My Lords, this Bill represents a major upgrade to the Government’s powers to screen certain acquisitions on national security grounds. Through the new investment security unit within my department, the new regime provided for by the Bill will act as a vital new tool in the Government’s armoury to protect national security in a rapidly changing world. The UK’s current powers to intervene when mergers or acquisitions pose national security threats date from the Enterprise Act 2002. Apart from some limited exceptions, businesses must have a UK turnover of £70 million or meet a share-of-supply test for government intervention.
The world is of course a very different place now compared to when the Enterprise Act received Royal Assent in November 2002. When it comes to investment, we are seeing novel means to undermine the UK’s national security that go beyond traditional mergers and acquisitions and the reach of our current powers. The case for action in this area could therefore not be clearer.
The Government have carefully considered these reforms over time. We first published a Green Paper in October 2017, followed by a White Paper in July 2018. We have further considered what powers are necessary to reflect the modern economic and investment landscape in the UK. The Bill before us today is the culmination of all that work.
However, none of the provisions in the Bill change the Government’s position when it comes to foreign investment into the UK. Simply put, the UK economy thrives as a result of foreign direct investment. Since 2010-11 over 600,000 new jobs have been created thanks to more than 16,000 foreign direct investment projects. Inward investment stimulates economic growth in every part of our United Kingdom. In 2019-20 over 39,000 jobs were created in England thanks to FDI projects, with over 26,000 over those jobs coming outside London.
We have designed the regime with business in mind. For the first time, timelines for assessments will be set out in law, not decided by the Government on a case-by-case basis. This will give businesses certainty about the length of the assessments that they are subject to, and the Government will be able to revisit decisions only in exceptional circumstances.
The Bill brings our approach into line with many of our closest allies, including the United States, Canada, Australia, France and Germany, but it does not represent any change in our appetite for investment coming into this country from overseas. I will now go through some of its main provisions. Chapter 1 of Part 1 of the Bill provides for a “call-in” power that the Secretary of State will be able to exercise if he reasonably suspects that a trigger event has taken or may take place that could give rise to a risk to national security. Any decision to use that call-in power could follow the receipt of a notification from parties, or could be a proactive choice on the part of the Secretary of State if an unnotified acquisition meets the relevant criteria.
I thank the Minister for introducing the Bill. He will be pleased to know that, as he will have gathered from its passage through the Commons, the Opposition are fully supportive —we might even say “at last”. We will, however, be wanting to make a few changes to ensure that it works even better than the Government envisage.
Today’s debate, not unusually for your Lordships’ House, will bring together an experienced group of speakers with expertise in industry, defence and security. I particularly look forward to the maiden speech of my noble friend Lord Woodley, who will speak from his own knowledge of the field. Some of his former trade union members, whom he represented, worked in defence sectors and thus played their role in the defence of the realm.
We hardly need to repeat that national security is the number one priority for any Government. We welcome the changes the Bill makes to ensure that investment, whether in companies, land, assets or know-how, never jeopardises our security. Our only surprise, as my honourable friend Chi Onwurah pointed out in the Commons, was that the impact assessment
“regrets that national security is an area of market failure requiring that the Government do something about it.”
As she said about that quite astonishing claim:
“National security is not a private concern first and a Government afterthought second. National security is the first reason for Government. It is not undersupplied by the market; it is outside the market altogether.” —[Official Report, Commons, 20/1/21; col. 998]
Putting that to one side, we welcome the new and updated regime for intervening in business transactions that might raise national security concerns. We applaud both the requirement for automatic pre-acquisition referrals in some areas, as well as a voluntary notification system and the ability to call in acquisitions of sensitive entities and assets where it is thought they need a national security assessment.
I too thank the Minister for his comprehensive introduction. I declare an interest as a member of the advisory board of the corporate finance faculty of the ICAEW, whose members comprise business owners, advisers to business and investors.
I believe that there will be little argument during the Bill’s passage about the principle involved of protecting national security. There will, however, be considerable debate about its scope and practical operation. Foreign investment is crucial to UK businesses and the economy. On these Benches we accept that it is important to put in place legislation to protect against national security risks posed by such investment. But this is a major change from previous provisions under the Enterprise Act, and must be done in a way that is workable and does not deter productive investment.
The Government have argued that it is necessary to give the Secretary of State greater powers to scrutinise investment in the UK, considering the technological, economic and geopolitical changes that have taken place over the past 20 years. However, the scope of the Bill and of the Secretary of State’s powers risk being far too broad, while lacking any industrial strategy to frame them or any clear geopolitical focus. Indeed, there is no definition of what constitutes national security.
How too will the Bill fit within the integrated review? Ministers have made it clear that the Bill is about the protection of national security, not national interest—but where does national security end and economic or commercial security, or critical infrastructure, begin? Will there be overlap between regulators, such as between the ISU and the CMA?
There is also the retrospectivity, which goes back to November and could already be having a chilling effect on inward investment and causing uncertainty in the investment community, not least in pension funds. For such funds the investment environment is crucial, and as a university chair I am only too well aware of the concerns expressed by USS. As the largest private pension fund in the country, its concerns should be taken very seriously. Arguably even more importantly, as the Russell Group has pointed out, the Bill could have a potentially damaging impact on university/business collaborations.
I remind the House of my interests as recorded in the register.
I am instinctively against all forms of protectionism, including those that apply to inward investment. Our current minimalist framework, set out in the Enterprise Act 2002, with a few recent tweaks, has served us well. As my noble friend the Minister has reminded us, the UK has benefited considerably from inward investment: UK companies with foreign direct investment links accounted for over 30% of UK employment and 40% of GVA, according to the latest detailed analysis by the ONS. Our investment partners, led by the US, are very largely from similar open democracies.
However, I agree with the noble Baroness, Lady Hayter, that the security of our nation is the top priority for any Government, and that is why this Bill has my support. It is our duty as Parliament to ensure that the Government have the powers they need to keep us secure.
Most investments are undertaken with a sound commercial logic, but we know that not all investment is driven this way. In particular, it is right to question the investment motives of organisations within states that do not share our values—or, to put it more directly, assets that are important for our security should not fall under the influence of China or Russia—and a few other states, although they do not on the whole have the resources to make significant acquisitions. I support the Government having powers to achieve that.
At the same time, we must ensure that the Government’s powers are proportionate to the threats and that they do not have unintended consequences. This is especially important in the context of the major economic renewal that is necessary as we deal with the pain inflicted on our economy by the Government’s lockdown policies.
I have some reservations about the Bill, which I look forward to exploring further in Committee. The first—which has been mentioned—is about whether the wording of the Bill gives the Government a secure armoury. It is firmly framed in terms of “national security”, but that is not defined in it, and there are no powers in it to do so. I believe that this is too important to be left to the courts. Instead, the Secretary of State will make a Statement about how he will use the power to call in transactions, including the sectors to be targeted, but Parliament’s involvement is only via the negative procedure. That feels weak.
2:48 pm
Viscount Waverley (CB)
My Lords, business investment will be central to shaping our competitive and dynamic economy. I am attracted to this Bill because it is a further building block in defining the country we are becoming in a new-look UK. After passing through the parliamentary labyrinth, the Bill should ensure that the UK remains one of the world’s top destinations for foreign investment, which is achieved by maximising its attractiveness for investment, while safeguarding our national security. The Government are setting out our stall with clear messaging of being a force for good, and they are setting an example to the world that we are not just open for business but mindful of standards and accountability.
Care should be taken, however, that safeguards do not unintendedly hamper UK competitiveness or limit investment that does not pose a national security risk. I concur with what the noble Lord, Lord Clement-Jones, said. The mandatory reporting regime for transactions should be narrow and based on evidence of real risk, and should not result in unintended consequences.
The Government’s call-in power under the Bill will be proportionate, sufficient to address any residual concerns that could arise in relation to transactions involving active or passive infrastructure. There are challenges, however, regarding the call-in power, which provides for the Secretary of State to call in transactions triggered by a person gaining control of a qualifying entity or qualifying asset that is considered to give rise to a national security risk. A significant extraterritorial impact also arises from the drafting of Clause 7(6), as these call-in powers could be construed to apply to every export deal from the UK to overseas. Understandably, UK exporters and overseas customers will want to mitigate the risk of call-in by the UK Government, so removing ambiguity from the scope of the call-in power is important—all the more reason to ensure that extraterritorial reach does not become an inadvertent consequence of any ambiguity in the drafting and interpretation.
As things stand, the likelihood is that UK exporters, particularly in sensitive sectors such as defence or military dual-use, will err on the side of caution and seek additional clearances from BEIS for such transactions in addition to making standard UK export licence applications. This interpretation of the Bill could lead, in practice, to a significant annual increase in the volume of voluntary notifications as the means of mitigating the risk of, and uncertainty over, future call-in on national security grounds. I venture, therefore, the need for a targeted amendment to this primary legislation, and for statutory guidance from BEIS, to remove uncertainty.
My Lords, I too welcome the Bill and congratulate Her Majesty’s Government on bringing it forward.
At the beginning of each day this House sits, our prayers recognise the delicate balancing act we have to perform. On the one hand, our precious democracy depends on the public wealth, peace and tranquillity of the realm. It is this social capital, this trust, this commitment to the common good, which sets people free to go about their business and allows for innovation, trade and wealth creation. This is fundamental to all we do. On the other hand, our prayers acknowledge that sometimes malign forces at work will look for opportunities to take advantage of us, and we cannot ignore, as the prayers put it, the enemies of the state, which we pray will be vanquished and overcome.
This balancing act has to be maintained, as we have left the European Union and are seeking to establish the role we want to play in the world—the global village. We know that there is strength in collaboration and in sharing information and technology for the sake of the whole world. We want to maximise this, as has been mentioned, in our universities in particular, which are one of our huge success stories. How can we set these groups free to capitalise on all the opportunities ahead? The development of the Covid-19 vaccines is a classic example of the benefits we get when we work collaboratively across the world. Nevertheless, we have to make sure emerging technologies and science are harnessed for the common good and not exploited for the military, economic or political ends of those seeking to undermine what is, nowadays, a fragile democracy, as we see threats in various parts of the globe.
In the past few days, Members of this House have been struggling with questions of how we use our legislative clout and moral leadership as we stand up and defend human rights. I take the Minister’s assurance that the Bill will be tightly defined. Nevertheless, we are going to be operating in a world where horrific stories of the persecution of the Uighurs, the Rohingyas and Christian minorities in places such as China and Myanmar immediately come to mind, which is why I hope, as we work on the details of the Bill, we will come back to the wider context in which we are set.
My Lords, I thank the Minister for his introduction and remind the House of my interests, as registered. Thus far, the Bill has enjoyed qualified support from all sides of both Houses during its passage through Parliament. However, I confess some concerns about its scope. For instance, I share the concern expressed by the noble Baroness, Lady Noakes, that essential elements of our critical national infrastructure appear to be inexplicably missing from the coverage of the Bill.
However, today I want to focus on one general point that I believe may prove potentially dangerous for our economic well-being and, ultimately, our national security. I refer to the Secretary of State’s assertion that the Bill strikes the right balance between encouraging inward investment and protecting national security. That remains an assertion since, inevitably, at present it remains untested and unproven. It can and will be affirmed only by successful implementation.
Colleagues from all Benches have offered several amendments intended to ensure a successful outcome of that balance: all thus far have been defeated. I say to the Government that in due course they may find that their victories on this are proved pyrrhic, so I hope that they will be more open-minded to some of these constructive amendments in the course of our following debates. There are some areas where we can agree. We can surely agree that in a networked world it has become clear that a qualifying entity or asset of concern can no longer be defined just by the size of the venture, its market share or its direct involvement in the defence sector. It is right also that the threshold for concern, the “trigger event”, is changed and that consideration extends for a five-year window.
Yet the threshold for change is no easy matter. Colleagues on all Benches are right to raise questions about basic definitions—not least for “national security” —which made filling the scrutiny gap helpful rather than a hindrance to the intended legislative outcomes. We should proceed with care. Now is not the time for the United Kingdom to hamper productivity gains.
I am afraid we cannot hear the noble Lord. Can he get closer to his microphone? We may have to come back to him.
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The call-in power must be exercised within six months of the Secretary of State becoming aware of an acquisition, and within five years if he was not made aware of it. However, the five-year limit does not apply to acquisitions subject to mandatory notification. The scope of the call-in power applies to trigger events taking place from 12 November 2020—that is, the day following the Bill’s First Reading in the other place. This is to ensure that no acquisition can be accelerated to avoid scrutiny while the Bill is making its way through Parliament.
Before the call-in power can be used, the Secretary of State must lay a Statement before Parliament setting out how he expects to exercise the power. The Secretary of State published a draft of such a Statement when the Bill was introduced in the other place. I must be clear to the House that the criteria for use of the call-in power are deliberately tightly drawn on the grounds of national security, and the Government have no intention to widen this to introduce any further “public interest” criteria.
Chapter 2 of Part 1 sets out the trigger events that are subject to the scope of the call-in power. There are broadly two types of trigger events: first, the acquisition of control over entities such as companies, limited liability partnerships and trusts; and, secondly, the acquisition of control over assets, including land and intellectual property.
In respect of entities, the Bill sets out situations where the acquisition of certain levels of shares or votes constitute trigger events. I will not set out the individual thresholds to the House now, but broadly speaking they correspond to the ability of parties to pass or block types of company resolution. The Bill also retains the concept of “material influence” over an entity, as used in the Enterprise Act 2002, as a trigger event for the purposes of the Bill.
When it comes to assets, trigger events occur when parties are able to use a qualifying asset or to direct or control how it is used. Chapter 2 also sets out instances where notifying the Secretary of State of some acquisitions in certain sectors is mandatory. Again, I will not explore each one in detail, but the Government have been careful to ensure that only those scenarios where parties can reasonably self-assess whether their acquisition qualifies are captured.
Parties involved in acquisitions that do not meet the criteria for mandatory notification, but which believe that they could pose a national security risk, will be encouraged to submit a voluntary notification to the Government. The Secretary of State will need to take a decision on whether to call in an acquisition for a full national security assessment within 30 working days of accepting a notification, or instead let it proceed. Once he has taken this decision, he cannot revisit it unless false or misleading information has been provided.
To ensure that mandatory notification continues to work as envisaged in the future, the Government propose taking a power to be able to update the situations where notification is mandatory. The power would also allow the Government to exempt certain types of investor from mandatory notification requirements.
In terms of the sectors where some acquisitions will be subject to mandatory notification, the former Secretary of State published a consultation alongside the Bill introduction on the statutory definitions of the proposed 17 sectors. That consultation closed on 6 January of this year. We have had a good number of responses and I thank all of those who took the time to provide valuable insights. We are now working hard to respond to that consultation and to bring forward draft regulations for consideration as the Bill goes through this House.
I would like to stay with mandatory notification for a minute or two longer. Chapters 3 and 4 of Part 1 set out the mechanics of mandatory notification and the consequences of proceeding with a notifiable acquisition without clearance from the Secretary of State. Put simply, if parties proceed with such an acquisition, it has no effect in law. The Government recognise that this approach represents a harsh deterrent to parties that do not comply, willingly or otherwise. I will make just two points on this. First, it is vital for our national security that parties are strongly disincentivised from trying to avoid scrutiny by this regime. This is even more pressing in the sectors of the economy where the notification of certain acquisitions is mandatory. Secondly, affected parties will have recourse to apply to the Secretary of State for retrospective validation of such acquisitions, as set out in Clause 16.
Clause 15 also obliges the Secretary of State to either call in a non-notified mandatory acquisition or retrospectively validate it once he becomes aware of it, if no national security risks arise. Clause 17 obliges him to retrospectively validate a non-notified acquisition if it is called in and subsequently cleared to proceed. The Secretary of State cannot, in other words, simply allow an acquisition to remain void once he becomes aware of it: he must take action, either to grant clearance and retrospectively validate it, or impose remedies. It has to be this way around: that is to say that non-notified acquisitions should be able to be retrospectively validated, rather than retrospectively invalidated.
The remainder of Part 1 provides for a voluntary notification mechanism whereby parties can formally submit a notification to Government. As with mandatory notification, once the Secretary of State has taken a decision to let an acquisition proceed, he cannot revisit that decision unless false or misleading information has been provided. The Government are committed to giving parties clarity when it comes to this regime and voluntary notification is a key part of that. The Bill also provides for information-gathering powers for the Secretary of State to be able to come to fully informed decisions. There are also safeguards on the use and disclosure of such information.
I turn to Part 2, which provides for the assessment process and any remedies following a call-in. The Bill provides for an initial assessment period of 30 working days once a call-in notice has been given, with an additional period of 45 working days. A further voluntary period is possible if certain criteria are met. I believe this represents a significant improvement on the current process under the Enterprise Act 2002, whereby the Secretary of State sets the assessment timetable on a case-by-case basis. For the first time, timelines for assessment will be set out in statute so that investors can build them into their own plans.
In the course of the assessment period, the Secretary of State may wish to impose interim orders to mitigate any national security risks that could arise as he undertakes this investigation. Such orders could be imposed, for example, to stop or prevent parties doing certain things that they would normally do prior to completing an acquisition, such as exchanging sensitive information. At the end of the assessment period, the Secretary of State must either give a final notification to allow the acquisition to proceed, or a final order if he believes that national security risks could arise as a result of the acquisition. All orders must be kept under review and parties are free to request that they are varied or revoked.
The Secretary of State will be supported in making decisions by the investment security unit which, as I said earlier, is being set up within my department. This new unit will be fully resourced to manage the administrative process for screening notifications and undertaking national security assessments. It will draw on expertise from across government and from the security services. If noble Lords permit, I will go through the rest of the Bill a bit more swiftly as I know there are many who wish to speak in this important debate.
Part 3 provides for a range of offences, along with associated criminal and civil sanctions, although I expect criminal cases in relation to offences committed under the regime to be exceptionally rare. Parties will, of course, have recourse to judicial review in relation to certain decisions made under the regime. Parts 4 and 5 of the Bill contain a number of miscellaneous provisions. Clauses 54 to 56 provide for smooth and timely information sharing when relevant between the Government and overseas public authorities, HMRC and the CMA. These are important clauses to ensure that time is not lost to administrative red tape and that information is appropriately handled.
Clause 61 provides for an annual report to Parliament, which will provide details of the number of notifications received, the number of call-in notices given and the sectors of the economy where they were served, among others. I will return finally to the fundamentals of the Bill before us. It is imperative for any Government to have the tools they need to protect national security in what is a rapidly changing world. This Bill will keep the British people safe. I beg to move.
I do, however, wonder whether sufficient thought has been given not just to tangible or IP assets but to the brain power which is vital to dealing with the security threats of today. It is not simply a matter of retaining domestic control over key assets, but also of ensuring that we grow and nurture the skill sets needed for this rapidly changing technology, where we need ability and domestic capability here in the UK. Could the Minister reflect on this when he comes to reply? Could he also comment on whether crucial national infrastructure is likely to be covered in the automatic notification part?
The Bill as it stands should be capable, subject to some issues over capacity which my noble friend Lord Grantchester will address when he winds, of protecting vital security interests. Our questions are twofold. First, they are about the security capability and cross-departmental working within BEIS. Secondly, they are about parliamentary scrutiny, which appears woefully thin.
Much of the business department’s work is to foster and promote inward investment, for the best of reasons. The UK has twice the direct foreign investment of France or Germany. That is good for our economy but potentially risky for security. Because of that dual responsibility, it is surely challenging to give the business department almost the opposite role to that of a cheerleader for investment: to check and sometimes prevent such investment. Indeed, it almost looks like a potential case of moral hazard. Can the Minister confirm that, at least, there will be strict Chinese walls within the department?
Perhaps even more fundamentally, it is hard to see how the Minister’s department can be close enough to departments dealing with land use, defence, supply chains, higher education, foreign relations, transport, science and medicine to be fully aware of what is happening across those areas. Traditionally it has been the Cabinet Office that handles such significant cross-departmental or multiagency working.
Having looked carefully at the draft Statement setting out the three types of risk to be considered by the Business Secretary—the target risk, a trigger event, and the acquirer risk, according to the Minister—it is clear that while judgments as to degree of ownership or control of a business fall within his department’s expertise, some of the other security judgments listed, such as the hostility of a particular state or knowledge of our security services, are not among those traditionally made by business specialists. The backgrounds and expertise of the advising personnel will need to be drawn from across other departments, and many of them will require high-grade security clearance. The decisions taken will be serious and could impact on our international and diplomatic relations, including with close allies.
I recognise that this remit has been with the business department to date, but the increased remit of the Bill—the sheer number of cases and their increased sensitivity—makes the future quite different from what was correct in 2002. Is the Minister therefore confident that the passing on of intelligence and advice from around Whitehall will work smoothly in the new set-up?
Allied to the nature of this work is my second question, which is about whether the Bill allows for adequate parliamentary scrutiny of the decisions which will fall to the business department. A strong case was made in the Commons for the Intelligence and Security Committee to be given an explicit role in scrutinising the working of the Bill; indeed, its chair spelled out very clearly how it was well within the committee’s terms of reference to handle it.
The response of the Minister in the Commons was rather disappointing, to say the least. He said that the Intelligence and Security Committee could ask for extra information or invite the Minister to attend if it wanted. However, as a Nobel laureate commented
“they do not know what they do not know.”
Indeed: the committee will not know what it has not been told until and unless it sees a report. The Intelligence and Security Committee, with its security clearance, would be able to do a proper job on behalf of Parliament in seeing how these powers are—or indeed are not—being used.
We need therefore to amend the Bill, along the lines suggested in the Commons, to ensure that reports are made to the Intelligence and Security Committee. Perhaps the Minister could reflect on whether this would be best achieved via a government amendment.
We welcome the Bill, which, as I said, is in some ways sorely overdue. We will scrutinise it seriously and call for changes to be made, particularly in relation to parliamentary scrutiny and ensuring that the new unit has the skill set, working methods and resources to ensure that its decisions are timely, cross-departmental and forward-looking, so that it safeguards our future security. I look forward to working with the Minister as we take the Bill through the House.
Many of my noble friends will focus on these issues in today’s debate. The key elements needed to achieve the balance required of the new regime will be achieved by pre-empting and mitigating the inevitable risks for the market by setting out a clearly defined scope. The Government have engaged in a long—some would say leisurely—process of Green Paper and White Paper consultation leading up to this Bill over the past three and a half years, but there is still a great deal of uncertainty around how it will work in practice.
The current sectors, as set out in the consultation, are incredibly broad. For instance, in respect of AI, the development of which I am reasonably familiar with, the definition is so wide that it captures any company developing any kind of application involving machine learning or deep neural networks.
We look forward to seeing the outcome of the promised consultation during the passage of the Bill, but we need to considerably narrow the width of the sectors captured. This in itself would not resolve the fact that many, if not most, technologies have both civilian and security uses, which potentially opens every deal to challenge. Taking dual-use biotechnologies as an example, how do we manage national security concerns without stifling innovation?
We also need to question the low thresholds adopted for market share and turnover, and the generous time given to the Secretary of State to intervene—especially given the Secretary of State’s quasi-judicial powers.
We need to reduce uncertainty to a minimum. Even a mandatory notification system for transactions means instituting an open pre-consultation process with market participants. In particular, it is essential, as the ICAEW has emphasised throughout, that the investment security unit publishes meaningful market guidance notes akin to the practice notes published alongside, but not as part of, the takeover code.
The Bill includes the requirement for the ISU to publish an annual report, but formal guidance will be much more useful, and, as they say, it is an important way of dealing with asymmetry of information among the investment and advisory community. A particularly good example will be in respect of trigger events that involve securing influence or control over qualifying intangible assets, such as know-how and intellectual property. It is possible to gain access to intellectual property through means other than ownership, so the question is: how might those intangible assets be applied in ways that could prejudice our national security in some way? The new unit may initially assess that on a case-by-case basis, but it will need to quickly come to establish a basis of precedent for its decisions. Along with the corporate finance community, I believe that the requirement for market guidance notes should be incorporated in the Bill.
All this means properly resourcing the ISU, which will need to determine which of some 1,000 to 1,800 transactions are to be analysed: 70 to 95, it seems, although many think this an underestimate. This compares to just 12 acquisitions reviewed under the Enterprise Act’s national security provisions since 2002. Otherwise, this will result in a huge number of mandatory notifications, which will overwhelm the new unit. The bottom line is that we need to make sure that a proportionate and last-resort approach is applied to government scrutiny of, and intervention in, these transactions.
In addition, given the low turnover thresholds involved—I have noted the Commons debate—many of us are concerned about the impact on SMEs. The impact assessment suggests that “80% of transactions” in the scope of mandatory notification under the Bill would involve SMEs. However, the assessment failed to consider the costs faced by the acquired companies or the impact on funding for start-ups.
However much we try to circumscribe the Bill, it will not always be possible to reduce uncertainty and risk. It will depend on the culture of the ISU to a great extent as well, so, when considering the Bill, we should heed the warning of John Fingleton, former chief executive of the Office of Fair Trading, in his recent article in the Financial Times. We must not let this Bill become an investment killer; it needs to be very clearly targeted and proportionate. I look forward to the debate and the Minister’s reply.
I also have a concern that the Government’s current view of “national security” is insufficiently comprehensive. The Government are consulting on 17 sectors on which they plan to focus the new powers. While that sounds like a lot, the list does not coincide with the separate list of critical national infrastructure, drawn up by the Government’s Centre for the Protection of National Infrastructure. In particular, I cite water and financial services: two quick ways to bring the country grinding to a halt are a lack of clean water supplies and the failure of payment systems. Why would the Government not want to be notified about potential takeovers of major players in these industry sectors as well?
I am concerned about the Bill’s impact on investment in both large and small companies—this has already been mentioned. I fear that the necessary power to block transactions that are undesirable on national security grounds could have a traumatic impact on investment transactions more broadly, and indeed I fear that the UK may lose its reputation as a good place to invest.
It will obviously be necessary for all the mandatory notifications to be handled efficiently, but the volumes will be critical to this. The impact statement has some very wide ranges in terms of the number of transactions that need to be handled, and the Government have very little idea about the volumes of asset rather than share-based transactions, which will come within the ambit of the Bill.
I am absolutely sure that, if there is any possibility of a transaction being within the scope of the legislation, lawyers will recommend notification; the penalties involved make this a no-brainer. If you add to that precautionary voluntary notifications, There could be very large volumes of notifications and they will not be confined to the early days, as people get familiar with the topic, because the risks to transactions will remain throughout the life of this legislation. We will need to explore in Committee how best to ensure that the system is not overwhelmed, with resultant harm to investment activity generally.
The core purpose of this Bill is good, and that is why I support it, but it will need careful scrutiny in Committee to ensure that the balance is right between protecting the UK’s security and growing the economy.
If I might express this differently: our proposed amendment to the primary legislation could be to the effect that where qualifying assets are authorised for export through the Export Control Act, a transaction or acquisition is automatically exempt from call-in and/or the voluntary notification regime.
Moving on to intellectual property issues, IP licences and assignments are a fundamental offering in business transactions and are inextricably linked with technology offerings both within and outside the UK. The UK export control regime already serves as a robust former national security screening regime for IP assets. Adding a parallel or second national security review under this NSI regime seems unnecessary. Would the Minister be minded to clarify the interplay between these two regimes? If this is the intention behind the Bill, the department will need to publish clear guidance to explain this extraterritorial reach and the interplay. This could bring technology platforms, sales, in-service support contracts with existing foreign customers and in-country technology transfers of capability—whether under Government-to-Government arrangements or in direct sales to a foreign Government or government-controlled entity—into the scope for call-in by the Secretary of State. Such proposals and resulting contracts will be subject to, and conditional on, stringent UK export control licensing processes in addition to any applicable pre-clearances through the MoD Form 680 process, which requires companies to obtain approval from the MoD to release information or equipment classified “official sensitive” and above to foreign entities.
Clauses 7 and 9 will also catch IP offerings that form part of offset transactions related to prime contracts with overseas Governments. This bring licences, assignments and transfers of IP into scope. Clause 7 defines qualifying assets as including
“ideas, information or techniques which have industrial, commercial or other economic value”.
and “designs”. Clause 7(6) further provides that IP assets are in scope only if they are used
“in connection with … activities carried on in the United Kingdom, or … the supply of goods or services to persons in the United Kingdom.”
Clause 9 states that
“a person gains control of a qualifying asset if the person acquires a right or interest in, or in relation to, the asset and as a result the person is able … to use the asset, or use it to a greater extent than prior to the acquisition, or … to direct or control how the asset is used, or direct or control how it is used to a greater extent than prior to the acquisition.”
Would the Minister comment on these aspects in his response or, at least, commit to a considered response in writing?
In conclusion, the Bill is a good starter for 10.
Some nations are not slow to use their economic power to further their own aims. Think, for example, of the Chinese increase in tariffs on Australian wines last November. We are aware that previous Governments supported Chinese foreign investment, potentially leaving critical national infrastructure under a regime that seems to be diverging further and further from our values and everything I hope we will stand for in the future.
As the Bill works its way through its various stages in this House, I know a number of us will be pushing for clarification in several areas. As the noble Lord, Lord Clement-Jones, noted, there is a need for more careful definition of what we mean by “national security” and which areas are simply “national interest”. We need to do that so that we do not hinder people. There is a danger that the notification process, as others have put far more eloquently than I can, could introduce more red tape and delay at a time when we need our entrepreneurs, especially SMEs, to be agile, nimble and exploiting opportunities more widely.
Despite the promise of an annual report, we need to look at the extent to which Parliament will be able to scrutinise what is going on. We know that in periods of transition, as we have seen in our ports and at customs, we can sometimes be overwhelmed suddenly and get backlogs that harm us. There are vital issues here about making sure there are adequate resources to help this scrutiny go forward.
I will close by saying that I hope that the Bill ushers in a larger conversation about strategic industries within the UK. Perhaps one of the enduring lessons of the pandemic is that when a global crisis comes along, solidarity can quickly go out of the window, as each nation looks after their own. Free trade is important and can bring prosperity but it can leave poorer nations vulnerable. It is important that, should another large crisis occur in the future, we are not only resilient and able to avoid shocks; we also need to think about wider areas such as food security, medicines and access to resources in order to safeguard strategic industries and ensure that we are prepared for what feels like an increasingly vulnerable world that we are living in. I look forward to working on the Bill with others in this House.
Vaccine nationalism has given us a taste of how counterproductive any isolationism can be. Likewise, many of our most severe national security challenges are global. If “build back better” and “levelling up” are to support a “global Britain”—allslogans at the forefront of the Government’s mind—then imposing disproportionate and unaffordable costs on the wellsprings of productivity will be most unwise. Large organisations may absorb these transaction costs, but networks of small and medium-sized enterprises, not to mention start-ups trying to scale up and, above all, the universities from which these arise, will struggle to absorb such transaction costs.
It is not so much the land or tangible assets that are the problem. It is that amorphous third category of qualifying asset—ideas. Those will be the hard cases. If we are wise, we should track the implications of the Bill back to our universities. The evidence over decades is clear. It is not financiers, nor the entrepreneurial state per se that catalyses innovation-driven productivity —it is our universities. You have only to look at the genealogy of our biggest unicorns to see how much they owe to universities, both directly and with ideas created from research, and in enabling start-ups to scale up with highly educated workers. Ultimately, our security rests on a productive economy. Everything flows from that, and that has to be innovation driven.
The Government’s consultation listed 17 sectors, 15 of which covered almost all growth areas in which SMEs, start-ups and universities catalyse the uptake of innovation. Asking them to master the tracking of dual-use, beneficial ownership or agents of influence seeking to take control is a tall order indeed. If our future productivity is not to experience a severe chill, the sector-specific guidance offered by BEIS’s new investment security unit will have to come with much support from competent staff and adequate resourcing to support SMEs and other organisations or networks unable to fully or adequately provide them themselves. It would be wise too, as several noble Lords have mentioned, for the unit to be properly scrutinised.
If these things are not done, the potential for harm may be hard to overestimate, making a nonsense of the assertion that a proper balance between national security and productivity has been struck. In short, we cannot ignore the evolving security risks and the Government are right to address them in this Bill, but we need to be able to handle them in a pragmatic and proportionate way. Otherwise, in the long run, that would be a real threat to our national security.