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

Lord Lennie Excerpts

Monday 1st November 2021 Grand Committee

These are important SIs, and the Liberal Democrat Benches support them as necessary instruments and in the hope and expectation that greater levels of transparency will become available as the regime settles.

[Lord Lennie (Lab)]

My Lords, I thank the Minister for outlining the regulations. I say at the outset that the Labour Party also supports these necessary instruments. Taken together, they provide for the operation and running of the NSI Act and the provision of a safeguard for the UK. The SIs identify, as we have heard, 17 sectors in which national security could be at risk—the so-called sensitive sectors—and establish how the Secretary of State would establish the worth of each business when calculating the value of monetary returns it would be required to make. The offences cover both completing an acquisition without approval and failing to comply with a final order when required to do so, with resultant penalties, as we have heard, of £10 million or 5% of turnover, whichever is the greater, or a daily rate of 0.1% or £200,000.

However, there appears to be no effective early warning system or method to forewarn businesses considering acquiring a business that they may be in breach of these regulations. Have the Government considered putting such a system in place to alert businesses that they may risk putting themselves in breach by continuing with an acquisition?

The current thinking about the destination of the funds raised by this instrument is that they will go to the consolidation fund. Surely more creative thinking is possible, such as using them for the specific purpose of funding start-ups and innovators to help build up UK resilience. Is this set in stone, or could the Government reconsider the destination of the funds and ally them to the problem that the instruments are designed to prevent?

As the noble Baroness, Lady Bowles, said, there is also some concern about the breadth of what is captured by this legislation; in particular, the biodiversity sector believes that the definition is cast too wide and covers industries not associated with security matters. Could the Minister look at the concerns raised by the biodiversity sector to be sure that the reach of the regulations is only as broad as is necessary and not more widespread than it needs to be?

Some concerns have been raised about how the Government engaged to build these better regulations. For instance, when considering issuing guidance to particular sectors, which the Minister said would happen shortly, he should be aware that SMEs do not have access to large legal firms to advise them on these matters and therefore require straight, clear guidance rather than obscure, legalistic wording. Can he explain this process to the Government when they are issuing such guidance?

Finally, do the Government believe that food security forms part of national security? I ask because they have shown little interest in the recent takeover of Morrisons, which will in turn undoubtedly act as an encouragement to others to consider similar purchases in this country.

While we support the regulations, they require a more muscular approach in some areas while in others a lighter touch is required. Getting this balance right is tricky but important to the UK’s inward investment programme and opportunities.

[Lord Callanan (Con)]

My Lords, I am grateful to both noble Lords for their valuable contributions to this debate. I will endeavour to respond to the points that were made; first, to those made by the noble Baroness, Lady Bowles of Berkhamsted, and then to those made by the noble Lord, Lord Lennie.

In response to the points made by the noble Baroness, Lady Bowles, about the maximum monetary penalties, some businesses may argue for the lowest possible turnover, for obvious reasons, and it is important that the Secretary of State retains the flexibility to set what would be a reasonable and effective fine. Of course, in all decisions the Secretary of State must act reasonably under public law duties, so it does not exactly give him a free pass. However, I am very happy to provide the noble Baroness with reassurance that, if there is any disagreement between the Secretary of State and the business that would be subject to the penalty, it will be for the Secretary of State to determine the relevant turnover in question.

In regard to the noble Baroness’s point about whether penalties are set too low—I do not often get to hear that criticism—the largest penalties are up to £10 million or 5% of turnover, whichever of those is the higher amount. I am sure the noble Baroness will appreciate that, to any business, £10 million is a substantial amount of money. However, as a civil financial penalty, it is only one of the possible forms of punishment. The noble Baroness will be aware that criminal sanctions are also available, and those criminal penalties may well include a prison sentence of up to five years, so we are satisfied that the appropriate disincentives exist to flouting the regulations.

The noble Baroness referred also to some of the sector definitions. I am happy to reassure her that we have engaged extensively on them in a number of different ways. We have changed the descriptions and amended them in communications with regard to qualifying entities carrying on activities in the UK. For critical suppliers to government, two of the five limbs of the definition set out in the government response were amended, and we made some changes in data infrastructure. We clarified some of the infrastructure activities with regard to energy, and, on suppliers to the emergency services, some of the limbs of that definition were amended and narrowed to provide an objective list of activities, as well as in the field of synthetic biology.

On points raised by the noble Lord, Lord Lennie, with regard to the funds, as was discussed—these points were also raised in the other place on 20 October—any funds received will go to the consolidated fund, as is standard practice. However, the noble Lord will be aware that we have a wide range of support schemes for businesses in other areas, particularly for establishing new technology.

On publishing the details of clear cases, we are of course required under the Act to publish an annual report setting out the numbers and sectors of cases that are notified and cleared. To ensure that mandatory notification works proportionately and that the Act is future-proof, the Secretary of State will of course keep this under constant review and will seek to amend the list of acquisitions that would be in scope in the future through additional secondary legislation to reflect evolving national security risks and technological changes. The noble Lord will be aware that, following the practice of previous Governments, we have never defined what national security is, and he will also be aware that of course I cannot comment on the additional case that he mentioned.

Both these SIs are essential for the effective operation and running of the NSI Act and for the provision of a safeguard for the United Kingdom. The Government have ensured that the proposed descriptions within the notifiable acquisition regulations will enable potential acquirers to self-identify for the purposes of the mandatory notification requirement.

The noble Baroness, Lady Bowles, also raised the point about communication and the possibility of a helpline. We do not think that that is necessary; officials remain available in the investment screening unit within BEIS for consultations, if necessary, on a confidential basis with businesses both large and small, if anybody is unclear about a particular acquisition. Advice is being provided at the moment and will be provided in future to any business that wants to call or email the team responsible for leading this. Sectoral expertise has been a vital part of the development of these regulations, and we have taken great care and time to get it right.

In response to the comments that the noble Lord, Lord Lennie, and the noble Baroness, Lady Bowles, made about available support for SMEs, as I said, we continue to engage directly with businesses around the NSI Act. I have done a number of consultation meetings, and I know that officials have done a lot as well. The first tranche of detailed guidance has already been published to assist businesses, investors and advisers in understanding the Act to comply with its requirements. We have established an expert panel, which I have met with on a couple of occasions, as well as officials, which includes business representative organisations, higher education bodies, investment associations and law societies, all of which will have an interest in having these provisions correctly interpreted. They are giving us constant and detailed feedback on the draft guidance and ensuring that the guidance is fit for purpose.

Our second tranche of guidance will be published ahead of regime commencement—as I mentioned, the regime will commence on 4 January—to continue to aid the interaction of parties with the new investment security unit and to ensure compliance, including on how to submit a notification form and guidance around notifiable acquisitions. We are also holding a communications campaign, which will focus on delivering teach-ins and guidance to a wide cross-section of businesses and organisations to build understanding of the Act in the United Kingdom and internationally. The Government have conducted targeted and extensive engagement with organisations which are most likely to be affected by the Act, including companies that invest or acquire entities in the 17 mandatory sectors.

Tailored explanatory materials have been sent to around 100 industry bodies and mandated areas of the economy, 70 major law and financial services firms, 36 international investors and 550,000 businesses via Companies House. We have taken great care to reach small and medium enterprises through associations such as the Federation of Small Businesses, British Chambers of Commerce and the CBI, which, taken together, have networks of something like 580,000 businesses.

I hope that I have been able to provide sufficient clarification and assurance to both noble Lords who spoke on this, and I commend the draft regulations to the Committee.