National Security and Investment Bill

Lord Clement-Jones Excerpts

Committee stage
Tuesday 9th March 2021 Grand Committee

[Lord Clement-Jones (LD)]

My Lords, it is a pleasure to follow the noble Lord, Lord Leigh, on his amendments. I think he will cause quite a stir when he gives his annual lecture. I will speak first to Amendments 20 and 24. I refer to my interests in the register.

Amendments 20 and 24 take account of the fact that the Bill as drafted does not include any de minimis thresholds for qualifying entities and assets, in stark contrast to other leading foreign investment regimes. The point behind these amendments is to ensure that mandatory notification requirements involving businesses have a de minimis threshold. Not having one would be disproportionate, given the likely cost of making mandatory filings and the relatively low risk of any national security issue arising in the context of such transactions. It would also act as a significant disincentive to global investors and the start-up and early stage businesses that they fund, which may simply relocate to a jurisdiction that takes a more benign approach. As the noble Lord, Lord Leigh, said, this risks seriously dampening innovation in the UK, particularly in the continued development of the technology sector and start-ups, which rely heavily on venture capital investment.

Introducing value thresholds of £10 million annual turnover in the UK for qualifying entities and £10 million gross value for qualifying assets, subject to anti-avoidance provisions to prevent the circumvention of the Act, would ensure a much more proportionate approach. Value thresholds are also used in a number of other leading foreign investment regimes. For example, Australia and Canada use a tiered threshold system based on the identity of the investor and the nature of the business, and, in the case of Australia, the level of control acquired.

The noble Lord, Lord Leigh, also explained the other amendments that he and I put forward in this group, Amendments 52A, 55A, 64A and 67A, which would introduce another red tape busting proposal: a fast-track process for non-problematic transactions. The Bill currently envisages that the investment security unit will reach an initial decision as to whether to clear a notified transaction or to call it in for a detailed assessment within 30 working days of acceptance of the notification as complete. As the noble Lord explained, a significant number of transactions will fall within the scope of the mandatory notification requirements due to the target’s activities being in a specified sector—we have seen those in the document published last week—but which clearly do not raise national security concerns. To minimise the deterrent effect of the new regime on foreign investment into the UK, these amendments would introduce a fast-track procedure for such non-problematic transactions, enabling the acquirer to request a review period, as the noble Lord again explained, within a period of 10 workings days instead of 30, combined with reduced information requirements for the notification.

I have mentioned Australia and Canada; if the Minister would prefer it, I can refer in this case to a special accelerated procedure recently introduced in France for certain transactions. The use of a fast-track initial review procedure would not prevent the Secretary of State referring a transaction for in-depth assessment, as the noble Lord, Lord Leigh, cogently explained, if this was considered necessary and the timetable for such subsequent review would not be affected.

I very much hope that, as I said, these two red tape busting amendments will be very carefully considered by the Government. Otherwise, we seriously risk the Bill’s impact being disproportionate and having a chilling effect on investment.

[Lord Bilimoria (CB) [V]]

My Lords, I will speak to Amendments 20 and 24 in the name of the noble Lord, Lord Leigh. The CBI, of which I am president, supports the principle of the legislation in the Bill in protecting national security, which will always be top priority. However, the current drafting makes the practical application of the Bill difficult for business and could lead to additional burdens and complexity at a micro level and be an unintended deterrent to investment at a macro level.

With no set de minimis thresholds for transactions caught by the legislation, there is a risk that a high volume of notifications will inadvertently represent relatively low-risk activity caught by this maximalist approach from legal teams and counsel. On top of that is the extraterritorial nature of the provisions in the Bill. Many transactions involving target suppliers supplying goods and services outside the nation will be caught in the notification requirements. Given this backdrop of a maximalist approach, there is real concern in business that the Government’s capacity to process the projected number of notifications while the regulations are in their infancy will be a problem.

According to the CFIUS annual report, in the United States in 2019, 231 notices were filed for screening, with 113 resulting in investigation. The Government currently estimate, and I wonder whether the Minister can confirm, that there will be 1,800 annual notifications. However, there is concern that the true estimate could be up to 10,000. We should not have the unintended consequence, mentioned by the noble Lords, Lord Leigh and Lord Clement-Jones, of deterring foreign investment just when the UK needs to increase its attractiveness to it. We are just coming through the pandemic, we have had Brexit, and we are establishing ourselves as an independent trading nation—global Britain. We are the second or third largest recipient of inward investment in the world, and a magnet for it. We are a gateway to Europe when it comes to investment, and we need to continue to be so.

Amendments 20 and 24, in the name of the noble Lord, Lord Leigh,

“seek to introduce value thresholds for qualifying entities and assets (subject to anti-avoidance provisions to prevent the circumvention of the Act), which would bring the NSI regime in line with other leading foreign investment regimes that have de minimis financial thresholds for notification.”

Such thresholds provide a critical floor to the regime, ensuring that higher-value, higher-interest transactions, entities and assets are predominantly in focus. Of course the Government should consider national security threats of all sizes. However, in order to provide officials with sufficient breathing space to make a success of the predicted number of notifications, which I spoke about earlier, this threshold should be applied.

Importantly, this amendment would concurrently bring the planned regime in line with other leading foreign investment regimes, as we have heard from other speakers. International comparisons and their consequential impact on the UK’s attractiveness as a location for inward investment should be a continual focus for government when implementing this regime.

Before I come to what the noble Lord, Lord Clement-Jones, mentioned, I should say that the Bill represents a significant expansion of the UK’s FDI. Since the Enterprise Act intervention regime was introduced in 2002, nearly 20 years ago, there have been just 12 interventions on the basis of national security. It appears that this new regime will see a large increase in the government’s workload and, as the noble Lord said, a much stricter regime than those brought in by other countries, including the USA, Australia, Japan and many countries in Europe.

We must not jeopardise, at any cost, our attraction for inward investment. Of course, national security is important, but we have to be a magnet for inward investment and the Bill must not prevent that happening.

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

My Lords, in moving Amendment 21 I will speak also to Amendments 27 and 32.

The first two of those amendments would amend Clause 7, which is entitled “Qualifying entities and assets”. Amendment 32 is a consequential amendment to Clause 9. As has been the case with all the amendments I have tabled, they are designed to give greater clarity to the detail of the proposed regime and maintain the delicate balance between national security and investor rights, which we have all talked about at some length.

I add to noble Lords’ views that the level of knowledge about the provisions of this Bill is pretty low. Last week, I was in the north of England at a conference involving a number of senior professional firms. I do not think that they had hoisted in the reduction in thresholds. They still thought that it was a regime that would apply primarily to large companies. When I raised the point made by my noble friend Lord Lansley—that the regime began to come into force on 12 November last year—they looked fairly astonished.

Turning to the amendments, as before, I am grateful to the noble Lord, Lord Clement-Jones, for his support and to the Law Society for its help in drafting them. First, I will speak to Amendment 21. Under Clause 7(3), an overseas entity is a qualifying entity if, among other things, it

“carries on activities in the United Kingdom”.

It would be useful if we could have some guidance on the meaning of “qualifying entity” under the provisions of this Bill. There is a useful definition in the Bribery Act; it may be possible to bring that across to give clarity to this Bill as well.

Clause 7(3)(b) also provides that an overseas entity that supplies goods or services to persons in the United Kingdom would be a qualifying entity. Other major jurisdictions do not apply their national security laws to investments in foreign entities. The argument is that the Bill should only treat overseas entities that carry on activities in the United Kingdom as qualifying entities, rather than include entities that simply export to the United Kingdom. To achieve this, Clause 7(3)(b) should be removed.

Amendments 27 and 32 would replace Clause 7(6)(a) and (b) with new wording. The background to this is as follows. Clause 7(4)(c) and Clause 7(6)(b) together provide that non-tangible assets, such as ideas, information or techniques, are qualifying assets if used in connection with the supply of goods or services to persons in the United Kingdom. This provision could inadvertently cover UK businesses that buy, procure or use technological products or services supplied by third-party providers. Under this scenario, a UK company that buys in foreign artificial intelligence technology to help to deliver its business objectives could be covered, as could a UK company that uses foreign computer software in, for example, building and maintaining a database.

The situation I just described could be further complicated if a UK business plans to purchase another UK company covered by that scenario. Although it is a UK to UK transaction, under the nexus set out in Clause 7 these types of deals will be covered and caught under the new regime. Solicitors will have a duty to flag that up as a risk when advising corporate clients, which means that many more companies are likely to seek a voluntary judgment from the Secretary of State for reasons of certainty. This is likely to significantly increase the number of applications for a judgment made to the Secretary of State, and so is likely to slow down business. On the other hand, if a deal goes ahead and the ruling is made after it is completed, it could have significant consequences for the organisations in cost and outcomes.

This possible application of the regime to acquisitions by domestic acquirers is unusual compared to other jurisdictions where Governments have taken national security powers. Concerns relating to national security and domestic investments are likely to be able to be dealt with much more expeditiously under existing regulations—for example, confiscation proceedings under the Proceeds of Crime Act or the director disqualification regime. Amendments 27 and 32 would give effect to this simplification. I beg to move.

[Lord Clement-Jones (LD)]

My Lords, I start with an apology to the Minister. Amendment 26 in the previous group was a rogue and should have been deleted, because Amendment 27, introduced so well by the noble Lord, Lord Hodgson, superseded it. The PBO produced a much better format, so Amendment 26 was left like an orphan in a previous group, but it has been extremely helpful in getting a foretaste of the Minister’s arguments in this group, so I apologise to him, but there is nothing like hearing a good argument twice, and no doubt we will be all that wiser for it.

As the noble Lord, Lord Hodgson, has introduced the amendments so well, he has made it clear that they are intended to do two things: to ensure that qualifying assets are only assets used in connection with activities carried on in the UK, but not the supply of goods or services to persons in the UK; and, secondly, to prevent “in connection with” being interpreted in a way that treats all assets within the relevant supply chain as being within scope, even if owned and controlled by unconnected third parties, which may have no visibility of the activities of businesses further down the supply chain.

As drafted, the territorial scope of the Government’s call-in power is extremely broad, extending to non-UK entities that supply goods or services to persons in the UK, and assets situated outside the UK that are used in connection with activities carried on in the UK or the supply of goods or services to persons in the UK. This extraterritorial application is out of line with the approach taken in most other foreign investment regimes, which focus only on acquisitions of corporate entities registered in the relevant jurisdiction. It is also unnecessary. There are a number of other more appropriate ways to protect against a threat to the UK’s national security in connection with a transaction involving a non-UK registered company or assets that are not located in the UK, such as export/import controls, the network and information systems regime for critical infrastructure and other licensing requirements relating specifically to national security. From a practical perspective, it may also be difficult in many cases for an acquirer to analyse fully all aspects of the supply chain in order to self-assess the risk of a particular transaction being called in for review.

Furthermore, referring to supplies of goods or services captures all aspects of the supply chain, however minor. It is difficult for an acquirer of a business fully to analyse the supply chain, and including this as part of a mandatory regime with criminal sanctions is disproportionate. The proposed requirement for control by the person exercising the relevant activities is necessary to prevent “in connection with” being interpreted in a way that treats all assets in the relevant supply chain as being in scope, even if owned and controlled by unconnected third parties that may have no visibility of the activities of businesses further down the supply chain.

There are other more appropriate ways to protect against a threat to the UK’s national security in connection with a transaction involving a non-UK registered company or assets that are not located in the UK. As I said, most other foreign investment regimes have managed to crack that issue. I very much hope that the Government will think again.

[Baroness McIntosh of Pickering (Con) [V]]

My Lords, I am delighted to support this small group of amendments. I will speak in particular to Amendment 21 for the reasons my noble friend Lord Hodgson so eloquently and effectively set out.

I am very well aware of the concerns raised by the Law Society of England, as set out by my noble friend and the noble Lord, Lord Clement Jones, as to the extraterritorial aspects of the application of Clause 7(3) as drafted. It raises a number of practical problems as to how it will be applied. In the view of the Law Society of England, it is potentially inappropriate in its wording.

I am grateful to my noble friend for stepping up to the plate and tabling these amendments. I hope that my noble friend the Minister will look favourably on them, the reason being that, in the definition of qualifying entities and assets currently given under Clause 7(3), an overseas entity is a qualifying entity if, among other things, it “carries on activities” in the UK. The Law Society would very much like to see further guidance on the meaning of this term, as is the case under the Bribery Act and the Modern Slavery Act. It begs the question as to why the Government have not felt able or willing to bring forward such a definition as part of the Bill. My noble friend must understand that it will be up to the practitioners to apply this wording. The courts could have to interpret it as well.

Clause 7(3)(b) also provides that an overseas entity that

“supplies goods or services to persons in the United Kingdom”

would be a qualifying entity. For reasons of international comity, other major jurisdictions do not apply their national security laws to investments in foreign entities. In accordance with this, I support the Law Society’s conclusion that the Bill should treat only overseas entities that carry on activities in the UK as qualifying entities, rather than including entities that simply export to the UK.

In my view, Clause 7(3)(b) should be removed entirely or the wording proposed by my noble friend Lord Hodgson, which I prefer, adopted. I find the Bill unacceptable as it currently stands. I hope my noble friend the Minister will understand that we are not the ones who will have to apply this. Practitioners have raised these concerns with us for very legitimate reasons.

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[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.

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[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.

[Lord Clement-Jones (LD)]

My Lords, I bow to my noble friend’s much superior knowledge on intellectual property issues. I entirely agree with her. That is a good reason for keeping provisions about intellectual property broadly speaking as they are. My noble friend pointed out to me that nowadays even Rolls-Royce engines are licensed as opposed to sold, because so much data is given off by their operation. That is proprietary in itself. So it is very difficult to distinguish between an outright sale and a licence in commercial life.

I wanted to come back because I did not think that the Minister was quite positive enough on Amendment 23 from the noble Lord, Lord Vaizey. I laughed out loud; that particular response was like an episode of “Yes Minister” because it tried to draw distinctions that were not particularly helpful in the circumstances. Somebody was being extremely clever when they put the paragraph together, but I do not think it pushes back the argument why that day-to-day type of software —that sort of absolutely bog-standard commercial licence equipment—should be captured in the definition of a qualifying asset. I will look very carefully at that very well-crafted paragraph again before Report.

[Baroness Bloomfield of Hinton Waldrist (Con)]

I am grateful for those comments. They will be noted.

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[Lord Lansley (Con)]

I shall refer only to Amendment 30, in my name, in this group. Earlier, we discussed the question of material influence. At this point in Clause 8, the fourth case to which we referred—the control of an entity—is, under subsections (8) and (9), effectively material influence. Looking at this, I could not understand why this bit of Clause 8 did not simply replicate Section 29 of the Enterprise Act, which is concerned with obtaining control by stages. I will not read the whole thing, but it is essentially about where a transaction or, in this case, a series of transactions—I will come back to that point—can be treated as occurring simultaneously, but which enables a person

“directly or indirectly to control or materially to influence the policy”

of the enterprise, or enables that

“person or group of persons to do so to a greater degree”.

We have here different language, and I would like the Minister to kindly explain how it works. I can see that it will be a person together with others, because of course it brings in holding an interest or a right by virtue of Schedule 1—working together with others—so that might be sufficient to say “directly or indirectly”. So, that might be covered by a common purpose, the connected arrangements and so on. But subsection (9), as it qualifies subsection (8), appears to suggest that if somebody already exercises a material influence over an entity, the fact that they increase their material influence by stages is not defined as control, unless it is one of the other cases set out in the clause. I think that is a gap. I think it ought to be included, and the clause ought to be constructed in a manner similar to the way in which the Enterprise Act enables control to be acquired by stages. I am not particularly asking for my drafting to be incorporated, but I invite Ministers to see whether it will be simpler to take out subsections (8) and (9) and insert something drawn from and similar to Section 29 of the Enterprise Act when we come back to this at Report.

[Lord Clement-Jones (LD)]

My Lords, it follows from the speeches of the noble Lord, Lord Hodgson, who introduced Amendments 29 and 72 so well, and the noble Lord, Lord Lansley, who has taken us very carefully through subsection (8), that Clause 8 is a strange beast. It is a mixture of the absolutely specific and then the rather vague in its different cases, which contrast extraordinarily. I have signed Amendment 29, in the name of the noble Lord, Lord Hodgson, which tries to deal with the vagueness in subsection (6) because the scope of that trigger event—the third case—is very broad and unclear, as he described.

It is not clear precisely what resolutions govern

“the affairs of the entity”

as set out in subsection (6). It could potentially capture typical minority investor veto rights or negative protections, which would not give rise to national security concerns. The amendment put forward by the noble Lord, Lord Hodgson, and supported by me, would narrow the scope, while ensuring that where a person can pass or block resolutions that cover matters akin to those covered by, say, ordinary and special resolutions under the Companies Act 2006, the ability to secure or prevent those resolutions would still be caught—even where the thresholds for passing those resolutions differ from the thresholds for passing ordinary and special resolutions under the Companies Act.

If shareholders of an overseas company can amend the company’s constitution, or wind up the company by passing a resolution with a threshold of 60% of the votes, any shareholder that increases their shareholding from less than 60% to 60% or more will be caught by the third case, if this amendment is accepted. At the moment, that subsection really repays some attention and I very much hope that the Minister will reply positively on this.

Amendment 72, also put forward by the noble Lord, Lord Hodgson, and explained clearly by him, would

“give investors certainty that any divestment or unwinding order will not render their contractual arrangements unenforceable”,

so they could contractually anticipate the consequences of an unwinding order. That is extremely important. If you cannot do that and everything is void, then you cannot make arrangements that stick after the voidness.

A long time ago when I knew some law, I think we talked about severable contracts. One would find that part of a contract was void but provisions that applied to circumstances in which the contract was void, or voided, would still subsist. It is important that those provisions continue after the voiding decision has been made and I very much hope that the Bill can be amended accordingly; otherwise, many companies trying to anticipate its impact will be absolutely confounded. They will have no way through what will be, in any event, a pretty difficult commercial situation.

[Baroness Noakes (Con)]

My Lords, I put my name down to speak in this group to support my noble friend Lord Lansley’s Amendment 97, which he has not spoken to. I shall speak to it in this group anyway in case he had no further intention of speaking to it when it comes up later as we go through the amendments on the Marshalled List.

Amendment 97 would remove former spouses from the list of connected persons who are defined in Schedule 1. I was fairly sure that this was a novel and unwelcome addition to the normal scope of connected persons found in legislation. In my view, it is not a common-sense interpretation of what a connected person is. For example, if I had had a brief marriage in my youth, Schedule 1 would continue to count my long-gone husband as a connected person of mine for ever, which is just not sensible. It also includes former cohabitees, so the possibilities of connected persons seem to be endless.

My view of the definition of connected persons was compatible with tax law, company law and even money laundering rules, but I discovered that this wider definition, extending to former spouses, is in the Insolvency Act 1986, which was a surprise to me. That definition was later picked up by the Pensions Regulator. The fact that precedents have somehow managed to find their way into the statute book or into regulations does not make it right, and I will support my noble friend Lord Lansley’s Amendment 97 if he chooses to propose it at some stage in the future.

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[Lord Clement-Jones (LD)]

My Lords, I am not going to speak for any length on Amendments 31 and 33. I just hope that the Minister has a battery of Scots lawyers advising on these amendments because it sounds as if they could be of huge significance and the issues under Scots law may well have been ignored in the drafting of the Bill. I am looking forward to hearing the Minister’s response, no doubt on advice.

I support, in particular, Amendments 34 and 35, tabled by the noble Lord, Lord Hodgson of Astley Abbotts, which he introduced so well. The common factor is that the existing wording of Clause 10(2) appears to catch intragroup investments where an ultimate parent company holds an interest indirectly through a wholly-owned subsidiary and decides to transfer the interest to itself so that it is held directly. Such transactions do not raise new or additional national risks as there is no change in the substantive control. For mandatory filings, as he also described, the initial acquisition will already have been notified and reviewed. Proposed Amendment 34 therefore makes sure that only those transactions where the initial investment took place before the commencement date are caught; they will thus not have been reviewed. Without this provision, each entity within a corporate group would need to make a separate notification for a single trigger event.

Amendment 35 deals with cases where corporate group companies comprise multiple, separate entities because Clause 10, as drafted, also appears to require each entity within the corporate group to make a separate notification for a single trigger event that takes place relating to the group.

These are well-crafted amendments and were well described by the noble Lord, Lord Hodgson, who, as he said, is supported by the Law Society. We have a Law Society group of amendments here relating to England, Wales and Scotland. I am sure that the Minister will have huge pleasure in responding on this group.

[Baroness Hayter of Kentish Town (Lab)]

My Lords, I have no new information to bring to the Committee. As we have heard, a number of transactions appear likely to be caught under the Bill which are probably outwith the intention of the authors of the Bill. I think the Minister has to explain why these provisions are in it, rather than noble Lords who tabled amendments having to explain why the provisions should be taken out. We look forward to his explanation of that and, perhaps, his reassurance to the Committee that the Bill is really fit for purpose across the whole of the UK, including for the Scottish legal system.

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

I have received one request to speak after the Minister, from the noble Lord, Lord Clement-Jones.

[Lord Clement-Jones (LD)]

My Lords, I thank the Minister for his response. No doubt the noble Lord, Lord Hodgson, and my noble friend Lord Bruce will respond very positively to the Minister’s offer on Amendments 31 and 33.

I must say that on Amendments 34 and 35 the Government are really tying themselves in knots in the way that the mesh—to come back to the Minister’s splendid fishing analogy—is woven in this Bill. This is catching minnows—it is catching transactions such as these intragroup transactions. I will read very carefully what the Minister has to say, but, given the number of fish caught by this that will have to be continuously thrown back in the sea after a period—as we have discussed, one that could be unduly protracted—this really is a catch-all Bill the longer we talk about and debate it. I do not think any of us is particularly comfortable with that in this Committee; we have to find a way of making it more proportionate. That will be the key task of the House as the Bill goes forward.

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

My Lords, this amendment seeks to ensure that research and development partnerships, such as those that are widely formed between companies and universities to create intellectual property and therefore qualifying assets, are not required to provide notification of the creation of these partnerships. If these partnerships lead to the creation of a qualifying asset, the trigger event should be determined to be the point of creation of the qualifying asset. It would minimise the notification burden on business and industry, and avoid discouraging these important relationships. This is the theme of many of my amendments.

To give your Lordships some background, UK companies are major funders of research and development at British universities across the world. They enter into hundreds, if not thousands, of research agreements every year. Those agreements can be a simple, straightforward funding of a PhD student or major multilateral projects valued at many millions of pounds. Business enterprise R&D represents something like two-thirds of the total, according to the latest figures from the Office for National Statistics. The biggest sectors for business enterprise R&D overlap significantly with the 17 sectors identified in the Bill. For example, computer programming is almost £2 billion, aerospace is almost £2 billion and software development is £1.5 billion.

This business investment, allied with our world-class universities, means that the UK is obviously at the forefront of many of these technologies, from quantum technology to artificial intelligence. The purpose of the research is, of course, to create new technology and new intellectual property that can be used by those British companies to grow British businesses, but at the beginning of any partnership the creation of intellectual property is simply an aspiration. It is certainly not guaranteed.

These projects risk being caught by the same minimal risk issue flagged in other debates on the Bill where companies seek pre-emptively to notify where there is a risk of a trigger event because there is a lack of clarity on this issue. All the amendment seeks to do is to postpone the need to consider notification until such time as the research has been successful, in effect by creating a qualifying asset.

[Lord Clement-Jones (LD)]

My Lords, I am very pleased to have put my name to all three amendments in this group. Rather like the noble Lord, Lord Lansley, I think that we have to find a way to deal with research and development partnerships in higher education. These are various alternative ways to do that, but whichever one is chosen we must find a constructive way. Having a debate and discussion at this stage is really important.

Although the Bill does not directly reference universities and a great deal depends on the Secretary of State and his statement saying how he will define and use the powers, given the width of the sectors it is clear that there is an intention to catch those partnerships entered into by universities. The Bill’s scope is so wide that it means universities could have to refer a significant proportion of their routine business collaborations for screening.

A key concern is that it is unclear which types of asset transaction should be referred for screening. The proposed definition of assets that should be referred to BEIS is very broad and could cover a significant proportion of what universities might consider run-of-the-mill engagement with businesses, including contract research, consultancy work and collaborative R&D. Elements of the Bill, while introducing measures to protect national security, could have unintended consequences for future investment in UK R&D and could cause BEIS to be overloaded with referrals from the university sector.

Up to 95% of Russell group research contracts grant external partners some form of intellectual property and could therefore be captured by the voluntary regime, given the current broad definition of assets. With uncertainty over definitions, universities will be forced to adopt a cautious approach and therefore will expect to refer a significant proportion of the partnerships that I have mentioned: their contract research, consultancy, and collaborative research projects, including those conducted with British businesses. This will add to lead-in times and create red tape for universities and businesses. That surely cannot be for the benefit of R&D in our universities.

As chair of the governing body of a research-intensive university, I can testify to the fact that protecting sensitive research from hostile foreign actors is now a priority for universities. Universities dedicate significant resource to complying with export control legislation and are now working to implement recommendations arising from last year’s guidance from Universities UK, Managing Risks in Internationalisation. As a result, enhanced due diligence processes have run in parallel to concerted efforts to secure R&D investment from domestic and international businesses. This includes due diligence on risk assessment, international research partnerships, policies and contractual agreements to protect intellectual property and dual-use technologies and export control legislation.

National Security and Investment Bill

Lord Clement-Jones Excerpts

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

We know quite a lot about what is sadly happening in Xinjiang, and that the Chinese Communist Party sees commercial influence as intricately linked to broader power. We should all remember what has happened to the relations between China and Australia since Australia demanded an investigation into the roots of the Covid crisis. The Chinese apparently talk about civil/military fusion. Butter dishes may not be of huge importance to intelligence, but they reflect the broader context of the intricate involvement of western economies with the Chinese economy.

[Lord Clement-Jones (LD)]

My Lords, I declare my interests as stated in the register. My noble friends Lord Fox and Lady Bowles have cogently outlined the purposes of Amendment 1 and the importance of having a framework of this kind for the Secretary of State when he is exercising his powers under the Bill.

I am taken by the fishing analogy which has been used in relation to the Bill. On these Benches, we support the trawling process and its purpose, but a large number of questions in consequence need answering about the extent of the net, the size of the mesh, and which species will be taken on board and which discarded, and how long that will take. We will come to those questions later in Committee. This amendment asks the broader question: what impact on the broader ecology is the trawling having? The Secretary of State cannot be oblivious to the impact on the investment ecology, as set out in the proposed new paragraphs, but must take account of the impact of what he or she is doing. I am sure that the Minister will want to give us assurances on many questions to do with the Bill as drafted. But we need certainty about this aspect and how the Secretary of State will exercise these considerable powers yet not thereby damage what we have in the UK—a thriving investment climate. As my noble friend Lord Fox has pointed out, it is not just the City but universities, trade associations and sectors such as space and biosciences that have raised concerns about the width of the Secretary of State’s powers.

Today, we have seen the outcome of the sector consultation, all 111 pages of it, which allays concerns somewhat, but I anticipate that many will still believe—as I do—that the net is being too widely drawn. This amendment is designed to constructively allay that concern. I hope that the Minister will recognise its merits. It is far from harmful, as the noble Baroness, Lady Noakes, suggested it was. She asked why we singled out these three elements: it is because, looking at the sectors, it is precisely those areas that we believe are most likely to be damaged if a net is drawn too wide. I am going to resist the temptation to pick up the points made by the noble Lord, Lord Robathan, because I am conscious we are not on Second Reading, but he has raised some interesting questions.

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

Lord Vaizey of Didcot. No? We will come back to him. I call the noble Lord, Lord Clement-Jones.

[Lord Clement-Jones (LD)]

My Lords, it is a pleasure to follow some of the early speeches in this group today. Noble Lords have already started to unpick some key elements in the Bill and have shown how much further explanation and guidance is needed. I will come on to Amendments 3, 4 and 8 in a minute, but, given the absence of the noble Lord, Lord Vaizey, I will speak first to Amendment 9.

As it stands, given the Bill’s very broad definitions of “trigger events”, “qualifying entities and assets” and “control” of entities and assets, businesses are not clear as to those transactions which require notification and those that do not. Although the Bill is retrospective, the Secretary of State will publish a Statement only after it comes into effect, so there will be little clarity for some time. Probably the word that will be most overworked during the passage of the Bill will be “certainty”, but that is exactly what we are all looking for as we proceed. The first person who used that phrase was my noble friend Lady Bowles, but I entirely agree that we must strive for that. If we are not careful, we will have significant overnotification of irrelevant transactions by businesses in order to avoid the risk of penalties for non-notification or subsequent call-in. As a former practising lawyer, I think I can testify to that.

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

My Lords, I have received one request to speak after the Minister from the noble Lord, Lord Clement-Jones.

[Lord Clement-Jones (LD)]

My Lords, I thank the Minister for that careful analysis, but I must admit that I am not wholly reassured as a result. I feel as though we have gone in a spiral of logic and I think we ended up where we began, in a cloud of uncertainty. In particular, I thought the Minister’s arguments on Amendment 9, that the statement was forward-looking not backward-looking, were very circular. It all depends on how the statement is constructed. It can be made both forward-looking and backward-looking simply in the way the Bill is amended. So the argument there was extremely circular.

I will read Hansard extremely carefully, but to me the question about the Secretary of State being unaware means that the Government have decided that the net is going to be extremely wide. We have assurances on the sifting process, but in the end everything falls in until it is thrown out. That, I think, is what worries quite a lot of us. The contemplation point may have some precedent, but the noble Lord, Lord Lansley, made the point that these transactions are not just mergers but intellectual property licences, know-how transfer, asset sales and a whole range of things. Is the merger regime fit for purpose for this broad range of transactions?

That is all I want to say at this stage. I thought the Minister valiantly tried to justify the current wording of the Bill, but I do not think he succeeded.

[Lord Grimstone of Boscobel (Con)]

The noble Lord, Lord Clement-Jones, and I have had the pleasure of debating these matters at a meeting prior to this Committee, and I must confess that I was probably the author of the fishing analogy, which I may live to regret. The point is that when you are dealing with matters of national security, and these matters are so important, it is perfectly appropriate to use a large net to put the fish in, but then it becomes very important that the way your screening unit works removes fish from that net as expeditiously and efficiently as possible.

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[Lord Hodgson of Astley Abbotts (Con)]

My Lords, this is the first time that I have spoken in this Committee, so I draw attention to my entry in the register of your Lordships’ House. I wish to speak to Amendments 41 and 44 in this group, which I have tabled with the support of the noble Lord, Lord Clement-Jones, for which I am extremely grateful. I am also grateful to the Law Society for its assistance.

The two amendments build on remarks made by my noble friend Lord Vaizey in moving Amendment 5. Amendments 41 and 44 are to Clause 13, which is entitled “Approval of notifiable acquisition”. I am afraid I have to argue that that title is, at best, ingenuous because, under the wording of the clause as presently drafted, there is no requirement for the Secretary of State to register his disapproval; instead, his silence is all that is needed. I argue that, from the point of view of providing certainty for investors, bankers and—last, but by no means least—companies, their management and employees, this is not good enough. Furthermore, this silence inhibits a proper degree of parliamentary scrutiny, making it more likely that cases can be slipped through under the radar. It will also prevent Parliament having the opportunity of examining how practice may be shifting as regards preserving the delicate balance that this Bill seeks to create and maintain between protecting national security and providing maximum safety for investors’ property rights.

We need the spotlight to be shone on those tricky areas so that decisions taken by the Secretary of State have to be justified openly and publicly. That is what Amendments 41 and 44 seek to achieve. Famously, TS Eliot wrote:

“This is the way the world ends

Not with a bang but a whimper.”

In this difficult policy area, a whimper is insufficient. I see no reason why in an open society the Secretary of State should not be under the maximum pressure to provide a clear, concise and public declaration of his decision and the reasons for it. Our society, together with our business and investment community, are entitled to no less, so I very much hope that the Government will be able to accept these two amendments.

[Lord Clement-Jones (LD)]

My Lords, it is very difficult to follow the noble Lords, Lord Vaizey and Lord Hodgson, especially after the quotation from the noble Lord, Lord Hodgson, of which I think we must be very mindful. I support both in their very similar endeavours, particularly the noble Lord, Lord Hodgson, in his Amendments 41 and 44, which I have signed.

The case has been very clearly made that automatic voidness creates excessive legal uncertainty for investors and lenders. The proposed wording would mean no automatic voidness but a power of the Secretary of State to impose it. A voidable power would give the Government power to declare a transaction or part of it void if it gave rise to national security concerns and ensure that workable steps can be taken to unwind the transaction to the extent considered necessary. While it is clearly important to apply significant sanctions when a transaction subject to the mandatory notification obligation is completed without first obtaining approval from the Secretary of State, such sanctions must also be workable in practice. Treating such a transaction as automatically void, as envisaged in Clause 13, will give rise to a host of practical difficulties and is simply not workable in practice.

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[Lord Hodgson of Astley Abbotts (Con)]

I put my name to this amendment, but somehow along the way I was left off the speakers’ list, so I am glad to have scraped back on again. My noble friend Lady McIntosh made the case for the amendment clearly and decisively, so I will merely sweep up and say that, at Second Reading, there was general agreement that we were seeking a balance between the fact that the country had to be protected from overseas powers gobbling up key companies in key sectors, yet at the same time keeping our economy open for inward investment, particularly in the tech sector, where we have such a worldwide reputation. We all agreed then, and agree this afternoon, that that is the difficult balance that we seek to strike.

Of course, once the Bill passes into law, Parliament’s opportunity to examine and, where necessary, recalibrate that balance will be limited, to say the least. When the noble Baroness, Lady Bennett of Manor Castle, talks about the dangers of the markets, I think she is headed in completely the wrong direction, with due respect. My concern about the Bill is about not markets but mission creep: that we will end up with the Bill doing nothing that was anticipated when it was first drafted.

Like my noble friend Lady Noakes, I have no doubt that the Minister and his officials will say they have a very clear idea of how the provision will be used, and there is no question of mission creep under the Bill. As we all know, Ministers, parties and policies change, and there are serious dangers if we do not accept some form of amendment such as this.

First, there is the issue of employment under paragraph (a). How easy is it to see a future Secretary of State, faced with some politically unhelpful headlines about unemployment following a potential takeover, being tempted to press the national security button to avoid some disobliging comments? Under paragraph (c), we should never underestimate the lobbying powers of big companies. Hell hath no fury like a big company that finds its market invaded by a smaller, nimbler competitor offering a better, cheaper product or service. The smaller competitor, perhaps growing faster than its internally generated funds can support, may need to find outside capital, and some of that outside capital may come from overseas—it is likely to. How convenient for the big company if it can lobby the Secretary of State to block funding for the growth of its successful smaller rival on the grounds of national security.

Those are just two examples where mission creep might occur; there are plenty of others. I hope the Government will understand that the purpose behind this amendment is to make sure that the Bill continues to do what it says on the tin.

[Lord Clement-Jones (LD)]

My Lords, it was a pleasure to put my name to the amendment in the name of the noble Baroness, Lady McIntosh, because I think that I understand its intentions entirely. It is also a pleasure to follow the noble Baroness, Lady Noakes, and the noble Lord, Lord Hodgson, in their elucidation of what the amendment is about. I think the noble Baroness, Lady Bennett, has entirely misunderstood the essence of this amendment.

Earlier in Committee today we were trying to get some sort of definition of national security, and I think that the noble Lord, Lansley, in his inimitable way, managed to unpick that rather successfully. As far as national security is concerned, it is a mission impossible to try to carry everything in one bundle in a definition. This tries the other way on and, as the noble Lord, Lord Hodgson, said, it is designed to avoid mission creep. It is trying to make sure that the definition of national security is not used as a blanket term to cover damage to the economy and society. It has the huge benefit of simplicity; it tells us what is not in national security rather than what is in it. It clarifies that certain factors such as employment, reciprocal investment or trading opportunities, and protectionism will not be taken into account when assessing national security. If there was mission creep in the way that was described, it would undermine legal certainty and damage investor confidence in the way that we have heard from a number of noble Lords.

The Government have kept assuring us that this is not, in the words of the noble Lord, Lord Callanan, a national interest Bill but a national security Bill. That is exactly what this amendment is trying to ensure—that we do not have that all-encompassing national security definition used by lobbyists or others to try to bring things into the net. I have seen it happen in the United States. The CFIUS is absolutely that kind of spider-like operation that brings in all sorts of spurious transactions. I very much hope that we will keep this provision absolutely focused, and this amendment is a very good way of doing it.

[Baroness Hayter of Kentish Town (Lab)]

My Lords, we support the approach of this amendment. As we have all made clear, the new regime must focus on protecting national security. The clue is in the title of the Bill. The definition of national security has to take best advice from across the Government about the threats and behaviour of our adversaries.

While I hope the Government will monitor the impact of the Act on technological investment, innovation and SMEs—which I hope a different part of the Government is actively supporting—those interests, along with employment, investment and competition, cannot and should not trump national security, albeit that I hope that the Government would consider mitigating any detrimental domestic impact of placing security first if that were needed.

Clearly, concerns about any political pressure, rather than any disregard for the issues listed, give rise to this amendment. The tone and the purpose of it are ones that we share.

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[Lord Hodgson of Astley Abbotts (Con)]

My Lords, Amendment 7 shortens the period in which the Secretary of State may give a call-in notice following a trigger event, under the provisions of Clause 2, from five years to two years. I am grateful to the noble Lord, Lord Clement-Jones, for his support.

It was interesting that, when giving evidence to the Public Bill Committee in the other place, on 24 November, Michael Leiter—perhaps related to Felix Leiter—head of national security and the committee on foreign investment at Skadden, Arps, the major US law firm, described the Bill as

“a rather seismic shift in the UK’s approach to review of investment.”—[Official Report, Commons, National Security and Investment Public Bill Committee, 24/11/20; col. 46.]

He stressed the importance of clarity in what was proposed, given the criminal penalties that are now being introduced and that there is no interim period for familiarisation.

This amendment and all the others that I have tabled, two of which I have already spoken to, aim to test both the clarity and, importantly, the practicality of the proposals that the Bill contains. I stress that practicality because, there can be a danger, when Bills like this are in Committee, of focusing on legal terminology and overlooking the flesh and blood consequences of the decisions that Parliament is about to take. I hope that the Committee will forgive me if I spend a moment on two real-life examples, because they give useful background to this and my other amendments.

Members of the Committee may be aware that I am chairman of the Secondary Legislation Scrutiny Committee of the House. In December 2019, our committee was notified of the laying and simultaneous making of two statutory instruments: SI 2019/1490 and SI 2019/1515. The full title of SI 2019/1490 is the Public Interest Merger Reference (Gardner Aerospace Holdings Ltd. and Impcross Ltd.) (Pre-emptive Action) Order 2019. The full title of SI 2019/1515 is the Public Interest Merger Reference (Mettis Aerospace Ltd.) (Pre-emptive Action) Order 2019. These were the first referrals under the new regime with reduced thresholds, and this was the very first time that the Government used pre-emptive powers; that is to say that they were seeking to stop a takeover before any offer was made, rather than reacting to an offer once made. These two statutory instruments therefore give us a glance into the world that the Bill takes us into.

I shall say a couple of words about the protagonists. Gardner Aerospace, the predator and potential acquirer, is based in Derby. It was acquired by Chinese investors in 2017 for some £300 million and has since made a number of acquisitions in the aerospace sector. Mettis Aerospace, one of the targets, is based in Redditch and has sales of £86 million, which is above the old threshold. It is substantially profitable—it made about £9 million of profit before tax—and has some 500 employees. Its customer list reads like a who’s who of world aviation and its two leading customers are Airbus and Boeing.

Mettis’s roots can be traced back to the early days of British aviation. For those who like a historical note to our debates, it produced the framework that held in place the bouncing bombs under the Lancasters flown by Guy Gibson and the men of 617 Squadron in their successful raid on the Ruhr dams in the Second World War. A few years later the company produced the fan blades for Frank—later Sir Frank—Whittle’s first jet engine.

Mettis is owned 25% by the management and 70% by a private equity firm called Stirling Square Capital Partners. The fund through which the investment is being made is based in Luxembourg. Stirling is based in London but, judging by its list of partners, has a strong orientation towards continental Europe. The investment will almost certainly have been made on behalf of third-party investors who have pooled their funds for Stirling to manage. Such investors may very well come from all over the world and this is unlikely to be their only investment in the UK, so if they perceive the treatment of any one of their UK investments as being inequitable, there will inevitably be a ripple effect on their readiness to invest in the UK generally. Mettis made it clear to the Competition and Markets Authority and the Government that it had not put itself up for sale. Gardner’s approach had not been sought and was regarded as being what in the trade is known as a fishing expedition. The outcome was that Gardner pulled away on 27 February, following a heavily redacted CMA report published on 13 February.

The story of Impcross is quite different. It is a much smaller company based in Stroud, Gloucestershire, with a turnover of only £11.9 million, so it would not have been eligible under the old thresholds. It lost money in the year to 30 June 2019, but only a small amount—£350,000—and, significantly, it is controlled by one person. Its accounts reveal a person of significant control, or PSC, holding between 50% and 75% of its shares. That has been built up over a lifetime and it would not be unreasonable if that director now wished to realise the fruits of his efforts. If the state stepped in to prevent that—we cannot be certain exactly what happened—without offering any alternative solution, it seems a hard moral choice. Either way, it all took a lot longer to resolve and it was only on 10 September that Gardner withdrew.

In speaking to Amendments 41 and 45 a few minutes ago, I argued that it was not good enough that, under the provisions in Clause 13, all the Secretary of State had to do to void an acquisition was to say nothing. For Mettis, this was not a problem: the company was clear that the approach was not welcome. For Impcross, there were 10 months of uncertainty with the Secretary of State appearing to set up a sword of Damocles but apparently never having to cut the string. That cannot be the right way to provide certainty for investors in the UK tech sector.

I have one final point. In our debate a moment ago on Amendment 6, tabled by the noble Baroness, Lady McIntosh, the Committee expressed concerns about the degree of parliamentary scrutiny of developing practice in this sensitive area. The two cases I have referred to were authorised by a statutory instrument. Statutory instruments are not amendable, and it would seem vanishingly unlikely that either House of Parliament would seek to reject one—the nuclear option—so any scrutiny of future practice will be at a very high level, and even that scrutiny will be ex-post. Both the above SIs were made and laid on the same day, 6 December 2019, at a time when Parliament was in any case not sitting because of the general election. It would be worthwhile if the Minister could confirm whether in this brave new world of these pre-emptive actions, each would still be the subject of a separate SI, so affording at least some degree of parliamentary oversight.

I turn now to the details of Amendment 7. I have tabled it because giving the Secretary of State the ability to unpick a merger or takeover after five years is to ignore the real world. Acquisitions are made with a view that two plus two will make five and that overall, they will be profit-accretive. In the event, that promise is often not achieved, but that is the idea that people set out with and to do that, changes have to take place at various levels.

First, the acquiring company will want to ensure that the financial performance of the two companies are managed on the same basis so that one company’s financial reporting systems will disappear. Secondly, it is inevitable that in any acquisition, there is extreme nervousness among the staff of the two companies about winners and losers in the new configuration. That nervousness can be reduced by an exchange of staff between the two companies, so that they get to know each other. Thirdly, it is unlikely that it will be cost-effective to maintain two separate research and development facilities, so they will be merged as one. Fourthly, marketing and sales teams are likely to be combined to broaden and deepen product range and market reach. Finally, it may be concluded that the new entity would be more effective and profitable if it operated from a single site, so one facility will be closed and the site sold.

Within five years, all of these steps could have taken place and if they had, the companies would be indistinguishable. I appreciate absolutely that the Government need some power to reach back where a case may have been slipped past them, but I argue that two years should be sufficient. At the same time, there is at least a likelihood of there still being a unit that is sufficiently independent to resume an independent life.

Members of the Committee may remember their days in primary school and the magic of mixing paints. If one mixed blue and yellow paints together then, suddenly and miraculously, one had green paint. That is in effect what one does with the merger of two companies: you mix a blue and a yellow company, and the result is a green one. After some time, and certainly after five years, the two constituent parts will be indistinguishable. That of course is vital, considering the position of investors who may find that they still own an investment which they thought had sold five years previously. I would argue that a maximum of a two-year clawback will provide a better balance between the interests of all the parties in this delicate area. If my noble friend is not inclined to accept the amendment, will he tell the Committee how his officials will undertake the practical challenges of separating the green paint into its original blue and yellow parts? I beg to move.

[Lord Clement-Jones (LD)]

My Lords, I speak in strong support of Amendment 7, in the name of the noble Lord, Lord Hodgson. I am a former company secretary and legal adviser to a publicly listed company. I know from personal experience what it is like to wait for competition decisions, takeover panel decisions and for all the uncertainties of regulation external to the company as a result of its commercial activities.

Given that, I am entirely in sympathy as the noble Lord, Lord Hodgson, has set out what he calls the flesh-and-blood consequences of the two case studies that he put forward extremely graphically and well. Not least, he has hinted at some of the issues around statutory instruments and the level of scrutiny. There is little that I can add to what he has said about the undesirability of having a massive period of time within which a Secretary of State can act—up to five years. However, I would like to add to the practicality issues that the noble Lord has raised.

The longer a deal has been in place, the more difficult it will be to void or avoid—that is, unwind—a transaction. Unwinding a transaction after five years is a very long time in commercial terms. Thinking back to my own career, subsidiaries are sold, businesses are purchased and the commercial realities change over five years. It would be exceptionally difficult, even if it were possible, for a listed company involving public transactions to unwind those transactions.

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[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.

[Baroness Hayter of Kentish Town (Lab)]

My Lords, as we have just been hearing, these notifiable acquisition regulations are significant and require proper oversight, not just from both Houses of Parliament but also from experts involved, and with the opinions of those experts being made available to legislators. It will obviously be important to ensure that the stakeholders to be consulted are knowledgeable and, if I may say it, at the cutting edge of technology.

--- Later in debate ---

[Baroness Hayter of Kentish Town (Lab)]

I forgot to declare at the beginning that I used to work for the Wellcome Trust. It was 20 years ago, but I think it should still be noted.

[Lord Clement-Jones (LD)]

My Lords, I thank the Minister for her response but I do not think that she has quite got to grips with the full concern about this. It is not so much that there has not been consultation about the current sectors; there has been an extensive consultation and the Government have come back with their views and have explicitly said that they may change them even further. Yet they are still going to return to Parliament with a pure affirmative process. It is not as if parliamentarians will be able to change it. The stakeholder discussion and consultation is going forward as she said, but there is no guarantee that when that set of regulations is passed there will be proper debate in the House, nor will there be thereafter if the sectors are changed and made more specific, less specific, added to—whatever. There is no guarantee that consultation will take place.

The Minister said that there are the right incentives. That is a bit thin. If that is the guarantee of government consultation, it is not very solid, and even then, Parliament is entitled to have a view about the width of those sectors in the light of changing circumstances. It might have different views about new risks emerging, to use the Minister’s phrase. Therefore, it would be entirely legitimate to have that debate if those regulations were revised. The Minister has not got the nub of the concern in all of this.

[Baroness Bloomfield of Hinton Waldrist (Con)]

I reiterate that we will continue to consult widely on important changes that merit further scrutiny. The Government care deeply that we get these definitions accurately put into the Bill before it receives Royal Assent.

National Security and Investment Bill

Lord Clement-Jones Excerpts

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

[Lord Clement-Jones (LD) [V]]

I too thank the Minister for his comprehensive introduction. I declare an interest as a member of the advisory board of the corporate finance faculty of the ICAEW, whose members comprise business owners, advisers to business and investors.

I believe that there will be little argument during the Bill’s passage about the principle involved of protecting national security. There will, however, be considerable debate about its scope and practical operation. Foreign investment is crucial to UK businesses and the economy. On these Benches we accept that it is important to put in place legislation to protect against national security risks posed by such investment. But this is a major change from previous provisions under the Enterprise Act, and must be done in a way that is workable and does not deter productive investment.

The Government have argued that it is necessary to give the Secretary of State greater powers to scrutinise investment in the UK, considering the technological, economic and geopolitical changes that have taken place over the past 20 years. However, the scope of the Bill and of the Secretary of State’s powers risk being far too broad, while lacking any industrial strategy to frame them or any clear geopolitical focus. Indeed, there is no definition of what constitutes national security.

How too will the Bill fit within the integrated review? Ministers have made it clear that the Bill is about the protection of national security, not national interest—but where does national security end and economic or commercial security, or critical infrastructure, begin? Will there be overlap between regulators, such as between the ISU and the CMA?

There is also the retrospectivity, which goes back to November and could already be having a chilling effect on inward investment and causing uncertainty in the investment community, not least in pension funds. For such funds the investment environment is crucial, and as a university chair I am only too well aware of the concerns expressed by USS. As the largest private pension fund in the country, its concerns should be taken very seriously. Arguably even more importantly, as the Russell Group has pointed out, the Bill could have a potentially damaging impact on university/business collaborations.

Many of my noble friends will focus on these issues in today’s debate. The key elements needed to achieve the balance required of the new regime will be achieved by pre-empting and mitigating the inevitable risks for the market by setting out a clearly defined scope. The Government have engaged in a long—some would say leisurely—process of Green Paper and White Paper consultation leading up to this Bill over the past three and a half years, but there is still a great deal of uncertainty around how it will work in practice.

The current sectors, as set out in the consultation, are incredibly broad. For instance, in respect of AI, the development of which I am reasonably familiar with, the definition is so wide that it captures any company developing any kind of application involving machine learning or deep neural networks.

We look forward to seeing the outcome of the promised consultation during the passage of the Bill, but we need to considerably narrow the width of the sectors captured. This in itself would not resolve the fact that many, if not most, technologies have both civilian and security uses, which potentially opens every deal to challenge. Taking dual-use biotechnologies as an example, how do we manage national security concerns without stifling innovation?

We also need to question the low thresholds adopted for market share and turnover, and the generous time given to the Secretary of State to intervene—especially given the Secretary of State’s quasi-judicial powers.

We need to reduce uncertainty to a minimum. Even a mandatory notification system for transactions means instituting an open pre-consultation process with market participants. In particular, it is essential, as the ICAEW has emphasised throughout, that the investment security unit publishes meaningful market guidance notes akin to the practice notes published alongside, but not as part of, the takeover code.

The Bill includes the requirement for the ISU to publish an annual report, but formal guidance will be much more useful, and, as they say, it is an important way of dealing with asymmetry of information among the investment and advisory community. A particularly good example will be in respect of trigger events that involve securing influence or control over qualifying intangible assets, such as know-how and intellectual property. It is possible to gain access to intellectual property through means other than ownership, so the question is: how might those intangible assets be applied in ways that could prejudice our national security in some way? The new unit may initially assess that on a case-by-case basis, but it will need to quickly come to establish a basis of precedent for its decisions. Along with the corporate finance community, I believe that the requirement for market guidance notes should be incorporated in the Bill.

All this means properly resourcing the ISU, which will need to determine which of some 1,000 to 1,800 transactions are to be analysed: 70 to 95, it seems, although many think this an underestimate. This compares to just 12 acquisitions reviewed under the Enterprise Act’s national security provisions since 2002. Otherwise, this will result in a huge number of mandatory notifications, which will overwhelm the new unit. The bottom line is that we need to make sure that a proportionate and last-resort approach is applied to government scrutiny of, and intervention in, these transactions.

In addition, given the low turnover thresholds involved—I have noted the Commons debate—many of us are concerned about the impact on SMEs. The impact assessment suggests that “80% of transactions” in the scope of mandatory notification under the Bill would involve SMEs. However, the assessment failed to consider the costs faced by the acquired companies or the impact on funding for start-ups.

However much we try to circumscribe the Bill, it will not always be possible to reduce uncertainty and risk. It will depend on the culture of the ISU to a great extent as well, so, when considering the Bill, we should heed the warning of John Fingleton, former chief executive of the Office of Fair Trading, in his recent article in the Financial Times. We must not let this Bill become an investment killer; it needs to be very clearly targeted and proportionate. I look forward to the debate and the Minister’s reply.

Trade Bill

Lord Clement-Jones Excerpts

Report stage & Report: 3rd sitting (Hansard) & Report: 3rd sitting (Hansard): House of Lords
Wednesday 6th January 2021 Lords Chamber

[Baroness Kidron (CB) [V]]

My Lords, I shall speak to Amendment 23 in my name and those of the noble Lords, Lord Stevenson of Balmacara, Lord Clement-Jones and Lord Sheikh. This amendment represents the wishes of many colleagues from all sides of the house, and with that in mind I have informed the clerk that we intend to divide the House. I refer noble Lords to my interests in the register, particularly that as chair of the 5Rights Foundation, a charity that works to build the digital world that children deserve.

The amendment has been slightly revised since it was tabled in Committee, to reflect comments made then, but its purpose remains resolutely the same: to ensure that the online safety of children and other vulnerable users is not compromised as a consequence of clauses that appear in future free trade agreements.

Like many colleagues, I would rather that the UK Parliament had, as the US Congress does, a system of parliamentary scrutiny of all aspects of trade deals, but that is not the case. The amendment would offer significant protections for UK children online by protecting UK domestic law, widely regarded as the best in the world, as far as it affects children’s online safety. It would sit after Clause 2 and would therefore pertain to all future UK trade deals.

Proposed new subsection (2)(a) would capture existing UK legislation and treaties. This would allow the Government to cite existing treaties, such as the Convention on the Rights of the Child, which the UK has ratified but the US has not, or domestic legislation that already offers protections for children online. It would also capture any further advances made in UK law between now and the time that any trade agreement is settled.

Proposed new subsection (2)(b) specifically refers to data protections brought into law on 2 September last year in the form of the age-appropriate design code, which will have a profound impact on children’s online safety. That code was an initiative introduced and won in this House by a similar all-party grouping, with support from all sides of the House. It would also ensure that the Data Protection Act 2018 was protected in total, since many of the provisions of the children’s code build on the broader provisions of the DPA.

Proposed new subsection (2)(c) would give the Secretary of State the power to carve out from a trade deal any new or related legislation—for example, the upcoming online harms Bill, or any provisions put forward as the result of inquiries by the Competition and Markets Authority, the Law Commission, Ofcom, the ICO and so on. Digital regulation is a fast-moving area of policy, and the discretion given to the Secretary of State by subsection (2)(c) would ensure his or her ability to reflect the latest commitments on children’s online protection in FTAs.

The amendment would also define children as any person under 18. This is crucial, since the US domestic consumer law, COPPA, has created a de facto age of adulthood online of 13, in the face of all tradition and decades of evidence of child development. Using 13 as a false marker of adulthood has been thoughtlessly mirrored around the world. It fails to offer any protection to those aged 13 to 17, who require protections and freedoms in line with their evolving maturity but are clearly not yet adults.

I am very grateful to both the Minister and the Minister of State for Trade Policy, Greg Hands MP, for taking the time to speak to me since I first tabled this amendment. I am sympathetic to their overall position that the Bill should not tie the hands of UK trade negotiators, but in this case it is imperative that we do so, because some things are simply not for sale.

In the very few weeks since we debated this amendment in Committee, we have seen that the protections outlined in the amendment are entirely absent in the EU-UK deal, and in the same few weeks we have seen suggestions for the inclusion of provisions in the proposed mini-deal with the US that could completely undermine all the advances that we have made to protect children. That is even before we get to a full-blown US-UK FTA. In this context, Ministers can no longer cast doubt on the relevance of the amendment, nor can they suggest that this is an issue that can be dealt with at some indeterminate time in the future. We have set our sights on being a sovereign trading nation and are seeking to do that in short speed. We must make sure from the very beginning that we do not trade away the safety and security of our children.

In closing, I point to the Government’s recent online harms response and say to the Minister, whom I know to be personally committed to the safety of children, that it is simply impossible to balance the promises made to parents and children in the context of the online harms Bill without us also determinedly protecting the advances and commitments that we already have made. Amendment 23 would ensure that the UK domestic attitudes, legislation and guidance that protect children’s safety online could not be traded away. In a trade deal, no one side ever gets everything that it wants. We have to take kids off the table. I beg to move.

[Lord Clement-Jones (LD) [V]]

My Lords, it is a privilege to follow the noble Baroness, Lady Kidron, and her extremely cogent introduction. I have signed Amendment 23, which we on these Benches strongly support. I pay tribute to her consistent campaigning efforts in the area of online child safety and child protection. Very briefly, I will add why we need this amendment, through some recent media headlines which illustrate the issues involved.

First, on the extent of online harms, here are just a few headlines:

“Social media stalking on rise as harassers dodge identity checks”,


“QAnon is still spreading on Facebook, despite a ban”,


“Facebook’s algorithm a major threat to public health”


and

“Tech companies continue to provide online infrastructure for contentious Covid-19 websites even after flagging them as fake news, finds new Oxford study”.


Many of these online harms impact heavily on children and other vulnerable groups.

Secondly, here are two headlines on the power of big tech:

“Google told its scientists to ‘strike a positive tone’ in AI research documents”


and

“Facebook says it may quit Europe over ban on sharing data with US”.


There can be no doubting the sheer global lobbying power of the major platforms and their ability to influence governments.

Thirdly, on the opportunity for change and to retain our laws, the headlines included

“New ‘transformational’ code to protect children’s privacy online”,


which refers to the age-appropriate design code that has now been renamed “the children’s code”, and

“Britain can lead the world in reining in the tech giants if we get the details right”,


which refers to the proposals to introduce a new online duty of care.

“CMA advises government on new regulatory regime for tech giants”


refers to the new digital markets unit, and the CMA is referred to again in:

“Google told to stamp out fraudulent advertising”.


We have started down a crucial road of regulating the behaviour of the big tech companies and preventing harm, particularly to our children and the vulnerable. In any trade deal we want to preserve the protections that our citizens have, and all those that are coming into place, and we do not want to water them down in any way as a result of any trade negotiation.

The trade deal that looms largest is of course with the US, and there are indications that with the new Administration, which so many of us welcome, there will be new attitudes towards privacy rights, especially now that it seems that Congress will have Democrat majority control. I hope that they will vigorously pursue the antitrust cases that have been started, but we have no guarantee that they will go further, for instance in successfully eliminating the all-important safe harbour legal shield for internet companies, Section 230 of the Communications Decency Act. There is no guarantee that this will go, or that there will not be attempts to enforce this by the US in its future trade deals.

The Minister, the noble Lord, Lord Grimstone, for whom I have the greatest respect, will no doubt say that the Government will have red lines in their negotiations and that there is no way that they will countenance negotiating away the online protections which we currently have. But, as we have seen with the withdrawal agreement, Northern Ireland, the fishing industry and the UK-EU Trade and Co-operation Agreement, these can be washed away, or blurred, as data protection is in the agreement with Japan. So there is a great degree of uncertainty on both sides of the Atlantic. For that reason, without doubting any assurance that the Minister gives, this amendment is essential, and on these Benches we will strongly support it if the noble Baroness, Lady Kidron, takes it to a vote.

Trade Bill

Lord Clement-Jones Excerpts

Report stage & Report stage (Hansard): House of Lords & Report: 1st sitting & Report: 1st sitting: House of Lords
Monday 7th December 2020 Lords Chamber

[Baroness Bennett of Manor Castle (GP) [V]]

My Lords, it is a great pleasure to follow the noble Baroness, Lady Sheehan. I support her Amendment 43 and share her concerns about big pharma, although I would go further and suggest that the profit motive should have no place in healthcare. Chiefly, I will offer three brief paragraphs in support of the cross-party Amendment 11, so ably introduced by the noble Baroness, Lady Thornton.

Looking at the excellent UNISON briefing on this amendment, I was taken back, as was the noble Lord, Lord Freyberg, to the Committee debate on the Medicines and Medical Devices Bill, in which we were discussing the place of artificial intelligence and big data in care and, of course, the dreaded algorithms. Clearly, this will be a fast-growing area of care, needing careful monitoring and democratic oversight, which is what this amendment seeks to achieve. What is decided by Parliament must not be undermined or overturned by free trade agreements. As the medicines Bill debate highlighted, these are big issues and there are huge issues around discrimination and potential misuse—accidental or otherwise—of the data, the algorithms and the whole approach.

I wish briefly to point noble Lords to the case of Henrietta Lacks in the US, including the treatment of her cells, the treatment of her data and the destruction of her privacy. It is an experience that surely should be studied as we face the loss of the protection of GDPR, as there remains uncertainty about the plans for WTO e-commerce rules and as there is grave concern about the way in which the UK-Japan agreement undermines UK domestic digital and AI regulation in healthcare services.

[Lord Clement-Jones (LD)]

My Lords, I rise to speak to the health data aspects of Amendment 11, which has been mentioned and was so well introduced by the noble Baroness, Lady Thornton, and the noble Lord, Lord Freyberg. I would add to the point of the noble Baroness, Lady Thornton: I join her in deploring the fact that we are debating this group of amendments, which are so important in this area, impacting on the NHS, at this late hour.

NHS data is a precious commodity, especially given the many transactions between technology, telecoms and pharma companies concerned with NHS data. In a recent report, EY estimated that the value of NHS data could be around £10 billion a year in the benefit delivered. The Department of Health and Social Care is preparing to publish its national health and care data strategy in the new year, in which it is expected to prioritise the

“safe, effective and ethical use of data-driven technologies, such as artificial intelligence, to deliver fairer health outcomes.”

Health professionals have strongly argued that free trade deals risk compromising the safe storage and processing of NHS data.

Through this amendment, the objective is to ensure that the NHS—not US big tech companies and drug giants—reaps the benefit of all this data. This is especially important given what the Ada Lovelace Institute called in its report—The Data Will See You Now—the “datafication” of health, which, it says, has profound consequences for who can access data about health, on how we practically and legally define health data and on our relationship with our own well-being and the healthcare system. Health information can now be inferred from non-health data, and data about health can be used for purposes beyond healthcare. So harnessing the value of healthcare data must be allied with ensuring that adequate protections are put in place in trade agreements if that value is not to be given or traded away.

There is also the need for data adequacy to ensure that personal data transfers to third countries outside the EU are protected in line with the principles of the GDPR. Watering down the UK’s data protection legislation will only reduce the chances of receiving an adequacy decision. There is also a concern that the proposed National Data Strategy will lead to the weakening of data protection legislation, just as it becomes ever more necessary for securing citizens’ rights. There should, however, be no conflict between good data governance, economic growth and better government through the effective use of data.

The section of the final impact assessment of the Comprehensive Economic Partnership Agreement—CEPA—between the UK and Japan on digital trade provisions says that the agreement contains:

“Commitments to uphold world-leading standards of protection for individuals’ personal data, in line with the UK’s Data Protection Act 2018, when data is being transferred across borders. This ensures that both consumer and business data can flow across borders in a safe and secure manner.”


The Department for International Trade, as mentioned by the noble Lord, Lord Freyberg, issued a document headed “UK-JP CEPA—a good deal for data protection”. However, the agreement has Article 8.3, which appears to provide a general exception for data flows, where this is

“necessary to protect public security or public morals or to maintain public order”

or

“to protect human, animal or plant life or health”.

The question has been raised of whether this will override data protections and what its impact will be on access to source codes and algorithms. There is also the question of the combined effect of Article 8.84, on the free flow of data, which provides that:

“A Party shall not prohibit or restrict the cross-border transfer of information by electronic means, including personal information, when this activity is for the conduct of the business of a covered person.”


Article 8.80, on personal information protection, says:

“Recognising that the Parties may take different legal approaches to protecting personal information, each Party should encourage the development of mechanisms to promote compatibility between these different regimes.”


It is all very well making reassuring noises, but what public legal analysis of the language in the relevant articles—and how advocacy will be permitted despite this—are the Government going to provide? Why, for instance, are these articles included, which the EU for its part will not sign up to? Unless the Government do this, there will be zero trust in future trade deals, especially regarding the US.

To date, there have been shortcomings in the sharing of data between various parts of the health service, care sector and Civil Service. The development of the Covid-19 app and the way the Government have procured contracts with the private sector for data management have not improved public trust in their approach to data use. There is also the danger that the UK will fall behind Europe and the rest of the world unless it takes back control of its data and begins to invest in its own cloud capabilities. Specifically, we need to ensure genuine sovereignty of NHS data and that it is monetised in a safe way, focused on benefiting the NHS and our citizens.

With a new national data strategy in the offing, the Government can maximise the opportunities afforded by the collection of data and position the UK as a leader in data capability and protection. As Future Care Capital says in its briefing on the Bill:

“Any proceeds from data collaborations that the Government agrees to, integral to any ‘replacement’ or ‘new’ trade deals, should be ring-fenced for reinvestment in the health and care system, pursuant with FCC’s long-standing call to establish a Sovereign Health Fund.”


This is an extremely attractive concept. Retaining control over our publicly generated data, particularly health data, for planning, research and innovation is vital if the UK is to maintain its position as a leading life science economy and innovator. That is why, as part of the new trade legislation being put in place, clear safeguards are needed to ensure that in trade deals, our publicly held data is safe from exploitation, except as determined by our own Government’s democratically taken decisions.

[Baroness McIntosh of Pickering (Con) [V]]

My Lords, I refer to my entry in the register. This is a particularly important group of amendments, on health and the protection of data. I thank the noble Baronesses, Lady Thornton and Lady Sheehan, and the noble Lord, Lord Freyberg, for introducing them.

I will limit my remarks to the specific issue of data, which will be relevant to the recently reached super-agreement with Japan. It was discussed as recently as last week, when my noble friend Lord Grimstone spoke about the importance—I agree with him—of a greater exchange of data flows, particularly from that agreement. However, as the noble Lord, Lord Freyberg, said, it is extremely important, as set out in Amendment 11, to protect this data. I will give one example. The Government have been heavily dependent on vaccine trials for the three vaccines that are coming out. Would people readily submit to such trials and completing confidential surveys if there was any doubt that the data they submit would be treated confidentially?

If my noble friend Lord Younger of Leckie is not minded to support this amendment, will the Government table their own amendment to ensure the greater protection of data processing services?

United Kingdom Internal Market Bill

Lord Clement-Jones Excerpts

Committee stage & Committee: 3rd sitting (Hansard) & Committee: 3rd sitting (Hansard): House of Lords
Monday 2nd November 2020 Lords Chamber

The current situation across the UK works well. No matter where someone is based or where they trained, they can secure the necessary qualifications, apply to IPReg to go on the recognised UK register, and thereafter practise generally across the UK and undertake specific reserved legal activities in England and Wales. The wording of Clauses 22 and 25 and the impact of the Government’s amendment are, I have to confess, a bit impenetrable. It is difficult to understand exactly what the impacts are. Will the Minister therefore please confirm that the current position as I have outlined it, for UK-wide regulation and applicability, for both reserved and unreserved activities, is endorsed by the proposed wording of the Bill and not in any way endangered?

[Lord Clement-Jones (LD) [V]]

My Lords, I declare a possible interest as a solicitor qualified in England and Wales and I share all previous speakers’ support for IP professionals, who ensure that we have the necessary intellectual property protection in the UK. I strongly support my noble friend Lady Bowles’s Amendment 107A and share her confusion, not to say bafflement, at Amendment 107. She has drawn attention to the obscurity of the drafting. Why are patent and trademark attorneys included and then excluded?

My noble friend has been, if anything, very kind to the drafters of the government amendment. Not only is it obscure but, as we have heard from the noble Lord, Lord Smith, there seems to have been no proper consultation with the professional bodies and regulators such as CIPA, CITMA and IPReg before it was tabled. This is all compounded by the use by both officials and the Minister of the term “automatic recognition” in communication with my noble friend, when we should be talking about qualifications.

Why has automatic recognition, from which exemption is needed, been introduced? As an interloper on this Bill, perhaps I can ask the most fundamentally naive question: why do we need not just Clauses 22, 23 and 25 but Part 3 in the first place? Are these the emperor’s new clothes? Even the Explanatory Note is rather obscure in its rationale, saying:

“There is currently no overarching system or consistent approach for the recognition of professional qualifications between the nations making up the UK internal market. Therefore, if professional divergence increases across the UK, professionals could have greater limitations on their ability to practise across the UK than exists currently.”


What professional divergence is threatened or envisaged? There is the continuing need for professionals covered in this part to be suitably qualified, but why do we need a new piece of legislation simply to preserve the status quo? I am sure the Minister has the answer at his fingertips.

[Lord Naseby (Con)]

My Lords, it is a little disappointing that, in a Bill that is vital for the future of our country, there seems to have been some misunderstanding; somehow or other the key role of patent and trademark attorneys has been misunderstood. They are vital to the future of our country because, as it happens, we are quite good at producing ingenious new products, processes and systems of manufacture that are patentable. Equally, we are good at marketing products that require trademarks. Here is an area where we really are at the forefront of Europe’s activity—and, many would say, the world’s—so this is crucial, and we need to be clear that it is going to operate properly without any hiccups.

In my judgment, we need to defend some of our trademarks in particular. When we are marketing on our own outside the EU, I believe that we will get challenges. I have worked overseas and seen it happen there, and I do not see why it might well not happen here in the UK. As we move forward on that challenges dimension, I recall that, as I think one or two of my colleagues know, I worked in south Asia for two years. When I was in India, there was a system of mutual recognition for trademarks in certain categories of products. I wonder whether that is an element of the new deal we have done with Japan.

On my final point, I declare an interest in that I have a son, a lawyer, working in the Cayman Islands—in other words, the Overseas Territories. Given the confusion that we have had today, I am not entirely clear whether in the Overseas Territories a qualified patent lawyer or trademark attorney, who is a UK citizen qualified in the law and in whatever elements are needed for such attorneys, is able to operate although they are not actually in a part of the UK.

Trade Bill

Lord Clement-Jones Excerpts

Committee stage
Tuesday 13th October 2020 Lords Chamber

For this strategy to be a success, it is crucial that the Government take back and retain control of their ability to make policies, regulate and provide medicines, medical devices and data processing services that safeguard and enhance the health of the nation. I beg to move.

[Lord Clement-Jones (LD) [V]]

My Lords, I wholeheartedly support the amendments tabled by the noble Lord, Lord Freyberg, to protect the healthcare data generated by the NHS as well as the safety and rights of the patients and citizens it exists to serve. I commend the way in which he introduced these amendments.

I have spoken on Second Reading and earlier in Committee about the need for data adequacy to ensure that personal data transfers to third countries outside the EU are protected in line with the principles of the GDPR. By the same token, we must protect NHS data, especially given the many transactions between technology, telecoms and pharma companies concerned with NHS data. Harnessing the value of healthcare data must be allied with ensuring that adequate protections are put in place in trade agreements if that value is not to be given or traded away.

Amendments 71 and 72 would introduce clauses to the Bill to help guarantee patient safety where the data-driven medicines and medical technologies feature in a trade agreement. These are products and services that are bound to grow in number and novelty in the future, as a direct result of both the ongoing Covid-19 health emergency and the accelerated use of new technologies. Given the number of healthcare-related amendments that have been discussed in Committee, it is very clear that there are fundamental concerns about protection of the NHS and the safety, efficacy and cost of the healthcare services that it delivers. There is the potential for the Government to lose control at precisely the moment they propose to take it back. That is why I have put my name to, and support, Amendments 71 and 72.

In July, in the case of Schrems II, the European Court of Justice ruled that the privacy shield framework, which allows data transfers between the US, the UK and the EU, is invalid. That has been compounded by the recent ECJ judgment this month in the case brought by Privacy International. In future, data exporters will have to rely on standard contractual clauses. Relying on standard contractual clauses in healthcare is simply not acceptable. Relevant to Amendment 72 in particular, there is a common assumption that, apart from any data adequacy issues, data stored in the UK is subject only to UK law. This is not the case: in March 2018, the US Government enacted the Clarifying Lawful Overseas Use of Data Act, or CLOUD Act, which allows law enforcement agencies to demand access to data stored on servers hosted by US-based tech firms, such as Amazon Web Services, Microsoft and Google, regardless of the data’s physical location and without issuing a request for mutual legal assistance. In practice, data might be resident in the UK, but it is still subject to US law.

Data cannot, therefore, simply be considered UK sovereign, and it is notable that Amazon Web Services gave a full response to more than 1,259 subpoenas, search warrants and court orders between January and June of this year. AWS’s own terms and conditions, which form part of its agreements with the UK Government, do not commit to keeping data in the region selected by government officials if AWS is required by law to move the data elsewhere in the world. Key and sensitive aspects of government data, such as security and access rules, usage policies and permissions, may also be transferred to the US without Amazon having to seek advance permission. Similarly, AWS has the right to request customer data and provide support services from anywhere in the world.

The Cabinet Office Government Digital Service team, which sets the Government’s digital policy, gives no guidance on where government data should be hosted. It simply states that all data categorised as official —the vast majority of government data, but including law enforcement, biometric and patient data—is suitable for the public cloud, and instructs its own staff simply to use AWS, with no guidance given on where the data must be hosted. The costs of AWS varies widely, depending on the region selected—and the UK is one of the most expensive regions. Regions are physically selected by the technical staff, rather than the procurement team or the security team. I should say that Amazon Web Services has a contract with NHSX, so that should be set in this context.

The free flow of data across borders, in principle, is of crucial importance, as the noble Lord, Lord Freyberg, said. However, I hope this example illustrates that control of policy and regulation as to what that data is and who it is shared with should be retained by the UK Government. In fact, that is not even enough existing control over government data. In particular, retention of control over health data, health service planning, and research and innovation is vital if the UK is to maintain its position as a leading life sciences economy and innovator. That is what these amendments would ensure.

[Lord Bassam of Brighton (Lab) [V]]

My Lords, the noble Lord, Lord Freyberg, is to be congratulated on bringing these amendments to the forefront of our discussions and considerations, not least because, as he said, at the heart of them is an attempt to guarantee patient safety. That should be a paramount reason for giving them the active consideration we are.

As the noble Lord, Lord Freyberg, said, there is a significant value to NHS data for a number of reasons: expanding research, testing technology, better under- standing of diseases and, of course, improving treatments. The fiscal value of NHS data cannot be underlined strongly enough—imagine its value if an insurance company were to find, for instance, access to data concerning test, track and trace.

The value of all this data is estimated to be around £10 billion a year, but, as I have mentioned before, the Bill in its current form could allow UK data to be moved to servers in America and stop the NHS being able to analyse its own health data without paying royalties. We should not pretend that tech companies and US drug giants do not recognise the value of all this data; the noble Lord, Lord Clement-Jones, has given ample voice to that argument.

Last year, it was revealed that pharma companies Merck, Bristol Myers Squibb and Eli Lilly paid the Government for licences costing up to £330,000 each, in return for anonymised health data. The Government, as has been said earlier, have also given Amazon access to healthcare information, and DeepMind was given access to the data of 1.6 million patients at the Royal Free Hospital.

As we have touched on before in a previous group, Labour supports protecting the NHS, including its data and publicly funded health and care services, from any form of control from outside the UK in trade deals. I have already pulled out the inconsistencies in the Government’s position. They say the NHS is not on the table in trade talks, but they will not put protections on the face of the Bill. What have they got to hide? They do not want to improve scrutiny mechanisms for trade agreements, and I think we should be concerned and highly worried about that.

I am not the only one to recognise this: more than 400 doctors and health professionals have urged the Government to amend the Bill and ensure that health services are not on the table in future trade deals. They have also argued that free trade deals risk compromising the safe storage and processing of NHS data. Let us commit in statute to protecting our beloved NHS in trade deals and making sure we can use valuable data to provide the most cutting-edge care for patients here in the UK.

Trade Bill

Lord Clement-Jones Excerpts

Committee stage & Committee: 2nd sitting (Hansard) & Committee: 2nd sitting (Hansard): House of Lords
Thursday 1st October 2020 Grand Committee

Moved by

[Lord Clement-Jones]

15: Clause 2, page 2, line 23, at end insert—
“( ) Regulations under subsection (1) may make provision for the purpose of implementing an international trade agreement only if the appropriate authority has published a report reviewing the impact of any changes brought about by that international trade agreement on the existing law of intellectual property.”Member’s explanatory statement
This amendment seeks to explore issues that could be damaging to intellectual property law.

[Lord Clement-Jones (LD)]

My Lords, in the digital era in particular, intellectual property is the lifeblood of our creative and tech industries. As the Alliance for Intellectual Property points out, the UK’s IP framework has a number of features that protect UK consumers and reward UK creators and inventors. It is quite possible that our trading partners may wish to reduce or water down these protections. To ensure that the UK’s IP framework will continue to deliver significant economic benefits, it is paramount that the UK does not concede or dilute its current IP standards as part of trade negotiations; indeed, they should be enhanced.

Ensuring that we will retain or enhance these core protections involves asking ourselves the following questions for each trade agreement. For instance, on international treaties generally, will the UK encourage all our trade partners to promote both the ratification of, and adherence to, terms of international treaties for the recognition and enforcement of copyright, trademark design and other intellectual property rights? With regard to trademarks, will we resist the introduction of proof of use?

With regard to maintaining the UK’s injunctive relief powers, in the UK rights holders can apply to the civil courts for no-fault injunctive relief. Will the UK Government ensure the preservation of their no-fault injunctive relief regime? With regard to design rights, will our negotiators ensure that the current level of protection is not weakened and that such protection is available to all UK designers, particularly regarding unregistered designs? With regard to copyright, will we make sure that the copyright term of 70 years after death is preserved? New Zealand, by contrast, has only a 50-year term.

With regard to copyright exceptions, will future free trade agreements negotiated by the UK include balanced copyright exceptions and limitations, and uphold standards such as the Berne three-step test? Will we resist any adoption of US-style fair use?

With regard to the liability of online platforms, will the UK oppose any obligations under any trade agreement, particularly with the US, that would broaden liability shields for online intermediaries or digital platforms? Will the UK ensure that its negotiators work together with the US to simplify the DMCA notice and takedown provisions and embrace a sharing of best practice within the US and UK systems? The amendment in the name of the noble Baroness, Lady Kidron, which I strongly support, would give this wider and greater force regarding children.

With regard to site blocking, will the Government make sure that our site-blocking provisions for pirate sites are protected and included in free trade agreements? It seems they have not been in the Japan free trade agreement. With regard to sovereignty over exhaustion rights, will we ensure that exhaustion continues to be a sovereign issue for the UK, that it is not prescribed in any trade agreement and that there is no shift to an international exhaustion regime?

With regard to the artist resale right, the ARR ensures that UK visual artists receive a modest royalty when their work is resold on the secondary art market. Will we be maintaining the ARR and pressing for it to be included in all future trade agreements? With regard to reciprocal public performance rights, will the Government press the countries that we are negotiating with to provide for full payment for all music rights holders from the use of their works or from recordings, public performance and broadcast?

With regard to source codes, will we be preventing the mandatory transfer of source codes, algorithms or encryption keys as a condition of market access? With regard to data, will we be supporting the development of AI through aligning open government data and text and data mining rules with our own? Lastly, with regard to robust enforcement measures, the effective enforcement of intellectual property rights and infringement is crucial for ensuring the integrity of future trade agreements. Will we be ensuring that effective mechanisms for enforcement are in place so that rights holders have the ability to enforce IP laws within these jurisdictions?

These are all significant aspects of IP rights that have hitherto been relied on by our exporters and service providers. The Minister assured me at Second Reading:

“As he will know, our intellectual property regime is consistently rated as one of the best in the world. One of our priorities will be to ensure that future trade agreements do not negatively impact on standards in this area and that our regime will promote trade in intellectual property.”—[Official Report, 8/9/20; col. 747-78.]


But how will we know for sure in advance? Here is a classic example. The Chartered Institute of Patent Attorneys points out that in the UK’s negotiating objectives under “Intellectual property” on page 11, the Government commit to:

“Secure patents, trademarks, and designs provisions that: are consistent with the UK’s existing international obligations, including the European Patent Convention (EPC), to which the UK is party”.


In the corresponding US negotiating objectives, the US Government state that they will seek provisions governing intellectual property rights

“that reflect a standard of protection similar to that found in US law.”

As CIPA says:

“These UK and US objectives are not fully aligned, and a similar non-alignment may well arise in negotiations with other countries. This carries the serious risk of creating damaging uncertainty about the UK’s continuing membership of the EPC”.


Let us take two more examples. The July letter of the noble Lord, Lord Grimstone, about the New Zealand negotiations on intellectual property gave very little away. In his slightly fuller letter on the Japan agreement in September, he said:

“New protections for UK creative industries—British businesses can now be confident that their brands and innovations will be protected. We have gone beyond the EU on provisions that tackle online infringement of IP rights, such as film and music piracy.”


That is all well and good, but it is precious little information on such an important subject. We should know in advance through a specific report what the IP situation on each trade agreement will be so that we can be assured that the relevant protection and provisions are in place. That is what this amendment does.

I turn briefly to Amendment 16 on data flows to which the noble Baroness, Lady Neville-Rolfe, will be speaking and which I have signed. However, I do not want to steal any of her thunder. It is sufficient to say that this was not dealt with by the Minister at Second Reading. It supports the free flow of data and regulated access to data sets; ensuring that data can flow across borders is essential for digital trade, in particular for e-commerce consumption and supply chains and the use of data collection and data analytics through the cloud and otherwise.

In his September letter on the Japan agreement, the Minister said that cutting-edge digital and data provisions had been agreed. Again, how are we to judge? How are we to judge, too, the impact of any safe harbour or privacy shield provisions on our wider digital economy, especially in the light of Schrems II? Already, the Government’s consultation on a national data strategy with its promise to remove legal barriers to data use are problematic. We have heard from the noble Lord, Lord Agnew, that the Government Digital Service is carrying out a risk assessment. What impact will that have on our trade agreement negotiations?

All of this argues for a specific impact report prior to a trade agreement being signed in respect of data flows. I shall leave the Minister to the mercies of the noble Baroness, Lady Neville-Rolfe. I beg to move.

[Baroness Neville-Rolfe (Con)]

My Lords, I shall speak to Amendment 16 in my name, which requests a similar report on data. I thank the noble Lords, Lord Clement-Jones and Lord Stevenson of Balmacara, for their support. I in turn support Amendment 15 in their names on intellectual property. This is an issue on which we have worked together over many years, and of course the Minister, my noble friend Lord Younger, is something of an expert on IP, so I am hopeful of making progress and look forward to his response.

Our amendment on data is possibly even more important than that on IP, if that is possible. Data is like the electricity on which it depends: it allows everything to work and permits communication and analysis across the world. Data flow now underlies almost every aspect of our lives from financial services to the food supply chain, from defence to the music industry. The cloud is everywhere; it has made some people very rich, and has radically changed the market valuations of the world’s companies—here I refer to my own registered interests.

However, unlike IP where there are well-established international frameworks and bodies, in data there is inadequate international alignment of standards, and that has led to disputes between the EU and the US, as I know only too well as a former Minister with responsibility for data. The combination of the GDPR and the European Court ruling on Schrems caused huge problems that we solved with the EU-US Privacy Shield Framework. Led by my right honourable friend Matt Hancock and my noble friend Lord Ashton of Hyde, who is now of course our esteemed Chief Whip, we put the GDPR and associated changes on to the UK statute book so that the UK would be declared equivalent to the EU and data could continue to flow after EU exit. We still await clarity on that equivalence decision, which is important to many sectors and is a matter of much concern to the EU Scrutiny Committee on which I have the pleasure of sitting.

--- Later in debate ---

[Viscount Younger of Leckie (Con)]

To answer the second question from the noble Baroness, we could well be. I think I have said, in other respects, when we do finally leave the EU after the transition period, because we will have left the EU it will be up to us to look at our standards and raise them if we think that is right. On the way forward on online harms, which is very close to the heart of the noble Baroness, I reassure her that there is a lot of cross-departmental work going on here. Although this is DCMS-led, I reassure her, on behalf of my noble friend Lord Grimstone, that the DIT and other departments are working together on the way forward, bearing in mind the White Paper.

[Lord Clement-Jones (LD)]

My Lords, I thank the Minister for his response. It was useful to be reminded by the noble Baroness, Lady Neville-Rolfe, of his antecedents. I remember many happy hours discussing copyright exceptions—I think it was from 2013 onwards —and I am sure it was one of the Minister’s favourite jobs at the time, with all the minutiae of intellectual property involved.

This has been a relatively short but, I hope, well-argued debate and I am grateful to those who supported not only my Amendment 15 but Amendments 16 and 34, which I strongly support as well. If we were looking for an order of priority, Amendment 34 in the name of the noble Baroness, Lady Kidron, is the absolute touchstone for this debate. She referred to putting an intentional red line in the negotiations, a very powerful phrase. The noble Lord, Lord Sheikh, said that children’s safety should not be traded away again, which really emphasises the importance of this. The point was made that we do not yet have all the legislation we need in this area, therefore any negotiations need to take account of future legislation. It is a really tricky one. The Minister has a wonderful bedside manner and used the word “reassure” on a number of occasions, but this is a really difficult and important area. Personally, I am not 100% reassured and if the noble Baroness wanted to bring her amendment back on Report, many of us would give her a great deal of support.

Turning to data, I agree with my noble friend Lord Fox: the one thing giving business sleepless nights is the whole issue of data adequacy and data flows. Post Schrems, that is a really difficult area. The Minister mentioned it and the noble Lord, Lord Agnew, answered a Written Question from me recently about the taskforce. It is urgent that we should have those guidelines in place. It is not adequate that people should simply have to rely on standard contractual clauses, especially for small business, as it will imply that they have to take a great deal of legal advice. I should say that since I no longer charge by the hour, I have no direct personal interest in that. However, it is a serious area and I hope it is being taken on board at speed.

On the IP front, there was a kind of multiple-choice questionnaire which I hope the Minister will use in future negotiations to tick or cross, as the case may be. The big problem is that this all demonstrates the feeling that the scrutiny process is inadequate, whether on continuity agreements or new agreements. The Minister says that the amendments would require another 11 reports, or whatever the tally would be, but that demonstrates a theme that has run through Second Reading and Committee so far: that the level of scrutiny we are being given over free-trade agreements is inadequate. Whether on things such as IP and data, which are crucial to business, or things which have a greater moral and societal foundation, as in the amendment of the noble Baroness, Lady Kidron, this is about the opportunity for scrutiny not being adequate at this point.

I will obviously withdraw the amendment, as we are in Grand Committee, but we are, in a sense, still back with the feeling that we have to go much further on scrutiny. If that involves 11 reports, so be it: these are important agreements for our future. I beg leave to withdraw the amendment.

Amendment 15 withdrawn.

Intellectual Property (Amendment etc.) (EU Exit) Regulations 2020

Lord Clement-Jones Excerpts

Monday 14th September 2020 Grand Committee

[Lord Clement-Jones (LD) [V]]

My Lords, I, too, thank the Minister for his introduction and I am grateful to the noble Lord, Lord Naseby, for raising points on the Explanatory Memorandum because it means that I will not have to go through it in the rather useful way that he has done.

In preparation for this debate, it was rather dispiriting to look back on the long debates we had in January, February and March last year, sometimes in both Grand Committee and the Chamber, on the original five intellectual property EU exit statutory instruments that are subject to amendment by this single draft SI. Much of the debate then centred on the lack of adequate consultation and impact assessments, the latter of which we still do not have. In the meantime, we have the provisions of Articles 54 to 61 of the withdrawal agreement and the consequent note of 29 January from the IPO on intellectual property and the transition period. It is admirably clear about what provisions are being put into place and is very helpful in understanding the outcome of this amending SI, but sadly it is not as clear about what is not being put in place and we are giving up.

As regards the creation of an equivalent EU trademark at the end of the transition period, the note makes it clear that businesses, organisations or individuals that have applications for an EU trademark which are ongoing at the end of the transition period will have a period of nine months from the end of the transition period to apply in the UK for the same protection. The position is similar for registered Community designs and unregistered designs. So far, so straightforward, but on international registrations designating the EU, the IPO note states:

“During the transition period, international registrations for trademarks and designs protected via the Madrid and Hague systems which designate the EU will continue to extend to the UK … We are continuing to work with the World Intellectual Property Organization (WIPO) on the mechanism to ensure continued protection.”


Can the Minister give some further detail of the progress of this work? As regards rights of representation, the IPO goes on to say:

“During the transition period, UK legal representatives will continue to have the right to represent clients before the EU Intellectual Property Office (EUIPO).”


However, it goes on to say,

“The WA also states that the UK will not amend address for service rules for the comparable UK rights for a period of three years after the end of the transition period.”


This is what has given rise to huge concern among IP professionals. It is totally asymmetrical. What induced the Government to give this away? This is the loosest and most damaging of loose ends and, as I am sure the Minister is aware, trademark-intensive industries contribute £650 billion to the UK’s gross domestic product every year, providing an estimated one in five of all jobs. This will give EEA trademark attorneys a significant advantage over their UK colleagues and is likely seriously to damage the UK trademark protection industry, which is a world leader, and will be highly detrimental to UK firms and the jobs they support.

UK professional firms will be, by and large, restricted to UK-only matters with no mutual rights in Europe. While larger firms may choose to deploy satellite offices in the EEA to carry out EU work in the future, not all UK firms can afford such arrangements. UK trademark professionals will lose rights of representation before the EUIPO. There will, in consequence, be a loss of representation on IP portfolios and incoming IP work from a number of major countries and a major risk to professional livelihoods. EEA firms are being handed a completely unfair and anti-competitive advantage. The UK is not “taking back control” of its hugely valuable IP system—it is handing it over to European firms for nothing.

After significant pressure, the IPO woke up to the issue earlier this year. I was told by the noble Lord, Lord Callanan in June—in answer to a Written Questions tabled in May—that officials at the IPO were having ongoing conversations with representative bodies over how best to address this matter once the transition period ends. The Government finally got round to publishing the consultation on changing the address for service rule on 27 July. The outcome of the consultation is not yet public.

Can the Minister give an advance idea of what the conclusion will be? As the address for service provision is incorporated in the withdrawal agreement, what flexibility do the Government have? What action can be taken? Does the weakness in the UK Government’s approach to negotiations mean that there is no level playing field in prospect for three years? Is there a constructive way of resolving the matter that does not depend on breaching the agreement, as seems to be the Government’s favourite method of proceeding in other respects?

As regards patents, the IPO note goes on to talk about the European patent system, which is unaffected by Brexit. What impact will the withdrawal from the unified patent court agreement without consultation or debate in July have on the UK’s innovators and protection of intellectual property after the transition period? The Minister may have read the important warnings from the noble Earl, Lord Devon, on this subject in the Second Reading debate on the Medicines and Medical Devices Bill. What is the rationale for the withdrawal and how will it improve our intellectual property protection in the UK post Brexit? Of course, I welcome the extension of SPC system provided in the SI and described by the Minister.

Then we come to the area of the exhaustion of rights As the IPO note states in the withdrawal agreement, the EU and UK have agreed that IP rights exhausted in the EU and the UK before the end of the transition period will remain exhausted in both areas. However, what happens after the transition date as regards the legal exhaustion regime. The note provides a link only to brief guidance on parallel imports. Is the regime to be adopted still under consideration? I hope the Minister can give more detail.

On copyright, the note says:

“Continued reciprocal protection for copyright works between the UK and the EU is assured by the international treaties on copyright. This is independent of our relationship with the EU so is not addressed in the Withdrawal Agreement.”


It fails to mention the very valuable intellectual property rights—some of which were referred to by the noble Lord, Lord Berkeley—which are being foregone by the UK’s refusal to adopt the new copyright in the single market directive. There is no agreement on portability for consumers, no enhanced duties for digital platforms in use of copyright material, no improved rights for authors and performers and no enhanced rights for publishers. I entirely agree with the noble Lord, Lord Berkeley, as to the consequences. On top of that, the EU orphan works directive will no longer apply to libraries, archives and museums and the position of our collecting societies is weakened. Broadcasting from the UK will also be more difficult. What happened to the Minister’s boast to me on 2 March that the UK has

“one of the strongest copyright protection frameworks in the world,”?—[Official Report, 2/3/20; col. 389.]

Finally, there is a very large elephant in the room. There is currently no deal with the EU. Will we need to come back and amend these regulations yet again for the situation post transition? I hope the Minister is crystal clear in responding on that aspect in particular.

Trade Bill

Lord Clement-Jones Excerpts

2nd reading & 2nd reading (Hansard) & 2nd reading (Hansard): House of Lords
Tuesday 8th September 2020 Lords Chamber

[Lord Clement-Jones (LD)]

My Lords, I add my own welcome and congratulations to the Minister and to the right reverend Prelate. I share all the concerns expressed by my noble friends and many noble Lords about the lack of proper scrutiny provisions in this Bill. Global digital trade is increasingly important in the post-Covid world. Its rules must be established, however, through bilateral and multilateral trade agreements.

Two areas where special scrutiny is required, particularly their place in the global digital and creative economy, are intellectual property protection and data transfer. It is crucial in future FTA’s negotiated by the UK that we do not concede or dilute our IP standards as part of trade negotiations. Indeed, they should be enhanced. These core protections include—it is quite a list—adherence to international treaties related to copyright, trademark, design and other intellectual property rights by our trading partners; maintenance of the UK’s “no fault” injunctive relief powers; robust enforcement measures for IP rights and infringement; strong design rights, particularly regarding unregistered designs; balanced copyright exceptions that uphold standards such as the Berne three-step test; no broadening of any liability shields for online platforms; retention of sovereignty over exhaustion rights and no shift to an international exhaustion regime; retention of artist resell rights; reciprocal rights of representation; reciprocal public performance rights for all music rights holders for their works, recordings, public performances and broadcasts; no mandatory transfer of source codes, algorithms or encryption keys as a condition of market access; and support for the development of AI through aligning text and data-mining rules with our own.

On the second major issue, data transfer, we need to ensure that data can flow across borders. It is essential for digital trade, particularly e-commerce, supply chains, data collection and data analytics through the Cloud. We have discussed the need for data adequacy in this House many times. In a significant ruling last month, in the case of Schrems II the European Court of Justice ruled that the privacy shield framework which allows data transfers between the US, the UK and the EU was invalid. Cloud services and data exporters from the EU will have to rely on standard contractual clauses. The UK will need to develop its own regime, similar to the EU’s adequacy framework, to ensure that personal data transfers to third countries outside the EU are protected, in line with the principles of the GDPR. We also need to ensure there is no enforced localisation of data or separate treatment for cross-border flows of financial data, as the Minister will understand only too well.

I look forward to the Minister’s response on these issues and how scrutiny will be guaranteed in the future.