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Grand Committee

Volume 834: debated on Monday 20 November 2023

Grand Committee

Monday 20 November 2023

Arrangement of Business


Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2023

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2023.

My Lords, this order was laid before the House on 19 September. The UK Emissions Trading Scheme—the ETS—was established under the Climate Change Act 2008 by the Greenhouse Gas Emissions Trading Scheme Order 2020 as a UK-wide greenhouse gas emissions trading scheme to encourage cost-effective emissions reductions, contributing to the UK’s emissions reduction target and, of course, ultimately our net-zero goal.

The scheme is run by the UK ETS authority, which is a joint body comprising the UK Government and the devolved Governments. Our aim is to be predictable and responsible guardians of the scheme and its markets. In doing so, we will ensure that the scheme remains a cornerstone of our ambitious climate policy.

We have brought forward this SI to implement a number of necessary changes and improvements to the scheme. The changes relating to aviation free allocation rules and to the treatment of electricity generators follow the announcements made by the UK ETS authority in July in our response to last year’s consultation on developing the UK ETS. The final change remedies an inconsistency around free allocation and carbon capture at UK ETS installations. On aviation, this SI will cap the total amount of aviation free allocation that operators are eligible to receive at 100% of their verified emissions.

This SI makes technical changes to free allocation rules regarding the electricity generator classification for industrial installations. It will amend the electricity generator classification to consider only electricity exports in the baseline period, instead of all electricity exports since 2005, allowing operators to change their installation’s electricity generator classification if they have put a stop to the export of electricity. Electricity exports represent no more than 5% of the total produced allowances and will also be excluded from consideration in this classification.

The SI will amend the electricity generator definition to exclude installations that have produced electricity for sale if that electricity was produced by means of a high-quality combined heat and power plant, operating as part of an operator’s industrial activity. This will limit reductions in free allocation entitlements and provide further encouragement for industrial operators to achieve improved efficiency for their combined heat and power plants.

The SI also makes an operational amendment to the electricity generator classification. The SI will allow electricity generators to be eligible for free allowances after the application date if they can demonstrate that they produced measurable heat by means of high-efficiency co-generation during the allocation period.

The SI also remedies an inconsistency in the legislation to make it clear that carbon capture and other types of regulated activity may be carried out on the site of the same installation. The SI will allow provision of free allowances to industrial installations at the same site as a carbon capture plant.

As the Northern Ireland Assembly is not sitting and cannot consider affirmative legislation, this statutory instrument therefore covers only Great Britain. Officials in Northern Ireland have agreed that that none of the provisions currently affects operators in Northern Ireland.

These changes deliver on commitments made by the UK ETS authority and improve the operation of the scheme. For aviation, the SI will ensure that aviation free allocation is distributed appropriately until full auctioning for the aviation sector in 2026. This follows the decision announced in July that aviation free allocation will be phased out by 2026.

On free allocation technical changes, the SI will ensure that installations classed as electricity generators, whose eligibility for free allocation is limited, are able to change their classification if they are no longer exporting electricity. The SI will also ensure that industrial installations with high-quality combined heat and power plants which export excess electricity to the grid are not classified as electricity generators so as to not limit eligibility for free allowances.

On the electricity generator operational amendment, the SI will ensure that electricity generators can become eligible for free allowances during an allocation period if they meet the eligibility criteria. On free allocation rules around carbon capture, the SI will prevent industrial installations being disqualified from receiving free allowances if they are on the same site as a carbon capture plant—a situation that could pose a risk of disincentivising the uptake of carbon capture technology.

These changes either follow appropriate and comprehensive consultation with stakeholders or did not require consultation. In developing the UK ETS consultation in 2022, the UK ETS authority considered what technical improvements can be made to the current aviation free allocation methodology until free allocation is phased out. The responses to the consultation called for an end to the overallocation of aviation free allocation. In addition, the policy intent of aviation free allocation is to mitigate the risk of carbon leakage, and the policy did not intend for aircraft operators to receive more allowances than their verified emissions. To that end, in July the UK ETS authority announced the decision to cap aviation free allocation at 100% of verified emissions.

In the consultation on developing the UK ETS, we considered technical changes to free allocation rules regarding the electricity generator classification. The majority of respondents agreed with our suggested amendments, and the UK ETS authority announced that it would proceed with changes to the electricity generator classification. A consultation was not carried out for the CCUS free allocation amendment as this is a clarification of existing policy intention and not a change in policy.

In conclusion, these alterations to the UK Emissions Trading Scheme will support its role as a key pillar of the UK’s climate policy. They show that we will take action to improve the scheme where necessary and continue our record of delivering on our commitments. I therefore commend this order to the Committee.

My Lords, perhaps I may make a few comments in front of the crowd here. I welcome the SI generally , obviously, and want to try to ensure that it works properly. I have a couple of specific questions.

I am interested in understanding how the free allocations were allocated or what the baseline was for the airlines. Also, in the scheme as a whole, what proportion of units are free issue these days? I would be very interested to hear that for the current period, which I think goes up to 2026.

The Minister referred to the UK ETS as the cornerstone of ambition in terms of net zero, but of course, that cornerstone is crumbling at the moment. I would be very interested to hear, more strategically, how the Minister sees the fall in the carbon price per tonne, which has moved this year from around £100 at one point down to under £50.

To me, that seems to be, in the words of Energy UK, a major disincentive to investment in the renewables sector. As I understand it, it has threatened the Treasury to the tune of £1 billion so far this year and will mean a hit of something like £3 billion on the Treasury per annum if that price continues. As we know, there is also a threat from the European Union’s move to a carbon border adjustment mechanism—particularly in 2026, when those measures will really start to bite. There is a feeling that UK industry’s exports to the European Union could be threatened by some £500 million per year if that price remains as it is. I want to know the Minister’s understanding of why the price has fallen so much. My economics A-level tells me that, with supply and demand, when demand stays roughly the same but the price goes down, there is an all-round surplus in the supply of those units. However, there is also a volatility there, perhaps through a lack of liquidity in the scheme as a whole.

Looking again at the trade and co-operation agreement, particularly the area of energy in 2025, I would be interested to understand whether this is an opportunity to bring those trading schemes more together again, which was a target that the Government sought to achieve when that agreement was first made. Clearly, the fall in price strongly affects the renewables and clean energy industries. It seems to me that, not just from a Treasury point of view but from an industry and net zero point of view, we need to get that price back up again. I would be interested to hear the Minister’s comments on how that can be achieved—or indeed whether the Government wish to achieve it.

My Lords, when the UK ETS was established due to the UK’s participation in the EU ETS ending, the Opposition supported it. It is essential that the UK has a robust carbon price to help reduce emissions. So when the UK ETS was launched, we expressed a preference for a link with the EU ETS. Indeed, the EU-UK Trade and Cooperation Agreement states that both parties

“shall give serious consideration to linking”,

which would lower the cost of decarbonisation through more price efficiency discovery and easier trade. Most importantly, it would ensure that UK exports of high-carbon products to the EU are exempt from the EU’s carbon border adjustment mechanism. This remains our preference, to support UK businesses in remaining competitive and retaining trade access to critical markets. Can the Minister tell the Committee whether an update on any such consideration is still being considered? Can he also say whether the Government have made any projections on the impact that the CBAM will have on our exports? What is welcome is the seriousness with which the Government are treating this while we remain unliked.

I turn to the instrument itself, which amends the ETS in five areas; I will touch on each of them but do not oppose any of them. As these changes do not seem simply to be updates on the system, I am keen to hear from the Minister how foreseeable the situations that led to them were and what impact the delay in implementing them, from when the UK ETS was established, has had.

First, as we heard from the Minister, the instrument implements a cap on the maximum amount of free allocation that aircraft operators are eligible to receive at 100% of their verified emissions. Not only does this seem to be common sense but, for the next two years, by 2021’s figures, it will save around a fifth by putting an end to overallocations in the sector. That is welcome. Again, by 2021’s numbers, this will prevent around £100 million of potential profits from operators selling these overallocations. Do the Government have any projection for 2024-25 or are the figures on pounds and percentage of emissions expected to be roughly the same? Going back to the first question, could this not have been seen from the start, or was it by design?

Secondly, there is an inconsistency in how carbon capture activities and installations are dealt with—namely that the legislation in some places wrongly assumes that capture activities will be self-contained. Again, there is a sensible fix, but I would be keen to learn what impact, if any, this inconsistency has had on relevant installations’ ability to deduct emissions.

Next, the instrument allows modifiers to reclassify if they have put a stop to the export of electricity or if their electricity exports make up a low enough proportion of their exports, making them eligible for free allocation. Again, this makes sense, but the previous situation is concerning. It seems that, until this instrument, an operator could have halted electricity exports 15 years ago and still be treated as one for the purpose of the ETS, with no mechanism for changing this. Is that correct? What is the impact of this misclassification and on what scale? Looking forward, does the Minister have any projections of how many operators are expected to use this new mechanism and change classification?

Finally, new exemptions from the ineligibility of electricity generators are made for operators with on-site combined heat and power plants, where electricity was produced by means of CHP plants that are quality assurance certified and electricity generators can demonstrate that they have produced heat by high-efficiency cogeneration. The latter is confusing, because this was already the case, but with no mechanism to demonstrate a change in reduction. One wonders how many operators were wrongly accepted on this basis. The Explanatory Memorandum says that there will be “no substantial direct impacts”, so can the Minister enlighten us as to how this could be?

I thank the noble Lords, Lord Teverson and Lord Lennie, for their contributions. As I said in opening, the SI will implement a number of necessary changes and improvements to the scheme. The UK ETS is a cornerstone of our climate policy and it sets a cap on emissions in the sectors covered—currently, about a quarter of the UK’s emissions. In doing so, it guarantees that these sectors will reduce their emissions in line with our overall net-zero target. The carbon price generated by the need to acquire allowances within this cap incentivises the investment in decarbonisation that is needed to make sure that we can build a thriving net-zero economy.

In July, the UK Government and the devolved Governments, who all comprise the joint UK ETS authority, set out a comprehensive package of reforms to the scheme. These reforms increase the ambition of the UK ETS, setting its cap on a path to net zero. As set out in that package of reforms in July, a wide range of changes is required to ensure that the ETS remains a key part of the UK’s approach to achieving net zero.

As part of the UK ETS authority, with the devolved Governments, we are determined to run and develop the scheme in the most effective way possible. Our aim is to be predictable and responsible guardians of the scheme and its markets. That is fundamentally why the changes in this SI are being brought forward: to deliver on our previous commitments and make essential improvements to the scheme. The alterations to the scheme that this SI brings about will support its role as a key pillar of the UK’s climate policy. They demonstrate the value of the detailed consultation that we have carried out with scheme participants. We are committed to listening to views and implementing changes where necessary to make the scheme run as efficiently as possible, so that it ultimately achieves its aims. The changes to aviation free allocation and technical changes to free allocation follow the comprehensive consultation on developing the UK ETS carried out last year. They deliver on commitments made in the response to that consultation in July.

I will now pick up on the points made in the debate, first in response to the noble Lord, Lord Teverson. We have decided to cap the total amount of aviation free allocation that operators are eligible to receive to ensure that aviation free allocation is distributed appropriately until full auctioning in 2026. In 2021, the level of aviation free allocation issued to operators surpassed the sector’s verified emissions, primarily due to the impacts of Covid-19 on aviation activity. However, even prior to the impacts of Covid-19, under the EU ETS, a number of operators received more free allocations than their verified emissions.

The current aviation free allocation methodology calculation is based on 2010 activity data, which is now of course inconsistent with current aviation activity and creates competitive distortions between participants. Not capping the amount aircraft operators are eligible to receive therefore effectively shields them from the price signal and provides an opportunity to benefit from the scheme, which, I am sure we would all agree, was not the intended aim of the policy. To answer the noble Lord’s question, in 2022, the proportion of UK ETS emissions covered by free allocations was approximately 36%.

On the noble Lord’s point on the fall of the UK ETS price, it is of course a market mechanism, and the price of carbon allowances in the emissions trading scheme is ultimately set by that market. However, in line with the net-zero cap that we announced in July, the supply of emissions allowances entering the market will fall significantly every year from 2024. Using the noble Lord’s supply and demand analogy, we can probably predict—without saying it—what will happen to the price in such circumstances.

As it is a market mechanism, I have some sympathy with the noble Lord’s point of view, but it would probably not be wise for me to comment on the overall price. I will let the market determine what it should be. If I say what I think the ideal target price should be, that would clearly be interfering in the market, which the noble Lord can understand I should not do.

We are committed to continuing to deliver these changes, as shown by our legislating to amend the supply of allowances over the coming years and the publication of the auction calendar for 2024. The authority has also committed to exploring measures for the future of the UK ETS market, including examining the merits of the supply adjustment mechanism, which would be a means of amending the supply of carbon allowances in response to market conditions.

The noble Lord, Lord Teverson, asked about the impact of the EU CBAM. We are of course following developments closely and engaging with the Commission to discuss the technical considerations relevant to UK manufacturing because, even though EU CBAM charging does not start until 2026, companies will have to report on their emissions from 2024 to 2026, prior to charging. We will see whether the EU proceeds with charging, but it will clearly have a significant effect on many UK companies supplying into the EU market, given the additional bureaucracy they will have to go through. Noble Lords should watch this space: I am sure the Government will have more to say on this shortly.

As I said, UK ETS prices are set by the market, as it is ultimately a market mechanism. The UK market is clearly separate from the EU market. It is therefore possible that prices will fluctuate and differ, although it is worth saying that both have similar levels of ambition. We will continue to work domestically and internationally to find solutions to any risk of carbon leakage and our ambitious climate commitments rightly require our industries to decarbonise. This includes our running a consultation earlier this year on domestic measures to mitigate carbon leakage, including a potential UK CBAM and mandatory product standards. We are looking at all these issues holistically to see which is the most appropriate carbon leakage mitigation across a number of policy designs. The response to that consultation will be published—to use the phraseology—in due course, and a further consultation on free allocation policy is due later this year.

On the point of the noble Lord, Lord Lennie, on linking the UK ETS and the EU ETS, as he correctly pointed out, under the terms of the TCA, the UK and the EU agreed to consider linking our respective carbon pricing schemes and to co-operate on carbon pricing. We are open to the possibility of discussing linking the UK ETS internationally with other schemes—it is not just the EU’s; there are a number of other schemes across the world—and we will continue to work collaboratively with other jurisdictions to tackle shared challenges and learn from the experience of others as we continue to develop the UK ETS. Indeed, I attended a meeting with a number of other jurisdictions only last week to discuss that very topic.

On the point raised by the noble Lord, Lord Lennie, on carbon capture and storage, there is currently an inconsistency in how capture activities and installations are dealt with in the ETS legislation, and that does not currently reflect the department’s policy. Some areas of the legislation recognise that capture and other regulated activities might occur at the same installation, but in other areas it is assumed that capture activities will be self-contained. The amendments clarify that carbon capture may take place on the same site as other UK ETS installations or regulated activities without the loss of free allocation in respect, of course, of non-capture activities. There has been no negative impact to date, as this technology is still very new and CCUS activity is not yet taking place, but the amendment will help incentivise the uptake of CCUS technology in the future and ensure that no negative impacts occur as it continues to develop.

On the electricity generator amendments and the impact of the previous baseline period, these rules were simply carried over from the existing EU ETS for consistency and we are now amending them to tailor them to the UK system. I hope I have answered all the points I was asked about and commend the order to the House.

Motion agreed.

Green Gas Support Scheme (Amendment) Regulations 2023

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Green Gas Support Scheme (Amendment) Regulations 2023.

My Lords, the regulations were laid before the House on Monday 16 October 2023. They make a set of changes to improve the administration of the green gas levy, which is charged to licensed gas suppliers in Great Britain, and to ensure that it works in line with the original policy intent. The legislation will ensure that the levy operates as intended and seeks to minimise the burdens arising from it for the scheme’s administrator, Ofgem, and for the gas suppliers that have to pay it.

The green gas levy, as noble Lords are aware, funds the green gas support scheme, which is a Great Britain-wide tariff-based scheme supporting new biomethane plants injecting biomethane into the gas grid. It facilitates ongoing investment in the biomethane industry and enables the development of new production plants. The green gas support scheme is expected to contribute 3.7 million tonnes of CO2 equivalent of carbon savings over carbon budgets 4 and 5, and 8.2 million tonnes of CO2 equivalent of carbon savings over its lifetime. During the peak years of production, biomethane plants incentivised by the GGSS will produce enough green gas to heat around 200,000 homes.

All funds raised by the green gas levy are used to fund the green gas support scheme. The GGL funds both tariff payments to plants on the GGSS and the scheme’s administration by Ofgem. The levy is charged to suppliers based on the number of meters they supply. Currently, the cost is relatively low, at 45p per meter in 2023-24. It will increase in the coming years as deployment of the green gas support scheme increases, with costs expected to peak at around £7.50 per meter in the late 2030s.

The amendments made by these regulations are technical in nature. They improve administration and bring regulations in line with policy intent. They do not alter the aims of the GGSS or the GGL and will not add to the amount raised by the GGL or the rate at which it is charged.

We have consulted the Scottish and Welsh Governments on these regulations. The Scottish Government have consented to them, as required under the Energy Act, which provides the underlying primary powers for the regulations. The Welsh Government have also agreed to the changes.

The amount that the green gas levy collects is set according to a formula specified in regulations. Each year, the Secretary of State announces the rate for the next financial year by 31 December. This statutory instrument will change the formula so that it will operate as intended. Currently, the formula dictates that interest collected by Ofgem on late payments and penalties is added to the levy collection total, whereas, as a credit to the scheme, it should be subtracted from it.

This change is needed by 31 December, by which date the Secretary of State must announce the 2024-25 levy rate. This is the first year since the launch in 2021 in which interest amounts will be factored into setting the levy, because interest is applied with a lag, two years after it is accrued. The change will future-proof the levy by ensuring that in coming years it will not be increased if Ofgem accrues significant amounts of interest.

Regulations require the Secretary of State to publish a maximum amount that the green gas levy can collect, called the maximum levy amount. This is set at the total that the levy is expected to collect in its peak year and provides transparency for gas suppliers, to aid with their business planning. The SI will allow the maximum levy amount to be set by reference to whatever year is expected to be the peak year. Current regulations require it to be set at the 2028-29 amount, but we expect the GGSS’s funding needs to increase in subsequent years due to inflation, longer ramp-up of production by plants and the scheme’s extension by two years and four months, announced on 21 October 2023.

These regulations introduce powers for the Secretary of State to set a de minimis amount for the green gas levy. This amount will apply to selected payment obligations and credit cover requirements. Obligations to make payments or provide credit cover for amounts below the threshold will automatically be disapplied. The de minimis will apply when the cost of administering payments or credit cover is not proportionate to the value of the sums involved. It will be limited to a maximum level of £200, which will increase with CPI inflation from January 2024.

The instrument makes five further minor changes, four of which are small changes to ensure that the levy works in line with policy intent. One alters how credit cover is calculated for a new gas supplier; one will allow Ofgem to draw down interest amounts owed by suppliers from credit cover if required; one ensures credit cover is topped up in all scenarios if drawn down; and one simplifies regulations covering mutualisation. A further change provides administrative savings if a gas supplier becomes no longer liable for the levy—for example, if it exits the market—by providing flexibility for Ofgem in how it administers the final GGL amount owed.

In conclusion, the changes made by this statutory instrument provide the basis for the green gas levy to be collected efficiently and at the intended rate over the lifetime of the green gas support scheme. The instrument will help Ofgem administer the policy effectively and as intended. By introducing efficiency measures, it will reduce administrative burdens for both Ofgem and gas suppliers, ultimately benefiting bill payers by reducing levy administration costs. I therefore commend these regulations to the Committee.

My Lords, I congratulate the Minister on a hugely extensive explanation of the SI. Unless I have missed something, which the noble Lord, Lord Lennie, will soon uncover, I will give the Minister the full support of the Liberal Democrat Benches on this SI.

The noble Lord has high expectations. As with the scheme we just discussed, we were very supportive of this scheme when it came out and we still are. Supporting the injection of biomethane into the gas grid, replacing other gases, produces substantial carbon savings and is very welcome indeed. As such, I will not speak for long on this instrument, which simply makes changes to improve the administration of what is already a very positive scheme.

The extent of these changes is to improve the administration of the green gas levy, as the Minister said, to reduce the administrative burden for Ofgem and the gas suppliers that pay it, and to ensure a maintained link between the regulations and policy intent. We welcome the lower administrative burden for Ofgem. It is due, not least, to successful efforts during the passage of the Energy Bill, and it now has a specific mandate to support the Government to meet their net-zero obligation.

I have a few questions, which may help the noble Lord, Lord Teverson, in his curiosity about this. Where the instrument changed the green gas levy formerly, it implied that gas suppliers were paying too much due to how interest on funds is allocated. Specifically, interest that had accrued in Ofgem’s account was added to the levy collection target rather than deducted from it, which makes little sense. How did that apparent mistake happen? While it feels peculiar arguing against more money for a scheme that we support—for once, I am not suggesting that gas suppliers’ profits should be better used—it is important that such a scheme is administered fairly. What happened to the previous levies that were collected at too high a rate?

The instrument also allows the Secretary of State to review and update the maximum levy amount to ensure that the levy remains able to sufficiently finance the GGSS after 2008-09, as the Minister said. This of course makes sense, as it is a good scheme and should be financed, but I am cautious on both sides of the argument. If the Secretary of State is to have this new power, why was the scheme not initially created with it written in? Also, if the predicted funding requirement increase is in part predicated on a welcome increase in biomethane production, do the Government foresee a situation where the other reason for the increase—inflation, which I should note was previously caused by the Government—could make a decision to increase the MLA difficult? If so, what happens to the scheme and, if not, could the MLA not increase automatically?

I am curious about the de minimis payments the Minister mentioned. Is this expected to make a net loss or profit for the levy, and has any review been done of the administrative functions that make small payments disproportionately burdensome?

As the Minister said, the other changes are minor, so I will conclude, other than to restate that it is welcome that this positive scheme is being further improved.

I thank the noble Lord, Lord Teverson, for his very brief contribution and his support. I will come on to the questions from the noble Lord, Lord Lennie, in a moment.

As I said, the green gas levy is charged to licensed gas suppliers in Great Britain to fund the green gas support scheme. These policies make an important contribution to achieving our emissions reduction target by incentivising the production of biomethane and its injection into the gas grid. This reduces the emissions intensity of the UK’s gas supply and ensures the capture and use of emissions from waste, which is used as feedstock for green gas production.

The SI will ensure that the green gas levy can run optimally and will reduce administrative burdens for Ofgem and gas suppliers, thus reducing costs. It will also ensure that the levy is set as intended by altering the collection formula and by adding flexibility to the setting of the maximum levy amount. Overall, this will help the delivery of a cost-effective levy, benefiting policy administration and gas suppliers and, therefore, bill payers.

I will pick up the first question from the noble Lord, Lord Lennie. As I said in my introduction, the interest is charged two years in arrears. There has therefore been no net effect from what was an administrative error when the regulations were tabled. We want this modification to the SI approved now so that, when those interest payments subsequently become due, they will be used to subtract and not add to the overall amount—as was originally stated in error.

The further changes will improve the administration of the levy by Ofgem and for all gas suppliers, and the instrument gives us the opportunity to make these changes. The levy was launched on 30 November 2021, and the intervening years to this point have given us the opportunity to identify one or two minor technical changes to the levy to help reduce the administrative burden. In answer to the noble Lord’s second question, again, we do not expect the de minimis level to make any difference to the overall rate—it is purely that for those very few gas suppliers that have a tiny number of meter points, the administration cost of the levy exceeds the sum raised, so actually it will probably save money in the longer term. However, of course it has no effect on all the big suppliers.

I have dealt with both questions from the noble Lord, Lord Lennie, and I commend this regulation to the House.

Motion agreed.

Resolution of Central Counterparties (Modified Application of Corporate Law and Consequential Amendments) Regulations 2023

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Resolution of Central Counterparties (Modified Application of Corporate Law and Consequential Amendments) Regulations 2023.

My Lords, these draft regulations make necessary technical and consequential legislative changes and provide legal protection for contractual arrangements to ensure that the expanded resolution regime for central counterparties, or CCPs, operates as intended.

Resolution is the framework for managing the failure of certain financial institutions. Within this framework, the Bank of England is the UK’s resolution authority and leads on resolution processes once instigated. The UK’s current resolution regime for banks and building societies was introduced in 2009, and this was partially extended to CCPs in 2014. A new, bespoke and expanded regime for CCPs was created this year through Schedule 11 to the Financial Services and Markets Act 2023.

CCPs are firms that provide clearing services for large volumes of financial trading activity. They sit between buyers and sellers and guarantee the terms of the trade. They are systemically important pieces of market infrastructure—without them, the financial system cannot function effectively. The failure of a CCP and the resulting loss of its clearing services could lead to serious consequences for financial markets, financial stability and public funds. The UK’s expanded CCP resolution regime will enhance the Bank of England’s resolution powers and ensure that the UK is aligned with international standards on CCP resolution. To fully implement the expanded CCP resolution regime, the Government must lay a number of statutory instruments. Two of these are being debated by your Lordships’ House today.

The first set of regulations, the Resolution of Central Counterparties (Modified Application of Corporate Law and Consequential Amendments) Regulations, make the necessary changes to existing legislation to ensure that the expanded CCP resolution regime can function as intended. These modifications have two main parts. The regulations will ensure that resolution powers under Schedule 11 will continue to be treated in a similar way to the existing CCP resolution regime in the Banking Act 2009. This largely consists of mirroring changes made under the Banking Act to the Companies Acts 1989 and 2006.

Secondly, the regulations make wider consequential amendments to broadly ensure that the consequences for CCPs of the use of resolution tools are consistent across the existing and expanded regimes, and that the Bank of England can continue to use its powers in a similar way to now. For example, the regulations ensure that corporation tax and stamp duty are applied and disapplied in the same way under the expanded regime as under the existing regime. They also disapply shareholders’ rights to call general meetings and amend the articles of association of the company in a resolution, and allow for appropriate disclosure of confidential information in a resolution. All this underpins the Bank of England’s ability to act quickly and effectively when resolving a CCP.

On the second set of regulations—the Financial Services and Markets Act 2023 (Resolution of Central Counterparties: Partial Property Transfers and Safeguarding of Protected Arrangements) Regulations—Schedule 11 gives the Bank of England the power to make partial property transfer and write-down instruments when resolving a CCP. These regulations ensure that these instruments do not affect protected arrangements that underpin the effective operation of financial markets, including set-off and netting arrangements.

Netting is one of the mechanisms through which a CCP reduces risk in financial markets. Multiple financial obligations are aggregated to create a single net obligation amount. Given the importance of this function to the operation of clearing services, these safeguarding regulations ensure that set-off and netting arrangements are protected when the Bank of England uses its property transfer powers. This is particularly relevant for partial property transfers, where the Bank of England can transfer all or some of the rights and liabilities of a CCP. For example, the regulations provide that the property or rights against which a liability is secured cannot be transferred unless the liability is also transferred. This ensures that these arrangements are maintained throughout a resolution, reassuring industry and minimising wider impacts on financial markets. The Bank of England also has the power to write down liabilities, meaning it can cancel, modify or change a security or the form of an unsecured liability owed to the CCP.

In summary, the regulations ensure that usual market practice continues and disruption to financial markets is minimised when the Bank of England takes action, while also providing certainty for market participants as to how they will be treated during any resolution proceeding. Together, these regulations ensure that a resolution can be conducted as effectively as possible, while reducing the impact on normal market functions.

In addition to the regulations I have outlined which are being debated by your Lordships’ Committee today, the Government have also laid before Parliament two statutory instruments subject to the negative procedure that are required when the new regime comes into force. The first set of these regulations relates to the use of cash-call powers. These regulations set out the maximum amounts of cash the Bank of England can require clearing members to pay through a cash-call instrument. The second set of regulations sets out the process by which the Bank of England can waive, suspend, or subsequently enforce a provision it has made in a resolution instrument. If all the SIs relating to the regime pass through Parliament, the expanded resolution regime will come into force on 31 December.

The Government have worked closely with the financial services industry in preparing this package of legislation and consulted on the expansion of the CCP resolution regime in 2021. Those engaging with the consultation and in industry engagement sessions were broadly supportive of the proposed framework. The Treasury is also advised by a CCP Resolution Liaison Panel, which comprises industry and regulator stakeholders. The panel was instituted earlier this year and was consulted on the substance of these statutory instruments.

In summary, these regulations will help ensure that there is a robust resolution regime in place for CCPs, protecting public funds and the financial stability of the United Kingdom. I beg to move.

My Lords, when the original legislation that sits behind all this was debated in the House—for many hours—I remember a conversation afterwards with one of the clerks, who had sat through nearly all of the proceedings. The clerk said to me, “I have sat in this House for years and have been through many debates of all kinds, but this is the first time I have sat through a debate and not understood a single word of the entire discussion”. I am feeling some brotherhood with that clerk at the moment. I remember the past, but I have to admit that I still find utterly daunting the complexity of CCPs and the various pieces of legislation.

I have been digging through my memory and am trying to understand whether these SIs are essentially tidying-up measures designed to give more flexibility to the Bank of England—in its role as the resolution authority—in somewhat changed circumstances, and measures to increase its efficiency. I ask the Minister: is there anything in here to which she would draw our attention as representing a more fundamental change? I admit that I cannot find it, but I thought I should ask the question, given the narrowness of my understanding of this complexity.

As I remember, the resolution of the insolvency of a CCP was structured using a waterfall of liability. First, equity and the CCP came into use, and, after that, if necessary, so did a default fund, to which the clearing members had contributed. My colleague, my noble friend Lord Sharkey, and I pushed on this question, because it seemed apparent to us that the combination of equity and a default fund could work if, say, one clearing member collapsed, or perhaps even two. But, if the collapse were systemic, very quickly only the taxpayer would have the resource to step in. The taxpayer would need to do so immediately to prevent chaos in the financial sector nationally and, probably, globally. The Minister will be aware that virtually all CCPs around the globe essentially have common ownership and, in many ways, need to be looked at almost as a network, rather than a series of individual operations—certainly when one thinks about resolution.

So we asked the then Minister—I believe it was the noble Lord, Lord Sassoon—to clarify why members should not be forced to make bigger contributions in the case of insolvency, above and beyond equity and the default fund, because, obviously, sitting behind CCPs are huge banking institutions and, in other cases, oil companies. As I remember, we were told that, if faced with additional liability, those who operate or participate in the CCPs would choose to use exchanges outside, rather than inside, the UK. So, do these additional SIs empower the Bank of England to require members to make additional cash contributions? I am somewhat concerned that the negative SI—which we are not debating today but which sits with these, as the Minister rightly said—and its cash call powers might have that possibility. I am not saying that I am opposed to that, but I just wonder whether the Minister can do anything to help me understand it and whether there are therefore any implications for the attractiveness of the UK as a location for clearing.

The Minister kindly assured all of us that assets held in the CCPs as margin—collateral, in effect—are fully protected, and there are no implications for netting or off-set. I think I have understood that correctly. But, in a dynamic situation, there must be some adjustment to netting and off-set because, if there is an insolvency, changes in value take place on a moment-by-moment basis. Is there a way to encapsulate how that piece of it works? I am concerned about saying that there are absolutely no implications for netting and off-set, when it is very hard to see that there would not be in an insolvency situation.

I just want to confirm again with the Minister that the “no creditor worse off” safeguard is still fully robust and whether the SIs—the negative and the positive together—weaken it in any way. Is the taxpayer liability, as the ultimate backstop, changed at all by these SIs? Are there, therefore, any implications for public sector net debt? In other words, regarding this liability to act as the rescuer of last resort—it is implicit in CCPs because we are looking at a “too big to fail” situation if we have systemic insolvency—are there any accounting implications for the national debt? Is there any possibility that these changes would drive towards putting the liability on the books?

The notional value of outstanding over-the-counter derivates, which represent the largest body cleared through CCPs, exceeds $600 trillion at any point in time. What is now LCH—I still call it the London Clearing House—dominates that market. A third of that business reflects the clearance of euro-based derivatives under an equivalence granted by the European Commission for UK clearing houses. However, that will last only until June 2025. I know that the City and the Treasury are convinced that the EU will extend that equivalence grant out of necessity, but if it does not, the implications for the City of London will be huge. This is not a time for complacency. I ask again: are there any competitive issues to which we should be alerted in these SIs and which may have consequences for either the EU grant of equivalence or our dealing with the consequences if that grant is not given?

My Lords, I begin by warmly welcoming the Minister to her new role. I very much look forward to working with her in the months ahead.

May I offer my apologies for not having welcomed the Minister to her role? We talk to each other across the House so often that I hardly realised a change had happened; I apologise.

As the Explanatory Memoranda accompanying these two SIs note, the current CCP regime was implemented around a decade ago, in part as a response to the global financial crisis. The Financial Services and Markets Act 2023 has introduced an expanded CCP resolution regime, with that Act giving the Bank of England, as the UK’s resolution authority, what the Government call

“an expanded toolkit to mitigate the risk and impact of a CCP failure and the subsequent risks to financial stability and public funds.”

Preserving market stability is of paramount importance. The UK’s financial services industry plays a vital role in boosting economic growth and delivering skilled jobs in every part of the UK. Almost 2.5 million people are employed in financial services, with two-thirds of those jobs based outside London, and the sector contributes more than £170 billion a year to GDP.

The City of London is one of only two global financial capitals and is at the very heart of the international monetary system. The UK’s reputation and success as a leading international financial centre depends on high standards of regulation as well as a stable and independent regulatory regime. Much of what is being implemented by these two SIs is a carryover between the old and new CCP regimes. Paragraph 3 of the impact assessment outlines that, if these steps were not taken, it

“would mean that there is no protection in place to ensure that the Bank’s powers do not disrupt normal market procedure.”

We therefore fully support both these SIs.

However, I want to ask the Minister a number of questions. First, an issue frequently raised with this type of SI is the sheer breadth of legislation that it tends to amend and the difficulty that those in the sector may face in familiarising themselves with all the changes once they have taken effect. The first of the SIs we are debating today makes a long list of changes to corporate law to ensure that the new Schedule 11 CCP regime will function effectively. The second SI somehow manages to be even more technical; it deals with partial property transfers and the writing down of liabilities, needed to ensure that they do not disrupt the new system’s operation. I ask the Minister, therefore, how interested parties will be, or have been, notified of the contents of these instruments, and when the guidance referenced in paragraph 11.1 of both Explanatory Memoranda will be laid. Will that guidance be laid before Parliament, or at least sent to the relevant parliamentary committees?

Secondly, both Explanatory Memoranda note that a consultation on the expanded CCP regime ran in early 2021, with 14 written responses received. The impact assessments cite figures from the Futures Industry Association that point to 215 clearing members. Fourteen respondents out of 215 members feels like a very small number, even for something so specialised. Is the Minister satisfied that the consultation was sufficiently thorough? The Explanatory Memorandum goes on to state that these responses fed into the policy ultimately contained in the Financial Services and Markets Act 2023, but there is no real explanation of the process. Could the Minister elaborate on how responses to the consultation were taken into account?

Finally, given that the consultation took place back in 2021, why were the changes we are debating not included in the Financial Services and Markets Act itself, rather than coming now in the form of SIs after Royal Assent? I thank the Minister in advance for her answers to the questions I have raised.

I am grateful to the noble Baroness, Lady Kramer, and to the noble Lord, Lord Livermore, for their kind welcome to my new role. From Transport to Treasury—how exciting. This is indeed my first outing, and I get to do some very, let us be honest, technical SIs. Like the noble Baroness, I too looked for the exciting or the unusual in these SIs and, unfortunately, I have not necessarily succeeded either. They are important and necessary to bring the new expanded regime into operationalisation, but I do not think there is anything in them that would trouble noble Lords. Judging by the questions raised by the noble Baroness and the noble Lord, it is more about the process, making sure that people are aware and ensuring that the CCPs actually function, which the noble Baroness pointed out.

I turn first to the noble Lord’s questions, because he was kind enough to give me sight of them before the debate, which is always incredibly helpful, because I always try to do my very best. I know I will not answer all today’s questions so I will, of course, write. I will start with notifying the interested parties. It should be noted that the CCP resolution liaison panel was convened in June this year to discuss the secondary legislation under Schedule 11, including the substance of these instruments. This panel includes a variety of industry stakeholders, including the three UK CCPs, organisations that represent large numbers of clearing members, insolvency experts and regulators. We have a wide range of people there, which feeds into the noble Lord’s point that it is disappointing to receive 14 responses to a consultation. However, for a consultation such as this we got responses from trade bodies and we are satisfied that the industry is well aware of what is going on and that it will be implemented on 31 December. The panel was not only consulted on these SIs but also on the code of practice, which describes how the Bank will use its powers under Schedule 11. This will be published when the new regime comes into force.

I am content that the industry is well aware of what is happening. We will continue to liaise with the industry as the regime comes into force and as the code of practice is published. That code will, of course, be laid before Parliament and updated and reissued—and therefore re-laid—as appropriate should any amendments be made.

In addressing the consultation responses, it is fair to say that we looked at all the feedback we had from the initial consultation and covered all the issues that were raised in the response. There has been ongoing consultation since then to ensure that the detail is correct, and that the relevant trade bodies and CCPs were fully involved in ensuring that not only the provisions of the FSMA but the subsequent delegated legislation required were robust. So we have done quite a lot of consultation and I do not believe that we could have done much more. It is certainly not my feeling that we have missed anybody out or that there is a groundswell of opinion out there that people needed to be heard.

With the FSMA, we very much tried to set out which elements should be in primary legislation versus some more technical measures which should be in secondary legislation. This legislation does not change the policy set out in the FSMA; it makes necessary changes to company law, which sometimes needs to be changed separately. It creates protections for important contractual arrangements, as necessary.

Noble Lords will have noticed the cash call limit. There are some things that everybody knows may need to be lifted in 10 or 20 years’ time; these are entirely appropriate for secondary legislation.

The noble Baroness, Lady Kramer, asked me a number of questions about the operationalisation—not only the way that these clearing houses work but who bears the biggest cost when they get into financial trouble. At the moment, given the potential impact on the UK’s financial stability from a CCP’s inability to continue to provide these clearing services, what we have done, and it is prudent to have done so, is ensure that the Bank of England has all the powers it may need in a full range of possible market stress scenarios. As the noble Baroness rightly pointed out, these things are often global and happen very quickly. Some may fare worse than others. In the unlikely event that this happens, it would be a highly unpredictable scenario. That is why we have tended more to set out a framework for how it would happen rather than go through the detail of any possible scenario.

The UK already has effective rules for CCPs’ own recovery arrangements. These include the requirement that a CCP’s total prefunded financial resources cover the losses from the default of two clearing members—not just two clearing members but those with the largest exposure. That is a fair balance between the likelihood of something happening and the necessity of tying up capital to provide a sufficient cushion. However, the Bank of England has a range of other powers that it would be able to bring to bear over the course of resolution not only on the CCPs but on those members within them to ensure that we end up with market confidence and that the system continues.

The noble Baroness mentioned “no creditor worse off”. The Treasury is required to have regard to the “no creditor worse off” safeguard in the event that a resolution occurs. Therefore, no individual will be worse off after a resolution than they would have been if the CCP had gone into insolvency. So, yes, these are not tidying-up measures but just key technical points to bring the regime into being.

I will write to the noble Baroness on how there can be no implications for set-off and netting. I understand what they are, but I want to reassure myself that I used the right words, and I will reply in writing, if that is okay. I have a little more information on whether clearing members should be required to make a bigger contribution, but I will also set that out in writing. There are probably one or two other points but, for the time being, I commend this instrument to the Committee.

Motion agreed.

Financial Services and Markets Act 2023 (Resolution of Central Counterparties: Partial Property Transfers and Safeguarding of Protected Arrangements) Regulations 2023

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Financial Services and Markets Act 2023 (Resolution of Central Counterparties: Partial Property Transfers and Safeguarding of Protected Arrangements) Regulations 2023.

Motion agreed.

Design Right, Artist’s Resale Right and Copyright (Amendment) Regulations 2023

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Design Right, Artist’s Resale Right and Copyright (Amendment) Regulations 2023.

My Lords, I beg to move that these regulations be considered. They and the Intellectual Property (Exhaustion of Rights) (Amendment) Regulations 2023 were laid before the House on 16 October 2023. Intellectual property—IP—matters. The IP framework protects creations of the mind, such as inventions, literary works, symbols and names used in commerce. The UK system is widely regarded as among the best in the world. Our IP system is built on laws that ensure consistency, certainty and balance. It has not only helped to incentivise innovation and the creation of new technologies and products but promoted competitive markets and consumer choice. Maintaining a balanced, consistent and stable IP framework is crucial for businesses, consumers and investors.

The draft regulations before the Committee today use powers contained in the Retained EU Law (Revocation and Reform) Act 2023—the REUL Act—to amend or restate certain provisions in IP legislation. They make targeted changes, to the benefit of our IP framework, in line with the aims of the Act. I will take each set of draft regulations in turn, beginning with the Design Right, Artist’s Resale Right and Copyright (Amendment) Regulations 2023. Subject to noble Lords’ approval, they will amend provisions in four pieces of IP legislation. I will explain more about these.

The Design Right (Semiconductor Topographies) Regulations 1989 provide protection for designs that are semiconductor topographies, implementing international obligations under the World Trade Organization’s TRIPS Agreement. Semiconductors, commonly referred to as chips, are the core component of all electronic devices. The semiconductor topography design right is an IP right intended to protect the design of specific semiconductor products, such as circuit boards, which can be relatively easy to copy.

In the UK, the law treats the protection of topographies of semiconductor products as a form of unregistered design right and extends protection to persons from certain qualifying countries. World Trade Organization—WTO—members that are not EU member states are included as qualifying countries by being listed in the Schedule to the regulations. The proposed amendment does not alter the design right but is intended to remove the need for further legislation to update the Schedule when new countries join the WTO, and so will future-proof it and save parliamentary time.

The Artist’s Resale Right Regulations 2006 provide the basis for an artist’s resale right—ARR—in the UK. The ARR is a form of IP protection related to copyright. It gives creators of visual art, such as paintings and sculptures, an unwaivable statutory right to receive a royalty when their works are resold in the secondary market by auction houses or other art market professionals.

The proposed amendments directly replace references to euros in ARR royalty calculations to pounds sterling and are intended to reduce regulatory burdens and costs on UK businesses. These changes reflect the UK market better and provide greater business certainty by removing exchange rate fluctuations when calculating whether artwork is eligible for ARR and the royalty payment due. A transitional provision has been included, so this change will apply from 1 April 2024. This will allow industry time to prepare and adapt to the changes in line with advice from the collective management organisations that administer ARR payment schedules.

The Copyright Tribunal Rules 2010 set out the rules of procedure for the Copyright Tribunal, which adjudicates on various commercial copyright licensing disputes, particularly concerning the terms of licensing schemes for copyright material. The amendments proposed by this instrument will mean a respondent or intervener in a Copyright Tribunal case will be required to provide an address for service in the UK rather than one located in the European Economic Area.

Lastly, the Collective Management of Copyright (EU Directive) Regulations 2016 set minimum standards for the governance, transparency and behaviour of collective management organisations—CMOs—established in the UK. CMOs operate as companies so are subject to domestic company law. The amendments proposed by this instrument will reduce the regulatory burden and costs on CMOs that qualify as small companies, by exempting them from the requirement to audit the accounting information provided in annual transparency reports. The amendments will also redefine other exemptions so that they apply to CMOs that qualify as a micro-entity under the Companies Act 2006. This will include the removal of references to euros. These amendments will ensure greater alignment with the domestic company law regime.

I now turn to the draft Intellectual Property (Exhaustion of Rights) (Amendment) Regulations 2023. I spoke earlier of the importance of maintaining a balanced, consistent and stable IP framework. An essential mechanism that provides this balance in our IP system is called the exhaustion of IP rights. Put simply, IP rights enable their owners to control the first sale of their creation, but our exhaustion of IP rights regime ensures that once a good is lawfully placed on the market, the rights holder can no longer use their IP rights to control the distribution or resale of that good. For example, after you purchase a book, the copyright owner cannot stop you selling that book to another person in the same territory. A functioning exhaustion regime is therefore crucial for commerce in our modern economy. This mechanism also underpins the rules on parallel imports, which is the importation of genuine, IP-protected physical goods that have already been put on to the market in other countries, such as medicines.

After we left the European Union’s exhaustion of IP rights regime, the Government created a bespoke, unique regional exhaustion regime. Under this regime, once a good is lawfully placed on the market in the UK or European Economic Area, the relevant IP rights in that good are considered “exhausted”. A rights holder can no longer use their IP rights to control the distribution of that good.

This regime was created to provide certainty for businesses and consumers while the Government consulted on what the UK’s future exhaustion regime should be. Here, I draw noble Lords’ attention to how our current exhaustion regime relies on retained EU law, which will no longer exist on 31 December. Without replacing this retained EU law, our exhaustion regime will not operate effectively from the end of this year. This could create uncertainty on the operability of import rules for IP-protected physical goods, which may affect supply chains and create a chilling effect on commerce and investment in the UK. Parliament needs to act now to ensure that the UK has a functioning exhaustion regime at the end of this year; these regulations achieve that purpose.

Subject to your Lordships’ approval, these regulations will restate certain retained EU law relating to the exhaustion of IP rights to ensure the continued operation of the UK’s exhaustion regime without substantial changes to this policy area. This maintains the two general principles of our exhaustion regime. The first principle is that, once a good is lawfully placed on the market within the geographical area of our exhaustion regime, a rights holder cannot use their IP rights to control its further distribution or resale. The second principle is that, in the same way as in retained EU law, trademark and patent rights holders can in specific circumstances seek to prevent the parallel importation of their goods into the UK where it is necessary to protect their industrial or commercial property, providing that this action does not constitute an arbitrary discrimination or a disguised restriction on trade.

I am pleased to advise noble Lords that this restatement also achieves the aims of the REUL Act by making our exhaustion laws more befitting for the UK’s statute book and for restating only retained EU law that is necessary for the continued operation of our exhaustion regime. In terms of the impact of these regulations, consumers and businesses should not see any significant changes to trading practices because they ensure a continuation of the exhaustion regime that has been in place since 2021.

I must emphasise to noble Lords that these regulations do not signify that the Government have taken a decision on the permanent exhaustion regime for the UK. Instead, they facilitate the continuation of our current exhaustion regime until a decision has been taken. Work to select the UK’s permanent exhaustion regime is ongoing and we will make an announcement as soon as a decision is made.

In conclusion, these two sets of regulations seek to use powers contained in the REUL Act to introduce targeted changes. The Design Right, Artist’s Resale Right and Copyright (Amendment) Regulations 2023 will make some technical changes largely to better tailor the legislation to a UK context. The Intellectual Property (Exhaustion of Rights) (Amendment) Regulations 2023 are of paramount importance for ensuring the continued operation of the UK’s exhaustion of IP rights regime. These targeted changes will ensure that rights holders, businesses and consumers can continue to have certainty and confidence in the UK’s IP framework. I beg to move.

My Lords, I declare an interest as a visual artist. Some of my remarks will, I hope, be of interest to DCMS as well.

Many of the areas covered by these regulations are important to the arts and creative industries, but I want in particular to highlight the concerns of the visual arts. On 23 February this year, the noble Baroness, Lady Brinton, and I argued strongly for the retention of the artist’s resale right, having supported an amendment to that effect that was helpfully tabled by the noble Lord, Lord Clement-Jones, during the passage of the Retained EU Law (Revocation and Reform) Bill. I will not repeat all the arguments made in that debate, but I am glad—as will be the artists affected and, of course, the relevant rights management organisation, the Design and Artists Copyright Society—that the Government have rightly decided to allow this extremely useful scheme to be continued. I am grateful to DACS for its briefing on this.

The ARR has been in operation in the UK for 17 years. As the timely report produced by DACS this year shows, it has paid more than £120 million in royalties to over 6,000 artists and their heirs. UK artists themselves earn on average between £5,000 and £8,000 a year for their work—very little for the important work that they do, really—and much of these royalties gets reinvested in their practice, which will include studio rents and materials. Heirs use the royalties to store, restore and archive artists’ work, so this scheme is hugely beneficial not just to the individual artists concerned but, crucially, to the overall culture of the visual arts in this country.

DACS has confirmed what the Minister said, which is that the change from euros to sterling is useful, in that it will simplify the collection process for the royalty, as well as providing a currency that, to UK beneficiaries, will have a consistent value in the sense of not having to go through an exchange rate. I understand that, in response to the IPO, DACS also looked at the number of sales that would qualify under a new threshold—£1,000 rather than €1,000—which turns out to be a small percentage of total qualifying sales per year.

However, I want to make the wider point that, important as this scheme is, it will most benefit artists who are a few rungs up the ladder and have a reasonable secondary market, although the poorer artists will get the greater remuneration through ARR. Times are extraordinarily tough for a variety of reasons for those artists who are starting out or whose work has not yet achieved much value in the secondary market.

By supporting this scheme, the Government are signalling that they support visual artists, but one of the things that a Government could do better is ensure that artists are properly remunerated for the work they do, in particular for inclusion in publicly funded exhibitions. Beyond ARR, we can and should do much better in this country to support visual artists, particularly at the very beginning of their careers.

My only regret with the present legislation is that it was necessary in the first place. We have not had the gap that those who have benefited from the Horizon programme have endured, although the uncertainty will have caused some sleepless nights for the artists affected. As we know, there is no upside whatever to Brexit for the arts and creative industries. We have, quite rightly, talked a fair amount about the multitude of problems facing touring musicians, and it is too easy to forget that other forms, including the visual arts and the arts trade more generally, are significantly affected by Brexit. As I have said before, artists, particularly those without galleries to represent them, have been reduced to unwillingly smuggling their own work across borders, even for prearranged exhibitions in Europe, which is a ludicrous state of affairs. These are artists who are not just making great work but often very engaged in cultural exchange, which, even in an age of globalisation, feels even more important today, given how much communities, even within Europe, can be riven apart from each other.

In this internationalist vein, whatever one thinks, in the round, about the trade agreements that the UK has been making with other countries, it is good that ARR has been included in these deals, such as with Australia, with which we have a reciprocal agreement. Of course, these regulations honour that commitment that this country is making with other countries that also operate this scheme, as well as encouraging others to implement ARR. When the Minister comes to reply, could he provide us with a full list of those deals in which ARR features, and perhaps explain why the resale right has been left out of trade deals with Canada and India, if that is the case?

I thank the Alliance for Intellectual Property, DACS and the Authors’ Licensing and Collecting Society for their briefings on IP exhaustion. I hope that the Government understand by now how significant it is that so many artists in so many disciplines are united in wishing to continue with the current regime and not move to an international exhaustion scenario, which would so detrimentally affect these industries at every level.

Continuing the UK-plus regime is very much to be welcomed, although industry is mindful that it is officially an interim decision. Designers, writers and publishers alike, the music industry, visual artists and so many others within the creative industries are very much in agreement on this. We are very good at exporting our creative product. For example, 60% of the UK’s book sector income comes through exports, yet it is estimated that a significant proportion of its revenue—about £2 billion—could be at risk under an international exhaustion scenario, with the threat in particular to the domestic market. ALCS says:

“If we were to have a regime of international exhaustion the consequences could be less pay for authors and fewer publishers”

based in the UK able to

“take a chance and invest in creative talent across the country.”

It will be no help to the consumer whatever if, in the end, there is no product to buy.

It is worth thinking in this respect about the structure of the arts and creative industries. It is not a few large companies for which shocks to the system just might conceivably benefit consumers. The UK’s IP-rich creative industries are composed of many businesses of differing sizes, with many small businesses and freelancers. They need support. Within this context, what they need above all else is stability—a key word in the Minister’s speech—which the current regime enables. However, I welcome the new government decision on this, which will provide the necessary continuity that the arts and creative industries require, but we need to make this arrangement permanent.

My Lords, it is a pleasure to follow the noble Earl, Lord Clancarty; I wholeheartedly agree with everything that he said. I should say from the outset that we on these Benches support both sets of regulations, which will, I hope, gladden the Minister’s heart as we start debating them.

There are, however, a number of points to be made in relation to them. I very much support what the noble Earl had to say about DACS, the not-for-profit visual artists’ rights management organisation. It recently helpfully published a report that highlights the pivotal role that artists’ resale rights play in supporting artists and the wider art market. As the noble Earl said, they have been somewhat controversial in the past, but, now that they have been included in trade agreements, I feel confident that they are now bolted fully into our intellectual and moral property rights. They are an absolutely vital source of income for many artists. The noble Earl talked about more than £120 million in ARR royalties, directly benefiting more than 6,000 artists and their heirs. Artists selling at the lower end of the art market benefit in particular from ARR: two-thirds of ARR payments in 2021 were less than £500 and 10% of artists received ARR royalties for the first time that year.

I will not repeat most of the rest of what the noble Earl had to say, just that I very much agree with a great deal of what he said. More than 90 countries worldwide have implemented some form of ARR legislation so we are in good company as regards what I see as this moral right. We have heard about the trade agreements; it would be useful to get from the Minister an idea of which agreements we have included this in. Christian Zimmermann, the CEO of DACS is definitely worth quoting. He said:

“The Artist’s Resale Right is more than a legislative mandate—it is a commitment to fairness, a recognition of the value of artists’ contributions, and an indispensable support for artists and their estates.”

The Minister may notice that I have used pounds sterling in my figures throughout so, naturally, I support that aspect of these regulations and, of course, the other aspects that are provided for in the regulations.

The Intellectual Property (Exhaustion of Rights) (Amendment) Regulations 2023 are, in many senses, a much weightier aspect of the regulations we are considering today. I am grateful to the Alliance for Intellectual Property and the British Brands Group for providing briefings and, indeed, their strong views on these issues. I know that the Minister will have heard many of their arguments in person but I want to put on record those views, with which, I should say, I and the All-Party Parliamentary Group for Intellectual Property strongly agree.

Members of both groups strongly consider that the status quo will deliver the strongest overall outcomes for shoppers, business and the UK economy. Following the UK’s departure from the EU, the UK Government now have control over the exhaustion regime. As the Alliance for Intellectual Property says, the importance of the decision on which exhaustion regime the Government choose cannot be underestimated. Although it seems a technical area of policy, it will have a real-life impact on businesses, consumers and regulatory authorities across the UK. Exhaustion regimes have the greatest impact on export-driven UK sectors as they underpin their ability to determine when, how and what goods to sell in international markets and at what price.

The noble Earl quoted the publishing sector. Industries of that kind are particularly successful at exporting; for example, the UK book sector derives 60% of its income from exports. We have heard that the Government have consulted on which regime the UK should select. In January 2022, the Government made an interim decision to select a UK+ regime that would maintain existing protections. As we have heard, this statutory instrument is being introduced by the Government relating to that interim decision. As the Minister said, though, the Government have not made a final decision on which regime to choose but are likely to announce their decision in the next few months. I hope that the Minister will give us some idea of the time in which he expects that decision to be made.

The British Brands Group believes that advice from officials is to make the interim decision permanent—at least, that is its impression—which would be widely welcomed. I want to take this opportunity to voice support for the interim decision and express concerns regarding any shift to an international regime that might arise in future. I am not going to explain what the alternatives are; I do not think I need to. National exhaustion is one alternative and international exhaustion is another; neither is practical nor attractive.

The current regime is regional exhaustion, an approach that has been working well for 50 years. Rights are exhausted once goods are placed on the UK or EU market, although they can be used to prevent the distribution of goods placed on markets outside those countries. This status quo operates well, as we know; it strikes us on these Benches and those organisations as proportionate, hence our strong support. The SI rightly provides for an IP exhaustion regime meaning that the holders of trademarks would not be able to object to the further distribution of their goods once they are placed on the market in the UK and the EU. They would, however, be able to object to imports from other countries.

The Government’s decision on the UK’s future exhaustion regime will be among the most important taken in relation to intellectual property policy during this Parliament. Its impact will affect businesses, consumers and regulatory authorities across the UK; as I have said, it will particularly affect export-driven UK sectors as it underpins their ability to determine how and what goods to sell in international markets and at what price.

Any shift to an international regime would also affect many of the UK’s leading design and branded goods companies. This would make it significantly more difficult to launch new products in countries around the world as those firms would not be able to vary pricing at launch for fear of those products re-entering the UK. A move to an international regime would also lead to consumer confusion since product and regulatory standards differ across countries internationally. Any “free for all” in parallel imports to the UK would undermine the UK’s product standards regulatory framework and would create uncertainty and confusion for the public.

Opponents of maintaining the status quo and supporters of an international regime suggest that there would be a reduction in pricing for consumers from an increase in parallel imports. Where parallel imports occur currently, in contravention of our regime, prices are not lower. As an example, you occasionally see bottles of Coca-Cola with foreign language labelling in some small shops but at the same pricing as compliant products.

We believe that the retail supply chain, including wholesalers and parallel importers, would therefore be the major beneficiary, rather than the UK public. The cost-benefit equation is likely to be between established creative industry sectors that find their home in the UK market but could choose to move elsewhere against a parallel import sector that does not currently exist and would not even need to be located on UK shores, nor to create UK jobs.

In summary, an international exhaustion regime would represent a significant policy shift away from innovation and growth. It would weaken competition, harm consumers and not help lower consumer prices, in our view. The SI as drafted sustains the current exhaustion regime until the Government confirm their long-term policy approach. The most recent government consultation identified no evidence at all to support a change in regime, so this debate is important.

I hope that the Minister, IPO and others in government resist calls for any change that could reduce IP rights holders’ ability to influence the distribution of their products in markets outside the EU and weaken their IP rights. A change in the UK’s trademark exhaustion regime would be a significant policy shift negatively affecting consumers, brand owners, UK exporters and public enforcement agencies, while not reducing inflation. I hope the Minister has got my message that this would not be a welcome change away from the current exhaustion regime.

I apologise for my slightly late arrival at the Committee. I hope that it was not noted too carefully, but we are doing two SIs as one group and I was here for the whole second part. I hope that that qualifies me to speak.

Also, it would be a terrible shame not to recapture the spirit of a few years ago, when a little group of three of four colleagues, including the noble Baroness, Lady Neville-Rolfe, debated a number of issues to do with intellectual property that came up at that time. It was interesting that a group from within the confines of Parliament then was able to get together and become quite expert at some of these issues. We had some very enjoyable debates and some of these issues have played out again today. Those who benefited from going on that journey gained a lot of knowledge and expertise, so I am not able to stun the Committee with some new insights; they have largely been covered by those who have built up their expertise from the same route that I have been on, so what I would say would be otiose.

I will congratulate both the noble Earl, Lord Clancarty, and the noble Lord, Lord Clement-Jones, for covering the points I would otherwise have made and piggyback on them to save the time of the Committee, which is a good thing.

However, it is interesting that we are still talking about issues that were live three or four years ago. I am sure the noble Baroness, Lady Neville-Rolfe, remembers them with some interest. We are still not clear what distinguishes our particular configuration of design rights. I still worry about those and hope that the department is working on a way forward with some of them. We had some clarity when we were thinking, within the EU context, of a way of trying to balance the difference between those which operated within the UK only and those that were being developed in Europe but were not able to go back to that. I do not think we quite got over the variations that can occur between the triad of patent, trademark and intellectual property in other forms, because they bump into each other. Although they have been dealt with rather well within these statutory instruments, there are occasions when they point in different directions and it is very hard to get a sense of the Government’s policy on them. There is still a need to do more work on that.

In turning to the SIs before us today, I want to raise a very narrow point on design right, ARR and copyright, from the Explanatory Memorandum. Although the noble Viscount touched on this in his introduction, he did not spend a lot of time on it. It is a question of broadly taking forward the arrangements that existed before we left the EU and making them slightly up to date as we go forward. I have no problem with the Design Right (Semiconductor Topographies) Regulations 1989, which were notably not mentioned by my two colleagues nor dealt with in any detail. That is a sensible move forward. We covered ARR and the copyright tribunal rules in some detail. That is a good change and an important way forward.

I have one point to make about the Collective Management of Copyright (EU Directive) Regulations. There is a dilution of transparency in the way in which these new regulations are being brought forward. The accounting information provided in annual transparency reports will not be audited. That may sound a narrow point, but it is quite hard to see—even though the numbers are very small—how that will not cause some difficulties for those who might be interested. According to paragraph 7.10 of the Explanatory Memorandum, it

“does not increase the regulatory burden”

because there would be other ways around it, but the issue deserves a bit more of a response. We are in a period in our industrial regulatory process where audit is a matter of concern, so diluting it, even at this level, seems a concern. I would be grateful if the Minister commented on that in his response, although it is not a major issue.

On the second statutory instrument, on exhaustion of rights, the argument has been well made. It is a matter of choice whether we have a regional, national or international regime. The Government have announced that it will be regional for this statutory instrument. I have no particular concern about that and support the line taken by the noble Lord, Lord Clement-Jones. However, that raises two questions. First, do we face the possibility of an expansion of the EU, with the discussions going on? Does that affect this situation? Are we happy with how that might develop outside our direct control—perhaps not preaching to the song of taking back control because of Brexit? As we get on to Ukraine and other things, for very good reasons, and add new places, would that cause the Government any concern? I would be grateful for the Minister’s comments on that.

Both noble Lords said that some of these rights will be affected by trade deals, particularly the Pacific deal which is the subject of a Bill coming before this House. Perhaps the Minister might anticipate some of the impacts it might have. This is slightly playing with the question of why it is regional. If it is to be international because we will have trade deals—it is in some of them, such as the Pacific deal, although I think not in the Canada or India deals; I would like to know why not—are we talking about a pick-and-mix approach? I would be grateful to know, particularly given that this is not the final word on this. It seems odd that we are debating this tonight and will presumably receive tomorrow or the next day agreement through Parliament—certainly from this House—that this SI will go forward, but we still do not yet know where the Government are. Like the noble Lord, Lord Clement-Jones, I would be grateful to know whether we have a timescale for that. Presumably, we would not be going forward with this SI if the decision would be, at least in the medium term, similar to what we currently have.

It would be worth having any thoughts that the Minister has at this stage. I look forward to his response.

My Lords, I very much thank the three noble Lords for their valuable and interesting contributions to this debate. As I said in opening, IP matters. The IP system exists to encourage innovation and the sharing of information, creativity and knowledge. It provides individuals and businesses with the confidence to invest their time, money and energy into developing something new. That is why the Government remain committed to a world-leading IP framework. We hope these regulations will ensure that the IP system continues to support innovation across the economy and will make some targeted changes to the benefit of our IP framework.

I shall respond to some of the important questions raised in the debate. The noble Earl, Lord Clancarty, asked about ARR. I thank him for his kind words and support for the changes to ARR in relation to the change of currency. He mentioned the benefits to smaller artists of the ARR regime and the noble Lord, Lord Clement-Jones, expressed similar support. Under that change, artists who continue to receive ARR payments will see an estimated average increase of around 7%, with the highest-value artworks obviously experiencing the largest increase. In addition, when UK inflation is taken into consideration, the minimum threshold resale price for ARR eligibility will actually be lower in real terms than when it was set in 2006.

The noble Earl and the noble Lord, Lord Clement-Jones, asked about government policy for ARR in free trade agreements and why ARR is not included in some negotiations; the noble Lord, Lord Stevenson, also touched on that matter. It is current government policy to support ARR globally via international fora as well as via UK free trade agreements. For example, in our recent free trade agreements with Australia and New Zealand we negotiated provisions to provide ARR on a reciprocal basis—that is, the UK will provide ARR royalties to Australian artists and vice versa.

Noble Lords asked about provisions in FTAs that are still being negotiated, specifically with India and Canada. They will forgive me if I cannot comment at this point on negotiations that have not yet concluded. Needless to say, I am happy to set out more information as it emerges on where we are with these or other free trade agreements.

I turn to the issue of exhaustion. I note the views of the noble Earl, Lord Clancarty, on the UK’s existing UK-plus exhaustion regime and on making the UK-plus regime permanent. As I think everybody in the Room agrees, this is an important matter. As the noble Earl is aware, the Government have consulted widely on it and continue to consider what the UK’s eventual IP exhaustion regime should be. Work to consider the decision on the UK’s future exhaustion regime is ongoing. We intend our future regime to strike the right balance between consumer choice and fair market pricing, protecting creators and promoting competition. The Government are aware that businesses would like certainty about future arrangements that will be affected by this decision. We will let stakeholders know the outcome of the policy decision in due course.

I think we all asked for a bit more detail than the Minister’s “in due course”. Could he be a bit more specific?

Indeed. DSIT has been making representations to precisely that effect across government and that process is in train. I cannot provide a date for when it is going to be complete.

Could the Minister perhaps hint at what form it might take? Are we at the White Paper stage of the process or will it just be a statement that the issues are finished?

I am sorry to interrupt the Minister as well. In addition to the timing, it would be useful to know what the instrument is going to be. Will it be another consultation? We have had a consultation, which finished last year, and now we have the SI. Is there going to be another consultation with another SI? The whole process needs unpacking a bit.

That is fair enough. What I am hearing is that noble Lords want to know not just when it will be but what it will look like when it happens. That is an entirely reasonable request, to which I am happy to accede.

I note the views of the noble Lord, Lord Clement-Jones, on how the UK-plus regime supports the publishing industry in particular. I recognise the importance of this issue to a variety of businesses, which have provided extensive contributions to the public consultation on this matter. On behalf of the Government, I thank those businesses for their constructive engagement during the consultation and since. The noble Lord also—no, I am getting ahead of myself. I will move on, except to note that this issue has the potential to impact so many business sectors and therefore it is important for the Government to take the time to get it right.

The noble Lord also mentioned his concerns about a potential move to an international exhaustion regime. As I mentioned, no decision has been made. However, I should advise noble Lords that we intend a future regime to strike the right balance between consumer choice, fair market pricing, protecting creators and promoting competition.

I turn to the matters raised by the noble Lord, Lord Stevenson. I am grateful for his and his colleagues’ expertise on this important area of policy. He raised the review of design rights. The IPO began a review of that legislation last year, with a call for views published in January 2022. We want to make sure that the UK design system best meets the needs of designers and businesses. The IPO is now working on policy proposals on which to consult, which will likely happen in the first half of 2024. The review is fairly wide ranging, as the law around designs is complex and has not been reformed in any meaningful way for some time. It is important to do this work properly to make sure that any changes work for users and all stakeholders.

The noble Lord raised concerns about transparency reports issued by collective management organisations not being audited. The purpose here is to align the treatment of CMOs with that of other organisations in Companies House of similar size; to not treat them differently simply because of the nature of the work they do as CMOs, and therefore not to require organisations that qualify as small to conduct a formal audit in that way, along with other organisations of their size, scope and scale.

Small CMOs will still be required to produce annual transparency reports and to abide by the regulations that govern their conduct and operations. Removing the statutory audit requirement strikes a fairer, more proportionate balance between risk and cost for these small entities. The changes to the audit requirements were in recommendations evidenced by the additional burden imposed on them during a 2021 post-implementation review of the regulations. To provide some reassurance, I hope: this change affects just seven of the smallest CMOs.

The noble Lord, Lord Stevenson, also mentioned the expansion of the European Economic Area and how it would affect our exhaustion regime. Currently, the geographical scope of our exhaustion regime covers the UK and the European Economic Area. If the European Economic Area expanded the Government would consider how that would affect our exhaustion regime, but we would not wish to prejudice such a decision.

I hope all noble Lords will recognise that these proposed changes support a balanced, consistent and stable IP framework that is crucial for businesses, consumers and investors. I absolutely recognise the strength of feeling and argument in favour of maintaining this regime, but meanwhile I commend these regulations to the Committee.

Motion agreed.

Intellectual Property (Exhaustion of Rights) (Amendment) Regulations 2023

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Intellectual Property (Exhaustion of Rights) (Amendment) Regulations 2023

Motion agreed.

Digital Government (Disclosure of Information) (Identity Verification Services) Regulations 2023

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Digital Government (Disclosure of Information) (Identity Verification Services) Regulations 2023

Relevant document: 54th Report from the Secondary Legislation Scrutiny Committee, Session 2022-23.

My Lords, I am glad to see the noble Lord, Lord Stevenson of Balmacara, and others, and I echo what he said about our constructive discussions in 2014-16. I am also pleased to see my noble friend Lord Camrose championing intellectual property, as we all try to do. I am glad to be accompanied by my noble friend Lord Evans of Rainow in his new position as Cabinet Office Whip.

The Digital Government (Disclosure of Information) (Identity Verification Services) Regulations 2023 are an important part of this Government’s commitment to strengthen the use of data and information across the public sector. We are bringing these forward so we can deliver better and more joined-up services and, in turn, improve outcomes for our citizens.

The regulations aim to allow information sharing between named bodies for the specific purpose of supporting cross-government identity checking when it is needed. Verifying a user’s identity—ensuring that a person is who they say they are—is a key part of delivering many government services. The draft regulations enable this by establishing a new data-sharing objective under Section 35 of the Digital Economy Act 2017 and by setting out which public bodies may use the new objective. This will create a legislative gateway, enabling us to use existing data sets, which public bodies already hold, to help as many people as possible to access the government services that they need online. It is therefore central to the development of more inclusive and accessible systems.

Specifically, the proposed objective would unlock the full benefits of the new cross-government digital system known as GOV.UK One Login. This is now live; users are able to set up an account, log in and prove their identity in order to access an initial set of 24 government services, with more being added all the time. However, at the moment, users must have photographic documentation, such as a passport or driving licence. This will change following the introduction of the new objective, as it will unlock new ways for people without photo ID to prove who they are, opening up the system to more users.

The delivery of One Login is a step change in simple joined-up access to government services online. This, in turn, delivers substantial cost and time savings for the Government and users by reducing duplication and providing enhanced capability to identify and stop fraudsters. In summary, the proposed objective will, first, enable checks against existing government-held information, such as PAYE and benefits data, to build confidence in the user’s identity, which will be particularly key where service users do not have a passport or driving licence. Secondly, it will provide a specific legal framework for checks against documents currently used in identity verification, such as driving licences. Thirdly, it will enable the sharing of the results of identity checks performed by one named body with another, so that users need to prove their identity only once.

The draft regulations set out which of the bodies already listed in Schedule 4 to the Digital Economy Act can use the new identity-verification data-sharing power, such as HM Revenue & Customs and the Department for Work and Pensions. They also add four new public bodies to the schedule that will be able to use the power: the Cabinet Office, the Department for Transport, the Department for Environment, Food and Rural Affairs and the Disclosure and Barring Service.

The public bodies listed in the regulations are either bodies that hold information that could be used in support of proving that someone is whom they say they are or those that own and manage services that people need to access, which they therefore need to receive the results of identity checks. Of course, some public bodies do both.

The territorial extent of the draft regulations is England, Wales and Scotland. The Information Commissioner’s Office and the devolved Administrations support the draft regulations, and indeed the Scottish and Welsh Administrations have requested that certain Scottish and Welsh bodies be included in the draft regulations to enable them to use the new data-sharing power—so it is devolved friendly.

I am sure noble Lords will be pleased to know that these draft regulations have been subject to the standard rigorous processes of internal and external review. In the first instance, the objective has been subject to scrutiny by the Public Service Delivery Review Board, as set out in the underpinning code of practice on public service delivery, debt and fraud of the Digital Economy Act 2017. The board recommended that Ministers take forward these draft regulations since they meet the required criteria of supporting the improvement, or targeting, of public services to individuals in order to enhance their well-being.

Furthermore, the objective has been subject to a public consultation, which received more than 66,000 responses. Some respondents recognised the benefits to individuals of improved and more inclusive services. Some mistakenly expressed concern that this was a back-door route to identity cards. Therefore, in response to the consultation, the Government confirmed that they have no plans to introduce mandatory digital ID or identity cards. We also published additional information on how GOV.UK One Login will operate within these regulations and within the overall data protection framework. We extended the time between the regulations being approved and coming into force, and we amended some of the wording to reflect that of the Act. Of course, the Government understand that people want to protect their personal information and this is central to our approach. The draft regulations relate to using data only for the purpose of identity verification.

Part 5 of the 2017 Act gives the Government powers to share personal information across organisational boundaries to improve public services. It lays down what data can be shared and for which purposes. Data sharing must also have regard to the accompanying statutory code of practice on public service delivery, debt and fraud, which sets out how the power must be operated, including how any data shared must be processed lawfully, securely and proportionately in compliance with data protection legislation and UK GDPR.

The Digital Economy Act statutory code of practice on public service delivery, debt and fraud also requires information-sharing agreements to be listed on a public register of information-sharing activity under the powers. The framework for data sharing under the DEA provides a supportive background to help organisations to share data in ways that benefit the public, as confirmed by the Information Commissioner’s Office in its recent review. It includes robust safeguards that ensure that organisations share data responsibly and in alignment with data protection principles, while also safeguarding people’s rights.

I think these regulations are relatively straightforward and important, and I hope that colleagues will join me in supporting them.

My Lords, it is good to see the Minister move seamlessly from intellectual property to digital and data, but both can sometimes create their own questions. Since this is the first time we have debated One Login in the Lords, I hope that the Minister will not mind if she gets a large number of questions about the scheme. As I understand it, the goal of the One Login programme is to create a log-in database owned by the Government and containing the verified names, addresses, dates of birth, phone numbers and email addresses of everyone who uses—eventually—all Government-owned digital services, which is likely to be everyone in the country.

Perhaps unfairly, I have always thought of One Login with some scepticism, as the son or daughter of Verify, and not in a good way. The cost of the failed Verify scheme was over £200 million. It would be very useful as part of this debate to hear the cost of OneLogin so far and how much more is budgeted to be spent on its rollout. It does seem strange that the Government are having another crack at a single verification system, given the many other trustworthy existing systems that could be adopted.

First, I think it worth mentioning what the Secondary Legislation Scrutiny Committee said in its 55th report in October. I think it was rather baffled and scathing at the same time:

“This is a classic example of an Explanatory Memorandum … with too narrow a focus”.

I think it felt it was being bounced to some extent, without the context in which One Login was going to be designed to work. It said:

“We therefore request that the Cabinet Office revises its”

Explanatory Memorandum

“to include sufficient background information to enable any reader to understand the legislation’s practical effects”.

I suppose I am lucky in that I followed the gory progress of Verify through to One Login and the current date. I have some idea of the purpose behind One Login. As I understand it, the principal effect of these regulations is to allow the Government to share data for the purposes of identification. The SI does not restrict those flows of data; data can flow into the Cabinet Office as envisaged but identity data can also flow from the Cabinet Office to any other listed department. I hope that the Minister will be able to confirm that.

Will the Government allow population databases to be copied, whether openly or not? The revised Explanatory Memorandum is silent on this, and it is unclear if this assurance from the Government’s consultation response will be delivered. The response said:

“In particular, information will set out which departmental services are using identity verification services to support delivery and which will provide data to help departments establish who a person is”.

Will that actually happen? Will there be that level of transparency? There are apparently no safeguards on sharing bulk data if the Government want to share for this purpose across government. What transparency will there be if and when this takes place?

There is then the question of for whose benefit One Login really is. Is this a “better login to government” project, which many people might applaud, or is it a “one identity to government” project? The answer at the moment appears to be the latter. I say this because medConfidential, which I thank for its briefing, reports that a

“meeting held during the consultation was told that the Government’s intent is to actively prevent individuals from having multiple login accounts. A person may be able to have multiple email addresses— indeed, they may already do—but Government would attach them to a single ‘identity’. This regulation allows that database to be shared in bulk”.

Not to put too fine a point on it, that turns One Login into a tool of a centralising state—with implications for the privacy of the citizen—which the Government have previously assured us many times they were not building. I would therefore be extremely grateful if the Minister described the reality of One Login, as well as its purpose and operation.

At a roundtable on the consultation, the Government Digital Service apparently said that the regulation’s “first use is One Login”, which suggests there will be a second use. It is unclear to us to what extent the DWP will embrace One Login for government, for universal credit, for HMRC’s services, or indeed for the MoJ’s digital courts. What commitment from government departments and agencies is there? I can see that they are all listed, but Verify fell down precisely because of the lack of commitment from many government departments. What about the identities, too, of public servants? Will they be able to have multiple identities as both citizen and employee? What is the reality of that?

The SI allows any identity information to be shared from and to almost anywhere across those government departments, and any restrictions appear to depend entirely on current departmental policy, not on legislation or regulation. There is, it seems, no explicit assessment of compliance with the identity assurance principles set out by the Privacy and Consumer Advisory Group in 2015. Do those principles remain government policy, despite that group currently being reconstituted? To summarise, these are an important set of principles, covering user control, transparency, multiplicity, data minimisation, data quality, service user access and portability, certification, dispute resolution and exceptional circumstances. Will all those principles be observed, and do the Government commit to them again? If so, what independent scrutiny will check that they are being observed in the course of the operation of One Login?

I do not really understand why the Government are proposing that this much identity data should be shareable in bulk to this many government departments with this little oversight. There must be explicit limits so that data may be shared only to the Cabinet Office, with explicit limits on what it may share to others. What is sauce for the goose is sauce for the gander. Not that long ago, the Government set out a framework for identity verification for the private sector, with clear forms of authentication and certification—indeed, many people thought that it was over-elaborate—but I see nothing in the scheme of One Login that means that there is that equivalent form of authentication and certification.

This is an exceptionally broad power with almost no oversight. It is far broader than is remotely acceptable or than those other powers under the DEA. Where do biometrics and genomic data fit? Can they be shared in the same way as the other data? Again, what standards will the system conform to? We need to know about that. One Login will have a great deal of information on users and the government services they use. As drafted, it looks as if that will all be within scope of the sharing powers. Is that correct?

Will the GDS be the accountable agency in providing all the details of a verified identity document to any department? For instance, if it is disclosing that somebody is a former prisoner or the nationality of the passport that they used to validate their identity, to whom are complaints made and where is there redress if that is not done properly?

In summary, there are many questions but three key ones for the Minister to answer. First, what is the real answer to this: has the Government’s One Login moved from a convenient “better log-in to government” project to a “one identity to government” project? Secondly, can the entire database be shared, in bulk, to almost anywhere in government for any purpose? Thirdly, what independent oversight of the One Login system will there be and what standards will it conform to? I heard what the Minister said about the public service delivery board and wonder whether it has something to do with oversight, but maybe not.

My Lords, I am grateful to the Minister for her helpful introductory remarks. This regulation concerns the sharing of information between public authorities to ensure that any information sharing under Section 35 is justified and proportionate. It permits public authorities to share information only for purposes consistent with tightly constrained objectives which are set out in regulations. This measure adds a new objective relating to identity verification.

In future, individuals will be able to create a reusable digital identity, which the Government say would be secure, convenient and efficient. Instinctively, we would be very supportive of this, but it would be helpful, certainly to me, if the Minister could perhaps explain with a practical example exactly how this will work from a citizen’s perspective, imagining perhaps that she is applying for universal credit. What will she be able to do that she cannot do now? How would her interaction with the service provider be enhanced by this new objective? Will there be a benefit to those who do not have a passport or a driving licence and who, on occasions, find it difficult to prove their identity? What future use does the Minister anticipate?

There are some future uses. The noble Lord, Lord Clement-Jones, quite rightly highlighted some of the potential problems with this, but there are potential benefits that I can see. For instance, could digital verification, in time, be helpful at polling stations in enabling individuals without passports or driving licences to vote, without having to obtain a certificate in advance? I do not know if noble Lords have ever seen one of these certificates that people have to get at the moment, but the one I saw recently was just a blurry picture on a piece of A4 paper. These things are meant to last for years. Perhaps the Minister could make inquiries as to whether digital verification at polling stations might be more convenient, perhaps even allowing real-time voter registration. It does matter, and it is vital that digital transformation benefits and enhances citizens’ experience and access to services, as well as making public services more efficient.

A number of respondents to the consultation were concerned—and I think everyone will have anticipated this—about the security of their information, and whether or not this could be the thin end of the wedge as they see it. We are pleased that this amendment would make things, I think, more convenient for individuals. To anticipate what the Minister may say, this is because they will no longer have to prove their identity multiple times, and should have a more seamless experience when accessing public services online.

However, there is concern from some that digital verification may become in some sense compulsory. It is rather like the banks, which have a strong high street presence—then online banking becomes very popular, and suddenly the more traditional methods of accessing the service become less viable and therefore less available, which arguably excludes some individuals. It is important that individuals are able to decline to access services digitally, if they wish, for whatever reason, and are not coerced or nudged into accessing services, which goes against their preference over time. With this in mind, it is important that individuals are provided with the right amount of information, so that they can understand what data is being shared, with whom, and what the benefits to them are in consenting to the data sharing. Can the Minister tell us more about how exactly this will be done and how consent will be obtained?

Having in mind the NAO’s report on digital transformation of government services from earlier this year, there are a number of potential issues that the Minister might also wish to comment on. The NAO found that departments are finding that in current market conditions, they cannot acquire sufficient digital skills and expertise in their teams. Can the Minister tell us what the Cabinet Office are doing to make sure that departments have the skills needed to safely progress with this change and future digital transformation across Government?

Also, what oversight are the Government planning? This is vital in establishing public confidence. What will the complaints process be? How are the Government planning to monitor the departmental use of this new objective and assess any inequalities created or made worse by its introduction? Will the Government check whether, in time, the less well off, older people, or people with certain disabilities or certain language issues, for example, are being disadvantaged by the preference of service providers to move to digital access? I look forward to the Minister’s responses to those questions.

My Lords, I thank the Committee—thin though we are—for its time and excellent questions in scrutinising the draft regulations. I think it is right to say that we have learned from Verify. One of the key things is always to learn from errors and learn how to improve things. This is a very different proposition.

The regulations will enable us to harness data more effectively, ensuring that as many people as possible can access the government services that they need online. This is particularly important where citizens and residents lack access to a passport or a driving licence, compelling them to resort to slower and costlier offline alternatives; the noble Baroness, Lady Chapman of Darlington, made that point. Approving the new objective allows us to construct more inclusive and accessible identity verification systems, namely GOV.UK One Login, which will deliver substantial user benefits and savings by minimising duplication and fraud risks.

The noble Lord, Lord Clement-Jones, asked many questions, mostly on the GOV.UK One Login programme, of course. This legislation is relatively narrow and is not about the programme as a whole, but I will try to answer some of his questions. I am sure that we can talk about things on another occasion, because I detect a lot of support for the principle of making it easier for people, particularly more vulnerable people, to access government services.

On the PCAG principle, GOV.UK One Login is being delivered in line with existing privacy principles. GDS has been working closely with members of its advisory groups to ensure this. The principles are a framework that GDS works within; they have never been official government policy. However, the data protection regime certainly gives me quite a lot of reassurance about how this will work. I tried to bring that out in my opening remarks.

On the question of population data, the purpose of GOV.UK One Login is to allow citizens who choose to use the service to prove their identity safely and securely in order to access government services online. It is not new that users need to prove who they are to access certain government services, nor that departments have to store information as a result. Let me assure noble Lords that users can delete their accounts at any time. The service standard requires services to provide a joined-up experience across all channels, so doing so would not lock a user out of all government services.

In response to the questions about benefits to individuals, let me say that the objective on data sharing would enable public bodies to share a wider range of specified data than is currently possible. This will allow GOV.UK One Login to draw on a broader range of government-held data sources when users need to verify their identity. This will benefit individuals and households by improving digital inclusion as people without photographic documentation, such as a passport, will still be able to provide their identity online and access government services by answering questions based on additional datasets. They will not have to provide the same data again and again. This will underpin users’ ability to reuse their verified identity across all government services without needing repeatedly to re-enter the same information each and every time they interact with a new service. Of course, that also brings savings to individuals and to government.

Let me understand this. In effect, data is being shared across departments so it is not simply a way of having a wallet, if you like, within the Cabinet Office that then gives you a clear identity for the purposes of accessing government services across government; it is a question of sharing that identity data across government departments. It is data sharing in bulk across government departments.

It is data sharing for the purposes of digital identity. Ultimately, by April 2025, we hope to have approximately 145 central government services that can be accessed via One Login. It is a mistake to think that this is somehow going to be used in the bulk way that the noble Lord describes. It is about identity checking, not collecting huge amounts of data for use in a Big Brother sort of way; the noble Lord may have misunderstood this. Users can delete their account at any time. I think that the noble Lord’s concern is perhaps misplaced.

While I am on the subject of benefits to the individual, there is an example that I would like to share with the committee; it reflects a question that I asked. Sometimes, married women have two different names. I am in that lucky, or unfortunate, position. We understand that some users will need or want to use multiple accounts, so users can already set up multiple accounts on One Login using different email addresses that can relate to different names. From next year, we plan to allow users to link accounts under the same verified identity. The noble Baroness, Lady Chapman, asked us to look through the eyes of the individual. This is one of the things we have been trying to do in this programme, learning from the past.

I am on my third surname as I have had two marriages, but that is not really where I was going. I was looking at it from the perspective of somebody trying to access a service. I cannot imagine that many people would be that interested in how you could link your different accounts, although I can see that it might be important at certain stages in someone’s life. In accessing a service, what will I be asked for or not asked for? It is about the practicality of it. If I am turning up at the benefits office, what is the difference?

The difference is that, at the moment, you tend to have to provide a passport. It is difficult to log in to some of these services without a passport or a driving licence. In future, as I made clear in my introductory remarks, it will be possible to use different sorts of identity data and to have a system within government that allows us to do that. That will have the effect of making it easier for more people who are finding establishing their identity difficult without encouraging a lot of identity fraud, which is obviously another concern that one has to take account of in putting these systems together.

I entirely appreciate the Minister taking the trouble to talk us through this. The question is: for whose benefit is this? Is this so that government departments can identify somebody right across the board, so that you can have only one identity in government and so that the Home Office will share data with universal credit and every other department that interfaces with an individual? Is that the idea of this One Login? Or is it possible to have more than one digital identity?

As I said, it will be possible. You are not confined to one. It is very much coming at the problem from the user, not simply from the government department, which I think was one of the problems with Verify.

I am still not quite sure that I get this. Let us say that I am going to the benefits office; I do not have a passport or a driving licence, and I am asked for other information instead to verify who I am. How will this benefit me in the future, assuming I have never had a driving licence or a passport? What difference will I experience? I am not trying to pick at this; I just want to see the benefit.

One obvious benefit is that more and more government departments are using digital. The technology is transforming our lives, after all. Once you have this single digital identity, you will then be able to use it to access services and opportunities from other government departments as well. That is the point: the digital identity will be used across the board. That is helpful to individuals. I should add that a document is published on GOV.UK outlining what data is being used by One Login. I think it is worth noble Lords looking at that.

The noble Lord, Lord Clement-Jones, rightly asked a question about cost—something we always used to ask about in our previous debates. The One Login programme’s total budget for 2022-23 to 2024-25 is £305.4 million. Of this, the programme forecasts expenditure of £132.7 million on the development and rollout of the system by the end of the current financial year.

The noble Lord mentioned the Explanatory Memorandum. We did indeed make some changes, as he acknowledged, to the Explanatory Memorandum, which was made available to the SLSC, to provide a clearer explanation of which part of the law the instrument is changing and why. He mentioned that the revised Explanatory Memorandum was laid on 2 November, and provided more contextual information. In particular, it explained that the SI provides the statutory basis for specified public bodies to share data in order to verify an individual’s identity in a safe and secure way so that they can access public services online, and that duplicative systems are being replaced with a single account. This is an obvious benefit.

The SI will also enable the GOV.UK One Login to draw on a broader range of government-held data sources when users need to verify their identity. That is an important point, because it is difficult for people who do not have a passport or a driving licence under the current system.

We are committed to being open and transparent by making information about data shared under the Digital Economy Act easily available for all to find and understand in the public register of data-sharing agreements. That was one of the safeguards laid down in that Act, so we have obviously taken that on board. That is an important point of transparency.

This is also underpinned by a robust code of practice—I have read it—which was created by Section 43 of the DEA. That sets out how the power must be operated, and includes setting out how any data shared under this power must be processed lawfully, securely and proportionately, in line with data protection legislation. We therefore have the DEA and data protection legislation coming together to allow us to implement this, hopefully life-changing, bit of technology in a way that protects the citizen. Obviously, the Cabinet Office is responsible for maintaining that register, and the Public Service Delivery Review Board is overseeing strategic consistency.

We have not seen that many regulations made under this Act—I think there was one on social care before—but we can see the value of the Act and the safeguards that Parliament added to it coming through.

On voter registration, the noble Baroness, Lady Chapman, raised a very good point, to my mind. I will have to follow up in writing. Fundamentally, as she said, these regulations will enhance the user experience. Despite many improvements over the last few years, today’s experience of interacting with government is too fragmented. We have multiple logins, and we are repeatedly asked the same information, which sometimes one has recorded on the phone—and sometimes recorded wrongly, as I know from my own experience. This is the same for everyone trying to access government. One Login will replace this with one system; we are used to this on our phones and so on, and there is a lot to be said for this new arrangement. We will have better data sharing to help those people without traditional forms of ID to access the services online that they need.

I hope noble Lords, having heard the benefits of the regulation—

My Lords, I am sorry to interrupt the Minister as she comes to the final furlong, but the question of oversight raised by the noble Baroness, Lady Chapman, and by me, and the standards that will apply to this system, are extremely important.

Given the time, I will take that away, along with the voting point, if I may. I drew attention to the code of practice and the parent Act; we have every intention of following the principles, but the point about review and oversight is well made by the noble Lord, as always. I will come back to him on that point.

I am sorry that I have not been able to answer every question on the login area. I can introduce noble Lords to my honourable friend in the other place, Alex Burghart, who has spent a great deal of time developing these regulations. The point is that these narrow regulations before us today are a necessary enabler for this major change for the citizen. I hope that noble Lords, having heard the benefits, will join me in supporting the draft regulations. I commend them to the Committee.

Motion agreed.

Committee adjourned at 6.26 pm.