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Public Bill Committees

Debated on Thursday 3 December 2020

National Security and Investment Bill (Seventh 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

Public Bill Committee

Thursday 3 December 2020

(Morning)

[Derek Twigg in the Chair]

National Security and Investment Bill

Good morning, everyone. Before we begin, I have a few preliminary points. As usual, please switch your electronic devices to silent; I just remembered to do mine. The Hansard reporters would be grateful if Members could email any electronic copies of their speaking notes to hansardnotes@parliament.uk.

Clause 11

Exceptions relating to control of assets

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

Clause 11 is intended to provide an exemption for certain asset acquisitions, which would otherwise be trigger events. The power to call in acquisitions of control over qualifying assets, as defined in clauses 7 and 9, will significantly expand the Government’s ability to protect our national security.

The clause ensures that these new powers will not extend to certain acquisitions made by individuals for purposes that are wholly or mainly outside the individual’s trade, business or craft. The Government do not believe, for example, that it would be right for the Secretary of State to be able to intervene in consumer purchases. Given their nature, such acquisitions cannot reasonably be expected to give rise to national security risks.

Moreover, a regime which could apply to such circumstances would quickly become impractical and could result in significant numbers of additional notifications for no national security gain whatsoever. As such, this clause explicitly limits the types of assets that the Secretary of State may scrutinise in line with the Government’s intention that the regime will primarily concern control of entities and only extend to assets as a precautionary backstop.

It would mean, for example, that sales of software products to consumers by a software company would not be caught by the regime, but—this is important—it would not prevent a transaction involving the software company selling the underlying code base supporting that software to a buyer acting in a professional capacity from the possibility of call-in under the regime, where that might give rise to a national security risk.

The Government have also carefully considered whether certain types of assets should remain outside this exemption clause. We have concluded that all assets that are either land or subject to export controls, as my hon. Friend the Member for Wyre Forest regularly reminds us, should not fall within the exemption. This approach, I believe, reflected in the clause, recognises the unique nature of the risks posed by land acquisitions and proximity risk to certain UK sites, as well as the particularly sensitive nature of items on the export control lists. The Government consider that this approach is proportionate and appropriately exempts acquisitions that do not give rise to national security risks, while ensuring flexibility exists to scrutinise hostile actors directly targeting the acquisition of sensitive assets.

I note that subsection (2) lists some exceptions, many of which are framed in terms of regulations of the European Parliament and the European Council. Let me ask the Minister two things. First, why is that the case, given that we will be completely out of the European Union in a matter of days? Secondly, and perhaps more importantly, if the European Parliament and the European Council were to amend those regulations, do the Government intend to amend this legislation to keep in step with what is happening in the rest of the European Union?

I am happy to write to the hon. Gentleman on that detail.

Question put and agree to.

Clause 11 accordingly ordered to stand part of the Bill.

Clause 12

TRIGGER EVENTS: SUPPLEMENTARY

I beg to move amendment 16, in clause 12, page 8, line 4, leave out from “does” to end of line 11 and insert

“establishes that arrangements are in progress or contemplation which, if carried into effect, would result in a trigger event taking place.”

This amendment would expand the scope of events to be considered trigger events.

It is a pleasure to serve under your chairship, Mr Twigg, and to see the Committee reconvened to debate this important Bill. On Tuesday, we had a lively, informative and generally collegiate debate in which we learned a significant amount about the Bill and each other. We learned, for example, that the hon. Member for Arundel and South Downs has an interest in low pay, the hon. Member for South Ribble is a scientist, the hon. Member for Wyre Forest has a great interest in defending business investment, and my hon. Friend the Member for Southampton, Test knows well the difference between “may” and “shall”, and entered Parliament at the same time as yourself, Mr Twigg. We learnt that my hon. Friend the Member for Ilford South has a great interest in defending our national security through supply chains. We learnt that I have a tendency to mispronounce and misplace my hon. colleagues’ constituencies—something that I am working on. We also learnt that the Minister feels this Bill is perfect in every way, clause and subsection, such was his reluctance to accept the most constructive and helpful amendments—I would say—put forward by the Opposition. As we look at our amendments today, I gently point out to the Minister that that is not a view held by everyone across the House, even by Government Members. I note the letter sent yesterday by the Intelligence and Security Committee pointing out several aspects that we have raised, requiring clarification and significantly indicating its intention—or desire—to be a greater part of both the scrutiny of this Bill and its implementation. I hope that in today’s deliberations we will meet with more support from the Minister.

We had lively debates on Tuesday and some votes, which as I have indicated that we did not win. Amendment 16, in my name and those of my hon. Friends, is a probing amendment. We seek to understand that the Minister fully understands the provisions of his Bill. That is an absolutely appropriate thing to do, as hundreds of thousands of business and individuals will be impacted by it and will have to seek to understand it. It is appropriate that we test the impact of the Bill now, particularly as the Minister has many competing duties, and, as we understand, is taking on more onerous ones.

Clause 12 contains supplementary provisions in relation to determining when a trigger event that takes place over more than one day is to be treated as taking place, and determining whether a trigger event is in progress or contemplation in circumstances where a person has entered into an agreement or arrangement that enables them to do something in the future that would result in a trigger event taking place. The amendment, as we have framed it, would considerably expand the scope of events that could be considered trigger events. In effect, it would give the Secretary of State power to call in events under contemplation, by leaving out from “does” to the end of line 11 and inserting:

“establishes that arrangements are in progress or contemplation which, if carried into effect, would result in a trigger event taking place”.

As we have discussed, the Bill gives significant powers to the Secretary of State and the amendment would significantly expand notification volumes. There are many minor transactions where parties agree that someone might have the right to buy more shares in the future, and, in themselves, these transactions do not create direct influence and are unlikely to create a threat to national security. We recognise that the amendment would require all such minor transactions to be notified; it would seek to reflect the potential intention that these minor transactions may be part of a greater contemplation of something which would lead to a trigger event.

We recognise that Government would already have the power to intervene, through notification, once a trigger event takes place, so this amendment brings all possible future trigger events into scope, not just actual, or likely, future events.

It is a pleasure to serve under your chairmanship, Mr Twigg. On the point on these disguised elements, does my hon. Friend agree that the issue is about not simply shareholding, but, as we heard in the evidence sessions, membership of boards, and how voting rights might not necessarily be in line with shareholding percentages, and that they can be distorted at a future date?

I am grateful to my hon. Friend for that intervention. He makes a good point, which reflects why we are proposing this amendment to test the Bill. As he says, influence can be exercised in a wide range of ways.

I will elaborate on this later, but we must recognise that hostile parties will not sit back and see the Bill, then say “Oh well, that’s fine; we won’t try anything against the United Kingdom’s security,” as a consequence. They will seek ways to game and effect an influence regardless. Changes to the relationships between voting rights and shareholdings, for example, might be one way where they could seek to bypass the Bill.

I recognise that this is a wide-ranging amendment, but I seek to understand how the Minister feels that the Bill, as it stands, can address the kinds of concerns that my hon. Friend has just raised. This also reflects—I emphasise this again—the approach that we are taking, as the Opposition, on the Bill. The first priority and central plank of that approach is to put our national security first, and to do everything that we can to secure the strategic and economic resources on which our security relies; that focus on putting national security first motivates this probing amendment.

As my hon. Friend indicated, there can be a number of contingent investment transactions where parties agree to future events that transfer controls or influence. For example, a buyer might buy a low share of a company today, but might acquire with it the right to influence its shareholding in the future to levels of material influence.

I think the Minister will agree that we must watch out for these disguised transactions. They can start with innocuous levels of shareholdings, but set the ground for harder-to-notice increases in influence. At the moment, the Bill leaves out these transactions from the scope of notification, so the Government could not intervene. The amendment is therefore intended to probe the Government’s approach.

I understand—and we have discussed—that we must ensure a regime that is proportionate in its notification demand, particularly for small and medium-sized enterprises. This has been raised a number of times by Members on both sides of the Committee, who are concerned about avoiding a disproportionate burden on small and medium-sized enterprises, which will make up 80% of the mandatory notification base alone, according to the Government’s impact assessment. For them, this new regime will be a major change, and we have tabled a series of amendments to ease the burden on them.

I also recognise that the amendment expands the powers, and to do so may significantly expand notification volumes without necessarily adding significantly to incremental substantive powers. There are lots of minor transactions, where parties agree that someone might have the right to buy more shares in the future. In themselves, such transactions do not necessarily create direct influence. However, we should not loosen our grip on security to make the regime more efficient for small and medium-sized enterprises. I would hope we could both ensure proportionality for small and medium-sized enterprises and maintain—indeed, increase—our guard on our national security. None of our businesses benefit when we lower our guard.

We must be awake—this is what I hope to hear from the Minister in his response—to the ways in which hostile actors might game the new regime. I am sure they are spending just as much time studying it as we are spending scrutinising it, so we must not assume that our logic will be mirrored by compliant hostile actors. We already heard from the recent head of MI6, Sir Richard Dearlove, of the sophistication of other actors. He noted in his evidence session that,

“the Chinese are highly organised and strategic in their attitude towards the West and towards us…We need to conduct our relationship with China with much more wisdom and care. The Chinese understand us incredibly well”,––[Official Report, National Security and Investment Public Bill Committee, 24 November 2020; c. 19-20, Q21.]

whereas we do not understand them nearly as well. We also heard from Dr Ashley Lenihan of the London School of Economics about the need for powers to deal with complex

“novel investments from countries such as China, Russia and Venezuela…that the Secretary of State and the investment security unit were not even aware of.” ––[Official Report, National Security and Investment Public Bill Committee, 24 November 2020; c. 34, Q40.]

That is the complex and changing security context we are in. Faced with that, our approach should be to ensure a wide scope of national security powers while creating the most efficient review process for SMEs, and the most accountable scrutiny structure for Parliament to hold Government to account.

The amendment will ensure the wide scope we need to protect our national security. As a consequence, covert transactions by hostile actors, which start innocuously but are intended to grow to material influence levels, would be ones where the Government could now intervene. We must give regard to expert evidence. We heard that information, not just influence, is critical to national security. Without the amendment, it would be harder for the Government to intervene in time, having to keep a close eye on a range of contingent transactions, and having to act promptly whenever shareholder levels move to become present trigger events, so there is a bit of a cliff edge issue there. It would be much easier and more robust for the Government to be called and act when those contingent events are agreed in the first instance.

I will go back to the expert evidence. I have quoted Professor Martin a number of times. He said

“the mantra, if I had one, would be, ‘Broad powers, sparingly used, with accountability mechanisms’.”––[Official Report, National Security and Investment Public Bill Committee, 26 November 2020; c. 80, Q96.]

I think this amendment aims to achieve that.

Christian Boney from Slaughter and May said:

“At the moment, the trigger events are focused, as you were saying, on the ability to influence a particular company, but there are certainly circumstances where, without acquiring a level of shareholding that enables a person to influence the company, the person can nevertheless gain very significant access to information”.––[Official Report, National Security and Investment Public Bill Committee, 26 November 2020; c. 75, Q88.]

The amendment seeks to probe the Government’s approach to such contingent events. I look forward to hearing from the Minister.

I thank the hon. Lady and share her reflections on the collegiate way the Committee has worked. I also thank her for her comments on the quality of the Bill. It is testament to the quality of the team that has worked on it—I place on record my thanks to the excellent civil servants who have worked on the Bill—and the level of consultation. We heard from the hon. Member for Aberavon, who is not in his place, that this has been a long time coming. There was the Green Paper in 2017, the White Paper in 2018 and then the consultation. There was, of course, deep consultation before the laying of the Bill as well.

I thank the Minister for his comments. I want to make it clear that we are not in any way indicating any criticism of the civil servants who have worked hard, in extremely difficult conditions in the midst of a pandemic, to bring the Bill before us. I think we can all agree—we had some discussion on Tuesday about the nature of parliamentary scrutiny—that the objective of the process is that the Bill benefits.

Hear, hear—I agree with every word.

For the benefit of the Committee, I will begin with clause stand part, before turning to the amendment. The Secretary of State’s power to call in trigger events that have taken place is limited to a maximum of five years after the trigger event takes place and six months after the Secretary of State becomes aware of the trigger event. It is important to bear that in mind when discussing the amendment. That means that the issue of timing as to when a trigger event actually takes place is incredibly important. Many trigger events will have a self-evident completion date, as supported by contractual or other legal agreements. However, some trigger events may be less clearcut. There could be terms agreed formally by the parties, followed by further documentation, leading to a formal completion, all spread out over a period of time.

The clause ensures that where a trigger event takes place over a period of more than one day, or if it is unclear when during a period of more than one day the event has taken place, the last day of that period is treated as the date the trigger event takes place. In addition, the clause seeks to provide clarity about when a trigger event may be considered to be in progress or contemplation, where a person enters into an agreement or arrangement enabling them to do something in the future that would result in a trigger event taking place. It makes clear that entering into such agreements or arrangements, including contingent ones, does not necessarily mean that a trigger event is in progress or contemplation at the time the agreement or arrangement is entered into.

Amendment 16 would ensure that a person entering into any agreement or arrangement that enables the person, contingently or not, to do something in the future that would result in a trigger event taking place would be deemed a trigger event in progress or contemplation for the purposes of the Bill. I welcome the intention to ensure that the Secretary of State can be notified about acquisitions before they take place and I understand the motivation behind that. That is very much the Government’s policy. Indeed, the inclusion of mandatory notification and clear requirements within the proposed 17 sectors illustrates that approach in the most sensitive parts of the economy.

The timing of any notification is clearly very important. It must contain sufficient information for the Secretary of State to decide whether to give a call-in notice. That means that a proposed acquisition must be at an advanced enough stage that all the key details are known: for example, the names of all the parties involved, the size of any equity stake in the entity or asset, and the specifics of any other rights—such as any board appointment rights, which the hon. Member for Warwick and Leamington cited in his intervention—being provided to the acquirer.

In some cases, however, such details may be known, but the likelihood of a trigger event actually taking place may still be low because the acquisition is conditional. For example, the striking of a futures contract or an options agreement may stipulate conditions that must be met before the acquirer is required to, or has the right to, acquire a holding in an entity or an asset. Such arrangements are common in the marketplace where, for example, a company’s future share price might be the basis of a conditional acquisition. Equally, lenders provide finance to many UK businesses on the basis of conditional agreements, often with collateral put up by the business as security in return for the loan. Those terms may, subject to certain conditions being met, allow the lender to seize collateral if repayments are not made as agreed.

Can the Minister explain, first of all, why subsections (3) and (4) are included here as part of a supplementary clause when they clearly affect definitions, and as such go to the very heart of the Bill? The main clause is about defining the date on which something has happened for the purposes of calculating when later stages have to take place, but subsections (3) and (4) not only apply to those timings; they apply to everything in the Bill. I wonder whether the Minister could explain why those subsections are not included in one of the earlier clauses.

Secondly, I understand the Minister’s argument, but would it not be more prudent to work on the assumption that if somebody insists on some kind of contingent future rights being built into an agreement, they think there is a possibility that they will have to exercise them? Would it not therefore be prudent for the Government to work on the assumption that they are likely to be exercised? If not, is the Minister not concerned that we could have a situation where a whole series of small events, none of which looks particularly significant by itself, adds up to something that does become significant when taken in sequence, but there might never have been a stage during that process where the Bill, or the Act, allowed the Government to intervene?

I am grateful for the hon. Gentleman’s intervention. I am just getting to the crux of the resistance to this amendment on the Government Benches, so if he will allow me, I will do that. As far as subsections (3) and (4) are concerned, we think they are exactly where they should be in the Bill.

In the loan scenario, obviously loans are routinely paid back by businesses as planned, so lenders do not have the option of enforcing any rights towards collateral. Indeed, even where businesses default on payments, lenders will often look for an alternative way to recoup their funds, such as restructuring the repayment amounts or repayment period. That is why the Secretary of State generally only expects to be notified about and, if the legal test is met, to call in acquisitions when they are genuinely in progress or contemplation, not just when they are optional or might take place in the future, as the amendment would effectively do. That could include where an option holder had resolved to exercise their option, or where a lender had decided to enforce their collateral.

None the less, the clause as drafted does provide the Secretary of State with the ability to call in at the time agreements or arrangements are entered into. That would be determined on a case-by-case basis and would, as per subsection (4), take into account how likely it is in practice that the person will do the thing that would result in a trigger event taking place. The amendment put forward by the hon. Member for Newcastle upon Tyne Central—she is right to probe on this—would mean that entry into any agreement or arrangement under which a trigger event could take place in future would be treated as a trigger event currently in progress or contemplation, allowing it to be notified and called in by the Secretary of State. We believe that this would—unintentionally, I am sure—have two significant negative implications.

First, it would mean that hundreds or thousands of theoretical acquisitions would become available for voluntary notification, many of which would simply never come to pass. It may encourage lenders and option holders to routinely notify the Secretary of State of every arrangement they enter into. It would require a huge amount of resource for Whitehall to process those cases in return for little, if any, national security gain.

Secondly, I fear it would harm our national security. Making all potential acquisitions open to voluntary notification at the stage of entry into the initial agreement or other preliminary arrangements would require the Secretary of State to make the one and only decision on whether or not to call in the acquisition at that point, too—prematurely, one would say. They would be asked to do so on the facts as they stood at that moment in time, although the acquisition may not occur for months or years, if at all.

That means that the Secretary of State would not be able to consider any subsequent significant developments, such as behaviour by the acquirer or rapid advances in the technology developed by the target entity. Furthermore, the Secretary of State would not be able to revisit the call-in decision, even if there were such developments, unless false or misleading information was provided and it materially affected the decisions. That is why entering into agreements or arrangements should not in all cases be treated as a trigger event in progress or contemplation.

I trust the hon. Lady can support this justification, and I ask her to withdraw the amendment.

I thank the Minister for his response. I listened carefully to what he laid out. I have some considerations, which I do not feel he fully addressed.

In broad terms, he raised many points that I have raised about why the amendment is broad in scope and could lead to a huge increase in the number of potential trigger events. However, I think he said that hundreds of thousands of actions or contemplations would be considered trigger events. I think it is truer to say that they could be considered trigger events and that the power to consider them as trigger events or not, as in the wording of our amendment, would lie with the Secretary of State. It is a broadening of the Secretary of State’s powers to consider the contemplation of future acts as a trigger event. That is the aim, rather than necessarily bringing them all into scope.

I will not debate with the Minister whether we can trust the Secretary of State to exercise those powers in a proportionate way, but I think he is effectively saying that the concern is that the Secretary of State would not have the resources to do that. I still did not hear him address the gaming point—the idea that transactions would be deliberately set up in a way that escapes the remit of the Bill. The increased powers for the Secretary of State would address that.

I was also concerned that the Minister said that if an event was called in at this stage, it could not be called in again, even if there was material new information. Surely if a trigger event occurred in future, such as shareholding going above 25%, it could be called in, regardless of whether it had been called in earlier under the amendment. Would he like to respond to that question, particularly as to how this increases the powers of the Secretary of State, rather than necessarily significantly increasing the number of trigger events?

Order. To be clear, you are asking the Minister to intervene, because he cannot come back afterwards.

I am disappointed that the Minister chose not to address the genuine concern about the provisions in the Bill being gamed by hostile actors.

I share his concerns about increasing the powers of the Secretary of State at a time when, as we understand, there are many more calls on the Department’s responsibilities and it may not have the resources. We have already noted the conflict of interest that can occur between national security and the Department’s focus on increased investment.

As I said, this is a probing amendment, so I will not press it to a vote. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 12 ordered to stand part of the Bill.

Clause 13

Approval of notifiable acquisition

I beg to move amendment 17, in clause 13, page 8, line 22, at end insert—

“(4) The Secretary of State must publish guidance that covers—

(a) consideration of the impact of a notifiable acquisition being deemed void under subsections (1) and (3), with particular regard to the impact on consequential obligations, liabilities and rights in completed events;

(b) who constitutes a “materially affected” person under Clause 16(1); and

(c) the informational and evidential standards that would underpin the requirement for completion “in accordance with the final order” at subsection (3).

(5) Guidance as set out under subsection (4) must be published within 3 months of this Bill becoming an Act and the Secretary of State shall review the guidance once every 12 months thereafter.”

This amendment would mandate the Secretary of State to publish guidance on the approval process of notifiable acquisitions.

Amendment 17 addresses the unwinding of void transactions. Clause 13, which is the start of chapter 3 of the Bill, is concerned with the approval of notifiable acquisitions. It provides that:

“A notifiable acquisition that is completed without the approval of the Secretary of State is void.”

It is a short clause with only three subsections, of which that is the first. Subsection (2) says that the Secretary of State may approve a notifiable acquisition by giving a notification, making a final order, or giving a final notification under various clauses. Subsection (3) says:

“A notifiable acquisition, in relation to which a final order has been made, that is completed otherwise than in accordance with the final order, is void.”

I want to emphasise the consequences and impact of such a short clause. Our amendment adds a new subsection that says that the Secretary of State must publish guidance that covers

“consideration of the impact of a notifiable acquisition being deemed void…with particular regard to…consequential obligations, liabilities and rights in completed events;…who constitutes a ‘materially affected’ person…and…the informational and evidential standards that would underpin the requirement for completion ‘in accordance with the final order’ at subsection (3).”

The amendment effectively mandates the Secretary of State to publish guidance on how the mechanism of deeming non-compliant transactions void would work in practice. Once again, we tabled it genuinely in the spirit of improving the Bill, because this issue is potentially a hugely significant part of it. The two words “is void” have a huge impact, which needs to be unpacked. This is a constructive amendment; we want to ensure that there is clarity for small and medium-sized enterprises, and accountability to Parliament, on how the new powers will be exercised.

I know that the Minister rejected further new powers in the last amendment, but even without them these new powers are significant. We welcome the expanded powers to tackle national security concerns, but we need to ensure that they come with accountability and guidance. The ability for transactions to be deemed legally void where they have not been approved by the Secretary of State, or where they have not complied with the Secretary of State’s final order, has potentially huge repercussions. Again, it marks a radical shift from today’s regime under the Enterprise Act 2002 and from the Government’s White Paper.

Under the “legally void” provision, transactions that took place three to five years ago could now be immediately deemed void. If the first transaction in a chain were deemed void, that would leave the legal rights and entitlements of all subsequent transaction parties in total uncertainty. That is not just a theoretical concern that we are raising to test or probe the Bill, but a truly practical one. A number of investment transactions involve a change of shareholder parties over a three to five-year period. The automatic default of non-compliant transactions becoming void would mean an impossible series of rights, entitlements and changes having to be unwound. It may well be practically unworkable and legally uncertain.

I appreciate the point that the hon. Lady is making, in that transactions over a period of three to five years could become complex, but surely if something is called in and deemed void in the overriding interest of national security there will be an extremely good reason for it. Although the complexity of downstream transactions is regrettable, we would be acting in the British interest if we had to trigger these powers.

I thank the hon. Lady for her intervention, which by and large I agree with. That is why we are not seeking to remove the power, but to ensure that the Government and the Secretary of State explain how it would work in practice. She is right that if a bad or hostile actor has deliberately gone behind our national security framework, or the legislation as set out in the Bill, to undertake a transaction, the consequences will be on their head. However, there might be a series of other transactions as a consequence that were not made by bad or hostile actors—I will give some examples—and the impact on them should be set out, as far as possible, to give some clarity, because this is a huge area of uncertainty.

As has been stated on a number of occasions, we attract more foreign investment than any European Union country, and one reason why the UK is such an attractive location for foreign investment is that we have a robust legal framework that is trusted globally, but by giving rise to uncertainty the clause might impact that. We are not seeking to remove this power, but to have it properly explained, as far as possible.

The hon. Lady and the Committee should recognise that, as well as the uncertainty, the clause places huge requirements on the Department for Business, Energy and Industrial Strategy, as it would require significant capability and capacity from the investment security unit to execute the effect of deeming any transaction legally void. To take that further, I will talk through some examples so that we can fully comprehend why the amendment is so important.

If this provision were applied to the takeover of a public listed company that was then found to have been void, it would be exceptionally difficult to deem that transaction void and to unwind every single dealing in the company’s shares and to answer questions of legal ownership of such shares. There are enormous practical questions about the approach taken in the Bill to deeming transactions void, and the impact assessment does not address those consequences in a sufficiently rigorous way.

We might expect that events would never come to the point where transactions have to be deemed void, that parties will be deterred by that prospect—it is an excellent deterrent—and that the power will never be used, because it is such an effective deterrent that everyone will notify and comply. To that, I say two things. First, we cannot reduce legislation to our hopes of how actors might behave. We should have regard to examples elsewhere, such as Huawei’s acquisition of 3Leaf, where the threat of having to divest still did not stop Huawei pursuing the acquisition without notifying the Committee on Foreign Investment in the United States. Secondly, threats are credible when they can be carried out. Even if the point of the provision is to act as a threat, it needs to show that it can be carried out. If a threat does not work practically, or would heavily harm other, non-hostile actors, it is less effective a deterrent. Even if we believe in the deterrence of the “legally void” provision, it is critical that the Government give thought to the provision’s operation, and that we hear their thinking on that.

There are major question marks over the provision in the clause, but they are not cause to get rid of it altogether. We can see that the “legally void” provision would deter parties from failing to notify or comply, and that it has some international overlap with similar regimes, such as that in France. However, the decision to include the “legally void” provision is a major one. We can see the reasons for it, but we can also see the uncertainty and the concern that it might cause, especially for our small and medium-sized enterprises and, importantly, for those investing in them. As I said previously, there are significant barriers to investment in small and medium-sized enterprises and start-ups as it is. While national security must always come first, we do not want to create further barriers unnecessarily by not giving clarity when there is clarity to be given.

For that reason, we want to know the Government’s thinking on how the provision would operate in practice, on three important fronts. First, we would like the Government to publish guidance that reflects an understanding of how the “legally void” provision would work, and especially how it will affect the rights, obligations and liabilities of parties involved in chain transactions. If one transaction in a chain was deemed to be legally void, what would happen to the rights of employees and—this is an important point—of pension recipients?

Secondly, we recognise that parties who are affected by the “legally void” provision could apply to the Secretary of State for validation, thereby avoiding the transaction being void, and we want clarity on which materially affected parties can do so. Would those whose employment rights or pension liabilities were affected by the transaction be able to apply or would only acquirers in the specific culpable transaction be able to do so? We urge the Government to provide clarity to our small and medium-sized enterprises and investors, because I know that they are worried about the nature of this power.

Thirdly, it is vital that the Government clarify what they expect when they apply the “legally void” provisions to transactions that do not complete in accordance with the Secretary of State’s final order. To comply with the order, to what degree would a party have to show their evidence, and what degree of evidence would be required for the transaction not to risk being deemed void? That might sound complicated, but the clause has complex implications. In some circumstances, orders might not be specific, or they may be subjective and behavioural, so we need a regime that is clear, specific, understanding and rational. We should be able to expect such clarity and rationality from the Government.

Ultimately, the Opposition’s approach is about ensuring that our small and medium-sized enterprises have clarity, and that those who invest in the UK understand the rules and how they work. The amendment is intended to ensure that there is clarity and confidence in the new regime for national security screening. That approach has been supported by experts who have given evidence to the Committee. For example, Dr Ashley Lenihan, of the London School of Economics, said:

“The Bill provides for a lot of regulatory guidance, which needs to come forward in a clear and very easily comprehensible and understandable manner.”––[Official Report, National Security and Investment Public Bill Committee, 24 November 2020; c. 36, Q42.]

David Petrie, of the Institute of Chartered Accountants in England and Wales, said:

“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…that would be extremely helpful.”––[Official Report, National Security and Investment Public Bill Committee, 24 November 2020; c. 53, Q60.]

Dr Ashley Lenihan also said:

“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.”—[Official Report, National Security and Investment Public Bill Committee, 24 November 2020; c. 34, Q40.]

I think it is clear that we are supportive of the ability to void transactions.

I want to close by thinking again about the Google acquisition of DeepMind, which took place in 2014. DeepMind has been in the news this week for its fantastic, innovative work on understanding how life itself works. In a letter, the Intelligence and Security Committee has asked what transactions would have come under the purview of this Bill had it been in place earlier. The Opposition have been calling for it, as has the Intelligence and Security Committee. Had it been in place in 2014, and had the Secretary of State for Business at that time been as focused on national security as he should have been, which some might argue was not the case, what would be the expectation? Had he decided in 2019 that that transaction should have been notified because of its security implications and, as a consequence, that it was not valid and should be voided, what would have then been the expectation?

What would be the expectations of the employees of DeepMind, who are now in California, with regard to relocating back to the UK? How would their pension rights be affected? How would acquisitions that DeepMind and/or Google had made over the years be impacted? I do not expect the Minister to be able to set out in detail every potential scenario, but it is right that we have greater and more effective guidance than is to be found in the Bill or its supporting documentation. I look forward to the Minister supporting our amendment and taking it forward.

I thank the hon. Lady for her constructive engagement with the whole Bill, and especially with clause 13. She referred to the Intelligence and Security Committee, and this Committee will know that I have written to the Chairman of the Intelligence and Security Committee.

However, in answer to one of the questions raised in the letter that has been circulated to the Committee, which the hon. Lady referred to, it would clearly not be appropriate for me to speculate on individual cases, not least because decisions on past interventions have been taken by previous Ministers or Governments, who made their decisions based on the facts as they were known at the time. The Enterprise Act 2002 has provided a robust basis for nearly two decades to intervene on mergers that might have raised concern. However, it is also right that we modernise our powers, and that is exactly what this Bill will do.

The Bill provides—we had a similar discussion about that at Second Reading—that if an asset or company is deemed very valuable to the United Kingdom, it does not matter who the acquirer is, even if they are from a friendly nation, and an intervention can still be made by the Secretary State.

Clause 13 sets out the mechanisms by which the Secretary of State may approve a notifiable acquisition. After I have set out the rationale for the clause, I will speak to the amendment itself. As I have set out previously, notifiable acquisitions are acquisitions of certain shares or voting rights in specified qualifying entities active within 17 sensitive sectors of the economy. These acquisitions must be notified to, and require approval from, the Secretary of State before they may take place.

That approval can be given in three ways. First, when a mandatory notice is submitted by the acquirer, the Secretary of State may decide not to exercise the call-in power—for example, because he does not reasonably suspect that a national security risk may arise. In those circumstances, he is required to notify each relevant person, following the review period of up to 30 working days, that no further action will be taken under the Bill in relation to the proposed notifiable acquisition.

Secondly, when the Secretary of State exercises the call-in power in relation to the notifiable acquisition, he may make a final order at the end of the assessment process, which, in effect, gives approval to the notifiable acquisition, subject to conditions. Again, in that instance the notifiable acquisition is clear to proceed.

Thirdly, as an alternative to the previous scenarios, at the end of the full assessment process the Secretary of State may ultimately conclude that no remedies are required. In those circumstances, he is required to give a final notification that confirms that no further action will be taken under the Bill in relation to the call-in notice. Once more, that means that the acquisition is cleared to take place.

Those three routes and outcomes are of critical importance to business, investors and their advisers. It is the means by which they receive certainty about whether they have the Secretary of State’s approval to proceed. In those cases where the Secretary of State confirms that no further action will be taken under the Bill, he cannot revisit the acquisition again barring a narrow exception for circumstances where false or misleading information has been provided to him.

Conversely, subsection (1) places beyond doubt that notifiable acquisitions that take place without the approval of the Secretary of State are void. I am very pleased to hear that the hon. Lady thinks that is an excellent deterrent. That means that the acquisition has no legal effect.

I thank the Minister for eloquently setting out the clause. I have to suggest that he not place words into my mouth—certainly as we have such excellent reporting. Although I did not say that I thought it was an excellent deterrent, I did indicate that it could be an effective deterrent, were it considered workable.

I am grateful for that clarification. I wrote down the hon. Lady’s words. She did say that it is an excellent deterrent, and went on to make her argument for the amendment.

To return to the substance, the provision means that the acquisition has no legal effect if it is void. It is not recognised by the law as having taken place. Clearly, voiding is a situation that it is in the interests of all parties to avoid, which should act as a powerful compliance incentive, if I can describe it as such. The Government’s view is that voiding is the logical result of a regime based on mandatory notification and clearance for acquisitions in the most sensitive sectors before they take place.

Although the Secretary of State, or the courts, may be in a position to punish non-compliance with criminal or civil sanctions, voiding is necessary to limit or prevent risks to national security that may otherwise arise where such acquisitions take place without approval. For example, there may be day one risks whereby hostile actors acquire control of an entity and seek to extract its intellectual property and other assets immediately. This is a reasonable and proportionate approach, and in arriving at this position we have carefully considered the precedent of other investment screening regimes. For example, France, Germany and Italy all have voiding provisions.

Amendment 17 would require the Secretary of State to publish guidance within three months of Royal Assent and then review it annually in relation to the approval process for notifiable acquisitions. I have listened carefully to the hon. Lady’s case for the amendment, and I hope that I can begin on common ground by saying that clearly voiding an acquisition is something that it is in the interests of all parties to avoid. That is why we are consulting on the sector definitions covered by mandatory notification and clearance, rather than simply presenting them to Parliament and external stakeholders like a fait accompli in the Bill.

That approach will allow experts from the sectors and the legal profession, and businesses and investors, to help us to refine the final definitions and tighten them up to ensure that the regime is targeted and provides legal certainty. Equally, mandatory notification applies only to the clearest acquisitions, focused on objective thresholds of shares and voting rights. Together, that will help acquirers to determine whether their acquisitions are in scope of mandatory notification, and therefore allow them to comply with their statutory obligation and avoid any voiding scenarios altogether.

I agree that the sensible starting point is that, if a major transaction has not complied with legal requirements, it did not happen. As the shadow Minister outlined in her comments, however, it is easy to imagine situations in which the fact of a transaction such as this becoming void could have significant impacts on people who are completely innocent of any failure to comply with the law. Is the Minister comfortable with the fact that the Bill has almost literally nothing to say about those people and that there is not provision for any kind of redress? There is no statement as to what happens to people who may quite innocently find themselves facing significant detriment through the actions and failures of others.

I am grateful for the hon. Gentleman’s intervention. As I was laying out, there is precedent from other screening legislation in Germany, France and elsewhere. Of course, the hon. Member for Newcastle upon Tyne Central is concerned about the hundreds of thousands of people who may be shareholders in a company. If the acquisition was a notifiable acquisition and completed without approval, it is void, regardless of the number of shareholders.

I return to the point I was making before the hon. Gentleman’s intervention. Together, this will help the acquirers determine whether their acquisitions are in scope of mandatory notification. None the less, the Bill sets out the various ways in which an acquisition may be retrospectively validated, both proactively by the Secretary of State and in response to a validation application, where non-compliance occurs. I believe the guidance that the amendment would require the Secretary of State to publish is well meaning but fraught with difficulties.

There are a number of reasons why the Government must reject the suggested approach. First, the amendment is an invitation to the Secretary of State to, in effect, legislate through guidance to set out the legal implications of acquisitions being voided pursuant to clause 13. In our view, it would not be appropriate for the Secretary of State to do so, as it is for Parliament to legislate, but ultimately for the courts to interpret and apply that legislation.

The hon. Member for Newcastle upon Tyne Central will be aware of the much-quoted report from the House of Lords Select Committee on the Constitution, which has emphasised the importance of avoiding guidance being used as a substitute for legislation. We have no intention to do so in respect of voiding.

I confess that I am somewhat surprised by the Minister’s comments. Does he feel that all guidance is an invitation to the Secretary of State to effectively legislate through guidance? Is that something that the Minister feels is the case for all guidance? If that is the case, we will not be getting very much guidance for businesses at all. Does he not feel that, in terms of regulatory clarity, there should be effective help and guidance that is not legislation? He is right to say that it is for the legal system to interpret, but it is also right that we have clear laws to be interpreted. As the hon. Member for Glenrothes said, there is currently nothing in the Bill about what “voiding” means and what it could mean.

Of course, not all guidance is guidance that the Lords Constitution Committee would have effectively considered to be a substitute for legislation. I will make some more headway, as I am conscious of the time.

Furthermore, the legal implications of voiding will depend on the particular facts of each case. It will ultimately be for the courts, as I said earlier, to resolve any disputes between parties.

Secondly, and for the same reasons, it would not be appropriate for the Secretary of State to publish guidance on who constitutes a “materially affected” person under clause 16(1). If it will assist the Committee, I will say that we consider these to be ordinary words of the English language and that whether a person has been materially affected by voiding will depend on the particular facts of each case. Ultimately, it will be for the courts to interpret this provision and to resolve any disputes between parties.

Thirdly, we do not consider guidance under paragraph (c) in the amendment to be necessary or appropriate. Final orders issued by the Secretary of State will need to be clear, and it is expected that in most instances they will follow extensive discussions with the parties so that all understand the conditions being imposed on the trigger event. That is equally true in relation to voided acquisitions scrutinised by the Secretary of State retrospectively. Where remedies imposed by the Secretary of State include restrictions on completion, it will be an objective question of fact, dependent on the circumstances of each case, whether the acquisition proceeds contrary to those conditions. This does not involve any determination by the Secretary of State, and it would ultimately be for the courts to resolve any disputes between parties, so it would not be appropriate for the Secretary of State to issue guidance setting out the “informational and evidential standards” that would apply. More generally, the value of any guidance would be limited, given that it would necessarily reflect the fact that retrospective validation will be dependent on the facts of an individual case.

The new regime understandably covers a broader range of acquisitions than is the case now. That is absolutely correct, as the hon. Lady stated. The combination of that fact with the reality that some voided acquisitions will come to light months or years after they take place and any number of events, involving numerous parties, may have occurred since then means that the Secretary of State must consider any validation application on a case-by-case basis. That is the right approach to keep this country safe, and this takes us back to the central issue that voiding is the logical result of a regime based on mandatory notification and clearance for acquisitions in the most sensitive sectors before they take place.

I sense that the Minister’s speech is coming to a close. He makes the point that voiding is the logical consequence of the new regime, based on mandatory notification. I have said that we recognise that, but, further to the intervention by the hon. Member for Glenrothes, if it is the necessary consequence, why is it not included in the impact assessment?

I thank the hon. Lady and the hon. Member for Glenrothes for their questions. It would be nigh on impossible to have an impact assessment as to what happened to a deal that should have been notified under the 17 sectors and then was voided. I believe that is something the Opposition should understand, in terms of the proportionality of the new regime, and I hope that it is something the hon. Lady and her colleagues can support. I hope that she will withdraw her amendment.

I thank the Minister for his remarks. As I set out, we recognise the importance of this power. We were not seeking to remove the power to void—for transactions to be deemed void. But as I also set out, the two words “is void” have a huge impact, and it is of concern that neither the Bill nor the impact assessment addresses that. The Minister said that it would be impossible to assess the impact of voiding, but the impact assessment, where it looks at the number of affected businesses, estimates the number of investment decisions, notifications, security assessments and remedies. It makes estimates of all those, but has nothing to say on the number of potential voidings. That is a significant gap in the Bill and the impact assessment and, as a consequence, in the level of certainty and understanding about the Bill.

I have said a number of times that we are going from a standing start of 12 notifications in 18 years under the Enterprise Act 2002, which the Minister cited as having robust powers, to the almost 2,000 that we are expecting. Given his response, however, on which we see no likelihood of him moving, and given that we acknowledge the importance of the powers, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 13 ordered to stand part of the Bill.

Clause 14

Mandatory notification procedure

I beg to move amendment 18, in clause 14, page 8, line 36, leave out “may” and insert “shall”.

This amendment seeks to make the Secretary of State’s prescription of regulation of the form and content of a mandatory notice mandatory.

With this it will be convenient to discuss the following:

Amendment 19, in clause 18, page 11, line 28, leave out “may” and insert “shall”.

This amendment seeks to make the Secretary of State’s prescription of regulation of the form and content of a voluntary notice mandatory.

Clause stand part.

It is an honour to serve under your chairmanship, Mr Twigg. These two amendments are simply about giving more direction. One issue that we have debated on every day of the Committee’s scrutiny so far is how the Bill will radically transform the merger control process and create an entirely new centre for that process within BEIS.

Small and medium-sized enterprises across the country will look at these changes with great interest and understanding that national security is important and imperative, but also with uncertainty as they consider the need to seek investment to grow and create jobs. We owe those businesses clarity, confidence and certainty in the new regime, which is why the amendment simply seeks to make the Secretary of State’s prescription of regulation of the form and content of a mandatory notice mandatory by deleting “may” and inserting “shall”.

The Bill gives some clarity on the assessment period and the review period under the new regime, but there is still major uncertainty about the first stage of the regime. It is unclear how long the Secretary of State can take to decide on rejecting a mandatory or voluntary notice. The Government’s consultation suggested that it would be as soon as reasonably practicable, but unfortunately that is of no assurance. For a new unit with major resourcing challenges, as soon as reasonably practicable could be far from soon.

My hon. Friend the Member for Southampton, Test spoke earlier in the week about his experience and the bad practice that could occur if the Secretary of State was left with so much discretion, rather than a little more compulsion. There are a number of examples, including the Energy Act 2013, where having “may” rather than “shall” meant that, in real terms, what was determined by the Bill never came into being.

Clause 66 of the Bill says that some clauses will immediately come into force, but it later says “may”. The Secretary of State could—hopefully he would not—wait for years or not do it at all. In both clauses referred to by the amendments, the regulations must be laid by the Secretary of State, and the term “may” creates some degree of uncertainty. It would be far better to take a more direct approach by inserting “shall”.

It is also unclear what specific form of content and information could be required in the mandatory or voluntary notices that firms and investors would have to provide. We could end that uncertainty. It is already an incredibly challenging time for firms to engage with a major new control process in the midst of a pandemic and, of course, while waiting to hear what our new relationship with the European Union will be.

I thank my hon. Friend for the excellent remarks he is making. Is his experience of small and medium enterprises in Ilford South the same as mine in Newcastle, in that they generally do not have the time to fill out the multiple forms required to receive grants or to apply for support? To expect them not only to respond, but to design the form and decide what should go into it is really taking our small and medium enterprises for granted.

I agree. It is Small Business Saturday this weekend, and I imagine that many SMEs will be telling us when we are back in our constituencies about exactly these kinds of issues: the uncertainty, and the decisions they want to take about investment in staff, in technology and, of course, in equipment.

With this amendment we are trying to focus on ensuring that businesses have as much clarity as possible, so that they can begin to plan. If that uncertainty is ended, as we come out of the covid crisis and move forward from the debacle of Brexit, it will be better for businesses to have clarity, so that they can begin to take the positive decisions that will hopefully create jobs.

It is already challenging for firms to engage in such a tricky process. Remember that small and medium enterprises will not have the vast resources that are perhaps available to the multinationals or mergers-and-acquisitions-type companies from which we heard evidence. It will be far more frightening for SMEs to face such things given everything else they are dealing with at the moment.

The amendment would go a long way towards ending uncertainty for SMEs and ensuring that the Government act with clarity and, of course, with competence. It would require the Government to publish guidance on the form and content of the notices that firms will have to fill out. There will always be a degree of paperwork for businesses, but this is about ensuring that it can be filled in as quickly as possible. The recommendation is that guidance should create efficient forms and content requirements, and that it contains some indication of how long the Government will take to accept or reject a mandatory or voluntary notice,

My hon. Friend is making some important points. The issue here, as he is illustrating, is simply that the pressures that SMEs face in particular are about cash-flow and attracting inward investment. They do not have the resources or the capacity to cope with those sorts of approaches and will be under huge pressure. That is why the amendment is so important.

My hon. Friend makes a good point. Businesses are feeling huge pressure. SMEs will often experience a degree of fear at the moment about potentially having to grapple with a whole series of new regulations—not just under this important Bill, but under the spin-outs that come out of our ongoing negotiations with the European Union. Many businesses are, I think, holding back on investment and investment decisions—even inward investment into their own company—simply because of the uncertainty. It is incredibly important to remove those barriers and to get people back investing in both staff and technology and feeling that they have the ability to see forward far enough to keep staff on the books through such a difficult crisis.

My hon. Friend is making an excellent point about Brexit, but I will not test the Committee’s patience on that. As for the changing forms and the requirements on SMEs, does my hon. Friend understand why the Minister is putting the onus for deciding what information is required on to small businesses, rather than on to his Department and the civil service, which could do that?

One of the things that we have probed a number of times, when taking evidence from witnesses and in our debates in Committee, is the idea that we need to give businesses clarity, because many are feeling uncertain. If they cannot make decisions about forward planning, clearly that will be detrimental as we move through the crisis.

Perhaps I should refer to some of the expert evidence we heard last week. Michael Leiter, who represents a very large, global limited liability partnership, told us:

“I think this is a rather seismic shift in the UK’s approach to review of investment… having some opportunity to make sure that both the private sector and the public sector are ready for that and understand the rules…is particularly important”.––[Official Report, National Security and Investment Public Bill Committee, 24 November 2020; c. 46, Q52.]

That was in our discussion about resourcing, and one of the questions that I and colleagues on both sides of the Committee raised was on the resourcing of BEIS. As my hon. Friend the Member for Newcastle upon Tyne Central suggested, rather than the burden falling on small and medium-sized enterprises, there should be a fully resourced and expanding new unit within BEIS. Given that the number of call-ins could rise from 12 to 1,800, as we have heard, we need a huge scaling up of BEIS’s ability to look at these, and obviously it does not have the same experience that the Competition and Markets Authority had previously.

I humbly point out that the Minister assured the House on Second Reading that:

“The investment security unit will ensure that clear guidance is available to support all businesses engaging with investment screening”.—[Official Report, 17 November 2020; Vol. 684, c. 277.]

The amendment is intended to secure that assurance in substance; not to tie the hands of the Secretary of State, but to give clarity to businesses by shifting from something that may happen to something that shall happen.

It is a pleasure to serve under your chairmanship, Mr Twigg. I know that there was quite a bit of discussion in an earlier sitting, which I was unable to attend, about the different between “may” and “must”. In relation to clause 14—my comments apply also to clause 18—if we try to imagine the circumstances in which the Secretary of State would choose not to make those regulations, we realise that there are none. If no regulations have been made, most of subsection (6), which clearly is the meat of the clause, just does not make sense.

Subsection (6) states that the Secretary of State may reject the mandatory notice if

“it does not meet the requirements of this section”.

But the clause does not place any requirements on the notice. A letter that says, “Dear Secretary of State, this is a notice under section 14” would meet all the requirements of that subsection, so it cannot be rejected on those grounds. Clearly, it cannot be rejected on the grounds that

“it does not meet the requirements prescribed by the regulations”,

unless the Secretary of State has made the regulations. It can be rejected if

“it does not contain sufficient information to allow the Secretary of State to”

make a decision. How can it possibly be fair for a business to have a notice rejected on the grounds that it does not contain sufficient information to allow a decision to be made by somebody who has chosen not to state what information needs to be provided?

Therefore, two of the grounds on which the Secretary of State can reject the notice are meaningless. The third one has meaning, but it is surely not a reasonable way to treat any business. If there is information that the Secretary of State feels will be necessary to allow her or him to come to a decision on the notice, surely that information should be set out in regulations so that there can be no doubt.

It is perfectly in order for the statutory form of notice to require additional information that cannot be specified in advance. Clearly, the Bill will cover a wide range of transactions, and there will always be information that is needed for one transaction but maybe not for others, but surely we will need to know the name of the acquirer, the identity of the asset and the timing of the intent to acquire. It will be impossible to process any notice without those kinds of things, so surely the Secretary of State will at the very least make regulations requiring that information to be provided. If the Minister can persuade me that there are realistic circumstances in which the Secretary of State can choose not to make any regulations at all, perhaps I would not support the amendment, but the clause will simply not work if the regulations have not been made. For that reason, it should require the Secretary of State to make those regulations.

That is made more important by the points that the hon. Member for Ilford South made, in that subsection (5) only requires the Secretary of State to come to a decision

“As soon as reasonably practicable”.

That is about as vague and woolly a time requirement as it is possible to put in legislation. I remember, thinking back to my days in the Health and Safety Executive, that the phrase “reasonably practicable” appeared in a lot of legislation on health and safety requirements. The “reasonably” part means taking into account the other circumstances applying to the Secretary of State and the Department at the time, so if they are up to their eyes in dealing with Brexit, trade deals, getting the vaccine distributed or anything else, then “as soon as reasonably practicable” could become a very open-ended time limit indeed. As soon as the Secretary of State has decided to accept—

It is easy to see that there will be circumstances where “as soon as reasonably practicable” becomes a very open-ended time limit—or non-time limit—indeed.

Given that so much of the rest of the Bill puts time limits on the Secretary of State to ensure that potentially beneficial transactions cannot be held up forever simply due to delays in the Department, the combination of the words “as soon as reasonably practicable” in subsection (5), right at the start of the process, and the massive uncertainty in the minds of businesses if the Secretary of State does not make regulations persuades me that the Bill should not allow the Secretary of State to make those regulations but should require the Secretary of State to make them, because the clause simply does not work or make sense if they are not made.

Ordered, That the debate be now adjourned.—(Michael Tomlinson.)

Adjourned till this day at Two o’clock.

National Security and Investment Bill (Eighth 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

Public Bill Committee

Thursday 3 December 2020

(Afternoon)

[Derek Twigg in the Chair]

National Security and Investment Bill

Order. I remind the Committee that interventions should be short. If Members wish to make wider points, they have an opportunity to make a speech, so they should seek to catch my eye while the lead amendment is being moved.

Clause 14

Mandatory notification procedure

Amendment proposed (this day): 18, in clause 14, page 8, line 36, leave out “may” and insert “shall”.—(Sam Tarry.)

This amendment seeks to make the Secretary of State’s prescription of regulation of the form and content of a mandatory notice mandatory.

Question again proposed, That the amendment be made.

I remind the Committee that with this we are discussing the following:

Amendment 19, in clause 18, page 11, line 28, leave out “may” and insert “shall”.

This amendment seeks to make the Secretary of State’s prescription of regulation of the form and content of a voluntary notice mandatory.

Clause stand part.

I will not take up too much of the Committee’s time, but I wish to say a few words about the excellent contribution that my hon. Friend the Member for Ilford South has made to our continuing discussions about “may” and “must”. It is a particularly egregious case that he has highlighted. If we look at the number of “musts” that appear in clause 14—this point has been made by other Members—we see that the subsequent “musts” would fall immediately if the Secretary of State may not prescribe by regulation the form and content of a mandatory notice—so the “must” in subsection (5) is relevant only if the Secretary of State does that in the first place, as are the “musts” in subsections (7) and (8), as my hon. Friend pointed out earlier.

There is also an interesting “must” at the beginning of the clause, which relates to the mandatory notification procedure itself. Subsection (1) states that

“a person must give notice to the Secretary of State before the person, pursuant to a notifiable acquisition…gains control in circumstances”

and so on. So subsection (1) appears to stand whether or not, in subsection (4), the Secretary of State decides to prescribe by regulation the form and content of a mandatory notice. That means that a person must provide a mandatory notice, even if the Secretary of State has not prescribed any form or content of that notice. The person may therefore have no idea what is to be in that mandatory notice, because the Secretary of State has not put it in regulations, but still they must give notice because this subsection says “must”.

That does not seem to be particularly proportionate. It appears to be constructed in such a way that, regardless of whether the concept is completely unknown to the person giving the notice, it is entirely up to the Secretary of State whether he or she makes the mandatory notice in any way comprehensible. I think that is quite an odd juxtaposition in this instance of “mays” and “musts”.

The “may” in subsection (6) is perfectly acceptable, in as much as its states that:

“The Secretary of State may reject the mandatory notice on one or more of the following grounds”.

That “may” is absolutely appropriate. However, the positioning of “must” right at the beginning of the clause, and the positioning of “may” in subsection (4), does not look reasonable to me. That could easily be solved by using the word “shall”, so that the situation is proportionate between those circumstances. That is the essence of the amendment 18, as my hon. Friend the Member for Ilford South outlined earlier.

I accept that there have been a number of occasions when, although I have not particularly liked “may” going into a Bill, it has had some justification. However, the particular juxtaposition that we see here causes me to think that it is a rather important issue, as far as “may” and “shall” are concerned. I am interested to hear whether the Minister thinks that the wording could give rise to the sorts of problems that I have suggested, in the event that another Minister—not himself, of course—might be tempted not to produce such regulations when defining the form and content, because I think that could cause potential problems for reasonableness, as far as this clause is concerned.

I rise to give some thoughts on clause 14 stand part, but will also refer to the amendment proposed by my hon. Friend the Member for Ilford South. Clause 14 is a critical part of this process, because it sets out the mandatory notification procedure. In some respects, it is the mandatory notification which places the greatest burden on those falling, or who might consider themselves to fall, within its remit. This is because it requires the person who is to make a notifiable acquisition to give a mandatory notice to the Secretary of State prior to the acquisition taking place.

The clause goes on to give the Secretary of State the option to set out the form and content of the mandatory notice. I shall come back to that. It then sets out the process by which the Secretary of State “must” decide whether to reject or accept that notice. If a mandatory notice is rejected, the Secretary of State must provide reasons in writing for that decision to be made. It also sets out the timescale elements and the persons to be notified. We recognise that mandatory notifications are an important part of making the Bill have the desired impact on our national security. It is absolutely right that in key areas the onus should be on those who will be aware that the transaction is taking place to notify the Secretary of State.

However, the amendment set out by hon. Friend is all about protecting and supporting the interests of small businesses. I am concerned that the Minister does not seem to be as vigilant about reducing the burden on and setting out the guidance for small businesses as we would like. All our constituencies have small businesses—it is often said that they are the lifeblood of the economy—yet in the Bill, and particularly in the clause, the Minister is not setting out the minimum support that they might require.

My hon. Friend the Member for Southampton, Test got to the nub of the matter in one of his very informative discussions about the difference between “must” and “may”. He observed that the “must” falls on the person who has to do the notifying. For example, it could be a small artificial intelligence start-up with a few members of staff, none of whom is a lawyer—remember that there are no de minimis provisions in the Bill for the size of the acquisition that must be notified—that is seeking investment from a foreign party. That start-up would be asked to indicate whether that investment would involve making a notification. Not only that, it must decide itself the form that the notification should take.

I really cannot understand why the Bill apparently seeks to give discretion to the Secretary of State to lighten his load, but not to our fantastic small businesses or to business generally. As my hon. Friend the Member for Ilford South said, why should a small business, the notifier, also have to set out the format in which its notification takes place? Given that the clause sets out,

“The Secretary of State may by regulations prescribe the form”,

why can we not simply turn that into “shall by regulation prescribe the form and content of a mandatory notice”?

Equally, when voluntary notices are considered, I hope the Minister has some ideas about what should be in the notification. If he does, is it not simple and desirable for him to share his ideas with our business community, which in less than a month’s time is facing a huge change in how it trades and does business with the European Union, our largest trading partner by value? That involves countless new forms to be filled out, as we have discussed in the Chamber, some of which are not yet designed. At the same time that that is happening, to require that they should decide for themselves what is involved in a notification seems wholly unacceptable.

On that basis, I ask the Minister to set out whether he intends to accept the amendment. If not, will he tell us what work has gone on in the Department to look at the kind of information might be required? How will the impact assessment assess the likely level of familiarisation required for this legislation—there is a phrase that says that there is not expected to be a huge amount of familiarisation required in it—while at the same time there is no guidance, assessment or inkling about the kind of information that will be required to be included in that notification?

I am grateful to the hon. Members for Ilford South, for Southampton, Test, and for Glenrothes, as well as to the shadow Minister, the hon. Member for Newcastle upon Tyne Central, for their contributions on this set of amendments and clause 14. With the agreement of the Committee, I will begin with clause 14 stand part and then turn to the amendments.

Clause 14 provides a mechanism for proposed acquirers to notify the Secretary of State of notifiable acquisitions, which are those circumstances covered by clause 6. Contrary to what the hon. Member for Newcastle upon Tyne Central said, we on this side of the House really do care about small business; indeed, we will be celebrating Small Business Saturday by highlighting the great small businesses that are trying to recover from covid-19. To avoid duplication or unnecessary burden for businesses and investors, if the Secretary of State has already given a call-in notice in relation to the proposed notifiable acquisition, no notification is required. Otherwise the proposed acquirer must submit a mandatory notice containing the necessary information for the Secretary of State to make a decision about whether to exercise the call-in power.

The Government carefully considered which parties should be legally responsible for this notification. In many cases we expect this to be a collaborative process between parties that have an aligned aim for the acquisition to take place. However, there may be instances where an acquirer who is purchasing shares from a number of individual sellers is the only party aware that, in totality, they are carrying out a notifiable acquisition. For example, if an acquirer buys 10% equity in an entity specified under the mandatory regime from two separate sellers—20% in total—each seller may be operating under the assumption their transaction does not meet the threshold of a notifiable acquisition. Equally, the entity itself may be unaware of these acquisitions until after they have taken place. As such, only the acquirer can reasonably be expected to know that their activities constitute a notifiable acquisition and the responsibility to notify therefore rests with them.

The precise information that will be required and the form of the mandatory notice will be set out in regulations by the Secretary of State in accordance with subsection (4). For the convenience of the House, the Government have recently published a draft of the information that is likely to be required in a mandatory notice. As hon. Members might expect, this is likely to include all the pertinent details about the acquisition, including the target entity, the nature of its business, the assets it owns, the parties involved, the details of the equity stake and any other rights that form part of the acquisition—for example, any board appointment rights.

Following acceptance of a satisfactory notification—for example, conforming to the format and content prescribed —the Secretary of State then has up to 30 working days to decide whether to exercise the call-in power, or to take no further action under the Bill. The Secretary of State will be entitled to reject a mandatory notice where it does not meet the specified requirements, or where it does not contain sufficient information for him to decide whether to give a call-in notice.

The nature of the information required should mean that such instances are rare, but it is crucial that the requirements of the notice are met in order for the 30-working-day clock to start only at the point the Secretary of State is in a position to make an informed decision. By the end of the 30-working-days review period, the Secretary of State must either give a call-in notice or notify each relevant person that no further action will be taken under the Bill. In effect, the latter clears the acquisitions to take place unconditionally.

The power to specify in regulations the content and form of the mandatory notice is an important one, as the Secretary of State may need to change this over time in response to the operation of the regime in practice, and in response to the volume and quality of such notices given and rejected. I certainly believe that this approach ensures that Parliament can scrutinise any such changes. This clause is a procedural necessity to give effect to the mandatory notification regime once notifiable acquisition regulations have been made, and I trust that it will be supported by both sides of the Committee.

Amendments 18 and 19 are designed to require the Secretary of State to make regulations specifying the form and content of a mandatory or voluntary notice, ensuring that the parties have clarity on what information they need to provide in order to have properly notified. That is undeniably important—I share the focus of the hon. Member for Ilford South on that point—so this is an entirely sensible proposition. I suggest, however, that the amendments are unnecessary because the Bill as drafted already achieves that aim.

In practice, in order for the notification regime to operate, the Secretary of State will first need to make regulations specifying the form and content of a notification, regardless of whether clauses 14 and 18 say that he “may” or “shall”. I pay homage to the hon. Member for Southampton, Test for introducing that experience to the Committee. Regardless of whether clauses 14 and 18 say that the Secretary of State “may” or “shall” make such regulations, the notification regimes cannot operate without the notification forms being prescribed in the regulations.

I am somewhat confused. The Minister is saying that clause 14(4) in its entirety is unnecessary, because those things are already prescribed. Will he set out in more detail where they are already prescribed? He argues that they are already prescribed, but where are they prescribed?

Let me make clear to the hon. Lady what I actually said, which was that whether clauses 14 and 18 say that the Secretary of State “may” or “shall” make such regulations, the notification regimes cannot operate without the notification forms being prescribed in regulations. My point is that whether the clauses say “may” or “shall”, it makes no difference. I therefore hope that the hon. Member for Ilford South will withdraw the amendment.

I have listened carefully to the Minister, and I feel that several issues have not been fully explored. The whole point of the amendment is to compel the Secretary of State to be clear that those regulations will be forthcoming in a timely manner, along with the reassurances that small and medium-sized enterprises seek. The amendment would mean that it was not the Secretary of State’s choice when or whether that happened. The use of the word “shall” would allow us to move forward more directly, because the Secretary of State would be compelled to do that as quickly as possible. On that basis, I will press the amendment to a Division.

Question put, That the amendment be made.

Clause 14 ordered to stand part of the Bill.

Clause 15

Requirement to consider retrospective validation without application

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

Clause 15 places a duty on the Secretary of State to consider whether to retrospectively validate a notifiable acquisition that was not approved by him before it took place. As I made clear in reference to clause 13, a notifiable acquisition that is completed without the approval of the Secretary of State is void. It is in the interests of all parties to avoid that situation, and voiding should act as a powerful incentive for compliance.

None the less, there may be instances where a notifiable acquisition takes place without approval and is therefore void, but the outcome is not a permanent necessity. This clause places a duty on the Secretary of State, following the point at which he becomes aware of the acquisition, to either exercise the call-in power in relation to the acquisition within six months or else issue a validation notice. A validation notice provided for by this Bill has the effect of treating the acquisition as having been completed without the approval of the Secretary of State, as though it were never void.

There are a number of circumstances in which the Secretary of State may decide not to issue a call-in notice in relation to a void acquisition. For example, as the Secretary of State may only call in trigger events, he may decide that the acquisition does not give rise to a trigger event—for instance, the acquisition of a 15% equity stake in a specified entity is a notifiable acquisition, but is not in and of itself a trigger event. A 15% stake may or may not, depending on the facts of the case, amount to or form part of a trigger event, namely the acquisition of material influence over the policy of the entity.

Alternatively, the Secretary of State may reasonably suspect that a trigger event has taken place but not reasonably suspect that it has given rise to, or may give rise to, a national security risk. In those situations, this clause requires the Secretary of State to give a validation notice in relation to the notifiable acquisition, which in effect provides the retrospective approval for the acquisition and means that it is no longer void. I should be clear that retrospective validation does not change the fact that the acquirer may have committed an offence by completing the acquisition without first obtaining approval. If an offence has been committed, criminal and civil sanctions will be available and may be used to punish that non-compliance.

As provided for by subsection (2)(a), where the Secretary of State decides, following consideration of a void acquisition, to exercise the call-in power in relation to it, he must give a call-in notice to the acquirer and such other persons as he considers appropriate. For the purposes of considering whether a trigger event has taken place under the Bill, including when deciding whether to exercise the call-in power, clause 1(2) provides that the effect of any voiding must be ignored, meaning that a notifiable acquisition that has been completed without approval can still amount to, or form part of, a trigger event even though it is of no legal effect.

This approach has been taken because a legally void acquisition may still result in a de facto exercise of the rights purportedly acquired and, consequently, a risk to national security. Where the call-in power is exercised in relation to a void acquisition, the case follows the conventional assessment process and is subject to the same statutory timelines and information-gathering powers. At the end of this process, the Secretary of State may decide to unconditionally clear the acquisition, resulting in a validation notice being issued and the acquisition no longer being void. Alternatively, he may impose remedies in a final order.

I have a brief inquiry, following the Minister’s recent letter to me on a previous point raised in Committee, for which I thank him for his prompt attention. If a hostile company takes over another company, effectively puts it into liquidation and walks off with the intellectual property, patents and various other things, and those are out of the door by then, will it be necessary to provide a validation for the transaction, if it has not been previously notified or noticed, and to then pursue the consequences of that validation by subsequent means, given that the company was presumably in existence at the time of the validation, if not thereafter? Would that perhaps not be a cumbersome procedure?

I am grateful to the hon. Gentleman for that question; I will write to him on that point, rather than attempting to go through our thinking on this. He raises an important point on what happens after the effect.

Where the final order has the effect of clearing the acquisition outright, subject to conditions, the Bill provides that the acquisition is no longer void. Where the final order has the effect of blocking all or part of the acquisition, the Bill provides that the acquisition remains void to that extent. Further provision on this particular situation is made in clause 17. The deadline of six months for giving either a validation notice or a call-in notice was chosen by the Government to align closely with the Secretary of State’s other requirements to act within certain timescales under the Bill.

I thank the Minister for his promise to write to my hon. Friend the Member for Southampton, Test. The Minister mentioned on a number of occasions that a transaction is no longer void when a validation notice has been given. However, the transaction was void when completed, because it was completed without approval, so there will have been a period when it was void. What are the legal implications of that period?

Is the hon. Lady is talking about a period when the Secretary of State was not aware of the transaction being void? If he is unaware of it, he is unable to act. It is only once he becomes aware, through a screening process or notification—

I want to explain myself better. The question is not about what the Secretary of State can do, because I clearly understand that he cannot act on what he is not aware of. The fact of the transaction being deemed legally void for a period, which it will have been, may have some legal implications for the owners or the customers or whoever.

Again, I am happy to write to the hon. Lady on that. Clearly, only when the Secretary of State is aware that a transaction is clearly in breach of the Bill is it then void. I am not clear as to what she is saying. Is she asking about before he is able to act?

Let me clarify. Clause 13(1) states:

“A notifiable acquisition that is completed without the approval of the Secretary of State is void.”

It is void at the time it is completed, not at the time the Secretary of State becomes aware of it. Sometime later, the Secretary of State becomes aware of it and gives a retrospective clearing of it, but there will regardless have been a period where that transaction was void. What are the legal implications for the owners? It seems to me that having a transaction being void for a period would have some legal implications, regardless of whether the Secretary of State has cleared it.

Again, I am happy to write to the hon. Lady on that point. Maybe I am being thick here, but the transaction only becomes void once the information is available to the Secretary of State. Is she talking about before that period?

My understanding is that it becomes void at the point when the transaction is completed. At some point after that, the Secretary of State gives a retrospective validation, but there is nevertheless a period of one year, or however long it takes, when the transaction was void. Does that not have legal implications?

I am happy to write to the hon. Lady on that point. What I think she is talking about is about the gap between the Secretary of State being aware and when the transaction actually took place, because the date where it is void is the date of the closing of that transaction, but I am very happy to write to her about that.

It is not in the interests of either the Government or the parties for the Secretary of State to have an unfettered ability to issue a call-in notice, perhaps long after he becomes aware of the notifiable acquisition. This approach provides a sensible mechanism for resolving the effects of automatic voiding arising from failures to receive clearance. I reassert my view that such situations should be rare, but it is only proper that the Bill provides such a mechanism for the Secretary of State to resolve them satisfactorily, should they arise. I hope hon. Members agree with that position.

I thank all the hon. Members for their contributions, and the Minister for his remarks and his good humoured response to the interrogation on certain parts of this important clause. I recognise the importance of the clause and the importance of considering retrospective validations without application giving the all-consuming power through the voiding of notifiable acquisition without the approval of the Secretary of State. This debate has illustrated the need for greater clarity.

In the absence of the additional guidance that we were looking for in our earlier amendment, this has the possibility of becoming a legal goldmine for lawyers who are requested to give advice on what would or would not constitute a void transaction at what time. I raise that in the context of the requests of my hon. Friend the Member for Southampton, Test and myself for greater clarity about the period, which may represent some sort of legal limbo, between when a transaction takes place but before it is given retrospective approval. However, we do not oppose the clause.

Question put and agreed to.

Clause 15 accordingly ordered to stand part of the Bill.

Clause 16

Application for retrospective validation of notifiable acquisition

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

Clause 16 provides a mechanism for any person materially affected by a notifiable acquisition being void to make an application to the Secretary of State to retrospectively validate the acquisition. Although there is a duty in clause 15 for the Secretary of State to give a validation notice or a call-in notice within six months of becoming aware of the acquisition, we recognise that in practice that is often likely to be a process driven by the parties themselves. It may be, for example, that a party realises that their transaction was a notifiable acquisition only after the event, and wishes to take proactive steps to resolve the situation. The clause allows them to make a formal application for retrospective validation, following a similar process to the conventional mandatory notification route.

Subsection (3) enables the Secretary of State to make regulations prescribing the form and the content of a validation application. It is likely that that will closely resemble the mandatory notification form, given all of that information remains pertinent to the Secretary of State’s decision on whether to give a call-in notice. The Secretary of State will be entitled to reject the application where it does not meet the specified requirements, or contain sufficient information for him to decide whether to give a call-in notice.

If the validation application is accepted, all relevant parties must be notified and a 30 working-day review period begins. By the end of the review period, the Secretary of State must issue either a call-in notice or a validation notice. Once again, if a validation notice is issued, the acquisition is no longer void and the Secretary of State must confirm that no further action under the Bill will be taken in relation to that acquisition. As is the case with clause 15, retrospective validation through that route does not provide immunity against criminal or civil sanctions being pursued.

Validation does not change the fact that a notifiable acquisition did not have the Secretary of State’s approval prior to taking place. This is simply about how the acquisition itself should be treated, following the screening of all pertinent details relating to the acquisition. I hope that hon. Members will be supportive of parties being able to apply to the Secretary of State for a validation notice, and that they will see clause 16 as part of our business-friendly approach to the investment screening regime.

This is more of a slightly extended intervention than a speech. The Minister has set out very clearly what the clause means and how it is to be operated, but I am not sure that he completely covered what the opinion of the Secretary of State may consist of. I am looking at subsection (8), which refers to the Secretary of State’s opinion that

“there has been no material change in circumstances since a previous validation application in relation to the acquisition was made.”

My concern is that the words “material change” are potentially subjective. That may be overridden by the fact that it is

“in the opinion of the Secretary of State”,

but there is no definition of what a material change might be considered to be, and what the boundaries of a material change consist of.

The provision does not say “no change”; it says “no material change”. Does the Minister consider that that is safe enough, in terms of the Secretary of State’s opinion overriding the material change, or does he consider that the subjectivity of a material change is potentially actionable if the Secretary of State were to say that there has been no material change, but somebody decided that the Secretary of State’s opinion was not reasonable or proportionate in the context of what has happened to a particular company?

I think the hon. Gentleman has answered his own question. Obviously, I do consider that the Secretary of State’s ability on the opinion is safe.

Question put and agreed to.

Clause 16 accordingly ordered to stand part of the Bill.

Clause 17

Retrospective validation of notifiable acquisition following call-in

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

Clause 17 provides for the retrospective validation of notifiable acquisitions that have been completed without approval, following the giving of a call-in notice in either of the situations covered by clauses 15 and 16. The previous two clauses detail how the Secretary of State may give a call-in notice in relation to a notifiable acquisition that has been completed without approval and is therefore void, either on his own initiative after he becomes aware of the acquisition or following a validation application.

Following call-in, there is a national security assessment process. The Secretary of State has a period of 30 working days to either make a final order imposing remedies or give a final notification confirming that no further action will be taken under the Bill in relation to the call-in notice. The Secretary of State may extend the assessment period by an additional period of 45 working days where the legal test is met. If a further legal test is met, the Secretary of State may agree a further extension or extensions with the acquirer.

Where the Secretary of State gives a final notification, in effect giving unconditional clearance to the acquisition, subsection (2) requires him to also issue a validation notice, which means that the acquisition is no longer void. That is because voiding cannot be maintained if there is no national security justification for it. Copies of that validation notice must be given to each person who receives a copy of the final notification, any person who made a validation application and anyone else the Secretary of State considers appropriate.

Alternatively, where, following the assessment process, the Secretary of State makes a final order imposing remedies, subsections (4) and (5) provide for so much of the void acquisition as is compatible with the final order to be validated. It may be helpful if I explain what that means, with some specific examples.

Where a final order has the effect of clearing the acquisition outright, subject to conditions, it means that the entire acquisition is no longer void. Where a final order has the effect of blocking all or part of the acquisition, the acquisition remains void to that extent. That means, for example, that where the Secretary of State decides that it is necessary and proportionate, for the purpose of safeguarding national security, to block 51% of a void 100% acquisition of an entity through a final order, 49% of the acquisition will be validated and the remaining 51% will remain void.

The Bill does not seek to prescribe how such a decision is delivered by the various parties in all circumstances. The Government recognise that some acquisitions may involve a range of sellers and the Secretary of State may not wish to stipulate in every case which constituent parts of the notifiable acquisition should remain void and which should be validated. Rather, we expect the Secretary of State to set out the end state that the acquirer must arrive at and to consider proposals from them to meet these obligations as part of the assessment process before a final order is made.

Any dispute between the parties arising out of how the void or validated elements are chosen will be a private matter for the parties. The Bill does not attempt to limit or cut across any restitutive action taken by the parties against one another if they deem it necessary as a result of the notifiable acquisition, or a proportion of it, remaining void.

This overall approach absolutely fits with our desire for the regime to be as reasonable and proportionate as possible. We have incorporated requirements for notifiable acquisitions to be retrospectively validated where the call-in power is not exercised in relation to them: where they do not pose a risk to national security, for example, or where the call-in power is exercised but ultimately no further action is taken in relation to them after the assessment process. We have developed a tailored approach through this clause, which provides for so much of a void acquisition as is compatible with a final order, and therefore with national security, to be validated automatically.

This is the legislation of a Government seeking to balance the country’s national security and prosperity interests. I hope colleagues on both sides of the Committee will support that approach in the clause.

Question put and agreed to.

Clause 17 accordingly ordered to stand part of the Bill.

Clause 18

Voluntary notification procedure

Amendment proposed: 19, in clause 18, page 11, line 28, leave out “may” and insert “shall”.—(Sam Tarry.)

This amendment seeks to make the Secretary of State’s prescription of regulation of the form and content of a voluntary notice mandatory.

Question put, That the amendment be made.

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

The Government are committed to providing as much certainty as possible for business. The clause therefore provides parties with a mechanism to require the Secretary of State to decide whether a trigger event outside the mandatory notification regime will be called in. If parties wish, they may notify the Secretary of State of such a trigger event when it is in progress or contemplation or, alternatively, after it has taken place. Any early notification will allow businesses to plan for, and mitigate, any issues that may subsequently arise.

Following the acceptance of a satisfactory notification—one that conforms to the prescribed format and content, for example—the Secretary of State has up to 30 working days to decide whether to exercise the call-in power or to take no further action under the Bill. Businesses can rest assured that where the Secretary of State decides to take no further action following assessment of a notification, that decision may not be revisited further down the line. The only exception is if the Secretary of State has been given false or misleading information in relation to the decision not to issue a call-in notice, but I expect such instances to be few and far between. On those rare occasions where the notified trigger event does require further action, early notification means that parties can also factor in a security assessment following a formal call-in early on in their commercial timelines.

I hope that the Committee will agree that that is a pragmatic approach that provides the Secretary of State with the time he requires to properly screen trigger events, while giving businesses as much certainty as possible about when they can expect decisions. I would go further and say that the Government would welcome informal discussions with parties before the notification stage begins. That would allow parties to prepare for a potential assessment, while also allowing the Secretary of State to better understand the trigger event.

This is part of our commitment to working with investors and businesses in as transparent a manner as possible while protecting national security. However, I stress that a formal notification procedure is still required to enable the Secretary of State to make an informed assessment of the trigger event based on a full suite of information. I hope that hon. Members recognise the length the Government are going to to put in place a robust regime that both protects national security and retains business and investor confidence. The voluntary notification procedure, alongside the mandatory notification part of the regime, helps to strike that balance and will, I believe, work in the interests of all parties.

I thank the Minister for his remarks. He is aware of the Opposition’s concerns about the voluntary notification procedure. I shall not repeat what he has said, and we recognise the importance of the clause and of having such a procedure. As with the mandatory notification procedure, the Minister has rejected our request for a requirement to set out the form of that notification. I would like to press him on this and to ask whether he would perhaps write to me to set out formally where it is that the pre-existing requirement that he said exists says that the Secretary of State “must”, rather than “may”, set out the form for the voluntary notification. I am also not clear whether the voluntary notification form format and information requirements are the same as those for the mandatory notification, given the difference in one being voluntary and one mandatory. Clarification on that would be helpful.

We agree considerably that we want to minimise the burden on businesses and the chilling effect on investment, while securing national security. The clause is an important part of that, so we will not oppose it.

I am very happy to write to the hon. Lady; I thought that I had touched on that in my earlier remarks. The forms should be very similar, because ultimately the decision-making process of the Secretary of State, whether the notification is voluntary or mandatory, will pretty much be the same thing. I am happy to clarify that in writing.

I thank the Minister for that intervention, and we will not oppose clause stand part.

Question put and agreed to.

Clause 18 accordingly ordered to stand part of the Bill.

Clause 19

Power to require information

I beg to move amendment 20, in clause 19, page 12, leave out lines 24 to 27.

This amendment seeks to broaden the Secretary of State’s powers to require information.

With this it will be convenient to discuss amendment 21, in clause 20, page 13, leave out lines 17 to 20.

This amendment seeks to broaden the information gathering powers of the Secretary of State, in specific regard to witness attendance.

I ought to explain to the Committee that the Opposition are under some multi-tasking pressures this afternoon, Mr Twigg. I should have been in the previous debate in the main Chamber on the future of coal, in my role as energy Front-Bench spokesperson for Labour. I managed to factor that job out to somebody else in order to be here in the Committee this afternoon, and I am sure that the Committee is delighted to hear that. Unfortunately, there was no such luck for the shadow Minister, my hon. Friend the Member for Newcastle upon Tyne Central.

I thank the hon. Gentleman for highlighting that our time is precious in the House. I, too, was hoping to be in the future of coal debate, to highlight the importance of the West Lancashire light railway. I thank him for bringing it to the attention of the Committee.

The amendments relate to clauses 19 and 20. Amendment 20 might be regarded as slightly unusual, as it seeks to remove a number of sentences in the Bill: to be precise, lines 24 to 27 on page 12—it would remove clause 19(2), while amendment 21 would remove clause 20(2). The Minister might be saying to himself that Oppositions usually try to restrict Ministers’ powers, yet here we are trying to extend their powers through these amendments. I want to explain why we think that is important.

We want to hear from the Minister why he thinks those particular paragraphs should remain in the Bill, and how the restriction that they place on the Secretary of State’s activity is advantageous to the Bill’s main purpose. The paragraphs that the amendments would take out relate to the power to require information and the power to require the attendance of witnesses and seek evidence. I am sure that hon. Members can read clause 19 for themselves, but I will point out the key part:

“The Secretary of State is not to require the provision of information under this section except where the requirement to provide information is proportionate to the use to which the information is to be put in the carrying out of the Secretary of State’s functions under this Act.”

That is to say that unless it can be, or is, established that the requirement to provide information is proportionate to what the Secretary of State wants to do under the Act, the Secretary of State is not able to require the provision of information. That is effectively what the clause states.

We have already heard during evidence to the Committee that there may well be a complex web when it comes to getting information and working out what is and is not relevant, particularly if a hostile power or body is seeking to take over a company or gain access to its information and IP. The information may well not consist of what it appears to consist of, or there may be a number of paths by which that information can be obtained.

From our expert witnesses we heard some interesting examples of things they thought looked rather far from the central activity of information provision. For example, on academic projects, in his expert evidence, Charlie Parton from the Royal United Services Institute told us:

“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.”––[Official Report, National Security and Investment Public Bill Committee, 24 November 2020; c. 6.]

He was suggesting that, of a number of those postgraduate and PhD projects, there were some that he might have put a question mark against and others not, but he was not sure which were which. Nevertheless he seemed to think that some of those research projects—although they were cited within the ordinary parameters of whatever the research project might be, and who might be collaborating with whom, and who might get what information out of that—might ring alarm bells. That was in terms of who was collaborating, how the information might be used and where it might be going.

I think I understand what the amendment is intended to achieve, but is not the hon. Gentleman concerned about the danger of almost explicitly building in a recognition that the powers in the Bill do not have to be used proportionately?

The hon. Gentleman raises an important point. I will come to the word “proportionate” in a moment, because that is an important part of this clause. I hope I can satisfy him about my concerns about the word “proportionate”. He may want to come back when we have that discussion.

We heard from Sir Richard Dearlove, who said 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”.––[Official Report, National Security and Investment Public Bill Committee, 24 November 2020; c. 19.]

Before we go any further, perhaps I should say that I have nothing against Chinese students coming to the UK. On the contrary, I think that in general, Chinese students in UK universities is a very positive thing, and spreads a very good element of international learning into the process. I also think we might be reasonably confident that those Chinese students are getting as much from us, in terms of our way of life and our way of organising things, as we are from them. I do not think Sir Richard Dearlove’s point was partial towards Chinese students, but he made the point that he thought that some of those students may have targeted, or have been targeted towards, particular subjects and areas in the UK and the United States. Again, that is extremely difficult to find out and go forward on.

I am citing those particular expert witnesses in the context of this area of information, particularly concerning somebody—a company, an organisation, or indeed a state actor—that has hostile, malevolent intent towards the information that they have. It is not very likely that they will simply present that information in a ring binder with coloured markers, specifying where the various bits are; it is a very different process indeed. The clause therefore appears to very much limit the extent to which the requirement to provide information can be carried out, and it does so by requiring the provision of information to be proportionate to the use to which the information is to be put.

The word “proportionate” is very important here, and is potentially a real problem in terms of ensuring that the search for information that may be necessary by diverse means can be carried out properly. On the surface, looking at the ordinary language, one might say that the use of the word “proportionate” is a thoroughly good idea. If we apply the ordinary language test—what is the opposite of proportionate?—the opposite would be unproportionate; we would not want the Secretary of State to go about this in an unproportionate way. However, in legal terms, the word “proportionate” has rather a different context,

Proportionality as a legal term is a relative newcomer to the legal lexicon. It entered the legal arena—I am not saying that it had not been used before, but it was put forward as a concept around which a lot of other matters might turn—with the civil litigation reforms introduced in April 2013, known as the Jackson reforms. They covered the concept of proportionality in legal terms as it relates to costs in legal cases, but the question of proportionality was discussed in a wider context. The concept of proportionality, which had not been a particular issue in legal matters before, stuck itself firmly into the legal lexicon. Since then, there have been a number of debates about whether ways of apportioning legal costs were proportionate, even if they might otherwise be seen as reasonable.

Up until that point, the guidance on the issue of proportionality came from Lord Woolf in the Court of Appeal in—I am sure hon. Members will remember the case well—Lownds v. Home Office, where he concluded that if the legal steps that had been taken had been reasonable and necessary, the other party could not object to the cost of these steps on the grounds of proportionality. The test of reasonability and necessity overrode the question of the grounds of proportionality.

That is what changed in 2013 with the civil litigation reforms. An interesting commentary was made in an article published on 12 March 2014 in The Law Society Gazette, entitled “Proportionality and legal costs”—I am saying all this because I am not sure I will get the article to Hansard easily.

The author had this to say about the meaning of proportionality:

“However, the meaning of proportionality is not straightforward and the new rules do not provide clear guidance on how proportionality should be applied. The suggestion seems to be that a body of law will develop on a case-by-case basis until gradually the meaning will become clear. Until that happens, litigants, legal advisers and judges will have to guess at what costs will be considered proportionate in particular circumstances.”

I am keeping the attention of the Committee perfectly.

I fear that the hon. Gentleman is taking the definition of proportionality into a context very different from what is mentioned here in the Bill, because this is not about whether the costs of civil proceedings are justified by the likely outcome, or even how those costs should be divided among the parties.

My reading is that subsection (2) is there to prevent a future Secretary of State—obviously, no one in the present Government would ever do this—from imposing extremely onerous requirements on a business, when it was perfectly possible for the Secretary of State to do due diligence and do the checks he needed to do without that information’s being provided.

I have not heard anything from the hon. Gentleman that would explain why he wants that protection to be taken out. He has said a lot about Chinese students, who may or may not collectively be working against our national interest, but this clause does not protect against that. What does the hon. Gentleman have against the idea that the Secretary of State is not allowed to put unreasonable and onerous demands on businesses when there is no clear benefit to national security of those demands’ being made?

I hope that the hon. Gentleman will bear with me a few moments longer. Having unpacked “proportionality” in legal rather than colloquial terms, I want to put it back into the clause and see how it works, as far as the concerns of the Secretary of State go.

Indeed, the hon. Member for Glenrothes has questioned what we want to do on this clause in terms of the colloquial understanding of “proportionality”. I have mentioned how “proportionality” has come into the legal arena, specifically in terms of costs. Nevertheless, “proportionality” is now loose in the legal arena, so there is an interesting area of debate about it in general in the legal arena. That is not necessarily solely attached to the question of costs and civil litigation.

The problem is that there is virtually nothing to define that wider issue of proportionality in case law at the moment. Placing that word back into this particular clause suggests to us that the Secretary of State is restricted considerably on how that information may be gathered. The hon. Member for Glenrothes talked about research projects and various other things listed to us by our expert witnesses. I emphasise that I do not want to undermine those research projects or the presence of Chinese students. All I want to underline from that is that, on occasions, the process of getting hold of information and requiring people to give evidence can be convoluted. Indeed, it may require seeking information by going down paths that are not immediately apparent. As I say, it is not a question of someone turning up with a ring binder of things that can be perused.

In this clause, it appears that the Secretary of State may well have denied him or herself the ability to get hold of information, because it states that it has to be

“proportionate to the use to which the information is to be put in the carrying out of the Secretary of State’s functions under this Act.”

But he or she will not know about that information until it has been obtained. If there are difficulties in getting hold of the information, he or she will never know whether it is useful for carrying out his or her functions, because there is already a limit on getting the information in the first place.

I have brought the rather wobbly legal status of proportionality into the debate because it is potentially actionable through an obfuscation or refusal to put information forward by those actors. An actor who was required to give information could say, “It appears to me, your honour, that this request for information is not proportionate.” Of course, the Secretary of State may have a different point of view about what is proportionate from the person who is required to give the information.

There is also a vagueness in the application of the term “proportionate”. Although we think we know what it means in common language, that is not the case in the courts. That could be an additional issue that affects the Secretary of State’s ability to get the required information to make a judgment, over and above the fact that he or she may not know that until the information has been collected. So there are two procedural problems in the clause.

The hon. Member for Glenrothes said to me, to put it bluntly, “What exactly are you driving at? Perhaps it is not a good idea to appear to enable the Secretary of State to act disproportionately.” Of course, that is not what we are saying. We know that the Bill is more or less a giant amendment to the Enterprise Act 2002. Indeed, if hon. Members look at the back of the Bill, they will see that that is the only Act amended by it. Several amendments are made to the 2002 Act, but that is it—it is still sited within that Act. That Act was drawn up before the civil litigation changes to proportionality were put in place. The test set out in that Act, which is not amended by the Bill, is one of reasonableness, which is well understood, widely commented on and pretty clear.

If hon. Members consult the 2002 Act, they will see in clause 55 that the Secretary of State, in terms of enforcement, shall take such action

“as he considers to be reasonable and practicable to remedy”.

Therefore, we are not saying that the Secretary of State by acting disproportionately should act unreasonably. We are suggesting that the test that should be carried out is one of reasonableness, and should be in this particular clause. As the Enterprise Act already does, that would indeed prevent the Secretary of State going on fishing expeditions and undertaking actions that are wholly disproportionate because they would be unreasonable in terms of the definition of the Act. Our suggestion is to stick by that definition, which would be good enough to restrict the Secretary of State under the different circumstance that we are in today, in terms of seeking information. At the same time, it would give the Secretary of State the ability to take a path—I have said it is often a convoluted one—to obtain information that can be judged and used for the purpose of this Bill. I hope that the Minister will be favourably inclined towards that slight, but constrained, addition to his powers under this legislation.

I am very pleased to be able to respond to the hon. Member for Southampton, Test on these well-intentioned amendments. I assure him that the Government and the Secretary of State will not be relying on a ring binder with highlighted paragraphs, because we have some of the best security and intelligence agencies in the world that would input into that process. It is an absolute joy to see Her Majesty’s Opposition play such a constructive role in the scrutiny of legislation, and to hear such a thoughtful speech.

Amendment 20 would remove subsection (2) of clause 19, through which the Secretary of State will be able to request information only through an information notice, where such requirements to provide information are proportionate. I agree with the hon. Member for Glenrothes on the issue. We have debated the fact that it is actually up to the courts to interpret if a particular acquirer feels somehow hard done by as a result of the process, and that there is a process to go through. The requirement to provide information is proportionate to the use to which the information is to be put in carrying out the Secretary of State’s functions under the Bill.

Amendment 21 seeks to remove subsection (2) of clause 20. Clause 20 enables the Secretary to require the attendance of witnesses and the giving of evidence. Therefore, clause 20 is complementary to clause 19, as it provides, for example, for the Secretary of State to receive expert explanation in person from those involved in a trigger event where the information previously provided does not give sufficient clarity. Clause 20(2) has a similar effect to clause 19(2). It means that the Secretary of State will be able to request information only through an attendance notice where requirement to give evidence is proportionate to the use to which the evidence is to be put in the carrying out of his functions under the Bill.

In response to both amendments, and mindful of the time, I can say that it is our view that any power of the Secretary of State to require the provision of information under clause 19, or to require the attendance of witnesses under clause 20, must be proportionate—indeed, the information-gathering powers are already significant. The Secretary of State may require information from any person in relation to the exercise of his functions under the Bill, which includes various stages of the procedure both before and after the call-in power is exercised. This may include requiring the provision of personal and commercially sensitive information about the parties in relation to a trigger event. There is good reason to include the restriction that any information required by the Secretary of State is proportionate to the use to which it is to be put in carrying out his functions. It is important that there are the safeguards for business. I have to say that I did not expect to be in the position of arguing against greater powers for the Executive from the legislature. It is clear to me, though, that business confidence and our reputation for being open for investment require it.

I hope that I have provided sufficient points of reassurance on these matters, and encourage the hon. Gentleman to withdraw his amendment.

I appreciate what the Minister has had to say. He is clearly confident that the fine print of this clause is not going to be a problem. I slightly beg to differ: I think it may be. I also wonder whether the Minister has considered the extent to which what is already there—or, should I say, what I think is already there—in the Enterprise Act 2002 effectively restricts the Minister in his actions, in much the same way as this clause does, except that the restriction is much clearer from a legal point of view. That is to say, by relying on the restrictions that are already in the Enterprise Act, the Minister would probably not act any differently from how he would under this particular clause, but by relying on that element of the 2002 Act, his actions would be far less potentially actionable.

Before the Minister gets carried away by the idea that the legislature, or in this instance the Opposition, is clamouring for the Secretary of State to have far more powers, that is not our case. Our case is that it would be rather wiser to restrict what the Secretary of State may do through clearer legal definitions, which are already there, than through the rather woolly definition that is in the Bill. Before the Minister goes home thinking, “I have free rein to do whatever I like now”, that is not so: it is not so according to the Enterprise Act 2002, and it is something we want to stand strongly by. We do not want to underscore the idea that the Minister can act unreasonably, especially since the phrase “acting unreasonably” has a long pedigree, both in terms of civil action and administrative law over a long period of time.

I am sorry that the Minister does not accept our case, with all the caveats on it, although it may be that he is less inclined to accept the case now that we have highlighted the fact that there are caveats on what the Minister can do. I do not think we want to press this amendment to a Division, but we do so rather more in sorrow than in anger, because we think this could have been a prudent way to proceed with this Bill.

As always, my hon. Friend is making important points. I was surprised to see the letter from the Chair of the Intelligence and Security Committee, which dates back to its 2013 report. Does my hon. Friend agree that if that Committee had been involved and consulted before this legislation was drawn up, some of the issues he is raising could have been brought out into the open and addressed better?

My hon. Friend is right. I think that, because things have changed so substantially over the past decade or so, we tend to see things in a way that we may not have easily seen them just a few years ago. Indeed, the expert witnesses who were before us made considerable points on the question of how naive we had been on some previous occasions; we had not really taken into account some of the implications of what we were doing, because we did not have a clear picture of the consequences of those actions.

My hon. Friend is right—I suppose this is to some extent wisdom of the stairs—that if we could have considered things at that particular point the way we see them now, we would have expressed ourselves in much firmer and more watertight ways. However, I do not think the fact that we did not do so then is any particular excuse for continuing not to do so now. The idea that we may miss out on the ability to get proper information that can point us in the direction we want to go, albeit possibly by very roundabout means, and that we deny ourselves that particular possibility because we have written something in the legislation that stops us doing it does not seem to me to be fully learning the lessons that we might have done from 2013 onwards.

However, far be it from me to lecture the Minister or otherwise on the wisdom of these things; I am sure he is able to decide that subsequently for himself, just as I have challenged him about the wisdom of the Secretary of State’s investment agreements a little while ago concerning Bradwell. I am sure he knows in his heart that that is an appallingly naive thing to have done in those circumstances, and we might have thought differently had that taken place even today. That is the spirit in which we are moving this amendment. As I say, we do not wish to press it to a vote, but I hope the Minister will be able to consider those points and think about how this section might best be applied in the circumstances we have before us today. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

Clause 19 gives the Secretary of State the power to require the provision of information in relation to the exercise of his functions under the Bill. The Bill provides for an investment screening regime for national security purposes—a purpose that we all agree merits appropriate tools. As such, it is essential that the Secretary of State is able to gain access to information to arrive at decisions that are fully informed. This clause provides for an information notice that the Secretary of State may issue to require any person to provide information that is proportionate to assisting the Secretary of State in carrying out his functions.

Any information notice may specify a time limit for providing the information and the manner in which the information must be provided. An information notice must specify the information sought, the purpose for which it is sought and the possible consequences of not complying with the notice. There is a range of scenarios in which the Secretary of State will need to require the provision of information, and I will provide some examples to illustrate them.

The first scenario is when the Secretary of State has reason to suspect that a trigger event that may give rise to a risk to national security is in progress or contemplation. That could be where an acquisition has not been notified but the Secretary of State becomes aware of it through market monitoring. In that situation, this clause enables the Secretary of State to require the provision of further information to inform a judgment on whether to call the acquisition in.

Secondly, when a party has submitted a voluntary or mandatory notification to the Secretary of State and that notification has been accepted, the Secretary of State may require additional information from the parties to decide whether to call in the trigger event. Thirdly, when a trigger event has been called in, the Secretary of State may need to require that parties provide further information to help to inform decision making. Information notices will allow the Secretary of State to gather evidence to support accurate and timely decision making. Hon. Members will agree that it is entirely proportionate for the Secretary of State to have recourse to this power as part of the investment screening process provided for in the Bill.

Question put and agreed to.

Clause 19 accordingly ordered to stand part of the Bill.

Clause 20

Attendance of witnesses

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

The clause provides the Secretary of State with the power to require the attendance of witnesses.

The Government are acutely aware that many of the acquisitions considered by this regime will be complex and highly technical. In addition to clause 19, which enables the Secretary of State to require the provision of information, most likely in written form, this clause enables the Secretary of State to require the giving of evidence. A notice requiring a person to attend under this clause is called an “attendance notice”. The clause is complementary to clause 19, discussed previously, as it provides, for example, for the Secretary of State to be able to receive expert explanation, in person, from those involved in a trigger event, where the information previously provided does not provide sufficient clarity.

In responding to an attendance notice and providing evidence, a person is not required to give any evidence that they could not be compelled to give in civil proceedings before the court. That protects privileged information. In addition, the Secretary of State will only be able to request information through an attendance notice that is proportionate in assisting him in carrying out his functions under the regime.

We envisage a range of scenarios where the Secretary of State may require the attendance of a witness in order to gather further evidence to make an informed decision on the case. I will provide a few to illustrate. First, I expect that a number of cases will involve complex acquisitions, either because of the advanced nature of the technology in question, or due to their financial structuring. In those cases, the Secretary of State may require those who hold expert knowledge to provide him with an explanation. There may also be cases where it seems that parties are being deliberately non-compliant, or only partly compliant with information-gathering requests. I expect those to be rare but, again, it is only right that the Secretary of State has the power to require the attendance of those parties to provide further information.

The attendance of witnesses may also be a more efficient way to secure additional information in some circumstances, and limit the risk that further time will be needed to consider additional information. There will be criminal and civil sanctions available to punish non-compliance with the notices and the provision of false or misleading information. The attendance notice is provided under threat of such sanction as it is important that the Secretary of State receives the information he needs and can count on to come to a decision.

A brief question: is it the Government’s intention to allow for witnesses to attend virtually, if it is unreasonable for them to attend physically at the Department, or the Minister’s office?

I suspect that the Government will accommodate whichever way is secure and provides the evidence.

I am sure that hon. Members will agree that the clause is crucial in allowing the Secretary of State to consider the fullest range of information in order to make informed decisions under this regime.

The Minister has given a good exposition of what the clause is about: the attendance of witnesses. I note that, as he said, the witnesses are required to give evidence on the equivalent level of civil proceedings before the court—as the clause states:

“A person is not required under this section to give any evidence which that person could not be compelled to give in civil proceedings before the court.”

To return to our previous debate, if that is the test—if the sanction is not a criminal sanction—what if the witness were to say, “I do not consider the evidence I am being required to give to be proportionate to the use to which it will be put”? What would that mean for the evidence in front of the Secretary of State? Would it be stopped? Would the Secretary of State then be unable to sanction that witness further? Or could the witness be compelled to provide information even if they did not think it was proportionate, and could they take action against the Secretary of State on the grounds that the evidence they had given in the first place was not proportionate? Perhaps the Minister could take us through that procedure, possibly in an intervention.

I think I have made very clear how these notices will work. The judicial procedure is open to any party that feels hard done by in any way by this Bill.

I thank the Minister for confirming what I thought, which is that this can be challenged post hoc but not at the point of giving evidence. That is what I understand the Minister to have just said—but hey, I could be wrong. That is the clarification we wanted. On the issue of witness attendance, it is important that the Secretary of State is able to specify a time and that the evidence is undertaken at a level commensurate with civil proceedings. We do not oppose the clause standing part of the Bill, given the Minister’s clarification on proceedings involving witnesses.

Question put and agreed to.

Clause 20 accordingly ordered to stand part of the Bill.

Clause 21

Information notices and attendance notices: persons outside the UK

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

Clause 21 makes provision in respect of the persons on whom the Secretary of State may serve an information notice or an attendance notice outside the United Kingdom. The clause applies in relation to the two earlier clauses. Clause 19 provides the power for the Secretary of State to obtain information either before or after the call-in power is exercised. Clause 20 gives the Secretary of State the power to require the attendance of witnesses to assist him in carrying out his function under the Bill.

Those outside the United Kingdom to whom an information notice or attendance notice may be given are clearly set out in clause 21, which is technical in nature. The purpose is to ensure that certain categories of persons with a connection to the United Kingdom are caught by the information-gathering powers, even if they are outside the UK. These categories of persons are UK nationals, individuals ordinarily resident in the UK, bodies such as companies incorporated or constituted in the UK, and persons carrying on business in the UK. Perhaps more importantly, notices may also be served on persons outside the UK who have acquired, or who are in the process of or are contemplating acquiring, qualifying UK entities or qualifying assets that are either located in the UK or otherwise connected to the UK. In practice, this means that notices may be served on most parties from whom the Secretary of State may wish to require information or evidence.

I certainly would not seek to oppose this clause, but will the Minister go into a bit more detail about how it works in practice? What if a notice is served on somebody who is not in the United Kingdom, who is not a UK citizen or UK national, who has never set foot in the United Kingdom and quite possibly never intends to, as might happen if a big multinational is seeking to acquire a business intertest in the United Kingdom? Is the intention to create an offence that can be committed by somebody with otherwise no connection with the United Kingdom under UK law? That would mean that the person had committed the offence in a different sovereign territory, not even by something they did, but by something they did not do—not responding to a notice and not attending when required.

I understand why the requirement has to apply to everybody, and I understand that there is no point in serving a statutory notice if there are no consequences to refusing to comply with it; I am just not sure about the practicalities. Has the Minister considered alternative sanctions in those circumstances? For example, the person could be disqualified from being a director or a shareholder in significant UK undertakings. That would potentially have the same effect.

It seems to me that, generally speaking, we would create a criminal offence for the conduct of somebody in a different sovereign territory only in specific circumstances. If somebody is serving with the UK armed forces, for example, they might be covered by UK law even when they are serving abroad. The other circumstance is if the crimes are so heinous as to be regarded as crimes against international law—crimes against humanity and war crimes, for example. I understand that the Education Secretary thinks that Britain is just the best country in the word and nobody else can touch us, but I doubt even he would think that failing to respond to a notice from the UK Secretary of State constitutes a crime against international law.

Is the Minister concerned about setting a precedent whereby we attempt to apply domestic law to the actions or non-actions of people who, in normal circumstances, are covered by the laws of the country they are in and not the criminal law of the United Kingdom? Given that this might create a difficult precedent, is he satisfied that the Government have looked at every possible alternative sanction? This could create a precedent, and other countries could start legislating to say that what UK citizens do in the United Kingdom is contrary to their laws, which would therefore make any of us subject to arrest and prosecution by the authorities of another country. I am a bit concerned about the reaction that might be provoked from Governments elsewhere if we get this part wrong.

I think the hon. Gentleman is referring to parties that are abroad and have a business in the UK—what if notice is served on them and they are non-compliant? Obviously, under UK law that would be a problem for them. I certainly think that, if an information notice is served, the timeline for the Secretary of State’s assessment of a trigger event is paused until the information is provided from the individual in whatever jurisdiction they or the entity happen to be at the end of the time period provided for compliance in the information notice.

If a party does not comply during the assessment process, that may lead to more onerous and stricter remedies being imposed by the Secretary of State than would otherwise be the case, including the acquisition being blocked or unwound where appropriate. It will therefore plainly be in the interest of those involved directly in the trigger event to provide information in a timely manner to the Secretary of State in order that a speedy decision can be taken. That is where the leverage lies.

I am grateful to the Minister for that clarification. As I say, I fully understand what the Government are attempting to achieve. I would expect that, in those circumstances, the Minister would block the acquisition if there was a serious failure to comply by anybody who was in practice beyond the reach of UK criminal prosecution. I would certainly hope that in those circumstances the Secretary of State would use the other powers to ensure that they could not become a controlling influence on any strategically important UK undertaking.

As I said, I do not want to divide the Committee. I did not even feel it was appropriate to table an amendment, partly because I could not think of a way of amending it that would make it any better. Having made those points, I am grateful for the Minister’s clarification, and we will leave it to future Secretaries of State to implement it as best they can.

I will pick up on one issue, which concerns subsection (3)(a). I would like some clarification from the Minister. I am trying to get my head around what is meant by

“a qualifying entity which is formed or recognised”.

Could he give an illustration of what is meant by “recognised”? I assume that this is about some takeover, merger or acquisition. Could it be some sort of shell company or some other form? Perhaps the Minister could clarify what is meant by recognition under the law.

Briefly, we fully understand the purpose of the clause. It is obviously necessary to ensure that witnesses, wherever they are, if they have a relevant interest in these matters, should be made available to give evidence. I share some of the concerns of the hon. Member for Glenrothes about how workable it might be. I particularly wonder whether subsection (2) includes UK overseas nationals. That is particularly relevant to some of our discussions earlier today. I see in the previous clause that if someone is a UK citizen and domiciled in the UK, they get their bus fare paid if they live more than 10 miles away.

But apparently there are no international flight payments as far as overseas witnesses are concerned. I do not know whether the Minister has that in mind, but I note a big difference between the two clauses. If such witnesses could get some payment towards their attendance in the UK, that might resolve some of the problems that the hon. Member for Glenrothes suggested—provided it is economy class, obviously.

Question put and agreed to.

Clause 21 accordingly ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned. —(Michael Tomlinson.)

Adjourned till Tuesday 8 December at twenty-five minutes past Nine oclock.

Financial Services Bill (Eleventh sitting)

The Committee consisted of the following Members:

Chairs: †Philip Davies, Dr Rupa Huq

† Baldwin, Harriett (West Worcestershire) (Con)

† Clarkson, Chris (Heywood and Middleton) (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 Clerk

† attended the Committee

Public Bill Committee

Thursday 3 December 2020

(Morning)

[Philip Davies in the Chair]

Financial Services Bill

Before we begin, I have a few reminders. Please switch electronic devices to silent, tea and coffee are not allowed in sittings, and I thank everybody for your respect of social distancing. The Hansard reporters will be grateful if Members could email any electronic copies of their speaking notes to hansardnotes@parliament.uk. If Members wish to press any of the new clauses that have already been debated to a Division, some prior indication would be helpful, although not compulsory.

Today, we continue line-by-line consideration of the Bill. New clause 1 has already been debated. Does Pat McFadden wish to press it to a Division?

No.

New Clause 2

European Union regulatory equivalence for UK-based financial services businesses

‘(1) The Treasury must prepare and publish a report on progress towards regulatory equivalence recognition for UK-based financial services firms operating within the European Union.

(2) This report should include—

(a) the status of negotiations towards the recognition of regulatory equivalence for UK financial services firms operating within the European Union;

(b) a statement on areas in where equivalence recognition has been granted to UK based businesses on the same basis as which the UK has granted equivalence recognition to EU based businesses; and

(c) a statement on where such equivalence recognition has not been granted.”—(Mr McFadden.)

This new clause would require a report to be published on progress towards, or completion of, the equivalence recognition for UK firms which the Government hopes to see following the Chancellor’s statement on EU-based firms operating in the UK.

Brought up, and read the First time.

With this it will be convenient to discuss the following:

New clause 28—Pre-commencement impact assessment of leaving the EU Customs Union—

‘(1) No Minister of the Crown or public authority may appoint a day for the commencement of any provision of this Act until a Minister of the Crown has laid before the House of Commons an impact assessment of—

(a) disapplying EU rules;

(b) applying rules different from those of the EU as a consequence of any provision of this Act.

(2) A review under this section must consider the effects of the changes on—

(a) business investment,

(b) employment,

(c) productivity,

(d) inflation,

(e) financial stability, and

(f) financial liquidity.

(3) A review under this section must consider the effects in the current and each of the subsequent ten financial years.

(4) The review must also estimate the effects on the changes in the event of each of the following—

(a) the UK leaves the EU withdrawal transition period without a negotiated comprehensive free trade agreement,

(b) the UK leaves the EU withdrawal transition period with a negotiated agreement, and remains in the single market and customs union, or

(c) the UK leaves the EU withdrawal transition period with a negotiated comprehensive free trade agreement, and does not remain in the single market and customs union.

(5) The review must also estimate the effects on the changes if the UK signs a free trade agreement with the United States.

(6) In this section—

“parts of the United Kingdom” means—

(a) England,

(b) Scotland,

(c) Wales, and

(d) Northern Ireland; and

“regions of England” has the same meaning as that used by the Office for National Statistics.”

This new clause would require the Government to produce an impact assessment before disapplying EU rules or applying those different to those of the EU; and comparing such with various scenarios of UK-EU relations.

New clause 36—Regulatory divergence from the EU in financial services: annual review—

‘(1) The Treasury must prepare, publish and lay before Parliament an annual review of the impact of regulatory divergence in financial services from the European Union.

(2) Each annual review must consider the estimated impact of regulatory divergence in financial services in the current financial year, and for the ten subsequent financial years, on the following matters—

(a) business investment,

(b) employment,

(c) productivity,

(d) inflation,

(e) financial stability, and

(f) financial liquidity,

in each English region, and in Scotland, Wales and Northern Ireland.

(3) Each report must compare the analysis in subsection (2) to an estimate based on the following hypothetical scenarios—

(a) that the UK leaves the EU withdrawal transition period without a negotiated comprehensive free trade agreement;

(b) that the UK leaves the EU withdrawal transition period with a negotiated agreement, and remains in the single market and customs union;

(c) that the UK leaves the EU withdrawal transition period with a negotiated comprehensive free trade agreement, and does not remain in the single market and customs union; and

(d) that the UK signs a comprehensive free trade agreement with the United States.

(4) The first annual report shall be published no later than 1 July 2021.”

This new clause requires a review of the impact of regulatory divergence from the European Union in financial services, which should make a comparison with various hypothetical trade deal scenarios.

Thank you for your chairmanship, Mr Davies. I rise to speak to new clause 2, in my name and the names of my hon. Friends. We discussed equivalence when we were debating clause 24 or 25, so it might relieve the Minister and the Committee to know that I will not repeat everything I said about how we got to this position, but let us look at what the current situation is.

First, we have withdrawn from the EU, and in so doing we have withdrawn from any joint decision-making process about mutual access to financial services. Secondly, a few weeks ago the Chancellor announced a unilateral move on the UK’s part to grant equivalence recognition to EU member states and their firms. Thirdly, there is a legislative mechanism to do that in the Bill. Fourthly, we now await decisions on equivalence from the EU. Finally, in terms of the regulatory picture, we have spent a lot of legislative time in this House—probably no one more than the Minister in the past two years or so—legislating to onshore various EU directives. That is where we are.

The aim of onshoring that vast body of legislation was to have a parallel position, or as near to one as we could reach, on day one of the end of the transition period. At the same time, though, we have given our regulators powers to diverge in various ways from the terms of these directives in future. We have discussed that quite a few times in Committee, and the Minister said that the Government are not interested in diverging for the sake of divergence, but of course there are many in the Government, and in his party, for whom divergence is the whole point of the exercise, because it is all about sovereignty. Although we may be almost totally in line on day one—new year’s day—what about day 100 or day 1,000?

Nothing in new clause 2 alters the power to diverge. If the package of onshoring and granting new powers to the regulators that the Minister is taking through is there, nothing in the new clause alters that, but it asks for a report on where we have reached in that process. We know that a positive outcome of this process could have a very significant bearing on the UK financial services industry. It would mean better access for our firms than without that process. It certainly would not give them what they have at the moment, but that is water under the bridge—we debated that earlier in Committee.

The converse is also true, of course: if we do not get equivalence recognition, it would have implications for jobs, tax revenue and how the UK is viewed as a home for inward investment in the financial services industries. All that the new clause does is to ask for a report on where we have got to in the process or, alternatively, a statement on who has refused to grant equivalence of recognition.

I hope the Economic Secretary does not mind if I point out that I cannot be the only one who is struck by the clamour, particularly on the Government Benches, for economic evidence to justify covid-protective measures. Everybody wants the exact detail of how that will affect their local economies. If that is the case, it is only right that the Government report on the economic consequences of the other major process that we are going through. That is the intention behind the new clause.

The sector is hugely important for the United Kingdom, as has been mentioned many times during our debates over the last couple of weeks. All that the new clause does is to ask for a report on where we are on market access. I very much hope that we have a positive outcome on that. Some of it may be about good will, and it might depend on what is agreed in the next week or two—we do not know. It is certainly in the interests of the sector to have a positive outcome. The least we can ask is that the Government report to the House on that.

Finally, if the outcome is positive, the Government will probably want to report back anyway. If the outcome is not positive, Parliament has a right to hear about that, too.

Then I will do that—thank you. It is a pleasure to see you in the Chair once again, Mr Davies. It is probably accurate and correct that the new clauses are grouped together, because they are quite similar in scope, particularly when considering the wider issue of divergence. I will come back to that.

New clause 28 seeks to provide an impact assessment before disapplying European Union rules or applying rules different from those of the EU. That is incredibly important, because it goes to the core of what the Bill is about in relation to our leaving the European Union. Only a few day ago, the Governor of the Bank of England highlighted that a no-deal Brexit could of course lead to a worse economic situation than covid. We need to be in a position to assess the reality of what the Government seek to do. That should apply in the case of no-deal, a good deal—as far as the Government see it—a bad deal or a “Boris deal”.

We should compare what we could have had with what we get. We should be open and transparent with the public about that. The Government talk about wanting to take back control and parliamentary sovereignty; let us take that back to the people as well and show them that the Government are being open and transparent with everything that is put forward. That is particularly important in a Scottish context because—lest we forget—the people of Scotland did not vote for Brexit, and they do not want it to happen, so it is incumbent on the UK Government to provide that clarity to them, particularly on such important matters.

If the Government are proud of the actions that they are taking and seek to go down a different path, they should be willing to follow up on their actions and be open and transparent, not shy away from that.

That takes me on to new clause 36, which would do something very similar to new clause 28, but rather than looking at the potential impact of future decisions, it would provide for an annual review of the decisions that had been taken. That, as the right hon. Member for Wolverhampton South East said, is, in the context of equivalence, incredibly important, particularly if we are to see the UK diverge from the European Union in any way, shape or form. As we have heard, the Chancellor has guaranteed equivalence to the European Union, so it will have access to the UK markets, but of course there is not a similar agreement in place for us. Conservative Members would, understandably, argue that that is the EU’s fault and that the EU should be delivering that for us, but, as I said on Second Reading, who can blame it when this is a Government who simply cannot be trusted, a Government—lest we forget—who are willing to break international law?

Irrespective of that, we should all be concerned about the reality of not having equivalence in place and what that could lead to. We have made and heard suggestions that it could mean, ultimately, divergence in relation to MiFID—the markets in financial instruments directive. It could mean divergence in relation to the wider insurance regulatory framework. I appreciate that there are arguments both in favour and against in that regard, but we need always to be mindful of what we are seeking to diverge from in relation to our wider relationship with the European Union. I appreciate that it will ultimately be in the gift of the Government to do these things, but they should surely have some concerns about the actions that they will be taking.

I go back to the comments that I made about new clause 28. If the Government are proud of the actions that they take and have taken, they will be willing to accept both new clause 28 and new clause 36 and to put their money where their mouth is and be open and transparent with the people of Scotland and the people of the United Kingdom that their decisions have not been ones that have had disastrous consequences for the economy of the UK. I suggest that if they do not accept the new clauses, that is because they know the damage that they are going to do.

What a pleasure it is to serve under your chairmanship once again, Mr Davies. These new clauses seek to place requirements on the Government to make various reports related to the UK’s withdrawal from the EU and the subsequent evolution of our financial services regulation.

New clause 2 deals with equivalence, which is an important mechanism for managing cross-border financial services activity. I can well understand hon. Members’ interest in that. However, the obligation that the new clause would impose on the Government—essentially, to report on the status of the EU’s considerations about UK equivalence—is beyond the Government’s power and therefore not something that the Government can agree to do.

The right hon. Member for Wolverhampton South East rightly referred to my right hon. Friend the Chancellor’s speech on 9 November, in which he made clear that we have made equivalence decisions—17 of the 30 that we have to make. We have co-operated very fully with the EU in terms of a timely response to the 17 questionnaires. Again, we cannot determine how it responds. Equivalence assessments are an autonomous process, managed separately from trade negotiations. That applies in the case of the EU, and where the EU chooses to grant the UK equivalence, that will be done in accordance with its own decision-making process. EU equivalence determinations are unilateral and do not require the UK’s agreement. Those decisions will be published and readily available to all, including UK parliamentarians.

I can reiterate today the Government’s commitment to operating an open and transparent approach to equivalence as the Chancellor explained in his speech on 9 November. Our overall approach is outlined in the recently published guidance document on the UK’s equivalence framework. That document makes it very clear that transparency will be one of the key principles of our equivalence framework.

As part of this, the Treasury will provide Parliament with appropriate information about the operation of the equivalence framework. After the end of the transition period, future equivalence decisions will be made by regulations laid before Parliament, giving Members the opportunity to consider and scrutinise the Treasury’s decisions as part of the UK’s normal legislative process.

As I said, the Chancellor recently announced a package of equivalence decisions following the completion of our assessment of the EU, where we took a thorough but proportionate outcomes-based assessment against the criteria in legislation. As the EU has confirmed publicly, there are many areas where it is not prepared to assess the UK at the current time. In the absence of clarity from the EU, we have made decisions to provide clarity and stability to industry, supporting the openness of the sector and to help to deliver our goal of open, well-regulated markets.

Those decisions will allow firms to pool and manage their risks effectively, and support clients on both sides of the channel in accessing our world-leading financial services in our highly liquid markets. I assure the Committee that we remain open and committed to continuing dialogue with the EU about its intentions on equivalence. The Government have taken all reasonable steps to co-operate throughout the process. I will keep the House updated on the UK’s approach to equivalence for the EU and the rest of the world, as I have done throughout the transition period.

New clause 28, tabled by the hon. Member for Aberdeen South, relates to assessing the impact of the provisions of the Bill under different EU exit scenarios. The financial services sector plays a crucial role in supporting the UK economy, and it is right that the impacts of the measures in the Bill are assessed and well understood. That is why the Government have published an impact assessment alongside the Bill that sets out the Treasury’s current understanding of the costs associated with each measure.

In the majority of cases, the Bill’s measures will enable changes that require further action from the Treasury in the form of secondary legislation, or from the financial services regulators in the form of regulator rules. The changes enabled through the Bill are vital to enhancing the UK’s world-leading prudential standards, promoting financial stability and maintaining the effectiveness of the financial services regulatory framework and sound capital markets. The final impact of the measures in the Bill will depend on subsequent decisions by the Government and the financial services regulators. Therefore, where appropriate, further details on the costs of each of the Bill’s measures will be explained in the impact assessments for the secondary legislation and in the cost-benefit analysis undertaken by the relevant financial services regulator in due course.

More broadly, the UK has been clear since the start of the free trade agreement negotiations that we want an agreement with the EU that reflects the maturity of our financial services relationship, and we remain committed to reaching an agreement. Although it would not be appropriate to discuss the details of our ongoing negotiations, the Government will ensure that Parliament is kept informed of the analysis at the appropriate times, in a way that does not impede our ability to strike the best deals for the UK.

New clause 36 deals with regulatory divergence in financial services. I have been clear before, as the right hon. Member for Wolverhampton South East was good enough to reference, that the UK taking control over its own rules does not mean a race to the bottom. We will continue to adopt high regulatory standards, appropriate for our markets. However, we should also recognise that regulatory regimes are not static, and international standards for financial services develop over time, and develop all the time.

Both the EU framework and our own will continue to evolve to meet the needs of markets and firms. Therefore, both the UK and EU frameworks will inevitably change over time. We can see early examples in the EU through its consultation on the alternative investment fund managers directive. Several of the changes that we are making through the Bill reflect similar changes being made by the EU to its regime. It is therefore not helpful to view all developments in regulation through the lens of divergence or alignment with the EU. It is not appropriate, having left the EU, for the UK to continually compare itself with the EU regime that was in place when we left, which will become increasingly out of date, or with the continually changing EU regime.

Where we are making changes, or will do so in the future, they will be guided by our continued commitment to the highest international standards and by what is right for the UK’s complex and highly developed markets, to support our world-class environment for doing business, ensure financial stability and protect consumers. In many areas, we already go beyond what EU rules require, and any future changes will be undertaken with consideration towards the impact of equivalence.

The Government are fully committed to ensuring accountability and scrutiny around new rules for the UK’s financial sector. That will include following the usual requirements for impact assessments related to both primary and secondary legislation, giving Members of Parliament the opportunity to consider and scrutinise Treasury decisions as part of the legislative process. Where the responsibility falls to the financial services regulators in the form of regulator rules, it is accompanied by robust accountability and scrutiny mechanisms, as I have set out to the Committee in previous sittings. The Government will ensure that Parliament is kept informed with the analysis of regulatory changes at the right times and in a way that does not impede the UK’s ability to strike the best deals with international partners. I therefore ask for the new clause to be withdrawn.

I want to respond to a couple of things that the Minister said. As I said when I moved the new clause, nothing in it stops divergence. There is no attempt to make sure that we are in lockstep with EU regulations for ever and a day. The new clause is completely silent on that.

Nor does the new clause pretend that the equivalence decisions that we seek can be within the gift of the Government. In fact, from the point of view of some of us, that is the problem. We would have a say over that at present, but we will no longer have a say in future. That is precisely why we are discussing this issue.

All that the new clause does is ask for a report on the outcome. What is the outcome for our financial services? It is like we are back on day one of our proceedings, when we talked about the different reasons for turning amendments down. The Minister has said that the Government will report regularly to Parliament, in which case the new clause would be entirely harmless. That is why we will press it to a vote.

Question put, That the clause be read a Second time.

New Clause 4

Strategy for financial services

“(1) The Treasury must prepare and publish a report on the Government’s strategy for financial services after the UK has left the European Union.

(2) The report should include statements on the Government’s proposed approach to—

(a) regulation of the sector;

(b) market access for overseas firms;

(c) competitiveness of the sector; and

(d) the environmental, social and governance objectives for the sector.

(3) The report must be published within 6 months of the passage of this Act.”—(Mr McFadden.)

This new clause would require the Treasury to produce a report on the Government’s post Brexit strategy for financial services.

Brought up, and read the First time.

I beg to move, That the clause be read a Second time.

We are by definition entering a new world for UK financial services. Whether it is a brave new world, I do not know, but it is a new world. The measures in the Bill are a small part of that. We are onshoring EU regulations and, although we will still be part of globally agreed standards such as the Basel regime, we will have to decide what future we want in this sector. As the Minister has advised us several times, we should not see the Bill as the totality of what the Government are doing in financial services. There will be a future regulatory review, and there might even be future Bills, so this is one part of the picture. That creates difficulty for the sector, and perhaps for us, in trying to divine where we are going.

That is important because the UK has possibly the most globally significant financial sector of any country in the world. We learned the hard way what the risks of that were in the financial crisis, when the sector ran into trouble. However, the converse is that if the sector is properly regulated, if it pays its way in terms of its taxation contribution, its contribution to innovation, its capacity to bring inward investment to the country and the employment it provides, and if it is properly run, it can also be a huge advantage for the UK. The new clause asks the Government to pull all of that together and take the pipeline of changes that they have in mind, together with the new context, and produce a strategy that gives clarity to the sector, the public and Parliament about where we are going.

That is not particularly unusual for the Government. They do that for other sectors. In the automotive sector, the Department for Business, Energy and Industrial Strategy has the Automotive Council UK, which brings together different players in the industry and looks at everything from supply chains and skills to inward investment. Over the years, it has played its part. The last couple of years have been pretty rocky, for reasons that we all know about, but up until then the UK had a growing, successful automotive industry. We were producing more and more cars each year, and we were very successful at winning inward investment.

If we take the parallel of financial services, there is plenty that such a strategy could cover. To name just a few obvious areas, we have a growing FinTech sector in the UK, which we want to succeed. It is doing more innovation, and we might hear more about that later. We have the development of cryptocurrencies, and it is in the public interest that we have a greater understanding of what that phenomenon is and what it means for investors, consumers and so on.

We have the green finance debate, which we have discussed a number of times over the past couple of weeks. If we really want the UK to be the leading force in green finance over the coming decades, what do we need to do to ensure that that is the case? We have also had an ongoing debate for some years about competition and about the challenges of getting new banking players into the UK market, which is, at the retail level, dominated by four or five high street names that account for the vast majority—90%-plus—of current accounts, deposits, savings and so on.

Then we have more difficult issues, which we have touched on, such as money laundering, fraud and so on. They are an ongoing challenge, and we will be talking more about them later this afternoon. There are probably a lot more, but those are the kinds of things that a financial services strategy might cover.

There is also the regulatory approach. Now that we are no longer going to be part of a common European rulebook, what is the philosophy behind the rulebook that we will have? What will it say to assure people that there will not be a race to the bottom? What will it say on capital to get the balance right between allowing innovation and protecting consumers from organisations that do not have enough resilience? Would there, for example, be a shift away from the traditional British strong focus on property investment to more investment in research, development, manufacturing technology and small business lending? That has been a constant theme. There is nothing partisan about it. There are many strong voices in the Conservative party as well as the Labour party speaking up for small businesses and raising the difficulties with lending and so on. That is also something that could be governed.

We spoke about the environmental, social and governance agenda. The Minister has been resistant to all our amendments on that. All the votes are on the record—we have had three or four of them. The Government do not want anything added to the Bill on environmental sustainability or anything like that. I have also said several times that the ESG agenda is really important for the UK, and the Government have said, at least in rhetorical terms, that they believe the same thing, so exactly how would it be advanced if not in the ways that we have tried to suggest—through the various amendments we have tabled to the Bill?

We have a lot of rebuilding to do as we recover from this pandemic. Many people have described it as a great acceleration in trends. There will be job losses, as the Chancellor tells us, and business closures. Many of the behavioural changes that we have seen in how people live, work and purchase things are likely to stay for a long time. A differently shaped day-to-day economy will emerge from this. Financial services will have a huge role to play in that, and Treasury Ministers will quite rightly want to say something about it.

How will that be received by the sector? We heard in oral evidence that such a strategy would be welcomed by the sector, and we might even call this the TheCityUK new clause, because it has called for such a such a strategy. The new clause could link together all these things—the Bill, the future regulatory framework, the pipeline of legislation—with some of the issues that I outlined. We all want the UK to succeed in this sector and to succeed in the future. We have done this elsewhere through the Automotive Council UK, and there is every reason why we should want to do this for our world-leading financial services industry.

I very much support what the right hon. Member for Wolverhampton South East says. It is important that we look at this in the round, and particularly at the newer technologies coming into force that we will need as part of our economy going forward.

I very much appreciate the sentiment behind the new clause. The right hon. Member for Wolverhampton South East set out all the different areas of focus involved in financial services, taking me through all our different calls for evidence and ongoing pieces of work—there are a number of others, too. However, the new clause is unnecessary.

Only a few weeks ago, the Chancellor made a statement to Parliament on the future of the UK financial services sector. Indeed, Miles Celic from TheCityUK described it as an “ambitious vision” for financial services. Across the range of different elements that the right hon. Gentleman set out, a lot of activity is ongoing. Indeed, a number of consultations are out at the moment. As the Chancellor stated, we are at the start of a new chapter for the industry, and our having an open, green and technologically advanced industry that serves the consumers, communities and citizens of this country and builds on our existing strengths, including our world-leading regulatory system and standards, was the essence of that vision. The UK will remain the most open and competitive place for financial services in the world by prioritising stability, openness and transparency.

The Chancellor set out new proposals to extend our leadership in green finance, including by taking the key step of introducing mandatory requirements for firms to disclose their climate-related risks within five years, making the UK the first country to go beyond the “comply or explain” principle. He also announced plans to implement a green taxonomy and, subject to market conditions, to issue the UK’s first ever sovereign green bond next year. He set out his intention that the UK will remain at the forefront of technological innovation, to provide better outcomes for consumers and businesses.

The UK’s position as a global and open financial services centre will be underpinned by a first-class regulatory system that works for UK markets. The Government already have several reviews under way, including the future regulatory framework review and the call for evidence on Solvency II, to highlight two. We also have the FinTech review, which will report early in the new year. That is the Government’s strategy for financial services now that we have left the European Union.

I hope that I could not be accused, as the City Minister, of being unwilling to come before the House to provide updates on the Government’s work relating to financial services, whether in the Chamber, Select Committees—I think I have made about 12 appearances now—or in Westminster Hall, or of doing that infrequently. The Chancellor and I will continue to provide updates at the appropriate times in the normal way.

Having considered the issue carefully, I ask the right hon. Gentleman to withdraw the new clause.

The Minister is right to refer to the Chancellor’s statement on 9 November, which was called a vision. While it touched on the green finance things the Minister mentioned, it did not touch on many of the things that I mentioned. He is also right to say that lots of reviews are going on. While it may be unfair to say that that is the problem, there is nothing that really brings them together with clarity about where we are going. I will not press the new clause to a vote today, but we may return to it, so I beg to ask leave to withdraw the clause.

Clause, by leave, withdrawn.

New Clause 5

Regulation of lead generators for debt advice and debt solution services

“(none) In section 22 of the Financial Services and Markets Act 2000 (regulated activities), after subsection 1A insert—

‘(1AA) An activity is also a regulated activity for the purposes of this Act if it is an activity of a specified kind which is carried on by way of business and relates to—

(a) effecting an introduction of an individual to a person carrying on debt advice and debt solution services, or

(b) effecting an introduction of an individual to a person who carries on an activity of the kind specified in paragraph (a) by way of business.’”—(Mr McFadden.)

This new clause would empower the FCA to regulate activities such as paid search and social media advertisements, including the impersonation of reputable debt management charities.

Brought up, and read the First time.

I beg to move, That the clause be read a Second time.

This new clause is directed at reducing harm to heavily indebted people by clamping down on imposter or clone websites that might direct people away from legitimate avenues of advice without their knowledge. It was suggested to us by the charity StepChange, which reports a serious, large-scale and ongoing problem with imposter or clone sites posing either as StepChange itself or as another reputable charity and preying on vulnerable people in debt. In fact, StepChange estimates that as many as one in 10 people searching for the organisation online are inadvertently led to someone else.

This is not just one of the traditional issues of having time-consuming and frustrating discussions with web providers to get them to take some responsibility for what is on their platforms; it is also a matter of regulation. The new clause proposes to close a regulatory loophole: the activity of introducing an individual to a credit provider is regulated by the FCA, but the activity of introducing an individual to a debt advice or debt solution service is not. That loophole represents a gap in the picture, and the new clause seeks to close that gap by bringing lead generators for debt advice and debt solution services clearly within the FCA’s remit.

The new clause is, perhaps, about quality control. It would protect consumers from clone sites and from unscrupulous operators who would prey on their financial problems. I argue that that becomes all the more important in the context of clause 32 and the establishment of statutory debt repayment plans, because the gateway to them will be through seeking advice from reputable debt advice and debt solution services. It would be entirely with the grain of the Bill, and the Government’s policy intent, to ensure that that gateway is properly regulated by the FCA.

The Minister has been consistent in resisting every amendment and new clause over the past couple of weeks, and I appreciate that he has probably come armed with advice not to accept any amendments, even if they look okay, because there may be a drafting issue or something. However, if there is some reason in his folder why he cannot accept this new clause today or—hopefully this is not the case—if the optics of doing so, because it has been suggested by the Opposition, are somehow too difficult to contemplate, will he at least take the matter away and consider introducing a provision either on Report or at a further stage in the Bill’s passage?

It is very much in the interests of the statutory debt repayment plans, for which he feels—I credit him for this—a big degree of personal ownership, that this regulatory loophole is closed, and that we do what we can to prevent people seeking that kind of help from being led away by unscrupulous operators on the internet. Instead, we must ensure that they are channelled to reputable advice organisations and solution providers—be it StepChange or somewhere else.

I rise to support the new clause. It is typical of the eagle-eyed way that the right hon. Gentleman has approached this Bill that he found this particular loophole. I am not sure which of his pots he thinks the Government might think it falls into, but it is a sensible, minor change. The Government would do well to take it on now or bring it back at a later stage. We want to protect people who have fallen into that situation in every way we can. We all know that there are vultures on the internet who want to cut a share of that and exploit people. The new clause is a sensible and reasonable way of addressing that and I commend it to the Minister.

I take this issue very seriously. I recognise the work of StepChange and I note the letter from Marlene Shiels, chief executive officer of the Capital Credit Union and her support for this. She makes a significant contribution to the Financial Inclusion Policy Forum that I chaired just last week.

The Government are taking strong steps to ensure that lead generators do not cause consumer harm.  As the right hon. Member for Wolverhampton South East said, lead generators identify consumers in problem debt and refer them to debt advice firms and to insolvency practitioners. That can help consumers access appropriate debt solutions and support their recovery on to a stable financial footing. However, I readily recognise the risk that unscrupulous lead generators could act contrary to their clients’ interests. To mitigate that risk, debt advice firms and insolvency practitioners are already required to ensure that any lead generators they use are compliant with applicable rules to prevent consumer harm in the market.  

Under Financial Conduct Authority rules, that includes ensuring that lead generators do not imitate charities or deliver unregulated debt advice, and that they are transparent with clients about their commercial interests. As such, the FCA, as the regulator of debt advice firms—and the Insolvency Service, as oversight regulator of insolvency practitioners—already influences lead generators’ impacts on consumers.

New clause 5 would not materially improve the FCA’s influence over lead generators. Its scope would be incomplete, applying only in respect of lead generators’ referrals to debt advice firms, not to insolvency practitioners. The Government have already issued a call for evidence on whether changes are needed to the regulatory framework for the insolvency profession and will publish a response next year. In the light of our recognition that the matter needs a focus and that work is being done on a response, I ask the right hon. Gentleman to withdraw the motion.

I am happy to do that. I just appeal to the Minister to try to find a way that he is comfortable with of closing the loophole. I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.

New Clause 6

Duty of care for financial service providers

‘(1) The Financial Services and Markets Act 2000 is amended as follows.

(2) In section 1C, after subsection 2(e) insert—

“(ea) the general principle that firms should not profit from exploiting a consumer’s vulnerability, behavioural biases or constrained choices;”

(3) After section 137C insert—

“137CA  FCA general rules: duty of care

(1) The power of the FCA to make general rules includes the power to introduce a duty of care owed by authorised persons to consumers in carrying out regulated activities under this Act.

(2) The FCA must make rules in accordance with subsection (1) which come into force no later than six months after the day on which this Act is passed.””—(Mr McFadden.)

This new clause would introduce a duty of care for the FCA which would strengthen the FCA’s consumer protection objective and empower the FCA to introduce rules for financial services firms informed by that duty of care.

Brought up, and read the First time.

With this it will be convenient to discuss the following:

New clause 15—Financial Conduct Authority: regard to consumer detriment

‘(1) The Financial Services and Markets Act 2000 shall be amended as follows.

(2) In section 1C(2), after paragraph (h), insert—

“(i) the prevention of consumer detriment, including but not limited to the promotion of unaffordable debt.”

This new clause would require the FCA to have regard to consumer detriment, including the promotion of unaffordable debt, when exercising its powers.

New clause 18—Duty of FCA to investigate and report on possible regulatory failure

‘(1) Section 73 of the Financial Services Act 2012 shall be amended as follows.

(2) In subsection 1(b)(ii), at end insert—

(iii) a failure of the FCA to intervene earlier or otherwise act effectively to protect consumers.”.”

This new clause would require the FCA to carry out an investigation into the events and circumstances surrounding any significant failure to secure an appropriate degree of protection for consumers and make a report to the Treasury on the result of the investigation.

New clause 21—Assessment of risks of consumer detriment

‘(1) Schedule 6 of the Financial Services and Markets Act (2000) is amended as follows.

(2) After paragraph 2D(2)(c) insert—

(d) the risks of consumer detriment associated with the firm’s business model and the likelihood for compensation claims from consumers.”

(3) After paragraph 2D(3), insert—

“(3ZA) When assessing whether the firm has appropriate financial resources to meet the risks of consumer detriment and the likelihood of compensation claims from consumers, the Financial Conduct Authority must ensure that, at all times, firms hold sufficient financial resources to meet any likely compensation claims from customers in full.””

This new clause would ensure that the FCA considers the likelihood of consumer detriment arising from the firm’s business model prior to, and following, authorisation, and that firm’s hold sufficient financial resources to meet potential compensation claims from customers in full.

New clause 23—Consumer redress schemes: FCA reporting requirements

‘(1) In section 404A of the Financial Services and Markets Act 2000, at end insert—

“(10) Where the Financial Conduct Authority initiates a consumer redress scheme by virtue of the powers conferred in section 404 of this Act, and makes any provisions for its operation by virtue of this section, the Financial Conduct Authority must—

(a) provide an initial written report to the Secretary of State detailing its reasons for any of the provisions it has made for the redress scheme under section 404A;

(b) ensure that any instructions provided to an appointed ‘competent person’ under subsection (1)(k) are included in the above report; and

(c) provide a further written report to the Secretary of State detailing the outcomes from any consumer redress scheme, including copies of any “competent person” assessments relevant to the redress scheme.””

This new clause would require that the FCA provide written reports to the Secretary of State setting out the reasons for any decisions made regarding the parameters decided, and approaches taken, in designing, investigating, and implementing consumer redress schemes, and requires a report on the outcomes achieved for consumers to be made.

New clause 38—Duty of care specification

‘(1) The Financial Services and Markets Act 2000 is amended as follows.

(2) After Section 1C insert—

“1CA Duty of care specification

(1) In securing an appropriate degree of protection for consumers, the FCA must ensure authorised persons carrying out regulated activities are acting with a Duty of Care to all consumers.

(2) Matters the FCA should consider when drafting Duty of Care rules include, but are not limited to—

(a) the duties of authorised persons to act honestly, fairly and professionally in accordance with the best interest of their consumers;

(b) the duties of authorised persons to manage conflicts of interest fairly, both between themselves and their clients, and between clients;

(c) the extent to which the duties of authorised persons entail an ethical commitment not merely compliance with rules;

(d) that the duties must be owned by senior managers who would be accountable for their individual firm’s approach.””

This new clause would mean that the FCA would need to ensure that financial services providers are acting with a duty of care to act in the best interests of all consumers.

New clause 39—Duty of care specification on all financial services providers

‘(1) The Treasury must by regulations require all financial services providers to act within a duty of care overseen by the FCA.

(2) The FCA may make rules to ensure all financial services providers act within the duty of care.

(3) Matters the FCA should consider when making duty of care rules include but are not be limited to—

(a) the duties of authorised persons to act honestly, fairly and professionally in accordance with the best interest of their consumers;

(b) the duties of authorised persons to manage conflicts of interest fairly, both between themselves and their clients, and between clients;

(c) the extent to which the duties of authorised persons entail an ethical commitment not merely compliance with rules; and

(d) that the duties must be owned by senior managers who would be accountable for their individual firm’s approach.

(4) If before the end of December in any year the Secretary of State has not introduced a requirement for all financial services providers to act within a duty of care, the Treasury must—

(a) publish a report, by the end of December of that year, explaining why regulations have not been made and setting a timetable for making the regulations, and

(b) lay the report before each House of Parliament.”

New clause 40—Duty of care specification on all financial services providers (No. 2)

‘(1) At least once a year, the Treasury must review the case for instructing the FCA by regulations to produce rules requiring all financial services providers to act within a duty of care.

(2) If, following the review, the Treasury decides not to introduce such regulations, the Treasury must publish and lay before Parliament a report setting out the reasons for its decision.”

New clause 41—Duty of care on all financial service providers

‘(none) The Treasury must instruct the FCA to impose a duty of care on all authorised persons providing financial services activity regulated by the FCA by the end of 2021.”

New clause 42—Report on FCA’s progress on duty of care consultation

‘(1) The Treasury must prepare and publish an annual report setting out the FCA’s assessment of the need for a duty of care and lay a copy of the report before Parliament.

(2) A Minister of the Crown must, not later than two months after the report has been laid before Parliament, make a motion in the House of Commons in relation to the report.”

New clause 6 is about a duty of care for financial service providers and several other new clauses push in the same direction. It is fair to say that this has been under discussion for some time. A private Member’s Bill was introduced on the subject in the other place about a year ago and the FCA has been involved in a long process of ongoing discussion about it for the past two or three years. The FCA produced a paper on it in 2018 and there was a response in April last year, although it did not reach a definitive conclusion.

Those who argue for a duty of care—I refer again to the charity StepChange—suggest that the current regulatory framework, even with the duty to treat customers fairly, which is part of the FCA’s current advice and regulations to providers, does not provide adequate protection for consumers. They seek to prompt the question from a financial service provider, “Is this right?” rather than just, “Is this legal?” That is a helpful way of considering what difference a duty of care might make.

The legal definition of a duty of care, as quoted in the FCA’s discussion document is,

“an obligation to exercise reasonable care and skill when providing a product or service.” 

Those who favour it believe that it will help avoid conflicts of interest, too and oblige service providers to act in the customer’s best interests rather than, for example, putting the interests of the company above those of the customer it serves.

Of course we can point to a number of mis-selling scandals in the past 10 years or so, where products were pushed on the basis of sales commissions and margins for the organisations that sold them rather than in the interests of the customers who bought them. This is why I believe that a duty of care would be in the interests of the industry as well as the customer. If we think about the amount of money that has had to be put aside as compensation for mis-selling scandals, what we call conduct issues—in the jargon of financial services—become prudential issues. So much money has put aside that we have to think, what more could we have done with that if that mis-selling had not happened? How much more could have been lent? How much more could have been invested in the economy? We have this ongoing situation where one scandal after another forces our financial institutions to set aside money to compensate people for mis-selling scandals, instead of putting capital to work in the way they are designed for. I therefore think a duty of care is in the interests of the industry as well as customers.

Another argument in support of the duty of care is fostering means of redress. I am sure all Committee members hold constituency advice surgeries, or we did until the covid pandemic made that much more difficult. We will all have constituents who have been engaged in lengthy and exhausting battles with banks and financial services institutions. The banks have always got expensive lawyers and many layers of being able to say no. It can take incredible tenacity on the part of our constituents to get results. In some cases I have seen, the degree of tenacity is deeply unfair on the individual and can exact an enormous personal toll.

The converse argument for those who do not want a duty of care is that it might not add much, or it could stifle innovation, because people would be scared of bringing in a new product in case it led to another mis-selling scandal. However, surely the innovation that is going on adds to the argument for a duty of care. We have already mentioned cryptocurrencies and digital currencies, and we will talk about buy now, pay later schemes this afternoon. My hon. Friend the Member for Walthamstow has tabled an amendment about those. As the sector innovates, does that not reinforce the argument to have a duty of care for the consumer? Some countries have done that. In the Netherlands, such a duty applies; in the United States, new rules have been introduced to require broker dealers to act in the best interests of retail investors; in Australia, there is a duty to act in the best interests of the client, and put the client’s interests above the firm’s. Many well-regulated, well-run countries have introduced something very much like this.

In its document, the FCA made clear that a statutory new duty would require “primary legislation”, which is before us here. In a second document on this from April 2019, the FCA produced a feedback statement saying it wanted to do further work. Andrew Bailey, the FCA’s chief executive at the time, said,

“we now want to weigh-up possible changes”.

That is where we are on this with the FCA.

Duties of care also exist in other fields, as the FCA pointed out in its discussion, such as tort law, negligence in contracts, duties of trustees to beneficiaries and the Consumer Rights Act 2015, so this can be done. Of course, it would have to be carefully defined. I point the Committee to the details of the new clause, because it is not prescriptive about how this should be done; it empowers the FCA to do it, giving it a six-month period in which to do so. This is work the FCA is already considering, so the new clause says the FCA should come to a conclusion on the general principle and then mandates the regulator to define that in the light of its principles and the rest of its work. It is not prescriptive.

I am sure members of the Committee will have seen the written advice that has come in in the past day or two backing up that point, which says:

“While the FCA generally does a good job with the tools at its disposal, regulatory interventions tend to come after problems have already happened”.

The new clause would recognise the “power imbalances”—I have spoken about those a few times in the past couple of weeks—

“between firms and consumers in financial services markets. Paragraph 1 and 2 would do this by requiring that the FCA must have regard to the general principle that firms should not profit from exploiting a consumer’s vulnerability, behavioural biases or constrained choices.”

The advice goes on to give an example of where a duty of care might kick in, namely, unsolicited increases in credit card limits. It might be that the consumer has not asked for that at all, but they get a communication from the credit card provider saying, “Great news! We have increased your credit limit,” from whatever it is to something significantly higher. The consumer might not have asked for it. It might not be in the consumer’s interest, but it might be in the credit card provider’s interest to get that person to spend more and pay more interest. That is a good example of where such a duty of care would give pause for thought for that kind of push tactic, which the consumer has not even asked for.

I stress that that is very different from a consumer going to their credit card provider and asking for an increase in their credit limit; of course, that should be available to consumers. We are not being prescriptive on personal freedom, but we are saying that this could go some way to redressing the imbalance of power and information between financial service providers and their consumers. That is why we have tabled the new clause.

It is a pleasure to serve under your chairmanship, Mr Davies, as ever, for the last time on this Bill. Let us make it a good one. I will try to keep it lively and maybe capture the attention of everybody on the Committee about the things we can do.

The new clauses provide the moment to finally talk about the big beast in this Bill: the Financial Conduct Authority. I say “big beast”, because, as someone who has tracked not only high-cost credit, but credit companies—as I know the Minister has for many years—I sometimes feel like Bob Peck in “Jurassic Park”, who played the warden, Robert Muldoon, who tried to warn people about the velociraptors, but was also supremely impressed by the way in which they evolved to be able to kill. In this case it is about evolving to be able to exploit.

It matters that we take a careful look at what the FCA is doing, because the FCA is our constituents’ best defence against the velociraptors of the credit industries in this country. I use “credit industries” widely, because for me this is not just about the high-cost credit industry. However, in supporting the new clauses, I want to share with the Committee the experiences around the high-cost credit industry and, in particular, the pay-day loan sector, because I think they speak to the challenges with the Financial Conduct Authority and why we need to amend the Bill, to ensure that as we give the FCA more powers, it truly has our constituents’ interests at the forefront of its mind.

I do not doubt the impact that the FCA has had. I want to put that on record, because the Minister and I have talked for a long time about my concerns about the FCA. I acknowledge that it has made progress. My point is about the pace at which it has made progress, about cutting through the stand-off that we sometimes see, whereby people recognise that this is a problematic type of credit or, as my right hon. Friend the shadow Minister has talked about, where issues arise for our constituents—the people who come into our constituency offices and tell us about their ongoing battles—and about ensuring that we do not just give them protection, which means avenues for redress, but actually prevent those problems. I believe that the FCA was set up to prevent problems, but if we look at its track record in some of those problem areas, we see where delays in dealing with them has led to our constituents paying the price.

Bear with me, Committee; I think it is worth sharing that example, because it explains why these amendments make sense. Indeed, I believe the Minister agrees with me on this. A bit like earlier, with the lead generators, I am sure he already has a folder full of examples of where the FCA has done brilliant work in tackling consumer detriment. In fact, I can see all the paper—goodness me, all the trees that have gone into that! However, I know that he wants the FCA to be more agile and does not want to have people like me continually coming to him and him knowing that there is a problem, but seeing this trade-off, as this aspect is overthought almost, with too much emphasis on the unintended consequences of acting and no emphasis on the unintended consequences of not acting on some of these issues. In order to cut through that, these amendments would give a clear direction to the FCA about what consumer detriment is, why and how it needs to act, and the particular issue it needs to take into account when it comes to debt.

On Tuesday, we talked a lot in this Committee about the debts already in our communities and the debts to come, which is why this is an urgent issue that cannot really be dealt with in another review or consultation, which will go on for 18 months, because by then, in every one of our constituencies, too many people will have lost their jobs and possibly their homes, and will be in what we are calling problem debt for decades to come. Indeed, I believe this Committee is already having a positive impact on that conversation, because on Tuesday we talked about the importance of making problem debt as much of an issue for the sidebar of shame in the Daily Mail as Kim Kardashian’s derrière, and last night I saw that the Daily Mail had started talking about the horror of middle-class people having to go to food banks.

Clearly we are starting that conversation in our country, but we need to do much more. Why do we need to do much more? Because it took too long to deal with the payday lending industry. In 2010, when I was first elected, I already knew many colleagues in this place were seeing these companies on their high streets and the problems with the eye-watering interest rates, where people thought they had missed where the decimal point was. Yet nothing was done for years, and those companies exploded, not just in our high streets but online, and our constituents got into huge amounts of debt. I know that the Minister agrees with me that it took too long. I know, too, that the Minister is not his predecessor, who, when I first went to see him about payday lending, literally patted me on the back, congratulated me on finding an issue that I could issue a press release to my local community about and sent me on my way. I know he is not like that; he recognises when there is a problem. However, if he looks at the regulatory history of the FSA on this issue, he will also see that there was a problem.

Let me set that out with companies that people will have heard of. They will have heard of Wonga, QuickQuid and BrightHouse, all of which operate in constituencies across the country. All these companies have collapsed or are in financial difficulty because of the debts they owe to their customers, our constituents, because of the way in which they lent them money on credit. They have not collapsed as a result of the work of the FCA, but because of the work of the ombudsman. In 2014, when Wonga was clearly a problem for so many of our constituents, the FCA agreed a redress scheme for 375 customers and announced that it had appointed a skilled person to monitor the new lending decisions that Wonga was going to make, to ensure that the issue was sorted. In November 2015, the FCA agreed a redress scheme for 4,000 QuickQuid customers worth £1.7 million, and in October 2017 it agreed a £14.8 million redress scheme for 250,000 BrightHouse customers in respect of 384 agreements for lending that may not have been affordable.

That is the critical issue here. At every point, the FCA has acted to look at the affordability of the loans. However—given it is that time of year—it does not take a rocket scientist to work out that if we ask turkeys to decide what is on the menu for Christmas, they will often say that a nut roast is better, and that is what happens when we ask these companies whether a loan is affordable. They would tell their clients that they could afford these loans, because the way they made their money was to re-lend. It was not for someone to borrow from them and pay it all back—it was for that person to borrow from them and get into a cycle of continually borrowing from them, because they would make a lot more money. Once a person was hooked, they would borrow and borrow. That was the decision about affordability.

At various points the FCA has been brought into these companies to determine whether they were making good affordability decisions—whether, in layman’s terms, they were ripping off our constituents. At every point, that affordability decision did not meet the needs of those customers. How do we know that? Because the ombudsman then had to interfere to help people who were in debt. The result was the same: the lenders all fell into administration, not because of the action of the FCA but because the ombudsman was making them repay our constituents, who had been ripped off by them.

If that is not a troubling outcome of what is supposed to be regulation by the FCA in defence of the consumer, I do not know what is. The FCA failed continually—at every turn—to stop consumer harm being caused by these companies’ irresponsible lending practices when it had the chance to do so. Only 4,000 customers were assisted by QuickQuid, but by 2018 it had become the company that was most complained about to the financial services ombudsman—excluding complaints about PPI matters. There were more than 10,000 complaints against it that year.

For a long time QuickQuid refused to refund interest on any loans taken more than six years before. That resulted in a huge backlog of claims with the financial ombudsman. QuickQuid made poor offers to consumers and then rejected the adjudicator’s decision. Eventually, in 2019, because of what the financial ombudsman was doing, QuickQuid accepted that it needed to pay out compensation. A similar story happened with Wonga and with BrightHouse.

There are other companies that Members will have heard of, such as Sunny, where the FCA has not intervened, but it is the same story. Opportunities to intervene early and stop the detriment to consumers were missed by the FCA, and we left it to the ombudsman. It is critical to think about the ombudsman, because, as I have said, I have tabled other amendments on matters where the ombudsman cannot be brought into play, and that is even more troubling. The ombudsman was the slow-moving organisation—the diplodocus, if we are going to carry on with the dinosaur comparison—against the velociraptor of the payday lenders, with the half-hearted triceratops at the FCA trying to protect people. I will stop with the dinosaurs. I might continue with Christmas references as we go on. My point is that when the FCA was presented with evidence of consumer harm it balked. Because it balked, the ombudsman had to step in. That is not a unique situation.

This is not just about high-cost credit. There is so much data now that shows that someone is actually better protected in this country if they take out a loan on high-cost credit through a payday loan, because of the capping—we will come to that in later new clauses—than if they take out a loan on their credit card. Millions of people in this country are in problem debt, as defined by the Minister, on their credit cards. He knows my concern about the fact that the FCA has yet again put back the idea of intervening in the credit card market, saying that what matters now is to tell people about affordability.

It is as if being tied to the train track and told when the train is coming to the station—which is what happens to our constituents when they have high levels of problem debt on their credit card and do not have the money coming in to pay it off—will make a difference and stop them borrowing, when they are borrowing, as we said on Tuesday, to pay for basic living expenses.

Yet again the FCA has balked. There is evidence, time after time, from the seven years of the FCA’s existence, that it does not have an understanding of what we mean by consumer detriment. It does not have the proactive approach to companies in relation to exploitation that we need it to have. Exploitation in the credit industry is like water. It will find a way through every loophole, just as my right hon. Friend the Member for Wolverhampton South East said on a previous new clause about debt generation lead agencies. These people find a way through because there is money to be made and there is exploitation to be offered.

We have seen that the FCA has been too slow in its approach to recognise that. As a result, consumers have not yet been protected. They have certainly felt the detriment. The new clauses are about saying, “This isn’t okay. Actually, seven years on from setting up the FCA, if we are going to give you more powers, we want to see more strength when it comes to protecting our constituents.”

New clause 15 is about the consumer protection objective. The Financial Services and Markets Act 2000 says a range of things about what consumer protection is, but it does not mention debt. If we think debt is a problem, surely we should be saying, “We want to protect you from unaffordable debt.” This is not about people never getting into debt; it is about the consequences of unaffordable debt, which we all see in our constituencies.

New clause 15 adds to the list of issues around protection the concept of

“the prevention of consumer detriment, including but not limited to the promotion of unaffordable debt.”

Government Members may consider it obvious that protecting people from unaffordable debt should be covered by consumer protection, but the evidence of the history of the FCA is that that has not been the case. I say to every Government Member that they may be sitting in their constituency surgeries when somebody comes in with a plastic bag full of all the correspondence they have had, and it will be clear that they have been ripped off and have got into financial difficulties. If Government Members do not want to make that a regular occurrence, they need the FCA to be on that, and we need clear guidance from Parliament.

The honest truth about the conversations that we have had with the FCA is that it looks to Parliament, and Parliament looks to the FCA, to act. The consequence is that nobody does, and we take too long. We have continual reviews and say, “Let’s give the market a bit more time to get its act in order.” It seems common sense that these companies would not exploit people, because then those people are unable to pay them back—until we understand that it is in the process of hooking people in, being their only lender of repute and being the one they owe money to that they make their money.

I do not want to be Cassandra on this. There are many new types of industry, which we will come on to this afternoon, particularly the buy now, pay later industry, where we see exactly the same patterns of exploitation—the water running through the loopholes. Fundamentally, the FCA knows of their existence too, but it is too slow to put consumer detriment and clarity about unaffordable problem debt at the heart of what it does. New clause 15 adds that in.

New clause 18 adds to section 73 of the Financial Services Act 2012 and requires the FCA to investigate when it has not acted. Surely, seven years on, we want the FCA to be a learning organisation. I found it fascinating that the FCA was robust in its defence of how it is doing brilliant things on high-cost credit. If we look at the history of the Wongas, the QuickQuids and the BrightHouses and of where action has happened, the FCA not be very proud of it. However, I am more concerned that it has no obligation to learn from when it should perhaps have intervened.

If we want the FCA to be able to protect our consumers in the future, we need to add a request that one of the things it has to consider is a failure of its own to intervene, which is what happened in the payday lending industry, what I believe is happening in the credit card industry, and what is happening in the guarantor loan industry. Members may have seen the adverts for Amigo Loans; many may have already had somebody come into a constituency surgery who is in difficulties with those loans. Again, we will come on to them this afternoon. New clause 18 adds the words

“a failure of the FCA to intervene earlier or otherwise act effectively to protect consumers”

so that we can learn. Surely we never want to see the FCA miss an opportunity to protect our constituents again.

New clause 21 is about covering the costs of failure. That is critical, because right now there is a huge, horrible irony that there are people who are being chased by the creditors of Wonga who are owed money in compensation because of what happened with Wonga. Many of these companies, which made billions of pounds for their original founders, did not have the resources to cover their obligations when it was found that they were exploiting people. Again, it is self-evidently good practice that a company should be able to cover its potential liabilities. New clause 21 asks the FCA, when it is thinking about authorising a company, to ensure that it can cover any potential cost of compensation for our constituents.

Surely we have a duty to people who are owed money because of a financial ombudsman ruling, but who are also being chased for money that they borrowed that was unaffordable—that is why they are owed compensation —to put this right and to ensure that we do not authorise companies that rip people off and then leave them trying to pay double the price, without the cash that they are owed and while being chased by those companies. That is what new clause 21 does.

Finally, new clause 23 is about the ability of the FCA to impose redress schemes. Clearly the redress schemes that it imposed on the payday lending companies were deficient. Had they been effective we would not have seen all those people continuing to take out unaffordable loans after the FCA got involved with those companies, with the financial ombudsman having to step in and clean up the mess that was created. New clause 23 is about how those decisions are made, and it would require the FCA to produce the evidence.

Like Bob Peck, I have been trying to understand what has been going on—I apologise to the Government Whip for using another dinosaur reference; I will stop now. Why did this take so long? Why were people left without the money to which they were entitled? There is no clarity. The FCA does not have to publish the details of how it has managed these redress schemes, so the risk is that we cannot scrutinise how it got it so wrong in this instance and whether it is getting it wrong in other instances. The new clause would require the FCA to provide that evidence to the Treasury, so that we can understand where it has drawn the line on the redress schemes.

Taken together, this package would make the work of the FCA effective. It is not about saying that the FCA cannot do its job. Do we think, however, that it could have done things better over the past seven years? Yes, we do. Do we recognise that some of that is about the clarity of its responsibility to consumers? Yes, in which case we as the political leadership in Parliament need to give it clearer direction about the issues that it should be looking at, because when we give it extra powers, it is clear that consumer protection is not in itself strong enough on consumer detriment. Detriment is about preventing the problems in the first place, and protection is about ensuring that people have redress. It is clear that consumers have used the redress scheme in the Financial Ombudsman Service, but we would all rather that they did not have to suffer problems in the first place.

I do not want to pre-empt what the Minister is going to say. I know that he shares my concerns to make sure that we get this regulatory regime right, but I want to know whether he genuinely thinks that the way in which the FCA handled the high-cost credit industry in terms of payday loans—there are many other parts of the high-cost industry—was as effective as it could have been. When he looks at those figures with the Financial Ombudsman Service, can he really say that that was the impact he expected the FCA’s intervention to achieve? That includes the extra years in which Wonga, QuickQuid and BrightHouse continued to lend unaffordable amounts to people—and we know they were unaffordable because otherwise the Financial Ombudsman Service would not have intervened. If he is going to tell me that that is an effective form of regulation, I think we have a problem, because that means that our constituents will always play second fiddle to the industry and the small “c” conservative definition of protectionism.

Even if the Minister does not accept these new clauses, I hope he will explain how he will make sure that consumers get a better deal from the FCA, because I really do not believe that he can defend what happened with the payday lending industry. I know that he is looking at the buy now, pay later industry and the guarantor loans industry, and that he has looked at the issue of consumer credit data on credit cards. Above all, I know that in the current environment somebody will visit his constituency surgery soon—as happened to me, which is why I got involved in all this in the first place—holding letters from the Financial Ombudsman Service and red letter bills, with fear in their eyes because they are in a hole they think it is impossible to get out of, asking who can help them. The answer should have been the FCA. It was not over the past seven years, but if we get this Bill right, it can be for the next seven.

I am very pleased to follow the hon. Member for Walthamstow, because she has been a force of nature on this issue, and I do not disagree with a single word she has said about high-cost credit. The Government really should be listening to her, given her expertise.

I want to speak to new clauses 38 to 42, which stand in my name and that of my hon. Friend the Member for Aberdeen South and focus on duty of care. I pay tribute to Ceri Finnegan from Macmillan Cancer Support, who got in touch when the Bill received its Second Reading and suggested a duty of care. I also pay tribute to the people on the ground in Glasgow who are doing amazing work through Glasgow libraries to support those with cancer and their families, intervening and supporting them when they face financial issues, so that they do not end up getting into greater debt and greater financial difficulties. That prevention aspect is incredibly important.

It is clear to me and to many in the sector that the current situation with the FCA is not working. The StepChange briefing states:

“It is notable that after 20 years of FSMA, the FCA is still talking about culture and has recently consulted on substantial new guidance to ensure firms treat their customers who are particularly vulnerable to detriment fairly. We strongly support this guidance but note that the FCA states that ‘the guidance itself is not legally binding’.”

The fact that it is not legally binding is the problem here, because if no one is being forced to do these things, they are not going to do them in a lot of cases. Some will, but that cannot be relied on, and customers cannot rely on that either. It could well be that one financial services organisation treats people fairly and another one does not, which, again, causes greater stress and confusion.

Macmillan proposed the change for several reasons. Its research suggests that only 11% of people tell their bank about a cancer diagnosis, which is really quite a tiny number considering how widespread cancer is. Macmillan suggests a number of reasons for that, but it would be much better if the banks assumed that people may be vulnerable. Macmillan further suggests that many people living with cancer and struggling with the financial impact of their diagnosis will find it difficult to seek and access support. One in three people with cancer experience a loss of income from employment following a diagnosis—£860 a month on average—which makes it more difficult for them to pay their bills or meet any other obligations, which is why this proposal is so relevant.

A patchwork of regulation is diffused across the different parts of the regulatory framework that accord with some of the key duty of care principles. Those include senior level accountability, competence of all customer-facing staff, acting in the customer’s best interests and tailoring products to individuals’ needs. Our new clauses would introduce a duty of care to consolidate and provide consistency of outcomes for consumers across authorised financial providers, because people in certain situations can easily fall through the customer protection safety net without providers having done anything wrong or broken any rules whatsoever.

As the hon. Member for Walthamstow pointed out very clearly, the current approach to regulation is reactive. Firms are sanctioned after they have failed to act in the interests of customers, and a duty of care would turn that around and ensure that the risk of harm to a customer was assessed pre-emptively and proactively. Authorised persons may also currently regard customer protection as a compliance tick box, rather than recognising that it means actively doing the right thing for consumers and anticipating that need. If people felt as though the financial institutions they deal with were taking that approach, perhaps more than that 11% would be willing to get in touch before they got into further problems.

The FCA has produced papers and guidance for businesses on treating customers fairly in practice, and it aims to provide clarity on its expectations for how businesses should respond to the needs of vulnerable customers and understand what treating customers fairly means in practice. Through that work, the FCA has found that its own regulation does not work consistently in the best interests of vulnerable customers, including people with cancer. In the 2020 “Guidance for firms on the fair treatment of vulnerable customers”—the feedback statement and second consultation on how firms should treat vulnerable customers—the FCA acknowledges that

“not all firms treat their vulnerable customers fairly, with the consequence that these consumers experience harm”

and that

“some firms are failing to think about vulnerability or ensure the fair treatment of vulnerable consumers is fully embedded into their business. As a result, there is inconsistency in the way vulnerable consumers are treated.”

That should give us cause for concern.

The right hon. Member for Wolverhampton South East mentioned the issue of unsolicited credit card increases. StepChange also pointed out that a duty of care could affect persistent debt in the credit card market. It feels that a greater focus in regulation on appropriate product design could have prevented products from being designed in such a way that people could fall into this persistent debt. That turns the issue the other way around and looks at where the problem is just now, asking how we can prevent such things from happening and foresee the harm that people will fall into. Our new clauses and the others proposed today look at things from the other way around. We should not want people to be in harm, and we should look for ways to turn things around.

I want to say more about what a duty of care would look like. It would place a requirement, articulated in law, on firms to take a pre-emptive approach to minimising harm to consumers. That should be based on a set of key principles that firms must then adhere to, and it should contain the following: an understanding that both a failure to act and acting without due care can cause harm to people with vulnerabilities, and a need to identify customers at potential risk of harm and to anticipate, investigate and understand their needs. Perhaps businesses should look a wee bit more at what is going on with someone’s account: “Why has something changed? Why has something happened here?”

A duty of care should require firms to act in the best interests of their customers at all times and to seek to achieve the most positive possible outcomes for them. It should require a flexible and responsive approach, recognising that the customer’s situation and needs may change over time, and it should require businesses to make fair and balanced decisions based on a realistic assessment of risks. All financial service providers having a legal duty of care to people using their services would encourage and empower people with cancer or other potential vulnerabilities to contact the provider early and ask for the help they need—it would make them feel comfortable doing so. Providers would promote the support available to customers, including short-term measures to help people to manage the financial impact of their condition in periods of financial difficulty, preventing their money worries from spiralling out of control. The people that this would affect probably have enough worries to be going on with, and we want to be able to lift that burden from them.

Customers should easily be able to access forbearance from their provider, including flexibility in mortgage payments and interest freezes on credit cards and loans, without damaging their credit files. That would prevent long-term harm and exclusions. Customers would have a clearer path to compensation when things do go wrong, because a provider would have clearly failed in its duty of care. By fostering a change in culture and practice, a duty of care would ensure that providers used inclusive product and service design to anticipate and meet the needs of a changing population and customer base.

I will give a couple of examples from case studies, which Macmillan has very helpfully provided. First, it has cited the story of Chris, who said:

“Just completed a 6-year IVA so banks not willing to help me. We never missed a payment for 5 years, did not take holidays or do anything as we took this seriously and yet we are still being punished by the banks who make decisions based on computer programs.

There was a loophole which meant I did not qualify for the 2 grants promised to Self Employed individuals. I have been self-employed since Feb 2019, paid my taxes, asked for nothing and yet when my family needed the assistance, we got nothing. Our savings are gone…I have not found employment to date, my wife has been on furlough, so we are not in a good place. Universal Credit does not cover our rent which is not high, so how we are meant to live is a mystery. We have had to resort to selling items in order to get up to date with the 'rent easing'…as our landlord has insisted, they want it back by Jan 2021.”

People have a lot of other things going on, and it is worth the financial institutions recognising all those things, seeing where people are vulnerable and stepping in—particularly now, when we face the covid-19 situation.

Macmillan also cites Angela’s situation:

“Angela’s son was diagnosed with rectal cancer at the age of 34 and his condition has left a substantial financial strain on the whole family. In addition to caring for him after surgery and chemotherapy, Angela has been managing most of her son’s day-to-day finances and ‘juggling all the money and bills’. She finds this quite stressful and worries about missing payments. The family haven’t disclosed their son's cancer to his bank, because they’re worried about getting a ‘black mark’ against his credit rating.”

That is the last thing that people should have to worry about in these circumstances, but it is clearly a worry for many people. The case study continues:

“Instead, they have moved into his house and have been servicing the mortgage on his behalf for the past year. Angela says she would rather lose her own house than her son’s”—

what a choice that is for people in such a situation—and it says:

“Despite the impact of this on their own financial situation, they haven’t yet told their own bank.”

The banks must know that something has gone wrong here—they are seeing changes in people’s behaviour, spending and payment patterns—but they have no obligation to do much about it. Angela’s family

“have spent over £30,000 whilst their son has been ill. Travel alone…cost Angela and her son over £1,500”.

Banks and other financial institutions have a duty to look at things more carefully, and to take their duty of care seriously. Organisations that support the introduction of this duty of care include the Money Charity, Fair By Design, StepChange, Age UK, the Alzheimer's Society and the Money and Pensions Service, as well as Macmillan Cancer Support.

This Bill is a portfolio Bill, as the Minister has said. In it, he has the opportunity to put something right, to address the situation and to take action to prevent people from falling into far more difficulty than they ought to.

I thank the hon. Ladies and the right hon. Gentleman for their speeches, to which I have listened carefully. I will try to address fully the 10 new clauses that have been tabled. In essence, they relate to the effectiveness of the FCA’s oversight; that is the substantive point behind them.

The lead new clause is new clause 6, which has two functions. Subsection (2) requires the FCA to have explicit regard for vulnerable consumers when discharging its consumer protection objective, and subsection (3) introduces a statutory requirement for the FCA to make rules requiring authorised persons to adhere to a duty of care when providing a product or service.

UK financial services firms’ treatment of their customers is governed by the FCA in its principles of business, as well as specific requirements in its handbook. The FCA’s principles for businesses require firms to conduct their business with due skill, care and diligence, and to pay due regard to the interests of their customers and treat them fairly. The FCA already has recourse to disciplinary action against firms that breach the principles.

The FCA has already announced that it will undertake work to address potential deficiencies in consumer protection, in particular by reference to its principles for businesses. Although the coronavirus pandemic has caused the FCA to reprioritise its resources and delay certain pieces of work, including the next formal stage of this work, delaying these initiatives has ensured that firms are able to focus on supporting their customers, including the most vulnerable, during this difficult period.

I draw attention to the second purpose of new clause 6, alongside new clauses 38 and 39, which require the FCA to introduce a duty of care. A number of other amendments here also relate to the duty of care.

The Government believe that, as the FCA is already taking steps to ensure that consumers are treated fairly and financial services firms are obliged to exercise due care and regard when offering products, services and advice, a statutory duty of care requirement is not necessary. I have already set out a number of actions that the FCA is taking to ensure that customers are properly protected.

On new clause 39 in particular, the Government believe that the scope, which applies to all financial services providers, is inappropriately broad. For example, it is unclear whether that would include persons exempt under the exemptions order, which includes entities ranging from central banks to any employer offering a cycle-to-work scheme. Furthermore, there is no indication of the territorial scope of the financial services provider. Assuming that the duty of care would apply only to actions being done within the UK, the vagueness is still likely to lead to enforcement difficulties if a provider is based outside the UK.

Finally, it is inappropriate to apply the provisions to all financial services providers as no assessment has been made, in relation to unauthorised firms, of the extent to which the existing common law and other consumer protection legislation is or is not sufficient to achieve the right level of consumer protection. For example, where providers are subject to supervision or oversight by other professional bodies, as is the case with professional firms, it is unclear how this proposal would interact with the remit of those bodies who may be better placed to assess matters relevant to duties of care.

New clause 40 would require the Treasury to review at least once a year the case for instructing the FCA to introduce a duty of care for all financial services providers. The Treasury will of course keep this question under consideration. However, it is disproportionate to set this requirement in statute. I have already set out the actions that the FCA is taking to ensure that customers are properly protected.

I want to pause here and note that I have enormous respect for the perspectives of the hon. Member for Walthamstow on this issue. I do not have her encyclopaedic knowledge of dinosaur names, but I do respect her engagement on the issue. I have engaged very closely with the FCA. I recognise that she is still dissatisfied with where things have got to and she makes some reasonable points, on which I am happy to continue the dialogue, but there have been significant changes in recent months with respect to the work that is going on—that is live at present. I suspect she will not be satisfied, but let me carry on and then we can see where we get to at the end of this.

On new clause 41, the Government believe that the FCA, as the independent conduct regulator for the financial services industry, is best placed to judge the merits of a duty of care for the financial services industry. It would therefore be inappropriate for the Treasury to instruct it to impose a duty of care on authorised firms, although that dialogue is ongoing.

On new clause 42, the FCA has already published a feedback statement following its discussion paper on duty of care last year. The FCA will also publicise the findings of its upcoming work on how to address potential deficiencies in consumer protection. Therefore, the Government view is that it would be unnecessary at this point for the Treasury to report on the FCA’s position on the need for a duty of care.

The Government believe that there are sufficient protections in place without expanding the FCA’s statutory consumer protection objective or introducing a statutory duty of care, but I reassure members of the Committee that we will continue to work closely with the FCA to keep this issue under review—I am not saying “No, never.”

New clause 15 would require the FCA to have explicit regard to the prevention of consumer detriment, including the promotion of unaffordable debt, when discharging its consumer protection objective. The Government believe that the FCA, as the UK’s independent conduct regulator, is best placed to judge how to protect financial services consumers from detriment, including that which arises from the promotion of unaffordable debt. The existing legislation accounts for the prevention of consumer detriment as a result of section 1C(2)(e), which outlines

“the general principle that those providing regulated financial services should be expected to provide consumers with a level of care that is appropriate having regard to the degree of risk involved…and the capabilities of the consumers in question”.

I am conscious of time, but approximately 1 million households that could ill afford it have lost out on about £1 billion of compensation from Wonga and QuickQuid. Does the Minister really believe that under the existing regime that he is defending, there has been sufficient recognition of what it means to consumers when it goes wrong, and that there is no need for change?

There is ongoing work and ongoing evolving action by the FCA. The Government have taken strong steps to prevent problem debt from occurring and to support those who fall into it. We want to make sure that people have the guidance, confidence and skills to manage their finances. That is why we established the Money and Pensions Service last year to simplify the financial guidance landscape, to provide more holistic support for consumers, and to give free support and guidance on all aspects of people’s financial lives. I welcome the publication of its UK strategy for financial wellbeing, which will help everyone to make the most of their money and pensions.

I have already mentioned the role played by the FCA’s principles of business. Further to that, the FCA has recently concluded a consultation on guidance for firms on the fair treatment of vulnerable customers. The protection of vulnerable customers and consumers is a key priority for the FCA. Although many firms have made significant progress in how they treat vulnerable consumers, the Treasury and the FCA want the fair treatment of vulnerable consumers to be taken seriously by all firms so that vulnerable consumers consistently receive fair treatment. I think that was the key point made by the hon. Member for Walthamstow.

Despite those preventive measures, I recognise that many people still fall into problem debt. Professional debt advice plays a vital role in helping people to return to a stable financial footing. That is why in June the Government announced £37.8 million of extra support, which brings the budget for free debt advice to more than £100 million this year. From May, the Government are delivering the first part of the new breathing space scheme, as discussed in Committee, for problem debt. That gives eligible people a 60-day period in which fees, charges and certain interest are frozen and enforcement action is paused.

We discussed on Tuesday the importance of the statutory debt repayment plan, as part of the debate on clause 32. The Government believe that sufficient protections are in place without expanding the FCA’s statutory consumer protection objective. However, I reassure the hon. Lady that the Government will continue to work closely with the FCA to keep that issue under review.

New clause 18 would introduce a duty on the FCA to launch investigations in situations where there is suspected regulatory failure as a result of inaction or a lack of effective action by the FCA, but that is already covered by section 73 of the Financial Services Act 2012. That section imposes a duty on the FCA to investigate where it appears to the FCA that events have occurred that, among other things, indicate

“a significant failure to secure an appropriate degree of protection for consumers”

either by the FCA or otherwise, and where those events might not have occurred but for a serious failure in the regulatory system, or operation thereof, established by FSMA 2000.

Further, section 77 of the 2012 Act enables the Treasury to require the regulators to conduct investigations in cases of suspected regulatory failure in circumstances where it does not appear to the Treasury that the regulators are already doing so, for example under section 73. The section 77 powers are broader than those set out in section 73, in that the Treasury can require the regulators to conduct an investigation into relevant events where it considers that it is in the public interest to investigate them. In addition, section 77 investigations can consider aspects outside the regulatory system as established by FSMA, which allows a comprehensive review to be undertaken in the public interest. Those existing powers ensure that, in cases where section 73 does not apply, a mechanism remains to ensure that investigations can be conducted in the public interest.

If I understand new clause 21 correctly, it reflects the ongoing concerns of the hon. Member for Walthamstow that she has raised in Parliament previously, specifically about circumstances where a firm fails but compensation is owed to a consumer. While I am sympathetic to these concerns, the Government believe that the FCA, as the independent regulator, is best placed to judge the resources that authorised firms need to maintain in order to carry out regulated activities.

I should explain that the FCA is already required by schedule 6 of the Financial Services and Markets Act 2000 to consider whether a firm’s resources are appropriate to the activities it carries out. It is obliged to take into account the nature and scale of a firm’s business, as well as the risk to the continuity of the services it provides to consumers, and must consider whether the business is to be carried on in a sound and prudent manner, with particular regard to the interests of consumers. The legislation also already requires the FCA to consider how a firm’s potential liabilities might impact the resources it should hold. The Government therefore believe that this new clause does not add anything further to the FCA’s requirements that already exist in legislation.

Once again, I would mention the FCA’s principles for businesses, which already require firms to maintain adequate financial resources and organise their affairs with adequate risk management. The FCA has recourse to take disciplinary action against firms that breach these principles. Therefore, the Government believe that there are sufficient provisions in place to ensure consumers can access compensation where they have suffered detriment.

Finally, I turn to new clause 23. I should first note that the launching of any consumer redress scheme is a significant undertaking, and it is right and proper that the process be open and transparent. The new clause proposes making amendments under section 404A of the Financial Services and Markets Act 2000, referred to as FSMA, which provides the FCA with rule-making powers for consumer redress schemes.

However, the existing legislation already sets out a number of requirements governing the actions of the FCA, including provisions to ensure that its actions are transparent. Rules made under section 404 by the FCA are subject to a formal public consultation before a scheme is put in place. The FCA also publishes a policy statement explaining its decision and the rationale for the provisions in any proposed scheme. That consultation also includes any decision to appoint a competent person, and the scope of the competent person’s responsibilities, which are documented in the policy statement. Finally, it is right that any scheme is monitored and assessed, to ensure that it has delivered its intended outcomes. Given the importance and impact of consumer redress schemes as good regulatory practice, the FCA would as a matter of course monitor the progress of the scheme as it is implemented, which would include assessing the scheme against its stated objectives.

Introducing a statutory requirement for a process that the FCA already undertakes introduces an additional and unnecessary hurdle. I appreciate that there is a desire to ensure that the regulators are properly accountable to Parliament, and I reassure members of the Committee that such an accountability mechanism already exists. As part of the requirements under FSMA, the FCA must already provide an account of its activity to the Treasury on an annual basis, and that account is shared with Parliament.

I regret that I have spoken for some time, but this is an important set of questions, and some more will come up later this afternoon. I hope I have satisfied the Committee, and therefore I ask the right hon. Member for Wolverhampton South East to withdraw the new clause.

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

Adjourned till this day at Two o’clock.

Financial Services Bill (Twelfth sitting)

The Committee consisted of the following Members:

Chairs: Philip Davies, † Dr Rupa Huq

† Baldwin, Harriett (West Worcestershire) (Con)

† Clarkson, Chris (Heywood and Middleton) (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 Clerk

† attended the Committee

Public Bill Committee

Thursday 3 December 2020

(Afternoon)

[Dr Rupa Huq in the Chair]

Financial Services Bill

Just a word of warning—we are a little bit behind time. There are still 11 groups of amendment on the selection paper to debate. We have the room until 5 pm, but I think there were some murmurings about moving that forward a bit. Hint hint: if we make progress, that would help.

Forgive me, Dr Huq. I might have got this wrong, but I think there might be one more vote on the previous group before we move on.

When we reach it on the amendment paper, so not quite yet.

New Clause 8

Money laundering: electronic money institutions

‘(1) The Proceeds of Crime Act 2002 is amended as follows.

(2) In section 303Z1(1) after “bank” insert “, authorised electronic money institution”.

(3) In section 303Z1(6) after “Building Societies Act 1986;” insert—

““authorised electronic money institution” has the same meaning as in the Electronic Money Regulations 2011.”

(4) In section 340(14)(b) after “Bank” insert “, or

(c) a business which engages in the activity of issuing electronic money”.’—(Abena Oppong-Asare.)

This new clause would update definitions in the Proceeds of Crime Act 2002 to reflect the growth of financial technology companies in the UK by equalising the treatment of fin tech companies with banks on money laundering and Account Freezing Orders.

Brought up, and read the First time.

I beg to move, That the clause be read a Second time.

It is a pleasure to have you chairing this sitting, Dr Huq. I rise to speak in favour of new clause 8, which would be good for consumers. [Interruption.] I see that the Minister is agreeing with me—or, at least, he is smiling with me—so I think we are almost getting there.

This new clause would be good for Britain’s world-leading FinTech sector. At the same time, it will improve the ability of our crime prevention agencies to do the job that we all want them to do—that is, to crack down on criminal activity and, in this case, money laundering. It would achieve those objectives by updating definitions in the Proceeds of Crime Act 2002 to ensure that customers of FinTech are treated in the same way as customers of traditional banks with regard to anti-money laundering provisions and account freezing orders. These outcomes would help. We have tabled this new clause because this is an opportunity in the Bill to address the technical deficiencies in the anti-money laundering regime; it is not political in nature. We hope that the new clause will therefore receive cross-party support, as we believe that we are all united in our desire to clamp down on money laundering.

The need for this new clause has arisen because outdated definitions in the Proceeds of Crime Act 2002 are disadvantaging customers, placing unnecessary pressure on law enforcement, and could allow suspected criminals to avoid complying with law enforcement requirements to forfeit illicit funds. Simply put, this legislation was written before FinTechs existed, and we really need to look at updating the law now because so many people use them. I understand that there is considerable support from the sector and law enforcement for updating the relevant definitions in the Proceeds of Crime Act to reflect the growth of FinTechs, and the passage of the Bill provides the ideal opportunity to do so. We need to act now by amending the Bill, rather than waiting for dedicated legislation, because the problems for consumers, the sector and our crime agencies are getting worse due to the rapid growth of the FinTech sector. I hope that the Minister will therefore accept this simple, highly targeted and rather uncontroversial new clause.

Let me turn to the details. The new clause fixes two specific problems. First, it updates the legislation relating to the defence against money-laundering processes. The second problem relates to account-freezing orders. Under the existing legislation, when financial services firms suspect that someone is engaged in money laundering, it is normal practice for their account to be frozen and for an appropriate decision to be made as to what should be done with the funds, which might include, for example, returning them to source. However, in order legally to be able to return the funds to source, the regulated firm is required to request a legal defence from the National Crime Agency—the so-called defence against money laundering, or DAML—to carry out this activity. DAMLs take two weeks to process. During this period, firms cannot even communicate with customers or allow them to withdraw funds. As we know, the covid pandemic is a particularly difficult period for a lot of consumers.

For reasons of practicality, an exemption was introduced in 2005 such that banks do not request a DAML if the transaction they are to carry out is below £250, but the FinTech sector did not exist at that time so the exemption does not apply to it. Electronic money institutions—that is what most FinTechs are regulated as—are still required to request DAMLs for all transactions, even those of a low value. Low-value DAMLs do not provide useful intelligence to the NCA. I understand that when the UK Financial Intelligence Unit reviewed a sample of 2019-20 DAMLs, it found no refusals for requests under £250.

The rapid growth in the FinTech sector and its inability to use the £250 exemption means that the number of DAMLs has grown from 15,000 in 2015-16 to 34,000 in 2018-19 and 62,000 in 2019-20. According to the NCA’s recently published annual report, the most significant growth was seen from financial technology companies. The report says that such firms submitted 32,454 DAMLs and suspicious activity reports, which is up 247.36% from the previous year, when there were 9,343. The number of DAMLs will continue to grow rapidly until the threshold is extended to EMIs.

That rapid growth is placing significant pressures on FinTechs, customers and law enforcement. For example, a recent article in The Times showed that many customers have their accounts locked out for extended periods. More worryingly, the head of the UK Financial Intelligence Unit, Ian Mynot, told the Financial Times last week that unnecessary DAML reports are affecting the NCA’s ability to investigate criminals. I am sure the Committee will agree that that is really worrying. The article says:

“The…National Crime Agency has called for deeper reform of the system for flagging potential money laundering”

There are concerns out there; it is not just Opposition Members who are concerned.

I am concerned that FinTechs have to spend significant amounts of time and money sending requests to the NCA, which provides the agency with extra admin and work that it does not want to do. That time and money could be used to build new products and services that would benefit customers and businesses and therefore be more cost-effective.

Subsection (4) of the new clause would extend the DAML threshold eligibility to electronic money institutions. When the Minister replies, will he give his assessment of how many DAMLs have been submitted this year and, of those, how many have been for sums under £250? Are the numbers now in the tens of thousands? How many DAMLs for sums under £250 have been refused in the past year? Is it zero? If so, what was the associated cost to the economy of all that unnecessary paperwork, not to mention the diversion of law enforcement resources from proactive investigation to dealing with administration and the intangible costs and frustrations to customers who have had their accounts frozen with no reason given? What is the Minister’s estimate of the amount of time and money FinTechs have expended on submitting DAMLs that the NCA does not want? Does that put the UK FinTech sector at a competitive disadvantage? I realise I am asking a lot of questions, but I have just a few more. How many DAMLS does the Minister expect to be submitted in each of the next three years if the definition in POCA is not updated through the Bill?

Before moving on, Dr Huq, it is worth pointing out that the new clause does not affect the parallel requirement for regulated firms to submit suspicious activity reports to the NCA every time a firm knows or suspects that someone is engaged in money laundering, regardless of the sums involved. I reassure hon. Members that the new clause would not change the SAR process. Does the Minister think that DAMLs of under £250 provide any useful intelligence to the NCA, given that it already receives SARs and given the comments of Mr Mynot? Can the Minister address that in his response?

The second issue that the new clause addresses relates to account-freezing orders, or AFOs. The Proceeds of Crime Act includes provisions that enable law enforcement agencies to freeze and forfeit funds held in UK bank or building society accounts, where there are reasonable grounds for suspecting that those funds are the proceeds of crime. In order to freeze funds in an account, a senior law enforcement officer has to apply to the courts for an account freezing order. Under POCA, AFOs can only be used to freeze funds held in bank or building society accounts.

The Minister may be able to correct me on this, but I understand that AFOs cannot be used to freeze funds held in accounts of FinTechs, which are regulated as electronic money institutions. It seems to me that there is clearly a significant risk that criminals will exploit that loophole and run illicit activities through FinTech accounts to avoid having their funds frozen.

Subsections (2) and (3) of the new clause would update the necessary definitions in POCA, meaning that law enforcement could use AFOs to freeze funds held in FinTech accounts in the same way that they can in standard current accounts. In his response, can the Minister let the Committee know if his Department is aware of any suspected money launderers exploiting this AFO loophole? That is important if we are to move forward. What are the sums involved? Have any police forces or law enforcement agencies made representations to the Minister urging him to adopt the measure? If so, does he agree with us that the loophole needs to be closed as a matter of urgency, and that the change in definitions cannot wait any longer?

Dr Huq, we all want to make progress on this issue. I will therefore be listening very carefully to the Minister’s response to my questions. As I said at the outset, I hope that we can use the opportunity today to obtain a cross-party consensus to fix these issues during the passage of the Bill. That would be good for consumers, it would support our crime prevention agencies and send a strong message of support to our fast-growing FinTechs. If the Minister is unable to commit to looking at this issue during the passage of the Bill, we would welcome his bringing it up at a later stage. I look forward to the Minister’s response.

It is a pleasure to serve under your chairmanship, Dr Huq. Before I respond to the hon. Member for Erith and Thamesmead, I would like to recognise her award last night as newcomer of the year by the Patchwork Foundation; I congratulate her on that success.

The hon. Lady asked a number of specific questions about suspicious activity reports, or SARs, and I have those answers for her. Before I come on to them, it is important that we contextualise this new clause in the great success that is the UK’s FinTech sector, with 600 propositions, 76,500 people working in the industry and £4.1 billion of venture capital money put into it just last year. The Government remain committed to supporting the sector, trying to maintain the UK’s leadership position in this market and making it the best place to start and grow a FinTech firm.

I am pleased to say that assessments have cited the UK’s strong Government support, access to skills, robust domestic demand and flexible regulator as particular strengths. It is a priority for the Government to maintain the UK’s strength as a FinTech destination and continue fostering innovation. That is why the Chancellor asked Ron Kalifa OBE to carry out an independent review of the sector. The review will make practical recommendations for Government, industry and regulators on how to support future growth and adoption of FinTech services.

The Government are conscious of the challenges that face the FinTech sector under the current suspicious activity reporting regime, in particular with respect to defence against money laundering SARs, sometimes known as DAML SARs. The volume of DAML SARs received by the NCA has grown substantially, with more than 60,000 received in 2020. Electronic money institutions—EMIs—are the largest contributor to that increase, with such companies accounting for four fifths of the increase in these requests. As the hon. Lady rightly pointed out, that has resulted in increased pressure on limited law enforcement resources. This year, £172 million was denied to suspected criminals as a result of DAML requests, up 31% on the previous year’s £132 million and more than three times the £52 million from 2017-18. It would be useful for the Committee to know that the Government are working closely with law enforcement to further resolve the current anomaly with regard to account freezing orders.

The Government are supportive of the objective to equalise treatment of banks and FinTech firms in the Proceeds of Crime Act 2002. Of course, that legislation could not take account of FinTechs. Under the economic crime plan, the Treasury and Home Office, along with law enforcement, have been working with the FinTech sector to identify and implement solutions to the challenges that the provisions of the Proceeds of Crime Act create. Progressing those solutions remains a priority, and we are committed to reforming the suspicious activity reporting regime as part of the wider programme of economic crime reform. It is a significant area in which banks and financial institutions urgently need to see reform, and it requires a collaborative effort between the Treasury, the Home Office and private sector actors.

While the Government agree with the intent behind new clause 8, it is drafted in such a way as to create inconsistencies with definitions set out within the wider statute book. Specifically, the insertion of references to electronic money institutions into the definition of “deposit taking body” in the Proceeds of Crime Act introduces scope for confusion as to the status of electronic money institutions in wider financial services legislation, such as the Financial Services and Markets Act 2000. Electronic money institutions are not classified as “authorised deposit takers” for the purposes of that Act.

The Government agree with the principle that the treatment of e-money institutions should be equalised with banks in those two specific areas. However, as the Committee will be aware, financial services legislation is complex, and it is important to work through these things carefully, to ensure that the legislation operates as intended and avoids any unintended outcomes. This new clause does not adequately consider interactions with other pieces of legislation. I recognise that that is a technical matter. The Government are aligned with the intent, so I have asked my officials to work—and, indeed, I have been working myself—with colleagues across Whitehall, particularly in the Home Office, to identify a way of addressing this issue that is consistent with the broader regulatory framework for these firms. I intend to provide the House with an update on Report. Given that commitment, I ask the hon. Lady to withdraw the new clause.

I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.

New Clause 9

Public country-by-country reporting by financial services companies

‘(1) The Treasury must, every year, publish and lay before both Houses of Parliament a report on its progress in pursuit of international action on public country-by-country reporting by relevant bodies.

(2) The report must include an update on whether the Treasury intends to require the group tax strategies of relevant bodies to include a country-by-country report, pursuant to paragraph 17(6) of Schedule 19 to the Finance Act 2016.

(3) The first report must be laid before both Houses of Parliament within six months of this Act being passed.

(4) For the purposes of this section, a “relevant body” means a body authorised by or registered with the Financial Conduct Authority.’—(Abena Oppong-Asare.)

This new clause would require the Treasury to report on a regular basis to Parliament on its progress, for FCA-registered and authorised companies, towards international agreement on a model of public country-by-country reporting and whether it will use powers in the Finance Act 2016 to require public country-by-country reporting in the UK.

Brought up, and read the First time.

I beg to move, That the Clause be read a Second time.

If agreed to, new clause 9 would be good for the country and at the same time would tackle widespread concerns about multinational enterprises exploiting the way national systems interact in order to minimise the total amount of corporation tax they pay. It would help create greater transparency around the taxation of multinational companies, achieving those objectives by requiring the Treasury to report on a regular basis to Parliament on its progress in pursuit of international action on public country-by-country reporting by relevant bodies.

Let me say at the outset that those outcomes are what we want to see. Labour’s aim in tabling new clause 9 is to use the Bill as an opportunity to help make the UK a world leader in financial transparency. I appreciate, as the Minister mentioned earlier, that financial legislation is complex, but we hope that on this occasion we will be able to receive cross-party support, as I believe we are all united in our desire to have far greater transparency.

The Government currently have the power to require multinational enterprises to publicly report their tax payments on a country-by-country basis, but so far they have resisted using that power. As I mentioned earlier, there is widespread concern about how multinational enterprises successfully exploit the way national systems interact in order to minimise the total amount of corporation tax they pay. New clause 9 is one way of tackling that. It is quite simple: it just requires public country-by-country reporting of the amount of tax multinational enterprises pay in each country where they have operations.

Schedule 19 of the Finance Act 2016 introduced a requirement for UK-headed multinational enterprises, or UK sub-groups of multinational enterprises, to publish a tax strategy. Paragraph 17(6) gives the Treasury the power to require those tax strategies to include country-by-country reports of tax paid. However, while the Government do not appear to disagree with the principle of country-by-country reporting, we still have not seen the full use of powers to require that. They say they want international agreement on public reporting first.

I am sure the Minister agrees that there has been recent pressure on the Government to use the power in the Finance Act 2016 to introduce public country-by-country reporting. It was most recently discussed during the passage of the Finance Bill this year. On Report, on 1 July, the right hon. Member for Barking (Dame Margaret Hodge) tabled new clause 33, which would have required a tax strategy published by a group liable for the digital services tax to include any relevant country-by-country reports. At the time, new clause 33 received cross-party support, including from our own shadow Chief Secretary to the Treasury, my hon. Friend the Member for Houghton and Sunderland South (Bridget Phillipson), and Conservative Members such as the right hon. Member for Haltemprice and Howden (Mr Davis), the hon. Member for Thirsk and Malton (Kevin Hollinrake) and the right hon. Member for Sutton Coldfield (Mr Mitchell). I echo the comments made by the shadow Chief Secretary to the Treasury, who said:

“For years, the Opposition have urged the Government to commit to country-by-country reporting on a public basis…the way in which they have held up progress at an international level, has been a source of deep frustration to those of us who want to see far greater transparency around the taxation of multinational companies.”—[Official Report, 1 July 2020; Vol. 678, c. 367.]

The right hon. Member for Sutton Coldfield said:

“The new clause would allow Parliament, journalists, campaigners and civil society to see clearly whether these businesses are paying their fair share of taxation. If the Government accept the new clause, that would, as the hon. Member for Houghton and Sunderland South suggested, make the UK a world leader in financial transparency.”—[Official Report, 1 July 2020; Vol. 678, c. 369.]

There are companies already undertaking voluntary country-by-country reporting. For example, SSE—one of the largest electricity network companies in the UK—has been awarded the fair tax mark for the fourth year in the row. It provides a shining example of how this could be done. We are seeing companies doing this on a voluntary basis, and the new clause would ensure that all companies do it and that it is not a difficult process.

The Government have made quite a big deal about wanting to be a global leader next year—it is not just me saying that; those are the Government’s words—particularly post Brexit and with our presidency of the G7. If the Government genuinely want to show global leadership, should they not be at the forefront of pushing these kinds of measures, rather than passively waiting for an international agreement to be reached? This is a perfect time to implement this provision. It would be great if we could get just one amendment through on this occasion.

The new clause would require the Government to publish an annual report to Parliament on their progress towards the international agreement, including whether they intend to use the power in the Finance Act 2016 to require public country-by-country reporting and publish tax strategies. We would welcome the Minister taking this opportunity to give us the latest update on progress towards the international agreements on public country-by-country reporting, including what specific discussions the Government have had with international partners and whether the Government anticipate any progress on this matter in 2021.

New clause 9 would require the Treasury to publish and lay before both Houses of Parliament an annual report that outlines its progress towards international action on public country-by-country reporting, and provides an update as to whether it intends to expand the existing tax strategy reporting requirement to include country-by-country reports of financial services companies. As the hon. Lady has acknowledged, the Government have championed tax transparency through initiatives at the international level, including tax authority country-by-country reporting and global standards for exchange of information, and through domestic action such as the requirement for groups to publish tax strategies.

In relation to public country-by-country reporting, the Government continue to believe that only a multilateral approach would be effective in achieving transparency objectives, and avoiding disproportionate impacts on the UK’s competitors or distortions regarding group structures. Different global initiatives to increase tax transparency and to help protect against multinational avoidance continue to be discussed in the international forums, such as the OECD, in which the UK is an active and leading participant. However, although the Government will continue to be clear and transparent about our broad objectives in this area, it would not be appropriate for the Treasury to provide a detailed report each year assessing the status and evaluating the progress of fast-moving, complex discussions that typically take place between countries on a confidential basis, nor do we think it appropriate to approach that from the narrow focus of financial services as the new clause suggests.

Although the Bill makes specific amendments to the scope of country-by-country reporting required in order to reflect the changes to the prudential regimes, the question of whether corporates should be required to publish country-by-country reports as part of their tax disclosures is a wider question that is relevant to large multinationals operating in all industry sectors, not just those in regulated financial services sectors. For those reasons, I ask the hon. Lady to withdraw the new clause.

I beg to ask leave to withdraw the clause.

Clause, by leave, withdrawn.

New Clause 10

FCA recommendation to remove a self-regulatory organisation: Ministerial statement

“(1) When the FCA makes a recommendation that a self-regulatory organisation be removed from Schedule 1 to the MLR pursuant to Paragraph 17 of the Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations 2017, the Treasury must make a statement to Parliament.

(2) The statement must be made within four weeks of the recommendation being made.

(3) The statement to Parliament must set out—

(a) the Government’s response to the FCA’s recommendation;

(b) the likely impact on the sector of any action the Government is proposing to take, including—

(i) the impact of the organisation retaining its Anti-Money Laundering supervisory responsibilities if the Government decides not to remove the organisation from Schedule 1 to the MLR; and

(ii) where the Government intends to place an organisation’s Anti-Money Laundering supervisory responsibilities if it decides to remove the organisation from Schedule 1 to the MLR; and

(c) where applicable, a timescale for the removal of the self-regulatory organisation from Schedule 1 to the MLR.

(4) For the purposes of this section, “MLR” means the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.”—(Abena Oppong-Asare.)

This new clause would require the Treasury to report to Parliament on its response to any recommendation by the FCA that an organisation have its anti-money laundering supervisory responsibilities removed, including the impact of either accepting or rejecting any such recommendation.

Brought up, and read the First time.

I beg to move, That the clause be read a Second time.

New clause 10 would be good for consumers. At the same time, it would improve the ability of our crime prevention agencies to do the job that we all want them to do—namely, to crack down on criminal activity and, in this case, money laundering. Our aim in tabling the new clause was to take the opportunity offered by the Bill to address technical deficiencies in the anti-money laundering regime. Again, I hope that we will receive cross-party support for our proposal, as I believe we are all united in a desire to clamp down on money laundering.

Tackling money laundering has a strong international aspect, but the Government need to ensure that we have clear and effective anti-money laundering measures within the UK. The intergovernmental Financial Action Task Force was founded by the G7 in 1989 to design and promote policies to combat money laundering around the world. In the EU, FATF standards are implemented by way of money laundering directives, which are designed to establish a consistent regulatory environment across member states. As I said, there is clearly a strong international aspect to the work, but it is the responsibility of the UK Government to implement effective measures in this country. Implementing new clause 10 would certainly help to address that.

There are concerns about fragmentation. Indeed, that is a long-standing concern about the UK’s anti-money laundering supervisory regime. In the UK, there are, in the accountancy and legal sectors, 22 different professional bodies with responsibility for monitoring compliance by their members with anti-money laundering measures. The EU’s fourth money laundering directive made it clear that bodies that represent members of a profession may have a role in supervising and monitoring them. As I said, however, the supervisory landscape in the UK has been criticised for being highly fragmented.

In 2015, that was recognised by the Government in the “UK national risk assessment of money laundering and terrorist financing”, the first such assessment, which highlighted the challenge of having a large number of supervisory organisations. Advocacy organisations such as Transparency International, which gave evidence to our Committee a few weeks ago, have long criticised the fragmented nature of the UK’s anti-money laundering supervisory regime.

In 2018, the Government created a new office within the Financial Conduct Authority to improve standards among professional supervisory bodies—the Minister will probably mention that—but concerns have been raised about its effectiveness. For example, the Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations 2017 gave the FCA the role of ensuring that the anti-money laundering work of the professional supervisory bodies was effective. That would be done through the new office within the FCA, the Office for Professional Body Anti-Money Laundering Supervision. The 22 professional bodies that OPBAS regulates are named in schedule 1 to the 2017 regulations.

However, a Treasury Committee report from last year, entitled “Economic Crime - Anti-money laundering supervision and sanctions implementation”, concluded that it was not clear how the Treasury would respond to an OPBAS recommendation to remove a professional body’s supervisory role. In particular, the Treasury Committee said that there was not an adequate indication of where the Treasury would move a body’s supervisory responsibilities if it was stripped of them. It concluded that the lack of preparation created a risk that a supervisor might become “too important to fail”. That is quite concerning to me. The Committee recommended that the Treasury publish within six months a detailed consideration of how it would respond to a recommendation from OPBAS.

In their “Economic Crime Plan 2019-22”, which was published in July last year, the Government committed to meeting the Treasury Committee’s recommendation by publishing

“a detailed consideration of the process for responding to an OPBAS recommendation to remove a professional body supervisor’s status as an AML/CTF supervisor, including managing changes in supervisory responsibilities, by September 2019.”