National Security and Investment Bill

Lord Bruce of Bennachie Excerpts

2nd reading & 2nd reading (Hansard) & 2nd reading (Hansard): House of Lords
Thursday 4th February 2021 Lords Chamber

[Lord Bruce of Bennachie (LD) [V]]

My Lords, the Bill has arrived in this House from the other place unamended, and across the House there has been general recognition of the need to reform takeover and investment rules to take account of national security considerations. However, for the Bill to be effective and proportionate it needs a clear statement of government strategy on what comprises national interest and security. At the moment, the provisional list of sectors is a catch-all and needs more detail. The Law Society of Scotland has stated reasonably that the Bill should be clear and that definitions of national security and details arising should not be left to secondary legislation. Without clarity, businesses and investors will face uncertainty about whether an acquisition or an investment in an influencing stake should trigger a referral, as other noble Lords have already stated. Should the fact that a foreign agency has a stake or qualifying interest in a UK-based company in any of the key sectors be, of itself, a reason for referral? The Law Society of Scotland and others believe that with a lack of clarity the number of referrals could be high, and that has been raised by a number of noble Lords.

There is also concern that, as the briefing states, almost anything purchased could conceivably be employed to attack national security. Examples are computers, drones, cameras and HDMI cables. So a medium-sized contractor preparing to start a contract could find itself subject to a referral, so delaying the contract and leading to extra costs and potential penalty clauses. This could even arise out of a malicious complaint from a competitor.

The society also highlights issues with Scots law relating to securities. This could be resolved if Clause 8 were amended to make it clear that nothing is triggered where the party taking security does not factually take control. Will the Minister consider this as failing to do so could specifically deter investment in Scottish companies?

There are also concerns that the possibility of referral could have an impact on the investment management industry, which is also important to the Scottish economy. The Institute of Directors, while accepting that the Government’s powers to intervene in the economy on grounds of national security need to be robust, is concerned about politicisation if the law is not clear. It is concerned that there will be a huge increase in workload, with real burdens on SMEs and that this, in turn, could, as the IoD puts it, have a chilling effect on investment.

Writing in the FT John Fingleton, former head of the OFT argues that the Bill goes far beyond measures introduced elsewhere in terms of its scope and in the measures that it introduces, including calling in deals up to five years after they were concluded. The Bill is also retrospective and applies to deals concluded the day after it was published, yet deals that may be affected can be referred to a new investment and security unit. Can the Minister say how that will be established and resourced because, as many noble Lords have said, the workload could be enormous and the specialisation should be very specific?

Both Fingleton and the IoD are concerned that, as the legislation is framed, it could lead to political lobbying for intervention with the possibility of Ministers using subjective, topical, political criteria. With this amount of uncertainty, there is a real danger that potential investors in UK businesses will be deterred and will look elsewhere. Many successful small and medium-sized businesses look for foreign investors to enable them to grow. They may find it harder if they are in one of the key sectors. The time and delay for an adjudication could be a decisive factor in preventing new investment or urgent refinancing or restructuring.

The current UK Government have been driven by their determination to deliver Brexit. The fall-out from the TCA will be felt for many years. What is not clear at home or abroad is what the Government’s strategic objectives are for the UK’s trade and investment future. Where is the industrial strategy? They have decided that our geography is not a prime asset. Why else would we tear up market access in Europe for as yet unquantifiable access to markets on the other side of the world? We have world-class universities and research and areas of technical excellence. I do not suggest that the Government should pick winners, but surely a strategy for building our economy based on our strengths and actively seeking international partnerships is a reasonable task. Of course, security threats may not be anticipated, and the Government need to be able to act when we are threatened, but a clearer set of criteria would balance national security against the need to keep Britain open for business.

In that context, I want Scotland to continue to offer an attractive location for inward investment. It is key to building a modern economy, developing new skills and improving the balance between the public, private and mixed sectors. We can be in the forefront of 5G, AI and quantum computing as well as biosciences and space and science technology, which was mentioned by the noble Lord, Lord McNally. Brexit presents bumps in the road, but uncertainty over Scottish independence could create roadblocks. Let not this Bill become another obstacle to investment. If it is clear, targeted and proportionate, it can protect our national security and investment promotion, and I hope that when it leaves this House it will do precisely that.

National Security and Investment Bill

Lord Bruce of Bennachie Excerpts

Committee stage & Lords Hansard
Tuesday 2nd March 2021 Grand Committee

The affirmative procedure, as proposed for this vital list of technologies, is not meaningful scrutiny, but the super-affirmative procedure set out in Amendment 94 is. I might have misspoken on the committees, so I refer to the amendment itself on those committees. I look forward to the Minister’s response and to being sure that we will get some movement when we get to the next stage of the Bill.

[Lord Bruce of Bennachie (LD) [V]]

My Lords, I support Amendment 14, tabled by the noble Baroness, Lady McIntosh, to which I added my name just too late. I also support the more detailed Amendment 94, tabled by my noble friends Lord Fox and Lord Clement-Jones, but as my noble friend Lord Fox has spoken at length and my noble friend Lord Clement-Jones follows me, I will leave them to expand on it, as has already been done. There is a connection, although I accept that there are distinct differences.

Amendment 14 and others that I have tabled reflect concerns that I raised at Second Reading, which have also been drawn to my attention by the Law Society of Scotland. Given the importance of financial services to Scotland and the contribution that Scottish financial services make to the UK economy, surely it is wise to ensure that relevant stakeholders are consulted in advance of any regulations. That is especially important given the importance of the professional services that underpin financial services and draw on different qualifications and traditions within Scotland.

The concerns that are being widely raised across many of the amendments to the Bill are directed not at its purpose, which is broadly supported, but at the possibility of it being applied too widely, with Ministers having too much discretion and with players in the market having inadequate information with which to make decisions and judgments. We are talking about people who have no particular intention to threaten national security but might inadvertently find themselves compromised in doing so.

I see Amendment 14 as trying to avoid unintended consequences or confusion that could prejudice investments made in good faith. As my noble friend Lord Fox has said, the Government can by regulation add new sectors to those designated as covered by the Bill. They can also expand on the definitions within the sectors. So surely it is appropriate that any such changes should be subjected to the same consultation as has been carried out to date with the 17 sectors so far designated. Why would you introduce new sectors or substantially modified ones and not apply the same level of consultation?

There remains a concern that investment transactions may be carried out in good faith, as I have said, without the intention or realisation of a national security dimension. It may therefore not be notified, as people may not feel there is a need to do so. However, if it is subsequently referred or called in and found by the Minister to be in breach, the transaction could be void, and we have had that debate already.

In the circumstance of, say, a land transaction, an area where the Law Society of Scotland has a particular concern, land being transferred could leave significant uncertainty in the air. Land issues have caused problems in Scotland in recent years. For example, landowners—lairds—often made land available for community use in the past, such as for a schoolhouse or cottage hospital. You may argue that that was generous— [Inaudible]— the community appreciated the benefit. Unfortunately, in those cases, formal conveyance did not always take place and, in more recent years, people who have acquired the title to the land have secured financial gain by putting charges on those who acquired the school, building, hospital or what have you and have made a nice little packet. You may say that that has nothing to do with national security, but it shows the problems when there is any confusion in the transfer of land.

Indeed, if I may briefly digress, the mountain from which my title is derived—Bennachie—for 60 years had people, smallholders, living on it on what was common land until, in a land grab, surrounding landowners simply seized that land and gave themselves the title, even though it had been held in common before, and evicted the squatters. We have had some controversial land decisions, but we are more concerned about legitimate transfers of land for environmental, recreational or financial purposes where because, for example, the landowner acquiring or disposing is not a UK citizen or is an institution that the Government may have suspicions about, it could lead to a problem.

Most people engaged in those transactions will look to professional services for appropriate advice. If those professional services have been part of the stakeholder consultation on any changes to the regulations or the detail of them, they will be able to provide transparency and legitimate advice to avoid those kinds of problems arising. That relieves the Minister of a problem and embarrassment and removes the possibility of otherwise legitimate investments being compromised or withheld because of a lack of clarity.

The conclusion I suggest to the Minister is that consulting with relevant stakeholder, when any legislation is being amended or introduced is to the mutual benefit of all players, including the Government and national security. We are talking about a relatively small number of clearly identifiable stakeholders, not a mass of agencies. The Government know who they are and they know who they are. It can be done quickly and efficiently, and the net result is that concerns that were raised would be headed off at the pass. They would not occur, so that we would not finish with legislation that leads to the threat of voiding contracts that in no way compromised national security, but somebody felt that they might have done. Sellers and buyers need clarity on the law; consulting relevant stakeholders will help to achieve this.

[Lord Clement-Jones (LD)]

My Lords, there are distinct common factors in both these amendments. The proposers do not believe that the current way of approving regulations under Clause 6, purely the affirmative procedure, is satisfactory. That is because of the importance of the regulations under Clause 6. As we heard, they underpin the necessity for mandatory notification for certain types of transactions in 17 sectors and they can be changed. We heard, particularly from my noble friend Lord Fox, that the definitions of these sectors are highly complex.

My noble friend took the example of artificial intelligence, a technology I have taken considerable interest in. As he explained, machine learning technology permeates almost every single sector and every use for both consumers and businesses one can think of—fintech, edtech, regtech, you name it. Artificial intelligence permeates those, and the new description of the AI sector published in the government response today states:

“In narrowing the definition, the definition now provides further clarity for businesses and investors”.


However, the definition still covers:

“the identification of objects, people, and events; advanced robotics and cyber security.”

That is pretty broad.

The policy statement published today is also extremely helpful in emphasising the importance of Clause 6 regulations. The policy statement says:

“Under Clause 6, the Secretary of State has the power to make regulations to:… a) specify the description of a qualifying entity for the purpose of identifying a notifiable acquisition; …b) amend the circumstances in which a notifiable acquisition takes place … c) exempt acquirers with specified characteristics … d) make consequential amendments of other provisions of the Bill resulting from provisions set out in paragraphs (b) and (c).”—[Interruption.]


I hope that I am having some impact on the Minister, my Lords. The policy statement goes on to say:

“For the commencement of the regime, the Secretary of State intends to make regulations only to specify the sectors subject to mandatory notification.”


I underline “only” because you would have thought that was significant enough in itself. This is obviously a self-denying ordinance, but it is not a very large self-denying ordinance when you are dealing with the intricacies of those 17 sectors.

My noble friend Lord Fox has rightly quoted the Constitution Committee’s 2018 report The Legislative Process: Delegated Powers, which talked about the rubber-stamping of the Government’s secondary legislation. He also referred to my long life, and in my already long life I have been responsible for overturning a statutory instrument. The Blackpool casino was very much wanted by the citizens of Blackpool, so the SI for east Manchester was defeated by three votes in the House of Lords, and one of those votes was from the Archbishop of Canterbury—the former Archbishop of Canterbury, I am glad to say. It was I who put the Motion, and we passed it by three votes to deny the Government the right to build the casino in east Manchester. Unfortunately, the Government never came back with a proposal for Blackpool, and that is a sad piece of history. I do not know why they did not; it would have been a great place to build a casino.

However, that does show that, on a simple proposition, it is possible to have an effective debate. When you are dealing with 17 sectors and 111 pages of text, which are going to be the subject of this regulation, that illustrates that the form of affirmative resolution proposed in this Bill is not fit for purpose. This kind of super-affirmative procedure means that there would be a genuine debate on the regulations and the 17 sectors and their extent.

I have huge sympathy with the amendment of the noble Baroness, Lady McIntosh, because of course one wishes to see consultation among stakeholders. In an ideal world, one would like to see both that and the super-affirmative resolution. But, to be frank, consultation is not the same as, or a substitute for, proper parliamentary scrutiny. These are crucial regulations, and it is right that they are opened up for full debate in this way. I am probably going to embarrass the noble Lord, Lord Lansley, by saying that he said earlier we will have some debates about the sectors—well, not really, unless this amendment is accepted.

National Security and Investment Bill

Lord Bruce of Bennachie Excerpts

Committee stage
Tuesday 9th March 2021 Grand Committee

Moved by

[Lord Bruce of Bennachie]

31: Clause 8, page 6, line 38, at end insert—
“(10) For the purposes of this section, acquiring a right or interest in, or in relation to, an entity by way of security does not constitute obtaining control over the entity, and any such rights or interests held by way of security do not constitute any of the cases described in this section.”Member’s explanatory statement
This amendment seeks to ensure that transactions are only caught where the person gains actual control of a qualifying entity and would exempt securities or other situations where no effective control is obtained.

[Lord Bruce of Bennachie (LD) [V]]

My Lords, I speak to Amendments 31 and 33, which relate to the continuing debate on Clause 8 and Clause 9 on the control of assets. The effect of Amendment 31 would be to ensure that an event is triggered only where the person gains actual control of a qualifying entity, and it would exempt securities and other situations where no effective control is obtained.

The definition of “control” in Clause 8(1), as has already been said, is framed very widely. It refers to 25%, 50% and 75% shareholding or voting thresholds, which correspond to those applied in the context of the people with significant control regime. Clause 8 also includes provisions adapting the above scenarios to cater for entities that do not have a share capital, such as partnerships.

This should be read alongside Schedule 1, which I suspect the Minister might allude to, which provides for particular cases in which a person is to be treated, for the purposes of the Bill, as holding an interest or right. In particular, paragraph 7 of Schedule 1 states:

“Rights attached to shares held by way of security provided by a person are to be treated as held by that person … where apart from the right to exercise them for the purpose of preserving the value of the security, or of realising it, the rights are exercisable only in accordance with that person’s instructions, and … where the shares are held in connection with the granting of loans as part of normal business activities and apart from the right to exercise them for the purpose of preserving the value of the security, or of realising it, the rights are exercisable only in that person’s interests.”


However, this clarification does not fully account for the situation where a lender becomes the registered holder of shares in security, as is the case with the legal mortgage over shares under the law in England and Wales, or a shares pledge under the law of Scotland.

Where the shares in an entity are transferred in security to a lender, the lender may find first that they have gained control of the entity under scenario one, notwithstanding the fact that under the terms of the security actual control remains with the security provider, for example, through the voting rights being exercisable only in accordance with the security provider’s instructions, as envisaged by paragraph 7 in Schedule 1 and that secondly, they would have triggered the second limb of the notifiable acquisition test.

As paragraph 7 of Schedule 1 refers only to:

“Rights attached to shares held by way of security,”


arguably it covers only the rights attaching to shares and not the ownership of the shares themselves—in other words, the rights rather than the ownership. As a legal mortgage over shares is unusual in England and Wales, but a shares pledge is the only way to obtain fixed security over shares under Scots law, this issue disproportionately affects Scots law fixed security over shares; that is, fixed security over shares in Scottish companies. As I have said in previous interventions on this Bill, the importance of the financial services sector and therefore the law of Scotland requires this to be addressed.

Effectively, we are talking about a situation where, for example, a bank providing a loan to a business takes security over shares unrelated to that business. In that context, the bank neither seeks nor exercises control of the shares; similarly if a parent company for example gives security to its bank over the shares of a wholly-owned trading subsidiary. In this case, the parent company retains direct day-to-day control, which would pass to the bank only in the case of default. Yet, as drafted, there is a risk that taking a fixed security over Scottish shares could trigger the provision, which would be highly disadvantageous to the Scottish economy specifically.

Given that a notifiable acquisition that is completed without the approval of the Secretary of State is void, the Law Society of Scotland argues that paragraph 7 of Schedule 1 should be extended to cater for the situation where shares are held in security by a lender. Paragraph 7 should similarly be extended to carve out security over qualifying assets since the security could be read as giving the security holder rights equivalent to those set out in Section 9. It would be helpful to include an express carve-out that nothing here is triggered simply by the act of holding any asset in security.

The society recognises what the Government are trying to achieve and addresses the situation where the borrower defaults and the terms of the security usually dictate that the asset will be sold. The transaction will therefore form a trigger event in the same way as any other transfer. I guess in rare circumstances, the holder of the security—that is, the lender—might seek to appropriate the asset. However, such appropriation could be caught within the meaning of a trigger event and if it were determined that the lender in question was not a suitable person to acquire ownership and control of the entity, the society considers that it would be possible for the conditions attached to the transfer to stipulate that the new owner would be obliged to sell their shares. They would thus be compensated for the value of their shares and any national security risk would be avoided.

I turn to Amendment 33, which has a similar purpose addressed to assets—namely, to ensure that transactions constitute a trigger event only where the person gains actual control of a qualifying entity and to exempt securities or other situations where no effective control is obtained. Where a lender holds as asset in security that lender may find that it has gained control of that asset, notwithstanding that under the terms of the security actual control remains with the security provider where they are in possession of the security. The second limb of the notifiable acquisition test may be triggered even when no effective control has passed.

Under Scots law, fixed security over incorporeal moveable property, which in English law is intangible property, can be achieved only be transferring the asset to the creditor. This includes, among other things, shares, insurance policies, contractual rights and intellectual property. For those assets where a real right of security can be treated without the transfer of ownership, such as land, a new real right is still being created in favour of the creditor. This right contains certain inherent negative controls—for example, a prohibition on sale—and certain positive controls: often the borrower must insure the property. I think we all know that this is common practice in mortgage arrangements and, as drafted, there is a risk that taking a fixed security over a Scottish asset could trigger this provision and this also would be highly disadvantageous to the Scottish economy.

Taking this into account, it would also be helpful to include an express carve-out, where nothing is triggered by the act of holding any asset. As stated in relation to the previous amendment, provision can be put in place to ensure that the Government’s interests are protected in the event of a default or the transfer of the assets, if triggered in the normal way. As already stated in the context of Amendment 31, such appropriation would be caught within the meaning of the trigger event. Conditions could attach to the transfer to stipulate that the new owner would be obliged to sell the asset; they would be compensated and national security risk avoided.

It appears that the Law Society of Scotland has identified practical issues for financial transactions under Scots law, which these amendments seek to address while fully recognising the Government’s national security objectives. It is a Scots law difference which could affect Scottish banks and Scottish mortgages but does not appear to have been considered in the Bill’s drafting. I hope that the Minister will be able to take this away and confirm whether the Bill needs to be changed in this way to ensure that the Scottish economy does not suffer what could be significant disadvantage as a result. I beg to move.

[Lord Hodgson of Astley Abbotts (Con) [V]]

My Lords, I have tabled two amendments in this group, Amendments 34 and 35, which I shall now address. Again, they seek to provide clarity on the detailed operation of the Bill. As before, I am grateful for the support of the noble Lord, Lord Clement-Jones, and the Law Society.

Amendment 34 proposes a clarifying change to Clause 10(2)(b). It is argued that the existing wording of the clause means that any changes of ownership within the group of a company falling into one of the relevant sectors will require a notification. For example, an ultimate parent company might hold an interest in one such company through a wholly-owned subsidiary and, as a result of a decision to reorganise the group, it is decided that the parent should hold the interest directly. The holding company has the shares transferred to it. Any such holdings which are acquired after the commencement date, when the Bill becomes an Act, will have been through the security screening process, so there is surely no need for further consideration of what is essentially a paper transaction.

That leaves us with the question of how to deal with similar intragroup transfers where the initial investment was made before the commencement date. In such cases, of course, no screening will have taken place. Amendment 34 would require such changes to go through the standard notification and approval process.

Amendment 35 again seeks to provide clarity about how the Bill will operate in practice. Applying the current drafting of Clause 10 to a group which has multiple separate entities appears to require each of them to make a separate notification of a potential trigger event. That surely cannot be a sensible approach and, if followed, is likely greatly to increase the bureaucratic burden of form-filling and checking, and be a strain on the ISU. Amendment 35 establishes that, in the case of a corporate group, only one trigger event would arise and only one such notification would therefore be required.

--- Later in debate ---

[Lord Bruce of Bennachie (LD) [V]]

I thank the Minister for his response. Given the detail of the response to the other amendments, I might have hoped that the department would be able to give us a little more detail on Amendments 31 and 33, but I genuinely accept his offer to write. I thank the noble Baroness, Lady McIntosh, for her support and suggest that the Minister takes up her offer, on behalf of us both as well as the Law Society of Scotland, to meet to try to find a way through this, because there are clearly some practical concerns about the impact of the Bill as it stands.

These amendments do not seek to undermine the Bill in any way. The concern is that the Bill unintentionally undermines the good working of the legal and financial services sector in Scotland, and it is clear that the Bill needs to take that into account. I accept and appreciate the sincerity of the Minister’s offer, but I suggest that a meeting that includes the Law Society of Scotland would be a more practical way forward than just an exchange of letters. I beg leave to withdraw the amendment.

Amendment 31 withdrawn.

National Security and Investment Bill

Lord Bruce of Bennachie Excerpts

Report stage
Thursday 15th April 2021 Lords Chamber

Moved by

[Lord Bruce of Bennachie]

9: Clause 8, page 6, line 38, at end insert—
“( ) For the purposes of this Act, a person does not gain control of a qualifying entity if the person acquires a right or interest in or in relation to the entity—(a) solely by way of obtaining security; and(b) in a situation where they obtain no effective control.”

[Lord Bruce of Bennachie (LD) [V]]

I thank noble Lords. Amendment 9 is self-explanatory:

“Clause 8, page 6, line 38, at end insert—


“( ) For the purposes of this Act, a person does not gain control of a qualifying entity if the person acquires a right or interest in or in relation to the entity—


(a) solely by way of obtaining security; and


(b) in a situation where they obtain no effective control.”


The purpose of this is to ensure that transactions constitute a trigger event only where the person gains actual control of a qualifying entity and, very specifically, to exempt Scottish share pledges or other situations where no effective control is obtained. I moved a previous amendment in Committee, and I thank the Law Society of Scotland, which has drawn this matter to my attention. I thank both Ministers, the noble Lords, Lord Callanan and Lord Grimstone, for engaging with me, the noble Baroness, Lady McIntosh, and representatives of the Law Society of Scotland to discuss this issue, which the Law Society still feels has not been satisfactorily addressed by the Government. Obviously, this amendment would be an attempt to ensure that it was.

There is a particular point about Scots law. The amendment is intended to exclude a situation whereby the sole fact of pledging shares in security, under Scots law, would be classed as a trigger event. A Scottish shares pledge does not allow a security holder to exercise effective control over the relevant shares in a Scottish company. The primary concern is that the current proposal suggests that a trigger event would take place in a situation where no control has in fact passed. The Ministers will be aware that not only did we exchange very useful views in discussion in meetings— I repeat, we are grateful to the Ministers for engaging with us—but the Law Society president then wrote to the noble Lord, Lord Grimstone, copying in the noble Lord, Lord Callanan, to express the concern that there was still an outstanding issue that needed to be addressed. As set out in the letter, the Bill as currently drafted fails to align with clear statutory precedents for treating shares that are the subject of Scottish share pledges as still being controlled by the pledger. For example, there is the definition of “subsidiary” in Section 11(59) of the Companies Act 2006, as supplemented by paragraph 7 of Schedule 6 to that Act. That reference obviously comes from the Law Society and not from me. This would create a disparity between Scotland and England—that is the real concern —and could make it harder for Scottish companies to obtain loan finance, as well as disincentivising potential investors from establishing vehicles under Scots law.

The amendment would ensure that a trigger event was recognised at the point at which the transfer of control actually occurs. In doing so, it would enhance the ability of the Secretary of State to carry out a national security assessment and impose any safeguards, but at the most appropriate point.

The Law Society, very helpfully, has set out a hypothetical example reflecting what it would say is a common, real-life scenario. For the purposes of this, it is control over company C which gives, or may give, rise to national security concerns. The situation is this: company A is seeking to raise finance, by way of a loan, and approaches bank B. Bank B agrees to lend the money against security over the shares held by company A in its wholly owned subsidiary, company C. Under current Scots law, the only way to obtain fixed security over shares is by way of a share pledge, with the shares being transferred to bank B or its nominee. As such, it can be said that bank B holds the shares, as per Clause 8(2)—that is, the bank holds 100% of the shares in company C. However, holding the shares in this scenario is not ownership in the true sense, and does not give the security holder effective control. Bank B will be unable to sell the shares, has no right to be paid dividends, has an obligation to immediately retransfer the shares on the money secured being repaid and, most importantly, will be unable to exercise voting rights, other than in conformity with company A’s wishes. In practical terms, company A therefore remains in full control of company C, and bank B is not, in fact, in a position of control.

In the previous debate, Schedule 1 was acknowledged and it appears to address the issue, recognising a scenario where a person grants security over shares but continues to exercise de facto control. However, the clarification refers to rights attached to shares, rather than the holding of the shares. Therefore, it does not fully account for the different situation, where a lender becomes the registered holder of shares in security. That has been the case with a share pledge in Scotland and has been standard Scottish legal and business practice since the 19th century. This is different from English law because, by way of comparison, under an English charge over shares this situation just simply does not arise, because no formal transfer of the charge shares is required to perfect the charge. In the parallel English scenario, the same relationships of control or lack of control exist but—this is crucial—no trigger event is recognised. The disparity between the situations in Scotland and England is one of real concern, which has been highlighted. It is not only prejudicial to existing Scottish businesses, by increasing obstacles to obtaining finance, but risks making Scotland less attractive as a jurisdiction in which to establish a business vehicle. I do not need to remind your Lordships how important the financial services sector is to Scotland. Indeed, Scotland’s contribution to the UK economy is disproportionately large in this sector. So, in project financing, investors could prefer an English vehicle, if this makes it easier to obtain funding. The practical effect is that long-established Scottish legal and business practice is being treated adversely compared to its English counterparts. I am sure that is not the intention of the Government or Ministers, but that remains a continuing concern of the Law Society of Scotland.

Acquisitions will, of course, be notifiable only in relation to the listed sectors. However, it is not the notification requirement per se that poses the risk to the ability of Scottish business to access finance. As identified in the context of the PSC, lenders are reluctant to enter into arrangements that suggest that they have control over an entity when this is not the case. The breadth of the call-in power, the potentially broad scope of national security concerns, means that many transactions may be called in for up to five years after the event has taken place. This creates uncertainty, and uncertainty, of course, opposes a commercial risk. The potential for transactions to be called in after the event in other sectors, may ultimately have a greater impact by disincentivising lenders. I hope the House is clear that this is a point of real and substantive concern.

In real life, it is very unlikely that bank B would seek to appropriate the shares in company C, in the scenario I outlined earlier. The most common scenario, following an event of default, would be for bank B to notify company A that it was going to enforce the security, and then sell the share in company C to repay the debt. The sale of the shares in company C to another purchaser—purchaser P—would constitute a trigger event under Clause 5. There is also the potential that bank B would decide instead to retain the shares. Having given notice to company A, bank B would therefore, at that point, enter into control of company C, acquiring all voting rights, dividend rights and the ability to sell the shares. That is the point at which the trigger event should occur. Entering into control of the shares following a default could indeed be specifically recognised as a trigger event, but that scenario is already suitably covered by Clause 8(2).

In a situation where company C falls within one of the 17 listed sectors, bank B’s acquisition of control would be recognised only if the appropriate notification had been given. In a situation where the Chancellor was not compulsorily notifiable, the five-year call-in period would begin to run at the point bank B assumed control. This could give the Secretary of State a longer timeframe in which to assess any risks posed by ownership of the shares vested in bank B. Notice of bank B’s interest would appear as a matter of public record, subject to the default occurring after the annual return showing that the share pledge had been taken. That would all happen long before bank B was able to take control. For these reasons, there is no real risk of hostile actors targeting lending arrangements as a means to gain control of national security-sensitive entities. The Secretary of State would retain discretion over available remedies, which could be applied at the appropriate time.

Nothing in the remarks that I have just made will come as a surprise to Ministers, because it has been set out in detail in a letter from the president of the Law Society of Edinburgh, addressed to the noble Lord, Lord Grimstone, and copied to the noble Lord, Lord Callanan. I hope that the Minister will acknowledge that there is an outstanding point of concern. As I say, we are all grateful to the Minister for engaging with us and showing understanding that this is a real issue.

None of us is of the view that there is any intention to put Scotland and Scottish businesses at a disadvantage, but, without this amendment or some comparable amendment that the Government might agree to or introduce, there remains a real possibility of discrimination against Scottish financial services and investment businesses, which would be politically awkward and embarrassing as well as practically damaging to the interests of both Scotland and the United Kingdom sector. I hope that the Minister can acknowledge that this issue needs to be addressed head on and that assurances can be given that the concerns outlined will not actually take effect. I beg to move.

[Baroness McIntosh of Pickering (Con)]

My Lords, I am delighted to speak in support of, and to have co-signed, Amendment 9. I am grateful to the noble Lord, Lord Bruce of Bennachie, for moving and speaking to the terms of the amendment so thoroughly. I also echo his thanks to the Law Society of Scotland for highlighting this issue at Committee stage and bringing forward this amendment for Report. I also thank my noble friends Lord Grimstone and Lord Callanan for the time that they spent with the noble Lord, Lord Bruce of Bennachie, me and members of the Law Society of Scotland going through the issue with us. I remind the House that I am a non-practising member of the Faculty of Advocates.

This is quite a sensitive time to be raising this matter, mindful of the fact that elections are going on in Scotland—they will be held on 6 May—so I am sure that it is not the intention of a British Government whom I overwhelmingly support to seek to disadvantage Scotland at this time. We are here to assist the Government and bring to their attention the ramifications of the preventions of the Bill currently before us. Amendment 9, so eloquently moved by the noble Lord, Lord Bruce of Bennachie, would simply ensure that transactions constitute a trigger event only where a person gains actual control of a qualifying entity—and to exempt Scottish share pledges in relation to other situations where “no effective control” is obtained.

Of all the comments made by the noble Lord, Lord Bruce, I echo the comparison that he made with English law, which could cause some confusion and has perhaps led to this regrettable situation. Of all the things that I recall from the conversation that we had on the call with my noble friends the Ministers, I want to impress on the Government that this is not just an issue but potentially one of some magnitude—my noble friend Lord Callanan seemed not to grasp that during the call, so I pause to emphasise it to him.

By way of comparison, under an English charge over shares, this situation does not arise, because no formal transfer of the charged shares is required to perfect the charge. In the parallel English scenario, the same relationships of control or lack thereof exist, but no trigger event is recognised. I am sure that this is just an unfortunate situation that has arisen, which is why it is timely to bring it to the Government’s attention today. The disparity between the situations in Scotland and England is one of the concerns that we seek to highlight as not only being prejudicial to existing Scottish businesses and increasing obstacles to obtaining finance but risking making Scotland less attractive as a jurisdiction in which to establish a business vehicle. I support all the comments that the noble Lord, Lord Bruce of Bennachie, made.

In the spirit of openness, as this is an extremely technical issue—I can quite understand if my noble friends perhaps do not fully grasp the situation in which we find ourselves—I have taken the opportunity to bring it to the attention of the Advocate-General, my noble and learned friend Lord Stewart of Dirleton, who will fully consider the ramifications. As such, I have every confidence that, before the Bill leaves this place, full and due consideration will be given to Amendment 9 and what we are seeking by moving it today.

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[Lord Callanan (Con)]

I am of course grateful to the noble Lord, Lord Bruce, and my noble friend Lady McIntosh for Amendment 9 in their names. As they outlined, it seeks to exempt from the call-in power acquisitions made by way of obtaining security over a qualifying entity where no effective control is obtained. I start by placing on record my thanks to the noble Lord, my noble friend and the Law Society of Scotland for meeting my noble friend Lord Grimstone and me following Grand Committee to discuss this issue in detail. Indeed, we have considered all the points that were made.

As I emphasised in that meeting and in our subsequent correspondence, the Government do not consider that the provision of loans and finance is automatically a national security issue. Indeed, lenders need confidence that they can see a return on ordinary debt arrangements in order to provide that service. However, we must also recognise that in a small number of cases national security risks can arise through debt arrangements. Noble Lords have particular concerns about the Bill with regard to Scotland. I understand—and the noble Lord, Lord Bruce, stated—that this is because it is usual practice in Scotland for a lender to become the registered holder of shares in security through a shares pledge.

Having heard the concerns, the Government have reflected carefully on the issue, but we continue to believe that an exclusion would not be appropriate in this case. In such circumstances, the legal title to shares will, as a matter of fact, have been acquired by the lender, and it is important that we do not inadvertently create a loophole that those who wish us harm might otherwise seek to exploit.

While I note that the proposed amendment has been updated since the version debated in Grand Committee, reflecting my noble friend’s intention to limit the exemption to situations where “no effective control” is obtained, I fear that this would be difficult to reconcile with the mandatory regime.

It would introduce a new, inherently subjective concept that would sit uncomfortably with the need for acquirers to be able to objectively determine their legal obligations. I hope that noble Lords who have stayed the course on this Bill—a small, gallant band—will know by now that it is focused on the central premise of acquiring control, with these circumstances defined in detail in respect of entities in Clause 8. This amendment would lead to a circular argument in the Bill, in which a trigger event is the acquisition of control—except for when control is not acquired. I am sure that a number of lawyers in this country would be licking their lips with that provision in the Bill.

I mentioned particular concerns about how this would affect the mandatory regime, but the Government also consider that this would cause difficulties for voluntary notification and for the Secretary of State’s call-in power. None the less, both my noble friend Lord Grimstone and I have committed to monitoring the operation of the regime in practice with regard to this issue. Clause 6 provides the Secretary of State with the power to make “notifiable acquisition regulations” to amend the scope of the mandatory regime. That could be used in future, if considered appropriate, to exclude circumstances related to acquisitions by way of security from the mandatory notification regime.

I will address head-on the point made by the noble Lord, Lord Bruce, that this will be particularly disadvantageous to Scotland. It is important to emphasise that such lending arrangements are also possible in England and Wales—albeit we know that they are less common. This Government are staunch supporters of Scotland and it is vital that the Scottish legal and finance sectors continue to flourish.

Let me briefly make three other points on this amendment, which I hope will provide further reassurances to the noble Lord and my noble friend. First, the Bill broadly mirrors the existing approach of the persons with significant control register, which does not exclude legal owners of shares acquired by way of security. I take great confidence from the fact that this has been in place since 2016 and has had no discernible effect on the willingness of lenders to provide finance in Scotland.

Secondly, the mandatory notification and clearance element of the regime is proposed to apply only to entities of a specified description within 17 sectors of the economy. The number of circumstances requiring notification where a lender acquires the legal title to shares at or above the thresholds in this Bill is therefore likely to be low and, as with all acquisitions, the Government expect that the overwhelming majority will be quickly cleared to proceed.

Thirdly, as has been previously debated, I am sure my noble friends will welcome the removal of the 15% threshold I spoke about in a previous group. This will further reduce the number of cases covered by the mandatory regime in relation to securities.

So, for all the reasons I have outlined, I hope that both noble Lords will accept the arguments I have put forward and will feel able to withdraw the amendment.

[Lord Bruce of Bennachie (LD) [V]]

I thank the Minister for his response and for addressing the details. I am not convinced that the Law Society will be entirely satisfied that the difference between Scottish and English law has been fully appreciated. The Minister talked about legal title but, as I said in my opening remarks, legal title is meaningless if the shares pledge explicitly excludes any mechanism for dealing with the shares—either receiving voting rights, dividends, or the right to sell and an obligation to have them back when the loan is repaid. It simply is not control.

I take note that the Minister is concerned that the Scottish situation is not unique and therefore could cause complications in England and Wales, but the practice is clearly well established in Scotland. As I said in my opening remarks, it has been since the 19th century and is relatively unusual elsewhere in the UK.

I understand that the Minister believes that there will be relatively few instances, but part of the problem with the Bill is that an awful lot is undefined, in terms of the 17 sectors, the details of how those will be determined, the circumstances in which triggers will happen and the definition of national security. All of those things are explicitly not set out in detail.

I welcome Ministers saying they will monitor the situation closely. The assurance I would be looking for if we withdraw this amendment—obviously we will ask the Law Society what it feels about the unamended Bill—is that, if it becomes apparent there is a significant negative impact on Scottish business and the Scottish sector, the Government will be prepared to act to remove such discrimination.

It is a long-established fact that one reason the Scottish financial services sector is so strong is that it has a long history of prudent asset management and insurance, which has given Scotland a disproportionate share of both national and international business because of its reputation for, if I may put it in these terms, “canniness” in managing investments and other people’s money. That being the case, we do not want a situation where the law as introduced somehow compromises that. That would not be good for Scotland or the UK either.

I hope these remarks will be noted by Ministers and they will undertake to consult and respond to any representations that emerge showing that the concerns we have outlined are real and significant. If the Minister is correct in his assurance that, though they may be real they will not be very significant, perhaps the matter can rest. But I am sure that I, the noble Baroness, Lady McIntosh, and others will make it clear to him that, if it becomes apparent that there is a significant problem for Scotland and that uncertainty is disadvantaging Scotland, he will hear about it. In the meantime, I withdraw the amendment.

Amendment 9 withdrawn.