National Security and Investment Bill

Baroness McIntosh of Pickering Excerpts

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

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

My Lords, I welcome the noble Lord, Lord Woodley, and congratulate him on his maiden speech. I also congratulate my noble friend the Minister on so ably introducing the Bill, with its ambitions to control foreign investment. I welcome the Bill in the broad and in principle, but I would like to highlight a number of points that I wish to explore during its passage.

The United Kingdom has a long and proud tradition of being open to foreign investment. What assessment have the Government made of the impact on foreign investments within the remit of the Bill, especially in terms of British technology and manufacturing sectors?

Both the Law Society of England and the Law Society of Scotland have highlighted a number of issues: in particular, why there is no definition in the Bill of national security. Also, the remit of the Bill is very loose and broad. While I appreciate that this is to be refined by secondary legislation, my noble friend the Minister will appreciate that we have very limited powers to review and scrutinise secondary legislation.

I welcome the consultation; I notice that transport is included within that. However, why have the Government proceeded with the Bill without the results of that consultation being known, processed and put before the House? I understand that the Government will put more detail in the secondary legislation, particularly on the transport aspects. But, once again, there is limited scrutiny over that secondary legislation, whereas if it was on the face of the Bill—as the 17 original sectors are—that would give us more powers to scrutinise and discuss this through its passage.

Like my noble friend Lady Noakes, I would like to ask specifically why the water sector is not covered. The provision of water to households and businesses is a strategic matter. It seems an oversight that it has not been included in the remit of the Bill. There may be a good reason for that, and I should be delighted if my noble friend the Minister would share that with us today.

In principle, I welcome the scope of the Bill and the opportunity we have today, and through its passage in Committee and further stages, to scrutinise it. The full remit of the Bill and particular definitions need to be properly understood. I welcome the opportunity that the passage of the Bill will provide in that regard. With those few remarks, I wish the Bill a fair wind today.

National Security and Investment Bill

Baroness McIntosh of Pickering Excerpts

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

[Baroness Hayter of Kentish Town (Lab)]

My Lords, I shall speak also to Amendments 13 and 83. Perhaps I will take a little more time than usual over this because it is one of the central issues on which we wish to hear the views of the Committee and, indeed, the response of the Government.

Given that national security is clearly the Government’s priority, it is important that to make the Bill work everyone involved in its provisions and their interpretation are clear about how the Government see national security—its range and depth, if I may put it that way. Therefore, Amendment 13 seeks to establish the issues which should be taken into account because clear rules will be vital for businesses seeking funds, researchers, investors and the unit having to take decisions. They need to work on basically the same template.

Let me take a moment to say that the Government have published 112 pages today—the Minister expected someone to say it, so I may as well say it now—but his letter covering the first amendment arrived as he was speaking to it and the Written Ministerial Statement did not even refer to a policy statement that I gather has also been put out, according to my up-to-date information. I think the Committee will understand that we have not had time to digest this and we may therefore have to try to look at some important issues in that.

One of the points relevant to Amendment 13 is that this response states that several respondents indicated that “national security” should be clearly defined. We are therefore interested to know whether the Minister will listen to those concerns which, in a sense, is what Amendment 13 is seeking to do. It is not trying to define exactly what is national security nor, by implication, what is not. It is setting out how people tasked with scrutinising potential investments may approach the first question—“Might this risk our security?”—by listing the sort of factors to be considered. The “have regards”, while not an exclusive list, indicate to officials, the Secretary of State and those handling investments the matters which should be considered in any decision.

We absolutely agree that neither the Government nor Parliament should prescribe or limit what national security covers, as is long-standing practice, and therefore do not seek by this amendment to curtail the Secretary of State’s flexibility to act, but we nevertheless think that the other parties involved who will be impacted by this legislation need to know the range of issues which will be among those considered by the Secretary of State.

Amendment 13 provides a framework which is neither rigid nor exclusive. It simply does what other countries have done, what experts have recommended and what we have heard that people submitting comments to the Government have also said. The Law Society argues that without something like this, there is a risk that a Secretary of State could become exposed to political influence, and the Investment Association says that a better understanding of national security could help calm investors. Therefore, the amendment indicates factors that the Government might consider, such as the impact of a triggering event on defence capabilities or how a hostile actor might be enabled to gain access to critical infrastructure. I hope that the Minister will accept that Amendment 13 provides such a framework and flexibility to help alleviate the concerns that have been raised, particularly in the defence sector.

We are also keen to ascertain whether critical infrastructure is included in the Bill. As we know from the ISC report published last year, Russia has

“undertaken cyber pre-positioning on other countries’ Critical National Infrastructure.”

It would therefore be useful if the Minister could clarify whether that is covered in the Bill.

Later this month—the rumour is a week tomorrow but certainly while the Bill is in this House—we will see published the Integrated Review of Security, Defence, Development and Foreign Policy. Perhaps the Minister could confirm its publication date and that it will indeed be a week tomorrow. He nods—I think I am not going to get a yes that question. Can he also outline how the results of the analysis of that review will feed into the work of the new unit and its decisions on what constitutes a security threat? Will the review focus on the private sector and on the role that the Government see for business, as well as on how the interests of innovation both in academia and in business should be promoted?

Amendment 83, to which the noble Baronesses, Lady Northover and Lady Bennett of Manor Castle, have added their names, highlights the relationship between the review just mentioned and the objectives of the Bill and seeks a government statement on it. Given that the Government have said that the review will include the

“long-term strategic aims for … national security”,

there are questions about how these would align with the Bill’s new regime and how we are able to keep an eye on technological developments in the private sector while keeping pace with security challenges. What we do not want to see is an important new national security regime buried in BEIS which does not link with the UK’s wider and longer-term security concerns and priorities.

The ISC noted

“the extent to which economic policy dictated the opening up of the UK to Russian investment”,

whereas the Bill seeks to put security first and our investment needs second. As I said on the earlier group, it is an important but not always easy judgment to make. It is therefore essential that the Government’s view on security is considered by the BEIS unit and that Parliament is able to see how that is happening by way of the statement suggested in the amendment. That statement should focus both on how the Government will align the provisions in this Bill with the outcome of the integrated review and on how the UK will respond to identified threats, including new technology, biological weapons, cyber and misinformation. The reference to new technology is key since new weapon capabilities could as easily be developed in the private sector as in an MoD lab. The Government will need to procure these assets while preventing certain foreign states also purchasing them.

I return to Amendment 2, which probes whether public order and public safety are included within the Government’s view of national security. The similar German regime captures “public order” as part of its national security, while the Japanese regime applies equally to “public order and public safety” and to national security. Is the UK regime narrower than the approach taken by these other jurisdictions? Perhaps the major issue we want clarified within that is whether an investment which could have an impact on the working of our democracy would be covered.

Last year’s Intelligence and Security Committee report on Russia stated:

“The UK is clearly a target for Russia’s disinformation … Russian influence in the UK is ‘the new normal’ … It is clear that Russia … poses a significant threat to the UK”,


including “interference in democratic processes”.

With regard to elections, the discussion at the time of the publication of the report, which of course was written a whole year before it was published, was more on bots, messages, and so forth, the report noting that

“Russia has carried out malicious cyber activity … including attempting to influence the democratic elections of other countries”.

The Government’s own response concluded that

“it is almost certain that Russian actors sought to interfere in the 2019 general election through the online amplification of illicitly acquired and leaked Government documents.”—[Official Report, Commons, 16/7/20; col. 71WS.]

However, an external force intent on interfering with our elections could instead invest in the electronic gear that stands behind our pencil and paper voting, and perhaps pose a threat that way. Given, as the ISC report notes, the

“fusion of government and business”

in Russia, a business providing advanced IT for elections could have very close ties to that regime, or indeed to any other regime. Indeed, the Government’s response to the ISC noted that the Defending Democracy programme in the Cabinet Office includes consideration of

“direct attacks on electoral infrastructure.”

So the thinking is clearly there. Perhaps the Minister could therefore clarify whether foreign investment in democratic electronic infrastructure would come under the remit of the Bill. It is partly about what we think of as national security.

When the ISC covered this, it noted that

“the issue of defending the UK’s democratic processes … has appeared to be something of a ‘hot potato’, with no one organisation”—

I assume it meant within government—

“recognising itself as having an overall lead.”

Could the Minister outline how such responsibility and oversight will sit within the BEIS unit, such that investment in any democracy-related hardware or software could be included in its remit, and explain how the Government will overcome what the ISC describes as

“nervousness around any suggestion that the intelligence and security Agencies might be involved in democratic processes”,

given the committee’s view that

“Protecting our democratic discourse and processes from hostile foreign interference is a central responsibility of Government, and should be a ministerial priority.”?


The answer to the questions may indeed be no, but to have a discussion on national security and the future of our democracy and our safety without considering this seems to us to miss out a vital ingredient. I beg to move.

[Baroness McIntosh of Pickering (Con)]

My Lords, I thank the noble Baroness, Lady Hayter, for bringing forward this group of amendments. I will speak in particular to Amendment 13.

In preparing for this stage of the Bill we have received a number of briefings from outside bodies. Every single one has said, in the words of the noble Lord, Lord Clement-Jones, that the trawl is being done far too widely. The Government would not be drawn on that at Second Reading, and it is absolutely appropriate that we try to pin them down through this form of probing amendment.

In leaving the parameters drawn as wide as they are, it is fair to say that all those who have briefed ahead of today would prefer to see a strict definition of what national security is. Am I right in assuming that national security for the purpose of the Bill covers everything that is not defined or covered elsewhere? Water treatment, the water supply and air traffic are covered by other legislation, so does that mean they are not covered by the purpose of the Bill? Are we wrong to assume that the Bill covers critical infrastructure in the way the noble Baroness, Lady Hayter, set out? It would be helpful to know whether we have to work on a process of elimination rather than on a specific reference point such as a definition, as is set out in Amendment 13, which is quite wide in its own right, given its number of “have regards”.

The Law Society of Scotland states that

“national security itself is not defined within the Bill. We note that the Enterprise Act 2002 definition refers to EU legislation”.

Are we right to assume that that definition still applies, or can we safely assume that, because we have now left the European Union, it is no longer valid? A steer from the Minister would be very helpful in summing up this debate.

The Law Society of Scotland goes on to say that

“: it might be helpful to introduce a stand-alone concept appropriate to the current context. An exhaustive definition is likely to be neither possible nor desirable but a general delineation of the concept together with detailed additional guidance as to how this is likely to be applied would be helpful.”

Does the Minister intend to do that as the result of this amendment to date?

I, too, received the letter from the Minister within the last half hour, when I was on another call. In the normal course of events, I would have studied such a letter quite closely to enable me to prepare for today, so it is a matter of some regret that we have not had a chance to read it. Perhaps the Minister will cover its main points in replying to this little debate on this group of amendments.

I believe that either we should adopt something like Amendment 13 in the course of proceedings or the Minister should bring forward some definition of the Government’s own drafting during the proceedings, before the Bill leaves the House.

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Moved by

[Baroness McIntosh of Pickering]

6: Clause 1, page 1, line 18, at end insert—
“(2A) For the purposes of this Act, the following shall not be taken into account when considering whether a trigger event may give rise to a risk to national security— (a) adverse effects on levels of employment in the United Kingdom, or a part thereof, except that adverse effects on the employment of one or more specific categories of employee may be taken into account,(b) the existence or extent of opportunities for persons resident or established in the United Kingdom to invest in, or make sales in or into, another jurisdiction, or(c) the protection from competition of business activities carried on in the United Kingdom or business activities carried on by persons resident or established in the United Kingdom, except to the extent that such business activities contribute materially to national security, or are likely to do so in the future.”Member’s explanatory statement
This amendment would clarify that certain factors—namely employment effects, reciprocal investment or trading opportunities, and the desire to protect UK business from international competition—cannot be taken into account in assessing whether a trigger event would give rise to a national security risk.

[Baroness McIntosh of Pickering (Con)]

I am delighted to move Amendment 6 and I thank my noble friend Lord Hodgson of Astley Abbotts and the noble Lord, Lord Clement-Jones, for lending their support to this amendment. I also thank the Law Society of England for its help in drafting the amendment, and I very much look forward to my noble friend Lord Callanan keeping up his good efforts this afternoon in responding to this debate.

We have not so far succeeded in coming up with a definition of how to limit our understanding of a definition of national security, so I shall approach it by a different route, which is to try to understand, define and limit what constitutes a trigger event. In the view of practitioners, as expressed by the Law Society of England, this amendment is needed as it would ensure that “national security” in the Bill will not be conflated with other issues of political or industrial concern which cannot be seen to relate to security but would still be flexible enough to allow for genuine national security threats to be deemed to be trigger events. I suppose this relates to my noble friend’s earlier comment in summing up a previous debate when he said that trigger events or national security relate to the whole economy, not just parts of it.

The purpose of Amendment 6 is to understand what constitutes a trigger event that would be deemed to lead to or constitute a security risk. It is in terms of being critical to investor confidence in the United Kingdom that the new regime is seen to be focused clearly on national security concerns and free of industrial or electoral influences not relating to national security. Therefore, the Bill would benefit from a clause such as this, explicitly stating the factors that should not be taken into account in assessing whether a trigger event would give rise to a national security risk. I set out here that the factors that would be excluded would cover any,

“adverse effects on levels of employment in the United Kingdom”,

or,

“the existence or extent of opportunities for persons resident or established in the United Kingdom to invest in, or make sales in or into, another jurisdiction”,

and the desire to protect UK businesses from international competition.

I accept that the amendment might not be necessary if we had established a definition for national security but, given that we have not achieved that, I am keen to press this as a probing amendment and include a clause such as this in the Bill, thereby making clear that certain factors such as employment effects, reciprocal investment and trade, and protectionist connections would not be deemed to be trigger events. With that brief explanation, I beg to move.

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

My Lords, it is a pleasure to follow the noble Baroness, Lady McIntosh of Pickering, with whom I am often in agreement—although, I am afraid, not in this case.

In my little over a year in your Lordships’ House I have noticed a strong tendency for Members to sign up to speak on amendments that they support and not those that they oppose. However, this has a clear and damaging effect, and slants the debate. Proponents get to put their case and the Government attempt to bat it away, often on merely technical grounds, and only one side of the argument is put. That sets the tone of the debate beyond just that day; it unbalances it. There is also the issue that, on Bills such as this, as a noble Lord said earlier, we often have an accountant followed by a banker followed by a lawyer. That is not a representative sample of society or opinion. It is for that reason that I signed up to speak on the amendment and express my strong opposition. I will be brief but clear.

The earlier groups of amendments on which I spoke, including Amendment 2, sought to define the national security on which the Bill seeks to allow the Government to act. The amendment does the very opposite by seeking to restrict the Government’s hand. The former amendments were “have regard to” amendments. This is a “shall not be taken into account” amendment. It is extremely ideological and seeks to assert the primacy of the market and the interests of business—which, by definition, given the nature of the Bill, is almost certainly big business, giant multinational companies—over what might be regarded as a key concern of the Government regarding employment. That is also, I would strongly argue, a national security issue—certainly a public order issue—with regard to Amendment 2.

The market is a human creation, not some natural process or action such as photosynthesis or the tides. To say that the market should have primacy over the well-being of society is a profoundly ideological argument that would have been very strange for most of the 20th century and reflects a particular neoliberal political position. Again, we are back to talking about investor confidence and the idea that we have to be a competitive nation—the very ideology that led us to the 2007-08 financial crash.

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[Lord Callanan (Con)]

I thank everybody who has spoken in this debate and thank my noble friend Lady McIntosh of Pickering for tabling the amendment. It seeks to clarify that certain factors, namely employment effects, reciprocal investment or trading opportunities and the desire to protect UK businesses from international competition, cannot be taken into account in assessing whether a trigger event would give rise to national security risks. I was surprised to see that the noble Baroness, Lady Bennett, and my noble friend Lady McIntosh are now differing on some things. That is most unusual; it is something to be encouraged for the future.

My noble friend articulates a reasonable concern here: that a regime used to screen investment for national security purposes could be used to screen investments more widely. Indeed, the shadow Secretary of State, in his opening speech at Second Reading in the other place, argued that the Bill should include an industrial strategy test—I was therefore surprised to see the noble Baroness, Lady Hayter, supporting this amendment.

As such, I have some sympathy with the aims of this amendment. I can, however, reassure my noble friend that the Bill is about protecting national security, nothing more and nothing less. The Bill does not set out the circumstances in which national security is, or may be, considered at risk. As I said on previous groups, this reflects long-standing government policy to ensure that national security powers are sufficiently flexible to protect the nation. The Bill also does not include factors which the Secretary of State must or may take into account when assessing national security risks. Instead, factors that the Secretary of State expects to take into account in exercising the call-in power are proposed to be set out in the statement that we have provided a draft of and is provided for by Clause 3.

The draft statement, published upon introduction of the Bill, includes details of what the Secretary of State is likely to be interested in when it comes to national security risks. This includes certain sectors of the economy, and the types of acquisitions that may raise concern. It does not currently state anything which the Secretary of State intends not to take into account with regard to national security. This is a conscious choice. If the Secretary of State were to start listing areas of the economy or types of acquisition that he considered unlikely to present national security concerns, I suspect that this would result in a long and dense document of little use. We judge that it is therefore more helpful for businesses and investors to set out where the Secretary of State is more, rather than less, likely to use the call-in power.

I understand, however, the concern that without a definition extraneous factors may be taken into account. My reassurance for my noble friend comes from the courts. Were the Secretary of State to seek to use the powers in the Bill for a purpose beyond national security, his decisions could be challenged in the courts through judicial review and could not be successfully upheld. It is with this judicial oversight in mind that the Secretary of State is constrained in delivering the purpose of the Bill. I am therefore confident that the Bill as currently drafted contains sufficient safeguards against inappropriate use of the regime, and that the Government are already providing a good amount of information for parties affected by the regime on its likely areas of focus.

I hope that my explanation, taken together with these points, provides sufficient reassurance to my noble friend, and that she therefore feels able to withdraw her amendment.

[Baroness McIntosh of Pickering (Con)]

My Lords, I am most grateful to all those who have spoken in the debate, particularly my noble friend Lord Hodgson, and the noble Lord, Lord, Clement-Jones, for their eloquent support.

Like the Minister, I am slightly baffled by the sudden lack of support from the noble Baroness, Lady Bennett, with whom I have enjoyed a deeply cordial relationship. I obviously take issue with a number of issues to which she referred, not least setting out the importance to the economy of foreign investment, which is well established and repeated in the national security and investment government response published, I understand, this week. I also take issue with the fact that I am not a great expert on the financial crash, although I seemed to lose an awful lot of the small amount of money I had invested in the stock market. What is the saying about how to make a small fortune in the stock market? I have forgotten, but, anyway, that burnt my fingers.

I believe that the start of the financial crash was actually in the US, with the selling of mortgages, both in the US and here, for a greater value than the value of the property, and a lot of grief was caused as a result. I am pleased that my noble friend Lord Callanan feels that the Bill is still perfectly formed and fit for purpose, but I beg to differ. My noble friend referred to the statement in Clause 3, but we are told that the Secretary of State only “may” publish such a statement. Clearly, it would be immensely helpful to have such a statement at this stage, if possible, to give an indication of the direction of travel.

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My question, therefore, is: what currently would prevent an identical or near-identical statement to a rejected statement being relaid immediately or is it just that it is against convention? I am not sure whether convention necessarily always holds any more but I am not the best on these constitutional things. If you need Amendment 11, I am all for it. It is a good thing to have something that makes such a rapid retabling respectable, and it may also mean that it is less challengeable and in general it might also imply that other mechanisms of rapid relaying are not possible. Can the Minister explain to me what the relaying process is and what are the limitations that are imposed by the obligation to consult but only to the level that the Secretary of State thinks appropriate? However, if we need Amendment 11 and it positively does something, I will support it.

[Baroness McIntosh of Pickering (Con)]

My Lords, in the spirit first put forward by my noble friend Lord Vaizey, I would like to tease the Minister at this point, if I may. Clause 3 states:

“The Secretary of State may publish a statement for the purposes of this section if the requirements set out in section 4(1) are satisfied”,


and now we have government Amendment 12, which amends Clause 4 to state that responses to the consultation may be required to be pursued through. What is the situation, if one might occur, if the Secretary of State chose not to publish a statement? Does the Bill permit that in this regard, and what would be the circumstances in which the Secretary of State may decide not to publish a statement?

[Lord Fox (LD)]

My Lords, as the noble Lord, Lord Lansley, said, government Amendments 37 and 75 are technical and Amendment 12 covers the ground of Amendment 11, so I will speak to the latter. I am broadly supportive. Clearly, this is an issue about “may”—my noble friend Lady Bowles and the noble Baroness, Lady McIntosh, asked the same question. If “may publish” means “may not publish”, where are we in this process, given that the statement is such an important part of setting out the modus operandi of the whole Bill? This is quite an important area.

I support Amendment 11 but it will be important to listen to the Minister’s response to decide how this might go forward in the next stage. I believe that some degree of accountability should not be left as an option to the Secretary of State; there should be an obligation on the Secretary of State to make that statement and, as the Government have said, to have the ability to remake it.

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Moved by

[Baroness McIntosh of Pickering]

14: Clause 6, page 4, line 11, after “may” insert “following consultation with relevant stakeholders”
Member’s explanatory statement
This amendment would impose a duty on the Secretary of State to consult relevant stakeholders when making regulations as specified.

[Baroness McIntosh of Pickering (Con)]

My Lords, Amendment 14 in my name came about as a result of my working closely with the Law Society of Scotland. I am very grateful to the society for drawing to my attention the fact that, on the present reading of Clause 6, the Secretary of State may make regulations without any further consultation in that regard. The reason for the amendment is that this consultation provides an additional layer of scrutiny by all interested parties. The requirement on the Secretary of State to consult will help to ensure openness and transparency of the Secretary of State’s actions. Imposing a duty to consult will ensure that any draft statutory instrument is exposed to critical comment from stakeholders, which may improve an instrument and help to avoid difficulties when it comes to progressing through Parliament.

All this assumes that the Government will actually pay attention to consultation and the results. It is felt that the provision as drafted gives the Secretary of State very wide discretion to amend the scope of notifiable acquisitions as per the present drafting of Clause 6(5). This can have far-reaching consequences, not least because, as set out in Clause 6(6), it may be used to extend the scope of notifiable acquisitions to acquisitions of qualifying assets. In particular, I want to put on record that Clause 13 states that where a notifiable acquisition takes place without the approval of the Secretary of State, this transaction will be void, although under Clause 15(2) and (3) the defect can be cured retrospectively.

This amendment addresses a concern that there will be a lacuna in relation to the impact on third parties. In particular, if the qualifying asset in question is land, and if it were to be established that a transaction had been void and that the ownership or other interest in the land had not been properly transferred, questions of liability may arise. This could be the case, for example, in relation to environmental or insurance liabilities. Although it appears that the third party would have an action under Clause 16, we are concerned that this could be both burdensome—that is the Law Society expressing its concern—upon that third party and unnecessarily complicated. There is also concern that it might not resolve all the relevant problems.

I welcome my noble friend to her speaking position, for once, this evening; I hope that this is not just paying lip service to diversity. If the Government are not minded to accept this amendment, can she say what the purpose is of introducing regulations at what would be quite a late stage and without having consulted at all with interested parties or stakeholders?

[Lord Fox (LD)]

My Lords, I fear I might have missed a trick here. I think we have two quite different amendments and I should have been smarter and disaggregated Amendment 94 from Amendment 14. I apologise to the noble Baroness, Lady McIntosh, that I am not going to speak to Amendment 14, although I firmly believe that my noble friend Lord Bruce of Bennachie will speak to it later. I will speak to Amendment 94 in my name and that of my noble friend Lord Clement-Jones.

Under Clause 6 the Secretary of State has great power to make the regulations concerning how this Bill will work. The Secretary of State can specify the description of the qualifying entity for the purpose of identifying a notable acquisition. He or she can amend the circumstances in which a notifiable acquisition takes place or does not take place, exempt acquirers with specified characteristics from the mandatory notification regime and make consequential amendments to other provisions of the Bill. These will be set before Parliament using the affirmative procedure. This was confirmed by one of the other documents that was circulated just before our proceedings began today.

For the commencement of the regime, the Secretary of State intends to make regulations only to specify the sectors subject to mandatory notification—that is, the 17 sectors we have already referred to elsewhere in this debate. This covers the activities of the entities of both sectors which give rise to an elevated national security risk. In the Government’s own words:

“Mandatory notification of certain types of transactions in 17 key sectors will ensure that the Government is informed of potential acquisitions of control or ownership in these particularly sensitive areas”.


As we have heard, using this list they will take action to investigate and mitigate any national security risk. The list is central to the workings of this regime. Therefore, so is the making and updating of it.

For the avoidance of doubt, and possibly to bore the Committee, I want to put on record the length and breadth of this list. It includes advanced materials, advanced robotics, artificial intelligence, civil nuclear, communications, computing hardware, critical suppliers to government, critical suppliers to the emergency services, cryptographic authentication, data infrastructure, defence, energy, engineering biology—which has now been commuted to synthetic biology—military and dual use, quantum technologies, satellite and space technologies, and transport. We heard from the Minister that in fact the Secretary of State can extend beyond this list if he or she feels it appropriate.

The so-called slimline version was published today, as mentioned by the noble Baroness, Lady Hayter, who has just popped out. She referred to the artificial intelligence sector which has been “slimmed down” to the identification of objects, people and events, advanced robotics and cybersecurity. The underlying software for that is going to be machine learning, and therefore that includes all artificial intelligence. While on the face of it this has been narrowed down, the reality is that if a Secretary of State so chose, anything involving machine learning could be dragged into this process. We need to be very wary of this list, which can be expanded and changed over time.

I expect that the Minister will choose to represent the proposed use of the affirmative procedure in the Bill as meaningful parliamentary scrutiny, but in truth the list can be amended by this and any subsequent Government as they please. For one thing, Parliament cannot amend statutory instruments, and for another, this House has voted down affirmative statutory instruments just four times in the past 70 years. That is nearly as long as my noble friend Lord Clement-Jones has been alive. As the Constitution Committee noted in its 2018 report The Legislative Process: The Delegation of Powers:

“Without a genuine risk of defeat, and no amendment possible, Parliament is doing little more than rubber-stamping the Government’s secondary legislation. This is constitutionally unacceptable”.


Affirmative statutory instruments do not constitute meaningful parliamentary scrutiny. This Government, or any subsequent Government, are effectively free to amend that already long list of technologies at will, so we need some sort of genuine democratic process. I am indebted to my noble friend Lord Sharkey; he proposed a very similar amendment to the Medicines and Medical Devices Bill, and I have ruthlessly plundered his thinking as it is just as apposite to this Bill.

As noble Lords know, there is a delegated legislation procedure that allows for significant parliamentary scrutiny. To the Government, it is known as “exceptional procedures”, and to Erskine May, in part 4, chapter 31.14 as the “super-affirmative procedure”. Erskine May characterises it as follows:

“The super-affirmative procedure provides both Houses with opportunities to comment on proposals for secondary legislation and to recommend amendments before orders for affirmative approval are brought forward in their final form … the power to amend the proposed instrument remains with the Minister: the two Houses and their committees can only recommend changes, not make them.”


Amendment 94, in my name and that of my noble friend Lord Clement-Jones, follows this pattern; it is more generally based on the variant of the procedure used by the Government of the day in the Public Bodies Act 2011, so it is not a stranger to government. It refers to the Secretary of State’s regulation-making powers and includes the long list of technologies that I have just read out.

First, the Secretary of State must lay before Parliament a draft of the proposed regulations and a document explaining them; secondly, he or she must request a committee of either House whose remit includes science and technology and business to report on the draft regulations within 30 days; thirdly, in proposing a draft statutory instrument containing the regulations, the Secretary of State must take into account any representations, any resolution of either House and any recommendations of the committee to which the draft was referred. After the expiry of the 30-day period the Secretary of State may lay before Parliament regulations in terms of the original or the revised draft. The Secretary of State must also state what representations, recommendations or resolutions were given in the 30-day period and give details. He or she must also explain any changes made in a revised draft. After that, the normal affirmative process continues.

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[Lord Fox (LD)]

I anticipated the Minister’s answer on the subject of time, and 30 days is 30 days, but the Government have shown that they are relatively adept. If there really was a national security emergency requiring quick action using other means, a statutory instrument with a debate in Parliament would act as a plug. My noble friend Lord Clement-Jones made the point that there is such significance, particularly around this list but also around the other elements of Clause 6, so I hope that the Minister will read Hansard and at least find some way of moving towards the very valid arguments that she has heard today on both amendments.

[Baroness McIntosh of Pickering (Con)]

I thank all those who have spoken on both amendments. The noble Lord, Lord Fox, will recall that we had a lengthy debate about the super-affirmative procedure during the passage of the UK Internal Market Act. I deeply regret that we did not go down the path of that procedure, for reasons that I gave. My noble friend the Minister cares passionately about Wales, and I hope that she will care equally passionately about Scotland and will be prepared to meet with me to bring these matters forward, because I do not accept that it is enough just to have regard to the public law requirements.

The Law Society of Scotland has identified three ways in which these regulations could move the parameters forward which I would like to discuss on a wider basis with her. While an official in the department said that it is not expected at this stage that those three areas will be covered, it is not excluded that that will happen in the future. I want to come back to that, but for the moment, I beg leave to withdraw the amendment.

Amendment 14 withdrawn.

National Security and Investment Bill

Baroness McIntosh of Pickering Excerpts

Committee stage
Tuesday 9th March 2021 Grand Committee

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

My Lords, I am delighted to follow the noble Lord, Lord Bilimoria, who spoke with such passion and, obviously, such knowledge.

I am delighted to support Amendments 20 and 24 and the later amendments in the names of my noble friend Lord Leigh of Hurley and the noble Lord, Lord Clement-Jones. I share the concern of my noble friend Lord Leigh that there appears to be little knowledge of this Bill in the wider business community, but I reassure noble Lords that the law societies of England and Scotland are well aware of this Bill and have raised a number of issues, including the ones we will come on to in Amendment 21 in the name of my noble friend Lord Hodgson.

The Bill as it currently stands leaves a number of loopholes and is loose in its drafting, so Amendments 20 and 24, in seeking to set a de minimis rule, are welcome indeed. They would assist the Government for the reasons the noble Lord, Lord Bilimoria, set out. I welcome the fact that my noble friend Lord Grimstone will respond to this group of amendments and I look forward to what he has to say, but the Government have set themselves a very difficult task. We wish to keep, and possibly increase, the level of foreign investment into this country. It was always one of our greatest achievements while members of the European Union that we attracted more foreign investment than any other EU country. There was a lot of envy of us because of that, because we were, dare I say, a light-touch regime, but there was a regulation in place and it worked effectively.

The noble Lord, Lord Bilimoria, touched on the sensitive issue of the level of referrals or own-initiative investigations which the Government, under the Bill as it currently stands, might bring upon themselves. I wish the department well in that regard. Surely it must be of interest to rule out some that, due to the level of investment, do not attract sufficient concern. If the Government are seeking to maintain a balance, which they have successfully kept to date, between encouraging a high level of foreign inward investment and meeting the national security concerns as set out in the Bill, the terms of Amendments 20 and 24, in particular setting the level of investment as an annual turnover of less than £10 million in particular, would not jeopardise national security concerns.

I also support the later amendments in this group in the names of my noble friend Lord Leigh of Hurley, which seek to set out an accelerated procedure. It cannot be in the Government’s interest to jeopardise what would be a legitimate investment if the procedure was fairly straightforward and could not be met under the terms set out in those amendments. These two sets of amendments in the name of my noble friend Lord Leigh of Hurley would improve the Bill, maintain a flow of foreign inward investment and not unnecessarily jeopardise our national security. I support them, and I look forward to hearing what my noble friend Lord Grimstone says in summing up.

[Baroness Noakes (Con)]

My Lords, I strongly support the amendments in this group, which seek to set up a fast-track process. Anything that can make the processes more friendly to help non-problematic business transactions is welcome. I am very worried about the impact that this Bill, which I support in principle, will have on the UK’s reputation as a good place to invest, and I echo what other noble Lords have already said today. That is why we have to work to make the operation of the Bill as painless as possible for transactions that fundamentally do not raise concerns.

I am less sure about the other amendments in this group. I understand the desire to protect SMEs and start-ups from the full force of the Bill. I do not believe that national security risks can be sized by reference to a point in time, monetary value of current assets or turnover of a business. So I do not support Amendments 20 and 24 in the name of my noble friend Lord Leigh of Hurley.

Similarly, I am not convinced about restricting qualifying assets outside the UK to those in connection with activities carried out in the UK, as envisaged by my noble friend Lord Hodgson of Astley Abbotts in Amendment 26. I do see a need to be able to focus on supply chains as well as on activities carried out in the UK, and I would not want to deprive the Government of the ability to do that if genuine national security issues arose.

--- Later in debate ---

[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.

--- Later in debate ---

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

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

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

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

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

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

I speak in support of Amendments 31 and 33. As I have the same brief, I do not intend to speak for long but I support all the arguments put forward by the noble Lord, Lord Bruce of Bennachie. I also state that I am a non-practising advocate of the Scottish Bar and a member of the Faculty of Advocates. If my noble friend the Minister is not minded to support the amendments, may I suggest that he meet the noble Lord, Lord Bruce, and me—if the noble Lord, as the author of the amendments, is agreeable—and, I hope, representatives from the Law Society of Scotland?

I honestly believe that this is a potential unintended consequence of the Bill, which could seriously disadvantage not just the Scottish legal profession but, more importantly, the financial service sector and financial investment sector in Scotland, which, as the noble Lord said, is sizeable in its contribution to the economy and employment. I endorse everything that he said and congratulate the Law Society of Scotland on bringing this to our attention. My understanding is that if the Bill is enacted as drafted, it could have grievous consequences for Scots law, Scottish practitioners and the financial sector. It behoves the Government to look favourably on the amendments. If not, I hope we can have the earliest possible meeting to discuss these matters in more depth.

National Security and Investment Bill

Baroness McIntosh of Pickering Excerpts

Committee stage
Tuesday 16th March 2021 Lords Chamber

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

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

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

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

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

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

[Baroness McIntosh of Pickering (Con)]

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

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

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

[Lord Naseby (Con) [V]]

My Lords, I very much welcome the amendments from my noble friends Lady Noakes and Lord Hodgson. Any of us who has worked in financial services, either before we came into Parliament or while we were in Parliament at certain stages, knows that it is difficult enough to put together a financial situation, but that the worst thing in the world is to not know the date by which something must be concluded.

Indeed, I reflect that London is, and I hope always will be, a leading financial centre in the world. In that context, we need certainty. Noble Lords will know that I have worked in south Asia. There was continually a degree of uncertainty there on some aspects of financial matters. In fact, major companies always had somebody to explain things to them, or to manoeuvre, in the nicest possible way, a situation. We do not want any of that. We really do want certainty and not this no man’s land that has been referred to.

I wonder about just one point, though. There might at some point be a situation where circumstances are such that, if these amendments are made or made in a slightly revised form, there must be some reserved power for national security. We have possibly experienced it in the pandemic that we are currently in. Some countries smaller than ours have suffered major power failure, and one could see the whole of the City of London being taken off the grid and everything else due to some unexpected event.

I am very much behind what my noble friends said in their amendments. I hope that the Government will respond to them, because they are needed, but I will understand if there is some national security dimension to the Bill that is not immediately obvious.

--- Later in debate ---

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

My Lords, it is a pleasure to follow the noble Baroness, Lady Bowles. I shall speak briefly to this group because my focus is solely on the final provision, which is that Clause 30 should not stand part of the Bill. I thank the noble Lord, Lord Hodgson of Astley Abbotts, for drawing our attention to this issue.

The whole subject of government spending, in particular where it relates to contracts but also to government aid, is now a matter of great public interest and concern. It is therefore important that this whole area should be given a great deal more attention and focus. We have seen, through our concern about international trade deals, the way in which companies carrying out their business and taking risks, which is supposed to be our economic model, have sought to attain compensation for, for example, government decisions about environmental matters or public health. We need to be concerned about the links in this, in particular as regards the ISDS arrangements, which I have debated with other Members of your Lordships’ House.

I would also ask the Minister if, either today or perhaps in the future, he would spell out how the Government see this working, especially what the mechanisms would be, and put a specific question to him about democracy and transparency. Clause 3 states that this legislation is to cover spending of £100 million or more. How has that figure been arrived at? Given that we are talking about government money, should it not perhaps be lower?

[Baroness McIntosh of Pickering (Con)]

My Lords, it is a pleasure to follow the noble Baroness, Lady Bennett. I support the amendments in this group and I am delighted to have the opportunity to speak to the proposal that Clause 30 should not stand part.

The impact assessment sets out graphically what the financial implications of the measures in this Bill will be. It states that the costs are to be found in two main areas where the new regime could incur additional costs, notably additional administrative costs and the potential impact of a new regulatory regime on investment decisions. Of course, what we do not know are the known unknowns of possible investments, particularly in infrastructure, that may be cancelled. I am delighted to see that my noble friend Lord Grimstone is the Minister to reply, given his background with the Trade Bill. However, do the Government have any idea what the implications might be?

I understand that the Government have put a figure in the cost-benefit analysis of the costs to business and the Government together being, on average, between £26.2 million and £73.1 million per year. My understanding was that, when we were in the European Union, we attracted more foreign direct investment than any other EU country, and that, as of 2019, we currently have the seventh highest inward foreign direct investment flow, as the impact assessment tells us. I have some involvement in the OECD and water policy and note that,, in paragraph 168 of the impact assessment, we are told that:

“ The National Infrastructure Pipeline details long-term plans to invest over £400 billion (including £190 billion to be invested—”


this year—

“across 700 projects in water, energy and transport infrastructure. A large proportion of this would have been in conjunction with overseas investors.”

Water is attracting a high proportion of foreign investment, which the Treasury and the Government have consistently and rightly encouraged.

My noble friend Lord Hodgson, in his remarks on the question on whether Clause 30 stand part of the Bill asked a lot of the right questions regarding who will decide and so on. I should add a few other questions. Are these loan guarantees or indemnities recoverable and, if so, what would be the timeframe within which they would be recovered? I should also be interested to know from which budget the grants, loans and indemnities would come. The clause recognises the financial hit that many of the parties and investors might attract, which is welcome, but, as my noble friend Lord Hodgson identified, we do not find a great deal of information in the clause. There is no supporting schedule that one might normally expect in those circumstances and the Explanatory Notes say little. That is why I welcome the opportunity to ask those questions and I look forward to my noble friend’s responses when he sums up.

[Baroness Noakes (Con)]

My Lords, I support my noble friend Lord Hodgson of Astley Abbotts in all his amendments. This House has an obligation to ensure that the Bill does everything possible to ameliorate the practical impact that it will have on business transactions. While most of the transactions will not, by the Government’s reckoning, engage national security issues, the fact is that they might do so and will inevitably result in a lot of precautionary notifications. We have to minimise the impact of the processes on ordinary investment decisions.

I particularly wanted to speak in respect of the question on whether Clause 30 stand part of the Bill and support what my noble friend Lord Hodgson said. It is extraordinary that a Bill about stopping certain transactions could have morphed into one whereby the Government will stuff public money into the pockets of one or more of the parties involved, with almost no explanation. As my noble friend Lady McIntosh of Pickering has said, one will find nothing in the Explanatory Notes or any of the other documents around the Bill. There is no comparable power in relation to the activities of the Competition and Markets Authority. That is extraordinary because the Government have taken the decision-making power to themselves in respect of transactions. They can then use public money in almost any way they choose. At the very least, we are entitled to have some clarity on how the Government expect to use the power.

I expect that the other place will claim financial privilege if we try to do anything to the clause, but we should not be deterred because of that.

--- Later in debate ---

[Lord Lansley (Con)]

My Lords, there are just two amendments in this group. They are both to the same purpose. As I explained previously, one relates to mandatory notifications, the other to voluntary notifications. My noble friend the Minister answered on Amendment 51 in his response to the previous group, but for my purposes it is linked to Amendment 50 in any case, so I will touch on it.

Amendments 50 and 63 essentially raise two questions. The first relates to circumstances where somebody gives a notice to the Secretary of State and they meet the requirements in the regulations—they have looked and said, “To give a notice to the Secretary of State, I have to tell the Secretary of State A, B, C, D”, or however many pieces of information. That should be specified in the regulations. As the Bill is drafted, the Secretary of State can then come back to them and say, “Yes, you provided all the information required under the regulations, but you didn’t provide us this further information, which would enable us to make a decision whether to accept or reject your notice.”

The purpose of these amendments is to say that we should not arrive at that situation. Somebody starting this process with a notice should be able to rely on the information specified in the regulations to accompany a notice being sufficient to start the process definitely, one way or the other. That is why Amendments 50 and 63 say what they do. As my noble friend Lord Callanan said in response to the previous group, the two initial points—does it meet the requirements of the section and the requirements prescribed in regulations?—should be enough, but the amendments would add, to make it absolutely clear,

“including as to the information required to be provided in relation to the notifiable acquisition”

or the trigger event in the case of a voluntary notification, so that there is no uncertainty about this. The regulations should say what information has to be provided. If it is provided, then the notice should be rejected or accepted.

The second question that arises from this is on voluntary notifications. Since it is not explained in the Bill, what happens if the Secretary of State receives a voluntary notification, decides that there is insufficient information, rejects it, sends a letter to the person who supplied the voluntary notification saying “You didn’t give me additional information X, Y or Z”, and the person concerned then decides not to bother? What would the Secretary of State do about this? It is not a notifiable acquisition. If it were the Secretary of State would have a degree of control, but on a voluntary notice there is no such control. I do not see what happens when a notice is rejected under those circumstances.

Perhaps when my noble friend replies on this short group he would also explain why notices should be rejected because people have not supplied the Secretary of State with information that he did not ask for, and what happens if somebody makes a voluntary notification, the Secretary of State rejects it and they then do nothing about it. I beg to move.

[Baroness McIntosh of Pickering (Con)]

I thank my noble friend Lord Lansley for tabling these two amendments. I would like to speak to Amendment 63, which gives me the opportunity to raise an issue raised with me, and I am sure with other noble Lords, by the Law Society of England. I put a direct question to the Minister in summing up this small group of amendments. Can he confirm that the Government have actually considered, and have regard to, the impact of the sheer large numbers of filings that they may receive on the new regime’s ability to dispense with these filings in a timely manner? My noble friend has done us a great service here by highlighting the level of information required in the first instance or that may be required at a later date.

The estimated volume of filings stated in the impact assessment, deemed to be between 1,000 and 1,830 transactions notified per year is, in the view of the Law Society, an underestimate. That is because, for reasons that my noble friend gave, there is likely to be a very large number of voluntary filings and requests for informal guidance, especially when the regime is new and businesses are accustoming themselves to its requirements. In my view, the Law Society has raised legitimate concerns, which are reflected in these two amendments. Can I have a reassurance that there will be sufficient resources to deal with the sheer number of requests that are expected to avoid delays and burdens for businesses, which could be avoided in this regard?

[Lord Grimstone of Boscobel (Con)]

My Lords, I extend my thanks to my noble friend Lord Lansley for his Amendments 50 and 63. I shall deal first with a couple of points that have been made. If a voluntary notification is incomplete, it is not effective. That may mean that the Secretary of State may choose to exercise his call- in powers at some point in future in relation to that.

My noble friend Lady McIntosh asked whether we had underestimated the number of transactions that were likely to come before the unit. She referred to the work that the Law Society has done on that. All I can say is that we have thought about this carefully, and I am happy to repeat the assurance that we will make sure that the unit is fully resourced. If the number is greater than we anticipate, the resources of the unit will have to be expanded to cope with those greater numbers.

I extend my thanks again to my noble friend Lord Lansley for Amendments 50 and 63 which both relate to the information that must be provided as part of a notification. Clause 14 sets out the mandatory notification procedure and Clause 18 the voluntary notification procedure. Both clauses provide powers to the Secretary of State, by regulations, to prescribe the form and content of a mandatory notice and a voluntary notice respectively. Both clauses also provide that the Secretary of State may reject a notice where it does not meet the requirements of the clause, or the requirements prescribed by the regulations.

These amendments seek to make it clear that the Secretary of State can reject a mandatory or voluntary notice where information relating to either a notifiable acquisition or a trigger event has not been provided despite being specified as required in regulations. These amendments also seek, as a result, to ensure that any such regulations include a requirement to provide the information about the notifiable acquisition or trigger event needed to make a call-in decision.

I am happy that I can reassure my noble friend, I hope completely, that the Secretary of State absolutely intends to use the regulation-making powers under both these clauses to prescribe both the form and content of mandatory notices and voluntary notices. Indeed, our view is that the regime simply cannot work and will not work without such regulations being made. The primary entry mechanisms into the regime are based on notification, so it is vital that we are clear with businesses and investors about what information they must provide and in what format.

That is why, ahead of Committee in the other place, we published a draft of the information likely to be required as part of a mandatory notice or voluntary notice. I continue to welcome comments from noble Lords about that draft, but I think I can reassure my noble friend that information about notifiable acquisitions and trigger events will certainly form part of such requirements.

With that said, I fear that my noble friend’s amendments would therefore be duplicative in this instance. Clause 14(4) and Clause 18(4) allow the Secretary of State to make these regulations. Clause 14(6) and Clause 18(6) allow the Secretary of State to reject a notice where it does not meet the requirements specified in the regulations. The Government consider that this approach provides the powers that the Secretary of State needs to reject a notice where insufficient or the wrong information has been provided, whatever the final notification forms look like.

I hope my noble friend is reassured by my explanation of these clauses and the Government’s general approach on this matter, and I hope, therefore, that he feels able to withdraw his amendment.

National Security and Investment Bill

Baroness McIntosh of Pickering Excerpts

Report stage
Thursday 15th April 2021 Lords Chamber

[Baroness McIntosh of Pickering (Con)]

My Lords, I am delighted to speak on Report. I congratulate my noble friend Lord Leigh on raising this persistently and so eloquently at earlier stages of the Bill. I congratulate my noble friend the Minister on listening to and acting on the concerns expressed across the House at that stage by bringing forward the amendments that he has today.

I particularly associate myself with Amendment 8, to Clause 8, in the name of my noble friend Lord Hodgson of Astley Abbotts. I would like to press the case a little further with my noble friend the Minister and ask that we pause for a moment at this stage and ensure that we are not going to scare off potential large investors with an increase in referrals that perhaps could not be managed or see a deterrence to potential investment, therefore possibly damaging the economy.

The way in which I would like to press my noble friend the Minister follows on from what my noble friend Lady Neville-Rolfe said in her opening remarks just now as to what extraneous factors may be taken into account that could damage potential investment in this country. Those further factors that I ask my noble friend to rule out have been put forward at earlier stages by the Law Society of England, which I supported in Committee and repeat in connection with Amendment 8 here.

Can my noble friend clarify and give greater certainty as to what constitutes national security? Will he specifically rule out extraneous factors such as employment effects, reciprocal investment and trading opportunities in other jurisdictions and a desire to protect UK business from international competition as factors that would be taken into account when assessing whether a trigger event would give rise to a national security risk? In terms of Amendment 8 and our earlier discussions, it would give clear guidance to those practitioners at this stage if we could rule out that those extraneous factors would ever constitute a potential national security risk.

[Lord Fox (LD)]

My Lords, we have had a short and interesting debate. Speaking to Amendment 2, the noble Lord, Lord Lansley, has as ever uncovered an incongruity in the way the Bill is drafted. I suggest the Government are wise to listen to his advice. Similarly with Amendment 8, there is a need for clarity for people. Where do they stand on this issue? That is all people deserve when trying to manage their affairs.

We then come to the extraordinary intervention of the noble Baroness, Lady Neville-Rolfe. It is a shame that she was not around to give a Second Reading speech, which perhaps might have guided us through some of our decision-making, and arrived only at this late hour to offer her help. I suspect that, had she involved herself a little earlier, she might have been less concerned with the issues than she is now. For fear of doing the Minister’s work for him, I ask him to confirm that the regime retains the right to call in deals that are less than 25% at any time. The notion that there are deals that the regime may not see is one of the points inferred by the noble Baroness, Lady Neville-Rolfe.

This is the point: the unit has to be sufficiently resourced and efficient in its work to be able to pick these issues up. We shall talk later about where it gets its information and how the security guidance is fed in, because that comes under another group of amendments. However, with all the issues coming through, the point is how well the regime is actually operated; the noble Baroness, Lady Noakes, has mentioned this on many occasions. That will be the rub, in terms of how business will be affected by the Bill. The more the Minister can reassure us that the resources will be there to deliver this, the happier most of us will be.

--- Later in debate ---

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

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

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


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


(a) solely by way of obtaining security; and


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


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

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

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

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

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

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

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

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

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

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

[Baroness McIntosh of Pickering (Con)]

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

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

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

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

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