, revived the issue from the Small Business, Enterprise and Employment Act. Since then the noble Lord, Lord Hodgson, has kept an eagle eye on it. He has been keeping our impromptu group of CIG veterans informed since then.

In addition to the persistence of the noble Lord, Lord Hodgson, our little cross-party group has benefited from the varied professional expertise of the noble Lords the Minister referenced, and the noble Lords, Lord Mendelsohn and Lord Vaux, and the noble Baroness, Lady Neville-Rolfe, have ably demonstrated that in their contributions today. Like them, I am pleased that we have got to where we are, but I agree that this may be part of a continuing journey. I also thank the Minister for meetings and bringing forward these regulations. It is a quirk of the speaking order that I get to speak after those other noble Lords, which leaves everything already well covered.

These regulations introduce a new requirement for an opinion by an evaluator to say whether a sale to a connected party is “reasonable” in all the circumstances. This requirement will come into play frequently. As quoted in Accountancy Age last October, Blair Nimmo, the head of restructuring at KPMG, said:

“When a company goes into insolvency and you need to have a fairly quick sale of the business, the person(s) with the most knowledge of a business and its operation are the existing directors. They are the most likely people to have arranged the pre-pack or at least be part of it, even if it is being funded or orchestrated by an independent party. Scenarios whereby there are zero connections to the previous directors are fairly few.”


That was regarding pre-pack procedures, but evaluators will also come into play in any rapid—that is, within eight weeks—connected person sale through ordinary administration procedures.

I welcome the compulsory aspect of the report because the previous measure of consulting the Pre Pack Pool went greatly underused: as the noble Lord, Lord Hodgson, has already noted, there were only 23 referrals out of 260 connected person pre-packs in 2019. It is now envisaged that the Pre Pack Pool, or members thereof, might be used to obtain the independent opinion required, but it is already possible to find evaluators advertising online. Ones I found appeared to have relevant experience, and perhaps it is a nice job for retired insolvency practitioners, who were the ones that I found.

However, the main criticism levelled against the original proposal was the self-certification nature of the credentials of the evaluators: they need only believe that they have the requisite knowledge and experience to provide the report. That is now bolstered by the need for indemnity insurance, which presumably means that the insurance company must consider that they have the credentials to be an insurable risk—or that the person pays a high enough premium to persuade the insurance company to take the risk. The fact that the insurance premium details, including the insurer and the amount insured, must be disclosed adds to the reassurance, although I am still a little disconcerted with it as the mechanism.

There is still disquiet in some quarters and, as ever, time will tell. The noble Lords, Lord Mendelsohn and Lord Vaux, and other noble Baronesses and noble Lords, have already highlighted several of these—notably, opinion shopping is still not resolved. Secured lenders should perhaps be connected, as the noble Lord, Lord Mendelsohn, has suggested—the administrator applying for the evaluation would solve the opinion shopping point. I also note that the difference between “substantial” and “significant” may also need resolution in due course—as well as the relationship of the evaluator to the company.

That said, I am reassured—I think—in that I now understand that we have regulations which can be amended in future and, therefore, these issues may end up being resolved in due course. However, it would be nice to have the confirmation that the noble Lord, Lord Vaux, has indicated he would like—namely, that June is not the last say and now that the regulations exist, they can continue to be tweaked as more evidence comes to light.

National Security and Investment Bill

Baroness Bowles of Berkhamsted Excerpts

Committee stage
Tuesday 16th March 2021 Lords Chamber

[Lord Hodgson of Astley Abbotts (Con)]

My Lords, as my noble friend Lady Noakes said, Amendment 67 deals with Clause 18 on the voluntary notification procedure. I entirely support what she has said and her amendment. Like her amendment, Amendment 67 is to deal with no man’s land, but it adds a further wrinkle to no man’s land beyond that which she covered in her remarks. I am grateful for the support from the noble Lords, Lord Clement-Jones and Lord Bilimoria, and I have been reliant on the expertise of the Law Society for the detailed drafting.

As I say, this amendment is concerned with voluntary notification procedures. The objective behind the establishment of voluntary notification procedures seems entirely praiseworthy in that it can speed up the investment or divestment process for those involved by seeking in advance a decision by the Government on whether the proposed action will be subject to a call-in notice. If the Secretary of State decides to issue a call-in notice, the clock starts running on the 30-day period for initial assessment.

So far so good, but the Bill as drafted is not clear —as my noble friend made clear—on the time the Secretary of State has in which to decide, following a voluntary notice, whether he or she should issue a call- in notice. The only guide we have is under Clause 18(5):

“As soon as reasonably practicable after receiving the voluntary notice, the Secretary of State must decide”


and so on. This does not give any clear idea of how elongated this process may be. In particular, the use of the word “practicable” is rather strange—practicable for whom and in what circumstances? The solution to this is to redraft the clause so that unless the Secretary of State responds to the voluntary notification, it is deemed to have been accepted. That triggers the 30 working day period, so gives an end date by which the company or the investor will achieve clarity.

Amendment 67 also aims to correct a procedural anomaly in the current drafting, which touches on a point that was the subject of a discussion between myself and my noble friend Lord Lansley on the first day in Committee. I think this point goes beyond where my noble friend’s amendment went. It is as follows: the Secretary of State has this 30 working day review period to decide whether to issue a call-in notice or notify the parties that no further action will be taken, but the drafting of Clause 18(9) appears to muddy that clarity when it says that the review period

“does not affect the operation of the time limits in subsections (2) and (4)”

of Clause 2. This was the point raised by my noble friend on our first day. This would appear to mean that the Secretary of State could fail to make a decision within the 30 working days but would still have up to six months from becoming aware of the trigger or five years from the date of the trigger to serve a call-in notice. The same difficulty applies to Clause 18(8)(b), which allows the Secretary of State to inform the parties after considering a voluntary notification that no further action will be taken. Again, it seems overridden by the provisions of Clause 2(2), with the six months or five-year period allowing for further reflection by the Secretary of State.

Amendment 67 aims to cut through this Gordian knot by requiring the Secretary of State to make a decision on the voluntary notification by the end of the 30-working day period, and the absence of such a decision would be taken as approval. Objectively, that is to give clarity and certainty to investors, as we are trying to do throughout the Bill. Without an amendment such as this, the whole purpose and the advantages of the voluntary notification procedure could be undermined.

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, I have added my name to the amendment in the name of the noble Baroness, Lady Noakes, and I support everything that she said. I also support what I might call the companion Amendment 67 from the noble Lord, Lord Hodgson, which has been signed by my noble friend Lord Clement-Jones. I also agree with what was said there.

I favour mechanisms to give certainty, and the way the Bill operates at the moment means that, absent a call-in or other response, a business is left in no man’s land—as the noble Baroness, Lady Noakes, called it. Indeed, the noble Lord, Lord Hodgson, pointed out that even if you escape from no man’s land, there is a piece of elastic that pings you back in again for up to five years.

I realise that with a new system the Government may not know how well it will operate, but many noble Lords have repeatedly expressed concern, and I am coming from the standpoint that it is totally unreasonable to push all the uncertainty on to industry.

We have operated without these measures for a long time—maybe for too long—but to switch to draconian uncertainty overnight does not seem fair. There needs to be a point at which no response is an all clear, even though that itself is unsatisfactory compared with the positive receipt of an all clear notice in your hand.

I have nothing else to add, but I support the amendments. The Government need to take notice and to make this whole process more workable for industry.

[Baroness McIntosh of Pickering (Con)]

My Lords, I am delighted to support Amendment 67 and, by the same token, everything that my noble friend Lady Noakes said in connection with her amendment. The two dovetail nicely together. It will be for the Government to determine which drafting is the best. I welcome my noble friend Lady Bloomfield to her position. I am delighted to be in the Chamber rather than in the virtual Chamber; it is an altogether more pleasant experience.

The consequences of the current drafting of Clause 18, as so ably set out by my noble friend Lord Hodgson of Astley Abbotts, together with Clause 2(2), leave everyone in a very precarious position, as the parties involved would have literally no clarity as to any certainty or finality. My understanding is that the parties would have to proceed to complete the transaction before any time limit started to run. Perhaps my noble friend the Minister could clarify that.

I welcome Amendment 67 in particular as giving clarity. I thank the Law Society for bringing it to our attention and my noble friend Lord Hodgson for bringing it forward, with the able support of the noble Lords, Lord Clement-Jones and Lord Bilimoria. I hope that my noble friend the Minister will look favourably on these amendments. If she is not minded to, will she undertake to bring forward amendments of her own? It would be very unfortunate to leave the parties in what my noble friend Lord Hodgson described as a no man’s land, without any degree of clarity or finality.

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[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, I support the amendments in this group, which, as usual, the noble Lord, Lord Hodgson, has done a very good job of introducing. I was particularly drawn to the notion of streamlining, as suggested in Amendment 48A. I admit that my interests are probably wider than in this particular instance, but what we are dealing with here is a situation where there may already have been a previous notification and much of the same information might be needed again. If this is thought too wide, in that it goes on for ever so that it is hard to believe that updating might not be required, perhaps the streamlining could be for a certain period and, as the noble Lord, Lord Hodgson, also suggested, on the condition that nothing else has changed or, perhaps as an alternative, that one has to notify only what changes have been made.

This also raises the question of how much record-keeping the Government are going to undertake. I raised a somewhat similar query last week when I was thinking about licences and an investment agreement that covered options for licensing and whether they could be covered at once or, as perhaps this amendment envisages, there could be some kind of streamlining. However, the response from the Minister was that each instance had to be dealt with on its own. That would be a great shame from the industry side of things. That is no way to build up, if you like, intelligence, and for that to work both for the department and industry in helping to make it simpler to get through these notifications and to understand what is going on.

Looking at how a lot of notifications are made on a precautionary basis—much of the interest in the Bill is about making sure that an acquisition is safe—if an acquisition has already been cleared as being not of interest in response to a voluntary notification, for example, is it then sold on again? Is it safe to assume that, if there has been no significant change in activity but it was felt previously to have fallen within the definitions, it is safe to go ahead again with a voluntary activity? That is because again there will otherwise be a temptation to think that safety requires another notification. I would have thought that it was in everyone’s interests to cut down on the number of voluntary notifications.

Amendment 67B is self-evident, given that the “reasonable in all circumstances” provision must cover not only any urgency perceived by government but also the facilities at the disposal of the person. One interesting point that I would like to make here, although it goes a little beyond what the amendment is all about, is that Clauses 19 and 20 bear some resemblance to clauses in the Internal Market Act 2020, which were in turn lifted from the CMA information requirements. If the noble Lord, Lord Callanan, was answering this —although it is not—I am sure there would be a recollection that I recalled bitterly that those conditions were inappropriate. It is interesting to see that, in what might be called rather stronger situations, a slightly lighter touch is nevertheless being adopted here; that is, when individuals are involved in something that is necessarily of a security interest. Perhaps that reflects some recognition by the Government that people who have done no wrong should not be subjected to overly coercive requirements as though they were wrongdoers. That is a comment on an aspect of this part of the Bill, rather than in direct relation to the amendments.

I support these amendments. I was not sure what the noble Lord was going to say on the financial clause. Some very good points have been made, but I tend to be of the view that if the Government’s requirements have caused disaster to befall a company through delay, there should be a mechanism for compensation. However, how that is to operate needs to be made clear.

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Amendment 64 is in that context in relation to voluntary notifications. If somebody has gone to the trouble of making a voluntary notification, the Secretary of State should reject or accept it very rapidly. Amendment 64 would ensure that, if the voluntary notification were accepted, the Secretary of State would be required to give notification within five working days instead of as soon as practicable. At that point, there is no justification for any significant delay at all. I hope that all these amendments work to secure much more specific timetables for this process.

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, I added my name to the amendments of the noble Baroness, Lady Noakes, as they are yet another way to incrementally reduce the various points of uncertainty. It is notable how many of these can be found as we go through the Bill. As the noble Baroness explained, these amendments relate to the time for accepting a mandatory notice, from which other time periods can also flow, and then shortens the time for deciding whether to issue a call-in notice. As she explained, this is not meant to be part of the assessment and can therefore be short.

Now that the noble Lord, Lord Lansley, has explained his take on solving what is basically the same problem, I wonder whether it is better to look at the whole period, or to keep it cut up into segments so that people know where they are as they go along. As the noble Lord explained, it is very important not to start the process with two “as soon as practicable” requirements, because that just looks like a bottomless pit.

I will not repeat what has been said, and I am sure I can anticipate the Minister’s answer, but it seems that at every point in the Bill, the balance of convenience rests with the Secretary of State and the department. It does not make for a good business environment when there is no pressure put on the department. It reminds me of conversations I had not that long ago when I was chairing a regulatory strategy group looking at doing business in China. The repeated refrain from the business side was, “How do we get legal certainty?” The answer was always that you cannot; it is when the party decides. That is where this Bill puts us, and I fear the collateral damage it will create. I regret that I have to use the language of warfare and bombs to bring that home, but this should be made much more business-friendly.

[Lord Naseby (Con) [V]]

My Lords, I shall be very brief. I am full of admiration for my dear noble friend Lady Noakes for the thoroughness with which she has trawled through the Bill and these particular aspects. I have been in and have knowledge of a situation of a mandatory notice—I make no comment on the other aspect—and my noble friend is absolutely right: we need certainty in life. Whether five working days is the appropriate length of time I personally am not able to judge, but it seems entirely reasonable, and if its sponsors and their experienced colleagues from the City believe in it, I am more than happy to go with it. It does not seem to allow for any wriggle room; the worst thing in politics and making law is to allow for wriggle room, so I am absolutely behind Amendment 49.

National Security and Investment Bill

Baroness Bowles of Berkhamsted Excerpts

Committee stage
Tuesday 9th March 2021 Grand Committee

[Lord Vaizey of Didcot (Con) [V]]

My Lords, Amendment 15 and other subsequent amendments seek to bring in an exemption from the mandatory filing requirement for acquisitions and investments by entities that are ultimately controlled by UK nationals or nationals from certain countries allied to the UK. It is important to stress that this is to exempt companies from the mandatory filing requirement, not from having to file at all.

The Bill currently provides that the mandatory filing requirement applies equally to all investors, despite the fact that the Government have acknowledged that UK investors are inherently less likely to give rise to national security concerns. A more targeted and proportionate approach, which would better reflect where national security risks are most likely to lie, would be to exempt from the mandatory filing requirement acquisitions and investments by UK nationals or entities that are ultimately controlled by UK nationals.

In addition, investors from countries which are closely allied to the UK, such as Australia, Canada, New Zealand and the US, plus any other country subsequently specified by the Secretary of State, should also be exempt from mandatory filing requirements for the reasons I have already stated. That is the thinking behind my Amendment 95, which is included in this group. To the extent that national security risks arise in relation to any such transaction, the Secretary of State would still retain the power to call in a qualifying transaction for review. As I say, the exemption would relate solely to the mandatory filing requirements.

Amending the Bill in this way would also better align the UK’s regime with those of other countries, such as the US and Australia, which I have already mentioned. I can understand why the Government may wish to appear agnostic when it comes to providing exemptions to UK nationals and friendly countries. While there is no doubt that, for example, investments from China in sensitive sectors would come under close scrutiny under the new regime—no one should pretend otherwise—it is important to bear in mind that only four of the 12 national security interventions under the existing regimes have involved Chinese investments.

It is important for me to acknowledge that the Government have intervened in eight transactions that involved investors from countries that have historically been allies, such as the US, Canada, Italy and Germany; they extracted undertakings from those investors to protect UK national security interests. A consistent theme in those interventions, in addition to the usual concerns about access to sensitive data, has been the Government’s interest in ensuring continuity of supply to critical services to government and to maintain strategic capabilities. Such concerns, I acknowledge, are effectively nationality-agnostic, because they go to ensuring that critical capabilities, skills and manufacturing are maintained in the UK and not moved abroad. As a result, it is likely that in particularly sensitive sectors we will see the Government calling in transactions involving investors from so-called friendly countries and imposing remedies under the new regime. The Government can, via regulation, exempt certain acquirers from notification requirements but no investors or classes of investor are currently exempt. Nevertheless, these interventions happened before the Bill was introduced, so I do not believe that they undermine my point—namely, that friendly countries and UK investors should be exempt from the mandatory filing requirement, which will not exist until the Bill is passed.

I looked at the evidence given to the Bill Committee in the other place and was particularly struck by two interventions from witnesses. One was from Dr Ashley Lenihan from the London School of Economics, who said that for the legislation to cover domestic investors would be “truly rare” in comparison to similar legislation in other countries and, importantly, that the inclusion of domestic investors will

“lead to a much larger volume of mandatory notifications than most other national security FDI regimes”.—[Official Report, Commons, National Security and Investment Bill Committee, 24/11/20; col. 33.]

This brings out the point that was a theme of our debate on our first day in Committee and at Second Reading, which is that the Government have wildly underestimated the number of notifications they expect to get. As I say, I think we are all united in wanting to see this legislation passed, but we all want to see it passed in a form that is workable, does not overwhelm the new unit that the Government are setting up and does not put off investors by placing too onerous burdens on them.

In addition, other evidence given to the Bill Committee in the other place in the same session included that of Michael Leiter, a lawyer from Skadden Arps, a US law firm. He said that including domestic investors “is probably not wise”. He went on:

“I think trying to take a slightly smaller bite of the apple and not including current UK businesses in the scheme would be well advised.”—[Official Report, Commons, National Security and Investment Bill Committee, 24/11/20; col. 42.]


So I pray in aid those two experts in making the point that this amendment in no way undermines the regime that the Government propose to bring in, but it does make it a slightly more practical approach as this legislation beds down. Indeed, Mr Leiter pointed out later that the Bill can still catch transactions in which the ultimate actor may be foreign, because the unit that the Government are setting up can still look at the ultimate parent or, indeed, at a follow-on transaction.

I understand why the Government may want the legislation to pass in its current form—to have a belt-and-braces approach and to avoid people trying to hide behind a UK investor or a friendly foreign investor—but in my view the Government will still have powers to call in such transactions if they believe that this is the case. I beg to move.

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, I am grateful to the noble Lord, Lord Vaizey, for introducing his amendments and explaining some issues that I agree with, such as whether the Government are trying to make a failsafe, will it catch too many people and whether there will be too much to do. Although I understand that there may be different levels of concern, depending on the relationship with the country of the acquirer, I do not fully support the amendments in this group.

Where there are already sensitive industries, especially related to defence, who owns them matters in the sense of whether they are fit and proper for that kind of industry. Those considerations can apply within the UK as well as outside so, at some point, they have to be looked at. The question is whether they should be within the same regime or left to other operations that, the Government have considered, do not necessarily pick up everything.

My experience suggests that, in most instances, companies already used to dealing with sensitive matters would already be alert to what might not be desirable, and that it would either not happen or not happen often, but that does not mean that there should be no way of acting when it does. Therefore, they should all be included within this generic framework.

The Bill will apply to more companies or interests than companies used to dealing with sensitive matters, as I have just called them. Quite a lot still looks speculative, so I wonder whether there is, or in due course might be, further subdivision where certain geographies and industries might have different thresholds, depending on how likely they are to be particularly sensitive.

There will certainly be instances where the ownership interests of Five Eyes countries or other allies are of less or maybe no concern, but that may not always be the case if the security of supply or knowledge base is threatened. There are examples in the defence industry where, following takeovers by US corporations, research has been closed down, leaving only certification, assembly or supply of parts as the UK activity. This has led to a serious loss of forward vision and an undermining of the knowledge base, as well as other issues, such as access to technology. Sometimes that might be accepted, but not always.

It is one thing to recognise that we do not—indeed cannot—stand alone on defence issues, but quite another to accept, always and without review, what might be serious diminution or removal of all active participation. Therefore, although I expect the results of reviews to be different for different categories of acquirer, I do not see how there can be any blanket exclusion at the initial filtering stage. I am very interested in how different thresholds may play a part in reducing the number of transactions that would have to be filtered.

[Baroness Noakes (Con)]

My Lords, my first instinct was to say that the amendments in the name of my noble friend Lord Vaizey are obviously correct. I am sure that the majority of cases that would threaten our national security will involve foreign actors and, like him, I am concerned about the volumes of notifiable transactions.

However, I think that there might be circumstances in which the powers in the Bill could appropriately be used in respect of wholly UK companies. In that respect, I agree with the noble Baroness, Lady Bowles of Berkhamsted. For example, large company A may have a monopoly or near monopoly in providing something critical to our security. Tiny company B may have developed a new technology, which not only achieves a better result in the light of emerging risks, but at a fraction of the price. If company A acquires control of company B, it can kill the new technology and keep its monopoly profits on its old products. Sometimes, large companies acquire smaller ones to avoid disruption to lucrative markets, rather than to exploit their innovations. I do not think it would apply often, but it is a good reason not to restrict the Secretary of State’s powers in the Bill.

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[Lord Leigh of Hurley (Con)]

My Lords, I will speak to Amendment 17, which is in my name. I thank the noble Baroness, Lady Hayter, for her comments in respect of her amendment, which might actually be a better amendment than mine but none the less would achieve much the same thing. She probably does it in a more elegant way, but the purpose of my amendment is to understand the logic here and to persuade my noble friend the Minister that he should revert to 25% throughout.

The mandatory notification obligation in Clause 6(2)(b), which the noble Baroness, Lady Hayter, wants to delete, is triggered as a result of acquiring over 15% of shareholding or voting rights. In paragraph 52 and elsewhere, the White Paper specifies 25% but forecasts 15% for notifiable acquisitions. Accordingly, it is not, and is not intended to be, consistent with Clause 8, as the noble Baroness said, but that leads us into problems. Let us try to walk through this. It is complicated.

As I read it, Clause 6 is there so that the Secretary of State is given a mandatory notification for them to consider whether a trigger event has happened. Let us look at what a trigger event is, then. For that, we have to rely on Clause 8 to see under what definitions a people has gained control. Clause 8 lists four situations, three of which are where the shareholding is 25% or more. That is fine, but that clearly does not apply in a 15% situation. So you have to rely on the fourth situation, which is set out in Clause 8(8), which bites because it is the scenario where there is the ability, alone or with others,

“materially to influence the policy of the entity.”

Therefore, if an investor goes from, say, 14% to 20%, a lot of work has to be undertaken to see whether that person can materially influence the policy. If the threshold was 25%, there would be no need to do this. So given that it is most unlikely that a sub-25% shareholder can materially alter the policy—more importantly, this will be hard to determine in practice, as the noble Baroness, Lady Hayter, said—are we not creating an unnecessary problem for ourselves? What does “materially influence the policy” mean anyway? Which policy? All policies? Dividend policy? Maybe. Hiring and firing policy? Most unlikely. Again, this will lead to consternation and commercial agreements on shareholders’ rights having to be implemented, which will be hard to negotiate because, when you enter this sort of area, there will be uncertainty over whether you can materially alter policy.

In my plea for certainty and clarity, can we make it 25% throughout? The risk of a 15% shareholder throwing their weight around to demand that action be taken to change a policy that would be against our national interest is somewhat remote. I suggest that, with a 15% threshold, there will be significantly more cases to consider, the overwhelming majority of which will not have national security implications. The current filing threshold of 15% is significantly below the thresholds used in a number of other major foreign direct investment regimes. France’s is 25%, which the amendment proposes, and Canada’s is 33.3%. I note that my noble friend Lord Vaizey is not due to speak on this group, unfortunately, but if he did I am sure that he would continue to encourage the Minister to look to Canada rather than France, which is perhaps a natural progression.

I am aware that some countries have a 15% threshold, but they are not jurisdictions seen as international business headquarters or centres of international business in the same way as we are, and we have to remember that there is a difference. Considering the volume of transactions, it will even, I suggest, lead to transactions that pose a national risk being overlooked because of the volume generated by this very low, 15% threshold.

While we are on this clause, can the Minister help me with Clause 6(3), which is relevant to the clause we are debating? It states:

“But a notifiable acquisition does not take place if complying with the requirement to give a mandatory notice under section 14(1) in relation to the gaining of control, or the acquisition of the right or interest, would be impossible for the person within subsection (2).”


What does “would be impossible” mean? I have asked around, and no one I have asked can be sure. Is this when a public company’s shareholder trips over 15%? What does “complying … would be impossible” mean? Could we all argue that it is impossible, give all sorts of reasons unspecified and that is the end of it? If much, much better brains than mine cannot understand the clause, it must need amending. I cannot amend it because I do not know what it is trying to achieve, but it cannot be good law to have clauses which are not immediately intelligible to, if not the layman, then the reasonably well-informed reader.

The whole of Clause 6 is difficult. It talks about regulations we have not seen and then gives power for those regulations to be amended at will under subsection (5). I think subsection (5) is where a white list is introduced in the regulations, but it, and subsection (6) allow carte blanche and, accordingly, more uncertainty. Can the Minister commit to look at Clause 6 again, specifically with the amendment I have tabled and with the amendment that he can see I will perhaps have to table on Report? Amendment 94, tabled by the noble Lord, Lord Fox, which we discussed the other day, would have helped. Can the Minister give some assurances that parliamentary scrutiny will be given to these regulations?

Amendment 17 looks to strike a more proportionate balance between protecting national security and reducing unnecessary burdens on investors. We want to be seen as an investment-friendly country.

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, I thank noble Lords for introducing their amendments and exploring the reasoning behind them, which I have found helpful. I put my name down to speak to Amendment 17, which was signed by my noble friend Lord Clement-Jones, for whom I am broadly substituting because he is regrettably unavailable until later today. Like the noble Baroness, Lady Hayter, I was wondering why the Government chose 15% as the threshold above which a notification would become mandatory.

On the previous group, I wondered whether we could have different thresholds for different reasons. That would not be without precedent. For example, Australia has different percentage thresholds for lesser and more sensitive assets and different business value thresholds depending on the country of the acquirer. However, here we have 15%, which might be a number above which you fear an activist shareholder, but why?

In the UK, shareholders get some additional rights at 5%: they can go to court to prevent the conversion of a public company to a private company; they can call a general meeting; they can require the circulation of a written resolution to shareholders in a private company; or they can require the passing of a resolution at an annual general meeting of a public company. At 10%, you can call a poll vote on a resolution. At more than 10%, in a private company, you can prevent a meeting being held at short notice. At 15%, you can apply to the court to cancel a variation of class rights, provided that the shareholders have not consented to or voted in favour of the variation. Getting to 25% is significant, because it gives the right to prevent the passing of a special resolution, which could affect various articles and other things. I cannot see that preventing a change in class rights, assuming that a court would agree, is significant. I am slightly bemused about where that 15% number was plucked from.

We get to the point about whether fear of an activist shareholder is what this is all about. We hear of the insistence on having a director, when there is a certain quantity of shares, but they have to be able to control all the other directors, which does not always happen. It brings to the fore a thought about who owns the other shares, which would have to be taken into account in any assessments. Conditions might then be put on a company in respect of what happens to other shareholders to allow a transaction to pass.

As the noble Lord, Lord Leigh, explained, this makes something more complicated for reasons that do not yet seem clear. There are surely other inherent safeguards that would do the job. From that point of view, I support Amendment 17 signed by my noble friend but, as has been explained, there are other ways in which it could be achieved.

[Baroness Noakes (Con)]

My Lords, the effect of amendments in this group may be to restrict the Government’s ability of to act where de facto control is the result of an acquisition. We should not underestimate the ingenuity that could be deployed to achieve de facto control or make it easier for people to escape the Bill where there are substantive concerns. For that reason, I do not believe that we should tie the Government’s hands in this way.

I put my name down to speak on this group, in particular on my noble friend Lord Leigh of Hurley’s Amendment 17, which increases the voting rights threshold for notification from 15% to 25%, and I support the probing Amendment 15A in the name of the noble Baroness, Lady Hayter, which removes the reference to the voting rights test.

While a shareholding needs to be 25% to be certain of stopping a special resolution—the noble Baroness, Lady Bowles of Berkhamsted, referred to that a moment ago—in practical terms that assumes that all other voting rights would be exercised and in the opposite direction. The de facto ability to stop a special resolution kicks in at much lower levels. I am interested to hear what the Minister says about the rationale for 15%.

For many years, I was a director of the Reuters Founders Share Company, which was set up to hold a form of golden share in Reuters to protect the independence and integrity of the Reuters news service and to prevent it falling under the control of any faction. There is a long history to that, which I will not go into. The trigger point for the ability to use the golden share was set at 15%, for the very reasons I have just given. It is the level at which the influence of a shareholding bloc can be significant. In the history of Reuters Founders Share Company, deployment of the 15% was needed on one occasion. For that reason, I am inclined to support the Bill’s cautious approach in this area.

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[Lord Lansley (Con)]

My Lords, I am pleased to have the chance to speak briefly to Amendment 38. This group is linked, in so far as we are all addressing issues relating to limitations on the interpretation of the “qualifying asset” in Clause 7. Amendment 38 in my name is particularly directed towards the issue of such assets in Clause 7(4)(c)—ideas and related intangible assets—where they are licensed. In particular, Amendment 38 seeks to regard such assets, which are licensed on a non-permanent basis, and where ownership of the asset is not transferred to somebody else in any permanent or substantive form, as not being controlled. This relates to the set of exceptions in Clause 11, which sets out those circumstances in which assets are not to be regarded as controlled.

We need to do that because Clause 9, “Control of assets”, is very widely drawn—deliberately, I am sure, and probably rightly so. It says that control of a qualifying asset can result in the person being able to use the asset. Of course, if an asset is licensed to somebody for their use, they could be said to be controlling it. But anybody licensing it to them will be doing so with restrictions and provisions. To that extent, they are not controlling it; the person who has licensed it to them is controlling it. So we have an issue not only of definitions but of scope.

The definition of control should not extend to where somebody had something licensed with restrictions imposed upon it. The definition of using the assets is probably, in that sense, too wide to be applied in this case to those kinds of innovative assets. To whom is this important? It is very important to those whose job it is to bring forward innovation and to license their intellectual property, and to do so in circumstances where they continue to control its use and exploitation. We do not want the routine use and exploitation of assets or intellectual property to be seriously impeded every time it is licensed or for this to be regarded as potentially the control of a qualifying asset and hence notifiable. Amendment 38 gives us an opportunity to set proper limitations on the use of licensing for assets on a temporary basis.

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, my reason for speaking in this group relates to licences. I generally support the thrust of Amendment 23, if there can be appropriate definitions, but I was not quite sure whether I agreed with Amendment 38. I disagreed with the explanatory statement of the noble Lord, Lord Lansley, because whether or not the licenser maintains control depends on quite a lot of things.

An IP licenser may be able to impose conditions when a licence is first granted, but what happens after that and how much control there is over future events is up to whatever is agreed in the licence. If the price and conditions are right, it could be a fully assignable licence; it could be assignable with or without consent of the IP owner; it could be exclusive, so that the IP owner no longer has any rights to use it themselves or to license others; or it could be a sole licence that also effectively restricts supply under the IP. A licence can therefore be for something that is relevant to national security and have both ownership and security of supply implications.

In paragraph (c) of Amendment 38—the substantive economic ownership point—I am sure the noble Lord, Lord Lansley, is trying to exclude the exclusive licences that are assignable because, as he would say, economic control had been obtained. I am not sure whether that is the right way to define it, but I understand the sense of what he is trying to do. However, I wonder whether that also captures what could be restriction of supply issues. Those can also happen through licences that would not necessarily mean economic control.

The whole matter of licences is quite interesting, but they can be unique—I used to do them for a living, so I should know. We therefore have to be careful about clarifying, perhaps in a more substantive way, the things that one wants to exclude from review. I think it is necessary to exclude some, because I am absolutely certain that you would get an even bigger deluge if you did not. It may be that things that count as ordinary licences, where there are many licensees—rather like in the other amendment—and no security of supply issues, can be treated the same as any product for sale. However, wherever there is a sole or exclusive licence in particular, it would be necessary just to have a look to make sure there was nothing that you might want to do something about. There could quite possibly be something if it was in a relevant technology area. However, the noble Lord, Lord Lansley, has drawn an interesting point to our attention.

[Lord Clement-Jones (LD)]

My Lords, as has been mentioned, the amendments in this group have a common factor very much along the lines of what the noble Lord, Lord Hodgson, said: that it is really important to look at the nature of qualifying entities and assets under Clause 7 with a keen eye. I think that the debate will continue beyond Committee.

One has to make choices here where one thinks it is appropriate to go for a change. I would give this a score of one out of three. I put my name to Amendment 23 in the name of the noble Lord, Lord Vaizey, because the argument there is very straightforward. As he said, it is about “business as usual” procurement and the purchasing of things such as software licences and standard equipment, so that, even if it might technically be caught by the sectors, it is not captured in the definition of a qualifying asset. This is so that, again, we do not have a vast quantity of referral requirements for what are essentially day-to-day transactions, which could be a massive burden on business. The noble Lord made the argument extremely well there.

I am much more nervous about the proposition of taking land out of this, particularly when it comes to reversing the requirement: that is, you publish the sensitive sites and then say whether the transaction is caught because it is next door to that site. The way in which the qualifying entities and assets clause is currently set out, with sensitive sites not being published, is probably a rather safer way of dealing with national security, but that is a purely personal view. I hope that we keep things that way round.

It was a great pleasure to hear what my noble friend Lady Bowles had to say about the third proposition, given her experience and expertise in the whole area of intellectual property. That was exactly my reaction: that licences are animals that can vary in many different ways. As she said, they can be exclusive or non-exclusive, long-term or short-term. I agree that they are not as easy to define as an asset transfer, such as an assignment of copyright or other forms of intellectual property. Nevertheless, in substance, they can mean the transfer for quite a period of time—indeed, the wholesale transfer of knowhow—just as much as an assignment can. One therefore needs to be somewhat wary.

Then you start getting into paragraph (c), as proposed by Amendment 38, which says that

“substantive economic ownership of the asset has not been transferred”.

That is virtually impossible to define for this particular purpose. I am wholly sympathetic to the idea of screening and filtering in a way that cuts back red tape, but at the same time one must recognise that intellectual property is one of the most sensitive aspects that needs to be caught by this Bill. That is the future. Intangible assets are the real Crown jewels of national economies. We must be very careful about that.

--- Later in debate ---

[The Deputy Chairman of Committees (Lord Bates) (Con)]

I have received requests to speak after the Minister from the noble Baroness, Lady Bowles of Berkhamsted, and the noble Lord, Lord Clement-Jones. I will call the noble Baroness first.

[Baroness Bowles of Berkhamsted (LD) [V]]

I have one comment and one question. My comment is that I understand everything the Minister said and I broadly agree, but I think the Government underestimate the amount of licensing they might find has to be reported, because licensing is the new sale. That is the way everything is going: there is no outright purchase of anything any more; everything is licensed, whether the programmes you use on your computer or anything else. Indeed, accounting standards even drive towards that kind of model because in some instances it becomes increasingly difficult to fit true sales into the new IFRS. I cite IFRS 15 as an example.

I meant to ask my question, but I spoke a bit too spontaneously to remember it. I am interested in follow-on activities. If, for example, you have a clearance on an investment into, say, some university research but that also encompasses a right to have a licence, would that licence to the same organisation automatically be cleared if the investment has been cleared or would you have to go round the loop again? You could apply the same to any assignment of a licence: if it is assigned to an essentially similar kind of business and a previous notification has not resulted in a clearing, can you be confident that you do not have to notify again on the basis of such a previous clearance?

[Baroness Bloomfield of Hinton Waldrist (Con)]

The noble Baroness makes some very good points—I am conscious of her much greater knowledge of this area than I have—particularly the point she makes about licensing being the new sale. I am pretty confident that we have taken these points into consideration. On her specific point about whether investments would be cleared, the true answer is that every notification would be counted separately.