That this House takes note of the Report from the Communications and Digital Committee AI and creative technology scaleups: less talk, more action (2nd Report, HL Paper 71).
My Lords, this is the Communications and Digital Committee’s final report from my time as chair, so I not only thank the committee staff and my fellow committee members for all their work and contributions to this inquiry but extend my sincere thanks to all colleagues with whom I worked over the past three years for everything they have done so that, collectively, we have been able to produce some high-quality work that has had impact. Likewise, I am hugely grateful to the witnesses who appeared before us and submitted written evidence to all our inquiries. That is particularly relevant to this report on scaling up AI and creative tech, because we drew so much on the work we did in preceding inquiries, especially those on large language models, the creative industries and digital markets.
This debate comes at the end of London Tech Week, where so many of the UK’s fantastic tech founders have spoken or been in attendance. We have so much tech and entrepreneurial talent to celebrate in this country. From the off, I emphasise how proud I am of the innovators and risk-takers who set up on their own to establish a business and go on to thrive and achieve great success, even if they have had to experience more than one failure along the way, because if there is one message that landed powerfully with me during this inquiry it is that we do not say or do enough as political leaders to celebrate and support our risk-takers and wealth generators. They do not just generate wealth for themselves; they help our economy grow, create jobs and provide products and services that are valued by consumers and other businesses alike.
I cannot speak for Oxford Ionics, which was just this week acquired by a US rival—I offer my sincere congratulations to its founders on their success and all they have achieved—but I am genuinely sorry about its loss to the UK as a British business, even if, under new ownership, it continues to operate here. As I shall come on to explain, what we have seen this week is another example of a worrying trend. Our report described the UK as an “incubator economy”: a great place to begin, but too often it is other countries that get to cash in. If we are serious about growth and retaining our position as a global leader in the tech sector, this situation has to change.
Our inquiry on scaling up looked at the causes of this problem and what steps the Government must take to support innovative technology companies to grow into thriving British businesses that want to stay here in the UK. We focused on AI and creative tech because these are two areas in which the UK has strong foundations and significant potential, but many of our findings apply to innovative tech scale-ups more broadly.
This failure to scale is not a static problem. It is a dynamic and damaging cycle. When our most promising firms exit early or scale overseas, we do not simply lose their immediate economic value; we also hamper the formation of the kind of ecosystem that drives sustainable innovation. In the United States, successful founders reinvest their capital and experience into the next generation of start-ups. This creates a powerful flywheel of talent, mentorship and capital. In the UK, existing gaps in funding, expertise and confidence will only widen if we do not retain and champion our top entrepreneurial talent.
Before my noble friend sits down, the problem with AI is that it uses astronomical amounts of electricity, and we have some of the highest electricity prices in the developed world. Does she think electricity prices are going to inhibit the growth of AI in this country?
My noble friend is right that the cost of energy in the UK is very much a deterrent to a lot of inward investment. It is not deterring them completely, but I was talking only yesterday to a very senior figure at Amazon and, as you would expect, he was drawing comparisons between us and France. I said earlier that London is no longer the leading tech hub, and according to one of these analysts the country that is really champing at our heels is France.
My Lords, I hope we will see the noble Lord, Lord Hamilton, here for the wind-up, because there is a wicked old habit in the House of Commons of intervening very early in a debate to which you have not put your name, so you are in Hansard but you can then be on the train home.
My thanks go to the noble Baroness, Lady Stowell, not only for her introduction today but for her chairmanship of this committee, of which I have been proud to be a member. It is the third such report that the committee has brought about under her stewardship, and it is a good example of how Select Committees can carry out programmes of work that are essential in working through legislation.
I am pleased to see the noble Baroness, Lady Kidron, in her place, and I look forward to her speech. This last week, which is coming to an end, has been a bit bruising. I have never been a fan of ping-pong; I do not think it is the best way of getting a resolution. We thought some 20 or 30 years ago—but you must not rush things in the Lords—that we should adopt the approach of the American Congress: when they get stuck on a piece of legislation, they appoint a joint committee with the task of bringing forward a solution.
I also share the wish of good luck given by the noble Baroness, Lady Stowell, to the noble Lords, Lord Evans and Lord Massey. My only caveat is that I see that the noble Lord, Lord Evans, has chosen a Yorkshire designation for his title, when he was born in Lancashire. Such apostasy is noted.
The noble Baroness, Lady Stowell, has given us a good start by looking forward and not brooding over the past. I am afraid that I have now reached the stage in my career where I do brood over the past. It is about 60 years since I first came to be interviewed for a job in the Fabian Society by the late Arthur Skeffington. I have worked in and around this place ever since. What struck me in preparing for this debate was that I was much inspired in my late teens and early 20s by two speeches. The first was John F Kennedy’s inaugural speech. He announced that
My Lords, we are here to discuss a really important issue. I am delighted that the noble Baroness, Lady Stowell, was able to secure the debate. As a member of the committee that worked on the report, I am indebted to her for her tireless efforts as chair of that committee—not just for all the behind-the-scenes work but for pulling together such a disparate group of people, often with disparate views, and bringing together something that I hope will be seen as really worth while. I also thank the staff who served us so well and made a positive contribution to our efforts.
If the country is to stand a chance of securing the growth it seeks, then the sector we are discussing today will be a crucial engine to get us there. The Chancellor of the Exchequer was absolutely right to say
“we want nothing less than to make the UK the technology centre of Europe. This is the path we need to take to create new jobs, new growth and new prosperity in every corner of our country”.
No one would argue with that. However, it was not Rachel Reeves who said this; those were the words of George Osborne, quoted in a 2014 report of what became the ScaleUp Institute. Ten years later, the ambition remains intact, but so do many of the problems that UK companies spotted then which prevented them fulfilling their potential and scaling up. Many of those obstacles apply to all sectors. There are some, however, that particularly afflict AI and the creative tech industries.
Writing 10 years after George Osborne, the noble Lord, Lord O’Neill of Gatley, referred to the “valley of death” that continued to lie in wait for too many of the companies which successfully start in the UK. We are still a wonderful country in which to start a business and our rate of entrepreneurship is second to none, but those companies come to an early end far too often. The noble Lord, Lord O’Neill, was penning the foreword to the latest report from the ScaleUp Institute. Although that report is positive about the achievements of the past 10 years, it acknowledges that many of the issues addressed in 2014 remain problematic now. The UK is an innovative developer in AI as well as the creative tech sectors—indeed, we are a leader in creative tech in many ways—but, as our report stressed, unless we can provide, quickly, the environment necessary to enable those companies to scale up, and with them many other businesses, they will leave.
My Lords, it is an honour and a privilege to be making my maiden speech in this House on this important issue affecting our country and, indeed, the growth agenda of the Government. I begin by extending my thanks to Black Rod, the Clerk of the Parliaments and the doorkeepers, who have eased my entry into this House with a combination of helpfulness, friendliness and great professionalism. I also thank my two supporters, my noble friend Lord Harrington, who was at university with me and has been a great friend ever since, and my noble friend Lord Polak, with whom I have enjoyed two decades of happy collaboration at CFI.
As a Hampstead-born lad, I have always remembered that my grandparents fled Odesa and found refuge in this great country. I met my Venetian wife, Fiorella, at 15 years of age at school here in London. We have been happily married for over 40 years and have three wonderful children, Lucie, Edward and Eloise. I arrive in this House as a lifelong Conservative, having started my political journey in the summer of 1978 as a research assistant to Peter Walker, later Lord Walker of Worcester, who many in this House I am sure will remember. Some 44 years later, I had the privilege of serving as the chief executive of the Conservative Party under the leadership of Rishi Sunak and Kemi Badenoch. I am honoured now to become a parliamentarian amongst you and look forward to making my contribution and serving the vital work of this House.
In parallel to my political interests, I have been involved in the financial services sector for over four decades, working in fund management and capital markets. I worked at a large global financial institution for 20 years, but subsequently founded a smaller financial firm, so—unusually perhaps—I have led businesses at both ends of the scale in terms of the size of the companies. My experience as a business owner and entrepreneur has taught me to recognise the importance of smaller companies, and I am keenly aware of the challenges that they face. I declare my interest as a director and shareholder in financial services companies, as stated in the register.
My Lords, I congratulate my noble friend Lord Massey on an excellent maiden speech. The maiden speech in this House is an opportunity to introduce oneself to many Peers, though I have to say that, looking around, several of us have known my noble friend for almost 50 years. I remember that he was involved in university politics, as I was. He, of course, was much better at it than I was: the stars were my noble friend Lord Massey and, if I may say so, my noble friend Lord Moylan. After that, we worked together as parliamentary researchers. He was researching with great skill for Peter Walker, and I was researching for Nigel Lawson—a reminder of the wide range of political opinions that the Conservative Party embraces at its best. After that, he made his career in the City, joining as a trainee and becoming the CEO of a major City company. All of us in this House look forward to the benefit of his expertise and understanding of financial services, as we have heard already this morning.
I also congratulate the noble Baroness, Lady Stowell, on an excellent introduction to a very important report, and I should declare my interest as chair of GenIP, a company applying AI, and as chair of the Regulatory Innovation Office. This report that we are considering is in many ways one report in a trilogy. It follows on from an excellent report by the Science and Technology Committee on engineering biology and it will be followed by a further report from the Science and Technology Committee specifically on the scale-up challenge. I think those three reports together are likely to contain a single very important shared message about the scale-up challenge facing the UK. It is absolutely right that we are very good at those early-stage start-ups but not so good at funding companies as they grow. That is the challenge.
The analysis in the report is striking, and I will draw attention to some features. Sometimes, we have a soft spot for SMEs and small businesses as a group. What the report focuses on is not the SMEs which—for perfectly legitimate reasons—are stable and operating at a certain scale with no great plans to grow; it is the gazelles, the rapidly growing companies, that really matter, and they can be counted in the low tens of thousands. In other words, this is a manageable challenge. We are not talking about 5 million SMEs; we are talking about 10,000—perhaps 20,000—high-performing, high-growth companies. It should not be beyond us to construct policies that support that crucial sector of the British economy.
My Lords, I add my welcome to the noble Lord, Lord Massey. I also look forward to hearing from the noble Lord, Lord Evans. I thank the committee for its very valuable report, and for the determination of the noble Baroness, Lady Stowell, and her colleagues, not to split the interests of the creative, creative tech and AI communities but to try and see them as a unified whole. I really appreciated that.
It is hugely important, and the committee was right, to highlight the serious risk of the UK becoming an incubator only for foreign economies. Most importantly, the committee’s assertion that AI is not a sector but a technology is profound and so often overlooked. It is a technology whose impact on specific domains is hugely different. By failing to consider it domain by domain, we are failing to create opportunity for homegrown AI companies to dominate in specialist areas. We are also perhaps failing to consider its impact overall over the whole of society. I really did appreciate that.
My remarks are going to be about data. The report recognises that data will be central to the AI revolution. It usefully highlights both the lack of data for training and the view that more is not always more. Given that my views on the data owned by the creative industries are so liberally distributed across Hansard, I want to talk about two other datasets and make the case that it is not only cash and compute but valuing data that will support the committee’s objective of ensuring that the tech revolution is a success in the UK.
This week I received a message from someone privy to discussions about the plans for the national data library—a project that enjoys a great deal of support from Members of your Lordships’ House and that the Minister, in Committee on the Data (Use and Access) Bill, suggested made redundant the idea of designating certain valuable or sensitive datasets as sovereign data assets. I want to be clear: I believe the Minister at the time was hopeful that the issues of privacy, value to the public purse and democratic values that were integral to our concept of a sovereign data asset would be covered by the national data library scheme—same idea, different name. But my correspondent, who himself works in tech and is a serial entrepreneur, explained that currently the tech companies are heavily lobbying government to share NHS patient data in that context, on the promise of streamlining NHS bureaucracy. Sharing the entire UK population’s NHS data is an enormous decision and has privacy and cost implications, but possibly the key point for today’s debate is that it has profound implications for who, how and on what basis—and, importantly, in which jurisdiction—the benefits accrue from innovations, commercial products and services that may never have been created without the help of that dataset. This is a serious issue if patient records are shared with a UK company, but even more so if they are to be shared with a company headquartered overseas.
My Lords, it is a great pleasure to deliver my maiden speech this morning, and it is a particular pleasure and privilege to follow immediately the contribution from the noble Baroness, Lady Kidron. I have sat here in recent weeks and watched her make her points repeatedly, and they lose none of their strength for repetition. I hope that the Government are listening and that we will see some movement from them.
I congratulate my noble friend Lord Massey on delivering his maiden speech. There was a great deal of knowledge and detail there, and I am sure that he will make a good contribution to the House in future, as indeed I hope I will.
As it is my maiden speech, I would like to thank Black Rod, the Clerk of the Parliaments, the Garter King of Arms and the House staff who helped me through my introduction ceremony back in February. It is an experience I will remember for the rest of my life. My guests loved it and I can tell your Lordships that when you wear ermine, nobody can see you tremble.
I also congratulate my noble friend Lady Stowell of Beeston on bringing this report before the House today. We have known each other for over a decade, and the report is presented with all the care and attention to detail that I would have expected from her.
I continue to be grateful to the doorkeepers and the security staff here. I do not think a day passes without me consulting them on some questions, and they deal with them courteously and knowledgeably all the time. They always go out of their way to provide help. I have made it my business to wander the Palace, opening doors to find out what is behind them. On one occasion a couple of months ago, I encountered a security guard in the Committee Corridor upstairs. Instead of admonishing me for what I was doing, he offered me a quiz about the House and the location of various things here. I am disappointed to say that I scored one out of five, but it was one more than I would have scored back in January, and I hope that if I had that quiz now I would do considerably better.
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This is playing out already. London, I am sad to report, is no longer Europe’s leading technology hub, according to Dealroom’s latest Global Tech Ecosystem Index. A recent survey of founders by Tech Nation found that 43% were actively considering leaving Britain. We are also struggling to hold on to the few British tech companies that have scaled domestically. This week’s unicorn is not the only one galloping overseas. Alphawave, Wise and Deliveroo have departed to the US by way of acquisition or relisting this year. Unless we act decisively, we will continue to erode the foundations required for long-term global competitiveness. As much as the Minister will not welcome me saying so, the day-one rights and other measures in the Employment Rights Bill will only deter further UK tech firms from scaling and staying here.
We received the Government’s response to our report in April. While it was supportive of our findings, it was thin, pointing to a series of policy announcements due in the spring. It is now summer, and while the Government have shed light on some issues through their announcements this week, we are still in the dark on several others. I will address each of these in turn, and I have several questions for the Minister.
I start with funding. The UK’s lack of scale-up capital is the most important barrier that needs to be tackled. The Council for Science and Technology has highlighted improvements in early-stage investment, such as seed funding and start-up investment, but it has stressed that UK companies have been “starved” by a lack of scale-up funding. The Capital Markets Industry Taskforce identified a $30 billion gap between the UK and Silicon Valley for funding rounds of more than $100 million.
A lack of domestic institutional investment is part of the problem. Just 10% of Britain’s venture capital pool comes from pension funds. In the US it is more than 70%, and Canadian pension funds invest 15 times what UK pension funds invest in private equity and VC. The Government acknowledged this funding gap for scale-ups and pointed to ongoing pension reforms, such as the new Mansion House accord. That is welcome in principle. However, the push-back from pension funds against a mandate to invest in UK-based assets suggests that these reforms may not be a silver bullet. Personally, I am very nervous about mandating, but I also know that we cannot afford to wait years for pension reforms to trickle through. We must actively crowd in capital now. When will the Government’s initiatives result in tangible improvements in capital access for our most innovative firms? How are the Government making sure that voluntary commitments translate into real action from institutional investors?
The committee heard that another source of confusion for businesses looking to scale is the plethora of disconnected programmes and government grants available to them. This has arisen over many years and is not a new problem, but I have described it in the past as a kind of bowl of spaghetti drowned in alphabet soup. In our report, we recommended that the Government evaluate the impact and join-up of initiatives administered by UKRI and the British Business Bank in particular. I was therefore pleased to hear Tom Adeyoola, Innovate UK’s new chair, acknowledge that the current system is a hindrance rather than an enabler, and I welcome his ambition to bring greater focus to the agency because it is really needed. I was also relieved to discover, since our report, that the British Business Bank has retired its various sub-brands. This is a step in the right direction towards simplifying the schemes that were previously on offer, but the Chancellor’s welcome decision this week to increase the BBB’s financing capacity makes the need for a clearer strategy and a more coherent offer for scale-ups even more important. Can the Minister provide an update on UKRI’s review of its portfolio of funding and support to SMEs, which was due this spring? Can she offer examples of how the memorandum of understanding between UKRI and the BBB is creating a clearer pathway of support for scale-ups?
The Government promised us that their new business growth service will
“ensure a joined-up, coherent approach to the government’s suite of business support programmes”.
That would indeed be welcome, but I have concerns that this will instead become yet another thread in an already tangled web, and that is before we take account of the new sovereign AI unit announced this week. Can the Minister clarify how the business growth service will streamline the journey for innovative firms? Can she reassure me that the partnership between the BBB and the sovereign AI unit will truly put boosters on our emerging AI champions?
Our evidence was clear about the strategic importance of AI in driving innovation and growth across multiple sectors. The AI Opportunities Action Plan, which the Government published in January, was a good start. It set out ambitious proposals that match the scale of AI’s transformative potential, which have now been backed up by funding for delivery in this week’s spending review.
However, a plan is only the start. The Government must be laser-focused on removing obstacles to growth for home-grown AI companies. For example, access to compute was consistently raised in our evidence as a critical enabler for AI scale-ups. We heard that the Government’s decision last August to cancel investment in the Edinburgh exascale supercomputer left the entrepreneurial community deeply unimpressed. It was therefore good to hear this week that it will now receive £750 million of government funding, but the Government’s hokey-cokey on this issue has been damaging and means that we have lost valuable time. The Government promised in their action plan to expand public compute infrastructure 20-fold by 2030, with a long-term strategy published by the spring, but that strategy has yet to materialise. Can the Minister confirm whether it will be published before the Summer Recess?
Our report also emphasised that effective and agile regulation is crucial if we are to support innovation. However, we heard widespread concerns about confusion in the current regulatory landscape, particularly in relation to AI. We need proportionate oversight that gives confidence without stifling innovation or creating new barriers to entry. It is home-grown AI companies, not big tech incumbents, that will drive the innovation needed to realise the UK’s AI potential.
Open markets and open competition are essential to ensure that they have a fighting chance, which is why successful implementation of the Digital Markets, Competition and Consumers Act is vital. We welcomed the creation of the Regulatory Innovation Office, which has been nicknamed RIO, but we emphasised the importance of clarifying its remit and its interrelationship with other regulatory bodies. Unfortunately, those concerns have not yet been addressed, and the extent of its powers over other regulators remains unclear. I am pleased that the Government were wise enough to appoint my noble friend Lord Willetts as the chair of RIO, and I am delighted that he is speaking in today’s debate. None the less, as the person accountable to Parliament, can the Minister provide detail on how she expects RIO to drive behavioural change to boost innovation across sectors?
I turn to the createch sector, where two UK strengths—creativity and technological innovation—meet. For those not familiar with createch, it covers gaming but also visual effects and that sort of thing. The think-tank Erskine Analysis estimates that createch companies could generate up to £18 billion in additional gross value added over the next decade, with the right support. We found that the wider issues of funding and co-ordination are particularly acute for createch firms. The creative sector has suffered from poor investor understanding and a lack of specialised investment vehicles. In addition, various schemes administered across DCMS and UKRI have paused and restarted, leading to confusion and duplication. As I said before, that is not a new problem; it has been the case over a period of time. It is worth noting that, while the Government tout the creative industries as one of their eight key sectors, it was not mentioned once in the Chancellor’s spending review speech on Wednesday.
Let me add that I would never criticise Ministers, or indeed the Prime Minister, for meeting tech founders. That is good; it is when Ministers do not pay regard to other important sectors that trouble is caused.
In their response to us, the Government promised that all would be revealed in an industrial strategy sector plan for the creative industries and told us that UKRI would develop a new strategy for the creative sector. So when will either of those be published?
I cannot not mention the issue of AI and copyright. Unfortunately, despite admirable efforts by many noble Lords—I am pleased to see that the noble Baroness, Lady Kidron, will be speaking shortly—progress remains elusive. Now that Parliament has dispatched the Data (Use and Access) Bill, focus turns to the Government’s commitment to host industry roundtables. Clearly, these must be successful, but, for me, when they were announced, they elicited a horrible sense of déjà vu. I worry that the Government’s mishandling will have made the prospect of negotiations even harder. I hope I am wrong, because our inquiry made it clear, as did every inquiry through which the committee examined the issue of copyright in an AI world over the last three years, that innovation and creativity must go hand in hand, not toe to toe. The one thing all parties can agree on is that resolution of this issue is urgent.
In conclusion, the Government’s tone on many of the issues covered in our report is encouraging, but warm words do not scale companies and time is not on our side. While the Government consult and reorganise, the global market races ahead. Other countries are acting boldly, and we must do the same. We are doing a disservice to our strong start-up ecosystem and our brightest AI and createch companies if we do not support them to achieve their full potential and become world leaders on a global stage. And, my God, do we have the talent: GBx, a group that brings together Brits in Silicon Valley, is calling the British talent that dominates so much of the big tech based over there “power Brits”. We need those power Brits to want to be here in the UK.
The committee’s message was clear: we have many of the ingredients needed to make the UK a home for scale-up success stories. What we lack is action, and if we do not act soon we will be left only to dream of unicorns, never mind bemoan the ones that gallop away. I look forward to the contributions of all noble Lords during this debate. Some illustrious speakers are going to follow me, and I wish both maiden speakers all the very best.
“we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe to assure the survival and the success of liberty”.
The second was Harold Wilson’s on 1 October 1963, when he called for a new Britain “forged in the white heat” of a technology revolution. I call attention to them today to draw a comparison between the upbeat optimism of a period when a US President could call on the best instincts of an outward-looking and generous-spirited country and the narrow self-interest of today’s incumbent. In the 1960s, we were still living in a post-war settlement made by that “never again” generation, but the very title of the report we are debating today, Less Talk, More Action, suggests a judgment on the Government’s strategy very far from the vision and sense of urgency contained in Wilson’s white heat of technology speech. The whole thrust of the report, and the dissection of it today by the noble Baroness, Lady Stowell, is to urge on the Government clear objectives and urgent decisions.
The challenge is clear. The changes now in train brought about by AI are as great and fundamental as those brought about by the first industrial revolution 400 years ago. Yet there is a worrying one-sidedness about the Government’s AI strategy, as they navigate a path between the tech firms’ freedom to exploit their technology regardless of any harm inflicted on the creative sector and creatives who fear for their livelihoods if the fruit of their hard labour is freely available for commercial exploitation.
Those fears are well founded, as the noble Baroness, Lady Stowell, reminded us. In the case of the creative industries, AI presents a real dilemma which needs a considered and rational response from the Government to a difficult question: how do we protect the intellectual property rights of creators while encouraging responsible innovation and investment in the development of AI? In this House during the passage of the Data (Use and Access) Bill, we tried very hard to offer constructive and workable solutions, but the Government have repeatedly demurred, and ping-pong, as I have said, is not the most efficient way of making progress on complex legislation. It does not help that the Government have during these debates increasingly given the impression that their main objective with that Bill is to convince not the House of Commons or the House of Lords but another house altogether—the White House.
In fact, the Government’s approach during ping-pong brought to mind the great Tommy Cooper in pulling various rabbits out of the legislative hat—none of which remotely resembled a rabbit that could reassure the creative sector. Nevertheless, one of these rabbits may yet have some life in it if, and only if, the Government demonstrate a genuine determination to arrive at a solution that is in in the interests of the creative industries as well as of the tech companies. I refer to the proposed parliamentary working group. One of the most constructive periods in a long parliamentary career was my time on the Puttnam committee leading up to the Communications Act 2003 and the creation of Ofcom. That too was also under a Labour Government with a large majority, but that Government showed their willingness to listen to a knowledgeable, cross-party committee making constructive recommendations, with an independent chair trusted by all sides. The committee must not be a fig leaf which the Government exploit to force through their own proposals in the face of opposition from the creative industries.
As I suspect we will hear later, this is not just about the creative industries. My full title is Lord McNally of Blackpool, and this morning I received a very persuasive brief from the mayor’s office in Blackpool on Blackpool and the Fylde coast’s bid for an AI growth zone. As well as the specifics of AI in terms of culture and creative industries, there is a real possibility of AI being used as an engine for growth. As the noble Baroness, Lady Stowell, warned us, it is an opportunity that if we do not take we will pay for it at our peril.
We need an imaginative regulatory intervention which satisfies both rights holders and big tech companies. I believe the Select Committee has played important part in informing this debate and this report sits well with its predecessors. It has been right in reminding us that AI is not a sector but a technology and that it must find its place in a coherent, cross-government vision that can drive innovation across all eight of the Government’s key growth sectors.
As the noble Baroness, Lady Stowell, wrote and says now, we are in danger of becoming an “incubator” country for other economies that will happily take our talent and help them scale up. We took evidence from a wide base, including some really exciting and enthusiastic entrepreneurs. They were by no means unanimously critical of the environment they found themselves in, and their asks were not greedy. The loudest call, echoing that of a decade earlier, was the one that the noble Baroness, Lady Stowell, referred to: the spaghetti of different grants and apparent help that would be on offer if they could access it. Some of them told us that in fact they had to pay consultants to help them find a way through the morass of stuff that was on offer and, by the time that they had done the sums, it was just easier and more cost effective to manage without.
That does not sound like much progress on 10 years earlier. We are assured that the British Business Bank is on the case. I am not a cynic; I like to believe it is. But—I think like most of us—I would like to see the evidence. So I will withhold my judgment until I can see the road map that will enable an ambitious AI company or a creative tech company to know just where it should go to access, at one step, the help that it needs to become a growing business. The unicorns, as we have heard, are escaping the country, and we cannot afford to lose them.
To help along that journey, I think that specialist hubs are the answer. We have heard about this in the past. I hope that the Minister will be able to tell us a little more about how these hubs are taking shape. At their best, they should be the answer, providing not just information, mentorships and the sort of mutually supportive ecology that we need but the compute that is required. It may not be on the scale that we have heard in the past, because some of the AI companies are capable of being very efficient in their use of AI. If we look at what is going on in China now, we see that the compute required is a fraction of what we used to think was essential. Nevertheless, putting things together in specialist hubs around the country will not only spread the gains but spread the pain.
I hope we will be able to hear more about that. We are waiting for the latest incarnation of the Government's industrial strategy. As ever, more detail would be much appreciated—as much as the Minister can give us today. Specifically, AI needs to be assured that the Government will not go backwards and forwards, as it did on the Edinburgh scheme. Without wishing to venture too much into territory that has caused such pain, as the noble Lord, Lord McNally, referred to in some detail, the issue of copyright hangs over the AI sector. If our specialist AI companies are to thrive, they need to know exactly what environment they are working in and what they are going to be using.
Any uncertainty is a deterrent to investment, and so it is with uncertainty over the future for fundraising and the exact proposals on pension funds. Personally, I share the qualms of the noble Baroness, Lady Stowell, about dictating where pension funds should invest my money, but the idea of putting funds together to give them more clout and therefore spread the risk means that they should be capable of investing a little more in UK companies and more risk-taking ventures.
Creative tech has different issues, however. There needs to be a broader understanding of what a large industry this is and how highly the UK is regarded in it internationally. A deeper appreciation of the value of special effects in theatre and movies, for instance, would have a very special effect on investment in that sector, where we are still a leader. The difficulty in keeping talent is a common refrain among tech companies. Higher salaries are part of the draw, but not everything. An appreciation of the value of wealth creation needs to be filtered through from an early age in this country. This is Money Education Week, and I would like to think that one of the spin-offs will be an understanding that wealth creation spreads among the population; it does not just create people who are going to spend an awful lot on handbags and so on.
Another reason why enabling companies to scale up in the UK is so crucial is to spread the wealth. Making employee share schemes generous and deep is another way that can help to do that. I would like to hear more from the Government about how they propose to make everyone a shareholder, or at least an investor, in the company in which they work. It has long been a discussed ambition in this country, but it does change attitudes. So I hope that we will hear something positive from the Minister today. I am not downhearted. We have the talent; we just need to channel it a little more effectively.
The current debate on how to scale AI and other creative British technology firms is indeed critical to the future of this country, as other noble Lords have said. As the study says, if we do not play to win, we risk becoming also-rans, which could damage our long-term growth prospects. The committee, under the chairmanship of my noble friend Lady Stowell, has done an excellent job in collating all the evidence and articulating a clear set of recommendations. Given my current roles as chairman of a small capitalisation asset manager—an asset manager of small companies—and chairman of a capital markets firm specialising in AIM, the junior market of the London Stock Exchange, I want to focus on two of the recommendations: accelerating financial reforms and championing entrepreneurial success, as my noble friend mentioned.
Tech firms in the UK are experiencing real difficulties in accessing capital from our public markets. The first issue, I am afraid to say, is one of increasing regulation that has beset our industry since the crisis of 2008. The FCA, like the rest of the Civil Service, has grown extensively since then, and its rulebook now extends to over 10,000 pages. Since 2022, the number of employees has expanded by over 30%, from 3,800 to 5,000, a growth rate which greatly exceeds the growth of the industry it regulates. Leaving aside the huge costs of regulation, the role of the regulator, while well intentioned, has had a suffocating effect on the industry, particularly on smaller companies, which constitute the engine room for AI and creative tech.
An example of this suffocation is the story of the decline of equity research over the last decade. One of the many legitimate complaints of the tech sector is that there are now few analysts covering small cap companies on AIM. They are right, as the evidence shows that for companies of under £500 million, there are four analysts covering a single company in the US but only one in the UK. This lack of research has a direct bearing on private and institutional demand for these equities and is the result of an EU rule brought in in 2014, as some noble Lords may recall, called MiFID II. This was designed to protect retail clients and provide transparency for institutions, but it has instead rendered much equity research uneconomic. This leaves the private sector less informed on public companies and reliant on the internet or non-independent research. The irony here is that the intention was to protect private investors from research that they might not understand, but in practice the result is a dearth of research and consequently less investment in the sector.
This needs a total rethink. The chief executive of the London Stock Exchange, Dame Julia Hoggett, put the situation very well:
“We also need to rebuild our risk culture in the UK. Since the financial crisis, UK markets have become known for their focus on managing downside risks—often for good reason. But taking an appropriate amount of informed and rewarded risk is an inherent part of well-functioning and liquid capital markets”.
Somehow, we need to reintroduce this culture into our country.
One of the side-effects of this risk-averse culture is, of course, that as a country we fail to eat our own cooking. While US pension funds invest 40% of their assets in domestic equities, the comparable figure for the UK is only 4%. The argument that the UK constitutes only 3% of the world’s index simply does not wash. Australia, for example, invests 24% of its pension assets in its domestic markets, yet it represents only 1.5% of the world index. In order to restore the vibrancy of our markets, another vital step must be to actually invest in our own companies, both listed and unlisted, and the Government have been across this. They have followed up the Mansion House compact introduced by Jeremy Hunt with the Mansion House accord, and I welcome the announcement this week of the British Business Bank investing a further £2.5 billion a year in start-ups and scale-ups. This is indeed welcome news and will potentially get the ball rolling again, although clearly a huge gap still remains.
Another way of stimulating domestic demand for UK equities is to use the tax system to create incentives for investors and founders to deploy capital and stay the course in the medium to long run. The Government raise funds from private investors very successfully in the gilt market. One reason for this is that gilts and other sterling corporate bonds are exempt from capital gains tax. This has been highly effective and leads UK investors to prefer sterling bonds over other countries and other currencies. Why do we not do the same with AIM stocks?
My suggestion would be to introduce this after a holding period of, say, five years. This would incentivise entrepreneurs and investors to take a medium view and look to scale up in the UK. If the cost of this is too great, then tapering should be considered where the rate of CGT falls in line with extended holding periods. This measure would echo the capital gains tax regime introduced in 1998 by the Labour Government, where, after a holding period of only two years, capital gains fell to 10%. Indeed, this was the incentive that, in part, led me to leave my well-paid corporate job to found my boutique in 2004.
The other measure that has been mentioned is stamp duty at 0.5% charged on buying UK shares. It costs 0.5% to buy British Telecom, but not for Deutsche Telekom. Does this make sense when we want to promote UK equity ownership? It is time to act decisively and boldly if we are to arrest our relative decline. The opportunity is substantial and we are indeed getting on the front foot, but I urge the Government to focus on countering risk aversion among regulators and pension funds and to create incentives for entrepreneurs to start businesses that can be scaled and become significant in the UK.
There are also very trenchant observations about the City and financial services. We have already heard some observations on that from my noble friend Lord Massey. Having worked on trying to get investment into technology start-ups in different ways, I think it was best summarised for me by someone who said, “If you are trying to raise money for your technology start-up in London, take your chief finance officer; if you are trying to raise the money in New York, take your chief technology officer”. The Americans wanted to understand the technology, and that is what excited them. For the Brits, it was all too often a matter of wanting to know about the cash flow forecasts three years out—which are invented figures when you are at the cutting edge of new technologies.
That is where the culture change is needed. It is a very significant challenge because early specialisation in our education system is one reason this happens. There are lots of people taking powerful, commercial investment decisions in the City of London who stopped studying sciences at the age of 16. They are less comfortable with these sorts of decisions than American investors, who have often, in the course of a far longer American higher education—we have the western world’s youngest graduates—studied sciences alongside an MBA or finance. That equips them for these decisions far better than us.
The fundamental challenge is how we can grow the start-ups to scale up and beyond. Here, of course, the VC community functions very differently in the US and the UK. The VC community in the US is a mechanism for putting more money into these companies so they grow to be very substantial. All too often, the VC community in the UK is putting in sufficient money to get a good sale price when they are sold to a far larger US company. As one American investor said to me, “The great advantage of the British system is that you grow the world’s best corporate veal”. They will turn it into beef, but we grow the veal. What can we do about that?
For me, the worst two missed opportunities were Solexa and DeepMind. Solexa was the world’s leading genetic sequencing technology company, which was sold to Illumina. DeepMind was a world leader in machine learning and was sold to Google. It is easy to stand back and criticise the investor. If you ask Demis Hassabis why he sold DeepMind to Google, however, he would say that to carry out the functions of DeepMind, he needed about $1 billion a year worth of compute capacity. There was no way that the UK—either in the public or in the private sector—was going to have the resources to deliver that amount of compute power. The report is absolutely right on the importance of investing in more powerful computing, and from the public spending Statement earlier this week, it sounds as though that is finally happening.
I have concluded from stories like Solexa and DeepMind that the minimal, most modest and reasonable objective for public policy should be to support these companies effectively for a sufficiently long time. That way, even if they are eventually sold to the Americans, their roots in the UK would be deep enough that it would be a rational decision from an American corporate owner not to shift all the activities to the west coast but to keep them functioning in the UK. It is at least good news that we still have a world-class centre of genetic sequencing in Cambridge and that DeepMind is key to the Knowledge Quarter in King’s Cross. That is the minimum we should aim for, and that itself requires public support for these companies going on for far longer than we have often been able to maintain.
We sometimes think that America has a better risk culture than us, but often, if you look behind the Jeffersonian rhetoric, you find a Hamiltonian state which, through federal agencies and state support, funds their technology start-ups for far longer and far closer to commercialisation than we purists in the UK who stop the public support too soon.
As chair of RIO, I should briefly comment on the report’s section on RIO. I have been chairing the Regulatory Innovation Office for three months and I report to Ministers, who are accountable to Parliament for our work. The aim of RIO is quite simply to tackle the obstacles that stand in the way of the successful development of new technologies and innovation. We have been set some priority areas which are not permanently fixed, and we can move on and add new priorities. At the moment, our four priority areas we are working on are: drones and other autonomous systems; space, particularly but not solely space launch; synthetic biology, or engineering biology as it is sometimes called; and, most revenant to this debate, AI. We are not trying to cover all of AI; we are particularly focusing on AI in medicine and healthcare.
We are trying to make progress, but often you find that, because these are general-purpose technologies, there is no single regulator involved. When you are dealing with a general-purpose technology, it is quite a sensible approach to say that a regulator will focus on a particular use, rather than having a single regulator for all the different ways in which a technology might be applied. Then, however, it is important that we try to bring the different regulators together; provide help for innovators and start-ups with a road map for how to find a way through; speed things up by regulatory clearance being simultaneous, not sequential, whenever possible; providing information about who does what; and perhaps have a lead regulator. There are lots of practical things we can do to help start-ups through this complicated regulatory environment.
While we are talking about complexity, perhaps I can finally, very briefly, comment on the concern about the complexity of the system, to which the noble Baroness, Lady Wheatcroft, has already referred. I fully realise there are so many different instruments and programmes involved. Behind it, there is a kind of logic, and I pay tribute to the Science Minister, the noble Lord, Lord Vallance, who is trying to bring this out and make a more coherent system out of it. There are research councils for upstream funding and small amounts of money for a whole range of research, including curiosity-driven research. Innovate UK is the next stage—I am sorry I am describing this sequentially, but it is a useful framework—providing grants for practical applied innovation closer to market. Then, you would hope that the British Business Bank can step in, and we need closer relationships between Innovate UK and the British Business Bank. After that, the National Wealth Fund comes into play. Those should be in a seamless route of support, from the earliest stage in the lab, right through to full-scale companies. I believe that the noble Lord, Lord Vallance, is actively trying to achieve that; I am sure his work will be informed by the excellent report from the committee.
This bears similarities to an argument we have had for so many weeks: a concern that the Government are being primed to share something of deep personal importance to their citizens, which in this case is paid for by the public purse and in the other case belongs to other private owners, with the corresponding economic concern that British people may see little gain or, indeed, may have to meet the cost of accessing the fruits of their own data. My correspondent worried out loud that the Government were going to be hoodwinked out of a true national resource.
A similar debate is going on around the UK’s CCTV footage, which is also of enormous interest to AI companies. This trove—among the largest in the world—has many applications, one of which is the ability to model simulations on the management of large groups of people. It is undoubtedly of interest to the UK police, but once created as a product owned by a private offshore company, what is to stop it being sold to regimes across the globe? How would conflicts play out—whether in Los Angeles, Ballymena, Gaza or Congo—if those in charge had infinite scenarios from which to kettle protesters, arrest them or worse? Is that what we want to do with our precious data? If so, are there terms of engagement or is it, like the copyright debate, going to have no regulation, no powers and no upholding of UK values and laws?
More broadly, CCTV footage is some of the most valuable in the world because it shows people’s movement at vast scale. That is what is needed to train the model. If we think about it as what YouTube data is for Google, it is almost incalculably valuable. I was fascinated by the contribution from the noble Lord, Lord Willetts, and I wonder whether our data, as well as our funding, might be used to keep companies in the UK for longer.
Last week the Prime Minister confirmed that the Government have accepted all 50 of Matt Clifford’s recommendations in the AI Opportunities Action Plan. From copyright law to the data library and security issues, and even sovereign AI, discussions—in private—appear to be dominated by overseas interests. I hear constant cries from UK AI companies that they struggle to be heard, and I recall that long before the consultation on copyright was published, when I asked for a meeting with the Minister responsible for data, the Lords Minister said that he had nothing to tell me yet.
My second point is that rather than the excruciating process of missteps and ping-pong—which has not served people, Parliament or government well—if the Government had heard from a broader group of voices, or if parliamentarians had seen the draft consultation, they could have raised questions at a time that might have been more useful to all. How we share data has profound implications for our economy, our security, our national identity and even our political independence. During the passage of the data Bill, many of these issues were raised by noble Lords across the House, but the Government refused to consider them—so now we have a data Bill that looks over its shoulder rather than to the future, and the oft-promised AI Bill has been pushed away by another year. I ask the Minister in true earnestness: does she understand why parliamentarians are frustrated? We want to discuss AI in health, AI in education, AI in security and so on. Can she find a way for those in government to be more open to accepting the expertise across both Houses?
We need our data policy to benefit UK people and businesses. We need transparency from government about the deals it is making, because they all shape our economy, democracy and national identity. All the Government’s moves to improve skills, infrastructure and energy prices so that the UK AI community can thrive are extremely welcome, but on the issue of data we must have a bigger vision than offshoring the value of our data to overseas.
Two Peers—two of my noble friends—gave up their time to introduce me and, although they are not here, I thank them now. My noble friend Lady Jenkin of Kennington has made a remarkable contribution to improving the representation of women in Parliament. I met her in 2005, when she founded the organisation Women2Win, which is dedicated to bringing more Conservative women into Parliament. I have given her some help with it over the years and I am very proud to have played a modest part in its great success.
I first met my noble friend Lord Jackson of Peterborough even earlier: back in 1990, when we were both contesting the London elections for different London councils. That was a tough year, but I am pleased to say that we both won our seats, and we have been exchanging notes and advice ever since, so it was a pleasure to be introduced by him in February.
That was not my campaigning debut, I have to admit. Back in 1981, I contested an election for the council of my sixth-form college. It was a relatively easy introduction, as there were six places on the council and only seven of us standing for election. However, I contrived to come seventh and was the only person to leave the count with nothing at the end of the process. The guy who won, in addition to having 100 votes more than any of us, also had a campaign slogan: “Vote for Rips and He’ll Kiss Your Lips”. He obviously understood the old saw that you campaign in poetry and govern in prose. He also understood that, sometimes, you make election promises without having any intention of keeping them at all.
I also thank my noble friend Lord Younger, my mentor. Any errors I make are my fault and not his; he has been very helpful for the last three months. I thank my Whip, my noble friend Lady Stedman-Scott, who has been hugely helpful; I think I have missed only one vote so far, so I hope I have been helpful back.
I also thank the Lib Dem Peer, the noble Lord, Lord McNally, for outing my origins in his speech earlier. I was born in Rochdale, Lancashire, in a suburb called Balderstone. It had been suggested by helpful people that I take the title Lord Balderstone, which, I suppose, would at least make me memorable. However, I have chosen to take Guisborough because that is the town where I grew up, went to school—and did not get to be a member of the sixth-form council. If it helps the noble Lord, Lord McNally, to feel better about it, Guisborough is not necessarily in Yorkshire. It has been, over the years, in Teesside and in county Cleveland, but I could see the boundary of Yorkshire from my window—a bit like Sarah Palin—and I hope that that is enough to qualify me.
My mother was a teacher. She inspired so many people when in that job and made a great difference. My father worked hard for local government; he worked in the environment department and in housing. For a while, he was the abattoir inspector. Fortunately, we did not have “Take Your Children to Work Day” at that time, although it might have been a character-building experience.
In 1987, I arrived in London to work. I worked for Royal Mail for 10 years, but it did not feel like enough for me. In fact, when I was in my car one day, I heard a politician on the radio speaking to a conference and people were applauding him; I believe it was my noble friend Lord Heseltine. I thought, “I could do that”, which was possibly a bit precocious at the age of 24. I volunteered for political service and served three terms at Waltham Forest Council, where I had the pleasure of working with the noble Baroness, Lady Brown of Silvertown, who I see here today. We were on opposite sides, and, occasionally, we had differences of opinion, but I had differences of opinion with quite a lot of people at that time.
One of the people I argued with was the council’s solicitor. He said to me one day, “I think you’d make a very good lawyer”. On the basis of this entirely unsupported statement with no evidence, I left my job and went back to full-time education. I was called to the Bar as a member of the Middle Temple in November 1997.
Something else happened in 1997 that was ground-breaking: the Blair Government arrived and created the Greater London Authority. Some of your Lordships may remember that the Government of London Act was the largest piece of legislation to go through here since the Government of India Act, and Members of this House all worked very hard on it. I spent four terms at the Greater London Authority, and over the years it has been a cornucopia of talent for Westminster to draw upon. I always see former members of the assembly here. I note the presence today of former members of our administration at City Hall: my noble friends Lord Ranger and Lord Moylan. Indeed, the noble Baroness, Lady Wheatcroft, made some contributions to our deliberations as well.
I am supposed to say something about the report before us today, so I point out that the growth of new technology is a key driver for the success of London and the wider UK. That is why it is vital that we respond to the challenges and opportunities in ways that maximise the benefits we can reap. Artificial intelligence, as the report correctly says, is a technology, not a sector. It has the capacity to affect every aspect of our lives. It has real potential to revolutionise the delivery of public services.
However, regulation needs to recognise the risks and the opportunities too. We love, as lawmakers, to design detail into regulation, but, after speaking to people such as the App Association and smaller providers of IT services, I argue that we should try to avoid regulating for products and regulate for outcomes instead. I recall from my time at City Hall a debate after Uber arrived in London. We found ourselves in the High Court trying to argue that a taxi meter and a mobile phone were the same thing, because that was the way the legislation was phrased. We should try not to do that, because the way things are moving now, we can get outflanked very quickly by the movement of technology. That is a problem we face throughout government in so many different ways.
It has been a wonderful journey to get off the train at King’s Cross in 1987 and, 40 years later, find myself standing here delivering this speech. Yet there is nothing unusual in that journey. I promise the House that every day—today, yesterday, tomorrow—people will be getting off the trains at London’s stations and off the planes at Heathrow, coming to our city with small suitcases and big ideas, and we want to continue to encourage that. They come here because London is a city of opportunities; it is a city of dreams. Technology is going to be at the core of the city’s success in future. We have a responsibility to promote technology and to build the economy for London, because a prosperous London will support a prosperous Britain. I commend the committee’s report to the House.