National Security and Investment Bill (Sixth sitting)

Sam Tarry Excerpts

Committee stage & Committee Debate: 6th sitting: House of Commons
Tuesday 1st December 2020 Public Bill Committees

[Chi Onwurah]

I thank my hon. Friend for that intervention. As a past employee of a regulator, Ofcom, he really appeals to my sense of regulatory best practice in speaking as he does about the importance of smart regulation that is not tied to narrowly defined legalistic definitions of national security but allows, as he says, a hierarchy of assessment of the different interests. We all need to take responsibility for doing everything we can to ensure that kind of smart judgment can be made by small businesses. We encourage giving as much guidance as possible—I see the Minister nodding, so I hope that he will be receptive to the amendment.

Finally, amendment 9 would mandate Business, Energy and Industrial Strategy unit resourcing updates. I will speak briefly to amendment 9, because I know that other hon. Members wish to speak to it. This amendment provides that a statement from the Secretary of State about the exercise of call-in power may include details of the resources allocated to reviews of national security within BEIS.

The driving thought behind this, again, is to ensure that the Secretary of State’s life is made as easy as possible by consistently looking at the resources available to do this very complex and difficult job, particularly given that we are transitioning, as one witness put it, from a standing start to potentially thousands of notifications.

[Sam Tarry (Ilford South) (Lab)]

It is an honour to serve under your chairmanship so soon again, Sir Graham. Following on from the eloquent exposition of those last two amendments by my hon. Friend the Member for Newcastle upon Tyne Central, I would like to focus on amendment 9. The amendment is simple. It tries to help the Government help themselves.

Amendment 9 provides that a statement from the Secretary of State about the exercise of a call-in power may include details of the resources allocated through reviews of national security within BEIS. We know that this is a significant and large change that the Department will have to absorb. For that to be effective—in whatever state the Bill ends up passing through Parliament—there will clearly be a need for proper resource allocation and for Parliament to scrutinise that process.

The Bill transforms the UK’s merger control processes. It locates the merger control processes away from the Competition and Markets Authority, which is a new development. The CMA had a history of experience of overseeing those sorts of processes. At the moment, there is no such expertise in BEIS.

While massively expanding the scope of the intervention, as my hon. Friend the Member for Newcastle upon Tyne Central said, moving from only 12 national security interventions in 18 years to potentially over 1,800 is such a significant step change, so it will be important for Parliament to have the ability to monitor that. It is unprecedented. The Government have neither a precedent nor a plan—none has come forward with the notes to this Bill—to assure the House of how the shift will be managed. That is why we felt it was important to put forward this amendment.

I believe this amendment has support on both sides of the House. Crucially, hon. Members across the House have raised legitimate concerns about the capacity and capability that will be required to manage this major shift. My colleague from the Transport Committee, Greg Clark, said,

“It is an enormous challenge for the Department to set up a new unit, especially since the current regime…has dealt with a very small number of transactions each year.”—[Official Report, 17 November 2020; Vol. 684, c. 228.]

Similarly, James Wild said,

“It is crucial that the structures and resources are put in place to ensure that the timetables for review and assessment in the Bill are actually met.”—[Official Report, 17 November 2020; Vol. 684, c. 266.]

I think both of those points are extremely pertinent.

I do not see this as a controversial amendment. I think it is important to allow the Bill, once passed, to function effectively and with proper oversight. It also provides the appropriate scrutiny, ensuring that this critical part of our national and economic security functions effectively and efficiently. I am sure that in amendments to come we will debate where the balance should be between economic freedoms and our responsibility to safeguard our citizens. But clearly, on the simple idea put forward in this amendment, the Government will have to be transparent about the capability and capacity of BEIS on investment security, as many other countries around the world do.

[Stephen Kinnock]

My hon. Friend is setting out the case very well. To add to that argument, this is also about reassuring us as Members of Parliament. A Bill is all very well—it puts it all down on paper—but what really matters is putting it into practice. How does the implementation work? The investment security unit will be the key place for that. We need assurance that that crucial part of this process will have the capability to deliver. The amendment we are putting forward is also an assurance amendment—that when Parliament votes this Bill through, we can be assured that the implementation capability will be there.

[Sam Tarry]

My hon. Friend is absolutely right. As we have shaped our own Bill, we have been learning about regimes in other countries and comparing and contrasting provisions. For example, in the US—we have heard evidence on this from Michael Leiter earlier in the week—they look in detail at only around 240 cases, and then they look at 100 in a short form. We are saying that will have up to 1,800, and at the moment we do not have any guidance on what would be a more detailed and thorough investigation. Clearly, we need to have confidence about the amount of resources and about the fact that the Department has proper oversight of that and has been doing things properly.

This is not just about making our country the most attractive destination to do business; it is also about ensuring that we have the resources in place so that we do not slip up. We do not want another Huawei situation. We do not to be in a place where we do not have the resources, and where the former head of MI6 has to come to our evidence session and say that successive Governments have placed too much emphasis on building the economy at the expense of our security.

One of the evidence sessions last week touched on the idea of moving from just a few dozen cases to 1,000-plus being investigated. We do not know exactly when those cases will come. If there is suddenly a glut of cases at the same time, we need to make sure that the resources are there to deal with all of them. In that way, we will not have smaller companies, in particular, which are not getting the media coverage that some companies have had, falling through the net. As we know, very small, innovative technology companies sometimes develop some very radical forward-thinking technologies, and we might not even notice that they have been bought out or taken over by a state-owned business or by a business that is aligned closely with another state that may not share British values or interests.

I will leave it there, Sir Graham. This is about helping the Government to help themselves, allowing Parliament to have oversight and ensuring that the resources are in place, so that we get this right and do not have to revisit it after a calamity in a few years’ time.

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Division 3

Ayes: 5

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Labour: 5

Noes: 9

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Conservative: 9

[Sam Tarry]

I beg to move amendment 11, in clause 3, page 3, line 16, at end insert—

“(7) The Secretary of State must publish guidance for potential acquirers and other interested parties separate from the policy intent statement.

(8) Guidance under subsection (7) must cover—

(a) best practice for complying with the requirements on acquirers imposed by this Act and regulations;

(b) the enforcement of the requirements; and

(c) circumstances where the requirements do not apply.

(9) Guidance under subsection (7) must be published within six months of this Act receiving Royal Assent.”

This amendment would require the Secretary of State to provide clear guidance to potential acquirers and other interested parties.

Again, this is, in our view, a fairly simple amendment. It is important because it is about ensuring that we are an attractive destination for business. A number of witnesses were very clear that many businesses need an early warning. The amendment would require the Secretary of State to provide clear guidance to potential acquirers and other interested parties, so that people are not put off from investing or getting involved in the British economy because of red tape that they might fear being tied up in. The amendment is about providing that clear guidance to companies.

If the Government went even further and published guidance that created regulatory sandboxes and clear engagement guidelines for innovative small and medium-sized enterprises, which could benefit from efficient regulatory engagement to pursue investment transactions just as, for example, the Financial Conduct Authority has done for the UK’s world-leading FinTech sector, we could turn this into an opportunity to encourage the right types of companies from our allies around the world to invest in Britain.

One of the things we fear is the introduction of significant uncertainty. We know that hard work is going on to finalise a trade deal. Businesses have for so long felt that their big problem, in deciding about long and medium-term investment, is uncertainty. The amendment is about tackling straightaway any fears of uncertainty among businesses, particularly innovative SMEs, which will not have the resources to spend on figuring out the lengthy processes and, potentially, the accompanying guidance that could be put in place once the Bill passes. The amendment would require the Government to try to reduce that uncertainty.

[Mark Garnier (Wyre Forest) (Con)]

I have a lot of sympathy for what the hon. Member says, because clearly the more clarity a potential investor has when investing in the UK, the better. The only problem is that if the Government are in a position to provide guidance in the first place, they are in a position to subsequently update it. Governments of different colours could change the guidance without necessarily having to refer back to Parliament. Does the amendment therefore not perversely create greater potential uncertainty, by enabling Governments to change their guidance willy-nilly, without scrutiny?

[Sam Tarry]

The hon. Gentleman makes a valid point, but it was not really borne out in the evidence that we heard from the witnesses. They were clear, even while having different approaches, that more guidance accompanying this, and providing it early, would provide that certainty. We heard a range of approaches and opinions, and that advice should clearly be listened to. Dr Lenihan said:

“The Bill provides for a lot of regulatory guidance, which needs to come forward in a clear and very easily comprehensible and understandable manner.”––[Official Report, National Security and Investment Public Bill Committee, 24 November 2020; c. 38, Q42.]

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[Nadhim Zahawi]

Amendment 11 would require the Secretary of State to publish guidance in relation to the Bill and regulations made under it within six months of Royal Assent. The hon. Member for Ilford South raised an important issue and I welcome the opportunity to discuss the Government’s plan for communicating the application of the proposed new regime, including the requirements that would or might be imposed on persons. It is important that appropriate steps are taken to make such persons aware of the requirements that would or might be placed on them. I have used “persons” here deliberately as it is the correct term, but I wish to make it clear that that includes acquirers.

First, the Government have published factsheets on the digital platform .gov that make clear what the measures in the proposed legislation are and who they apply to. The factsheet “Process for Business” sets out step by step what steps persons must or may need to take to ensure compliance with the regime. Secondly, we have set up the email address [e-mail] specifically for the purpose of providing advice on what may be in scope of the NSI regime for persons to contact to ensure that they properly understand the proposed regime. Of course, the Government believe that the Bill does not require any adjustment but should adjustments happen as it passes the scrutiny of this House and the other place, then any adjustments that affect persons would be reflected in the factsheets.

Thirdly, the Government have published and will continue to publish guidance alongside key documents in the Bill. Hon. Members will, for example, be able to review the information likely to be required for notifications online, as well as draft guidance. It is our intention to complete similar such guidance wherever it would be beneficial to parties. I hope that that provides sufficient reassurance for the hon. Member for Ilford, South and the shadow Minister that the Government are thinking carefully, and will continue to think carefully, about how to ensure that all parties who need to understand the measure are able to. For the reasons that I have set out, I cannot accept the amendment and I hope that the hon. Member for Ilford, South will withdraw it.

[Sam Tarry]

I wish to press the amendment.

Question put, That the amendment be made:

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Division 7

Ayes: 5

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Labour: 5

Noes: 10

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Conservative: 10

[Sam Tarry]

I beg to move amendment 12, in clause 8, page 6, line 38, at end insert—

“(10) The fifth case is where a person becomes a major debt holder and therefore gains influence over the entity’s operation and policy decisions.

(11) For the purposes of subsection (8A), a major debt holder is a person who holds at least 25% of the entity’s total debt.”

This amendment would mean that a person becoming a major debt holder would count as a person gaining control of a qualifying entity.

[The Chair]

With this it will be convenient to discuss amendment 14, in clause 8, page 6, line 38, at end insert—

“(10) The fifth case is where a person becomes a major debt holder and therefore gains influence over the entity’s operations and policy decisions.

(11) For the purposes of subsection (8A), a major debt holder is a person who holds at least 25% of the entity’s total debt.

(12) The sixth case is where a person becomes one of the entity’s top three suppliers of goods, services, infrastructure or resources and therefore gains influence over its operations and policy decisions.”

This amendment would mean that a person becoming a major debt holder or a major supplier would count as a person gaining control of a qualifying entity.

[Sam Tarry]

Amendment 12 is about where a person becoming a major debt holder would count as a person gaining control of the qualifying entity. I know there is some debate about the technicalities of this, but Admiral Mike Mullen, former chair of the US joint chiefs of staff, famously said of the US:

“The single greatest threat to our national security is our debt.”

This is an important point, because there is a substantial body of evidence to show that the debt holding of bondholders can indeed exert influence over companies. A particular feature of our current economic circumstances is extremely low, or zero, interest rates, so companies have drawn heavily on debt, not just equity, to fund themselves. In that context, it would be a major loophole for this Bill not to put debt investments under scrutiny in protecting our national security. This amendment would simply change that by bringing it into scope.

The amendment would ensure that an entity holding more than a quarter of a company’s debt became a qualifying entity, bringing transactions into the scope of the national security screen. We think this is really important, because we would want that level of scrutiny. We also know that a number of states use this kind of leverage in some of the companies that they are taking over or, indeed, taking the debt from. Without it, hostile actors can be expected to exert explicit influence by buying up UK companies’ debt, and that is something that should worry us all of us. Indeed, the Parliamentary Commission on Banking Standards talked about the importance of how debt can be used to exert influence. It said that,

“while a bank remains solvent, the formal powers of other creditors, such as bondholders, are much more limited.”

However,

“The terms of some bond issuances may have provisions in situations when the security of the bond may be affected”,

secured against

“creditors, such as securitised or covered bond holders”.

So in practice, the scale of the funding provided by bank creditors means they simply have more influence over companies. If debt was bought in that way, we could indeed have a situation where a loophole was used to bring in hopefully benign, but potentially troubling influence within a company which could impact our national security.

There is considerable research showing that, in some companies, there is a strategy of using a negative relationship between debt investments in research and development that has actually stopped innovation, so we want to tackle all those things, but most importantly simply focus on closing the loophole that is here. There may be some pushback from the Government side of the Committee to say that, legally, debt holders have no operational control over a company. Of course, technically that is correct, but in practice companies’ executives pay huge attention to bondholders and are materially influenced by them in substantive practice. There are a number of examples of that. From our point of view, we would like to push forward this amendment so that we bring into scope something that is otherwise a major loophole.

[Stephen Flynn]

I will be brief, as our amendment 14 is incredibly similar to the amendment moved by the hon. Member for Ilford South—not the hon. Member for Southampton, Test; I know that much. In any case, it is indeed very similar; I would just add that we must be clear about the fact that power does not just lie in ownership and investment, but also in debt and, indeed, in suppliers too. If we are standing blind to that, then I am not quite sure where we are at, particularly in terms of national security. Surely, it is an issue that we should be giving cognisance to, and the amendment certainly seems like a constructive proposal for the Minister to take forward.

I also have a fear that, as we approach anything to do with national security and investment, the bad guys, as they are often portrayed—and rightly so—will look for ways to get around things. If there is potentially a way to get around things, particularly by buying up debt or buying up the supply chain into an organisation, then I have absolutely no doubt they will do that. As we know, they will seek to exploit every opportunity available to them to wreak the damage they want to cause. We need to be mindful of that.

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Taken together, Sir Graham, I do not believe these two amendments are in the interest of supporting business in this country to succeed. They do not offer the protections to national security that the Bill already appropriately and proportionately provides. As such, I respectfully ask the hon. Members to withdraw them.

[Sam Tarry]

I thank the hon. Members for Wyre Forest and for Aberdeen South for their contributions. It is my fear that, in some of the Minister’s answers, there was perhaps an admission from Government colleagues that there is a correct driver, in terms of what we are trying to push at with this amendment. It would be more ideal if we were able to bring back an amended amendment that would win the support of the Government side, given that there clearly is recognition from experienced Members of the House that this is a problem and it could continue to be a problem. That could be a risk. For that reason, we will press for a Division.

[The Chair]

I am sorry. Can I be clear that you would like a Division?

[Sam Tarry]

We would indeed, because it is a point of key principle.

Question put, That the amendment be made.