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Public Bill Committees

Debated on Tuesday 24 November 2020

National Security and Investment Bill (First sitting)

The Committee consisted of the following Members:

Chairs: Sir Graham Brady, † Derek Twigg

† Aiken, Nickie (Cities of London and Westminster) (Con)

† Baynes, Simon (Clwyd South) (Con)

† Bowie, Andrew (West Aberdeenshire and Kincardine) (Con)

Fletcher, Katherine (South Ribble) (Con)

Flynn, Stephen (Aberdeen South) (SNP)

† Garnier, Mark (Wyre Forest) (Con)

† Gideon, Jo (Stoke-on-Trent Central) (Con)

† Grant, Peter (Glenrothes) (SNP)

† Griffith, Andrew (Arundel and South Downs) (Con)

† Kinnock, Stephen (Aberavon) (Lab)

† Onwurah, Chi (Newcastle upon Tyne Central) (Lab)

† Tarry, Sam (Ilford South) (Lab)

† Tomlinson, Michael (Lord Commissioner of Her Majesty's Treasury)

† Western, Matt (Warwick and Leamington) (Lab)

Whitehead, Dr Alan (Southampton, Test) (Lab)

† Wild, James (North West Norfolk) (Con)

† Zahawi, Nadhim (Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy)

Rob Page, Yohanna Sallberg, Committee Clerks

† attended the Committee


Charles Parton OBE, Senior Associate Fellow, Royal United Services Institute

Sir Richard Dearlove KCMG OBE

Public Bill Committee

Tuesday 24 November 2020


[Derek Twigg in the Chair]

National Security and Investment Bill

Before we begin, I have a few preliminary points to make. Please switch electronic devices to silent. Tea and coffee are not allowed during sittings. Members can sit in any seat marked with a “please sit here” sign. That includes the side tables and the Public Gallery, although Hansard colleagues have priority on the side tables. Members sitting in the Public Gallery should stand by the microphone to my right.

We will first consider the programme motion on the amendment paper. We will then consider a motion to enable the reporting of written evidence for publication, and then a motion to allow us to deliberate in private on our questions, before the oral evidence sessions. In view of the limited time available, I hope we can take these matters without too much debate. I call the Minister to move the programme motion agreed to yesterday by the Programming Sub-Committee.

I beg to move,


(1) the Committee shall (in addition to its first meeting at 9.25am on Tuesday 24 November) meet—

(a) at 2.00 pm on Tuesday 24 November;

(b) at 11.30 am and 2.00 pm on Thursday 26 November;

(c) at 9.25 am and 2.00 pm on Tuesday 1 December;

(d) at 11.30 am and 2.00 pm on Thursday 3 December;

(e) at 11.30 am and 2.00 pm on Thursday 8 December;

(f) at 11.30 am and 2.00 pm on Thursday 10 December;

(g) at 9.25 am on Tuesday 15 December;

(2) the Committee shall hear oral evidence in accordance with the following Table:





Tuesday 24 November

Until no later than 10.30 am

The Royal United Services Institute

Tuesday 24 November

Until no later than 11.25 am

Sir Richard Dearlove KCMG OBE

Tuesday 24 November

Until no later than 2.45 pm

The Centre for International Studies, London School of Economics

Tuesday 24 November

Until no later than 3.30 pm

Skadden, Arps, Slate, Meagher & Flom LLP

Tuesday 24 November

Until no later than 4.15 pm

The Institute of Chartered Accountants in England and Wales

Tuesday 24 November

Until no later than 5 pm

The Investment Association

Thursday 26 November

Until no later than 12.15 pm

Slaughter and May

Thursday 26 November

Until no later than 1 pm

Professor Ciaran Martin, the Blavatnik School of Government, University of Oxford

Thursday 26 November

Until no later than 2.30 pm

Herbert Smith Freehills

Thursday 26 November

Until no later than 3.15 pm

Simons Muirhead and Burton

Thursday 26 November

Until no later than 4 pm

Chatham House

Thursday 26 November

Until no later than 4.30 pm


(3) proceedings on consideration of the Bill in Committee shall be taken in the following order: Clauses 1 to 10; Schedule 1; Clauses 11 to 58; Schedule 2; Clauses 59 to 66; new Clauses; new Schedules; remaining proceedings on the Bill;

(4) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 11.25 am on Tuesday 15 December.

It is a pleasure to serve under your chairmanship, Mr Twigg, and to serve with colleagues on this important Bill Committee.

Question put and agreed to.


That, at this and any subsequent meeting at which oral evidence is to be heard, the Committee shall sit in private until the witnesses are admitted.—(Nadhim Zahawi.)


That, subject to the discretion of the Chair, any written evidence received by the Committee shall be reported to the House for publication.—(Nadhim Zahawi.)

Copies of the written evidence that the Committee receives will be made available in the Committee Room. We will now sit in private to discuss lines of questioning.

The Committee deliberated in private.

Examination of Witness

Charles Parton OBE gave evidence.

We will now hear oral evidence from the Royal United Services Institute. Before calling the first Member to ask a question, I remind all Members that questions should be limited to matters within the scope of the Bill and that we must stick to the timings in the programme motion. The Committee has agreed that for this sitting we have until 10.30 am. Will the witness introduce themselves for the record? [Interruption.] I am going to suspend the sitting for a few moments to see whether we can sort out the technical problems that we are having. This is not the first time; even the Prime Minister had problems yesterday.

Sitting suspended.

On resuming—

Q I will resume the sitting. Sir, could I again ask you to introduce yourself?

Charles Parton: Thank you for inviting me. I am Charles Parton. I was, for 38 years, a diplomat, mostly with the UK, but for five years with the European delegation until the end of 2017. My area of work has largely been on China and, in the last decade, on the politics of China and the Communist party. I was an adviser to the Foreign Affairs Committee of the House of Commons on two of its recent China reports. I continue, since leaving diplomacy, to study what the Communist party is doing and the relevance of that to our UK policy.

Q It is a pleasure to serve under your chairship in this Committee, Mr Twigg. Thank you very much for joining us, with your extensive background, Mr Parton. As you know, we have an investment screening regime under the Enterprise Act 2002 that has led to 12 interventions on national security grounds since the Act came in. Which security threats do you feel are not covered by those existing public interest powers? While we have been waiting for the Government to act on this front, are there specific instances where you think the Government should have acted but did not exercise their powers, or did not have the relevant powers to exercise?

Charles Parton: I would not profess to be an expert on individual cases, but I would like to make some general response to your excellent question. The first point to make is that the Government have not really been attending to the problem with the attention that they should, given the nature of the threat, particularly from the Chinese, although others may be relevant too. I do not think that there is the structure for actually assessing the degree of the threats; I think that 12 cases since 2002 is very few indeed, when you look worldwide at the Chinese programme for technology acquisition, both under and over the table. That in itself shows that there has been insufficient attention paid to the issue.

The delay in the Bill is also regrettable, because the threat has been fairly clear for some time. I would urge the Government, first, to research the question, which is the one you asked, of to what degree in the past have the Chinese in particular bought up technology companies, the acquisition of which was greatly against our interests? That work could and should be done.

I am an associate fellow at the Royal United Services Institute, which has a team that has been looking through technology at a number of questions, but it could quite easily divert that team to look at this question, which needs China expertise and the ability to search through a lot of open data, which it has. I am not a member of the Government, but I am not aware that the Government have done that sort of research to establish the full degree of the problem.

From the point of view of the threat—if you will excuse me, as this is the first question, for putting a little bit of context to it in terms of the China thing—it is undoubted that there is nothing wrong with investment. In fact, that is extremely good. We want as much investment and good relations with China as with everyone else, but we need to recognise that there is a values war going on. I have written an article about that, which came out in the Conservatives’ China Research Group report a week or so ago.

This is not a cold war, because China is very important to us for trade, investment and many global goods, and it is a science and technology power, but we should not underestimate the degree to which Xi Jinping and the Communist party intend, as Xi said to the first politburo meeting, to get the upper hand against western democracies. He talks about us being hostile forces and about a big struggle all the time. When you add that to his policy of civil-military fusion—using civil in the military context—and the fact that he has set up a party organisation specifically to push that forward, and the change in investment policy away from things such as property, football clubs and other things, very much towards benefitting China and its technology, we have to be a lot more careful than we have been in the past.

The first step for that is to do the research. I am not aware of a really good assessment of just how much technology has been bought, the targets and so on. Maybe the Government have one—I don’t know—but I do not think that they do.

Q Thank you very much for that response. I certainly agree with you on the delay in addressing this critical issue. I appreciate your experience, particularly with China, which obviously, as you say, has made a number of technology acquisitions.

I was particularly interested in the civil-military fusion, if you like, of China’s technology ambitions. Could you say a little more about how the Chinese see nascent technologies that are indirectly critical to downstream industries that supply our national security? I am trying to understand how, if you like, we differentiate between industrial strategy and technology to ensure that we have leading defence and national security capabilities. Is there a distinction that we can make there? Do we need to do further research, as you suggest? Do the Chinese make that kind of distinction? Do we need to address some elements of our industrial capability when we consider national security?

Charles Parton: We should widen this not only to companies, but to academia, if I could come back to your question from this angle. We have the phenomenon at the moment of Chinese companies, one might say, hiring our academics, in one way or other, to do scientific research on their behalf. Some of that is probably something that our defence establishment and security establishment would be pretty upset about if they were aware of it.

It is quite difficult to distinguish some of these and to know about them all, but a few weeks ago The Daily Telegraph did a story on, I think, Oxford University and Huawei’s commissioning of research. I think there were 17 projects. I looked at those, and I am not a technologist by any means, but some of them rang certain alarm bells. If you are researching, on behalf of the Chinese, drone technology, cryptography, gaits— Gait is very important for gait recognition. We have facial recognition and voice recognition, but in circumstances where people are wearing masks or there is bad weather, gait is an absolute identifier. Again, are these bad technologies? Well, there are perfectly good civilian uses for them, no doubt, but there also military and surveillance uses. I think we need to be very clear on what our academics, as well as our companies, are doing.

To give you another example, if you go on the website of one of the top Oxford mathematician professors, he has now retired and set up a company with a base in Shenzhen. He is an absolutely top mathematician and does the most abstruse things in cryptography. Should one of our top mathematicians be helping the Chinese in cryptography? Well, there are perfectly good and innocent uses of cryptography, I presume, for things such as banking and e-commerce, and there are perfectly not good uses of it, in military and surveillance and other things. I have no idea whether that is something we should be concerned about. On the face of it, it strikes me that we should be.

I think we need to broaden the scope—forgive me if this is outside the Committee’s scope; you are only looking at the Bill—because the whole question of defence of technology needs to be looked at, in terms of whether we are strengthening a hostile foreign power, but also let us not forget the reputation of British companies and universities. If you look at what is going on in Xinjiang, for instance, with the concentration camps there—activities that quite definitely meet the definition of crimes against humanity under article 7 of the International Criminal Court’s Rome statute, or article 2 of the UN genocide convention—should our companies and universities be helping with technologies that can be used to strengthen that surveillance and that repressive regime? What is the difference between that and South African apartheid or some of the other things that we have seen in the past? Increasingly, the excuse of, “Well, we didn’t really know what was going on,” has gone, and companies and academia will have to be much more careful of their reputation. I have slightly moved away from the nub of your question. Perhaps you could just push the tiller a bit and put but me back to the centre of it again.

Q I think you addressed the core of my question. I really like your phrase “defence of technology”, rather than the technology of defence, because the question was around how you distinguish in the industrial strategy between specific security concerns and the development of technologies that give us capability in those sectors. Can we identify at what point that becomes a national security concern?

Charles Parton: That is sort of way outside my technical expertise, but I would certainly say that one major criticism I have of the Bill is that you have to set up the right structure to be able to do that. I am not sure that the Bill’s putting everything in the hands of the Department for Business, Energy and Industrial Strategy and its Secretary of State is the right answer.

Let us take Huawei and the debate we had over the last couple of years, as well as the various flip-flops that have gone on. One might add flaps, as well as flip-flops, actually. There has been a big a division between the so-called economic and security Ministries. It is right that both have a say in the decision. Economic interests are very much at stake, but so are security interests. If you put everything into the hands of BEIS, which probably does not have the expertise on China—certainly not in the defence, security and surveillance realms, although not unnaturally, since its job is to encourage investment—you will perhaps find that the security and repression elements are not given sufficient weight, and more to the point, the perception will be that they are not given sufficient weight. We might therefore go back to this sort of business with Huawei, where there is a fight back and another fight back and so on.

What we actually need is an organisation that is made up of people on all sides of the debate and that has some real experts who actually understand what the technology means. One specific example I came across a year or so ago was a very interesting computer game. Fine. What is wrong with that? Well, I understand that it was then bought up by the Chinese and used to train fighter pilots. You cannot defend against everything, but you at least need some unbiased experts—a sort of, if I can use the words, Scientific Advisory Group for Emergencies—who would be there to advise, and then decisions would actually be accepted by all sides, not questioned.

On occasion, I am sure that questions would be put up to the National Security Council and the Prime Minister for decision if they were really important. However, the issue is often about very small companies with some very interesting technologies that have not been established. The Chinese are extremely efficient at hoovering around, finding them and buying them up early. I am not convinced that the structure and decision making of the whole process are right.

Q Good morning, Mr Parton, it is great to see you. Without going further on your last point, I want to reassure you that the Bill is designed to deliver a quasi-judicial role for the Secretary of State for Business, Energy and Industrial Strategy. The team’s infrastructure will be pulling in all parts of Government expertise. My question is this: how do you think the current challenge of covid has exposed national security threats through investment? What are you seeing? How do you see the behaviour of malign actors anywhere in the world at a time of covid?

Charles Parton: I think what covid has done is expose the nature of the Chinese Communist party, in answer to your question. I hope that it has brought home to people the nature of the beast. Looking at what happened, China did not do so well to start with, and its people were pretty upset with it. China then used its external propaganda machine to right its domestic problem, pushing forward the line, “Look how badly the foreigners have done, and look how well we are helping the foreigners out of the mess,” while hiding the fact that it had allowed the virus to propagate so fast in the first place. To many people in democracies, that brought home the fact that the Communist party of China is prepared to use that against us.

Where the Chinese Communist party was unhappy with how countries were acting, it started to put them under pressure and made threats about the delivery of personal protective equipment or whatever. Australia is really taking it in the neck at the moment because it had the temerity to ask—perfectly reasonably—for an investigation of the origins of the virus, which is essential for scientific and preventive purposes. Look at the political pressure on Australia. There is absolutely no doubt that where the Communist party sees an opportunity to use whatever is going on at the moment, it will do so.

The question that I have continuously asked is this: to what degree is investment threatened by a country such as the UK, Australia or Canada standing up for its own interest? We are not actually attacking China, but we are saying, “Sorry, but we have our own interests and our own security. You wouldn’t allow the equivalent in your country, possibly rightly, and we are not allowing it here because we are defending our security, in this case.” To what degree is the tool of depriving someone of investment a real threat? I have urged in a number of papers that the Government look at that in dispassionate terms. The China-Britain Business Council recently put out a paper, but I would not describe it as dispassionate. That is for the Government to do. My own feeling is that the likely conclusion is that, on the whole, the threats are pretty hollow. Chinese investment is not done for charitable reasons.

Since 2017—the high point was 2016—China has cut back on investment. Beijing was getting pretty annoyed at the way money was seeping out not in line with its policies, but investment is now more tightly controlled and aimed at the acquisition of science and technology. To what degree are we vulnerable? This is not charity. Money is very cheap at the moment; it can be got at negative interest rates. It is not as though China is the sole source of money. It invests because it wants technology. Surely we have to look at that carefully and ask where is the mutual benefit. If it is mutually beneficial, fantastic, let us go ahead. Let us not be too brow-beaten by this thing—that if you do not do x or y, or if you do not take Huawei, we will hit your investment. I think, in practice, if you look at that and then look at some of the other threats that China has made over the years, including to your exports, all those have grown for all countries, although they had been in the diplomatic doghouse historically—certainly in the past; we will see about the future—but I think it is greatly exaggerated.

I am grateful to you, Mr Parton. I do not want to hog the floor, as I am sure many colleagues want to ask questions. Thank you very much.

Q It is a pleasure to serve under your chairmanship, Mr Twigg. I do not know whether you can see me, Charlie, but I am here. I am sitting at the back due to social distancing, but it is good to see you.

Going back to your point about resourcing the investment security unit, can you give a bit more detail about what would be an ideal outcome from your point of view? Would it be that we need specificity in the Bill that key representatives and experts of the intelligence services, of the Ministry of Defence, of the diplomatic corps and of other agencies be formally named in the legislation, so we would have that reassurance that the body doing the screening had all the necessary breadth across the spectrum of both the economy and national security?

Charles Parton: That is a good question; it is not necessarily for me and I do not necessarily have the experience to lay down precisely how it works. For me, I think, first, that all those organisations you have mentioned—although others also on the economic side, such as the Treasury and BEIS—perhaps should be there to set the parameters of what needs to be referred. I think that, as a sort of preliminary filter, one would hope that there was an ability for most companies, and most universities as well, very quickly to put forward the deals or the pieces of work that they felt might be coming up against the parameters set by such a Government body.

For a quick decision, is the topic one that is suitable, or does it need a little more investigation? Should we be working with this organisation, or in some cases this particular Chinese academic or company, which may have links to the military or to the repressive regime? The experts, as it were, which means the SAGE-type committee, surely should be very quickly—companies and academics need to move quite quickly—making a preliminary estimation of whether this needs to be referred upwards to a Government Committee that wants to look at it in more detail.

I do agree with you that the range of interests needs to be representative if the decision is to be perceived by all sides as acceptable when it is eventually made.

Q Thanks very much; that is very helpful. On this point about making sure that we have the most effective and streamlined system in place, one of the areas where the Bill diverges from legislation in similar jurisdictions, such as Germany and Japan, is that it does not contain a definition of national security as such.

In the Japanese and German cases, they refer to national security including concepts of public order. I refer in particular to your comments about organisations out there in the marketplace, whether they are universities or businesses, needing to have clarity to know what needs to be referred and what does not. They need to know where the amber or red light is flashing, and where it is clearly a green light and not an issue. Would that be aided and facilitated if the Bill contained a definition of national security?

Charles Parton: It is a bit like defining terrorism. It is really quite difficult to be all encompassing. Sometimes, I am in sympathy with the Chinese legislation that adds at the bottom “and other offences” or “and other things”. I think it is quite difficult, even if people are convinced that they can effectively define that. It is not only national security; there is a question whether you are aiding crimes against humanity or the genocide that is going on in Xinjiang. I am using loaded terms there, but I think they are justified. There must be some mechanism for ensuring that those, too, are brought to bear, but I am not expert enough in legislation to be able to say, “Yes, we need a watertight definition of ‘national security’.”

Certainly, the Bill must convey to companies and academics the need to clear a range of topics. That will not be specific, but, at best, they must be encouraged to consult almost as a default, so that they are not caught out. The other question is, what happens if they don’t? What sort of sanctions are they under if they do not consult, when it is clearly something they should consult on, for reasons either of security or of repression and crimes against humanity?

Q It is a pleasure to serve under your chairmanship, Mr Twigg. Mr Parton, thank you for your past service. You have clearly studied China and Asia at a fascinating time in their own economic development. I will ask you to play devil’s advocate.

As a Committee considering this Bill, we will hear from a constituency that could sometimes trip over into Sinophobia, being against any form of engagement or trade with China. Looking at the economic development of that market and the opportunities that it presents, could you talk a bit about the non-risk-based categories, such as inert goods and household manufactured goods, which the Committee should draw a clear line around, and those categories that you have talked about, which are covered in the Bill and speak to a real national threat?

Charles Parton: Let me make the general point that I am sometimes accused of being anti-Chinese. I greatly resent that. I am anti-party, as anybody should be if they saw what it does in places like Xinjiang or Hong Kong. I am not anti-Chinese. I think the Chinese Communist party itself deliberately muddies the waters on that one and says, “You are anti-China,” when, actually, you are opposing the policies of the Chinese Communist party. That said, I began the session saying that we want investment from China, trade with China and good relations with China. China is a major player. This must not be a cold war. If America or China decides to pursue that, we must try to avoid it.

I always talk about the holy trinity of national security, UK interests and UK values. We should establish those with the Chinese and say, “Sorry, those are non-negotiable. Just as you sometimes come and say, ‘These are our core interests and we are not negotiating them,’ we have the right to do that too.” But beyond that, we want open trading relations and open investment relations. What is wrong with China buying London Taxis International? Nothing. If it wants to invest and that is mutually beneficial, great.

We want an open China as much as possible. We certainly want a much more level playing field than there is at the moment. China runs a series of negative lists and there is much on them, particularly in the area of services, which we would want opened up. We must press for that in conjunction with the Americans, the EU, Australia and all the other democracies that wish to trade with China. In many ways, that is in China’s interest. It is certainly in the interests of its people. A closed market, with China just relying on its own consumption—it is a big market—is not going to be good for China any more than it is good for us. I fully go along with that. I do not think we should be anti-China in any circumstances. That is, in a sense, racist. We should be anti-Communist party, or certain against its policies, but with the Chinese people, and in trading, we should maintain a perfectly normal relationship.

Q It is a pleasure to serve under your chairmanship, Mr Twigg. Mr Parton, I want to pick up your point about access to academics, universities and so on. There is clearly a big push from universities to invest heavily in China and build relationships. Do you think there should be more safeguards in the Bill for those relationships? Secondly, do you think the Bill provides sufficient protections for intellectual property?

Charles Parton: On the first question about academics, I am not sure whether this is about investment. I think that academics are in some ways a separate question, unless universities are setting up, as they do, companies, and are moving that way.

Q I am thinking about Cambridge and so on, which are moving into more commercial areas.

Charles Parton: Where academia sets up a company, and that involves itself with China, yes, that should be under the purview of the Bill. There is a separate question about when Chinese companies hire or fund—whichever you like to say—UK academics to carry out a specific piece of research for them. Universities are working on that, and that is a very urgent question. Again, I think that a much stricter regime should be put in place to stop the seeping out of technologies that could be used in the military field or the repressive one. I am not convinced that that is there at the moment; I am sure it is not. That might be a separate question. It may or may not be one that requires parliamentary legislation—people who are experts on that can make up their mind—but some form of consultation with the Government, or perhaps a sanctions regime, needs to be put in place so that that does not happen.

On the question of intellectual property rights, China has a very rigorous campaign to get hold of our IP. Some of it is stolen through cyber, and I am sure our intelligence services and others are doing their best to combat that. I am not sure about the degree to which this Bill can act as a defence against Chinese abuse. It can certainly try to encourage companies to raise their own defences, but the UK has an organisation—the Centre for the Protection of National Infrastructure—that aims to put out that advice and help. I do not know whether it is strong enough in its actions and shield; that is outside my area of expertise. It is certainly there, but perhaps it, too, needs strengthening.

Q It is a pleasure to serve under your chairmanship, Mr Twigg. Mr Parton, thank you for your time today. You said that small firms may come under pressure to be bought up, and are often targeted. What is your view on how this Bill can strengthen national security by ensuring that firms—particularly small firms—are not taken over by legitimate, friendly actors, which further down the road are bought up by China or whoever? Does the Bill protect us from that type of long-term acquisition?

Charles Parton: I suspect that there is a limit as to how far down the line one can go, but where activity is still going on in the UK—that is to say, where UK individuals are still running that company in the UK on behalf of a friendly foreign country, and the company is later bought up—that should be covered by this Bill. Otherwise, you are absolutely right: you may find a company in Liechtenstein buying it; then the company gets bought by the Chinese, and the technology gets siphoned out. There has to be a defence against that.

If a company is bought by a friendly country and the technology is exported, and nothing is happening in the UK, then I cannot see how extraterritoriality would be applicable.

Q It is a pleasure to serve under your chairmanship, Mr Twigg.

I want to explore the extent to which the world—if I can describe it as one world—of academic consultants and private sector companies, to which you have referred, would agree with what you are saying. You refer to having a SAGE-like committee; is there a danger that, if you did have such a committee, it would actually have very divergent views?

I fully respect where you are coming from, but you made some quite hard-hitting comments earlier about crimes against humanity in the concentration camps, and questioning whether companies and academia should be involving themselves in aspects of China. You also referred to a top mathematician, who was formerly at Oxford University, helping China with cryptography.

I want to get a feel for the extent to which you think that your views are shared by academics, consultants and the private sector, and then feed that back into whether, if you did put together a SAGE-like committee—and I can see the sense in doing that—you might find it quite difficult to come to a consensus.

Finally, it must be quite difficult to judge exactly whether what is being developed—whether it be from an academic idea or from a corporate idea—will be helpful to the Chinese in a way that is detrimental to Britain, or is actually a perfectly sensible piece of research and development that could be of benefit to both countries.

Charles Parton: Can I take those three questions almost backwards, or certainly not in the order in which you have presented them? In terms of expertise within a SAGE-type community, those experts would not be making the political decision. They would be making the technical decision: “To what degree can these technologies be used in a military, as well as a civilian, context?” That is the advice that would be going up. It would then be for the Ministers on a committee to say, “Well, we judge that risk to be acceptable,” or “We do not.”

Of course, nothing is black and white in technology because, as the distinction between civil and military is increasingly eroded, it is quite difficult to know; there are many shades of grey here. A judgement has to be made on any particular technology—either “Sorry, we will have to rule that one out,” or “On this one, yes, there are some risks, and maybe we will come to regret it, but on balance, we will let that one through.”

On whether consultants, academics and others agree with my views on China and the nature of the regime, I think that depends, if you will excuse my saying so, on the degree to which they have studied China and looked at the issues.  It is noticeable that those who read what the Chinese communist party says about itself tend very much to agree with what I say, or with the sort of views that I put out.  Those who have other interests do not.  Of course, there are some who I would say are captured, quite frankly, by the degrees of interference and other aspects that the Chinese United Front Work Department pushes. 

There is a variety of opinion there, but I think that those who understand China and read what the party says—the party says an awful lot, actually, if you bother to read what it says; it is not a black box—are inclined very much to my views.  Those views are: be careful, because it is not coming from the same angle as us, and has some very distinct and not very nice aspects to it. At the same time, it is a major economic power, a major science and technology power, and a major influence on the goods in the world, whether for health, development, peacekeeping or whatever, and we must get on with the country to the best of our ability.  I don’t know if that answers your question fully; do come back.

Q I am pleased to take part in this Committee under your chairmanship, Mr Twigg.

Mr Parton, the Bill looks primarily at direct investment by potentially hostile operators. Does it give sufficient protection against indirect control? For example, a company may be reliant on its bankers, who may or may not be based in a hostile territory, and who may rely on technology through a company such as Huawei; or a company’s ultimate owners and controlling party could be registered in an offshore tax haven, and it could be that nobody has any idea who actually owns that company. Does the Bill give sufficient protection against those kinds of threats through indirect influence and control?

Charles Parton: I am not a legal expert, but the Committee stage of the Bill needs to look deeply at that question. If there is any doubt as to who the ultimate owners are, that should be taken into account by whatever organisation makes the recommendation on whether a particular investment is acceptable. If we cannot follow through relatively easily back to the ultimate beneficial owners and users, that is a factor that needs to be weighed very heavily in the decision on allowing a particular, possibly sensitive, investment to go ahead.

Q In your experience, is that a technique that either the Chinese Communist party or other potential hostile players either have used or are likely to use if it is in their interests? Do you have knowledge, for example, of China using non-disclosure territories to set up companies in order to try to invest in the UK or elsewhere? Are you aware of them using the influence of the technology, for example, to try to exert influence on companies that do not, at first glance, appear to be directly owned from China?

Charles Parton: I have to say that that is outside my expertise, but I do think it is an extremely good and important question that could be researched relatively easily. Forgive me if I am pushing RUSI here, but I suspect that RUSI has the capability in one of its teams to do some data mining on that, and come up with an answer. It is a very important question, but I am not aware of any research, though there may be some, that goes deeply into that question. It is certainly one that should be followed up.

Q It is a pleasure to serve under your chairmanship, Mr Twigg. Good morning, Mr Parton. The Bill obviously aims to protect national security while promoting investment in the United Kingdom and not dissuading any inward investment into the country. With your experience, and given everything that you have said this morning, do you think the Bill will succeed in its aims?

Charles Parton: Again, I am not a legal expert, but it seems to set out the legal framework. It all very much depends on the structures and mechanisms, and the resourcing of them, that are set up to ensure whether the judgments about a particular company or a piece of academic research and the technology from them should be blocked or allowed through. I put it back to the Committee: if its detailed research, and the measures that go into the Bill, show that whatever organisation is set up is sufficient unto the job, and that the channels are there to ensure that all these small and sometimes obscure technologies are at least passed by it, that is a really important piece of work.

Q Secondly, I wondered how the proposal might compare to regimes that are already in place in comparable countries—for example, our Five Eyes partners.

Charles Parton: I have not done comparative research on that, or done a paper on it. That is something that needs to be done by the Government. Perhaps they have done that. The impression that I get from discussions of this sort of question in the various fora that I mix in suggests that the Americans and Australians have taken a much more hard-hitting approach than we have. Again, it depends on what structure is set up by the British Government, and how it functions in line with the Bill. Forgive me for not giving you a full answer, but that is the sort of research that needs to be commissioned by the Government in order to make decisions on how to deal with that question.

Q It is a pleasure to serve under your chairmanship, Mr Twigg. Mr Parton, I want to ask about influence. We have seen companies linked to hostile states hiring former diplomats, civil servants, parliamentarians and Ministers to provide a veneer of respectability. How can we do more to guard against that? Secondly, on the Bill, provided advice is drawn widely from the agencies and other parts of Government through the investment security unit in the way that you have described, do you think that having a quasi-judicial decision made by the Secretary of State guards against that influence and potential cronyism in the decision making?

Charles Parton: The question of elite capture is very important and very topical. First, I have called for this in various papers that I have written. The Cobra committee that makes decisions on employment after political or civil service careers definitely needs strengthening. I am not sure of the degree to which work on that is going on; in fact, I do not think much is. Certainly neither the provisions, nor the exercise of those provisions, have been sufficiently rigorous. It is very much a question of lengthening the amount of time between leaving a particular post and taking up a job where, in some cases, you are laundering the reputations of some of these companies. If that period is too small and the criteria are too weak, there is a great risk of people, while still in office or still in post, saying to themselves, “I’d better not be too harsh on this, because in a couple of years’ time, I might be approaching these people, or they might approach me for a job.” That is pretty crude, I know, but it is perhaps easier to see in the case of a defence company. If you were in the MOD, say, and you had to make a decision, one hopes you would make it entirely in the national interest, rather than with a view to possible employment by whichever company might be bidding for a contract, but that is one area that needs strengthening.

The other area in all influence problems, of course, is that sunlight and transparency is the one weapon we have, but if a Minister, an ex-Minister or a top civil servant is running a consultancy company, and let us say Huawei is employing that company—I choose this example by sheer chance—that should be known. That should be declared, because if such people—who are still influential with their old colleagues, whether parliamentary, ministerial or civil service—are urging a certain line, as I have heard some urge, it may not be disinterested; in fact, it certainly is not in some cases. That needs to be made clear. Sorry, could you just repeat the second part of your question?

Q It was picking up on your point, which I think we all share, about ensuring that the investment security unit draws advice from the agencies and across other parts of Government. Provided it does that, having a quasi-judicial decision that is challengeable under judicial review by a Secretary of State in some ways guards against that soft influence or cronyism getting involved in a SAGE-type committee. Can you see the benefits of that model?

Charles Parton: Yes, but I think you have to be very happy and convinced that the Minister in charge is one whose future does not incline him or her to make a decision that is somewhat biased. It is not without precedent in the world, anyway, that some ex-Ministers have been under the influence of the Chinese Communist party for one reason or another, so you have to be quite careful about that, and it is a really important decision. That is why I would be more inclined to make sure it is very clear that it is not just within the purview of BEIS, because BEIS’s job is to push investment. That is perfectly fair, but there may be occasions—not now, but in the future—where people’s backgrounds, inclinations or futures incline them to be less than even in their judgment.

Q Thank you very much, Chair, for giving me another bite at the cherry. Mr Parton, as a final point, I thought it might be useful to remind the Committee of the symbiotic nature of the relationship between the Chinese Communist party and the Chinese business community. Based on your extensive experience in China, could you briefly outline how the Chinese Communist party in essence runs the business community; the role that it plays in ensuring executives are appointed who are sympathetic to the party; and the whole way in which the nomenklatura works? That will help us to understand the extent to which Chinese business interests in this country are, in essence, the same as the interests of the Chinese Communist party.

Charles Parton: That is a very good question.

Could I just add to that? That is an excellent point, but could you also say a little bit on how China responds to proposed takeovers that might implicate its national security, if those takeovers are allowed? How does it respond to that investment into its companies?

Charles Parton: Those are both good points. First of all, divide it into the state-owned sector and the private sector. In terms of the state-owned sector, the top executives of the big state-owned companies are appointed by the central organisation department of the party. That is the organisation that is, as Mr Kinnock has said, in charge of the nomenklatura: the top 3,000 to 4,000 party officials. Of course, a lot of state-owned companies are also owned at the provincial and lower levels, and there, too, the top executives are party members and beholden to the party. Let us not forget that most foreign investment by the Chinese is state owned, so it is not just a fair bet but a fair certainty that any state-owned enterprise investing is fully politically controlled.

When it comes to the private sector, Huawei has spent a large amount of its time insisting that it is a private company—I really do not care. And I do not really care that the national security law says that any individual or organisation must help the party or security organs when called upon. The brute fact is that, in the way the system is run in China, if the party tells you to do something, the only response from private business to an order is to say, “Certainly, Sir. How high do you want me to jump?” so this debate is entirely irrelevant. The party is now pushing committees into all private enterprises—foreign and local—and it would be a very unwise head of a private company who said, “No, Mr Xi Jinping. I don’t think so.” If nothing else has been shown by what has happened with Jack Ma, China’s second-richest person, and the Ant Group finance company in the last few weeks—there are, of course, financial risk reasons they might want to control Jack Ma’s Ant Group—it is, “Sorry, you are beholden to the Communist party.” That was a very fierce reminder of it.

In terms of this debate, I do not think we should be under any illusion that if a party says to a company about its technology or whatever, “Well okay, it’s all very well that you’ve got that, but we want it fed into our People’s Liberation Army organisations and science and technology system,” no company is going to say, “Oh no, that’s not right. We won’t do that.” For instance, when Huawei says, “If we were asked to do something against our commitments, in terms of what we do abroad, that would threaten security, we would not do that,” it is rubbish. They know that.

I am afraid that brings us to the end of this part of the session. Mr Parton, I thank you on behalf of the Committee for your evidence and the clear, concise answers you gave. We must now move on to the next session. If Members want to take a comfort break for a couple of minutes, I am happy to do that.

Sitting suspended.

Examination of Witness

Sir Richard Dearlove KCMG OBE gave evidence.

Q Order. We will now hear oral evidence from Sir Richard Dearlove. Please introduce yourself for the record, Sir Richard.

Sir Richard Dearlove: I am Sir Richard Dearlove. I was in MI6 for 38 years. I was chief of the service from 1999 to 2004. Before that I was head of operations, and before that I was head of all the admin and personnel. In fact, I completed the building of the new headquarters and the move of the whole service into that. I retired in 2004 and became the Master of Pembroke College, Cambridge, where I was for 11 years. I am now chair of the board of trustees of the University of London and hold a number of other directorships and advisory roles. I still remain pretty heavily involved as a talking head on geopolitics and intelligence issues, and I have founded a small think tank, which is actually an educational charity in Cambridge called the Cambridge Security Initiative. That gives you in essence my colourful past.

Q Thank you very much, Sir Richard, for bringing your expertise to the Committee. The existing powers for intervening in transactions on national security grounds came in when you were chief of MI6. How have security threats evolved since then? Specifically, which security threats do you consider are not covered by existing public interest powers? It would be helpful to hear whether you think the Government have missed specific threats, or types of threat, by relying only on historical powers, and by not bringing in new legislation until now?

Sir Richard Dearlove: Wow. That is a massive question. Bear in mind that a large part of my career related to the cold war. In that period, our main concern was the Soviet Union and the members of the Warsaw Pact. It was characteristic of that period that there were heavy controls, mainly exercised through NATO structures, to prevent strategic material from leaching, as it were, into the economies of the Warsaw pact. I will not go into all the mechanisms. Historically, one does not need to worry about those now, but it was very much an issue that was at the forefront of people’s minds during that period of the cold war. Bear in mind also—I think this is important in looking at the broader context of what you are interested in—that the Soviet Union had hugely sophisticated what’s called S and T operations: science and technology. A whole line of Soviet intelligence of the KGB was devoted to obtaining strategic material that would help the Soviet economy, particularly in the military industrial complex.

This is now in the public domain: in the mid-1980s, there was a major intelligence success, which, interestingly, was conducted by the French, but in which the UK had an important role. We completely dismantled, or learned, exactly what the Soviet Union and its allies were up to on a global basis. We knew before, but we did not know the detail to that extent, and what we learned was pretty shocking. That case has not been greatly publicised, but it was probably one of the most important intelligence cases of the cold war.

With the break-up of the Soviet Union and the disintegration of the Soviet empire, particularly the economic structures that bound the Warsaw pact countries together, in the West our attitudes towards those issues changed very significantly. There was a much more laissez-faire situation and, as countries broke away from the Soviet empire, an enthusiasm to trade with them without the same degree of control.

During that period, you had the emergence of China, which was still very much a regional power but with aspirations to become a global power. To short cut, we have now transferred to China the concerns we had about the Soviet Union and its allies, but the problem with China in some respects is much more serious than the problem with the Soviet Union, although that was bad enough. Charlie Parton, who was talking to you before, is an expert on China specifically. I am not, and my view is maybe more strategic, although I had a lot to do with China when I was head of MI6.

If you look back at the emergence of China as a regional power, from the very start—when Mao was still alive and was then succeeded by Deng Xiaoping—its intelligence community focused on China’s economic growth. It was not particularly interested in what we would see as strategic or political intelligence. There is a famous passage in Kissinger’s book on China in which he is talking to Mao and Mao says to him, “We’re not interested in your politics because we have our own ideological view of the world, and I don’t really care what our intelligence service reports about what’s going on in the west.” What he did not say, but what was quite clear because it became evident subsequently, particularly under Deng Xiaoping, was that the primary purpose of the Chinese intelligence machine outside China was to contribute to the economic rebuilding of China.

We in the West have been, over a longish period of time, pretty naive and had forgotten the fundamental dangers of having a close relationship with China. I am not anti-Chinese or a cold warrior. I understand—and this is the complexity that lies at the heart of this legislation—that our economies in the West are tied to China’s. They are intertwined in a manner that did not exist during the cold war between the United Kingdom and the Soviet Union. Of course there were economic links with the Soviets but essentially the relationship was one of separation. But that is not the case any longer. We are intimately engaged with the Chinese economy. Our enthusiasm––I am using “our” in the broadest sense of the West’s enthusiasm––to trade with China and to have a close relationship and to build that relationship is thoroughly understandable, but in the process we have let down our guard and we have been extremely laissez-faire, as it were, in our attitude towards the commercial threat from China.

I remember very well on one of my visits to the far east, when I was coming out of China through Hong Kong, talking to a British lawyer who had been head of a legal office in Shanghai for a long time. He said, “Richard, you have got to understand one thing about the Chinese attitude to us: they don’t understand win-win. All they understand is ‘We win, you lose.’” However intimate and successful your relations with China may be economically, if you are too successful, you can absolutely guarantee that the Chinese will transfer that success to themselves in their own economic structures, having allowed you to run successfully for a period of time.

What we now know and understand is that the Chinese are highly organised and strategic in their attitude towards the West and towards us. For example, some of the thousands of Chinese students who are being educated in Western universities, particularly in the UK and the United States, are unquestionably organised and targeted in terms of subjects––I am thinking more about graduates, PhDs and post-docs––looking at areas of strategic interest to the Chinese economy, and they are organised by Chinese intelligence.

We need to conduct our relationship with China with much more wisdom and care. The Chinese understand us incredibly well. They have put their leadership through our universities for 20 or 30 years. We in comparison hardly know anything about China because we just do not have that depth of knowledge and experience. You have people such as Charlie Parton and many wonderful Chinese scholars who understand intimately, in particular, the workings of the Chinese state, but they are rare individuals who are now massively in demand in trying to educate people about the problem that we have on our hands.

I am not one who is saying that we have to hold China at arm’s length. It is impossible to do that because they are so intimately involved in our economy, but we have to understand where we restrict their access, where we control their access and where we do not allow them to build strategic positions at our expense and literally take us for a ride. If you go back a little way, we were incredibly naive about this, which accounts for the position we got into with Huawei. It was completely ridiculous that we should even have been considering Huawei to build our 5G. That is probably why you called me. I was heavily involved in lobbying MPs through these various structures. I am delighted that the Government have now taken a grip on this issue.

Thank you. I have no leeway to go past 11.25 am, so please can we keep questions as succinct as possible.

Sir Richard Dearlove: Sorry. That was a long answer, but it is precisely the question one should be considering.

Q Absolutely. I appreciate the response and I would like details of the Soviet case of the military-industrial complex that was dismantled, which you mentioned. That would be interesting to compare.

You have talked about the relationship between the military-industrial complex, in the case of Russia, and economic development, specifically in the case of China. We have essential industries that are critical to our economy and there has been concern that BEIS is going to be overseeing the security implications. Where we have industries and technologies that are critical for national security, they are also critical for our economic security, so our national and economic security end up being linked. You have talked about some of those links in the case of Russia and China. How can we reflect those links effectively in the Bill? Do we need structures within BEIS, or outside BEIS, to identify and reflect the overlap between economic and national security?

Sir Richard Dearlove: This is a really difficult question. I am expressing the problem, not the solutions. You have to bear in mind that I spent my life as a poacher, not a gamekeeper, so my view of these problems is mirror imaging. I was an offensive intelligence officer, not a defensive one. I spent my life trying to penetrate Chinese intelligence, if you see what I mean.

The problem is much bigger than just national security; that is one of the difficulties. It leaches into the whole future of our economic competition with China. I do not like to talk about it, but some people use the phrase “a new cold war”. I do not subscribe to that. We have to find some other way of talking about this. They are very serious competitors who are beginning to edge along the path of enmity in the way they treat us on some issues—witness Hong Kong at the moment—so you have to have some sort of flexible scrutiny arrangement.

The reason this is so difficult to comprehend is that areas like climate change and energy policy, which are national security issues but not right on the frontline, are so big that, I think, China has a pretty disturbing agenda for us. They will encourage us to follow policies that they think are disadvantageous to our economy.

If you take their statements on things like climate change, which is relevant to what we are talking about, China is going to go on increasing its carbon emissions up until 2030, if we look at the figures and understand its policies. China is going to completely miss out renewables. When it has generated enough wealth and success in its economy, it is going to jump from carbon energy straight to nuclear and hydrogen. It will have the wealth and the means to do that. Renewables for the Chinese are going to be rather peripheral, because they will not generate the energy intensity that the Chinese economy requires. China has a road map in its head that is really rather different from ours and there is no question but that, competitively, our green agenda is going to put us at an even greater disadvantage to China, if you take a 30-year view of that.

There are some very worrying aspects of this. That means that if we are gaily allowing the Chinese to walk off with all sorts of bits of our economy, we are going to pay possibly a pretty high price for that over a long period. We need to take a strategic view of this. China certainly has a strategy, and at the moment we do not really have a strategy. We are beginning to realise that we have to have one, and maybe this Bill is a healthy first step in that direction.

You will need sub-committees of some sort, with flexible thinking and experts to advise on where these problems lie. The difficulty is also that we do not want to ruin our economic relationship completely with China. We still need to partner with it in areas that are advantageous to us and our economy as well.

Q The Bill provides for an annual report to Parliament, Sir Richard. What is your view on balancing transparency and ensuring Government can take national security decisions sensitively? Where does that balance lie in terms of our ability to be as transparent as we can without harming sensitivities around these decisions?

Sir Richard Dearlove: My view would be that the annual report has as much transparency as possible, but you are probably going to require a secret annexe from time to time. It is a bit like the reports of the Intelligence and Security Committee, which I dealt with frequently as chief. They and we were keen that they should publish their reports, but there comes a point where it is not in our national interest that some of this stuff is put in the public domain. I would be pretty clear cut on that.

I call Peter Grant, who will be behind you, Sir Richard, because of the social distancing rules we have in Committees.

Q I think this is the first time I have had to stand further away from somebody to speak to them. Thank you for your attendance today. We have heard a lot this morning about the threat from China and a bit about the threat from Russia. There may well be other hostile states out there that have their eyes on us. There are certainly hostile non-state enterprises that have their eyes on us. Is the Bill wide-ranging enough to allow the Government to respond to all those different kinds of threat? Does it allow enough flexibility to respond to the threats that we have not yet discovered, that we do not know about or have not yet been invented?

Sir Richard Dearlove: Obviously, the threat scenarios shift and change. I think I accept that. Clearly, at the moment, what is driving our considerations is mainly China, but you are right. It applies to others—Iran, North Korea—and there may be other states.

A good example in the past, not a current one, is Pakistan. The Pakistani bomb built by A. Q. Khan—the Khan Research Laboratories—was created by sending 600 Pakistani PhD students to do separate bits of research in different universities around the world. That is the origin of our thinking on counter-proliferation, and it is another very clear example of where you have to have control from the security services. Now, I believe, we register PhDs in relation to the nationalities studying in certain areas.

The Bill should be able to accommodate a changing set of scenarios, and you are right to say that non-governmental organisations can become problematic. The proliferation issue, whereby Khan was trying to sell his technology to other countries, happened around the time of my retirement and the disarmament of Libya. That was all based on Pakistani technology, but there was a commercial network run by a family of Swiss engineers called the Tinners. This is an example of how dangerous things can be. The Tinner network had several semi-clandestine factories dotted around the world that were all making different parts for nuclear centrifuges. Okay, that network was eventually dismantled by the UK and the Americans, but the problem of national security goes into some pretty odd areas, and you are right to identify those as not necessarily just being China or, in the past, Russia. There are still aspirations on the part of certain powers to break the non-prefoliation treaty and become nuclear weapons states.

Q It is a pleasure to serve under your chairmanship, Mr Twigg. Sir Richard, I want to ask some questions about how the Bill and the mechanisms that make it operate cut across certain other parts of Government Departments. That is clearly looking at how we can scrutinise investments coming into the UK, but we also have a department with respect to export control. Broadly speaking, this is quite a similar type of problem. Although it is not necessarily looking at intellectual assets, it certainly looks at the ability of countries that are buying certain things to reverse-engineer, and therefore to try to steal our intellectual property in that way.

I am interested in your view on how the department that is proposed to be set up within BEIS to scrutinise this cuts across the Export Control Joint Unit, which is obviously a combination involving four Government Departments. Is that complementing it or contradicting it? Can they cut across each other? How do you see those two departments working together? They ultimately have the same aim, although they come from slightly different objectives.

Sir Richard Dearlove: I cannot give you a detailed answer to that question. From my experience, I would say that on some of these issues the co-ordination of Government Departments is one of the really big challenges, particularly when they ultimately have different objectives. The sophistication of our co-ordination mechanisms in the UK has not been highly developed, so we have run into problems in the past. My suggestion would be that this be given forethought rather than afterthought—that there is some arrangement to avoid those clashes of departmental interest.

Q I would not want to put words in your mouth, but it sounds like you would suggest that this Committee urge the Government to look at the possibility of developing relationships between those two departments, so that they are not contradicting each other.

Sir Richard Dearlove: Yes, because they could be pulling in different directions. You have to have some degree of co-ordination. It is always better if these things are anticipated and something is put in place in advance, rather than scrabbling around to sort it out afterwards. I have seen that happen a lot.

We are back to facing the front now, Sir Richard. Most members of the Committee wish to speak and I want to get everyone in, but I will have to cut them off at 11.25. Keep questions as succinct as possible.

Q I want to pick up on a couple of points. You spoke about energy policy and, as we have seen over the past nine months, some of the risks and threats to our society and economy come from unexpected places. Do you think that the Bill does enough to recognise where those threats may come from and that they may be from a malign power?

I am thinking of the consideration of investments from China in our nuclear power stations and other infrastructure networks. Something as simple as road traffic signals or rail infrastructure might break down if someone decided they wanted that to happen. Do you think the Bill does enough to recognise the unexpected areas of investment that a malign state might want to attack?

Sir Richard Dearlove: Probably not is the answer. The Bill should take account of the complexity of modern technology and the difficulties that we could run into in the future if we allow foreign entities to have a strategic piece of our critical infrastructure. Relationships can change over time and you can cause huge difficulties by throwing a switch and engaging a piece of software that is deeply embedded in something somewhere and causing a huge problem.

I do not want to be too alarmist, but Chinese engagement and involvement in nuclear power is another area of terrific concern and worry. It is not something that we should take at face value. We need to think very carefully about some of these issues. I would much rather have a French company building a nuclear power station than a Chinese company.

Q You mentioned Huawei. Were you involved in 2003 when BT was letting the contract for the network? Did you raise concerns at that point?

Sir Richard Dearlove: No, I was not. The first Huawei contracts were signed by BT in 2003 and, because BT was the primary provider, the relationship between BT and the intelligence community was, let us say, important; I will not go any further than that. BT was a successor to the General Post Office and, essentially, that was how the relationship came about.

At the time, people like myself were deeply concerned and shocked that we were signing deals with a Chinese company that looked to us to have strategic implications. Basically, as chief, I was not consulted. Basically, when I raised some questions, I was largely told, “It is nothing to do with you. These are issues we can control.” The relationship with Huawei took off without real consideration at the time that it would have a bearing on national security. I think that was extremely misplaced. I have written or said somewhere before that those of us who raised objections in 2003 were just disregarded.

Q Well, the ISC report makes clear that Ministers were not informed about the contract at all at the time.

Sir Richard Dearlove: I knew about the contract and said I thought it was completely inappropriate.

Q In the Bill, there are 17 sectors listed where mandatory notifications are required. They include transport and communications, as in some of the points that Mr Western was raising. Should others be added to that?

Also, do you think that although we need to look at the Bill as to what it does, we should also recognise that it does not solve all the problems and threats from hostile states—that the intelligence activity and other things we do to raise the cost of theft of IP need to be seen holistically across the piece, and that the Bill cannot solve all the problems?

Sir Richard Dearlove: The Bill is a step in the right direction. What is important about the Bill is that it raises parliamentary and public awareness of the issue. Everybody takes a big step forward in being sensitised to the problems in the future.

To be honest, I do not have any suggestions right now to add to the list, but I might look at that and see whether there are certain areas. For me, the Bill is almost a symbolic move—one that is long overdue and signals a change in attitude at Westminster and on the part of this and future Governments. It is a very healthy, pleasing and important development.

Q Thank you very much, Sir Richard, for the evidence that you have given us today. The Intelligence and Security Committee defines critical national infrastructure as

“certain ‘critical’ elements of infrastructure, the loss or compromise of which would have a major, detrimental impact on the availability or integrity of essential services, leading to severe economic or social consequences or to loss of life.”

Would the Bill benefit from having that definition of critical national infrastructure embedded in the middle? Linked to that definition, should special measures be taken to raise our guard even higher when it comes to any kind of investment in our critical national infrastructure?

Sir Richard Dearlove: I would certainly see that as advantageous, because it defines a clear area where you start and from which you can make judgments about the involvement of foreign firms being given space or activity in those areas. That is not a bad idea at all, actually.

Q Thank you, Chair. Thank you, Sir Richard. When and why did we let down our guard to China and where would you restrict its access? You made that comment in your statement, and you have commented already on areas such as nuclear power. Can you add to that to give us a bit more of an idea of other strategic areas where you think we should restrict its access?

Sir Richard Dearlove: I think we were over-enthusiastic about becoming a favoured trading partner with China. I am not going to name names, although I think I have done in one or two instances where, let us say, certain Ministers were incredibly enthusiastic and uncritical about building a commercial relationship with China. Part of that was driven politically, in that if we are going to not be a member of the EU, we need alternative relationships. I am not sure I would see it quite like that.

There has been a big emphasis on building a privileged position with China, which has led to people such as myself shouting from the sidelines and being pretty unpopular. For example, the 48 Group Club that the Chinese set up in the UK is extraordinary. They recruited a whole group of leading British business and political figures into that group who were designated cheerleaders for a burgeoning relationship with China. Huawei was an important part of that. The composition—the British membership of the Huawei board—was a very impressive line-up of people who were there to persuade us to drop our guard.

Anyway, I am glad that that is now largely history. A lot of the people who were involved are very keen to jump ship and be disentangled from those involvements. I am sure that, in time, the economic rewards that they were offered to go on to those boards and things were pretty significant. So the Chinese knew how to play us and that is why we got ourselves into this very difficult position on 5G.

Sorry, what was the second part of your question?

Q The second part was: can you say a bit more about where you would restrict their access, because that was one of your key points? You have mentioned nuclear power.

Sir Richard Dearlove: On artificial intelligence, given that the UK is a leader in its own field, there are all sorts of aspects of AI and we would not want to allow the Chinese to buy those companies or take over the technology. There is no question but that the China dream that Xi Jinping has expressed is based on—let me put it like this—authoritarian technological supremacy and having a capability that dominates the global market in those areas. Huawei was definitely a step in that direction.

The critical areas are largely about the speed of technological advance and AI-related companies. We are very sophisticated in those areas, and the Chinese do not have a good record themselves of developing that sector without pinching it from the west—not to put too fine a point on it. The embargo placed on chip manufacturing by the Americans is a serious problem for China, because at the moment they cannot replicate that. I am sure that they will solve the problem themselves in due course. Of course, we have a certain dependence on them for certain things such as rare earth elements, so the quicker we can develop alternative sources, the better.

I am Cornish—I was born and brought up in Cornwall—and I see that one area where you might, using new technology, get rare earth out of the ground is Cornwall. I am devoted to the development of the Cornish economy, and I would love to see us making a real effort to develop Cornwall, for example, as a source of those elements, which is technically possible. It would be more expensive than buying them from China, but would be of huge benefit to our domestic economy. That is a good example of a sensitive area.

Q I will be brief. Thank you for commenting. It is a real privilege to listen to you and take on board everything you said regarding our naïveté and the intertwining of our two economies, nowhere more so than in the North sea, where CNOOC, China’s national oil company, initially through Nexen, a Canadian company—this is going back to something my colleague raised earlier—is now the biggest producer of oil. Allowing what some might describe as a hostile actor to have such control over our energy security is incredible—very naïve.

I was going to ask you a question I put to Mr Parton, although it is probably more relevant to you. How does what the Bill proposes compare with what is being done in other, comparable countries, such as our Five Eyes partners? Does it go as far as the Australians and the Americans, or are we still some way short of where we should be?

Sir Richard Dearlove: No, I think we will catch up. A very good example for us is Australia. They are hyper-dependent economically on their relationship with China, but the current Australian Government had the resolve to take a tough line on strategic issues, and they have suffered as a consequence. But their relationship with China will come back into balance, so the idea that you cannot be hard with the Chinese on these issues because it will prejudice a good trading relationship is rubbish.

The Chinese will probably respect you more if they know you mean business, they want a clear-cut relationship, and they see you have the legal means to impose that domestically, so they cannot just buy a high-tech company and walk off with the intellectual property, thank you very much. In the past, we have been so laissez-faire, it is ridiculous.

Chinese involvement in the oil industry is an interesting example too—I mean, look what they are doing now. They are doing deals with Iran and with Saudi Arabia on carbon fuel, exactly in the way I explained earlier. They are not going to cut their fuel emissions until they are ready to go for a nuclear-hydrogen economy, which they will have the means to do. We are sitting by and watching it happen, in a manner of speaking, and not worrying about the consequences for us.

One of my friends, who is a Chinese scholar, drew my attention—you will enjoy this, I think—to the 36 stratagems from the era of the warring states, which is 481 to 221 BC. I will mention three of the stratagems, because I think they are appropriate to the thinking of this Committee. Kill with a borrowed sword—that is, get what you can. Loot a burning house—bear that in mind in terms of taking advantage of the current pandemic. The third one is hide a knife behind a smile.

Q It is an honour to serve under you, Mr Twigg. We have focused mainly on China. Thinking about regimes we could put in place to govern all this as we work through the Bill, do you think there could be exemptions—a bit like the US has done for potential allies? Could we have almost a graded system, so we can build relationships quicker and faster with those we want to support, or do you think that would be a bad idea?

Sir Richard Dearlove: You are talking about allied countries?

Obviously, if you are involved in global universities, for example, there will be some countries that we want to keep a much better relationship with, and whose students our intelligence services will have to monitor less.

Sir Richard Dearlove: There is definitely a graded difference in, let us say, our burgeoning relationship with India, but India can also raise some strategic security concerns for us. It has not always been entirely friendly, and bear in mind that it has quite a sophisticated weapons programme of its own. However, it would be wrong to treat India in the same way as you treat China; I agree that there is a gradation of treatment.

That brings us to the end of the time allotted for the Committee to ask questions. On behalf of the Committee, I thank our witness very much for his time.

Before we finish, I want to read a message out to Members. I would appreciate it if Members did their best to arrive in the room a few minutes before this afternoon’s sitting starts at 2 pm, to ensure we can be seated in a socially distanced manner so that everybody remains safe.

The Chair adjourned the Committee without Question put (Standing Order 88).

Adjourned till this day at Two o’clock.

Financial Services Bill (Fifth sitting)

The Committee consisted of the following Members:

Chairs: † Philip Davies, Dr Rupa Huq

† Baldwin, Harriett (West Worcestershire) (Con)

† Cates, Miriam (Penistone and Stocksbridge) (Con)

† Creasy, Stella (Walthamstow) (Lab/Co-op)

† Davies, Gareth (Grantham and Stamford) (Con)

† Eagle, Ms Angela (Wallasey) (Lab)

Flynn, Stephen (Aberdeen South) (SNP)

† Glen, John (Economic Secretary to the Treasury)

† Jones, Andrew (Harrogate and Knaresborough) (Con)

† McFadden, Mr Pat (Wolverhampton South East) (Lab)

† Marson, Julie (Hertford and Stortford) (Con)

† Millar, Robin (Aberconwy) (Con)

† Oppong-Asare, Abena (Erith and Thamesmead) (Lab)

† Richardson, Angela (Guildford) (Con)

† Rutley, David (Lord Commissioner of Her Majesty's Treasury)

† Smith, Jeff (Manchester, Withington) (Lab)

† Thewliss, Alison (Glasgow Central) (SNP)

† Williams, Craig (Montgomeryshire) (Con)

Kevin Maddison; Nicholas Taylor, Committee Clerks

† attended the Committee

Public Bill Committee

Tuesday 24 November 2020


[Philip Davies in the Chair]

Financial Services Bill

Before we begin, I have a few preliminary points to make, some of which you will have heard before. Please switch electronic devices to silent; tea and coffee are not allowed during sittings and, again, I remind everyone about the importance of social distancing and thank you all for complying with that. The Hansard reporters would be grateful if Members could email any electronic copies of their speaking notes to

Today, we begin line-by-line consideration of the Bill. The selection list for today’s sitting is available in the room and shows how the selected amendments have been grouped together for debate. Amendments grouped together are generally taken on the same or a similar issue, and decisions on amendments do not take place in the order they are debated, but in the order they appear on the amendment paper. The selection and grouping list shows the order of debates; decisions on each amendment are taken when we come to the clause that the amendment affects.

If a Member wishes to press to a Division an amendment that is not the lead amendment in a group, it would be helpful to indicate that in advance. I will use my discretion to decide whether to allow a separate stand part debate on individual clauses and schedules, following the debates on the relevant amendments. We start with clause 1 and amendment 19.

Clause 1

Exclusion of certain investment firms from the Capital Requirements Regulation

I beg to move amendment 19, in clause 1, page 2, line 21, at end insert—

“(7A) The Secretary of State must, within three years of this Act being passed, prepare, publish and lay before Parliament a report on the impact of the amendments to the Capital Requirements Regulation made by this section and Schedule 1 to this Act.

(7B) The report must assess the impact on—

(a) financial stability;

(b) competitiveness; and

(c) consumer risk.”

This amendment would ensure that, where departures from current capital requirements take place, the Government carries out a review of the impact on competitiveness and consumer risk.

Thank you for your chairmanship today, Mr Davies. With your indulgence, I would like to explain to the Minister broadly the approach we are going to take with these amendments. A number will be about reviewing, producing reports, parliamentary accountability and so on. Another number get into the accountability framework for the regulators and that “have regard to” list, and we will want to explore that quite deeply. Then there will be another set around the later parts of the Bill, relating to the savings provisions, the debt scheme and so on. That might help the Minister and the Committee to understand broadly where we are coming from when we move these amendments.

This first amendment, amendment 19 to clause 1, is in the first of those groups. Clause 1 exempts certain categories of investment firms from the requirements of the capital requirements regulation. This amendment explores what the effect of that might be and not only our right to know that effect, but our obligation to understand it. The reason we tabled this amendment is that capital, or the lack of it, was at the heart of the financial crisis. The banks that keeled over were over-leveraged and behaved as though a rainy day would never come. In fact, it is estimated that when the financial crisis hit, Royal Bank of Scotland, which was one of the biggest banks in the world at the time, was leveraged to a degree of about 50:1, so they had very little cushion of resilience for when more troubled times came.

The Basel II rules, which were in place at the time, failed to stop either the collapse or the public’s having to step in—through taxpayers and Governments around the world—to bail out the sector. Last week, when we were taking oral evidence on the Bill, I quoted Paul Volcker, the former Chairman of the Federal Reserve, who gave evidence in this House about a senior banker who had told him that his bank did not need any capital at all, that money could always be borrowed on the wholesale markets and that the banks could operate without capital. The crash proved that not to be true. The banks need capital. They need a cushion. That is not just their insurance policy, it is ours—it is the public’s insurance policy too.

Following the crash, the world’s regulators, whether in the United States, the UK or the European Union, set out to solve the problem of “too big to fail”, which has been characterised as privatising the profits and nationalising the risks, and developed a new set of capital requirements for banks and financial institutions. It was designed to make them more resistant to downturns. Those rules, on a global level, are set out in the Basel III process, now revised to the Basel 3.1 process, in the CRR and in the actions of national regulators. That is important, because the Basel rules should not be regarded as a maximum when it comes to the safety of our financial institutions. They should be regarded as a floor.

Most banks and regulators will say that today they hold significantly more capital against their loan books and that they are better equipped to handle a downturn or economic shock than they were 12 years ago. That is broadly true. Banks are better capitalised now than they were. However, they do not all like that situation, in truth. They will also say—I am sure that some banks tell the Minister and the regulators—that if only they did not have to hold so much capital they could lend more. They may well be saying that more loudly during the covid situation, when, as we see light at the end of the tunnel, we want to get the economy moving again. The smaller banks and new entrants will complain about being held to the same capital rules as larger and more established institutions. They will argue that that is a barrier to market entry and that it acts to reinforce the oligopoly in the UK where there are four or five major high street institutions, which it is difficult for new entrants to compete against. Other institutions will complain of being held to the same rules as deposit-taking institutions, which is part of the exemptions in clause 1, arguing that the character of their business is different.

Clause 1, as I have said, equips the regulator to respond to some of those points. We are not only onshoring, as it were, the capital requirements regulation, we are making provision, through the clause and other subsequent clauses, for the regulators to depart from it. Of course, departure from a common rulebook is a consequence of Brexit. Indeed, some might argue that it is the whole point. The clause allows it, and it is important that the Committee understands that the amendment would not prevent it. Neither does it seek to relitigate the referendum or to prevent the common rulebook to which we have subscribed for many years from ever being changed. That is not what the Opposition are saying. We are saying that, Brexit or not, and inside the EU or not, capital requirements still matter and they are there for a reason.

I would argue that for the UK the need for financial resilience is even greater than it is for most economies. We are a medium-sized economy with a huge financial sector. The consequences of that sector getting into deep trouble are potentially all the greater for our economy than for some others. Having a big financial sector is in many ways a great strength, of course. It brings employment, tax revenue and investment to the country, but it is a risk when it gets into trouble, as we found out in our recent history.

The other thing that we learned during the crash was how interconnected the system was. With so many institutions lending to and trading with one another, when one falls over the consequences for the whole system can be catastrophic. That old saying “The thigh bone’s connected to the knee bone” was certainly true during the financial crash, as it is of our interlocked and interdependent financial system.  We therefore have a duty, at the very least, to be vigilant about capital requirements. They are, as I said, the public’s insurance policy against having to bear the costs of another crash or steep financial crisis. The changes that have been made since 2007 and 2008 through the CRR, the Basel rules and other steps are, as yet, untested. Yes, the regulators do conduct stress tests and scenarios about what would happen if employment rose to this level or GDP fell to that level, but these are inevitably not quite real-world exercises. They are as real as war games compared to the real thing.

All the amendment does is ask for a report from the Treasury after three years of the new regime. That report should cover the impact of any departure from the current capital requirements in three areas: financial stability, that is to say the overall health of the system, because we learned how interconnected it all was; competitiveness, which is built into the regulator’s aims in the Bill and is bound to be the argument for any changes to the capital requirement rules; and, importantly, consumer risk. If we are only thinking about the competitiveness of our financial institutions and not considering consumer risk, we have not learned from the financial crisis. That is the other side of the scales. We can make the system ultra-competitive by asking institutions to hold hardly any capital but that exposes the consumers and public to greater economic risk. That last point is crucial.

To recap, the amendment does not attempt to freeze the situation forever as it is now. It does not stop clause 1 doing what the Government want it to do. It does ask for a report on the consequences and broader issue of divergence from capital rules, should the regulator allow greater divergence in the future. We should not allow this regime to be set up and then opened up to all the banking and industry lobbying that is likely to take place without making sure we have a means of understanding the consequences of that. Given the importance of this sector for the UK economy, we should be careful of these consequences. By enshrining these in a report from the Treasury, we can ensure that Parliament and the public see the consequences of divergence. That is the purpose of amendment 19.

It is a pleasure to see you in the Chair, Mr Davies. I rise to support the amendment. I think it is perfectly sensible that we make assessments and ensure that the changes the Government are putting in place are worth while and valid and that we keep a close eye on them, because of the very risks that the Labour Front-Bench spokesman set out. We cannot predict the future, but we can assess how things are going and make sure that neither consumers nor businesses are at risk. I support that very much and do not have much to add to his comprehensive speech.

I repeat that is a pleasure to see you in the Chair today, Mr Davies—there will be a bit more of that as we make our way through the Bill. I support my right hon. Friend’s amendment, and want to tease out some of the Government’s intentions in this very technical Bill. We may not have known before 2008, but certainly know now, that highly technical things can be crashingly important if we do not keep a close eye on them. Given that we are now onshoring all these directives, and that the Government have decided, before the transition period is even over, in anticipation of changes to the capital requirements regimes, to diverge from what was put into UK law as part of the withdrawal agreement, I think the Minister owes us—I am sure he will be prepared to do this—a detailed explanation of what the Government perceive to be the advantages of diverging from rules that we had such a crucial part in writing when we were in the European Union.

It was certainly the case when I was a Minister, and I am sure it still is, that because of the relative size and importance of the financial services industry in the UK, our technocrats, if I can call them that, were always very involved in drawing up and agreeing the financial service directives that were in effect in the whole of the European Union. We used to have quite vigorous arguments with the European Union about the nature of some of that, given the slightly different culture that we have in the Anglo-Saxon world, if I can put it that way—the Minister knows what I mean—compared with some things that more routinely happen in the EU, and also because, frankly, our financial services sector is far larger than most financial services sectors within the EU and differs in its make-up. There were always these cultural issues.

However, in the aftermath of the financial crisis, there was widespread recognition and agreement—not only in the Basel III and 3.1 regulatory negotiations and how those agreements were put into EU law, which we are talking about now—about what had gone wrong; about needing to identify systemically important companies and make sure they were regulated appropriately, given the risk that under-capitalisation posed to the economies of countries in which those organisations were based; and about having rigorous and intrusive regulation to avoid some of the mistakes and traps that were fallen into in the run-up to 2008.

I am particularly interested in—I hope the Minister will explain it—how this will work, given that the Bill gives our regulators the power to change what has just been onshored to create a completely different system for investment firms, and then to take that forward in future regulation. We know that we have to be eternally vigilant to the way that companies evolve to respond to regulatory systems. If we end up fighting the previous battle, we will probably miss the next bubble. I would therefore appreciate it if the Minister—in commenting on the amendment, which is probing, in that sense—will explain how he believes that the regime that the Bill introduces will be able to respond to the challenges of the evolution of threats. Once the nature of what had been going on during the financial crisis was laid bare—a lot of it had been going on under the radar—one of the surprises was the connection between investment companies and banks, particularly the investment arms of banks. We discovered their trading of derivatives and the leverage they got out of those derivatives to make more money for themselves, more commission and more remuneration. Actually, a lot of what was in those derivatives was not sighted, and the regulation had essentially involved taking on trust the rating agencies’ assessments of what those derivatives were worth, without looking inside the packages.

There are many slightly different ways in which a similar problem could occur with investment companies. When the Minister replies to the debate, could he set out how he believes the Financial Conduct Authority and the regulatory authorities will keep an eye on that, if we are going to make it easier, as I believe the Bill does, for investment companies to pull away from the regulations that the CRR and the directive have imposed on banks?

I accept the argument that investment companies are not deposit-taking institutions and so we will not see a run on them, but there are equivalent runs on those companies when their credit freezes. We saw that happen in more than one example during the financial crisis, and we also saw many banks dragged to the edge, and potentially over it into insolvency, by the activities of their investment arms. I want some reassurance about how such interconnections, often not fully visible, can be properly tracked if we are loosening the regulatory requirements on investment bodies.

I remember talking to the Governor of the Bank of England about how deep and liquid the credit market was shortly before the whole thing froze. There is a lot going on below the surface that is not always obvious, including connections between institutions in terms of some of the assets they hold. Everyone missed that during the crisis, but there will be other new things that the Minister and I have probably not thought of that those institutions will be doing even as I speak. I hope that the regulators will know about that; otherwise we are in for some even more exciting times than we have had this year. I want reassurance that the proposed loosening, change and divergence that this Bill allows for does not prove less effective than the regime that we helped to design, and which we are now leaving behind.

Can the Minister share with the Committee some of the benefits that that divergence will deliver for the country? We know from 2008 what the risks can be, and that is why the amendment is so important, because it asks for an impact assessment to be made public of the effect of the changes that this Bill, were it put on the statute book, would introduce. It is only worth introducing change and diverging from what is generally judged to be state-of-the-art, good, high-standard regulation if we get some benefit from that. Perhaps the Minister could outline what he believes that benefit to be.

In common with my right hon. Friend the Member for Wolverhampton South East, who speaks from the Opposition Front Bench, I worry about just using competitiveness as the reason for fewer regulations. We have been there and seen the damage that can be done if competitiveness runs away with itself. Can the Minister say a bit more about competitiveness, and how he thinks that the proposed regime will benefit those who seek to ply their investment trade in this jurisdiction, as opposed to that of the EU or others around the world? Risks may have to be balanced, and I would like an understanding of them.

In line with what my right hon. Friend said, we must not forget the consumer interest. It is not often mentioned in the fog and the forest of regulation, but if money is being taken out of the system by middlemen and remuneration systems that incentivise the wrong behaviour, the people who suffer—first and foremost and always—are the consumers and customers of these institutions. If it is systemic and goes badly wrong, we all suffer as a result. I would like some information from the Minister about the benefits and the potential risks that we are running in introducing this regime.

There is a final area I would like to ask the Minister about. The three pillars, I think, of investment company will be regulated differently. I am sorry; I meant classes, not pillars. I am all over the place at the moment with Test and Trace and all sorts, so I often get my pillars and classes mixed up. Class 1 investment companies are the systemically important ones: if they go belly up, we have a big problem. Class 2 is slightly lower, and class 3 is much smaller. Clearly, if regulations are proportionate, it makes a lot of sense not to regulate the class 3 ones as if they were systemic.

I am interested in a couple of points. First, has the Minister thought about the dynamics of how the class system might change? How does a firm get from class 2 to class 1? Is the Minister introducing incentives to make it harder for firms to grow because they become systemic? Should we be worried about potential cliff edges? Secondly, if something below a systemic element is not systemic—which by definition has much lower levels of oversight and regulation—there is an incentive for companies to remain in class 2 rather than go up to class 3. Has the Minister thought about that? How will the FCA deal with that if there are situations with companies that might be on the edge in a dynamic situation?

Those are just a few observations about our amendment. I would like some insight from the Minister over and above the rather dry descriptions in the notes about how they foresee the system working.

I would like to take this opportunity, at the beginning of the Committee scrutiny stage, to say what a pleasure it is to serve under your chairmanship, Mr Davies, and to consider this important legislation with all Committee members. I welcome the opening comments of the right hon. Member for Wolverhampton South East, who described how the Opposition will approach the eight sittings over the next two weeks. I also broadly acknowledge and agree with virtually all of the comments that he and the hon. Member for Wallasey made in respect of the history of financial services regulation, and I look forward to responding to the points made and to a wide-ranging and constructive discussion over the next two weeks.

As I set out on Second Reading, this Bill forms an important part of the Government’s wider strategy for financial services at this critical moment, as we approach the end of the transition period. I just want to say at the outset that financial services, as some of us know––I look particularly to the hon. Member for Glasgow Central who has been in multiple Committees with me over the last three years––is necessarily a complex topic with a sometimes impenetrable vocabulary of its own. I will do my utmost to ensure that, in speaking to the Bill and any Government amendments, my comments are as clear, accessible and accurate as possible. Please feel free to challenge me on this and if at any point Committee members feel that I have fallen short of that ambition, I look forward to trying to correct that.

Let me move to amendment 19. The Government are fully committed to ensuring that any delegation of responsibility to the regulators is accompanied by robust accountability and scrutiny mechanisms. Members referred to divergence and regard to consumer interests. The differentiation between different categories of firms depends on an assessment of eight systemically important firms that will continue to be the responsibility of the Prudential Regulation Authority. Amendment 19 seeks to add a requirement for the Secretary of State to publish a report within three years of this Act, including an assessment of the impact of amendments to the capital requirements regulation on financial stability, competitiveness and consumer risk.

The amendments to the capital requirements regulation tell only a small part of the story. The Bill amends the capital requirements regulation to remove Financial Conduct Authority investment firms from the scope of the banking regime. The more important story will be told by the FCA’s rules that implement the investment firms prudential regime. I want to be absolutely clear on the point about divergence. Obviously, as we get towards the end of the transition period, we will get to a point where we have left the EU and the provisions of alignment within the transition period. Therefore these measures reflect the reality of where we will be on 1 January. As the hon. Member for Wallasey said, the UK’s regulators, Ministers and officials played an instrumental role, given the size of the UK financial services industry, in shaping those regulations on an EU-wide basis. But it is surely only appropriate that, when we have left the alignment provisions of the transition period—and rightly so—we should look to actually govern and set the regulatory environment that suits the particular needs of our industry. The configuration of that industry, as was understood in the speeches that have been made, is different.

When the FCA does implement the IFPR, the Bill requires the FCA to demonstrate how it has regard to several considerations, which I shall set out now. First it must have regard to relevant international standards: Basel 3.1. That goes to the point about the relative standing of the UK. The right hon. Member for Wolverhampton South East made a point about the risk around individual firms lobbying for differentiated treatment. It is right that the regulators are responsive to the needs of the UK industry, but they are also accountable to those international standards––the relative standing of the UK––in addition to the current statutory objectives under the Financial Services and Markets Act 2000 to protect consumers and the integrity of the UK financial system.

This approach aligns with the March 2020 House of Lords EU Financial Affairs Sub-Committee recommendation to delegate more power to the regulators, underpinned by more and strengthened parliamentary scrutiny. We are delegating this to regulators because they have the technical expertise, not the Government. The Bill’s reporting provisions should provide the information that Parliament is seeking. This amendment would create a duplication of efforts by the regulator and the relevant Departments on undertaking such an assessment.

I recognise that some points were made about, and the hon. Member for Wallasey in particular asked me to respond on, the relationship in terms of moving between different categories of firms. I think it absolutely necessary that we essentially, through this provision, right-size the regulation for the different configurations of firms. I also think this right in an environment where, in general in the UK, we have had standardised models of capital requirements. One of the key arguments with respect to banks, for example, is that there has not been meaningful competition because those capital requirements are too rigid. I will draw attention to the Committee’s experience last week with Gurpreet Manku from the British Private Equity and Venture Capital Association, who, when asked about the levels of capital required, said that in some cases higher levels of capital would need to be held. I think that that recognises that what we are doing here is actually seeking to empower the regulators to right-size the regulation, having regard to international standards but also fixing it appropriately for the UK regime.

I do not see that this amendment delivers over and above the accountability and scrutiny mechanisms already in the Bill, which already find the right balance in relation to parliamentary scrutiny and regulator accountability. Therefore, I ask that the amendment be withdrawn.

I want to come back on that and press the Minister on a couple of questions that, with all due respect, I do not think he answered in his response. Clearly, our amendment is a hook on which to hang a debate about transparency, so that we know what the regulators are doing, and about accountability, because, as I said earlier, if these organisations begin to respond to particular inducements, such as their own remuneration, they can cause risk to happen in a way that can be severely detrimental to consumers and entire economies, as we have seen in recent history. I think that, in the light of that, we are perhaps owed a little more of an explanation from the Minister—I am putting this gently—about what the approach of the regulators will be. The Minister can stand there and say, “The regulators are going to right-size regulation.” That sounds like a fantastic thing because of the very phrase that the Minister has used—“right-size”—but how are they deciding?

We clearly got the wrong size because of evolutionary behaviour to avoid regulation and increasingly risky behaviour in the global financial system in the run-up to the global financial crisis in 2008, which was caused by or began in the subprime mortgage market in America but which brought most of the—if I can put it this way—western-style banking systems close to ruin in the rest of the very interconnected economy because of what had been happening with derivatives. Therefore I wonder whether the Minister might be able to say a little more about the benefits of having the regime that he called right-sized regulation; why we might wish to move away from the current position so quickly after the transition period is over; and what he sees as the benefits of doing this. Refusing our amendment means that there will be no transparent analysis of the effect on the public domain, so we will not be able to discuss it.

I for one think it is important to get these very technical, dry regulations out into the open and to translate them, with the seriousness they deserve, into the potential implications that they present for all our constituents. Our amendment seeks to do that by at least having a transparent publication of these kinds of analyses. The Minister wants to keep it in the regulators’ ambit, in which there is not so much light, to be honest. It is highly technical, and it is hard for those on the outside to have a look inside to see what the implications are. I have hardly had any correspondence from outsiders on the Bill to help me through the long hours and sittings to come. That rather illustrates my point: that a light needs to be shone on this area, because of the risks if we get it wrong.

The Minister rightly wants to get it right, but surely it is relevant to hear from him and to have a bit of transparency, and to put something on the record now about how he sees the advantages playing out, as opposed to the risks. Will he have another go?

I am very happy to have another go. The hon. Lady is at risk of suggesting that there is somehow a clumsy, rushed delegation to regulators and a risk that—in that delegation—the industry will influence regulators to right-size in a way that damages consumers. I draw her attention to the fact that the legislation gives the FCA responsibility to have regard to the impact on consumers, on the market and on firms—that is, the impact on themselves—of not having the appropriate capital requirements.

The right-sizing comment refers to the fact that the firms are currently bound by rules that align them to other institutions that are clearly functionally different. Nobody really believes that it would be right for there to be a prescriptive mandate from primary legislation on exactly how those technical rules and those capital requirements on a firm-by-firm basis should exist. The FCA has the right to reclassify firms and monitor that reclassification as firms evolve. The PRA will retain oversight of systemically important firms.

I contend that the Bill contains sufficient mechanisms to ensure public and parliamentary scrutiny of both the FCA and the Treasury through the draft affirmative procedure and the FCA reporting requirements. That combination of the FCA’s existing statutory duties and the “have regards” set out in the Bill cover the areas that amendment 19 seeks to address.

I make one further important point that goes to the heart of the wider regulatory framework. The future regulatory framework consultation that we launched on 19 October sets out over a 12-week period to look holistically at what should be the constitutional relationship between the FCA, the PRA, the Treasury and Parliament to embed an enduring accountability framework on a much broader basis. There will be another consultation subsequent to that. I anticipate that the response to the consultation might be, “Why haven’t you done this before?”. The bottom line is that the measures are required to meet international standards within an internationally determined timeframe of expectations. I declared on Second Reading that this is the first in a series of pieces of legislation, and I have always said so. This first piece of legislation sets the accountability framework for the initial measures.

I do not think any of us doubt the Minister’s intention to get this right and to recognise that these decisions have a consumer impact. The challenge, which I think we all see, is that it is one thing for the FCA to conduct a public consultation on high-cost credit firms, for example—he knows my specialist subject—but on something like LIBOR or the Basel regulations, which is less tangible but no less impactful, the argument he is making seems rather to strengthen the point the amendment makes about including consumer risk as one of the things to be reported on, because it does not immediately grasp people’s imagination until a catastrophe such as the last financial crisis happens. He says he envisages the FCA’s performing this role, so will he set out how he sees it performing that role if we do not say, “Actually, could we in a couple of years’ time get some information on how consumer risk has been identified and addressed in this process?”. That is harder to quantify, but no less important.

I am very happy to respond to that point and I thank the hon. Lady for her comments. I recognise her expertise, particularly on high-cost credit, and I look forward to—I imagine—further amendments on that, perhaps next week.

The FCA will be required to publish an explanation of how having regard to the additional considerations that I have set out has affected the proposed rules that it comes up with. When the FCA makes those final rules, it will publish an explanation complying with them, as well as a summary of those new rules, aligned to the FSMA publication requirements.

The challenge here is a bit of a mismatch between the concerns that we have collectively in Parliament to maintain standards that will not allow a repeat of what the right hon. Member for Wolverhampton South East eloquently set out as the problem leading up to 2008 and to have regard to the enduring and ever-transforming consumer risks, which derive from rules and technical standards that we in this place are not well placed to deliver, given their design. What we must do subsequently with the future regulatory framework review—it is not some short, rushed exercise, but a deliberately open exercise of consultation to try to examine best practices—is to come up with something that gets that balance right between the direction that Parliament sets in primary legislation and the accountability to this place that will exist for our regulators, through the Treasury Committee and through potentially significantly enhanced accountability mechanisms.

However, setting out the enduring final framework of that relationship between the regulators and Parliament is the point of that consultation exercise. With respect to this measure, I believe that the accountability mechanisms set within it and the procedures set out will achieve the accountability that is necessary and appropriate at this stage.

Before I call the shadow Minister, I say that one of his many qualities is that he is very softly spoken, which is not conducive to Committee Room 14 with social distancing in place, so I encourage him to speak up; I am sure that would be appreciated by all.

I am a softly spoken and moderate man; it has not always done me good, but I am on track here at the moment.

I want to respond to the Minister’s reasons for advising us not to press the amendment. I talked at the beginning about three pots of amendments, and it strikes me that there are really two or three pots of reasons why Ministers say no to amendments. The first is that the amendment is wrong or not competently written in some way. Pot two is that it has completely misunderstood the Bill and therefore is not just incompetently written, but actually wrong in its intent. Pot three is to say that it is covered anyway. Usually, if somebody is not going to say yes to an amendment, it falls into one of those categories. The Minister has gone for pot three today. He has not really argued that the amendment is wrong in its content or that there is anything wrong with the way it is written; he has argued that this kind of thing is covered anyway. There is a problem for us in accepting that.

Does my right hon. Friend agree that there is a fourth one, which is to say, “This should not be on the face of the Bill; we are going to do it, but we are going to put it in secondary legislation,” which of course is unamendable and usually rammed through this House in a way that makes scrutiny even harder?

My hon. Friend is absolutely right. Perhaps there is even a fifth one, which is, “Wait for the consultation on something else.” The problem with going for pot three and saying the amendment is covered anyway is that that concedes that it would be completely harmless and there would be nothing wrong if it were accepted. The Government are, in effect, agreeing with its intent and saying they will do it.

The Minister, probably not for the last time, referred to the future regulatory framework consultation that was published a month ago and said, “We will cover a lot of this in there.” I have had the pleasure of going through that document—I was looking longingly as I did so at Tim Bouverie’s excellent book on appeasement on my bedside table and resisting the urge to pick it up—but we do not know its conclusions. He might turn out to be right and we might have something similar, but we might not.

More seriously, the reason why we need such a report and why we need to be careful about what is in the clause—we may come to this in the stand part debate—is that although investment firms, which do not take deposits, may be characterised in some ways as different from deposit-taking banks, we learned during the financial crash about the degree of interconnectedness. Frankly, if the system falls over, no one will care about that—it will not matter at all. When the system is so connected, it will not matter that one company, metaphorically speaking, put its hand up and said, “We wanted to be treated differently because we did not take deposits.”

That brings us back to the consumer, who has to know that the system as a whole is safe—or as safe as can be expected. I find myself unconvinced by the reasons not to accept the amendment, so I am minded to press it.

Question put, That the amendment be made.

Question proposed, That the clause stand part of the Bill.

As ever, the UK remains committed to the highest level of regulatory standards. The UK is also committed to better regulation—regulation that is fit for purpose and appropriate to the risks, size and activities inherent to UK firms. At present, investment firms are supervised by either the FCA or—for those that are systemically important—the PRA. However, both currently operate under the same prudential regulatory regime as banks, which is not appropriate for non-systemically important investment firms. Such investment firms do not typically grant loans or accept deposits, so the risks they face and pose are different from those of banks.

A new, bespoke regime is required for investment firms, and the first step in that process is to remove non-systemically important FCA investment firms from the relevant regulations for banks. That is precisely what clause 1 does: it sets out the necessary amendments to remove FCA investment firms from the scope of the capital requirements regulation. Only credit institutions and PRA-designated investment firms will remain under the CRR. That is appropriate, as systemic investment firms pose similar risks to financial stability as the largest banks.

Clause 1 also introduces a definition of “designated investment firm” that recognises that only investment firms that conduct bank-like investment activities may be designated by the PRA as systemic institutions. As such, commodity dealers, collective investment undertakings and insurance undertakings that are not bank-like are excluded from the definition. That reflects the EU’s approach. The remaining investment firms—all FCA investment firms—will be regulated under the new investment firms prudential regime, which I will turn to when we debate clause 2 and schedule 2.

Clause 1 also amends the Capital Requirements (Country-by-Country Reporting) Regulations 2013. The amendments are necessary to ensure that FCA investment firms adhere to tax reporting requirements that are consistent with the new investment firms prudential regime, and not with the current banking regime. For example, the smallest FCA investment firms will be exempt from the reporting requirements, which is in line with the IFPR’s more proportionate application of regulatory requirements on the smallest firms.

Clause 1 is merely a first step in the introduction of the investment firms prudential regime, but it is a crucial step. I therefore recommend that the clause stand part of the Bill.

I just have a couple of questions for the Minister. He described the rationale behind the clause, but can he tell us how many firms we are talking about? How many of the non-deposit-taking investment firms are likely to be exempt from the capital requirements regulations under the terms of the clause?

What is the Minister’s response to the point that my hon. Friend the Member for Wallasey and I have been trying to make about interconnectedness? He has advanced a reason as to why such investment firms should be treated differently, but how will the regulators cope with the interconnectedness of the system if companies are treated differently in that way?

My concerns very much lie around the interconnectedness, because the system will be only as strong as the weakest part within it. If the weakest parts start to pull down everything else and make everything else unravel, we have a real problem on our hands.

My questions are about the monitoring of risk within the system that is being established. How can the Minister be certain that the risks are being closely monitored by the regulators, that the regulators understand the business that smaller firms are doing in their part of the market, and that the activities that those smaller firms are engaged in does not pose a risk to everything else? There is definitely cause for them to be monitored in order to have an eye kept on them, and to ensure that their activities do not cause wider risk. If attention is not being given to them, how can we ensure that their activities are above board and are not causing further risks anywhere else within the system?

How will the monitoring be scrutinised more widely by Parliament and others? The Treasury Committee gets the opportunity to question the regulators, but getting down to such a level of detail is not necessarily something that we would do. How does the Minister envisage Parliament having a role in that scrutiny in order to ensure that, should something happen or go wrong, we find out about it timeously rather than when it is too late to have any impact and when the whole thing has tumbled down?

Like the hon. Member for Glasgow Central, I am on the Treasury Committee. We have a very full programme. The hon. Member for Hertford and Stortford also shares the pleasures of being on the Treasury Committee. However, it would be very difficult for us to question the FCA with this level of granularity. Therefore, given the onshoring and the importance of this regime as it evolves, how does the Minister expect the transparency, oversight and accountability to be put in place going forward? Does he expect that to also include consumer authorities and the consumer interest, and will explain what he expects these companies to be able to do under this regime that they cannot do now?

I am grateful for those questions, and I shall seek to bring some clarity. The right hon. Member for Wolverhampton South East asked me two questions about the numbers. I cannot give a specific number here, because it is fluid and would be something for the FCA to determine. I am sure the FCA would be very happy to give him an indication on that.

To the other point around interconnectedness, made by the hon. Member for Glasgow, Central as well, the classification will be based on the evolving nature of the activities, and this is something the FCA makes judgments on all the time. The PRA is responsible for eight systemically important institutions, covering Goldman Sachs and J. P. Morgan, among others, which are of a size and scale such that their interconnectedness means they are of systemic significance.

There are a lot of complex relationships between financial institutions. Therefore, as acknowledged by the hon. Member for Wallasey, as people who are technically capable of evaluating those interconnected elements, it is appropriate and in their interest to make those judgments, and that sort of decision making does go on currently.

The scrutiny process links back—I will not keep repeating it—to the point that the right hon. Gentleman made about the “Future Regulatory Framework Review”, which will look at the appropriateness in a situation where that scrutiny has previously happened at an EU level, through combined conversations, the Council of Ministers, work that is then is auto-uploaded to the regulators. What is the new mechanism to hold regulators accountable in a situation where they are given the task from this place? That would be the purpose of the extended regulatory review and future legislation. It may involve an enhanced role for the Treasury Committee, with additional resources to augment the expertise that already exists, but that is a matter for that consultation.

In answer to the question from the hon. Member for Wallasey about what I expect the companies will be able to do that they currently cannot, this comes back to some of the evidence we heard last week from the British Private Equity and Venture Capital Association, which says there is a wide family of firms with different activities. The question is: are the regulations as they apply at the moment—as fitted for 28 countries, where obviously some compromises were made—appropriate for the configuration of firms as they exist?

What I would expect to see is consideration given for capital requirements that match the actual profile of activities, notwithstanding the very legitimate points made around the interconnectedness and the risks associated with their broadest activities. I have stressed throughout the passage of this Bill so far, and I reiterate now, that the essential purpose of the Government’s approach is to ensure that we have the highest regulatory standards. Our reputation as a centre for financial services is based not on finding quick fixes that shortcut regulatory standards, but on finding something that fits the nature of our industry, aligned to international standards, that gives us the best opportunity to grow and prosper in a way that is safe and secure for consumers.

Question put and agreed to.

Clause 1 accordingly ordered to stand part of the Bill.

Schedule 1

Exclusion of certain investment firms from the Capital Requirements Regulation: consequential amendments

Question proposed, That the schedule be the First schedule to the Bill.

Schedule 1 complements clause 1, in so far as it makes consequential amendments to the Capital Requirements Regulation 2013 and the Capital Requirements (Country-by-Country Reporting) Regulations 2013. For example, many of these consequential amendments remove references to the Financial Conduct Authority as the competent authority under the CRR in recognition of the fact that henceforth only the Prudential Regulation Authority will be responsible for regulating credit institutions and PRA-designated investment firms under the CRR. Taken together, these technical amendments achieve the aim of removing FCA investment firms from banking rules while keeping the most systemically important investment firms under the regulation and supervision of the PRA. I therefore recommend that the schedule be accepted.

I have just one question. The Minister mentioned country-by-country reporting, which we may come to at other points in the debate. Could he help the Committee by telling us what is covered in the country-by-country reporting? There is an ongoing and very live debate about what we expect multinationals to cover in country-by-country reporting in order to avoid tax arbitrage or transfers between countries that do not stand up to scrutiny. What are the things covered by country-by-country reporting in schedule 1?

I just want to ask the Minister about the additional responsibilities in the schedule. When we took evidence last week, Sheldon Mills said:

“We can always do with more resources”.––[Official Report, Financial Services Public Bill Committee, 17 November 2020; c. 9, Q12.]

What further discussions has the Minister had about ensuring that the PRA and FCA are adequately resourced for these additional responsibilities? It is an awful lot of extra work. We are moving an awful lot of work over to them while they have covid and Brexit to look at too. I just wondered whether there had been any further detail about what additional resources might be available or required in the months and years ahead.

I will come first, if I may, to the hon. Lady’s point about the resourcing of the FCA. It is resourced by a levy, which it determines. It is under review, but it is approved and set by the FCA. The hon. Lady has asked that question a number of times over the past 18 months. She is right to draw attention to the enormous pressure that the FCA is under, in terms of giving guidance about the forbearance measures for consumers and banks. That will be a matter for the FCA. I have six-weekly conversations with its chief executive officer. That is not a matter that he has raised with me, but it will be under review. I support it in what it needs to do to secure those resources.

The right hon. Member for Wolverhampton South East asked about the Capital Requirements (Country-by-Country Reporting) Regulations. They were designed to ensure that appropriate tax reporting regulations are imposed on firms regulated under the banking framework. They require firms to report relevant information on tax and revenue in each country that it has operations. An objective of the IFPR is to make regulations for FCA investment firms more proportionate to the risk, size and activities of those firms. That will be reflected in the country-by-country reporting. That will enable certain investment firms, such as the smallest FCA investment firms, to have reporting requirements consistent with their size and activities, and ensures that such firms are competitive. Furthermore, the smallest investment firms do not typically have overseas operations, making these requirement irrelevant for them. I cannot say any more about that at this point, but I am happy to follow up further if the right hon. Gentleman wishes to have information.

Question put and agreed to.

Schedule 1 accordingly agreed to.

Clause 2

Prudential regulation of certain investment firms by FCA rules

Question proposed, That the clause stand part of the Bill.

This short clause gives effect to schedule 2, which inserts provisions that will enable the introduction of an investment firm’s prudential regime into the Financial Services and Markets Act 2000. I therefore recommend that it stand part of the Bill.

I do not really have substantial questions at this stage, because schedule 2 sets out the detail, and I think we will probably have an extensive debate on it.

The clause inserts a new part 9C into the Financial Services and Markets Act 2000, which forms the legal basis for the new regime that the Bill introduces for investment companies. We have been talking about the minimum amount of capital required. We have covered some of that, although we will get further into it when we come to the Basel 3.1 bits.

Will the Minister say a bit about remuneration policies? That is another issue that will be regulated. We know from what happened in the financial crash and the build-up to that bubble that remuneration policies formed a key part of the bad incentives that created the behaviour that caused the crash. How will the Government be dealing with the regulators about remuneration? What will the principles be? Getting the right incentives for remuneration is a key driver for behaviour, and behaviour is a key driver for activities in that area, as we know only too well. If we did not know that from 2008, we would know it from the Wall Street crash in 1929. It is part of a set pattern. How will the Government ask the regulators to deal with that issue?

I am happy to respond to that. The risk that the hon. Lady sets out—that, broadly, this country will go down a route where we deviate significantly from the new established norms of the regulation of remuneration and the rules around rewards and bonuses and so on—is a matter for which the regulator has responsibility. It will be incumbent on the Government to look at evolving best practice and the appropriate way to bring continuity to such regulations in line with those highest standards.

It is not our wish to create deviation for the sake of it. We will continue to look at the market situation. The point has been made already that we have to be alert to evolving new practices. In the same way, I think the hon. Lady would acknowledge that, in the light of the last crisis, there was an evolution in business models with respect to high-cost credit. There is always a risk in the sort of environment that we are in now that there will be new developments. I cannot prescribe precisely how we will look forward, but we will look to adhere to global high standards, because the integrity of our reputation relies on it.

I thank the Minister for his indulgence. Clause 2 is also partly about enforcing regulations; there are references to fraud and criminal offences, which again we will come to in more detail later. Will he let us know whether fraud enforcement will be beefed up? We can have a great regulatory regime and redefine fraudulent behaviour, but if enforcement is not up to scratch, that will not really deter. This is area where, if enforcement is too weak, the rewards are very high and the risk of being caught and prosecuted or fined is very low. Can he give some reassurance on that point at this stage?

I am happy to. The hon. Lady makes a fair and reasonable point. We have to maintain the highest standards of regulation. The FCA and the PRA are extremely well respected globally, but that does not lead me as the Minister to be complacent. We must continually be vigilant about whether those standards of compliance and intervention into non-compliance are sufficient and adequate. We will always seek to maintain that.

To return to the principle, these capital requirements for firms are extremely detailed and technical. The regulators have the right expertise to update them. They will have increased responsibility, but they will need to consider the principles set out in the Bill. We are following the advice of the House of Lords Financial Affairs Sub-Committee, which said that these delegations would be appropriate. The broader conversation about the direction of travel around what sort of framework we wish to have in the UK is not fully addressed at this moment, but there will be more to say in the context of the response to the future regulatory framework two-stage review and the legislation we bring forward subsequently.

Question put and agreed to.

Clause 2 accordingly ordered to stand part of the Bill.

Schedule 2

Prudential regulation of FCA investment firms

I beg to move amendment 20, in schedule 2, page 63, line, at end insert—

“(ba) the target for net UK emissions of greenhouse gases in 2050 as set out in the Climate Change Act 2008 as amended by the Climate Change Act (2050 Target Amendment) Order 2019, and”.

This amendment would require that, when making Part 9C rules, the FCA must have regard to the UK’s net zero 2050 goal and the legislation that has been passed in pursuit of this goal.

With this it will be convenient to discuss the following:

Amendment 39, in schedule 2, page 63, line 5, at end insert—

“(ba) the likely effect of the rules on the UK meeting its international and domestic commitments on tackling climate change, and”.

This amendment would ensure the likely effect of the rules on the UK meeting its international and domestic commitments on tackling climate change are considered before Part 9C rules are taken.

Amendment 24, in schedule 3, page 79, line 29, at end insert—

“(ca) the target for UK emissions of greenhouse gases in 2050 as set out in the Climate Change Act 2008 as amended by the Climate Change Act (2050) Target Amendment Order 2019, and”.

This amendment would require that, when making CRR rules, the FCA must have regard to the UK’s 2050 net zero goals and the legislation underpinning those goals.

Amendment 42, in schedule 3, page 79, line 29, at end insert—

“(ca) the likely effect of the rules on the UK meeting its international and domestic commitments on tackling climate change, and”.

This amendment would ensure the likely effect of the rules on the UK meeting its international and domestic commitments on tackling climate change are considered before CRR rules are taken.

Amendment 20 focuses on the new accountability framework for the FCA set out in schedule 2. If anyone wants to follow the detail, I am referring to the list at the top of page 63 of the current edition of the Bill. Returning to my opening remarks this morning, we tabled a similar—possibly identical—amendment to the accountability framework set out for the PRA in schedule 3, but we will come to that in due course.

As the Bill stands, the accountability framework in schedule 2 asks the FCA to have regard to three things: international standards, which I do not think anyone would argue with; the relative standing of the UK as a place to do financial business, which can be interpreted in a number of ways, but could be summed up as a competitiveness criterion; and other matters, which may be specified by the Treasury. I ask the Minister, why were those three picked out of all the things that we wanted the FCA to have to regard to in this brave new world, where we are onshoring all this, and not others?

We take the view that this list is incomplete and could be usefully added to. The regulators have an expanded new task, between schedule 2 and schedule 3, of regulating this huge, globally significant financial services industry with a lot of new powers, so what should they have regard to when they do this? There could be a number of things added to this “have regard to” list. Perhaps the most obvious is the UK’s climate change goals, specifically the commitment to reach net zero emissions of all greenhouse gases by 2050.

Why do we want to add that in particular? There are several reasons. First, this is completely bipartisan. The Government are committed to it and the Opposition support it. It does not divide the parties in this House; it has multi-party support. Secondly, we are not asking for something that has not already been legislated for. It was legislated for on two important occasions in this House. We are not tacking on a new, previously undiscussed climate change commitment to the Bill. The legislative history of this, as hon. Members will know, is that the original goal of an 80% reduction in greenhouse gases by 2050 was legislated for in the Climate Change Act 2008 under the last Labour Government, which the Conservative Government changed to a commitment to net zero by 2050 through the 2019 order referred to in the amendment, so this has already been legislated for twice, once at 80% and now at net zero.

Thirdly, the commitment goes beyond international standards. The accountability framework references adhering to international standards, which is absolutely right. However, as I said when we were discussing the capital requirements previously, that does not mean that that is always what the UK should do. We have chosen as a country to commit to net zero by 2050, which goes beyond what we have to do under international standards. It is a specific UK goal, in line with our commitment under the Paris agreement of using the “highest possible ambition”. Through that agreement, we will end our contribution to global warming.

Fourthly, the Chancellor has already signalled that he sees the financial services sector as playing a crucial role in achieving this target. In fact, he signalled that just two weeks ago when making a statement to the House on the future of financial services, saying that the UK will issue its first green gilt and that he wants to put

“the full weight of…capital behind the critical global effort to tackle climate change”—[Official Report, 9 November 2020; Vol. 683, c. 621.]

This is very much in line with what the Chancellor says he wants to do.

Is it not also important to recognise that some of the strongest drivers for reaching some of those emissions targets will come from the financial sector itself? For example, the move towards decarbonising pension funds has been hugely beneficial in promoting renewable energy. It makes sense to join the dots when it comes to our country’s financial objectives and our wider social and climate objectives.

My hon. Friend is absolutely right. Joining the dots is exactly what we should do. Of course, she is right that individual investment firms will make their own decisions on these things, perhaps sometimes pressed by pension fund members, consumer groups or trustees in some ways. We applaud firms that do that, but how much more powerful would it be if that was a goal of the regulators, set out in our own financial services legislation? It would be more powerful, because the UK has this huge financial sector, which has around it this cluster of expertise, which we refer to a lot—legal and accountancy firms and all the rest—and because our own domestic commitments can bend the power of that sector towards the net zero goals.

The amendment goes with the grain of what more and more firms and people in this sector are talking about. By including this change, we can take all the fine-sounding commitments on corporate websites and put them at the heart of our regulatory mission. It can mark out the UK financial services regulation as having a new post-Brexit mission. If asked what we want the UK financial services sector to do in this post-Brexit world—we debated divergence and capital rules and all the rest earlier—what would be a better answer than making sure that the power of this is bent towards us achieving net zero, and in so doing encouraging financial sectors elsewhere in the world to go down the same path?

Finance will play a huge role in whether or not we meet the target. I do not propose, Mr Davies, to go through what the Committee on Climate Change has said that we need to do to reach the target in great detail, because we would be here all day, but I want to give the Committee an idea of a few headings that will require enormous investment.

If we are going to achieve the target, we will need a quadrupling of the supply of low carbon electricity. We have done well on low carbon electricity in the UK, in the last 20 years or so. We have vastly expanded the provision of renewables that go into the grid, but even after doing well we need to quadruple that if we are going to meet the target.

We will need a complete automotive transition, from internal combustion engines to electric or other zero emission vehicles. Just a few days ago, the Prime Minister himself announced a new, more advanced target for the phasing out of internal combustion engines.

There will need to be a huge programme of investment in buildings and heating. Whether that is through heat pumps or hydrogen boilers, there will need to be a huge programme of retrofitting equipment to millions of houses throughout the UK.

There will need to be a large programme of afforestation, because remember this is net zero. It will not be that we never have emissions, but we will have net zero. One of the main vehicles, if you like, in absorbing the emissions that we are still responsible for is afforestation, so we will need a huge programme.

We will need changes in farming and food production. We have the return of our old friend, carbon capture and storage. That takes me back, because a decade ago, when I was sitting where the Minister is now, we were announcing carbon capture and storage. It was announced again last week. There might be Members here who are quite new to Parliament, such as my hon. Friend the Member for Erith and Thamesmead, the hon. Member for Hertford and Stortford and maybe others who were elected in 2019. I look forward to them coming back in 10 years’ time and debating a Bill where new carbon capture and storage has been announced. Maybe we will even have achieved it by then, who knows?

Members may indeed remember carbon capture and storage well, because we were promised a huge project in Peterhead, ahead of the indy ref, which has not yet emerged.

Perhaps it is not her ambition to be here in 10 years’ time. Carbon capture and storage is back. There are more things that we will have to do, but all of those headings will need finance, capital and investment. That will not all come from the state. It has got to be a combination of public and private investment, if the country is serious about this goal.

This is not an ordinary piece of legislation or A. N. Other Bill that we want to tack on to the regulatory framework. It is an overarching piece of legislation that will inform investment patterns and work production in a whole range of areas. It is one of the most significant pieces of legislation in this country since the end of the war. Perhaps we do not always realise that, but it really is, if one thinks about the list that I have gone through.

All of those things will take finance. It seems to me not odd to add this to the regulatory framework, but very odd that it has not been added already, particularly because the Government have made so much of the country being an international leader in the area, including asking the former Governor of the Bank of England, Mark Carney, to play a leading role. We absolutely welcome that.

The right hon. Gentleman sets out very well the problem that our generation faces. I say that as someone who has worked in financial services and has a family member who also works in the sector. The right hon. Gentleman is totally right that the key to unlocking progress towards 2050 is through private capital, but will he not concede that the Government have already made significant announcements such as those on the green gilts, the long-term asset fund and the green homes grant? Many announcements that have been made will help to mobilise capital towards the goals that he seeks.

The hon. Gentleman is right and he goes for pot 3 in terms of my reasons. I repeat: the problem about pot 3 is that the reason not to accept an amendment is that it concedes that it is absolutely heartless to do so. He is absolutely right. The Government have said that they want the UK to be a leading player and they appointed Mark Carney, who is a champion of green gilts, I believe. I was pleased to hear the Chancellor’s announcement, because green gilts have been issued by other countries in the past year or two. They have often been oversubscribed, which shows an investor appetite for products geared to that end.

Let me put the point back to the hon. Gentleman. If there are new financial innovations, such as green gilts, that Governments can issue to finance the list of things I mentioned from the Climate Change Committee and if there is investor appetite, as there seems to be, for the limited number of green gilts that have already been issued, why on earth would we not put at the heart of the regulator’s mission that they should have regard to these goals and use them as a guiding principle, particularly as we are going into a post-Brexit world where we will be asked on many fronts what we are for now given that we have left an existing framework? It is particularly appropriate to add this proposal to the Bill. This will require investment and it cannot all be done by the state. It will require innovation in finance. We have mentioned green gilts but other kinds of saving products, investment products, bonds, loans and all sorts of instruments will all have to be geared to the necessary changes to meet the net zero target.

The final reason for the proposal is to stress the ambition of the target. Any one of the things that I read out would require a lot of ambition and a lot of investment. It is pretty hard to see how this can all be achieved if it is not an explicit goal of financial regulation.

To recap, the amendment seeks to make these changes in the least possible contentious way. We have not added a syllable or comma to anything that the Government have not already legislated for. All we are asking for is that the Government signal that they are taking their own legislation seriously by adding the net zero commitment, which the House has already legislated for, to the mission of the financial regulators. That seems to be a most uncontroversial and reasonable thing we can do in the post-Brexit financial regulatory framework.

I support Labour amendments 22 and 24 and wish to speak to amendments 39 and 42 in my name and those of my hon. Friends.

I agree very much with the right hon. Member for Wolverhampton South East. Our amendments are trying to help the Government out. That is unusual but, in the spirit of cross-party consensus and doing things together to save the environment, that is perhaps how we should proceed. On 9 November, the Chancellor said that he wanted to lead the world in the use of technology and green finance. Unfortunately, the Bill somehow missed the boat. It is unfortunate that the Chancellor’s statement came just before the Minister made his Second Reading speech because the Bill would be the place to start with this ambition.

Our amendments very much align with the Chancellor’s stated aims on green finance and we want to help the Government meet their aims. Amendment 39 would ensure that

“the likely effect of the rules on the UK meeting its international and domestic commitments on tackling climate change”

was considered before part 9C rules are made. Amendment 42 would do the same for the CRR rules. This is very important to me, not least because the COP is scheduled to happen in my constituency next year. I am sorry that it did not happen this year, but that is the way that things are with covid.

We know that it is important for all parts of Government and the financial services sector to assess how their activities impact climate change, because if we do not take this seriously right across the board, change will not happen. The radical change that we need will not happen quickly enough. I was heartened when the Governor of the Bank of England said at the Treasury Committee yesterday that he was very keen on his rules being changed to help meet these green objectives. The Bank of England is in discussions with the Treasury about changing its mandate to reflect green ambitions. It is important that we reflect that across all the regulators as well.

Our amendment would ensure that climate change remains high on the FCA’s agenda and part of its core activities. New section 143G(1)(c) in part 1 of schedule 2 refers to

“any other matter specified by the Treasury by regulations”,

so it may well be that this will be done anyway, but it would have been nice, in the spirit of cross-party consensus, if the Government had taken this on rather than waiting for some point further down the road. We have the opportunity here today to say that we think that this is important enough to put in the Bill itself. It may well be something––the Minister will tell us––that they are going to do later or eventually, but why not take the opportunity today?

While we welcome and recognise movements within the financial services sector to progress environmental, social and corporate governance and other moves supporting the environment, it is vital that the regulations keep pace with the pressing need to ensure that the private sector contributes as much as possible to our environmental goals. The covid-19 pandemic has been an unprecedented global crisis that has fundamentally changed every aspect of our lives and it will continue to do so for some time to come. While the immediate focus of the Government continues to be on protecting lives and livelihoods, the climate emergency has not gone away and must be central to our recovery from this difficult time. The amendment would be timely in doing this now to ensure that the recovery and the actions of the financial services sector reflect that.

In anticipation of the new normal, we have the chance to reimagine the world around us and begin building a greener, cleaner and more equal society and economy. Our starting point has changed but our ambitions have certainly not changed. The SNP remains deeply committed to its ambition to end Scotland’s contribution to climate change by 2045. I am equally clear that the year’s delay to the COP should not and must not mean a delay in collective global action to tackle climate change.

The UK really does have the opportunity to be a leader here. If Scotland were independent, we would hopefully be leading that charge, but we leave reserved matters to the UK Government and ask them to take on those obligations. We hope that the FCA can go further in tackling the climate crisis. Westminster still lacks the ambition that we have in Scotland. I should set out that our climate change targets are for a 75% reduction in emissions by 2035, net zero carbon emissions no later than 2040 and net zero for all emissions by 2045, which is five years ahead of the UK. Energy policy is largely reserved to the UK, so we need to take this opportunity to follow the money, to look at where investment is going and to ensure that we can meet our obligations. We welcome the pledges on green finance and think that the amendment would help to enhance the UK Government’s commitments.

Since the right hon. Member for Wolverhampton South East mentioned carbon capture and storage, I want to set out briefly where we see this. We see very much that the north-east of Scotland has been left behind again. My hon. Friend the Member for Aberdeen South is still travelling down here. When we discussed the scheduling of the Committee, I mentioned that the way the Committee meets during the covid pandemic makes it difficult for Members from further afield to get here, and this afternoon is very much the soonest that he can make it here this week, because of the difficulties we have with transportation, the limitations of this Committee and the fact that we cannot do things virtually. He would want to highlight that the north-east of Scotland has not had the commitments that we were promised on carbon capture and storage or on the oil sector transition deal.

In 2015, the UK Government axed the £1 billion grant that established the carbon capture scheme in Peterhead, which would have created 600 jobs and made Scotland a global leader in clean energy technology. Despite the promises made pre-indyref and in the 2015 manifesto, the money did not appear. The £200 million is a far smaller amount. It was earmarked for two clusters by the mid-2020s, with another two for the 2030s. One must be in Scotland and the north-east as well as at Grangemouth, which needs to make that transition.

We very much feel that the UK Government have not met the promise in their rhetoric on climate change. We know that there is much more that could be done. Although the purse strings are held and the decisions made in Westminster, we will continue to put pressure on the Government to be more ambitious and to do more. Our amendments would push them and the regulators a wee bit further, to try to move a good deal faster because of the pressure of the climate emergency that we face. We cannot wait until some point down the road to make the changes. We need to start today.

I am delighted to speak in favour of amendment 24. In just 12 months, the UK will host and hold the presidency of the 26th UN climate change conference of the parties in Glasgow, where the world will be watching. The amendment shows that the UK means business on climate change and that the Government are putting in place their promise to join forces with civil society, companies and people on the frontline of climate action ahead of COP26. It has the support of all political parties, so this is in no way party political or controversial.

Last week the Committee heard evidence from the likes of the Finance Innovation Lab and Positive Money, which support the amendment. The witnesses mentioned that it would be helpful if the FCA could refer to the Climate Change Act when preparing secondary legislation. Will the Minister therefore consider putting in capital requirements for investment firms, introducing weighting on environmental, social and governance issues such as penalising assets that have climate risks? As we know, the Bill covers legislation on packaged retail and insurance-based investment products, which will bring the £10 billion market to the EU.

We also heard last week that the Bill could be improved further, with a key information document that investors receive when looking at PRIIPS to include disclosure on environmental and social governance issues, and to ask the FCA to ensure that happens. I am sure the Minister will agree that that would help the Prime Minister achieve his ambitious 10-point plan—it is certainly ambitious—for the green industrial revolution.

It is important to know that there is a drive towards greater ESG integration across the financial sector, which investors are pushing for as well. This is an opportunity for the Bill to be shaped more robustly, and it sends a really strong message that the UK takes climate change seriously.

As we sit here today, hundreds of young people are meeting virtually at the mock COP, ensuring that net zero goals are deliverable. I am therefore surprised that elements of the amendment are not already in the Bill, given the Prime Minister’s ambitious 10-point plan for a green industrial revolution, which will not be deliverable if we do not reinforce our commitment to environmental sustainability in the Bill.

The amendment, which I believe is rather reasonable, would lay the foundations for sustainable environmental infrastructure with substance. As mentioned by a number of colleagues, this is not controversial but something that we really need right now. Particularly as we are dealing with covid, we need to be thinking seriously about the environment. The only way we can ensure that this is delivered is by putting something in the Bill that requires firms and the regulator to step up on this issue.

We do not have time for delay. This is an opportunity for us to put our heart into the Bill and deliver what we have promised, and it falls in line with what all political parties have been asking for.

The shadow Minister is making a powerful speech. I take the point made by the Government side, but I always wonder: what about the counterfactual? What problem will there be if we do not put these things into legislation? What message would that send about what might be jettisoned if, God forbid, we had another crisis on a similar scale to this year’s? Action on climate change is something that we simply cannot afford to go slow on. The counterfactual on this is an important issue, because it gives us an opportunity to say that if we do not put it into legislation, we are sending a message that this might be an optional extra, rather than an integral part of our future as a country.

My hon. Friend makes a good point. The UK Government constantly say on their website that they plan to go further and faster to tackle climate change. As my hon Friend has mentioned, this is a perfect opportunity to ensure that this is implemented in the Bill. I am surprised, frankly, that it is not in there. All that we are asking for is a reasonable amendment that already falls in line with the Government’s objectives. It is not going to create any extra work. We need to think about the future, particularly if we do not take action to address climate change, because we are heading for difficult times and I am really worried about the future for younger generations.

Let me say at the outset that the Government are fully committed to reaching our climate change aims both domestically and internationally. We have set our commitment to net zero in legislation. When I was listening to the right hon. Member for Wolverhampton South East discuss the range of interventions and announcements that the Government have made in recent weeks and pivot back to the good work done previously, this underscores the fact that looking at this through a bipartisan lens is probably the most effective way. The aims that we share should be supported by sectors across the economy, not least financial services, as the Chancellor set out in his recent statement to the House.

Amendment 20 would insert the net zero target into the FCA’s accountability framework for the implementation of the investment firms prudential regime. Amendment 39 is similar, as it would insert an additional consideration into the FCA’s accountability framework, requiring the FCA to have regard to the likely effect on the UK’s domestic and international commitments on climate change.

I fully support the intention behind these amendments, of course, but the aim of this measure is to enable the implementation of a specific prudential regime to apply to a specific type of firm. The current “have regards to” provisions in the Bill are those that the Treasury found to be immediately and specifically relevant and that reflect issues raised by industry. I think about our relative standing and the importance of considering and aligning with international standards. Those are the ones that also relate to the equivalence decision and are directly tied to the implementation of the IFPR.

As the Chancellor set out in his statement outlining the new chapter for the financial service in the UK, if we are to achieve the net zero target it will mean putting the full weight of private sector innovation, expertise and capital behind the critical global effort to tackle climate change and protect the environment. The Treasury and the regulators are already making ambitious strides to that effect, and Members have referred to the role of the former Governor, Mark Carney. I draw attention to the green finance strategy, which the Government published just 15 months ago, and to the work across a number of activities in the City on which I have been seeking to lead over the past three years. The green finance strategy is something that the regulators have actively supported.

There is the joint PRA/FCA climate financial risk forum and the Chancellor’s recent announcement that this country will become the first in the world to make disclosures that are aligned with the recommendations from the taskforce on climate-related financial disclosures. We are making those disclosures fully mandatory across the economy by 2025.

I think the hon. Member for Erith and Thamesmead mentioned the remit letters. I reconfirmed at the Treasury Committee hearing last week that we plan to use remit letters for the regulators, which the Treasury is required to issue at least once per Parliament, to set ambitious recommendations relating to climate change. We have already done that for the Financial Policy Committee, and we will issue the remaining remit letters at the next opportunity, to allow the Government to reiterate their expectations for the regulators ahead of the UK hosting COP26 in November 2021, which has also been mentioned this morning.

I acknowledge, of course, that a net zero “have regard” to the implementation of the IFPR would not be contradictory to the wider picture. However, the “have regards” currently in the accountability framework reflect the considerations that are tailored to each prudential regime. Furthermore, there is a lot of ongoing work on how to capture climate change risks in prudential regulation—for example, a Basel Committee taskforce seeks to understand how climate risk is transmitted, assessed and measured. Careful consideration of such work, and consultation of the regulators and other sources, is needed to understand how a prudential green “have regard” might best be added.

The Bill grants the Treasury a power to specify further matters in the accountability framework at a later date, which could be used to add a requirement to explicitly have regard to green issues in the prudential framework, if appropriate. In the light of that power, I can assure the Committee that the Treasury will carefully consider a green “have regard” in the future, once the Government have had consultations on their exact framing of the prudential regimes and on the considerable body of international work that is going on.

Apologies; I did not realise the Minister was going to move on. He has made an incredibly powerful case for the importance of including such a commitment, and he has essentially said that the Treasury might look to include it. He said that it had looked only at the immediate and specific regulatory requirements. Of course, many of us believe that we are facing an immediate and specific crisis, so can he tell us why the Treasury has not already taken on the issue of climate change, given that he has made a case that it should be part of it? He has gone for pop No. 3 in the shadow Minister’s list. There might be a sixth option here, which is: “If we did not come up with it, we are not going to support it.” That would be rather short-termist, surely.

I hope I would never be accused of taking such an approach. The reality is that I want the Bill to work most effectively. As I just said, the regulators are already taking into account climate change as a risk to the economy. The FCA/PRA climate financial risk forum and the Bank of England’s climate change stress test are alive and working, and I am confident that they will continue to consider climate change risk when making rules for the prudential regimes. In that context, we will look carefully at the need to add that specific additional reason. I have also stressed the work that is going on internationally. We should ensure that what we put in primary legislation is actually best practice and in line with the evolving consensus on how to deal with such matters.

I turn now to amendments 24 and 42, which make a similar set of changes to the Prudential Regulation Authority’s accountability framework for the implementation of the remaining Basel standards. As I have already said, the Government are already considering how best to ensure that the regulators and the financial sector can meet the commitments, and the Bill grants the Treasury a power to specify further matters in both accountability frameworks at a later data, which could potentially be used to add such a “have regard” in future, if appropriate. Therefore, after serious consideration, I respectfully ask the right hon. Member to withdraw the amendment.

The Minister is effectively saying that this is not the right time or place, but it is something that the Government will carefully consider. Given the things that have happened in politics in recent years, prediction is a dangerous game, but I expect that this is something that the Government will eventually decide to do, and I think they will make a virtue of doing it at that time. Indeed, I can see the Chancellor making the statement to the House of Commons right now, saying, “This new requirement for the Bank of England, for regulators, for the whole of Government, puts the UK at the heart of this shift to green finance and the achievement of tackling climate change.”

I agree with my hon. Friend the Member for Walthamstow that the more the Minister said he agrees with this, the more it begged the question of why he does not do it now; we have to start somewhere, and putting it in here would only encourage it being put in broader financial regulatory systems. We also have this consultation in the future regulatory framework; it might even be part of the conclusion to that. For that reason, I am minded to press the amendment today.

Question put, That the amendment be made.

Ordered, That further consideration be now adjourned. —(David Rutley.)

Adjourned till this day at Two o’clock.

National Security and Investment Bill (Second sitting)

The Committee consisted of the following Members:

Chairs: † Sir Graham Brady, Derek Twigg

† Aiken, Nickie (Cities of London and Westminster) (Con)

† Baynes, Simon (Clwyd South) (Con)

Bowie, Andrew (West Aberdeenshire and Kincardine) (Con)

Fletcher, Katherine (South Ribble) (Con)

† Flynn, Stephen (Aberdeen South) (SNP)

† Garnier, Mark (Wyre Forest) (Con)

† Gideon, Jo (Stoke-on-Trent Central) (Con)

† Grant, Peter (Glenrothes) (SNP)

† Griffith, Andrew (Arundel and South Downs) (Con)

† Kinnock, Stephen (Aberavon) (Lab)

† Onwurah, Chi (Newcastle upon Tyne Central) (Lab)

† Tarry, Sam (Ilford South) (Lab)

† Tomlinson, Michael (Lord Commissioner of Her Majesty's Treasury)

† Western, Matt (Warwick and Leamington) (Lab)

Whitehead, Dr Alan (Southampton, Test) (Lab)

† Wild, James (North West Norfolk) (Con)

† Zahawi, Nadhim (Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy)

Rob Page, Yohanna Sallberg, Committee Clerks

† attended the Committee


Dr Ashley Lenihan, Fellow, Centre for International Studies, London School of Economics

Michael Leiter, Partner, National Security; CFIUS and Foreign Investment Reviews; Cybersecurity and Privacy; Congressional Investigations and Government Policy; Skadden, Arps, Slate, Meagher and Flom LLP and Affiliates

David Petrie, Head of Corporate Finance, Institute of Chartered Accountants in England and Wales

Chris Cummings, Chief Executive, Investment Association

Public Bill Committee

Tuesday 24 November 2020


[Sir Graham Brady in the Chair]

National Security and Investment Bill

The Committee deliberated in private.

Examination of Witness

Dr Ashley Lenihan gave evidence.

Q36 Members can sit in any seat where there is not a “Do not sit here” sign. Any Member sitting in the Public Gallery should stand by the microphone when they wish to speak.

We will now hear oral evidence from Dr Ashley Lenihan from the Centre for International Studies at the London School of Economics. Thank you for joining us today. Can you hear me now?

Dr Lenihan: I can hear you now.

Q We have until 2.45 pm for this session. Will you please introduce yourself for the record? I will then call Committee members to ask questions.

Dr Lenihan: First, let me thank the Committee for including me in today’s evidence-gathering session. My name is Dr Ashley Lenihan and I am a fellow at the Centre for International Studies at the London School of Economics, as well as an associate at LSE IDEAS. My research for almost 20 years now has focused on foreign direct investment and national security.

Q Thank you very much, Dr Lenihan, for putting your expertise at the disposal of the Committee. I am particularly interested in your expertise in the international aspects of the debate. As you are aware—the Bill responds to this—a number of the UK’s allies have national security and investment screening regimes, and almost all of them have updated their regimes in the light of the changing geopolitical and technological contexts. From your comparative work, what governance and decision-making structures have you found others adopting to ensure that all relevant Government expertise shapes national security and investment decisions? Are they appropriately reflected or considered in the Bill?

Dr Lenihan: That is an excellent question. To answer it, I will first step back for a second and say that the Bill is a very important step in the UK’s alignment with its closest allies on this issue, and especially the Five Eyes, because there is clear evidence that states are trying to use the market and companies over which they have control and influence to gain economic, technological and even military power in foreign investment. During times of economic downturn and crisis when asset prices are low, the opportunities for that type of behaviour increase. Hence, we have seen these modifications to regimes not only in the West, but outside the West as well.

I think one of the most important elements of regimes as they have evolved—especially among the Five Eyes, but among our NATO allies and even in Russia and China—is the move to ensure that review mechanisms have the institutional capacity and resources that they really need behind them. Part of this institutional capacity usually involves a multi-agency review body of some type.

There is always a lead organisation, and in the West—especially in the US, Germany and France—these tend to be in Treasury or in business or trade Ministries, and that lead body, like the Department for Business, Energy and Industrial Strategy in the Bill, receives the information and handles the day-to-day activity. However, in the US with the Committee on Foreign Investment in the United States, the idea behind having a multi-agency review body with multiple agencies and Departments across vast areas of Government is that you have the ability for regularised monitoring and feed-in from these agencies across the spectrum of possible threats, and you have dedicated staff within those agencies who have the necessary security clearances, training and specialised knowledge over time to keep an eye on potentially risky transactions and bring them to the awareness of the lead agency.

One of the key elements of CFIUS that has been very positive is that, as it has evolved, it has brought in more agencies, not less, so you have multiple opinions on the same potential transaction being brought to light and discussed before any decision needs to be taken by a Secretary or Head of State, depending on the question. In CFIUS, that responsibility ultimately lies with the President, but the idea is that you have had a multiplicity of views and, under the Foreign Investment Risk Review Modernisation Act—the most recent update of US legislation—you have an ensured national security risk assessment made by the head of intelligence on detailed investigations of certain transactions.

The idea behind this is that—hopefully—any decision made will be viewed by the public as one that is truly based on national security concerns because of the debate that had to take place behind the scenes. That lowers the risk of politicisation and intervention, and again heightens the possibility of actually catching risky transactions in a way that otherwise can be difficult.

One of the great examples of transactions in the US caught not originally in the regularised monitoring process, but by a CFIUS employee in one of the agencies, was the unwinding in 2011 of Huawei’s purchase of 3Leaf, which was a US-based cloud computing technology company that had gone bankrupt. The assets, employees and patents had been purchased by Huawei—bankruptcy assets were not consistently monitored by the regime at that time. The purchase was caught by a Government staffer who happened to notice on his LinkedIn account that somebody whom he knew, who had partially run 3Leaf, was now listed as a consultant for Huawei. That transaction had to be reviewed and retroactively unwound. At that point, of course, one must assume that the bulk of the damage had been done, but it goes to show the importance of having not just one agency looking at these cases and being responsible; a multiplicity is needed across the piece. If I have any concerns with the Bill, my primary concern would be that the institutional capacity and resources behind the review regime are not made clear.

Q Thank you, Dr Lenihan. That is absolutely fascinating. The need for different agencies to be involved needs to be recognised.

In terms of your work on investments, and the investment regime, is there not a risk that it ends up capturing a host of investment transactions? I am particularly thinking of the burden and impact on our innovative tech start-ups. The likely definitions of the sectors to be involved include artificial intelligence and data infrastructure. Based on your experience of other countries’ introduction of new investment screening rules, have you found patterns in how similar changes have affected foreign direct investment, and potential trade deals, which is a topical subject? Do you have any thoughts on ways to mitigate the burden and impact, particularly on start-ups?

Dr Lenihan: The Bill is arguably broader in scope on call-in powers than some other foreign direct investment regimes—I would argue that these perhaps even include the US regime—because it does leave wide latitude for call-in powers. The Bill also covers trigger events that are initiated by all investors, both domestic and foreign, and that is truly rare among Western FDI review regimes that are focused on national security. Usually, the concern is to focus the regime on investments from foreign-owned, controlled or influenced entities. Domestic entities and acquirers that have, for example, ultimate foreign ownership or influence in some ways should be able to be caught by any well-institutionalised and resourced regime. I am not sure why it is that we do not actually see the word “foreign” in the Bill, even though it is supposed to be based on foreign direct investment. Perhaps that is a concern about potential domestic threats down the road, but either way, it will lead to a much larger volume of mandatory notifications than most other national security FDI regimes—the US, Germany, Australia and other countries. Almost 17 have made changes in the past couple of years, and these have increased and been modified since the covid pandemic.

I understand that the legislation may be written as it is to include domestic investors, perhaps to avoid appearing to discriminate against foreign investors. I would suggest that that is probably too broad a formulation for focusing on and identifying real risk. The EU framework for FDI screening encourages its EU members to adopt mechanisms that do not discriminate between third-party countries, but that does not mean that it takes the word “foreign” out of its legislation to target foreign investments as opposed to domestic ones. Part of that is about the volume of transactions.

One thing I would highlight is that FIRRMA expanded the scope of covered transactions to include non-controlling investments of potential concern, as well as any other transaction or arrangement intended to circumvent CFIUS’s jurisdiction. But because it has had more cases to review on a detailed level in the past two or three years than in its history, since 1975, a major element of that Act is, again, around staffing and resources. There is a specific provision in FIRRMA, which is very clear that each of its agencies needs to hire under-secretaries in each agency just to be dedicated to this task.

There are two elements. An inter-agency review team is needed. You need enough staff to actually handle and catch all the risks. You the need the proper resources to do so—the right access to the databases, the right security clearances, the right training. On top of that, the volume of mandatory notifications will be increased by the fact that this is not just focused on foreign investment. I do not think there is much you can do about the foreign cases that you will get. There will be a high volume of those, and you need to be ready for them, but it is an important national security risk that needs to be dealt with.

Q It is a pleasure to serve under your chairmanship, Sir Graham. Dr Ashley, considering your experience of other countries—we talked about the US at length in the first couple of questions—such as Japan and Germany, what are your views on the retrospective powers under our Bill?

Dr Lenihan: Personally, I think they are fine. I know that might not be a popular answer with some. Germany, France and even parts of the EU framework set up this five-year retroactive for cases. I think that that is at minimum important. Other countries, such as China, Russia and the US, do not place any limit on retroactivity. I would have to check up on Australia and Canada, but there have been cases that have gone beyond a year there. Under the original Government White Paper, the idea of having only a six-month period, whether or not you have been notified, is quite dangerous, because there have been cases that were well known where they have been caught after that point.

Some of my examples are from the US. The reason for that is that it is one of the longest-standing and most institutionalised regimes. It is also one of the most transparent, from which we know most about the cases that have gone through it. I have looked at over 200 cases of this type of investment over a seven-year period in the US, UK, Europe, China and Russia. One case that stands out in the US is the 3Leaf acquisition by Huawei, which was caught almost at the year mark. Another good example that went over the one-year mark would be the review in 2005 retroactively of Smartmatic, which was a Venezuelan software company, and its purchase of Sequoia Voting Systems, which was a US voting machines firm. Smartmatic was believed to have ties to Chavez. However, that acquisition completed without knowledge of CFIUS and it was not actually able to be unwound until 2007. At that point, you worry about what has happened, but at least you do not have the ongoing concern.

You do need flexibility. With the volume of notifications and the learning curve that the investment security unit will have to undergo, or whatever the final regime truly looks like, it will take time to get the team in place and get the knowledge and systems down, to accurately catch even the most obvious investments that are of concern. Dealing with the kind of evolving and emerging threats we see in terms of novel investments from countries such as China, Russia and Venezuela needs the flexibility to look at retroactively and potentially unwind transactions that the Secretary of State and the investment security unit were not even aware of.

One thing is that for mergers and acquisitions transactions, which are historically what have been covered under these regimes, across Europe, Australia, Canada, Russia, China and the US, all the systems that have been used—the M and A databases: Thomson ONE, Zephyr, Orbis—take training, but they only cover certain types of transaction. They do not cover asset transactions; they do not cover real estate transactions, which are of increasing concern, especially for espionage purposes.

It is going to take time, and I believe that flexibility really needs to be there. It can always be reviewed in the future, but I do not think that so far foreign investment has been deterred in any way in countries that have that retroactive capability. To limit the UK’s capacity to protect itself for some kind of strange feeling that we need to be perceived as being even more open than everybody else when under threat is not really wise at this time.

Q It is a pleasure to serve under your chairmanship, Sir Graham. Dr Lenihan, I am keen to know more about whether, other than in the US, you have seen good exemplar approaches to screening investments into these sectors; we spoke about Japan and Germany a moment ago. Can you give examples which we might learn from?

Dr Lenihan: I do think the US system is the most institutionalised that we have, and the best at the moment. That being said, Germany’s system is very good; it has caught quite a bit. The German system has also been very good about regularly updating, changing and adapting its regulations as it sees new emerging threats to itself. They seem to have good feed-in across Government and they are exceptionally good at co-ordinating with other states in terms of information of concern.

In terms of national security review, Canadian and Australian systems are quite good. The problem with those systems is that they tend to do national interest reviews at the same time or in tandem with their national security reviews. Over the long term, including national interest in the regime has had an impact on how they are perceived in terms of their openness to foreign direct investment abroad. In the OECD’s FDI restrictedness index, Canada and Australia rank far lower than the US, the UK, Germany and France, and I think this is because of their inclusion of national interest concerns. Similarly, on the World Economic Forum’s global competitiveness index, they rank far lower. That does not provide investors with the type of clarity that they need. In general, we see that investors tend not to be dissuaded from investing just because there is a new foreign direct investment regime, as long as that regime is seen to have clear regulatory guidance, is transparent, and is applied consistently over time.

France sometimes gets quite a bad reputation for economic nationalism, but its review mechanism is also quite good at catching potential threats to national security. Japan is an interesting case. It has been so restrictive for so long that it is a little harder to compare with the other western countries. Its system has been tied in again to an overarching inward investment regime that has been restrictive towards foreign investment for other means beyond national security, so I find that country to be less of a comparator for these purposes. I hope that answers the question.

Q It is a pleasure to serve under your chairmanship, Sir Graham.

I have found your comments particularly interesting, Dr Lenihan. My own background is in the financial world, where I was involved in cross-border M and A and quoted equity transactions. I fully accept the premise of the Bill, which I think is important and has to be put into effect, and I draw encouragement from what you are saying about other regimes, but I am still left wondering a little bit whether, in practice, it will be really quite difficult for us to put into effect. Your point about the necessity of expertise among staff is crucial. Having sat at the centre of the process, I recognise that the point you make about a huge amount of information flowing across, especially in respect of unquoted companies, is very important; often, there is not much established information in the public domain. That first point is very important. The second point is that there is a very complex mechanism of market sensitivity as well. I do not quite know how this system intervenes with that. Also, within the UK itself there is a culture of openness, which has been touched on before, and in some respects we are a very different country from the others, particularly given the strength of the City of London. We therefore have the ability to transact in a way that some other countries do not, and a different culture.

The other point I wanted to raise and to hear your comments on is that there is a danger of political interference. I know that that is not the intention, but it must be a hazard in this process. What happens if the Government get it wrong about a company? Could not that be interpreted as political interference rather than seeking to establish a security risk?

Dr Lenihan: I started my career in mergers and acquisitions in aerospace and defence M and A, in London. I think you make an important point: the UK has historically been the most open country to foreign direct investment on most indices and indicators. That perception is strong, and I do not think that that culture of open investment will or should change with the introduction of the regime. To the contrary, it actually gives you one of the best starting points that any country has to do this.

As I said, on the whole, in the Bill as written, and in the statement of policy intent behind it, it is very clear that the powers for review and intervention should be used only for an identified risk of national security, and not on the grounds of national interest. Regimes that are based only on national security, like that in the US but also Germany and France—even with a very different culture in many ways—have not seen a lowering of levels of foreign direct investment over time, because they have introduced, modified or kept these regimes up to date. It is because, on the one hand, the stable environment that they provide and that the UK will definitely provide for foreign investors, is far more attractive than any uptick in cost from having to get up to speed on a new regime; also, they are able to retain these global perceptions of openness to foreign investment and ease of doing business because of the way in which the rules are applied. As long as the rules are applied consistently, and with clear reasons behind their use, and applied consistently and transparently over time, it should be okay.

The Bill provides for a lot of regulatory guidance, which needs to come forward in a clear and very easily comprehensible and understandable manner. As long as that happens, it should be okay. Global Britain should still be the proponent of liberal economic values that it always will be, while also being able to demonstrate to itself and to its allies that it is able to protect itself from this type of investment.

Going forward, Britain’s relationship with many of its Five Eyes allies is going to depend on having a comprehensive regime of this nature that is used well. Under FIRRMA, under US law, for example, the UK is an exempt foreign investor in certain categories—one of three with Canada and Australia. It has been stated that for that to continue––it is going to be reviewed––it needs to have a regime to protect itself. We can talk about this later, but part of that is about the potential concern about not just the ability to share intelligence on these issues, but about acquisition laundering, export controls and all these issues that tumble on behind that can affect investment, trade and intelligence-sharing relationships over time. That is important.

The research evidence shows that foreign investment is not deterred unless there is a problem in how this is applied. There has been politicisation of cases; demonstrated proportionality of response is also extremely important. There are many cases in which a threat to national security can be mitigated by agreements and undertakings without needing to block a deal. When you look at the modern history of foreign direct investment intervention across Europe and the US––even if you look at Russia and China and how they behave––the preference is, where possible, to mitigate national security concerns through comprehensive agreements, and that can be done in a host of ways. It can be that you have a board of directors that is only UK nationals, or that you require divestment of a certain black box technology company to another UK company or a friendly allied country. Whatever it may be, historically, there has been a preference for that type of action to be taken. Vetoes of cases are actually quite rare since world war one, when we first really saw this type of issue pop up.

The concern is if we see the UK blocking deals where it could mitigate because a deal has become a political hockey puck. In today’s world, where this is something that is constantly discussed in the Financial Times and The New York Times, whereas it was not 15 years ago, any case has the potential to be discussed widely in the political debate. The question is how it is treated by Government and how other countries perceive that treatment. I know that I have used US examples quite a bit, but if you look at US-China investment, China still invests a lot in the US, even though it complains every time a deal is blocked or mitigated. The reason behind that is because this is a sovereign right under customary international law, and China does the same thing when it has the same concerns. It is only if a case becomes truly politicised that there is an issue.

To give you an example, in 2005 in the US, the case of Dubai Ports World and P&O, which was a takeover of a UK company, became overly politicised in the US system. It is one of the only real examples where it has happened, and that was because there were a few US lawmakers who had a completely different view of the risk and relationship of the US vis-à-vis the United Arab Emirates than the Department of State or the Department of Defence. That is quite rare but what ended up happening was US lawmakers seeking to block a deal when most reasoned professionals in the industry and in various Government Departments thought that any risk could be mitigated simply in a host of other ways.

In the case of overuse, overbalancing, misuse, politicisation, whatever you want to call this tool of economic statecraft, there was a momentary blip in relations between the US and the UAE. There was a momentary stalling of trade talks, change in the currency basket and some uncomfortable months, but the relationship was strong enough to survive and it usually is. This is not really an aspect of going to war. I think the key is proportionality in response, how it is applied, and it is about consistency and transparency. The Bill is well written in many ways, but how it is used can go any number of ways, so it is about how the UK uses it going forward.

Thank you, Dr Lenihan. There are lots of Members wanting to speak and we have limited time, so I will try to get through some quickly. I will call Stephen Flynn, Mark Garnier, then Stephen Kinnock.

Thank you for your comprehensive and helpful answers, Dr Lenihan. I would like to divert back to some of the comments that were made about the Bill on Second Reading, particularly relating to definitions, or a lack thereof, in relation to national security. I would welcome your thoughts as to whether the Bill should or should not have a definition.

My second question relates to the scope of the Bill, which you mentioned earlier. In terms of the consultation going on, 17 sectors have been identified. The glaring omission seems to be social media, but I would appreciate your view on whether artificial intelligence would cover off social media to a level that you would be comfortable with.

Dr Lenihan: Those are both really good questions that I hoped would be asked. If national security is that which seeks to maintain the survival of the state and preserve its autonomy of action within the international system, unfortunately that means that you cannot necessarily define national security in law without binding yourself in an inflexible way. What we have seen is that most foreign direct investment regimes of this nature all refer to national security. I do not know of a single one that actually defines it or limits itself to a particular definition. I could be recalling incorrectly but I have looked at over 18 of them and I have never seen a particular definition.

What you do see in regulations is guidance as to how national security risk might be assessed or examples of what could be considered a threat to national security. US guidance is helpful on this, in terms of how they put their regulations together. Some have argued that it is too comprehensive—it is a lot to read and provides the lawyers with a lot to do—but it is useful and has meant that the process of knowing when you might be triggering concerns is easy to navigate. I really do not think that the UK wants to define it in the Bill.

There was a US Government Accountability Office report in 2008 examining the foreign direct investment restrictions in 11 countries at that time. Each was determined to have its own concept of national security but none of them actually defined it. In 2016 the OECD did a similar report after a new resurgence of changes in laws, and it looked at 17 countries including Lithuania, Korea, Mexico and Japan, and they came to the same conclusion. The OECD has quite good guidance in general on this and they have not recommended that their countries define national security risk, but they have recommended regulations to help increase transparency around what could be considered a risk.

Regarding the sectors for mandatory notification, I think that is a very good question and one that it is difficult to grapple with in many ways, because the threat is emerging and changing at the very same time that technology is emerging, changing and interacting with our society in various ways. Various countries have been trying to deal with this. In the US, a final rule was just put out in relation to non-controlling investments and situations where you have certain mandatory notifications. A pilot programme was initiated in 2018 to try to define—as your consultation will, in many ways—the proper sectors using North American industry classification system codes, instead of standard industrial classification codes as the UK regulation does.

Whatever codes you use, though, the US found that they had an incredibly high volume of mandatory notifications and were not necessarily getting to the issue that they wanted to. They have changed that under the final rule, and now mandatory notifications in that classification are going to be defined [Inaudible.] and would come under certain US export control regimes. The idea behind that is that the US is doing a review of export control regimes, which will try to get to what foundational technologies might be of concern. I think that applies to your question about social media.

Social media is of concern because of the data, and data retention, involved in most social media. As I understand it, the sectors in the Bill will be kept under constant review and can be changed and updated as needed. That is important, and it might be worth doing a pilot programme.

Dr Lenihan, I was trying to squeeze two more questions in, but I think it will probably be just one.

Q Thank you, Sir Graham. Dr Lenihan, my questions refer back to points you made in response to the first batch of questions. You spoke of the review regime not being quite up to full standard. It is an interesting dichotomy that the Bill sets up a new review regime in BEIS, but there is an export control unit in the Department for International Trade that already looks at arms control, as well as intellectually sensitive exports. I would be interested to hear your comments about how those two play together.

Secondly, it is worth bearing in mind that the Minister, Lord Grimstone, sits in both the DIT and BEIS. He is responsible for investment promotion. We are talking about more acquisitive types of investment, but do you see a potential conflict of interest between the ambitions of the Government to secure more investment into the UK and potentially having the wrong kind of investment?

Sorry, Mark, but we have about 90 seconds for that to be answered. Please have a go, Dr Lenihan.

Dr Lenihan: I would suggest that the investment security unit and the unit that will handle the processing of this regime remain in BEIS. That is fine; however, it would be useful to set up in the Bill some sort of multi-departmental review body that contributes regularly, and that has staff in those Departments who monitor the risks in relation to this concern. As you say, the Department for International Trade will be able to monitor, find and catch risk that others—such as the Foreign, Commonwealth and Development Office, GCHQ and its new cyber unit—cannot.

It would seem very strange to not have a feed-in from intelligence agencies and the Ministry of Defence on a regular basis. If you set that up in an institution that is clear, at least to the outside world, about its composition and makeup, as opposed to having ad hoc feed-in over time, it would help with the perception of openness from the outside. It would also help to counter any claims of an individual or place being politicised or used for some other purpose by a particular Minister, because then they could give a balanced opinion for the Secretary of State in charge to make a final decision.

Thank you very much, Dr Lenihan. That brings us to the end of the time allotted to the Committee for asking you questions. We are grateful to you for your time. Where members of the Committee wanted to ask questions and were not able to, I will try to give them a bit of priority on the next panel—or in another, if that is helpful.

Examination of Witness

Michael Leiter gave evidence.

We come to our fourth panel of witnesses. We will hear oral evidence from Skadden, Arps, Slate, Meagher and Flom LLP and Affiliates. For this panel we have until 3.30 pm. Mr Leiter, I welcome you, and ask you to introduce yourself for the record.

Michael Leiter: Good afternoon. My name is Michael Leiter, and I head the national security and Committee on Foreign Investment in the United States practice at Skadden Arps. It is a pleasure to be with you this afternoon.

Q Thank you, Mr Leiter, for joining us and sharing your extensive expertise with the Committee. I wanted to look at strategic and critical industry. There are a series of cases where nascent or strategically important industries might become critical to national security in the future, but they are important to industrial and economic strategy now. For example, it was not clear that there was a direct national security threat from Deep Mind’s artificial intelligence algorithms in 2014, but it is clear that the company was important for the UK then, and it is clear that artificial intelligence is important for national security now. That is reflected in the Bill. Based on other countries, how do you think the Bill can capture these forward-looking public interest or industrial strategy concerns within national security grounds for acting?

Michael Leiter: Thank you for the question; it is quite a good one. It is one that the United States has struggled with, as have other countries and their regimes. We suggest a couple of approaches. First, one piece that I think the Bill does quite well—although there is a countervailing concern that has to be addressed—is not having a de minimis threshold, in terms of dollars. The Bill is quite strong in that regard, because as you note in your question, just because someone acquires a start-up company for a relatively modest amount—a few million pounds—it does not mean that that company and that technology does not have, or will not have, very significant national security implications.

The flipside of that is, of course, that without the de minimis threshold, it becomes a far more difficult regime to manage. The volume can be much higher. It can potentially poison venture capital innovation. This is best balanced by not having a threshold for dollars, as you do with the no de minimis threshold, but then making sure that regulators have the ability to review these matters extremely quickly. The pace of investment in emerging technologies requires a very short timeframe. It is not like a large public company transaction, which has extended timelines. As long as one implements a very rapid review process and has the officials in Government to keep up with that potential backlog, I think those two interests can be effectively balanced.

Q To follow up on your point about notifications, the Government impact assessment for the Bill suggests that up to 1,830 notifications might come in each year under this new regime. I am concerned that they look at the impact on the acquirer, and they do not capture the fact that almost every start-up seeks capital investment at some point. What impact do you foresee on the overall UK investment climate, and what might FIRRMA and CFIUS changes lead us to expect in our case?

Michael Leiter: This is very important. I was rather taken aback by two things about the Bill. The first is the projection of over 1,000 matters, going from the very, very few that the UK has traditionally had; this is an explosive increase in matters. I am concerned that no Government are ready for that rate of change. Even in CFIUS under FIRRMA, although there is not an increase in the overall number of long-form notices, in the short-form declaration process, there was an increase. That was relatively modest, an increase of about one third, so the US now reviews approximately 240 full cases, and about another 100 short-form.

When you talk about going from a few dozen to 1,000, you have to be very sure that you have both the resources and the expertise to process that. I would be concerned by that. Another case where your Bill goes much farther than anything I have seen, and certainly much farther than anything in the United States, is in encompassing not just acquisition and investment in businesses but acquisition and investment in supplies, goods, trade secrets, databases, source code and algorithms, so it is tangible and intangible objects, rather than businesses. That scale is very difficult to predict, and if one is more in the mood for incremental change, so as to see how a Government can handle change, including those elements poses some real risk for management.

Q Thank you, Mr Leiter. That is really good feedback. Building on the point made by my colleague the shadow Minister, the CFIUS regime in the US obviously operates successfully, in the sense that the US remains an incredibly attractive place for inward investment. How have the US regulators balanced those two things? Does the Bill as drafted provide us with a similar opportunity to strike that balance?

Michael Leiter: I am honoured to have worked with the UK Government for 20-plus years on security issues, and over the past 10 years on economic issues. I certainly think you have the potential to strike that balance. In the US, traditionally, the CFIUS structure was a balance between the security agencies, which tended to want to restrict investment, and the economic and commerce agencies, which tended to want to encourage that investment. Certainly, in the case of China, we have seen massive decline in direct investment because of both Chinese controls and US controls: a tenfold decrease from 2016 to 2018. But as you said, the scale and strength of the US economy mean that global investors look to the United States no matter what.

I do not mean to make less of the UK in any way but, from a UK perspective, one has to be a bit more careful, because you simply do not have the scale that inevitably will attract investment. The US could be a rather poor place to invest, with lots of regulation, but people would still come because of the scale of the market. You don’t have quite that luxury. That is not to say that the UK has not for generations been an incredibly attractive magnet for investment, but whereas the US can err on the side of security, from my perspective, admittedly an American one, the UK might want to be a bit more careful about restrictive measures, because the size of the market is not in and of itself so inherently attractive that companies and investors must be in it. We have a bit of an advantage over you on this one.

Q Good afternoon. I do not know whether your saw much of the previous witness’s evidence, but she commented on how countries such as the United States have a limited number of excluded or exempt countries—including the United Kingdom—that are not covered by their equivalent legislation. What are your thoughts on how the Bill does not have any provision to exempt entire countries from its scope?

Michael Leiter: I was able to see part of Dr Lenihan’s excellent testimony, which was quite informative and good. First, to clarify, although the US does make distinctions for exempted countries—obviously those are the UK, Australia and Canada right now—that exemption is extremely narrow. It limits those countries only on mandatory filings, and only if investors from those countries fulfil a fairly rigorous set of requirements. So, although Canadian, UK and Australian investors were quite excited before CFIUS reform, when the regulations about excepted investors were promulgated, that has had a minimal effect on those countries. It is not a significant advantage. Those countries are still subject to CFIUS review in the vast majority of investments they make. Now, that gives only half the story, because clearly investments from those nations go through a much less rigorous review, and come out with much better results than those from countries where the US has a more strained security relationship.

On what I see in the Bill, I would say a couple of pieces about the excepted possibility. First, as I read the Bill right now, it covers investments from other UK investors—not even simply those outside the UK. If my reading is correct on that front, I have to say that is probably not wise. We have already talked about the significant increase you could have, based to some extent on mandatory transactions as well as some other factors, and I think trying to take a slightly smaller bite of the apple and not including current UK businesses in the scheme would be well advised.

To the extent one has open trade and security relationships with certain countries, lowering the bar for review to exempt them, or including things such as dollar limits and getting rid of the de minimis exemption, might well make sense. That is another way of making sure that the Secretary of State can focus on those areas you think are the most sensitive from a security perspective. Whether we like to do so or not, that can be aligned to some extent with the country of origin of the investor. It is not always perfect—one must often look below that, especially when dealing with limited partners and private equity—but it is a relatively easy way to reduce the load you may experience if all these measures were implemented.

Q There are 17 sectors included in the Bill, but are any sectors missing? Is there scope for future-proofing?

Michael Leiter: Right now, it is a very robust list. In fact, I would probably err on the side of going in the other direction. I think this is a good list of 17, but what is critical is that these sectors gain further definition about what this actually means. Let me give you a quick example: artificial intelligence. I invite you to go online and try to find more than 10 companies in the world right now who are doing well and do not advertise their use of artificial intelligence in one way or another. It is one of the most commonly used marketing terms there is: artificial intelligence and machine learning, all to serve you in your area of work. If one interprets artificial intelligence as encompassing all those businesses, there will be a flood of reviews. Now, if one focuses on those companies not using artificial intelligence but actually developing artificial intelligence, I think the definition of the mandatory sector will make much more sense. That is an area where I think the US is still finding its way. As Dr Lenihan noted, the US began with a set of listed sectors where transactions were more likely to be mandatory. They eliminated that and now focus purely on export controls, but again, it is not that a company uses export control technology; it is that it produces export control technology.

That may be too narrow for your liking, but if one mapped out your 17 sectors as currently described to their widest description, I think there would be very little left in the UK economy, except for some very basic manufacturing and some other services that would not be encompassed. This is a very broad list and, again, I think it will take some time to tune those definitions so they are not overly encompassing. Again, if you look at data infrastructure, communications, transportation —at their extreme, that is quite a broad set of industry descriptions.

Q Just thinking and reflecting on a few of your comments, Mr Leiter, if we are given the timescale that you have had at CFIUS—it has a long history, it has been here a long time and you have brought in a new and updated regime to meet the threats that the US Government see are coming towards us—how could we translate that to our context as we put together this regime here? Are there any particular lessons that we could use? Are there new threats that have been captured by the new regime that you now have in place?

Michael Leiter: Thank you for your question. I will do my best to provide some advice. I do so with some hesitation, because I readily accept from my experience working with the US and the UK that although we are related, we have two very different systems. The scale of our Governments and the scale of our private sectors are different, so one should always be very careful of trying to learn lessons from any other single country.

First, I would try to take this incrementally. This is a very big step and in trying to predict second-order and third-order effects of this—both the security effects, which may be positive, and the economic effects, which may not be as positive—I would tread carefully. I would start narrowly, then open up the aperture as necessary, rather than opening up quite wide and then narrowing it down.

Secondly, I think it will take some time, and not only to develop the administrative capabilities to handle this volume within the Government. I think you would have a significant amount of learning to do within your private Bar as to how this works, but also how to manage those voluntary filings. You are talking about including voluntary notifications across the economy, which I think is quite a sensible approach, but that requires a degree of collaboration between the UK security sector and the Secretary of State and the UK private legal Bar and commercial sector to understand where those national security threats and risks may lie. This is something that has developed in the United States over the past 20 years, but does not, in my view, yet exist fully in the UK.

Next, I would say that it is very important to consider how this should be applied for limited partners in private equity. Private equity plays a massive role both in UK and US investment and having clear rules about limited partners and the rights that may or may not implicate non-British ownership in those private equity funds is a very important step to take and one that should be clarified up front. It should not be approached without further clarification.

Lastly, I think it is important to build into the scheme the ability to evolve as technology evolves. I heard some of the questions about social media during the previous panel and it would have been very difficult to understand the sensitivities that are implicated by social media 10 years ago, or perhaps even five years ago. The ability for the review and notification to evolve with changing technology, access to data and new national security threats is critically important. The regime should be a living one that will evolve with those changed political or technological circumstances, not one that keeps still.

Q Following on from that, given the scale and breadth of the challenge you have outlined, covering so many areas, including private equity, how do you think we would best resource and staff this arrangement? Clearly this will be a potentially large undertaking for the Department as it stands at the moment.

Michael Leiter: Having worked with some of them, I think you have some outstanding individuals in some of the relevant Departments who can look at this matter. I believe that they will have to increase their interaction with the security elements of Her Majesty’s Government in a way that does not perhaps yet fully exist. The departments and agencies that I worked with while I was in the US Government were generally fairly separate from these sorts of investment review, and it will be necessary for training among those agencies to ensure that there is an understanding of the nature of acquisitions and investments in the private sectors in a way that security agencies do not yet fully understand it. Teaching the economic agencies about those security concerns will also be necessary. I think that the Government will need an initiative to make sure that there is a degree of integration across Her Majesty’s Government based on an understanding of those cross-fertilisations, which will take some period to take hold.

Q It is a pleasure to serve under your chairmanship, Sir Graham.

Thank you for joining us, Mr Leiter. It is invaluable to have a practitioner’s perspective as we make legislation; that is something I would like us to do more often. I wanted to ask about your practitioner experience with respect to two things: first, the inclusion in the Bill of personal criminal sanctions and, secondly, its behavioural impact, from the point of view of attorneys and lawyers advising clients, on the likelihood of notification.

Michael Leiter: Let me answer that with two points. First, there is clearly an educational process when such a new regime comes into place for bankers, attorneys and business people. This regime will take some time for them to understand as well, but I think that the UK, like the US—I have already drawn some distinctions about the risk of reducing investment in both countries—remains overall one of the most attractive places to invest in the world. One of the reasons it is so attractive is that it has a strong rule of law and courts system, and clear legislation. In that regard, those who would come and invest in the UK very much understand the need to comply with these regulations, and criminal and civil penalties.

What we have seen in the United States is an appreciation, even if there was some initial shock at the scope of the review and what might be considered a national security concern, and a very robust understanding that we at the Bar and our clients have developed about the importance of these reviews and compliance with the legal regime that applies. I do not see any likelihood of, or reason for, the same not taking hold in the UK. I find that my clients are quite appreciative of the counsel we give them, whether it is related to the US or a UK foreign investment. Overall, I think that the concern tends be less about personal criminal liability, although such concern undoubtedly inspires some, and more about the ability to continue to have good, strong, open relations with regulators in the country in which business is being done. That is critical.

The second piece I would commend you on, which is much better than the US system, is that the Bill provides for a very full and complete review by your courts. That is quite positive, especially with the change that will have to be implemented by the Government. The fact that there is an ability to turn to the courts for review is central and important. As you may know, that is not nearly equivalent in the United States. The ability to pursue remedies in the courts in the context of CFIUS is actually quite narrow. On behalf of my clients, and for improvement of the system, I am quite jealous of your approach on this front.

Q Thank you for your comprehensive answers, Mr Leiter. I am afraid that I have crossed out many of the questions that I had because your answers have been so comprehensive. To go back a couple of steps, you have referenced the structure and understanding of the regulations, and the challenges posed by that, as well as the understandable challenges posed by the creation of a new body to oversee the call-in process. That, understandably, will take time to implement. Do you think that lag and uncertainty might put off investors? On a similar line, in terms of the timeframe for call-in, there is the five-year retrospective, the six months for the Secretary of State to act, and the potential for up to 75 days or more to act. Is any of that likely to put off investors?

Michael Leiter: I will take those in reverse order. You are absolutely right: the timing is often central to much of what goes on in the world of mergers and acquisitions. With respect to the effective five-year look-back with six months of notification, that is not dissimilar to what we have in the United States. It serves a very useful purpose in that it certainly incentivises parties to file voluntarily.

To the extent that one includes a voluntary notification regime, I think that it is very important to have some period of look-back. I do not have a strong view whether that should be four or five years, but I do think that look-back is important in a voluntary regime. Of course, in CFIUS, there is no statute of limitations at all, but in reality, we rarely see CFIUS going back more than one year, at most two or three. Again, I think that if everything were mandatory, this would not be required, because to the extent that one has a voluntary regime, it is perfectly reasonable to give the Government an opportunity to look back. Doing so also provides an important incentive for parties, because they will often calculate the likelihood of the Government coming and knocking on their door one or two years down the line. I think that a general approach makes sense.

With respect to the specific timeline for the reviews, your Bill mirrors not perfectly, but closely, the CFIUS approach. In most cases, that timeline works relatively well, but there are a few exceptions. First, in public company mergers and acquisitions, this is no problem. The period between signing and closing tends to be quite long, so the idea of 75 days is not problematic. Similarly, whenever you have a matter where there is a competition review, which of course encompasses many things—on our side, Antitrust and Hart-Scott-Rodino, and in the UK and EU there are separate regimes—that 75 day-period seems to fit relatively well, provides sufficient time for the Government do their review, and will not be problematic.

The place where I think this is more problematic—I apologise that I cannot recall the Member who asked the question—is in smaller-scale, early-stage venture investments. That is where deals can go signed to close within hours or days, and having that longer period could be quite disruptive. In that sense, to the extent that one is concerned with early-stage technology investment, these timelines can be problematic, and finding a window to get through that quickly is quite important.

Finally, with respect to the timing of implementation and the time that it will take to get up to speed, I think it is important to have this effectively phased. I know I have said this several times, but I think this is a rather seismic shift in the UK’s approach to review of investment. I am not saying it is a bad shift. I think it is a shift that is consistent with the United States and other allies in Europe, and Australia. I think it is going in the right direction, but it is very significant, so having some opportunity to make sure that both the private sector and the public sector are ready for that and understand the rules—that the sectors are defined in a clear way and that parties understand, especially in the realm of having criminal penalties—I think it is particularly important to do that.

I think there are probably ways, to the extent you are worried about a risk during that interim period that things are not being reviewed, of addressing that as well, with the look-back provision, or initially implementing things in a narrower or separate sense, but I would be a bit careful about not having some transition period, which allows, again, both the public and private sectors to adjust to this very significant change.

Q Obviously, the consultation in relation to the 17 sectors, which was mentioned earlier by a colleague, is going to run beyond the end of the Bill—perhaps, I imagine, of its being implemented. The Government may well just get it through the House, but were that to happen the consultation would still be ongoing, so, again, I am sorry to try to pin you down on this, but do you think that would create a level of uncertainty that investors simply would not be comfortable with, and that they might well look elsewhere unless the Government were clear about having a system in place that makes things more flexible for business?

I am sorry to flip back again, but on smaller-scale early-stage ventures, we said this could be an issue, and again, I am sorry to pin you down: could it, or will it, be an issue? Where would you lean in that regard? Will we find that investors seek to go elsewhere with this a little bit more, where the timing is a little easier?

Michael Leiter: I think it will be an issue unless you are confident that small-scale, early-stage investors can have their transactions quickly reviewed within roughly 30 to 45 days. If it is longer than that, that will make the investment climate, I think, worse than other competing markets. I think that could have an impact.

On your first point, let’s face it, business always likes predictability, so you always want certainty, but deal makers have to understand risk and understand some uncertainty. That is inherent. I will say, it is not that the US has done this remotely perfectly. The US announced almost two years ago now that it was going to further define foundational and emerging technology that would then be subject to different levels of review under CFIUS. Here we are, almost two years later, and we still do not have that. The fact is that there has been uncertainty, and there will be uncertainty on your side as well. Having those definitions clarified as quickly as possible is good.

Do I think that a lack of clarity for three, four or five months about these sectors will suddenly stop investment in the UK? No. I don’t want to exaggerate it to that degree. You can try to pin me down, but the fact is this is all a matter of balancing, and there is no clear answer about when people will stop or start investing. More clarity is better. The faster there is clarity, the better, and to some extent, a lack of clarity will push people to look at other markets.

Q It is a pleasure to serve under your chairmanship, Sir Graham, and thank you very much, Mr Leiter, for your insightful evidence. I was wondering about the acquirer definitions, which are an important part of the equation, and the extent to which the legal structure and ownership base of the acquirer should play a role and, perhaps, be more clearly defined in the Bill, in terms, also, of what the triggers are for the screening process. If the acquirer is a state-owned enterprise or a state-backed investment vehicle, should that trigger a, for want of a better word, tougher or more robust screening process? If so, what might that look like in practice, and do other regimes contain that differentiation between a private sector acquirer and a state-backed acquirer?

Michael Leiter: Thank you for the question. The answer is that many regimes do draw such a distinction, which is generally a good thing, but there is an exception to that as well. This is important on two points, one of which I have already raised so I will not belabour. Understanding the ownership structure of private equity to understand how the Bill will or will not handle limited partners who are managed by a general partner at a fund is very important. That is a significant amount of investment, and clarity on that point is critical.

In the United States, for example, foreign limited partners in US private equity are fundamentally, overall, not considered for CFIUS. For foreign private equity investing in the United States, foreign limited partners are considered. Again, that is broad brush, but that is fundamentally how it works. With respect to sovereign wealth funds or state-controlled investments, there is a perfectly good argument that yes, the standard of review might be a bit more rigorous. In the United States, the way that works is that if a foreign Government-controlled entity invests in what is known as a TID business—one that that deals with critical technology, critical infrastructure or sensitive data—in the United States, and if they own more than 25% equity, that is a mandatory filing. So, it is increasing the likelihood of a mandatory filing if you are controlled by a partner.

Using such a standard makes sense. Right now, I do not believe the Bill provides many opportunities for that. You are already saying that, in the 17 sectors, all will be mandatory and there is no de minimis threshold. From that perspective, whether you are a sovereign wealth fund or not, it will be mandatory in a large scale of matters. You could of course say, with a dollar threshold such as you have now, that in the voluntary sector, if it was a state-sponsored entity, that would also be mandatory. I think there is some sense to that, but I would move slowly on that because, as I have noted several times, you are going to have a relatively high number of mandatory filings in the first place.

There is a second important piece to this, though, about whether you actually want to change it for Government-controlled entities. That is, especially in the case of China, but other countries as well, the distinction between state controlled and not state controlled is becoming less and less. Again, in some western democracies, it is quite clear whether it is a state-controlled entity, but to the extent a foreign Government can influence a private sector actor, that distinction starts to fade away, at least partially. Under your regime, it is not clear to me, other than expanding some voluntary into mandatory, how that will apply, and I think, to some extent, the distinction is losing some of its fineness.

Q I have a small follow-up question. The points that you have been making about private equity are very interesting. Large swathes of our social care system in this country, particularly residential care homes, are owned by private equity companies. Do you think it would have a material impact on the assessment of a private equity company if it was looking to invest in the social care sector, which one could argue is critical national infrastructure?

Michael Leiter: That raises two excellent points. First, yes, I think private equity is quite methodical about thinking of those restrictions. Whenever I deal with private equity in the Unites States, whether it is US private equity, foreign private equity or sovereign wealth funds, there is always a consideration of the way in which the business in which they are investing may be subject to a national security review and whether or not they will, even if approved, lose access to critical information, technology or other management control of the business in a way that would make it a less attractive option. From a US Government perspective, I think that is entirely appropriate; it is the entire purpose of the national security reviews.

It could affect the choices of private equity in the UK, but one still has to identify what the national security risk would be—and not just what the national security risk might be, but the extent to which, if the investment was allowed, the Government could still put in place restrictions that would eliminate or mitigate that national security risk. That leads me to make two very quick points.

First, there has been much commentary about defining what national security means. I would not welcome to go down that path; frankly, I think it is a bit of a fool’s errand. The Government will define national security as they may. Certainly, they should not overreach in extreme ways, but this is not one that I think legislative language is well tuned to trying to capture. That is not to say that it should not be limited in practice, but trying to capture it in legislative language is, I think, exceedingly hard. Again, it changes over time, depending on technology, access to data and other factors. One can imagine certain things that, before covid, we never would have considered to be issues of national security, but that are today. Capturing language for that is quite challenging.

The second piece is making sure that you have a good regime. We have been talking so much about screening, punishment and what falls into the bucket of review. There has been much less discussion here, and there is much less discussion in the law, about what mitigation and rules and enforcement there will be. If you permit a foreign investor to invest in one of these sectors and you put in place certain protections to protect British national security, how will you actually make sure that that occurs? It is wonderful to have these rules, but unless you actually have the regime and follow these things and ensure that there is enforcement and monitoring of them, you will have spent an enormous amount of time and money but actually not protected national security, so I think we should not give short shrift—[Inaudible]—deal is closed and approved but still being monitored by the Government for the very national security risk we are trying to protect against.

We have to end this session at half-past 3, so I think that this will be the last question and it will come from Simon Baynes.

Q Thank you, Sir Graham. Mr Leiter, I would like clarification on the point about disguised takeovers, and perhaps you can use CFIUS as an example. What happens if a benign country or an organisation in a benign country, such as Canada or wherever, takes over a business and then that gets sold on to a state actor or a non-obviously state actor? How does CFIUS respond to that, and do you think that this Bill covers it?

Michael Leiter: I think your Bill does cover it. CFIUS would cover it in two ways. First, to the extent that a non-benign actor was behind the first transaction, CFIUS looks at the ultimate parent and whether it has been structured to evade review, so I think there is robust authority there. Secondly, the follow-on transaction itself would of course also be subject to CFIUS review, so I think you could catch it in the first instance or the second instance.

I think your Bill covers that. I will say also that I think the Bill is quite expansive and potentially problematically so. The US regime looks to see if there is a US business that is being acquired or invested in. That is a broad definition, but it still requires, generally, some physical presence, some people or the like. Your Bill does not seem to contemplate that, and specifically it says, “If the business simply provides supplies and goods to the UK or from the UK”. That is a very broad definition. It fundamentally means that if someone in London is buying something from a US business and it sends that to London—well, I read that as being covered by the Bill. That would actually be more expansive than CFIUS. It might, in that sense, give you greater national security protection, but I think it also may implicate a far more significant scale of transactions.

Thank you very much, Mr Leiter. We are grateful to you for giving of your time so generously to assist the Committee.

Examination of Witness

David Petrie gave evidence.

We now move to the next session. David Petrie is from the Institute of Chartered Accountants in England and Wales. Mr Petrie, would you be so kind as to enough introduce yourself for the record?

David Petrie: Good afternoon, Sir Graham, and thank you very much indeed for inviting me to give evidence to the Committee. My name is David Petrie, and I am head of corporate finance at the Institute of Chartered Accountants in England and Wales. My background is in corporate finance and mergers and acquisitions, for 10 years or so now in my current role at the ICAEW and prior to that with PwC. My experience includes advising on transactions, principally in the mid-markets, including private equity buy-outs, company sales and some infrastructure transactions. Prior to that I had a career in industry as well, so I have seen all sides of the fence on this, I suppose.

Thank you very much. Before I move on to taking questions, I remind everybody that this session has to close by a quarter past four.

Q Welcome, Mr Petrie, and thank you very much for placing your expertise at the disposal of the Committee. You have experience of mergers and acquisitions, and I am sure you will be aware that we have seen several transactions in this country—I will name GKN and Melrose, SoftBank and Arm, and indeed I will include the failed Pfizer-AstraZeneca case—where it appeared that the Government had no legal powers to secure jobs, pensions, research and development and key UK industries, relying instead on behind-the-scenes soft power. That created uncertainty and lack of clarity for investors. Do you think that is a problem for both Government and investors, and how do you think we could effectively tackle that gap?

David Petrie: The Government have been very clear that the purpose of this legislation is to focus on protection of national security. The guidance notes they have issued, which accompany the Bill and are intended for market participants, are very clear on that aspect. I would suggest that probably all the factors you listed in your question extend beyond a simple matter of national security—if national security can be a simple matter; no doubt that this Committee has heard this afternoon about the difficulties associated with defining national security. Many of the factors that you set out there, important elements though they are to all stakeholders in a company, are not necessarily matters of national security.

I would also say that that for some of the companies that you mentioned there, while certain of their activities might well be included within the scope of this new Bill, it would be very difficult in certain instances to suggest that they had a direct impact on our national security. Of course, that would be up to the new investment security unit to determine, based on a full representation of the facts. If that unit was at all concerned, a procedure is set out in the Bill whereby it would be able to call for as much evidence as it felt was necessary in order to be able to reach a balanced determination on whether investment by an overseas entity did indeed constitute a real threat to our national security. I think that is the point here.

Q Thank you for your response. If we look at GKN-Melrose and, indeed, even SoftBank-Arm, we could consider that they had national security implications. I suppose the point is that there are essential industries that are directly critical for our economy, but that at first may not seem directly critical for national security because they are evolving technologies, as in the case of Arm and the ongoing takeover by Nvidia, or because they are indirectly critical as suppliers to downstream industries that support national security. Indeed, in the response to the Government’s consultation for this Bill, an example is given of the undermining of the functioning of an airport by a software manufacturer, which would be within the transport sector but would not necessarily immediately appear to be directly concerned with national security. Economic security and national security end up being linked. Do you think that should be reflected in the Bill, and how do you think it can be reflected?

David Petrie: I have read the impact assessment, which included that example. It is a difficult situation, as described in the example. In accordance with the way that this new legislation is drafted and the number and extent of the sectors that are regarded as mandatory—the sectors in scope such that their operating activities would require a notification of the unit—the example set out in the impact statement would indeed require screening by the investment security unit. The Government would likely have the opportunity to review a potential acquisition in that software company.

I was struck by that example, in that it suggested that service had failed, or a malign actor had decided not to provide the necessary services to the airport. I think a broader question here is what might happen in reality. Those services would be procured through a commercial contract, which in turn would, presumably, be backed by insurance. If it were an absolutely critical service, I would expect that the airport would have a back-up system, whether power supplies or a parallel running system, as they do for air traffic control. There are commercial protections for the actual operating activities of critical infrastructure, which should work. It is difficult to protect against the actions of malign actors, but critical infrastructure already has systems and processes, and invests heavily in capital equipment, to ensure that there is not an interruption of supply. The question would be the extent to which ownership of that asset physically gave the owners of the shares the ability to get in and interrupt supply. That almost implies mechanical breakdown or some deliberate and malign disconnection. Again, companies have cyber-security systems in place to ensure that critical infrastructure does not fail.

The point you made was about whether suppliers of that sort of service to our critical infrastructure and their ownership should be subject to review. As the Bill is set out and as the sectors in scope are drafted—of course, the Government will consult over the next month or so on those definitions and whether they should be adjusted or whether they are as wide-reaching as they should be—a business like that would be captured. The investment security unit and, presumably, the security services would have an opportunity to review whether or not to allow that to go ahead.

Q Mr Petrie, you will understand better than most that businesses will want to ensure information is being treated sensitively in any transaction. I want to capture your view of the closed material procedure for judicial review under the Bill and what you think of it in terms of that sensitivity of information.

David Petrie: I think a quasi-judicial review is really important and a part of the process, and then, if necessary, there is judicial review. I think the question cuts back to how many times that is likely to happen. We have to step back a little bit and recognise that that would be a situation where the parties to the transaction are challenging the Secretary of State’s decision as to whether or not this is in the interests of national security.

I would assume that if the sellers are British companies, they will probably have received what they feel are adequate assurances that it is okay to sell to an overseas acquirer, but the Secretary of State takes a different view, presumably based on evidence provided by our national security services. Ultimately, if there is a compelling body of evidence to suggest that a transaction should be modified or adjusted or, in extremis, blocked, it would be quite an unreasonable group of shareholders to disagree with that if the if the Secretary of State was applying the test as set out in the Bill, and indeed in the guidance note, that intervention is to be limited only to matters where the national security of this country is at threat.

That is quite different from the national interest. It is tempting—or possible, rather—in this debate to get sucked into questions about what we should and should not be doing in this country. That is not what this is about. The Government have been very clear to the investment community, and to British business more generally, about the purpose of this legislation. That is why, although markets and investors recognise that it will take a certain amount of time and effort to comply with a mandatory regime—the Government have been very clear about their purpose in introducing that—the market is generally favourably disposed towards it. We can see that it is unfortunately necessary in these modern times.

Q Thank you, Mr Petrie, for your answers so far. I just have a couple of straightforward points for you to address. We discussed the timeframe in earlier sessions, in relation to the five years of retrospectivity, the six-month call-in and the potential 75 days. Do you have any concerns about the impact that that might have on potential investors into the UK? On a similar note, in terms of the fact that there will potentially be in excess of 1,800 notifications annually, an entirely new body will have to be set up, possibly working across Departments and involving the security agencies. A lot of detail will need to be put behind that, and again, that will take time. Do you think any of that will cause any uncertainty among investors and perhaps lead them to look elsewhere?

David Petrie: Perhaps I could deal with the second part of your question first, if I may, on the potential number of notifications that the new legislation is going to necessitate. The first point I make about that is that this new investment security unit will need to be very well resourced. A thousand notifications a year is four a day; I am just testing it for reasonableness, as accountants are inclined to do. That is quite a lot of inquiries. I note from the paperwork that the budget allocated to the new unit is between £3.7 million and £10.4 million. I do not know and cannot comment yet as to whether that is likely to be adequate. What I can say is that the impact statement also suggests that of those 1,000 or so transactions which are going to be subject to mandatory notification, only 70 to 95—the numbers set out in the impact statement—are likely to be called in for further review by the Secretary of State, where a very detailed analysis of those businesses and the potential target is going to be necessary.

As, I hope, has been echoed by other witnesses, it is going to be extremely important that this new unit can engage in meaningful pre-consultation with market participants—with British companies, finance directors, and investors and their advisers—so that they can get a pretty clear steer at an early stage as to whether or not this is likely to be subject to further review. If the unit operates in a way where it can give unequivocal guidance to market participants at an early stage and is open to dialogue—I understand from discussions with the Minister that this is the way the unit is being asked to operate—that would be extremely helpful.

I would say that that is about process, certainly, but I think it is also about culture. It has to be a balance, which is well achieved by the Takeover Panel, for example, in this country. You do not tend to approach the Takeover Panel unless you are well-informed and have done your homework—"Don’t bother us with stuff you ought to know” is the unwritten rule. But at the right time and place, I think it is important that there is an opportunity for market participants to be able to engage in a dialogue. The guideline where we put this “Don’t bother us with stuff you ought to know” question is going to shift. At the moment, we really do not know a lot about the way the Government are going to look at certain transactions. We do know which sectors and operating activities are in scope, but, again, we are not quite sure at what stage it will be right to consult and try and get clear guidance. This process will evolve.

I note that the Bill includes provision for the new unit to issue an annual report as to the number of transactions called in and the sectors they are in. That will be extremely helpful for market participants. An issue here, I think, is potentially asymmetry of information. In order to resolve potential asymmetry of information amongst the investment and advisory community, it would be very helpful that the unit is well resourced and able to engage in meaningful pre-consultation, but, by way of a third recommendation, it would also be extremely useful if it was able to issue meaningful market guidance notes, similar to the notes that accompany the takeover code. That would again be extremely helpful so that we can understand. It would help the market to be better informed. If, for example, the unit is receiving a lot of notifications that are not correctly filled in or with important details as to ownership missing, then it would helpful to have guidance notes as to what we can do to make sure this process works with more certainty, speed, clarity and transparency—these are the things financial markets need to see—to help us with that, beyond what has already been issued, which is very helpful, I have to say. As the market evolves, that would be extremely helpful.

Q May I follow on from that question about the resources? There is talk about 1,800 companies coming forward and voluntarily disclosing that this transaction is going on, but I am just as interested in what happens with those companies that do not disclose this? I am not for a moment suggesting that there are a huge number of dishonest actors involved in the corporate finance market, but given the fact that the threshold was reduced to £1 million a year under the recent review, there are an awful lot of small businesses with turnover of about £1 million a year that are not very well resourced for their corporate governance functions and that could easily miss the requirement to disclose, should a transaction come through that is enticing for the shareholders, who are presumably offered the same as the directors. Are you confident that the Government have in place sufficient resources to be able to police the whole sector, to make sure that we are not missing out on a number of transactions that are going through? Even if we do, are we getting in there quick enough to make sure that the intellectual damage is not done by the time we have found out what is going on?

David Petrie: That is a very difficult question. We will find out—that is the answer to that. I think businesses working in sectors where there is a real threat to national security know that. They know that they are involved in weapons design or designing software that could have a dual use. In advising companies over the years, I have found that no one knows better than the company directors about the value of their assets and their business, both from a market perspective and to competitors or others seeking to gain access to their technology.

The Bill has been in discussion for some years now, and the advisory community is well aware of its existence and of the Government’s desire to put this legislation on the statute book, so I do not think there will be many corporate finance advisers for whom the Bill emerging last week was a surprise. I am very sympathetic to the points made about small companies falling under the provisions of the Bill, but I hope that it will be possible for them to complete what, in the first instance, is a five-page questionnaire—when completed, it could run to 20 pages or more—at a relatively low cost.

To my earlier point, I hope they are able to engage in formal and meaningful dialogue with the unit at the earliest possible opportunity by saying, “This is what we do, and this is what we are worried about.” They have to say, “We’re concerned about this. These are the people from whom we are hoping to attract investment to take the business to the next stage. How do you feel about our business, and how do you feel about the people we are talking to? How does the Government feel about xyz corporation?” I think that kind of steer would help remove a great deal of uncertainty from the circumstances that you have set out.

Q Thank you, Mr Petrie, for a very interesting presentation. I want to look at two areas. One was touched on by the previous witness: the inclusion of not only businesses, but tangible and intangible assets. That is one issue. The second is the acquisition of material influence over qualifying entities’ policy being another trigger point. I would have thought that these are more subjective—perhaps I am wrong—in terms of how you define them, whereas the other trigger points are obviously very clear cut. There are different levels of voting shares in the qualifying entity. I think the previous witness was somewhat surprised to see the tangible and intangible assets element of it and said that this goes further than other similar regimes in other countries. Can you comment first on whether you are surprised or whether you think it makes perfect sense? Secondly, is it easy to define the material influence and the assets, either intangible or tangible?

David Petrie: On the question of tangible assets, it really depends on what we are talking about. Again, it was trailed in the White Paper and the Green Paper that assets would also be within scope, so it is not going to be a surprise. It depends very much on the nature of those assets. In a relatively small country, the ability to acquire land or other buildings—strategic assets—immediately next to a sensitive military installation is, presumably, now included within scope because people who know about these things think it ought to be. I think the investment community will have a degree of sympathy there.

With intangible assets, that is a much more difficult question. It depends on the extent to which ownership of those assets is necessary in order for a malign actor to have the control or the information that they might need. It is possible to gain access to intellectual property through means other than ownership, so the question here is, how might those intangible assets be applied in ways that might prejudice our national security in some way? Again, that is something that the unit is going to have to assess on a case-by-case basis.

It makes sense to include assets that could be sold separately, without the sale of shares in a business. Companies often do that. They may well sell a parcel of patents, or parcel up a division and sell it on because it is no longer core to their operating activities. That is understandable. The investment community will understand that. In short, it is not a surprise, and we are going to have to find our way through this on a case-by-case basis.

Q Could you expand on one or two examples of such intangible assets? You have stated patents. Could you illustrate what you understand to be such assets?

David Petrie: That would be the most obvious example. There are things like industrial designs, blueprints or chemical processes that may not be subject to patents. It is typically those aspects of production and design that it is necessary to ensure would be in the scope of this kind of legislation.

Much of the discussion that has led to the publication of the Bill has been around the ownership of shares or of the business—as to whether that is actually the bit that malign actors might want to get hold of. That may not be what really interests them with the business. It may well be intellectual property or these other assets, which it is necessary to separately define. If they are able to get hold of those without buying the company, then it seems to follow that it makes sense to include that within the scope of this Bill.

Q But they would be quite difficult to police, would they not? How would you know—

David Petrie: Yes. I don’t think anyone is suggesting that the job of this new investment security unit is going to be straightforward. In fact, we are absolutely not suggesting that. It is going to be absolutely essential for Government Departments to work together and, going back to my original point, for this unit to be extremely well resourced, to be able to respond quickly and appropriately to what is put before it.

Q Good afternoon, Mr Petrie. There will be some entities that try to take over British businesses where the warning flags are flown immediately, because it is well known that either it is a foreign state, or a company controlled by a foreign state. Often, it is difficult or even impossible to know who the ultimate controlling party of a business is if they have arranged to have their ultimate ownership registered somewhere offshore, where that information is not made public. Does the Bill, as presently worded, provide enough protection against a hostile power trying to infiltrate the system by going through a secretive intermediary state? If it does not, what more should be done in the Bill to protect us against that scenario?

David Petrie: This is an issue that is well recognised by the investment and advisory community. I think that, as you say so rightly in your question, the warning flags, flares or whatever they might be will already be going off if this is a particularly sensitive military asset that is being considered for acquisition. I think that the unit will be able to look first at the nature of the asset, and it will be apparent very quickly as to whether this is a very sensitive issue. If the acquirer is not a British public limited company, a British private company or one invested in by private equity, if the ultimate ownership is structured in a way that is not conventional—many companies are held through offshore companies for entirely conventional, obvious and transparent reasons for the investment community—and if there is something strange about that ownership structure that makes it extremely difficult to trace the ultimate ownership, it feels to me as though that would be one of the 70 to 90 cases that the Secretary of State would want to review in a lot more detail. Then, due and diligent inquiries would be made to try and understand the ultimate ownership of those holding companies. There would be lots of complicated diagrams drawn, no doubt, showing who owns which bit of what and who are the key individuals and shareholders. The answer would be that, I am afraid, this unit is going to have to keep digging until they get to the bottom of who are the ultimate shareholders.

The Bill is drafted in such a way that you do not need to own much in the way of shares—or there are provisions included within it such that if an entity or individuals, or individuals reporting elsewhere, have control or influence over those holding companies, that in itself would be something we would be concerned about. The Bill includes provision for that because we know, and I believe the security services are well aware, that the equivalent of layering is used for acquisition of these sorts of businesses, or people have certainly tried to do that. So, it is going to be a matter of hard work and digging to get to the bottom of who really owns and controls those entities.

Q When you talk about a lot of hard work and digging to get to the bottom of it, does that include potentially gaining information that is not in the public domain and from a jurisdiction where that information is not allowed to be disclosed? Does that potentially mean having to rely on information that is gained covertly by British intelligence, which then cannot be shared in open court if the case is challenged?

David Petrie: I suspect that would be the corollary of that, yes. We are probably dealing with a relatively unusual set of circumstances here. It rather assumes that the shareholders of the British company are absolutely determined to sell or take investment from an entity where its ultimate ownership is quite difficult to identify. We are dealing with quite an unusual situation—not unprecedented, certainly, but relatively unusual. I do not know what resources the new unit will have at its disposal, but given that this is relatively rare and is a question of national security, I would expect that the Secretary of State would ask it to use whatever resources are necessary to gain the information it needs.

I hope—again, we will see—that the closed doors process for the judicial review, should it come to that, would enable national security to be protected, so that if there were some other breaches as a result of the investigation, or if explaining how we found out what we know caused a breach in national security elsewhere, that problem could be resolved. I am comfortable—I think that would be the right expression—that those difficulties can be dealt with in circumstances in which the absolute preferred option for the company is to take investment, but I have to say that I think those circumstances would be relatively rare.

Q How have you found your engagement with Government so far, and what processes are you looking for, in terms of how the Government engage with you and the industry—whether it is with your organisation or more widely? Do you have any comments on that?

David Petrie: Yes, I have. The Government have been very clear about the need to bring this legislation on to the statute book, and they have done so through the Green and White Papers. When consulting on the White Paper, they sought opinion from a very broad spectrum, including business groups, businesses, the investment community and so on. They have set that out in the response to the consultation.

The next consultation is the one on the sectors within the scope of the mandatory regime, and the next month or so is going to be a very important stage in this process. Defining those sectors in a way that market participants understand and that does not trigger manifestly unnecessary notifications is going to be very important, and we look forward to engaging in that process, as does the legal and investment profession and British business.

Q How do you think the mandatory notification framework could impact small and medium-sized enterprises in particular, which are obviously having a difficult time, given the consequences of the pandemic?

David Petrie: Yes, that is an important consideration. I hope that if small businesses have limited resources, that is recognised by the new unit, and that smaller businesses are able to have an open dialogue with it, and can say, “This is what we do, and this is what we need the money for. We are going to need it quite quickly because we are running out of money.” If the unit is able to give unequivocal guidance very quickly, that would be very helpful.

I would also say that the new unit should not treat the 30-day turnaround for a mandatory notification as the target. The target should be to respond as quickly and efficiently as it can, and in such a way that does not cause difficulty or distress for small and medium-sized companies. A five-page form for a small or medium-sized company seeking investment for a UK or a relatively straightforward overseas entity is not a terribly burdensome obligation. I hope that it will be possible for them to find their way through that at relatively low cost.

I do not think there are any more questions, so once again I thank you, Mr Petrie, for generously giving your time to assist the Committee.

David Petrie: Thank you.

Examination of Witness

Chris Cummings gave evidence.

We welcome Chris Cummings, the chief executive of the Investment Association. Mr Cummings, would you be so kind as to introduce yourself for the record?

Chris Cummings: Thank you for the opportunity to appear in front of you. My name is Chris Cummings, and I am the chief executive of the Investment Association. We represent UK-based fund managers, an industry of some £8.5 trillion used by three quarters of UK households today. We own roughly a third of the FTSE.

Q Thank you, Mr Cummings, for sharing your expertise with us. We all recognise the importance of inward investment, and indeed of the Investment Association, to our economy. The impact assessment for the Bill estimates that up to 1,830 notifications might come in each year under the new national security and investment regime, but those numbers do not capture the fact that almost every start-up seeks capital investment at some point. The requirements to notify are put on the acquirer, but I would like your thoughts on the impact that may have on start-up companies. As part of that, I imagine it will be especially hard to hold merger and acquisition auctions while checking on the outcome of these processes. What do you foresee will be the overall impact on the UK investment climate, and in particular on the ability of our most innovative start-ups to raise capital? I am often told that access to finance is the key barrier to start-ups growing, and staying in the UK as they grow.

Chris Cummings: Thank you; that is such a pertinent question. Before I address the substance of it, I want to try to describe the work of many of my members, which is broadly portfolio investments. They seek not to acquire a company but to invest, taking a very small stake—a fraction of a percent—of those companies. That provides an opportunity for those companies to receive the investment they are looking for, and enables us as investors to invest in a company, an industry or a whole sector in order to generate a return for the investors whose money we are managing. They tend to be pension funds and insurance companies—institutional investors.

Of that £8.5 trillion I mentioned that we manage, about 80% to 85% comes from institutional investors; the other 15% or so comes from retail: people on the high street saving in individual savings accounts and so on. Our view on the Bill is about how we can continue to do our work to help finance companies in the UK and internationally with the investment collateral that we can bring to bear. We do that in the two major parts of the market: listed companies and unlisted companies.

Perhaps I can address the point you made about small and medium-sized enterprises. We make investments in unlisted companies—of course, small and medium-sized enterprises are not listed organisations—by developing an understanding of sectors and industries. We look for individual institutions that we regard as high-performing—that is, high-performing over a long period of time, because we are patient investors, tending to take a long-term view, unlike colleagues in other parts of the industry, who are more high-frequency, or looking at a two to three-year earn-out period. To help us do that, we need two things. The first is legal certainty around the investment climate here in the UK, so that we understand the rules of the game, so to speak. This particular Bill is helpful in establishing greater clarity about the rules of the game; we do have one or two caveats, but it is helpful. The other is publicly available information, such as analysts’ reports—the type of thing that we as investors would look to receive and interrogate, and on the back of which we would then make an investment decision.

We are really looking for whether the Bill helps make the UK more attractive; whether it helps us funnel savings into productive investment that can help companies grow, create jobs and so on; and whether it is adding to the legal certainty of our investments. You are right to ask about SMEs; our members who invest in higher-growth companies are really keen to make sure that the process is as friction-free as possible, and that there are no surprises. Being very clear about a pre-notification regime is especially important to us, as is something like the five-year review period that could come after a deal has ended. Certainty about those 17 sectors is particularly important as well. That is why we have wanted to maintain a really close dialogue with the officials—the team that has sponsored this Bill—to make sure that no inadvertent barriers have been erected to us deploying that investment in the right way.

One of the suggestions we would like to commend to this Committee is something we have seen work particularly well in Japan, which considered a similar raft of legislation: a blanket exclusion for investment—not for takeovers, obviously, but for portfolio investment, where the investment industry wants to support unlisted or listed companies, and it is clear that there is not a desire to take them over, involve ourselves in the management of those firms, seek a position on the board or secure the intellectual property, but where we are just performing the role of long-term investor. That has been judged as being outside the scope of the legislation, but we commend that to the Committee as a practical step that takes forward the principles of the Bill and secures the “investability” of the UK’s investment landscape.

Q Thank you very much. I note your suggestion regarding the blanket exception for investment funds. I had two quick follow-up points: first, could you say how they would be defined in such a way that would exclude, for example, foreign sovereign investment funds and so on, which might give cause for concern? Also, you said you had a couple of caveats. I take it that is one; what is your other caveat?

Chris Cummings: Forgive me: I noticed that I missed the point about mergers and acquisitions. We regard the pre-approval facility that officials have mentioned—I believe the last witness mentioned it, as well—which is a way in which the team responsible could be approached ahead of a deal being put together, as a very sensible, practical step forward, as long as confidentiality was absolutely rigorously maintained.

In terms of definitions, we find the Japanese definition quite attractive, and again we commend it to the Committee. It clearly differentiates out investors such as the ones we represent, who are looking to provide capital for a company and share in its success for the benefit of the investors whose money we manage, but are not seeking to take an active role in the management of those companies. We are not looking to put somebody on the board; we are not looking to intervene directly in day-to-day management decisions. Our relationship is with the board chairman and so on, in order to engage in a constructive and strategic discussion, but we stop short of securing assets or taking an active role in management. That is a system that works well.

Turning to our caveats, I mentioned the five-year review period. We undoubtedly recognise the spirit in which this legislation is drafted, but Governments change, as does public opinion. The strength of this Bill is that it is focused around national security. Perhaps a definition of national security may go a little further in helping investors as well, because we could not really strike upon a catchy, well-turned phrase that defined national security, and have a reluctance to move away from national security; we would hate to see the Bill being widened into more public interest ability.

A final point to note would be the interplay between this legislation and the Takeover Panel, which has a different and distinct role to play. The notification percentages are slightly different: it is 25% in the Bill, and 30% in the Takeover Panel, so ensuring that there was no accidental misalignment would be most useful.

Q Welcome, Mr Cummings. You mentioned the feedback from your members about keeping the Bill focused very much on national security. The message that we want to get out there is that Britain remains very much open for business, and that we want to maintain our place in the premier league of foreign direct investment. How has that statement of policy intent, which we published alongside the Bill, landed with your membership?

Chris Cummings: When it comes to a clarification point around national security, this is similar policy-intent-driven legislation to what we have seen in other emerged markets, such as the US, Germany, France and so on. We do not find that it is out of step with other developed markets. In other jurisdictions—I will take the US as an example—the legislation has started small and then grown as people have become familiar with it. The UK, perhaps because we feel we are playing catch-up—that is not for me to say—has started on a larger scale first. That is why there are queries around scope and around the durations. We look forward to engaging with the definition of the 17 sectors to ensure it is as specific as possible, and to ensure that we understand the operation. We would like to hear from officials and colleagues in ministerial positions on how they see it working in practice, so that the investment community is really clear that the rules of the game have not changed, and that the UK really is as attractive as we want it to be for incoming investment.

As I mentioned, we represent UK-based investment managers, but of course, those organisations are headquartered not only across Europe, but in other parts of the world, particularly the US. We are managing pension scheme money not only for UK savers and pensioners, but from other parts of Europe and places as far-flung as Brazil. If we as investors were looking to make an investment in UK plc, we would need to be clear about where head office was, and where the money was coming from. All those things could be either pre-approved or ruled in court as quickly as possible to ensure that there is not a missed beat in attracting the investment that we all want to see.

Q I forgot to say earlier that it is a pleasure to serve under your chairmanship, Sir Graham. Mr Cummings, thank you for your time today. Are there any particular areas in the Bill that concern you—that you think may put off the investment community from investing? Also, what would you say are the particular strengths of this Bill?

Chris Cummings: As for particular strengths, we feel that the aspects that deal evidently with national security are strengthening a regime that needed some modernisation.

On the protection of intellectual property, one of the key areas—it is absolutely essential for us as investors—is knowing that if we are investing in a particular company, we are doing so because, depending on the market and sector it is in, we feel that the intellectual property is clear, maintained and protected by clear legal contracts, and that if something goes awry, we, as investors, have recourse to legal sanctions.

There is much in the Bill to be commended. In terms of areas of weakness—forgive me; I feel I have touched on these—it is about ensuring that, as investors, our position is clear and understood. In investing in a company, when doing that not to try to take it over or seize the reins, it is to provide more of a long-term investment to support the company’s development. We do not feel that quite comes through in the way the Bill has been written at the moment. It has been written, rightly, for takeovers. We do not want to be hit by ricochet —by accident—in wanting to continue to support UK plc and find that new barriers have been erected that prevent us doing that, simply because this part of the investment landscape had not been completely thought through. That is a caveat, rather than a point for deep consideration.

Q On the 17 sectors that were included in the Bill, do you think there are too many or do you think any sectors are missing?

Chris Cummings: That is something we are looking forward to engaging with. When you first hear it, 17 sectors sounds like quite a lot, but having worked through the 17 sectors and looked at some of the draft definitions, I think that each one is justifiable.

We would be keen to point out a few things to the Government. First, the greater the specificity around the definitions, the better. Secondly, we should not rush to change the sectors by adding to them too quickly. Investment needs a degree of stability, and legislative stability most of all.

Thirdly, in consulting with industry and thinking about the operations and practice, I would ask to have industry expertise around the table. We found time and again working with officials—they are hugely valuable, talented individuals, but do not come from a commercial background, almost by definition, although some do—that having the commercial insight, we can play a role in nudging in the right area, to ensure that nothing is hard-coded that would prevent a deal because the nuance has not been appreciated. Having that industry insight would be a big step forward, if it could be accommodated.

Q Good afternoon. The Government’s impact assessment expresses the view that a national security regime such as this does not have much of an impact on overseas investors and their investment decisions, as long as they are comfortable that any interventions are appropriate and the regime is predictable. Do you share that view?

Chris Cummings: With any new piece of legislation, and certainly one of this character and this far-reaching, investors will always want to understand the motivations that led to it being introduced, how it will work in practice and whether we can give case studies as quickly as possible to prove that it does work in this way.

The important thing—I cannot stress this enough—is how it gets spoken about by Ministers. That enduring political support for investment carries such weight with investors. More than the words on the page, what matters is how it is presented—how Ministers then talk about the desire to continue to attract investment and how they make themselves available to investors.

All major economies, because of the covid-19 crisis, are seeking new levels of investment, whether for individual corporates or infrastructure investment, let alone Government debt. We feel very strongly that the UK has a tremendous story to tell. Introducing new legislation such as this at a time when, bluntly, we are looking for more investment to come into the UK, will require a degree more explanation. The way it has been phrased so far, as national security and almost as a catch-up activity with other developed jurisdictions, is fine. However, if Ministers make themselves very much available to investors to explain how this will work, and make a bonus of the pre-authorisation facility, so that if investors are troubled that an investment they are considering could attract attention, there is an ability within 30 days —that is a really important point: within 30 days—to have it pre-approved and then stood by, that will go a long way in the investment community.

As you can tell, we will have to paddle a little bit harder, but that has the potential to be a short-term explanation for a long-term gain. Potentially, that is fine, but I say again that we hope Ministers will seize the opportunity to explain this to investors, the course will be set and we will not see further iterations or scope creep from national security to other sectors, which then becomes a little more worrisome.