National Security and Investment Bill

Lord Callanan Excerpts

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

Moved by

[Lord Callanan]

That the Bill be now read a second time.

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

My Lords, this Bill represents a major upgrade to the Government’s powers to screen certain acquisitions on national security grounds. Through the new investment security unit within my department, the new regime provided for by the Bill will act as a vital new tool in the Government’s armoury to protect national security in a rapidly changing world. The UK’s current powers to intervene when mergers or acquisitions pose national security threats date from the Enterprise Act 2002. Apart from some limited exceptions, businesses must have a UK turnover of £70 million or meet a share-of-supply test for government intervention.

The world is of course a very different place now compared to when the Enterprise Act received Royal Assent in November 2002. When it comes to investment, we are seeing novel means to undermine the UK’s national security that go beyond traditional mergers and acquisitions and the reach of our current powers. The case for action in this area could therefore not be clearer.

The Government have carefully considered these reforms over time. We first published a Green Paper in October 2017, followed by a White Paper in July 2018. We have further considered what powers are necessary to reflect the modern economic and investment landscape in the UK. The Bill before us today is the culmination of all that work.

However, none of the provisions in the Bill change the Government’s position when it comes to foreign investment into the UK. Simply put, the UK economy thrives as a result of foreign direct investment. Since 2010-11 over 600,000 new jobs have been created thanks to more than 16,000 foreign direct investment projects. Inward investment stimulates economic growth in every part of our United Kingdom. In 2019-20 over 39,000 jobs were created in England thanks to FDI projects, with over 26,000 over those jobs coming outside London.

We have designed the regime with business in mind. For the first time, timelines for assessments will be set out in law, not decided by the Government on a case-by-case basis. This will give businesses certainty about the length of the assessments that they are subject to, and the Government will be able to revisit decisions only in exceptional circumstances.

The Bill brings our approach into line with many of our closest allies, including the United States, Canada, Australia, France and Germany, but it does not represent any change in our appetite for investment coming into this country from overseas. I will now go through some of its main provisions. Chapter 1 of Part 1 of the Bill provides for a “call-in” power that the Secretary of State will be able to exercise if he reasonably suspects that a trigger event has taken or may take place that could give rise to a risk to national security. Any decision to use that call-in power could follow the receipt of a notification from parties, or could be a proactive choice on the part of the Secretary of State if an unnotified acquisition meets the relevant criteria.

The call-in power must be exercised within six months of the Secretary of State becoming aware of an acquisition, and within five years if he was not made aware of it. However, the five-year limit does not apply to acquisitions subject to mandatory notification. The scope of the call-in power applies to trigger events taking place from 12 November 2020—that is, the day following the Bill’s First Reading in the other place. This is to ensure that no acquisition can be accelerated to avoid scrutiny while the Bill is making its way through Parliament.

Before the call-in power can be used, the Secretary of State must lay a Statement before Parliament setting out how he expects to exercise the power. The Secretary of State published a draft of such a Statement when the Bill was introduced in the other place. I must be clear to the House that the criteria for use of the call-in power are deliberately tightly drawn on the grounds of national security, and the Government have no intention to widen this to introduce any further “public interest” criteria.

Chapter 2 of Part 1 sets out the trigger events that are subject to the scope of the call-in power. There are broadly two types of trigger events: first, the acquisition of control over entities such as companies, limited liability partnerships and trusts; and, secondly, the acquisition of control over assets, including land and intellectual property.

In respect of entities, the Bill sets out situations where the acquisition of certain levels of shares or votes constitute trigger events. I will not set out the individual thresholds to the House now, but broadly speaking they correspond to the ability of parties to pass or block types of company resolution. The Bill also retains the concept of “material influence” over an entity, as used in the Enterprise Act 2002, as a trigger event for the purposes of the Bill.

When it comes to assets, trigger events occur when parties are able to use a qualifying asset or to direct or control how it is used. Chapter 2 also sets out instances where notifying the Secretary of State of some acquisitions in certain sectors is mandatory. Again, I will not explore each one in detail, but the Government have been careful to ensure that only those scenarios where parties can reasonably self-assess whether their acquisition qualifies are captured.

Parties involved in acquisitions that do not meet the criteria for mandatory notification, but which believe that they could pose a national security risk, will be encouraged to submit a voluntary notification to the Government. The Secretary of State will need to take a decision on whether to call in an acquisition for a full national security assessment within 30 working days of accepting a notification, or instead let it proceed. Once he has taken this decision, he cannot revisit it unless false or misleading information has been provided.

To ensure that mandatory notification continues to work as envisaged in the future, the Government propose taking a power to be able to update the situations where notification is mandatory. The power would also allow the Government to exempt certain types of investor from mandatory notification requirements.

In terms of the sectors where some acquisitions will be subject to mandatory notification, the former Secretary of State published a consultation alongside the Bill introduction on the statutory definitions of the proposed 17 sectors. That consultation closed on 6 January of this year. We have had a good number of responses and I thank all of those who took the time to provide valuable insights. We are now working hard to respond to that consultation and to bring forward draft regulations for consideration as the Bill goes through this House.

I would like to stay with mandatory notification for a minute or two longer. Chapters 3 and 4 of Part 1 set out the mechanics of mandatory notification and the consequences of proceeding with a notifiable acquisition without clearance from the Secretary of State. Put simply, if parties proceed with such an acquisition, it has no effect in law. The Government recognise that this approach represents a harsh deterrent to parties that do not comply, willingly or otherwise. I will make just two points on this. First, it is vital for our national security that parties are strongly disincentivised from trying to avoid scrutiny by this regime. This is even more pressing in the sectors of the economy where the notification of certain acquisitions is mandatory. Secondly, affected parties will have recourse to apply to the Secretary of State for retrospective validation of such acquisitions, as set out in Clause 16.

Clause 15 also obliges the Secretary of State to either call in a non-notified mandatory acquisition or retrospectively validate it once he becomes aware of it, if no national security risks arise. Clause 17 obliges him to retrospectively validate a non-notified acquisition if it is called in and subsequently cleared to proceed. The Secretary of State cannot, in other words, simply allow an acquisition to remain void once he becomes aware of it: he must take action, either to grant clearance and retrospectively validate it, or impose remedies. It has to be this way around: that is to say that non-notified acquisitions should be able to be retrospectively validated, rather than retrospectively invalidated.

The remainder of Part 1 provides for a voluntary notification mechanism whereby parties can formally submit a notification to Government. As with mandatory notification, once the Secretary of State has taken a decision to let an acquisition proceed, he cannot revisit that decision unless false or misleading information has been provided. The Government are committed to giving parties clarity when it comes to this regime and voluntary notification is a key part of that. The Bill also provides for information-gathering powers for the Secretary of State to be able to come to fully informed decisions. There are also safeguards on the use and disclosure of such information.

I turn to Part 2, which provides for the assessment process and any remedies following a call-in. The Bill provides for an initial assessment period of 30 working days once a call-in notice has been given, with an additional period of 45 working days. A further voluntary period is possible if certain criteria are met. I believe this represents a significant improvement on the current process under the Enterprise Act 2002, whereby the Secretary of State sets the assessment timetable on a case-by-case basis. For the first time, timelines for assessment will be set out in statute so that investors can build them into their own plans.

In the course of the assessment period, the Secretary of State may wish to impose interim orders to mitigate any national security risks that could arise as he undertakes this investigation. Such orders could be imposed, for example, to stop or prevent parties doing certain things that they would normally do prior to completing an acquisition, such as exchanging sensitive information. At the end of the assessment period, the Secretary of State must either give a final notification to allow the acquisition to proceed, or a final order if he believes that national security risks could arise as a result of the acquisition. All orders must be kept under review and parties are free to request that they are varied or revoked.

The Secretary of State will be supported in making decisions by the investment security unit which, as I said earlier, is being set up within my department. This new unit will be fully resourced to manage the administrative process for screening notifications and undertaking national security assessments. It will draw on expertise from across government and from the security services. If noble Lords permit, I will go through the rest of the Bill a bit more swiftly as I know there are many who wish to speak in this important debate.

Part 3 provides for a range of offences, along with associated criminal and civil sanctions, although I expect criminal cases in relation to offences committed under the regime to be exceptionally rare. Parties will, of course, have recourse to judicial review in relation to certain decisions made under the regime. Parts 4 and 5 of the Bill contain a number of miscellaneous provisions. Clauses 54 to 56 provide for smooth and timely information sharing when relevant between the Government and overseas public authorities, HMRC and the CMA. These are important clauses to ensure that time is not lost to administrative red tape and that information is appropriately handled.

Clause 61 provides for an annual report to Parliament, which will provide details of the number of notifications received, the number of call-in notices given and the sectors of the economy where they were served, among others. I will return finally to the fundamentals of the Bill before us. It is imperative for any Government to have the tools they need to protect national security in what is a rapidly changing world. This Bill will keep the British people safe. I beg to move.

--- Later in debate ---

[Lord Callanan (Con)]

My Lords, I thank all noble Lords for their contributions on this important Bill. There is clearly a wealth of expertise on this subject across the House and, as is usual in your Lordships’ House, we have had a thorough and engaging debate, with thoughtful speeches coming from all corners of it.

I start by congratulating the noble Lord, Lord Woodley, on his excellent maiden speech. It is a pleasure to see him in his place today, and I am glad that he has chosen this debate to make the first of what I am sure will be many well-informed contributions. I am glad, too, to have his support for the Bill.

I was contemplating what I had in common with the noble Lord, despite our obvious political differences. We are both from the north, him being from the north-west and me from the north-east; we are both football fans, the noble Lord being a fan of Vauxhall Motors, while I am a fan of Newcastle United; and of course we both have reasons, although different ones, to be profoundly grateful to Jeremy Corbyn. I wish him well, as I do Vauxhall Motors, which, it seems, was on a fine run of form before being stopped in its tracks by the latest national restrictions. Listening to the comments of the noble Lord, Lord McNicol, it seems that his all-weather football pitch would be particularly appropriate on a day like today.

I will do my utmost to respond to as many as possible of the issues raised, but, as always, my door is open to anyone who wishes to discuss the Bill further as it goes through the House.

I thank the noble Baroness, Lady Hayter of Kentish Town, and the noble Lord, Lord Grantchester, for the constructive tone in which they delivered their speeches. I am glad that a sort of consensus is emerging across the House that the Bill is the right step forward. I even find myself in the very unusual position of having the support of the noble Lord, Lord Rooker, and that self-declared old lefty, the noble Lord, Lord Foulkes—two of my most trenchant critics on other pieces of legislation. These are indeed strange times. I reassure the noble Lord, Lord Foulkes, that I am indeed proud to introduce this Bill, so he can put his mind at rest there.

I turn, first, to the concerns expressed about the investment security unit being within my department and its potential caseload—a point raised by the noble Baroness, Lady Hayter, and other noble Lords, including the noble Lords, Lord Reid of Cardowan, Lord Dodds of Duncairn, Lord Bilimoria, Lord Rooker and Lord Bruce. I assure them and the noble Lord, Lord Grantchester, who also raised it, that the unit will not work in isolation from the rest of government and will not in any way compromise on its duty to put national security first.

When it comes to the operation of this regime, we will not have informational barriers with other government departments. We will work closely with them to ensure that we use skills and experience from right across government. We will, though, have appropriate walls in place with those responsible for promoting investment —some walls but not others. Indeed, other departments and the security services are actively contributing to the design of the unit, thus ensuring that the plans for it take a cross-governmental approach. We have worked closely with our allies around the world on how to create an investment screening process fit for the 21st century.

I reassure noble Lords such as the noble Lords, Lord Bruce, Lord Fox and Lord Rooker, that the unit will be fully resourced to ensure that the Government provide a slick and predictable process for all parties involved. Officials will have a mix of national security, business and casework experience. The noble and gallant Lord, Lord Stirrup, spoke forcefully about the importance of having that mix of expertise, and my noble friend Lord Holmes emphasised that important point.

On the caseload for the investment security unit, I stress that the Government expect a fraction of acquisitions across the economy to be affected by the new regime. Once it beds in and investors become familiar with the process, we expect the number of notifications to decrease further. Of the transactions notified, we expect that fewer than 10% will face a detailed national security assessment and, of those facing one, only a small proportion will likely result in government intervention. We have been clear that businesses and investors will be encouraged to come to the investment security unit in advance of any formal notification, allowing for early discussions with officials about deals, although any final decision will be for the Secretary of State.

A number of noble Lords raised concerns about the impact of the regime on business investor confidence, including in relation to small and medium-sized businesses —a point made by the noble Viscount, Lord Waverley. Among those who also spoke on that issue were my noble friends Lady Noakes, Lord Leigh of Hurley and Lord Vaizey, the noble Lords, Lord Clement-Jones, Lord Reid, Lord Bilimoria and Lord Bhatia, and the noble Baronesses, Lady Bennett of Manor Castle and Lady Ritchie of Downpatrick. The Government are committed to making the regime work for business. We have already published guidance for business on GOV.UK that sets out how the process is intended to work.

Noble Lords are entirely reasonable to expect further high-quality guidance from government to help businesses and investors navigate the regime. My noble friend Lord Hodgson of Astley Abbotts was right to raise that point. On the issue of prepacks, I am pleased that he received my letter in time for this debate and I look forward to further discussions. I know that he has strong views on that subject. That is why we will bring forward further guidance well in advance of commencement to give businesses as much clarity as is meaningfully possible on how the regime will function in practice. We will work directly with businesses and their representative organisations to make sure that we get that guidance right.

More broadly, the Government will never stand in the way of innovative, high-potential businesses setting up in the UK. Our record demonstrates that. Our investment in the British Patient Capital fund has attracted £1 billion of venture capital investment to date and we will continue to invest. By investing alongside the private sector, British Patient Capital aims to support £7.5 billion-worth of investment for British businesses. We have also announced a £7 billion investment in R&D over five years as a first step towards our target to raise total R&D investment to at least 2.4% of GDP by 2027 and 3% in the longer term.

Many noble Lords spoke about introducing a definition of “national security”, including my noble friends Lady Noakes and Lady McIntosh of Pickering, the right reverend Prelate the Bishop of St Albans, the noble Baronesses, Lady Northover, Lady Ritchie of Downpatrick and Lady Jones of Moulsecoomb, the noble Lords, Lord Fox, Lord Clement-Jones, Lord Reid of Cardowan, Lord McNicol of West Kilbride and Lord Bruce, and my noble friend Lord Holmes of Richmond. The Bill does not set out the circumstances in which national security is or may be considered at risk. That reflects long-standing government policy to ensure that national security powers are sufficiently flexible to protect the nation. National security risks are multifaceted and constantly evolving. What may not constitute a risk today may do so in future. I am glad that my noble friend Lord Lansley and the noble Lords, Lord Truscott and Lord Desai, recognised that point. The ability of the Secretary of State to safeguard national security would be limited if the Bill set out the circumstances in which national security is, or may be considered to be, at risk. By defining what national security is, we would, of course, also define what it is not. This could have grave implications and deliberately show hostile actors where the Government could not intervene. It would also have unintended consequences for other national security legislation.

The noble Baroness, Lady Hayter, and the noble Lords, Lord Grantchester, and Lord West of Spithead, spoke eloquently on the issue of parliamentary scrutiny with a particular emphasis on a role for the Intelligence and Security Committee in overseeing the work of the regime. I am grateful for the discussion that we had with the noble Lord, Lord West, last week.

As I set out in my opening remarks, Clause 61 provides for an annual report to Parliament, which will be crucial in ensuring parliamentary scrutiny of the work of the investment security unit and the broader functioning of the regime. The Government will very much welcome the Intelligence and Security Committee’s review of the annual report. There are of course no restrictions on the committee requesting further information from the unit or the Secretary of State. Parliament will also be able to scrutinise the Statement, as was mentioned by the noble Baroness, Lady Bowles of Berkhamsted.

The former Secretary of State laid a draft of the Statement on introduction in the other place and we would, of course, welcome Parliament’s views on its content. We will carefully consider these views and look to reflect those in the next draft of the document, which will be published for formal public consultation, where the Statement can be fully scrutinised.

Many noble Lords spoke about the sectors subject to mandatory notification, including how they interact with other critical national infrastructure sectors. Considered arguments on this point were made by my noble friends Lady Noakes and Lord Naseby, and the noble Lords, Lord Clement-Jones, Lord Reid, Lord Woodley, Lord McNally, Lord Truscott, Lord Rooker and Lord Foulkes. The list of proposed sectors covered by mandatory notifications has been carefully developed across government, with input from all relevant departments and from the intelligence agencies. Put simply, the Government have sought to identify the sectors where certain types of acquisition could give rise to the greatest risks, while balancing this against the need to minimise the burdens on business.

As I set out in my opening remarks, we are working hard to bring forward regulations in time for your Lordships’ consideration. Some sectors, including water, as raised by my noble friends Lady Noakes, Lord Lansley and Lady McIntosh of Pickering, are part of our critical national infrastructure. However, the Government consider that other safeguards provide sufficient protection to not require their inclusion in the mandatory notification sectors. In the water sector, for example, water supply and sewerage licenses are granted by Ofwat based on an assessment of a potential operator’s managerial, financial and technical competencies. Regardless, the Secretary of State will be able to call in acquisitions of control across the economy where the legal test is met. As such, not being in a mandatory notification sector does not mean that acquisitions of control over water, financial services or other critical sectors are exempt from the regime altogether.

Given some of the appalling news around at the moment, it was right that many noble Lords spoke forcefully about human rights—my noble friend Lord Robathan, for example—particularly the situation in Xinjiang. As noble Lords will be aware, the Foreign Secretary made a Statement in the other place setting out a series of measures that the Government are taking in response. The Government are gravely concerned about the human rights situation in Xinjiang. There is growing evidence of large-scale forced labour in the region, alongside the use of extrajudicial political re-education camps and severe pressure on religion and culture. We have been clear that we want a mature approach to China and that we must work together to address global challenges, but we will never hesitate to stand up for human rights as a force for good in the world.

Finally, a number of noble Lords raised the question of the effect of the regime on academia and universities, citing concerns raised by the Russell group. These included the noble Lords, Lord Clement-Jones, Lord Reid of Cardowan, Lord Bilimoria, Lord Desai and Lord Grantchester, and the noble Baronesses, Lady Bowles of Berkhamsted and Lady Ritchie of Downpatrick. I assure them that my officials have been engaging closely with the Russell group; we will continue this engagement as the Bill goes through the House to ensure that universities have smooth engagement with the new regime where necessary.

I thank all those who have spoken today and reiterate what I said in my opening remarks: this Government will always be absolutely committed to the free flow of trade and investment. The Bill does not change that; rather, it is a vital upgrade to our current powers that will keep the British people safe. I look forward to discussing it further in Committee but, for now, I commend it to the House.

Bill read a second time and committed to a Grand Committee.