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Public Bill Committees

Debated on Thursday 26 November 2020

Financial Services Bill (Seventh sitting)

The Committee consisted of the following Members:

Chairs: † Philip Davies, Dr Rupa Huq

† Baldwin, Harriett (West Worcestershire) (Con)

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

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

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

Eagle, Ms Angela (Wallasey) (Lab)

† Flynn, Stephen (Aberdeen South) (SNP)

† Glen, John (Economic Secretary to the Treasury)

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

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

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

† Millar, Robin (Aberconwy) (Con)

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

† Richardson, Angela (Guildford) (Con)

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

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

† Thewliss, Alison (Glasgow Central) (SNP)

† Williams, Craig (Montgomeryshire) (Con)

Kevin Maddison; Nicholas Taylor, Committee Clerks

† attended the Committee

Public Bill Committee

Thursday 26 November 2020

(Morning)

[Philip Davies in the Chair]

Financial Services Bill

Before we begin, just a few reminders: please switch electronic devices to silent; no tea and coffee during sittings; and, again, I thank everybody for observing the social distancing regulations. As you have seen, the spaces are marked and now cannot even be moved, so there is no excuse for not social distancing. The Hansard reporters would be grateful if Members emailed any electronic copies of their speaking notes to hansardnotes@parliament.uk.

We continue now with line-by-line consideration of the Bill.

Clause 8

Review of which benchmarks are critical benchmarks

I beg to move amendment 28, in clause 8, page 7, line 38, at end insert—

‘(7) In reviewing critical benchmarks in accordance with Article A20 of the Benchmarks regulation as amended by this Act the FCA must have regard to—

(a) ensuring a benchmark is based on actual trades or contracts;

(b) preventing a benchmark from manipulation for the benefit of anyone submitting information to that benchmark; and

(c) robust sanctions up to and including custodial sentences for anyone found to be engaged in manipulation or attempted manipulation of a benchmark.’

This amendment would require the FCA to have regard to ensuring a benchmark is based on actual trades or contracts, that it is not open to manipulation and that robust sanctions are in place for those who manipulate, or attempt to manipulate, a benchmark.

Thank you for your chairmanship today, Mr Davies. Perhaps with your indulgence I may, as I did the other day, explain how I shall try to approach this morning’s sitting. I believe that within a sometimes impenetrable Bill the clauses we are to debate this morning may be the most impenetrable. That is often the case when clauses change provisions elsewhere, as in this instance. I shall, as I go through my remarks on the provisions, ask the Minister some questions. The real meat will come at about clauses 13 to 16, and I will speak for a bit longer. I just want to give the Committee the shape of my approach.

To return to the amendment, it begins, I guess, with LIBOR. I want by way of illustration to ask the Committee to think about the price of bread. If we were all asked what the benchmark price of a loaf is, it would be easy to establish it. We would go to a supermarket, look on the shelf, and see the price of a loaf. If we were keen shoppers with a good eye for a bargain, we might go to two or three supermarkets and compare the price of a loaf. I could pop-quiz the Committee, but I shall not put anyone through that.

The price of a standard loaf in one of our supermarkets is roughly £1.10, give or take; people who want to go for one of those sourdough loaves can pay a bit more if they want, but for what I would call a normal brown loaf it is about £1.10. That is the benchmark price of a loaf, dictated by the supply and demand of a competitive supermarket environment.

Now I want Members to imagine a different way of setting prices, where we were setting the price of a loaf and could all submit our opinion on what the price of the loaf might be—and we owned bakeries, and were selling loaves. We would have a debate every day to set the price of bread. Perhaps the Minister and I would converge on about £1.10, but someone else might say, “Look, could we just edge that price up? Could you do me a favour and make today’s price £1.11 or £1.12? It would be a really good favour and, by the way, if you do it I might send you a case of champagne at Christmas.”

The trader might be saying those things in the knowledge that they had a lot of loaves to sell that afternoon—maybe millions. The penny difference in price could make a great difference to the profit. Alternatively, a benchmark price of £1.09 instead of £1.10 could mean that they would lose a lot of money on the bread they had to sell. That is basically what was happening with LIBOR. That is the problem that was unveiled.

The problem is exacerbated where there is not a liquid market for bread and where the benchmark relies more and more on what our oral witnesses last week called “expert judgment”. That is one phrase for it, but we could also call it opinion, and if we did not have supermarkets selling millions of loaves every day and the price of bread was down to the opinion of only the bakers, we can see there would be the potential for price manipulation.

That is what was happening with LIBOR and what was uncovered as traders around the world shaved tiny proportions off the daily rates. The volume of money being traded meant that even a tiny proportion—0.01% or something like that—could make a huge difference to their own trading account over the course of the year. That is the problem that this set of clauses is trying to deal with.

How do we deal with the problem? We focus a lot on what the Bill calls the representativeness of the benchmark, because there is not really a problem when millions of loaves are being sold and there is a competitive environment; if I do not like the price at Tesco, I can go to another supermarket and try my luck elsewhere. But when wholesale markets were not very liquid and relied more and more on expert opinions, there was the potential for—indeed, the reality of—manipulation. That is what happened.

That matters because this benchmark underpins trillions of pounds’-worth of trades, yet was found to be vulnerable to the kind of manipulation I have just tried to illustrate. I have tried to show that even the tiniest movement in the daily benchmark could make a big difference to traders because of the volumes of money that they were trading. The benchmark’s flaws were exposed a number of years ago, yet its use to underpin trading has persisted because of the volume of contracts linked to it.

One of the problems in the complexity of this set of clauses is that it takes us into the area of contract law, which is both complex and, in this case, international. Huge volumes, contract law and international jurisdictions are involved, so—to be fair to the regulators and the Treasury—it is not easy to get this right. Our amendment does not try to get into the contract issue, which we will come to later when we debate a few clauses further on, but rather tries to set out some ground rules for the regulator in establishing and sanctioning successor benchmarks to LIBOR.

The criteria that we have set out ought to be uncontroversial. The first is that the benchmark should be based on actual trades in the market for which real prices were paid. I confess I have been away from the issue for a while, although I served on parliamentary inquiries into it some years ago, but we learned last week that those so-called expert judgments are still being used to set LIBOR prices. That is someone’s opinion of what a trade might cost, not necessarily what it does cost in a real marketplace. That use of expert judgments has created the potential—and, as we have seen, more than the potential—for manipulation.

We also learned that SONIA, the sterling overnight index average and the favoured successor to LIBOR in the UK, is based on much more liquid markets. That is a good thing, but there is also a potential problem. LIBOR is an internationally used benchmark. While we are debating this legislation, the United States is also legislating, the European Union has parallel legislation and the Swiss have parallel legislation—and they have all gone for slightly different successors. That raises the problem, which the Minister and I will get into discussing: how to take contracts based on an internationally used benchmark and try to ensure fairness to those who signed up to contracts under it when the countries legislating for successors to it are all choosing slightly different overnight rates for those successors.

The amendment, therefore, goes with the grain of how trades are moving. We all agree that a benchmark based on large liquid markets will be more accurate than one based on opinion. The second and third elements of the amendment give the regulator a duty to prevent manipulation by those submitting information to the benchmark and to have robust sanctions, including custodial sentences, when that occurs.

We will get back to debating that elsewhere in the Bill. When the LIBOR scandal unfolded some seven or eight years ago, I remember that both the Treasury Committee and the Parliamentary Commission on Banking Standards heard evidence from chief executives of the major banks. Often, their defence was, “I had no idea what my traders were doing. I did not know that they were doing this.” There was a constructive ignorance built into the system. Although that did not make the chief executive look good, it was far better than the chief executive admitting that they knew what the trader was doing but they looked the other way because it was making more profit for the bank and the trader. The sanctions and the responsibility up through the institution are very important.

All that is hugely important for trust in the system. The average constituent probably does not know much about LIBOR or what it does, but the truth is that the financial products they buy are often related to this benchmark, so it does have an impact in the real world. No matter how esoteric the financial products are—they have become too esoteric—in the end there is a customer, and the customer should only pay a fair price. The imbalance of information should not result in the customer being fleeced or the trader being unfairly enriched, and it is the job of the regulator and the financial institution for which that trader works to ensure that is the case. That is the intention behind our amendment: to set that as a clear goal for the regulators before we get into the meat in the clauses of how we will transition from LIBOR to other kinds of benchmarks.

It is a pleasure to serve under your chairmanship again, Mr Davies. I appreciate the opening remarks of the right hon. Member for Wolverhampton South East and his compelling attempt to contextualise the complexity of the scrutiny of the clauses that we will undertake this morning. In that spirit, it might be helpful if I contextualise for the Committee what benchmarks are, what the LIBOR benchmark is and where we are with the EU benchmarks regulation before I respond to the Opposition amendment.

A benchmark is a standard against which the performance of a fund can be measured or by reference to which payments can be calculated. They are most commonly found in financial instruments, but are used to compare a variety of products, from commodities—oil, gold and diamonds—to the weather. The most widely used benchmarks are interest rate benchmarks, such as LIBOR, the Euro Interbank Offered Rate and SONIA. They reflect interest rates for inter-bank lending and borrowing. They are regularly calculated and made publicly available. As was mentioned, they are used in a wide array of financial instruments used in global financial markets. They also have a use in trade, finance, valuation, accounting and taxation.

The LIBOR methodology is designed to produce an average rate that is representative of the rates at which large international banks could fund themselves in the wholesale and secured funding market. It is produced by ICE Benchmark Administration. It is calculated based on submissions made to the administrator each day by a number of major global banks known as the panel banks. They use a methodology that requires, to the greatest extent possible, submissions based on or derived from actual transactions. LIBOR is internationally used and systemically important. It is available in five currencies and published over seven time periods, known as tenors, ranging from overnight, up to one.

The FCA has regulated LIBOR since 2013, initially under the Financial Services and Markets Act 2000 and subsequently under the benchmarks regulation. The benchmarks regulation aims

“to ensure the accuracy, robustness and integrity of financial benchmarks”

providing participants in the market with confidence in their use. The benchmarks regulation places requirements on administrators, supervised entities and supervised contributors relating to governance, transparency and methodology requirements.

The right hon. Gentleman mentioned his involvement in the Parliamentary Commission on Banking Standards, set up following the LIBOR scandal. The commission’s focus on LIBOR was around the scandal itself and the inadequate governance and scrutiny that the financial sector was under. The right hon. Gentleman referenced that and the inadequacies of the defence of the executives whom he encountered during that work. The commission’s report highlighted the fines levied to the perpetrators of the scandal. That is an encouraging example of a more appropriate penalty, highlighting that fines had not previously provided a sufficient deterrent.

It is worth mentioning the importance of this issue and why we are legislating today. The panel banks that contribute to LIBOR had previously colluded with each other to manipulate the rate, which came to light in the 2012 LIBOR scandal. In light of the LIBOR scandal and subsequent investigations, significant improvements have been made to the administration and governance of LIBOR, particularly around the quality of the governance and controls around submission, and the administration of the rates—that pricing of bread process.

However, the scandal also brought to light an inherent weakness in LIBOR: the underlying market that LIBOR seeks to measure and the unsecured wholesale term-lending markets that are no longer very active. This means that LIBOR has increasingly been based on expert judgments rather than actual transactions. Given that LIBOR is referenced in $400 trillion globally of financial contracts, it is a serious risk to financial stability for those not to be grounded in real transactions. On that basis, in 2014 the Financial Stability Board recommended the identification of alternative rates that could be used in place of interbank offered rates, or IBORs, and that market participant transactions should move from IBORs to these rates.

That is the context for what we are doing today. We are here to ensure that we have a mechanism for the FCA to manage the process of moving away from LIBOR going forward. The Government are committed to operating a fair and effective market and ensuring consumers are protected from all forms of market abuse, including manipulation of a benchmark. The amendment proposed by the right hon. Member for Wolverhampton South East—although provided, as ever, with the best of intentions—does not advance these goals.

First and foremost, the review process in article 20 of the benchmarks regulation, which requires the FCA to review critical benchmarks, concerns whether or not a benchmark meets relevant criteria to qualify as a critical benchmark and is subject to more stringent oversight. It is not an assessment of the benchmark’s input data, or of the legislative framework that applies to the benchmark.

Adding additional considerations to this process could, in fact, weaken our regulatory regime, potentially preventing certain benchmarks that are, legitimately, not wholly based on transaction data, from being classified as critical, therefore greatly reducing the oversight powers that the FCA has over them. Even if we did consider these suggestions appropriate for all critical benchmarks, it is not clear how requiring the FCA to have regard to them would factor into the clear criteria outlined in the benchmarks regulation. That would damage the clarity of the review and designation process.

Furthermore, such requirements are unnecessary. The UK benchmarks regulation already contains this requirement:

“the input data shall be sufficient to represent accurately and reliably the market or economic reality that the benchmark is intended to measure.”

It also says:

“The input data shall be transaction data, if available and appropriate.”

It is therefore important that there be some flexibility for an administrator in choosing appropriate input data. For example, where a benchmark measures an illiquid market, such as the value of large infrastructure projects, it may be inappropriate to have a benchmark methodology that is solely reliant on transactions. The use of expert judgment enables the continued calculation and publication of such benchmarks.

I listened carefully to what the right hon. Member for Wolverhampton South East said. The risk of inappropriate use of estimations that was inherent to the previous scandal is a live concern. That is why the calibration of those inputs in all circumstances needs to be carefully governed.

Separately, I note that there is already clear legislation that covers manipulation or attempted manipulation of a benchmark and provides sanctions for such activities. Under the Financial Services Act 2012, it is a criminal offence to make misleading statements in relation to benchmarks. In fact, in the Bill, as the right hon. Gentleman also rightly mentioned, there are measures that increase the maximum sentence for such a crime to 10 years.

It is wonderful to serve under your chairmanship, as ever, Mr Davies. The Minister is explaining that there is a process for enforcement. We all know that this issue is very specialist. If he thinks the current regulations and sanctions are appropriate, could he set out how they are being enacted and monitored? Frankly, it requires someone with a specialist understanding of how these rates can be manipulated to enact them in the way he outlines. If he does not want to add the amendment, could he explain how these issues can be investigated, and what resources there are to do that?

I thank the hon. Lady for her point. These matters are administered by the FCA. I have set out the framework under which it operates. Its resourcing is a matter for it, and I speak on a six-weekly basis to the chief executive about that. The sanctions available to the FCA vary considerably according the nature of the breaches. Some will be small, modest technical breaches.

The Minister has set out the criminal sanction. I am interested in whether there is support and resourcing expertise in relation to the criminal element, as opposed to the regulatory element.

At this point I cannot give her chapter and verse on the exact attribution of resources to this measure, but I can look into that and come back to her.

It is a pleasure to serve under your chairmanship, Mr Davies. I will be brief. The Minister has made a compelling case, but perhaps not as compelling as that made by the right hon. Member for Wolverhampton South East, who made illuminating remarks on the potential price of bread, although I encourage him to go to Aldi, where he will get it for a lot cheaper than £1.10.

What is proposed here is a common-sense approach that would give the wider public confidence that the Government are taking this matter seriously, notwith- standing the Minister’s remarks thus far. In general terms, I do not think there is a huge difference between the two positions, but looking at both sides, I think the common-sense approach would be to tighten this process and make it more robust; that would provide the public with the confidence they feel they need on these matters, particularly given the scale of past scandals.

I listened carefully to what the Minister said. I do not think anyone looking at the issue would conclude that the responsibility for these actions had been fairly allocated, so there is an issue. I am not saying we want to go around looking to put people’s heads on spikes—we do not want that sort of politics—but it does rankle with our constituents when certain types of crime that are, candidly, easier to understand are met with heavy punishments while somebody who does a very complex crime that is more difficult to understand can somehow get away with it.

Having said that, I accept that legislation for criminal offences, and particularly for custodial sentences, needs to be very carefully drafted in exactly the right way, and I cannot say that I am 100% certain that my amendment is, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

Clause 8 is the first of 14 clauses that amend the benchmarks regulation in order to provide the FCA with the powers it needs to oversee the orderly wind-down of critical benchmarks such as LIBOR. Critical benchmarks are benchmarks that meet certain criteria—for instance, they are used in a significant volume of transactions, or the benchmark is based on submissions by contributors, the majority of whom are located in the UK. A number of powers in the benchmarks regulation are limited to the oversight supervision of critical benchmarks or the administrators of such benchmarks.

Clause 8 adds new criteria for what may be designated as a critical benchmark. As a result, a benchmark will be considered critical if its cessation would cause significant and adverse impacts on market integrity in the UK, even where the benchmark has market-led substitutes, provided one or more users of the benchmark cannot move on to a substitute. The new test means that, as a critical benchmark winds down, the value of contracts that use the benchmark diminishes. The powers available to the FCA to manage the wind-down of critical benchmarks will remain available, provided that the benchmark meets the relevant tests to remain designated as a critical benchmark.

In addition, one of the existing tests for what may be designated as a critical benchmark has been changed. The test originally stated that a benchmark would be designated as critical where it met either both a qualitative and quantitative threshold of use in more than €400 billion-worth of products, or the qualitative threshold only. The quantitative threshold has now been removed, as it has become redundant. This measure has been welcomed by industry as an important development in managing LIBOR transition, and will ensure that the FCA has the powers it needs to manage the orderly wind-down of this critical benchmark.

I am aware, as a result of my engagement with industry—indeed, the Committee heard evidence of this last week—that there is support among market participants for additional safe harbour provisions to complement the provisions in this Bill. I can assure the Committee that we are committed to looking into that further issue and providing industry with the reassurance it needs. That conversation is ongoing and, I think, is to the satisfaction of the industry; we are working to a conclusion with it. However, given what I think the Committee will concede is the complexity of the matters involved, I cannot commit to an outcome, and I think the industry recognises that.

I want to go back to what happens if moving to another benchmark is “not reasonably practicable”. I note that the Minister is looking into that and seeking reassurance. One thing that we are particularly concerned about in this clause is the question of whether “one or more users”, if it is reasonable and practicable, can switch to a market-led substitute benchmark. How do the Government define what is reasonably practicable in this case? Will he explain that to me, please?

I am grateful to the hon. Lady for her question. In terms of the benchmark’s being classed as critical and the appropriateness of substitutes, certain contracts face barriers to moving off a benchmark. While some contracts are bilateral and that renegotiation may be possible, many contracts are multilateral and involve the consent of multiple parties before a change can be made. Therefore, in some cases, achieving consensus on the changes is likely to be difficult or impossible, due to the absolute number of parties that will be involved, or due to the threshold at which consent would be achieved. In those situations the existence of an appropriate substitute is not relevant, as users will not be able to move on to it. The complexity of what they are on means that there is not anything substitutable.

If there are still enough contracts using a benchmark for it to mean that the benchmark’s cessation would have an adverse effect on market integrity in the UK, and parties are unable to move away from that benchmark, it is appropriate that the benchmark should be recognised as critical.

In truth, this is a complex judgment made by the regulators in the context of what is happening in the market, the readiness of the alternatives, and what I have just described. The Government will make a direct evaluation of that, but here we are setting out the context in which that power will be used by the FCA.

On the point about the Government making a direct evaluation, if the benchmark user argues that it would not be reasonably practical to move to a market-led substitute, but the Treasury disagrees with that, what recourse does the user have to challenge this decision?

These matters will be governed by protocols with the industry. The industry would have a dialogue with the FCA, through which these matters would be resolved. There would be a dispute, I would imagine, about the number of contracts, the number of people involved in those contracts, and the readiness of an available alternative. Usually, these matters would be resolved through dialogue and consultation.

That is really helpful, in terms of the dialogue with the FCA. Will a process be followed to ensure a fair system is applied with regard to substitutes that disagree with the Treasury process, or will how it is done be judged at that time?

The complexity of these contracts and their reference to these benchmarks necessitates ongoing dialogue. There is a significant team in the FCA that deals with this work. The industry has been very concerned about this. This is a live, ongoing conversation. Given the context, and the history that the right hon. Member for Wolverhampton South East and I set out, and how appalling this situation was previously, there is wide consensus that this should be done in an open and collaborative way. This regulation will be used in that spirit.

Paul Richards from the International Capital Market Association, who gave evidence last week, said there were around 520 legacy bond contracts to be moved over, and only 20 had been converted in the market so far, because it is a difficult and time-consuming process. Is there more the Government could be doing to reassure and help? Does the Minister envisage bringing forward any amendments to make this any easier? It sounds like this process will cost the markets money.

I thank the hon. Lady for her question. The evidence from the ICMA last week underscored the ongoing complexity and challenges of this. It may be that legislation will be required in a future Session, but that would be subject to a resolution. There is no point of crystallisation from the industry; it is not compelling us to bring something forward. There is no resistance on the part of the Treasury to doing that; it is a question of working out what would be appropriate for the market. That dialogue will continue, and the Government will respond in the appropriate way in due course. I think the gentleman who gave evidence last week was appropriately making the Committee aware of that ongoing additional dialogue regarding that safe harbour provision. But there is no point of conflict between the Treasury and the industry on this matter.

The questions asked by my hon. Friend the Member for Erith and Thamesmead expose the potential for litigation if the Government and regulators are moving contracts from one basis to another; some of the people involved will have deep pockets and expensive lawyers. The Minister tells us that it will all be sorted out—thrashed out—and I hope he is right; but I am not sure that we can guarantee that.

I have a couple of questions about the clause and those clauses that follow. First, is it all about LIBOR, even though it talks about critical benchmarks, or is it more general? For example, might the provisions be used on a benchmark related to the price of a particular metal, or something like that? For our understanding of the matter, should we, wherever the provisions refer to a critical benchmark, just be thinking about LIBOR—because that is what we really mean; and is there some parliamentary drafting reason why the Bill does not say that?

Secondly, the clause deals with a review of which benchmarks are critical benchmarks. The Minister said, and the clause says, that that seems to be a benchmark for which a market-led substitute exists, although for some reason it is not practical to transfer activity to such a market-led substitute. That is what is confusing about the clauses. We are told that the policy decision, and the regulatory decision, is to move away from LIBOR and to cease using it by the end of 2021. That is my understanding. Yet it seems that the clauses both facilitate that and facilitate the continued use of such benchmarks.

My reading of the clause and the one that follows is that the FCA will retain the power to compel organisations to submit information to a critical benchmark, even though the policy decision has been made to move away from that benchmark. The question then is why the regulator would want to do that, and what the power means for the 2021 LIBOR end date. Does the power mean that the FCA could compel submitters to keep submitting information to LIBOR, and is that because so many contracts depend on it? Is that really why the power to continue submitting information to critical benchmarks is engaged in this? What I am really asking is whether the clause is putting the brakes on LIBOR or, in some ways, continuing a facilitation of LIBOR after the end of 2021, for some things.

In the UK, LIBOR is the only critical benchmark. However, for reasons that the right hon. Gentleman has alluded to, we do not want the provision to be on just the LIBOR benchmark. For reasons to do with the type of legislation that that would mean—private legislation referring to something specific—a different process would be created. We have to use benchmark legislation—benchmark regulations; but LIBOR is what it pertains to. That is the only critical benchmark in the UK.

A mechanism to compel panel banks to continue to submit data beyond the end of 2021 does not exist. We have to be able to wind down in an orderly way and make provision for continuity, which is needed for the tough contracts that continue to exist and will need some reference point. We need to do that in a way that satisfies the market and maintains stability. It is in that context that we are giving the FCA the powers.

Question put and agreed to.

Clause 8 accordingly ordered to stand part of the Bill.        

Clause 9

Mandatory administration of a critical benchmark

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

Clause 9 amends article 21 of the benchmarks regulation, which concerns the mandatory administration of a critical benchmark.

Article 21 gives the FCA the power to compel the provision of a critical benchmark where the administrator notifies the FCA of its intention to cease providing the benchmark. Clause 9 amends article 21 to increase from five to 10 years the maximum period for which an administrator can be compelled by the FCA to continue to provide the benchmark. This will increase the time which the FCA has to manage the wind-down of a critical benchmark.

Under the clause, if the FCA decides to compel an administrator to continue publishing the benchmark, the FCA must assess the capability of the benchmark to measure the underlying market or economic reality and inform the administrator in writing of the outcome of this assessment. The FCA’s assessment that a critical benchmark is no longer representative of its underlying market, or is at risk of becoming unrepresentative, is the first step in providing the FCA with its wider powers to manage the wind-down of such a benchmark. We therefore wish to ensure that the FCA can take steps towards starting the managed wind-down of a critical benchmark in circumstances where the benchmark administrator itself proposes to cease the benchmark. I recommend that the clause stand part of the Bill.

The clause takes us, in a sense, to the next step after a review. Again, I have a couple of questions. First, subsection (2) refers to a period of 10 years. The Minister made clear a few minutes ago that LIBOR is definitely winding up by the end of 2021, so to what does 10 years refer? With something that is supposed to be winding up in one year, I still cannot quite understand why we are giving the regulator powers to continue it in a form for up to 10 years. I am confused about that, and I do not know if I am the only one.

Secondly, subsection (3) refers to an assessment of a benchmark. That assessment revolves around the question of the representative nature of the benchmark. It says that the FCA will always give either

“a written notice stating that it considers that the benchmark is not representative of the…economic reality”—

perhaps it has become too illiquid, in the way we discussed, or too reliant on expert opinion—or

“a written notice stating that it considers that the representativeness of the benchmark is not at risk.”

In other words, we have a good competition going here for the price of the bread. Does the 10-year period of extended mandatory information apply when the FCA has judged that the benchmark is not representative, or could it apply in cases where it is judged that it is representative as well? Subsection (3) seems to indicate that the assessment could go either way. I am trying to get at what this 10-year power is for and to which kind of benchmark it applies.

I thank the right hon. Gentleman for his entirely reasonable and appropriate questions. The compulsion period of 10 years is about having a timely period to continue with the revised methodology of the synthetic LIBOR. One of the main aims of the Bill is to provide an appropriate mechanism for the wind-down of LIBOR and to reduce the risk of contractual frustration in the event of an unplanned or sudden cessation of LIBOR. To enable a managed wind-down of LIBOR, it may be necessary for the FCA to compel the benchmark administrator to continue to provide the benchmark for a period of time, to allow a portion of LIBOR-referencing contracts to mature and end. We expect a significant number of outstanding LIBOR legacy contracts at the end of the five-year compulsion period, and those outstanding contracts will still pose a material financial stability risk, as the Financial Stability Board noted in 2014.

Extending the maximum compulsion period to 10 years means that there is potentially more time for tough legacy contracts to mature or to move to that alternative rate before the administrator is no longer required to produce LIBOR, therefore reducing the risks of mass contract frustration and subsequent litigation. The 10-year period is the maximum for which a critical benchmark such as LIBOR might be compelled. The compulsion direction issued by the FCA will have to be reviewed and renewed on a 12-monthly basis, so each year the FCA will have to review the use of the power and consider whether the decision to compel its use in compliance with the requirements of the benchmarks regulation is still appropriate, and it will need to act rationally in doing so.

If the compulsion powers were to be used, there is no guarantee that the FCA would sustain a critical benchmark for a 10-year period. Again, that would depend on the circumstances at the time, what the operating reality was with contracts in the market, and what the expectation and needs were. Parties should therefore continue to make attempts to transition away from LIBOR.

The right hon. Gentleman asked me about the representative nature of the benchmark and the mechanism by which it will be deemed unrepresentative. I cannot say that I am absolutely certain on that point, but my assessment would be that the dialogue with the market actors, and what was actually happening with the live transactions and the material evidence they were submitting to provide the basis for the benchmark to be constructed, would inform the decision on the need for an alternative—basically, whether it was functioning properly. That would not be a matter of a market-driven outcome; it would be clear from a regulatory and market security need, and that would be a conversation the FCA would have with the industry. However, we are getting into territory that I would need to look into further if I was going to give more satisfaction to the right hon. Gentleman, which he absolutely deserves.

The Minister’s phrase, “synthetic LIBOR”, helps us to understand this. I think it might mean something like this: that the regulator has the power to designate a benchmark as critical when it is unrepresentative of market reality, but in a way LIBOR is not really ending at the end of 2021, because we have synthetic LIBOR—the ghost of LIBOR, we might say—and the ghost of LIBOR is necessary because of those legacy contracts.

Where I still get confused is that the reason LIBOR is being wound up, and the reason that the FCA can designate it in this manner, is that it is unrepresentative—yet for the ghost of LIBOR, or synthetic LIBOR, to have any validity, the FCA has to continue to compel submitters to submit information to it. I do not know what the implications of that are for the quality of the ghost of LIBOR; we must remember that the reason it has been designated in the first place is that it is failing the market representativeness test. How is it, therefore, that for up to 10 years we can compel submitters to submit information to something that the regulator has judged invalid?

The right hon. Gentleman has accurately summarised the issue around synthetic LIBOR, but we are getting into suppositions about the time period for which that synthetic LIBOR would be necessary. The FCA recently published a paper on this. It is about evolving circumstances in the market. It is very difficult to be prescriptive, hence the 10-year provision. We are now getting into the realm of market operating realities at some point in the future. We have to have something that references the fact that we have a considerable volume of contracts that reference the historical LIBOR and we have to have a reference point going forward. I hope that is helpful.

Question put and agreed to.

Clause 9 accordingly ordered to stand part of the Bill.

Clause 10

Prohibition on new use where administrator to cease providing critical benchmark

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

Clause 10 inserts article 21A to the benchmarks regulation. This article provides the FCA with the power to issue a notice prohibiting some or all new use of a critical benchmark by supervised entities. The FCA may use this power where the administrator has stated that it wishes to cease providing the benchmark and the FCA has assessed the administrator’s plans to cease the benchmark or otherwise transfer it to a new administrator.

The FCA can exercise this power only if it considers that it is desirable to advance its consumer protection objective or its integrity objective under the Financial Services and Markets Act 2000. The notice will contain the reasons for the prohibition, the date when it is to take effect and any further information that the FCA considers appropriate to allow supervised entities to understand the decision. The FCA’s ability to prohibit new use in circumstances where the administrator is seeking to cease to provide the critical benchmark is an important step in preventing the pool of contracts referencing a benchmark from growing ahead of its possible cessation. I therefore recommend that the clause stand part of the Bill.

I thank the Minister for his explanation. This clause is about the prohibition of the use of benchmarks. Again, I have a few questions. Is it the case that prohibition can take place only after the kind of assessment of the representative nature of the benchmark that we discussed under clause 9(3), or are there other grounds for issuing a notice prohibiting the use of a benchmark, such as suspected criminal activity or manipulation in some other way?

My second question is about use. New article 21A prohibits “new use” of a benchmark. I think the Minister is saying that there should not be new use of a benchmark, but there may be continued use for the reasons that we have discussed—for legacy reasons. Could the Minister confirm that existing contracts referenced in the benchmark would not be covered by this “new use” provision?

My third question is about paragraph 4 of new article 21A, which says that the FCA must have regard to effects outside the UK of any decision to cease use of a benchmark. I can see why such a provision would be there, because LIBOR is used to underpin contracts all over the world. However, what can the regulator, which only has jurisdiction in the UK, do to stop the use of a benchmark elsewhere in the world? To what degree does this require work with other regulators through, for example, the Financial Stability Board, or is the judgment that action by the FCA alone would be enough, even though that action might have international effects, because of the importance of UK benchmarks? I suppose it is as if some jurisdiction has a particular influence in a sport, so when they change the rules, everybody else has to change the rules, too.

I assume that those criteria about the protection of the consumer and so on that the Minister referred to are in the Bill to protect the FCA from litigation risk by making clear that in acting on this, it was doing so in line with its statutory objectives, because the danger of litigation risk runs right through this.

The right hon. Gentleman raises a number of questions, and I should start by making it clear that we in the UK cannot stop use overseas. The provision applies to UK-supervised entities working with international partners. He is right to say that there is interconnectedness between those institutions, and the FCA has a significant role in terms of LIBOR.

The simple purpose here is that, where a benchmark is to be ceased, the pool of contracts referencing that benchmark should stop growing. The prohibition power that the right hon. Gentleman referenced is available only at the point at which the benchmark administrator has informed the FCA that it is planning to cease to publish it and the FCA has considered whether it is realistic for the benchmark to be ceased or transferred to a new administrator. Clearly, it would not be desirable for the pool of contracts that reference the benchmark to continue to grow in circumstances where it is likely that that benchmark is on a pathway to ceasing to be used. It is therefore appropriate at that stage to stop supervised entities entering into new contracts that reference the relevant benchmark.

In terms of the rules broadly governing the FCA in exercising this power, it can do that only if it is desirable to do so in order to advance this FSMA consumer protection objective or the integrity objective, so it would have to be confident that it would secure an appropriate degree of protection for consumers or advance the integrity of the market, and it would have to publish a statement along those lines. I recognise that this is complex, but we are really trying to give an appropriate toolkit to the FCA to do what is necessary not only to safeguard the appropriate ongoing construction of benchmarks, but to ensure that it has the authority to justify the management of the wind-down in circumstances where that is necessary.

Question put and agreed to.

Clause 10 accordingly ordered to stand part of the Bill.

Clause 11

Assessment of representativeness of critical benchmarks

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

Clause 11 introduces two new articles to the benchmarks regulation. New article 22A requires the administrator of a critical benchmark to undertake,

“an assessment of the capability of the benchmark to measure the underlying market or economic reality”.

The administrator must undertake such an assessment when a contributor to the benchmark is proposing to withdraw, when the FCA requires the administrator to undertake a review of the benchmark, or every two years as part of a biannual review process. New article 22A also requires that:

“If a supervised contributor…intends to cease contributing input data to a critical benchmark”,

it must provide written notification to the administrator at least 15 weeks ahead of the date it intends to cease contributing. That replaces the existing four-week notice period, which is insufficient.

New article 22B requires that the FCA must conduct its own representativeness assessment of the benchmark once it receives an assessment from a benchmark administrator under article 22A. The FCA may also proceed with its assessment where the administrator has failed to provide an assessment within the timelines specified by the legislation. After making its assessment under this article, the FCA must provide the benchmark administrator with a written notice setting out its findings, which could be that it considers that the benchmark is not representative of the economic reality it is intended to measure, that it is at risk of not being representative, or that the representativeness of the benchmark is not at risk.

Those assessments play a crucial role in the process we have designed for managing the wind-down of a critical benchmark. A finding that a benchmark is no longer representative or that its representativeness is at risk is the first step in activating many of the new powers that are being granted to the FCA. I recommend that the clause stand part of the Bill.

Question put and agreed to.

Clause 11 accordingly ordered to stand part of the Bill.

Clause 12

Mandatory contribution to critical benchmarks

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

Clause 12 amends article 23 of the benchmarks regulation, which concerns the mandatory contribution to a critical benchmark by supervised entities. Article 23 already provides the FCA with certain compulsion powers over the administrator and supervised entities, which contribute to a benchmark, including the power to compel supervised contributors to continue to contribute to a benchmark. These powers were previously only available where the representativeness of the benchmark was judged to be at risk.

The clause amends the article to ensure that it works with the new representativeness assessments we are introducing under the Bill, and that these powers are available either where the benchmark is at risk, or where the benchmark has actually become unrepresentative. The changes mean that, for instance, the power to compel a contributor will now become available whenever the FCA has made a finding that the benchmark is unrepresentative, or its representativeness is at risk.

The clause also extends the compulsion powers to supervised third country contributors and requires that if a contributor gives notice that it intends to withdraw on a specific date, it may not cease contributing on that date without written permission from the FCA. It also clarifies that the FCA’s compulsion powers and other powers in paragraph 6 of article 23 are available specifically for the purpose of restoring, maintaining or improving the representativeness of a benchmark.

These powers are important in ensuring that a critical benchmark does not simply cease in circumstances where the representativeness of the benchmark could reasonably be maintained or restored through appropriate FCA action. I recommend that the clause stand part of the Bill.

I have one or two questions to the Minister. The clause gives the FCA the power to mandate contributors, including those outside the UK—it will be interesting to see how that works—to continue to submit information to a benchmark for up to five years. However, clause 9 states that synthetic LIBOR—the ghost of LIBOR—can be kept going for up to 10 years. Why is it five years in this clause but 10 years in clause 9?

I thank the right hon. Gentleman for his question. He draws attention to the discrepancy between the provision for five years in clause 12 and 10 years elsewhere. It is important to remember that the powers in the Bill are not just for LIBOR but will be relevant to benchmarks that are designated as critical in the future. The changes in the clause ensure that the existing compulsion powers work with the amendments made to the wider regulation. Where we have a benchmark that is unrepresentative or is at risk of being unrepresentative, the FCA should have access to these powers.

With respect to LIBOR, the amendments ensure the FCA will have the required time to implement the various processes that we are introducing, to access their new powers, and to mitigate the risk of the rate simply ceasing due to insufficient input data. The 10-year provision is a contingency about the ongoing use of the benchmark. The timeframes are constructed with respect to both the LIBOR provision and the wider needs of benchmarks and have been constructed in consultation with the FCA over quite a long period.

I am not sure that that is entirely convincing, because neither clause refers specifically to LIBOR, for reasons that the Minister has explained. They both refer to benchmarks in general.

The different timescales used throughout this section are somewhat confusing. There are reviews every two years; other timescales of three months are mentioned here and there. I am genuinely confused about why clause 9 gives the power to compel contributions for up to 10 years, yet here we are a few clauses on talking about five years. I accept that the Minister says that the 10 years might be a maximum, but if these powers are to deal with the issue of legacy contracts, I am still not sure why we have this discrepancy. It could be that I am not understanding something or that I am missing something. That is certainly possible. Is this an arena where the Government may come forward with an amendment during the later stages of the Bill’s passage?

I am always open to looking at the possibility of amendments, as I have demonstrated during the sittings we have had so far. The 10-year reference was under the revised methodology for LIBOR to be produced by the administrator. It will probably be useful for me to reflect on this exchange, and to write to the right hon. Gentleman and the Committee to clarify the apparent discrepancies and rationale for this. I recognise that this is genuinely complicated. I want to bring satisfaction to the Committee and I am happy to do that.

It is a pleasure to serve under your chairmanship, Mr Davies. The shadow Minister is obviously concerned and quite rightly scrutinising the detail of every clause. Does my hon. Friend agree that it would be apposite to recall from the evidence from the regulators, including the Prudential Regulation Authority, the FCA, and specifically the LIBOR transition director for UK finance, how supportive they are of the provisions of this Bill? The LIBOR transition director said explicitly in his evidence:

“These powers, in preventing all those negative outcomes for both customers and market integrity, are absolutely critical as part of the transition.”––[Official Report, Financial Services Public Bill Committee, 17 November 2020; c. 18, Q30.]

That plays back into the consultation and regulators’ support for the Bill.

I appreciate my hon. Friend’s intervention. It demonstrates that there is widespread concern for this legislation to be passed. The right hon. Gentleman is pressing me, quite appropriately, on these apparent anomalies, and I am happy to submit to his questions. The issue is that synthetic LIBOR is related to the 10-year provision, but the five-year provision is for other critical benchmarks, which do not have the same context in terms of their contractual longevity. As I said in my response to the right hon. Gentleman, I will write to him and to the Committee to bring clarity on this matter. It is an important matter that needs clarifying.

Question put and agreed to.

Clause 12 accordingly order to stand part of the Bill.

Clause 13

Designation of certain critical benchmarks

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

The clause inserts a new article into the benchmarks regulation that, in essence, provides the FCA with the power to designate a critical benchmark as an article 23A benchmark, if they consider that the representativeness of the benchmark cannot reasonably be restored, or there are not good reasons to restore and maintain its representativeness. This designation allows the FCA to use a number of the new powers that are set out later in the Bill, such as the ability to require that the administrator change the benchmarks methodology.

Given the significant impacts of making such a designation, we have included a number of safeguards to the designation power. First, if the FCA considers it appropriate to designate a benchmark, they must inform the administrator and allow 14 days for the administrator to make representations before proceeding with the designation. If the FCA decides to proceed with the designation, they must publish a notice. That should include, among other things, the reasons for their decision, the date it takes effect and any further information that the FCA considers appropriate to assist supervised entities in understanding the effects of the designation.

In summary, clause 13 sets out the procedure by which the FCA can designate a benchmark and access the powers detailed later in the Bill. I therefore recommend that the clause stand part of the Bill.

I am grateful to the Minister. Before I begin, I say to the hon. Member for Hertford and Stortford that we are under a duty here to try to understand what we are doing. It is in that spirit that I am asking these questions. I was reminded by a colleague about a different kind of Standing Committee, which some years ago was considering the Hunting Bill. He told me that after a month they were still on clause 1, which was about the title of the Bill, so I do not think we have gone over the top in asking these questions.

With your and the Minister’s indulgence, Mr Davies, I would like to make a few points about the next few clauses; I think they go together and get to the heart of what this area of the Bill is about. As I said, the Opposition understand why LIBOR is being wound down; we have gone over the history of the manipulation and so on. It is why the Bill rightly places such an emphasis on benchmarks being representative of market activity: so far, so uncontroversial.

However, there is a problem in the transition from LIBOR to SONIA or other new benchmarks. As we have referenced several times, there will clearly be some impact on the value of LIBOR-based contracts. That impact is openly acknowledged by the FCA when it says:

“Where parties to contracts referencing LIBOR cannot reach agreement on how those contracts would operate in the event of LIBOR’s cessation, discontinuation could cause uncertainty, litigation or loss of value because contracts no longer function as intended. If this problem affects large volumes of contracts it could pose risks to wider market integrity of contracts/financial instruments.”

Remember that, given the volume of money involved—we are talking about not millions or billions but trillions—this is a systemic risk, as well as a risk to individual parties to contract.

My understanding of the provisions in clause 13 and a few that follow is this. When the FCA feels that a benchmark is no longer representative of the market to which it relates or that that representativeness is at risk, it can designate the benchmark under article 23A of the benchmark regulation. Then there are various provisions about notices being published, reasonable fees being charged and so on; we can leave those aside. When such a benchmark is designated by the FCA, that can only be done in line with the statutory duties, to which the Minister referred, of consumer protection and market integrity. When a benchmark is designated in that way, new use of the benchmark is prohibited, but—this is the critical “but”—the FCA can mandate continued legacy use of that benchmark. The Minister may come back to me about timescales—five years, 10 years or whatever it is.

Finally, if the potential disruption brought about by the discontinuation of LIBOR—or a critical benchmark, if we want to refer to it in that way—is too great, it is suggested in the Bill that the FCA may compel its continuation, as we have discussed. How realistic is it for the FCA to continue to compel administrators to submit information to something that they have said they want to phase out in a year’s time? The provisions are intended to allow the FCA to wind down a critical benchmark but in a way that protects these legacy contracts, which are based on the old benchmark. That brings us to those legacy contracts and what is or is not included, and to the potential legal risks.

As I understand it, there might be two issues. First, what is the definition of a legacy contract? Is it one where there has not been agreement between the two parties to transfer to the new benchmark, or is it something different? What are we talking about when we discuss legacy contracts? What would we do if there were a dispute between the parties about whether something should be treated as a legacy contract or not?

Secondly, how will the provisions cope with the potential legal action and/or market disruption as a result of parties feeling aggrieved, for one reason or another, about the switch from one benchmark to another or, in consequence, taking action that results in disorderly markets? In other words, to what degree is the process subject to disruption through legal action by the parties involved, which could feed into market operation, given the volume of money involved in these contracts?

This situation is complicated even further by the fact that the UK is not the only jurisdiction passing such legislation. Both the European Union and the United States are passing similar legislation. Is it not the case that both contain the safe harbour provisions to which the Minister referred, and on which we had representations last week? In fact, I believe that legislation was introduced just a month ago in the New York Senate that contains these safe harbour provisions. New York law has particular influence over financial markets, given the volume of the US financial markets located in New York.

Given the international nature of the use of these benchmarks and the contracts based on them, if we legislate here and do not have a safe harbour provision, do we open up the potential for what some refer to as forum shopping or regulatory arbitrage, whereby parties gravitate to the jurisdiction that appears to offer the highest levels of protection? Let us remember that the firms that we are talking about are global in nature and highly international. It would not be unusual for someone involved in this area to have an office in London and New York, and maybe in other countries, too.

Is the absence of a safe harbour because the Government are against it, or might they make an amendment to that effect on Report in the Commons or in the other place? Does the Minister accept the point that, in the absence of a safe harbour provision in the UK but its inclusion in American or parallel European legislation, we could face the issue of forum shopping?

Finally, in the event of legal action, who gets sued? Is it for the parties to the contracts to sue one another, or is there a danger that these provisions create the potential for the FCA, through the act of designating and winding up a benchmark, to be sued by people who feel that they are caught on the wrong side of price changes?

I accept that that is a lot of questions to give the Minister at once.

However, I thought it better to take these next few clauses together and raise those points with him in this way.

I want to ask a quick question about what is perhaps neither synthetic nor ghostly LIBOR, but zombie LIBOR, because it seems to be lurching on and not quite dead.

I am curious about the monitoring of whether these critical benchmarks are becoming unrepresentative, how that practically would work and at which stage that happens. I also note that there is an obligation under clauses 13 to 16 to bring things to the attention of the public and the supervised entities, but no such requirement to bring them to the attention of Parliament. Will the Minister reflect on whether it would be useful to us as parliamentarians to hear about those things? We cannot necessarily be expected to monitor things on the FCA website as members of the public, and those things might be something that parliamentarians might usefully want to find out.

I thank the hon. Lady and the right hon. Member for Wolverhampton South East for their questions, and I will do my best to address them.

On legacy use, this is broadly where a benchmark was used in specified existing contracts or instruments prior to its designation as an article 23A benchmark. The right hon. Gentleman went on to ask a series of questions about the concept of safe harbours, the different jurisdictions of legal process, and the compulsion process. The Government believe that the proposal is realistic. The administrators do not submit information; the contributors do. On safe harbours, which we picked up on from the evidence from the gentleman from the trade association last week, we recognise the challenges identified in that session, and the powers are designed to assist those contracts that cannot feasibly move away from LIBOR, as Paul Richards described. I am committed to looking to address the issue of safe harbour through further work with industry.

In practice, it will not be possible to table amendments during the passage of this Bill, but that is not down to my unwillingness to do so; it is a matter of the maturity of the conversation, and I think that will be acknowledged. A live productive conversation is going on.

Is the parallel legislation in the United States and the EU part of that consideration? When we received the oral evidence last week, I confess that I had not appreciated that parallel legislation on this subject, with safe harbour provisions, was going through in those two jurisdictions. Given the co-operation that already exists through the FSB, involving in the Federal Reserve Bank of New York and the Bank of England, is that part of the consideration?

We are looking and working internationally. We have an active dialogue with the US through a regulatory working group, and we will be monitoring that. There is no question of us seeking to find some competitive advantage in this; there will be a need to find as much alignment as possible to give as much clarity and certainty to the market actors. However, the conversation is not at that stage yet here. There is no sense that that is jeopardising the integrity of this process. This is the first step, but we reserve the right to do other things further to the conclusion of those conversations.

As for accountability to Parliament, as raised by the hon. Member for Glasgow Central, the legislation requires the FCA to produce statements of policy and notices when exercising the powers. There is also a requirement to review the exercise of its methodology every two years and to publish a report following that review. The FCA is required to exercise its powers in accordance with the two statutory objectives: consumer protection and market integrity. That is the relationship to parliamentary accountability.

Turning to the other matters raised by the right hon. Gentleman around the administrator challenging a designation, if the FCA decides to designate a benchmark under this article, the benchmark administrator has the option of referring the matter to the upper tribunal. The FCA is required to inform the administrator of its right to refer the decision to the upper tribunal and the procedure for doing so.

As for the continued publication of a benchmark that has been deemed unrepresentative, in the case of a critical benchmark such as LIBOR, the benchmark is so widely used that its discontinuation would represent a risk to financial stability and create disruption for market participants. Therefore, this Bill provides the FCA with the power to require a change to how a critical benchmark is determined, including input data, to preserve the existence of the benchmark for a limited time period to help those contracts that otherwise would not realistically transfer to an alternative benchmark.

I hope I have done justice to most of what the right hon. Gentleman raised. I will seek to review what we have exchanged and, if there are outstanding matters, to write to him. I am relieved we have moved beyond clause 1.

Question put and agreed to.

Clause 13 accordingly ordered to stand part of the Bill.

Ordered, That the debate be now adjourned.—(David Rutley.)

Adjourned till this day at Two oclock.

Financial Services Bill (Eighth sitting)

The Committee consisted of the following Members:

Chairs: Philip Davies, † Dr Rupa Huq

† Baldwin, Harriett (West Worcestershire) (Con)

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

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

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

† Eagle, Ms Angela (Wallasey) (Lab)

Flynn, Stephen (Aberdeen South) (SNP)

† Glen, John (Economic Secretary to the Treasury)

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

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

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

† Millar, Robin (Aberconwy) (Con)

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

† Richardson, Angela (Guildford) (Con)

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

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

† Thewliss, Alison (Glasgow Central) (SNP)

† Williams, Craig (Montgomeryshire) (Con)

Kevin Maddison; Nicholas Taylor, Committee Clerks

† attended the Committee

Public Bill Committee

Thursday 26 November 2020

(Afternoon)

[Dr Rupa Huq in the Chair]

Financial Services Bill

The same drill as the other day: I am happy to permit Members to remove their jackets. Apparently permission has to be sought from the Chair to remove a jacket, so there you go—that is how nice I am. I saw you a lot on TV yesterday, Minister; it is nice to see you in the flesh.

Clauses 14 and 15 ordered to stand part of the Bill.

Clause 16

Review of exercise of powers under Article 23D

I beg to move amendment 3, in clause 16, page 23, line 13, leave out “latest” and insert “most recent previous”.

This amendment clarifies what the FCA has to review before re-exercising the power under Article 23D(2) of the Benchmarks Regulation.

Clause 16 introduces a new provision: article 23E of the benchmarks regulation. It requires the Financial Conduct Authority to conduct and publish a review of an exercise of its article 23D powers to direct the administrator of an article 23A benchmark to change the methodology rules, or code of conduct, of the benchmark. Where the FCA has exercised a power under article 23D, the FCA is required to conduct and publish a review of the exercise of that power two years after the power is first exercised. The FCA must then conduct and publish such a review in each subsequent two-year period until the benchmark ceases to be published.

The FCA will also be required to review the exercise of this power under article 23D whenever it intends to re-exercise its power in relation to the same benchmark. The FCA must conduct and publish a review of the latest exercise of its article 23D power before re-exercising the power where that is reasonably practicable. In circumstances where it may not be reasonably possible for the FCA to conduct its review prior to the use of the power, the FCA must conduct and publish its review as soon as is reasonably practicable after the re-exercise of its article 23 power. For instance, it is possible that the FCA may need to take such a course of action when it needs to access its article 23D powers urgently to prevent significant market disruption or financial stability risks.

In concluding the review, the FCA will be required to consider whether the exercise of its power has advanced, or is likely to advance, its statutory objectives to protect consumers and market integrity. It must also have regard to the statement of policy that the FCA has published in respect of the use of its article 23D powers. The clause provides a statutory mechanism through which the effectiveness of the FCA’s exercise of its powers under article 23D can be evaluated. It also serves to increase the accountability of the FCA in the exercise and re-exercise of the powers.

I apologise for not acknowledging you in the Chair, Dr Huq; it is a pleasure to serve under your chairmanship. I recommend that the clause stand part of the Bill.

I thank you, Dr Huq, for chairing this afternoon’s session. For clarity, we had a fairly extensive debate on clauses 13 to 16 together, hence the speed of our progress at the beginning of this session.

Amendment 3, which stands in my name, is a technical amendment. As the explanatory note says, it is intended to clarify the scope of the review that the FCA is required to undertake where it re-exercises its article 23D(2) powers in relation to the same benchmark. Article 23D(2) provides the FCA with the powers to direct the administrator of a critical benchmark to change the methodology rules or code of conduct of the benchmark. The amendment serves to put beyond doubt which exercise of power the FCA is required to review at this point in time.

I would like to address the point raised by the right hon. Member for Wolverhampton South East just before we broke for lunch on the international LIBOR transition. The Government have followed related global regulatory developments closely, including what is going on the United States, as he mentioned, with the US Alternative Reference Rates Committee’s legislative proposal. We continue to work with regulators to engage our international counterparts directly, as well as through the Financial Stability Board’s official sector steering group and the International Organisation of Securities Commissions.

It is quite clear that, as the right hon. Gentleman stated, we will need a co-ordinated global approach, and we aim to provide consistent outcomes for users. The Government are committed to ensuring that their dialogue with international counterparts continues, and aim to firmly limit any unhelpful divergence to outcomes. I hope it will be helpful for the Committee to have that put on the record.

I am grateful to the Minister; I suspect that is a harbinger of a Government amendment at some point, because of the debate we had on safe harbour provisions. If they are coming in in the US and the EU, I suspect, given what he has just said about marching together on this internationally, we may see an amendment from him on this at some point.

It sounds like fine-tooth comb stuff this morning.

Amendment 3 agreed to.

Clause 16, as amended, accordingly ordered to stand part of the Bill.

Clause 17

Policy statements relating to critical benchmarks

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

Clause 17 introduces a new provision, article 23F of the benchmarks regulation. This clause requires the FCA to publish statements of policy and to have regard to those statements when exercising certain new powers set out in the benchmarks regulation. The FCA is required to publish a statement of policy with respect to the exercise of this power to designate a critical benchmark as an article 23A benchmark. This is the designation the FCA can make where it determines that a benchmark’s representativeness cannot be restored or maintained, or that there are good reasons not to restore or maintain representativeness.

The FCA must also publish a statement of policy with respect to the exercise of its powers under article 21A, which allow it to prohibit new use of a critical benchmark when the administrator of that benchmark has notified the FCA of its intention to cease providing the benchmark. The FCA is also required to publish a statement of policy in exercising its powers under article 23C, which allow it to permit certain types of legacy use of an article 23A benchmark by supervised entities. Finally, the FCA must also publish a statement of policy in exercising its power under article 23D, which allows the FCA to impose requirements on the administrator of an article 23A benchmark to change the methodology, rules or code of conduct of the benchmark.

The Bill states that the FCA’s duty to prepare and publish those statements of policy can be satisfied before as well as after this legislation comes into force. On 18 November, the FCA published two consultations inviting industry feedback on statements, which ask for views on how the FCA intends to exercise its article 23A and article 23D powers granted under this Bill. It has also stated its intention to engage with industry stakeholders and international counterparts in the development of its statements of policy with respect to its powers under articles 21A and 23C.

This clause increases transparency regarding how the FCA will exercise certain new powers set out in the Bill to support the orderly wind-down of a critical benchmark. In developing statements of policy, the FCA will be able to engage with industry and international counterparts. The clause also requires the FCA to have regard to those statements when exercising its new powers, reducing uncertainty for market participants. Therefore, I recommend that the clause stand part of the Bill.

I just have a question about these policy statements. We have been through quite a lot about how the FCA will designate, compel and continue the submission of information and all the rest of it. What role do these policy statements play in all of that? Is the policy statement simply putting into law a requirement on the FCA to say why it has acted as it has, or is it, as part of what I think is behind some of the stuff in these clauses, insulating the FCA against the threat of legal action because of the possible effect on contracts? Is this a nice to have, best practice or is it something that helps to protect the FCA against the threat of litigation, which has been a thread through this discussion?

Obviously, this is a very technical area, to say the least. I just want to ask a couple of questions so that I can get my head round how the FCA will use the power. We have different regulators who could make different determinations as to what constitutes benchmarks going forward, and yet those benchmarks write contracts worth trillions of pounds and dollars into the future. Any arbitrage opportunity in the way that those contracts work could make some people very rich and ruin others. This will be decided as one goes along. Some of these contracts are being made, but some are already projected into the future.

To ensure that markets are not distorted and the potential for nefarious profit by some with insider information is minimised, we need reassurance about how the FCA will perform the task, particularly in its interactions with the other regulators. I am not sure what the Government’s intention is, apart from saying they are going to liaise with other regulators. Is it the Government’s intention that these benchmarks ought to be similarly designed and defined across different regulatory jurisdictions, since this is almost a currency, or are we seeking divergence here as well in order to perhaps increase our chances of being the place where some of this business is written?

Perhaps the Economic Secretary could reassure me on that, because the FCA’s powers are pretty strong, but what is the intention? That might be in all of the many consultations, which I confess I have not read, so it might be set out there. If the Minister could put a little more on the record, we might at least have some certainty there, not least for Pepper v. Hart purposes.

I thank the right hon. Member for Wolverhampton South East and the hon. Member for Wallasey for their observations. The hon. Lady demonstrates her experience and professionalism in being able to jump in on the first clause, having not been here this morning—no disrespect intended.

The point that the hon. Lady makes is absolutely clear. We need to ensure that the regulations are in line with global practices because the issue is global. The interconnectedness of financial services markets demands, as in the statement I made just now, that we work very closely with regulators in other jurisdictions. It is absolutely right that we learn the lessons that the right hon. Gentleman, in his work on the Parliamentary Commission on Banking Standards several years ago, drew attention to with respect to the appalling abuses in the market. This measure is designed to give us a framework and to give the FCA the powers to ensure that we have global best practice and no ambiguity.

The right hon. Gentleman asked about the statements of policy and their use, and sought reassurance on how this system will work. They are published by the FCA to describe in more detail how it will interpret and exercise its supervisory and regulatory functions more transparently. Obviously, the FCA has stated its aspirations with respect to LIBOR and its intention to engage market participants in the development of the statements of policy. But this measure will provide greater clarity and certainty to market participants—given the sums involved in the contracts, the associated risks are significant—as to how the overarching legal framework will be operationalised to deliver the orderly wind-down of this benchmark, which is the only critical benchmark to which these provisions would presently apply.

The FCA will continue to engage with market participants—that means domestically and internationally—as well as with other international authorities. In developing the statements of policy, the FCA will be able to consider the broad spectrum of views and determine the appropriate way in which its powers could be exercised.

I will say that I have been doing this job for nearly three years and I have received a considerable number of pieces of advice over that time, because this is such a complex problem to resolve well, as the industry will testify, but this measure is about ensuring continued evolution of transparent policy making in this area.

Question put and agreed to.

Clause 17 accordingly ordered to stand part of the Bill

Clause 18

Critical benchmarks provided for different currencies etc

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

This clause introduces a new provision, article 23G, into the benchmarks regulation. The clause makes provision about critical benchmarks provided for different currencies, or for different maturities or periods of time. This type of benchmark is known as an umbrella benchmark. LIBOR, for instance, is an umbrella benchmark. It is published in five different currencies over seven different time periods, ranging from overnight to up to one year. Those five currencies and seven time periods are paired to form 35 individual LIBOR settings, referred to in the legislation as “versions” of the benchmark. An example of a version of LIBOR would be three-month US dollar LIBOR.

Paragraph 3 of article 23G sets out that specified articles of the benchmarks regulation will apply to umbrella benchmarks as if each version were a separate critical benchmark. Paragraph 4 sets out how provisions under paragraph 3 of article 21, paragraphs 1(a) and 2 of article 22A and paragraph 1 of article 23E of the benchmarks regulation are modified in relation to an umbrella benchmark.

The Treasury will be able to make, by regulations, provisions about the operation of the UK BMR in respect of umbrella benchmarks. The regulations must be made by way of the affirmative procedure.

This clause sets out that the FCA will be able to exercise certain new powers to support the orderly wind-down of a critical benchmark in different ways in relation to different versions of an umbrella benchmark. It also clarifies the existing operation of certain provisions of the benchmarks regulation and how the FCA’s powers apply to versions of a benchmark. Those clarifications of the FCA’s powers will be of aid in supporting the orderly wind-down of a critical benchmark. For example, where panel banks begin to withdraw their submissions to some or all versions of LIBOR after the end of 2021, the different versions of LIBOR are likely to become unrepresentative, as we discussed earlier, or be at risk of becoming unrepresentative at different speeds.

It would be neither practicable nor appropriate for the FCA to exercise its new and existing powers uniformly across all versions of LIBOR simultaneously. For example, it is possible that if the robust input data necessary for an alternative methodology is not clearly available for certain versions of LIBOR, the FCA may not be able to exercise its power to direct a change in its methodology. In other cases, market participants may prefer to cease publication of some LIBOR versions. The FCA will consider evidence and views from market participants and global authorities in deciding the best course of action in respect of LIBOR versions.

It is critical to the wind-down of LIBOR, and future umbrella benchmarks, that the FCA can apply its powers under this legal framework to different versions of an umbrella benchmark at different times and in different ways. I therefore recommend that this clause stand part of the Bill.

Question put and agreed to.

Clause 18 accordingly ordered to stand part of the Bill.

Clause 19

Changes to and cessation of a benchmark

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

The clause introduces amendments to article 28 of the benchmarks regulation, including new paragraphs 1A to 1E. Article 28 of the benchmarks regulation stipulates requirements for benchmark administrators and supervised entities in preparing for changes to, or the cessation of, benchmarks. I will refer to this as the change and cessation procedure.

The clause inserts the word “robust” in paragraph 1 of article 28 to define and strengthen the nature of the change and cessation procedures that benchmark administrators are required to publish. The clause also inserts new paragraphs 1A to 1E, which set out requirements for the written change and cessation procedure that a benchmark administrator must publish.

New paragraph 1A establishes that the administrator must publish a robust written change and cessation procedure alongside the publication of the administrator’s benchmark statement, which, among other things, sets out the market or economic reality that the benchmark intends to measure. The documents must be published within two weeks of the benchmark being registered in the FCA’s register. Wherever a material change occurs, the benchmark administrator is required to update its written procedure. For critical benchmarks, the proposed changes in new paragraphs 1B to 1E set out additional and more stringent requirements.

When publishing its written procedure, the administrator of a critical benchmark is required to provide an assessment to the FCA, on the basis of the information available to it, that considers the nature and extent of the current use of the benchmark, the availability of suitable alternatives, and how prepared users are for changes to, or the cessation of, the benchmark. Before publishing an updated written change and cessation procedure, critical benchmark administrators must also provide that assessment together with their updated written procedure to the FCA for review. The FCA is required to review and consider whether the procedure is sufficiently robust. The administrator must not publish an update of its procedure without receiving written notice from the FCA that its procedure is sufficiently robust.

In order to be designated as a critical benchmark, a benchmark must be used extensively, and its cessation may pose significant and adverse impacts on market integrity, financial stability, consumers, the real economy, or the financing of households and businesses. It is therefore reasonable and proportionate to require administrators of critical benchmarks to demonstrate via an assessment that their cessation plans are robust. We do not expect it to be an overly burdensome assessment for benchmark administrators. The clause will support increased preparedness in the event of changes to, or the cessation of, benchmarks in the future. I therefore recommend that the clause stand part of the Bill.

Again, I have just a few questions so that I can get in my head precisely what the reason is for putting this in primary legislation. LIBOR clearly had its issues but it was used for a very long time. Is the Minister anticipating that benchmarks will change much more rapidly in the future, or does he want some kind of stability with the new benchmarks that are based on actual prices, rather than the guesses of participants in the market, as LIBOR came to be defined prior to its demise?

Is the Minister expecting that this kind of provision for ceasing benchmarks will be used regularly? I anticipate that the answer will be, “Only when it is needed because of what is happening in the market.” If this kind of procedure is theoretical and on the face of a piece of legislation but hardly ever used, does that mean that the mechanisms that the Minister is setting out in clause 19 and other parts of the Bill will rust away? They will be there in theory, but there will be nobody there to work them properly. How does he anticipate that the market, the FCA and the benchmark administrators will maintain the capacity to do this if cessation is a very irregular, rare thing?

Will the Minister spend a bit of time defining what “robust” means in this context? In my time in this place, I have had many arguments with Ministers, and made many arguments as a Minister, about why we must not put particular words on the face of Bills and what their meaning is. Can the Minister enlighten us as to what he, the FCA and the Treasury mean by “robust” and how they are defining that in law, so that I can have a bit more confidence that they have got it right on the face of the Bill?

I thank the hon. Lady for her comments. Although the provisions of this legislation are under the heading of benchmarks, they really refer to the capacity that we need to have to deal with the LIBOR issue. She is right to raise the question of the enduring provision and how tested and exercised that capacity would be, but this is about setting a framework for future use, which is very difficult to anticipate. We want to ensure that it is fit for purpose for the future.

The hon. Lady asks when the framework could be used, which is not a matter that I can reasonably be drawn on, because it would be about market conditions evolving, but it certainly means that we are ready for whatever might evolve, in terms of benchmarks on the path towards becoming critical. However, it will be for the FCA, in conversation with the market and Parliament, to determine how to bring that forward.

Does the Economic Secretary think that, given the incredible trouble that the wind-down of LIBOR has caused in the markets—not least because of what is on the face of the Bill and the very difficult issues caused by having to exit the LIBOR benchmark—it is best to try to get the next benchmark sorted and future-proofed, so that it does not turn into LIBOR 2 and cause his future successor in the Treasury and me all this kerfuffle in a Public Bill Committee?

Absolutely. It is absolutely right that we give the power to the FCA but also keep a vigilant eye on evolving market conditions, so that we are well placed to move earlier to deal with any failures in benchmarks.

The hon. Lady asked me to define “robust” in the context of the Bill. I am reluctant to be drawn on that, because it is a matter of legal definition, but I would be very happy to write to her on that and respond at subsequent sittings of the Committee, if she wishes me to do so.

Question put and agreed to.

Clause 19 accordingly ordered to stand part of the Bill.

Clause 20

Extension of transitional period for benchmarks with non-UK administrators

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

The clause amends article 51(5) of the benchmarks regulation, which provides for a transitional period during which the UK’s supervised entities can continue to use all third-party benchmarks. Those are benchmarks that are provided by administrators located outside the UK. When the UK onshored the EU benchmarks regulation, the transitional period for third-country benchmarks was extended from the end of 2019 to the end of 2022. The extension was made to provide third-party benchmark administrators with more time to apply for continued access to UK markets. For the UK’s supervised entities to continue to use benchmarks that are administered outside the UK after the end of 2022, the benchmarks or their administrator must be listed on the FCA benchmarks register.

The benchmarks regulation provides three access routes for third-country administrators or benchmarks. They must apply for the endorsement of specific benchmarks or for recognition as an administrator, or they can benefit from an equivalence decision made by the Treasury with respect to their home jurisdiction’s regulatory framework. As of October 2020, however, only 14 third-country benchmark administrators have come through the access routes that are outlined in the EU benchmarks regulation. Industry engagement has also revealed important concerns about the operation of the current regulatory regime for third-country benchmarks under the benchmarks regulation. For example, many non-European economic area jurisdictions do not have specific regulator rules for benchmarks.

The UK will explore how best to support the use of global, non-UK benchmarks that adhere to equivalent regulatory outcomes. The endorsement and recognition access routes both rely on third-country administrators being willing to apply for market access, and require the appointment of a UK entity to facilitate their application for ongoing market access. Some third-country benchmarks are provided on a non-commercial basis, however, meaning that those administrators lack an economic incentive to apply. Smaller firms may also be reluctant to appoint a third-party UK entity to oversee their benchmark administration.

Consequently, under the current regulations, UK firms are at risk of losing access to important third-country benchmarks after the end of 2022. Those benchmarks are relied on for key business functions, such as risk management, Treasury financing and overseas investment. The Government will consider changes to the third-country regime so that it is proportionate for third-country benchmarks and appropriate for the needs of the UK economy. By extending the transitional period for third-country benchmarks to the end of 2025, the clause will provide legal and economic certainty for UK firms that rely on third-country benchmarks. That will also allow the Government to fully consider and operationalise an appropriate third-country benchmarks regime for the UK. I will update the House on that in due course.

I just want to ask the Economic Secretary a question to ensure that we have properly understood the clause. All through this part of the Bill, we have talked about the different timescales in different clauses, and here we have another, which extends the transition period for benchmarks with third-country administrators until the end of 2025.

For my clarity, and perhaps for that of colleagues, will the Economic Secretary clarify whether the measures are different—I think they are—from the five and 10-year timescales in clauses 9 and 12, relating to the FCA designating what the hon. Member for Glasgow Central called zombie LIBOR? Is this five-year period about something different or does it relate to that?

Having debated this matter for a couple of hours, I am not sure that we have resolved it. My feeling is that we are leaving quite a lot to the FCA. I hope that the clause minimises the risk of harm. We have talked a lot about the risk of litigation, but there is also the risk of harm to those who have entered contracts based on LIBOR in good faith. The Government and regulators are trying to move away from that system for reasons that we understand are to minimise harm to those who signed up in good faith, but I suspect that there is still a fair bit of work for the regulator to do to ensure that that is the case.

Will the Economic Secretary share with the Committee the intention behind the extension to 2025? He said that it was to create certainty—I can understand that. Is the intention to transition to something different—the new third-country regime—after the extension, or is it to develop and introduce it earlier if it looks like there are advantages to doing so? I know that I am asking him to gaze into the future, but this will be in the Treasury and regulators’ work list and they will presumably schedule it at some stage. Does he expect the creation of a third-country regime to be difficult or quite easy? Are the Government thinking of basing it on the existing regimes or diverging from what we are used to? Will he give us a little more information about how the Treasury intends to proceed with this piece of technical but very important work.

I am very happy to address those points. The right hon. Member for Wolverhampton South East raised the issue of the different time periods. This is different from the LIBOR transition; it is about the third-party benchmarks exclusively. It is a response to the market reality, as we have seen in the number of applications. I will come to the point of the hon. Member for Wallasey in a second.

The right hon. Gentleman also asked about the risk of harm concept and how important that is. Clearly, the LIBOR transition, as we have established today, is an incredibly complicated matter with a great deal of legal complexity, an imperative to align to global best practice, the need to produce a synthetic alternative and the evolution of policy around that. It is also designed to protect. He is right to say that there is a lot more work to be done; there is no off-the-shelf solution. This measure allows the formal framework for that to evolve.

The hon. Member for Wallasey asked me to comment on the future time period by which the new third-country benchmark regime would be constructed. The extension is a response intended to resolve industry concerns and to ensure that UK markets can retain access to the third-country benchmarks. There is no intention to find some way of deviating from norms on that. It is in our interest to have complete alignment to global best practice. The extension gives UK firms the legal and economic certainty. As soon as it can be done, it should be done. I cannot give her the precise location of where that is in the work plan—the FCA has a lot on at the moment—but she is right that we need to operationalise it appropriately, recognising the different obligations on different sized firms. I will be working with the FCA to keep an eye on that in the coming weeks and months.

Question put and agreed to.

Clause 20 accordingly ordered to stand part of the Bill.

Clause 21

Benchmarks: minor and consequential amendments

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

This clause inserts schedule 5, which sets out minor and consequential amendments to the benchmarks regulation to provide for the effective operation of that regulation in the context of the amendments introduced by clauses 8 to 19. I therefore recommend that the clause stand part of the Bill.

Question put and agreed to.

Clause 21 accordingly ordered to stand part of the Bill.

Schedule 5 agreed to.

Clause 22

Regulated activities and Gibraltar

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

Clause 22 delivers the Government’s commitment to enable Gibraltar-based firms to have continued access to the UK’s financial markets. We move on, finally, from benchmarks and LIBOR; I cannot say that I am too disappointed by that.

I recognise that I missed a lot of exciting things this morning, but I do not think the Minister is really moving on from that, as he now has to do the work to put it into effect.

It was projected that we would get up to clause 20 by the end of this morning, in fact.

I allowed myself a moment of light-heartedness, but I can see that that was not appropriate.

In financial services, the Financial Services and Markets Act 2000 allows for several categories of authorised persons to carry on regulated activities in the UK, such as firms with domestic part 4A permission or, until the end of the transition period, EEA passporting firms. The clause provides a regime through which firms authorised for activities in Gibraltar can be recognised as authorised persons in the UK.

When significant areas of financial services regulation were set at EU level, that meant that the UK and Gibraltar followed the same rules. Now that the UK and Gibraltar have left the European Union together, the legal framework that provides for mutual market access and aligned standards needs amending. Without new permanent arrangements, Gibraltar will lose its current breadth and depth of access to the UK market, which not only would damage Gibraltar’s economy and our special and historic relationship but could lead to disruption and more limited choice for UK consumers.

The detailed application of the regime is set out in two schedules, which in turn insert two new schedules into the Financial Services and Markets Act 2000: schedule 2A, as inserted by schedule 6, governing the operation of the arrangements for Gibraltar-based firms; and schedule 2B, as inserted by schedule 7, which provides for the requirements that outgoing UK-based firms must meet before accessing the Gibraltarian market.

I should clarify that we are not legislating for Gibraltar. The measure is primarily about Gibraltar-based firms’ access to the UK. The Government have a responsibility to ensure financial stability and the correct operation of the UK financial services system, particularly when we open our markets to other jurisdictions. The clause therefore also requires the Treasury to lay a report before Parliament about the operation of the regime every two years.

The report will explain the Treasury’s assessment of whether the three conditions in the clause—that is, compatibility with the objectives in the clause, the alignment of law and practice, and co-operation—have been met during any reporting period, and whether the Treasury therefore proposes to enable market access for particular activities. That will give Parliament confidence that regulatory and supervisory standards are being applied in a consistent manner by UK and Gibraltarian institutions, so that UK consumers can benefit from products from a wide range of providers without additional risks.

Given that clause 22 is central to the creation of permanent market access arrangements between the UK and Gibraltar, I recommend that it stand part of the Bill.

Like the Minister, I too bid a fond farewell to LIBOR. Clauses 22 and 23 and schedules 6 and 7 establish the Gibraltar authorisation regime, which could be described as a sort of mini-single market in financial services between the UK and Gibraltar. The Government have set out many detailed pages in the schedules in particular about how that mini-single market should work.

Up until now, Gibraltar has been regarded as a European territory that was a member of the EU through its status as a British overseas territory. That meant that Gibraltar had full access to single market rights, including those in financial services. Given that Gibraltar, as well as the UK, has now left the EU and is coming towards the end of the transition period, the Government clearly felt that they had to put a regime in place to be the basis of future trade in financial services between Gibraltar and the UK.

Such a regime was, to some extent, necessary, because of the volume of trade in financial services that already exists between the UK and Gibraltar. We heard during last week’s oral evidence that roughly one in five car insurance policies in the UK is held by Gibraltar-based insurance companies. As I said during an oral evidence session last week, there is great good will towards Gibraltar on both sides of the House. The people of Gibraltar voted to remain in the EU by an overwhelming margin—I think it was about 95%—so we could describe the clauses and the accompanying schedules as the consolation prize to Gibraltar for having to depart the EU at the same time as the UK.

I know that under clause 22 the Treasury will report every two years on how the regime is operating. I cannot fail to reflect that that is precisely the kind of regular reporting mechanism that the Minister so stoutly rejected about four times on Tuesday when we were trying to insert it into the clauses on capital requirements. Why is it right and necessary for the Treasury to review this regime every two years but not to review the impact of change in the capital requirements on major parts of our financial system?

According to schedule 6, the report must have particular regard to paragraphs 7, 8 and 9 of that schedule, which set out the details of the new regime. Paragraph 7 tries to instil protections for the UK into this process, including for the soundness and stability of our own system, and, according to paragraph 7(c),

“to prevent the use of the UK financial system for a purpose connected with financial crime”.

It goes on to talk about ensuring markets work well, the protection of consumers and, interestingly, according to paragraph 7(h), about the need

“to maintain and improve relations between the United Kingdom and other countries and territories with…significant markets for financial services.”

I would like to ask the Minister a few questions about the significance of the review mechanism against these criteria. Does the rolling two-year commitment mean that Gibraltar should not necessarily view these arrangements as permanent? Is the right way to think of this, rather than as the establishment of a permanent mini-single market between the UK and Gibraltar in financial services, as something akin to a renewable two-year licence to operate in the UK under this regime? Or does that overstate the importance of this two-year Treasury review mechanism?

With regard to financial crime and money laundering —we will talk about this later—has the Minister read and considered the Financial Action Task Force and Council of Europe report into “Anti-money laundering and counter-terrorist financing measures” in Gibraltar? That report, which was published about a year ago, found that while the Gibraltar Financial Services Commission and the Gibraltar Gambling Commissioner had a “robust”—that word again—

“understanding of risks at sectoral level”,

there were shortcomings because of

“underestimating the cross-border threat which Gibraltar faces as an international financial centre.”

It also says that

“the assessment and understanding of the FT risk are affected by insufficient consideration of data available on transactions to/from conflict zones and high-risk jurisdictions. The risk related to cross-border transportation of cash is also”

misunderstood, and goes on to say that the financing terrorism risk is “not properly understood” by the financial institutions, particularly banks and e-money providers, and that banks do not properly consider “transactions to high-risk countries”. The picture painted here is of regulators trying to do the right thing and operate to UK standards, but of financial institutions operating in the territory that are sometimes not fully aware of the risks outlined in the report. What is the Minister’s response?

My right hon. Friend is making a powerful and important case about the importance of ensuring that we do not inadvertently support money laundering or standards that could enable that by accident. It is worth reflecting that in February this year, the EU anti-money laundering watchdog, MONEYVAL, called for Gibraltar to do more. One question for us in this legislation is whether there are things we can do to ensure that we are not inadvertently creating access that would enable such behaviour, now that we are leaving the European Union, which might have been offering that level of scrutiny. Does my right hon. Friend have a view on joining up those dots?

My hon. Friend is absolutely right.  In fairness, I do not think that the UK system on money laundering and financial crime is perfect—we have our own issues, which we have debated before and will debate later in our consideration of the Bill—but these findings should be taken seriously, particularly as we are creating a new situation. In the past, both the UK and Gibraltar were part of the EU and we operated under the single market rules, including those on financial services. I do not know whether what we are creating is unique—I will ask the Minister about uniqueness—but it is certainly a new concept: a mini-single market in financial services between two territories.

What is the Minister’s response to the report’s findings? In particular, given that protection from financial crime has been written into the Bill through the Government’s two-year review process, what contact has there been between the Treasury, the relevant regulators and the financial institutions in Gibraltar since the report was published a year ago? What actions do the authorities propose to take? I certainly believe that the Gibraltar authorities will want to act in good faith and try to uphold proper standards, but some of the report’s findings are concerning.

Another issue raised last week was the difference in corporation tax between Gibraltar and the UK: Gibraltar’s main corporation tax rate of 10% is significantly lower than our own. The Minister from Gibraltar said in his evidence, with some charm, that corporation tax would not be a factor in location—that, if anything, quality of life was more important. I have no doubt that the quality of life in Gibraltar is very good; looking out on a slightly gloomy London autumn afternoon, I have no doubt that the weather and climate is a big attraction, too. I am sure that he was right about that, but it is a big tax difference. He also pointed out—again, quite fairly—that the corporation tax differential predates our departure from the EU and has been in place for some time. However, this is a new situation, with a new, specially designed market access regime for Gibraltar being enshrined in UK law. Has the Treasury made any assessment of the likelihood of corporate relocations from the UK to Gibraltar as a result of the new measures under discussion?

I also ask the Minister about the condition, which I have described as interesting, about relationships with other territories with significant financial services markets. Why has it been written into schedule 6 as something that the Government should consider in their biennial review? Is it considered that this mini-single market will create some sort of vulnerability in those other relationships? Why is it thought possible that the arrangement might affect our relationships with other territories?

Finally, how unique and specific to the Gibraltar situation is the new regime? Could it conceivably be extended to other territories such as Jersey and the other Channel Islands? As the Minister will know, some Crown dependencies have been accused of being tax havens or of being susceptible to money laundering. Is it possible that such a regime could, in effect, be used to extend the reach of UK regulators to territories other than Gibraltar? This is a very big topic that has been debated quite a lot over recent years. I suppose I am asking about the Treasury’s thinking, rather than just about the Bill: might the arrangement with Gibraltar be a model for the treatment of other Crown dependencies or overseas territories, or should we view it as specific and purely a consequence of Gibraltar having to leave the European Union? I would be grateful if the Minister considered and responded to some of those points.

It is a pleasure to see you in the Chair, Dr Huq. I just have a few quick questions, mainly coming from the evidence we heard last week. During the fourth sitting, at column 125, the Minister, Albert Isola, said that the Bill is akin to enabling legislation, and that other things would need to be worked through in relation to other aspects of the financial services that are currently dealt with. If the Minister could clarify what would happen about those other areas, that would be useful.

Secondly, perhaps the Minister could give further assurances about access to the Financial Ombudsman Service. It is important that consumers here should have adequate protections in the new arrangements, and that those should be made clear. That is the kind of scenario that would not be found out until a consumer needed to make a complaint. Something would have to go wrong for it to be addressed, and I would not want to be such a consumer, feeling in those circumstances that I did not have recourse to the protection that I would have had if I had chosen an insurance policy not based in Gibraltar. It would be useful to hear about that.

Lastly, it would be helpful to have any further clarity that the Minister can give about what would happen to UK businesses and customers if market access were suddenly withdrawn, and where that would leave consumers in the UK. Would they be left without policies and protection? What would happen as a reaction to that, should market access be withdrawn for a period of time? Would it mean that businesses would dry up, withdraw their UK services and go somewhere else, or does the Minister envisage other scenarios happening in that case? I appreciate that it is a scenario that he would want to avoid at all costs, but it could well arise, and I want to ask what state the Government’s preparations for such a scenario are in.

I suppose I want the Minister to reassure me about the fact that financial markets are rapid and regulation—if there is an equivalence regime, or mini-single market as my right hon. Friend the Member for Wolverhampton South East put it—allows the Gibraltarian authorities to do the regulation and then have immediate access to the UK. That may be done in a way that gives us some benefit; perhaps the Minister will say what the benefits of the regime are, particularly for UK consumers, given that Gibraltar does 90% of its business with the UK anyway. Perhaps he will also say what the risks would be.

My right hon. Friend spent a little time raising some of the risks and I suppose they can be characterised by the view that in a very liquid and rapid global money market, if there are vulnerabilities or back doors into regimes that are interconnected, that causes risks. We saw some of those risks playing out during the global financial crisis. To what extent does the Minister believe that the Gibraltar regime for which the clauses legislate will be—I am going to use that word—robust enough to prevent the opening of back doors to vulnerabilities for all sorts of money that is sloshing round the world? My right hon. Friend mentioned some of that—money used for money laundering, drugs and terrorism. It is important that the defences that we have against coming under that kind of influence should be maintained and strengthened, rather than weakened.

My hon. Friend is giving the speech that I wanted to give, so I thought I would intervene. One example, to express some of the concerns we might have, is the fact that in the Gibraltar regime there is currently no legal requirement to refuse registration to someone with a criminal record. In practice that does happen. It is something that the FATF report flags, but it is not inevitable. One thing we might want to think about for our regulatory regime—and I take the point made by the shadow Minister about not suggesting that the UK regime is perfect—is looking at whether there are lessons in the report that should be put into the Bill to make sure we do not create such a back door. That seems an eminently practical example of the sorts of things that might happen if people with criminal convictions, who may still be able to access financial regulations as a result of the Gibraltar regime, are now able to operate in the UK.

My hon. Friend gives an example of exactly the kind of point I was trying to make more generally about ensuring that these regimes are correct. Given that Gibraltar governs itself, the Bill makes it clear that Gibraltarian regulators will continue to do that job in Gibraltar and supervise the companies based there after this arrangement has been legislated for. That is quite proper in many ways, but it does give our regulators in a small number of narrowly-defined circumstances—I think this is the phrase—the duty or the right to leap in and do some regulation or enforcement presumably. Will the Minister say a bit more about that? He did mention it in passing in his introduction to the clause, in which he talked about financial stability. We clearly had some recent examples during the 2008 crash, where some robust enforcement had to take place with offshore island countries or territories that were trying to take money out of our jurisdiction in ways that were unacceptable at the time.

There is therefore a financial stability issue, but there is surely something about consumer protection, fraud and money laundering here as well. Perhaps he could talk in more detail about what those narrow circumstances are. Our regulators will be reluctant to romp and stomp all over Gibraltarian institutions and their regulators. Yet, by definition, Gibraltar is a small territory, and it will have less capacity to deal with some of the sophisticated fraudsters and international terrorist, money-laundering types than we do here. I am not saying that our regime is perfect, if we are honest, and we will get on to that later in the Bill.

My worry is that this might inadvertently create some vulnerabilities. I suppose what I am seeking from the Minister is some reassurance that the regulators have got a handle on this, that they will not allow the wish not to infantilise the Gibraltarian regulators to be a reason for not paying close attention to this, and that there will be some close supervision of what is happening, particularly once the regime is established. Once these things settle down, it is then that things start to happen. If a door is opened inadvertently somewhere, this money swilling around tends to find it, and then things can start changing very rapidly.

What warning flags does this regime put up to ensure that if that dynamic begins to happen, we can close it down rapidly? Does the Bill expect some kind of relationship between the Gibraltarian regulators and the Treasury? How does the Minister expect that relationship to work out? Obviously, I do not want to spend all my time being so negative about these things, so will the Minister also say a little more about what the benefits might be?

Will the Minister also talk about consumer protection in his response? Motor insurance is one of the largest components of the financial services that Gibraltar currently sells into the UK, and clearly there is a big retail consumer protection angle to such financial services.

While we are considering the variations for companies based in Gibraltar as opposed to the UK, it would be helpful if the Minister answered the question that the insurance bodies could not: about VAT benefits for companies based in Gibraltar and the likelihood, now that we have left the European Union, of companies moving more industry to Gibraltar because of that benefit, which could also affect consumers. Does my hon. Friend agree that it would be helpful if the Minister set out those figures? The industry seemed slightly coy when we spoke to it about those matters.

Clearly, the potential situation is there now. In evidence, the response—reasonably—was that that has not happened to date, even though there have been close connections between Gibraltar and the UK. However, these things tend to be dynamic and, once the agreement with Gibraltar is established, our tax regimes may diverge even further. If the Chancellor has his way after yesterday’s statement, I suspect they might have to.

Will that create more of a temptation for financial service companies to offshore to Gibraltar outside of the UK? Is the Minister convinced that that will not happen as a result of the Bill? I want reassurance from him about those potential weaknesses or risks and about consumer protections. He might even want to say a bit about benefits, if he feels up to it.

I counted several questions in those four contributions and I will do my best to address them. First, I will reiterate what we are trying to do: to create the market access regime for Gibraltar-based financial services wishing to operate in the UK, and to make provision for outbound UK-based firms wishing to operate in Gibraltar.

The right hon. Member for Wolverhampton South East made a number of points, which I will start to address. He asked about the two-year reporting mechanism. The Gibraltar authorisation regime provides a broader and deeper market access into the UK market—including to the retail market—than other market access regimes, so the Treasury needs to be satisfied continuously that all conditions are met. We will therefore work carefully with the Minister we spoke to last week from the Government of Gibraltar to ensure that those conditions can be satisfied on an ongoing basis.

It is important to contextualise the nature of the relationship with Gibraltar. There has been a lot of dialogue, visits—not latterly—and evaluation of each other’s situation with respect to market access. In the lead up to the new regime, the Treasury will assess Gibraltar against the relevant market conditions for the sub-sectors to which it seeks access, and we will work closely with the Government of Gibraltar. The most significant area is the Gibraltarian insurance market, and 90% of that is UK facing.

The right hon. Gentleman compared the two-year review to our refusal to review the prudential regimes. As we have already discussed, the prudential measures include an accountability framework; we had a different view on the suitability of the one we suggested versus the amendment. The regulators have the expertise to set rules in the complex and technical areas of financial regulation and can do so in an agile way.

The right hon. Gentleman also referred to the FATF report. I have not read it in full, but I am aware of its broad indications of the challenges that exist. I am also aware that, while we had a good report, there are some challenges that we need to address in the UK. I will not hold back on admitting that. I will write to him specifically on those measures that pertain to Gibraltar, because I ought to do justice to his proper scrutiny.

There is an issue with the extension of the Gibraltarian regime to other countries. That is a bespoke regime that has been specifically designed for Gibraltar, recognising what the right hon. Gentleman and others will acknowledge is a special historical relationship, and our past common membership of the EU. These circumstances do not apply to any other jurisdictions, so that is not designed as a model or, as he said, a mini-single market to be extended elsewhere.

The hon. Member for Glasgow Central asked about the scope of the FOS jurisdiction over products sold by Gibraltarian firms. Our intention is that all Gibraltar-based firms with a schedule 2A commission will be covered by the FOS’s compulsory jurisdiction. That ensures that individuals and small businesses can seek appropriate redress. However, the extension of the FOS’s jurisdiction to schedule 2A firms does not require express wording in this Bill. The Bill makes schedule 2A firms a type of authorised person, so the FCA be able to make rules about them, bringing them inside the FOS’s remit. The FCA will be reflecting that change in the rules governing the FOS’s jurisdiction. Firms already under the FOS’s voluntary jurisdiction will transfer to the compulsory jurisdiction, with no loss of eligibility for their consumers in respect of actions occurring before they entered the compulsory jurisdiction.

The hon. Member for Glasgow Central also asked about the withdrawal of equivalence. If market access were to be withdrawn, schedule 2A puts in place winding down arrangements that enable the Government to pass secondary legislation providing for Gibraltar-based firms to exit the market in an orderly fashion, with appropriate protections for UK consumers. That is what would happen in market failure.

The Minister was just talking about the Financial Ombudsman Service being extended. One of the things that we might be concerned about is that our constituents might experience fraud from companies based in Gibraltar, perhaps in relation to insurance. Many of us can think of some famous Brexit backers who run insurance companies in Gibraltar and might have concerns about these issues. The FAFT report tells us that at the moment the supervision is only for new companies. There is a historical legacy of companies that have not previously been registered that might, therefore, under new supervision, be companies that we would not want to see operating in the UK. The Minister talked about the FOS’s requirements being retrospective, but that will be the same with the FCA. Can he clarify that if there are companies that are historically registered in Gibraltar, which we would not want to see registered here, perhaps because the people running them have criminal records, will they retrospectively be denied a licence, or is it only those from new registrations onwards, as with the current Gibraltarian regime?

I wish to examine that matter carefully on the basis of the FATF report. I totally understand the clear point the hon. Lady is making about the retrospective nature of this and what could we essentially onshore, in terms of access to UK consumers, and the inherent and apparent risks in that. If the hon. Lady will permit me, I would like to examine that and get back to her.

The hon. Member for Wallasey asked about the independent Gibraltarian regulator and whether it will remain the supervisor of Gibraltar-based firms. The explicit intention for the UK regulators, contained in proposed schedule 2A, is to guarantee the protection of UK consumers, but that will be exercisable only on specific grounds, for example where a situation is urgent or if a Gibraltar-based firm is contravening a rule. We are not trying to take over their regulator.

The hon. Lady asked if the parties will co-operate sufficiently. There has been close and frequent co-operation over the past three years, between both Governments and regulators. They are developing their regime, and I am confident that will continue. The Minister in Gibraltar —effectively, my opposite number there—was positive about that last week. Schedule 2A will create a framework for this effective co-operation. That also means that the UK and Gibraltar Governments, the respective regulators and the Financial Services Compensation Scheme will put in place effective procedures to carry out any dialogue and co-ordinated action for the good functioning of the regime.

The hon. Members for Walthamstow and for Wallasey asked about consumer protection. It is obviously of the upmost importance that we provide the right level of protection for UK customers of Gibraltarian products, and that the level of protection afforded is communicated to them. Under this regime, most UK-based consumers purchasing products from Gibraltarian providers will receive a similar level of compensation as those purchasing their products from UK firms, whether through the FSCS or through the equivalent Gibraltarian schemes.

Schedule 8 will amend the Financial Services and Markets Act in relation to the FSCS to adapt the provisions to the new framework, and I can confirm that, under the GAR, UK consumers of Gibraltarian products will receive a similarly high level of compensation as consumers of UK-based firms, either through the FSCS or through the equivalent Gibraltarian scheme.

The other point that was made on Second Reading, and possibly in some of the questions last week—the right hon. Member for Wolverhampton South East referred to it—was the risk of relocation, notwithstanding the different climates. While we were members of the EU together, financial services firms were already able to base themselves in Gibraltar and access the UK market. Reflecting on what the witnesses said last week, a wide range of issues will have played a role in firms choosing Gibraltar as a base, including the availability of specialised personnel. Given the geography of the Rock, obviously there are some constraints there.

The hon. Member for Wallasey referenced the differential tax regimes, but there is a wide range of factors that would clearly provide some meaningful checks on rapid movement over there to access that regime. There are also significant costs involved in relocating to another jurisdiction. Obviously, Gibraltar is fiscally autonomous; it has its own democratically elected Government, who will continue to set the rates of taxation. The interaction between ourselves is a matter of speculation. I do not think that I can say much else on that point. I hope that has given some satisfaction to Opposition colleagues.

Question put and agreed to.

Clause 22 accordingly ordered to stand part of the Bill.

Schedule 6

Gibraltar-based persons carrying on activities in the UK

I beg to move amendment 4, in schedule 6, page 100, line 31, at end insert—

“(i) an order under section 143S, or”.

This amendment extends the definition of “prohibition order” in paragraph 19 of new Schedule 2A to the Financial Services and Markets Act 2000 to include an order under section 143S (inserted by Part 1 of Schedule 2 to the Bill).

These very simple and limited amendments are necessary to ensure that the measure functions as intended. As the explanatory note states, amendment 4 expands the definition of “prohibition order” in paragraph 19 of new schedule 2A to the Financial Services and Markets Act 2000 to include an order made under section 143S, as inserted by part 1 of schedule 2 to the Bill.

The amendment ensures that UK regulators can reject a notification in relation to a Gibraltar-based firm if a senior manager of the Gibraltar-based firm is prohibited from performing a function by a part 9C prohibition order made under new section 143S, in line with the treatment of other firms in the Bill. A part 9C prohibition order may be made by the FCA in relation to an individual if the FCA believes that the individual is not of sufficiently good repute or does not possess sufficient knowledge, skills and experience to perform a function relating to an activity carried on by a non-authorised parent undertaking of an FCA investment firm.

Amendment 5 expands the definition of “prohibition order” in paragraph 19 of new schedule 2A to the Financial Services and Markets Act 2000 to include an order under the law of Gibraltar that the appropriate UK regulator considers to be equivalent to an order under section 143S as inserted by part 1 of schedule 2 to the Bill. That is a simple and limited expansion enabling the UK regulators to reject a notification if a senior manager of a Gibraltar-based firm is prohibited from performing a function by a prohibition order under the law of Gibraltar that they consider to be equivalent to an order under section 143S.

Finally, amendments 6 to 11 clarify the UK regulators’ powers to give directions altering the meaning of “protected contract” and “existing contract” for the purposes of part 10 of new schedule 2A to the Financial Services and Markets Act 2000 in the event that a UK regulator or the Gibraltar regulator cancels the permission of a Gibraltar-based firm.

Amendment 4 agreed to.

Amendments made: 5, in schedule 6, page 100, line 34, after “56” insert “or 143S”.

This amendment extends the definition of “prohibition order” in paragraph 19 of new Schedule 2A to the Financial Services and Markets Act 2000 to include an order under the law of Gibraltar which a UK regulator considers to be equivalent to an order under section 143S (inserted by Part 1 of Schedule 2 to the Bill).

Amendment 6, in schedule 6, page 123, line 32, leave out “67” and insert “67(1)”.

See the explanatory statement for Amendment 11.

Amendment 7, in schedule 6, page 123, line 38, leave out “67” and insert “67(2)”.

See the explanatory statement for Amendment 11.

Amendment 8, in schedule 6, page 124, line 37, leave out “67” and insert “67(1)”.

See the explanatory statement for Amendment 11.

Amendment 9, in schedule 6, page 124, line 43, leave out “67” and insert “67(2)”.

See the explanatory statement for Amendment 11.

Amendment 10, in schedule 6, page 125, line 17, leave out

“this Part of this Schedule”

and insert

“paragraph 64 or 65 (or both)”.

See the explanatory statement for Amendment 11.

Amendment 11, in schedule 6, page 125, line 19, leave out

“The power under sub-paragraph (1) includes power to”

and insert

“A UK regulator may, by giving a direction,”.—(John Glen.)

This amendment and Amendments 6, 7, 8, 9 and 10 clarify the UK regulators’ powers to give directions altering the meaning of “protected contract” and “existing contract” for the purposes of Part 10 of new Schedule 2A to the Financial Services and Markets Act 2000.

Question proposed, That the schedule, as amended, be the Sixth schedule to the Bill.

New schedule 2A to the Financial Services and Markets Act 2000 sets out in detail the operation of the new market access arrangements for Gibraltar-based firms into the UK. Part 1 of the schedule defines key concepts of the new framework, such as approved activity. Part 2 sets out that the Treasury will be able to designate a regulated activity as an approved activity for market access only if the following conditions are met: if approval of an activity is compatible with certain objectives, such as financial stability and consumer protection; if the Treasury is satisfied that the relevant law and practice between the UK and Gibraltar is sufficiently aligned; and if the Treasury is satisfied that there is co-operation between the UK and Gibraltar Governments, our respective independent regulators and the FSCS.

Part 3 will introduce a simple notification process by which Gibraltar-based firms will be able to obtain permission to carry on an approved activity. I stress that this is not intended to be an application process; Gibraltar-based firms will automatically obtain a schedule 2A permission once the period for the UK regulators to consider a notification has expired. Parts 4 to 6 provide for the Gibraltarian regulator or the UK regulator to be able to vary or cancel a schedule 2A permission, or to impose, vary or cancel requirements on a Gibraltar-based firm, and set out the process the regulators could follow in each case. None of those powers dilutes the fact that Gibraltar-based firms will continue to be supervised by the Gibraltarian regulator and remain subject to the laws of Gibraltar. The intervention powers for the UK regulators will be available only in specific defined circumstances, as set out in paragraph 28. The option of withdrawal of approval for an activity will remain available to the Government as a tool of last resort. However, were any issues to emerge, the Treasury would work closely with the Gibraltarian authorities to ensure that all conditions of market access can be satisfied.

To provide clarity and transparency, part 11 will require each UK regulator to issue a statement of its policy on the use of its intervention powers. Part 12 imposes duties on the UK regulators to inform, consult and obtain consent from one another, as well as to keep the Gibraltarian regulator informed to support the functioning of the regime. Similarly, part 13 will require co-operation between the UK and Gibraltar Governments, our independent regulators and the manager of the FSCS, including setting out procedures and approaches to resolving any supervisory concerns to support the delivery of the regime.

I have summarised the effects of proposed new schedule 2A in the legislation. It sets out in great detail the new market access arrangements for Gibraltar-based firms looking to operate in the UK and it will lead to the renewal and strengthening of our relationship with Gibraltar. For that reason, I therefore recommend that the schedule be agreed to.

Question put and agreed to.

Schedule 6, as amended, accordingly agreed to.

Schedule 7 agreed to.

Schedule 8 agreed to.

Clause 23

Power to make provision about Gibraltar

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

The new regime introduced by clause 22 revolves around activities covered by the so-called Gibraltar order, which provides Gibraltar-based firms accessing UK markets and UK-based firms accessing Gibraltar markets with rights equivalent to the passporting rights conferred on European economic area firms. Certain regimes conferring rights on UK and Gibraltar firms sit outside the remit of the Gibraltar order, as they are authorised not under the Financial Services and Markets Act but under separate regulatory regimes, and therefore need to be addressed separately.

The majority of these regimes are not as central to the UK-Gibraltar bilateral relationship as the regimes under clause 22, as they represent smaller sub-sectors such as e-money and payment services. The Government are requesting a delegated power to make provision for these regimes, which will allow the Treasury to safeguard the rights that Gibraltar firms currently exercise, to ensure that the legislative framework works efficiently and, wherever possible, to subject these regimes to principles and mechanisms similar to those in the new section 32A of and schedules 2A and 2B to the Financial Services and Markets Act, to ensure consistency with the rest of the regime introduced by clause 22.

Regarding the regime introduced by clause 22, it is right and proportionate that the Government are able to make adjustments to take account of the UK’s and Gibraltar’s new position outside the European Union and in relation to the regimes not captured by the Gibraltar order. The power that the Treasury is requesting is not unlimited, but is constrained at multiple levels. The power is limited in scope, as it only applies to a narrow pool of legislative regimes, as described in clause 23, which are not covered by clause 22. Further, this power can be exercised only in a manner that is compatible with the objectives set out in clause 23, such as financial stability and consumer protection. In addition, the Treasury must consult the FCA, the PRA and the Government of Gibraltar before making certain regulations. Finally, all regulations made in the exercise of this power will be subject to the affirmative procedure, giving Parliament effective oversight of the exercise of these powers by the Treasury.

The clause is crucial to ensuring a consistent approach to regulatory supervision, co-operation and other relevant standards and requirements across different financial services regimes. It achieves the right balance between accountability and effectiveness, so I recommend that the clause stand part of the Bill.

Given that some of the areas caught by this part of the regulation were previously quite esoteric, but might not be so esoteric in the not-too-distant future—I am thinking of electronic money, which a few years ago would have been a tiny amount of transactions and is now very much larger—can the Minister reassure the Committee that, if the size and importance of these transactions grow, they are confined in the right area of the law for regulation? Does the Treasury have any views on how to take account of the changing importance and size of this area and to change the regulations around it in future? As we see, the pandemic has meant that many people who used to use cash no longer use it. Payment services and e-money are growing areas and could grow rapidly.. Is he convinced that this is the right regime to have in and around areas of perhaps rapid evolution?

I thank the hon. Lady for that relevant question about how we intend to apply these powers to smaller regimes that are of increasing significance to consumers and potentially to stability. As a Government, our intention is to ensure that existing cross-border activities are not disrupted in any way. We are asking for the ability to update these regimes to reflect the growing relationship and the evolving domestic mechanisms and principles.

To some extent, many of these areas being looked at now—crypto-assets, stablecoins and so on—are evolving globally and there is is a spectrum of approaches, so we need to examine the appropriateness of the application. We would work to examine closely where the risks are, and therefore where the application of new and evolving orthodoxies of regulation would apply to Gibraltar. We are committing to ensuring that the necessary legislative arrangements are in place in any event, but we rule nothing out in terms of scope and application to new sectors as the world of financial services evolves, which it has done considerably in recent years.

Question put and agreed to.

Clause 23 accordingly ordered to stand part of the Bill.

Clause 24

Collective investment schemes authorised in approved countries

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

The clause introduces the new overseas funds regime, which delivers on the Government’s commitment to introduce a simpler way for large numbers of investment funds from other countries to be marketed to retail investors, including the general public. The OFR will promote openness to overseas markets, allowing the UK to offer broad market access to investment funds from other countries. It will also allow consumers to benefit from the widest possible choice of funds, while maintaining existing levels of investor protection.

The new regime could provide a more efficient way of allowing large numbers of investment funds from the EEA to market to retail investors on a more permanent basis. Many EEA funds are marketed into the UK through the EU’s passporting regime, which will end after the transition period. Although the Government have introduced a temporary marketing permissions regime to allow existing EEA funds to continue marketing after the transition period, these funds will need to apply for permission to market on a more permanent basis. If the OFR were not legislated for, the funds would have to apply for recognition under the existing regime; that regime allows overseas funds to be marketed to the general public, but it requires an assessment of each individual fund. Establishing the OFR could therefore provide a more permanent basis for these EEA funds to continue marketing in the UK, provided that the EEA member states are found equivalent. It will also allow for the possibility of funds in other countries gaining easier access to the UK if they meet the criteria set out in the schedule. The new regime has been welcomed by the UK’s asset management industry, and the majority of consultation respondents were highly supportive.

I will now detail how clause 24 introduces the new OFR. The clause adds to the legal definition of a recognised scheme, so that it includes funds recognised under the OFR. That will allow the funds to market to the general public in the UK. The clause also introduces schedule 9 to the Bill, which comprises the main operational elements of the OFR and any minor and consequential amendments needed to ensure the new regime is fully functional. Compared with the current assessment of individual funds, the OFR enables the Treasury to make equivalence determinations which allow specified categories of funds from other countries and territories to be marketed in the UK. Therefore, the OFR has the potential to promote the interconnectedness of financial markets and consumer choice, to provide a more appropriate basis for recognising the large number of EEA funds currently marketing through the temporary marketing permissions regime, and to support bilateral agreements with other countries.

The clause is necessary to ensure that the OFR is inserted into the relevant legislation and can fulfil its potential. I recommend that it stand part of the Bill.

I thank the Minister for his explanation. As he said, this clause, schedule 9 and clause 25 create an overseas fund regime for establishing the recognition of collective investment schemes based outside the UK. It is estimated that there are about 9,000 such schemes, which are often known as UCITS.

Up until now, those schemes have operated under the European Union’s passporting provisions, as have UK-based schemes operating in other countries; it has been a two-way street. It was not inevitable that passporting had to end when the UK left the EU. There were models of leaving that could have preserved those rights for UK-based firms. Indeed, there were votes in Parliament that sought to guarantee the continuation of passporting rights, but the Government set their face against that, so the first thing to say about these provisions is that the need for them has arisen out of choices made by the Government.

That there would be an adverse impact on services from this decision was acknowledged. It seems the dim and distant past now, but back in the halcyon days of 2018, we had something called the Chequers plan. That document was issued in July 2018 with—I noted when I had another look at it—a foreword from the current Foreign Secretary. The Minister could usefully remind him of that the next time he bumps into him. The document said that the Government

“acknowledges that there will be more barriers to the UK’s access to the EU market than is the case today.”

It went on to note that

“these arrangements will not replicate the EU’s passporting regimes”.

Let us look at what the document’s verdict was on equivalence, which is the thing that we are trying to achieve and in part legislate for today. This is the Government’s own verdict on the kind of regime in clauses 24 and 25 and schedule 9. It said:

“The EU has third country equivalence regimes which provide limited access for some of its third country partners to some areas of EU financial services markets. These regimes are not sufficient to deal with a third country whose financial markets are as deeply interconnected with the EU’s as those of the UK are. In particular, the existing regimes do not provide for:…institutional dialogue…a mediated solution where equivalence is threatened by a divergence of rules”—

we have discussed divergence of rules quite a lot in this Committee—

“or supervisory practices…sufficient tools for reciprocal supervisory cooperation…This would lead to unnecessary fragmentation of markets and increased costs to consumers and businesses; or…phased adjustments and careful management of the impacts of change, so that businesses face a predictable environment.”

That is not my verdict on equivalence; it is the Government’s verdict on equivalence when they published their own plan two years ago. So there we have it in the Government’s own words. That which they have been as yet unable to secure from the EU was dismissed as inadequate for the UK’s financial services sector even if we were able to secure it, which we have not, or at least not yet. The Government were aiming for something different, because it was deemed by them to be inadequate. They were aiming for

“a bilateral framework of treaty-based commitments to…ensure transparency and stability”,

because, as the document goes on to say, equivalence

“is not sufficient in scope for the breadth of the interconnectedness of UK-EU financial services provision. A new arrangement would need to encompass a broader range of cross-border activities”.

The Government wanted common principles, supervisory co-operation and

“a shared intention to avoid adopting regulations that produce divergent outcomes”.

Where did all that go? What happened to all of that? That was the aim. Why is it now the summit of the Government’s ambitions to achieve an outcome for the UK’s globally significant financial services sector that they dismissed as inadequate only two years ago? Why is this not at the heart of the UK-EU negotiations, in this crucial period? We have just over a month left—less, in real terms—to strike a deal. We must think of the significance of this sector to the UK economy and look at the employment, the investment and the tax revenue.

The shadow Minister is making a powerful case, and I suspect he is about to move on to this point. In layman’s terms, the Government are asking financial companies, which represent hundreds of thousands of jobs in our country, to deal with more paperwork, more bureaucracy, more regulation and a tougher business environment in which to operate. Does the shadow Minister think that these major financial companies are going to adhere to that because they are rather fond of London, or might they make different commercial decisions because we have not secured the kind of regulation he is talking about as yet and move themselves to other parts of the European Union?

We will come on to their reaction. It is extraordinary that a sector this important has been relegated so far in the Government’s priorities. It is absolutely extraordinary that in these final days of renegotiation this is not front and centre. We just need to look at the employment, the investment and the tax revenues, and the role that the sector can play in global standards. Yet it has been relegated by the Government to an outcome that they admit is inferior and which, right now, they have not even been able to achieve.

All we can legislate for here is what we do. The fact that it is not front and centre of the negotiations right now speaks volumes about how far we have drifted from talk of achieving all the same benefits and securing a free trade zone from Iceland to the Urals—do hon. Members remember that? All of that has gone.

Is my right hon. Friend therefore surprised or unsurprised that the Office for Budget Responsibility documents yesterday said that the cost of the end of the transition period will be an economy that is permanently 2% smaller?

That is the OBR’s estimate of the additional cost of a no-deal scenario, on top of the already long-term hit in the deal scenario. My hon. Friend is absolutely right to set that out.

The fact that this has happened slowly over the past couple of years, and maybe the fact that the industry has become weary of arguing about it—as, perhaps, have all of us—should not disguise the importance of what has happened. It is important to set that out and to put these clauses in perspective. The Government chose to relegate the importance of UK financial services industries in the Brexit negotiations. Having made that decision, they then relegated financial services even further by aiming for an outcome that they openly admitted was inadequate, and they have not even been able to achieve that outcome. That is the context of these clauses.

I have a few questions on the details of the regime being established by the clauses. First, how does this relate to the Chancellor’s statement on financial services on 9 November? The clause and schedule 9 set out a country-by-country approval system for equivalence decisions, but in his statement on 9 November the Chancellor said that he was publishing a set of equivalence decisions for the UK and the EEA member states—those member states who still have access to these passporting rights, even though they are not EU members. Clause 24, as I said, implies a country-by-country process. Does the Chancellor’s statement mean that in policy terms, the equivalent recognition has already been given to all EU and EEA member states? Is that for all the financial products that are produced to which such equivalence might apply—that is, those traded on a cross-border basis?

Secondly, the regime being established here still requires company and product registration with the FCA, as I understand it. Is this process of registration necessary for the 9,000 collective investment products from EU member states that already exist, or is it only for new products for firms based in those states? I know that the intention is to make this a fairly light administrative burden for the firms and the regulators. Can the Minister tell us a bit more about how that firm-by-firm registration process would work?

Thirdly, can the Minister confirm what the scope of these provisions is geographically? I appreciate that this regime is being established with EU countries in mind, but is it applicable to countries outside the EU, which may wish to sell investment products here, for example from the United States or elsewhere?

Fourthly, could the Minister say something about the permanence or otherwise of the equivalence status being granted? In what circumstances could the Treasury and the regulators withdraw that equivalence recognition? Given that this is a country-by-country system, would withdrawal operate at the level of a country or the individual firm, or could it operate on the basis of both the country and the individual firm?

My fifth question relates to the products themselves. Given that as things stand we are granting equivalence recognition to firms from EU countries, but we have not secured equivalent recognition for companies from this country, does this mean that there will be two types of uses marketed in the UK—one EU type and one British type—and will there be differences between those two products, given that one has Europe-wide recognition and the other does not?

Finally, could the Minister give us an update on when he expects to hear about reciprocal decisions in response to the Chancellor’s announcement of 9 November? I know the Minister is hoping for a positive response, and I am too. It is very much in the interest of the financial services sector to get this recognition, even though it is much less than we were aiming for at the beginning of the process. What is the relationship between the desire for equivalence and all the powers of divergence that we put into the Bill? Is it not the case that there is a risk that the EU will watch to see how we use all these divergence powers on one directive after another before deciding about granting equivalence to UK firms?

In conclusion, I can understand why the Government are legislating for this regime. They want to minimise market disruption here in the UK. I can understand how doing it in this way makes things more manageable for our regulators, but no one should be in any doubt that this does not come anywhere near what it was claimed would be achieved for financial services at the start of this process. The fact that all of us are hoping for a positive response from the EU does not illustrate us taking back control; it is a graphic and, potentially, economically significant example of control being lost.

I have one or two further questions about people who are invested in things for which equivalence is withdrawn. The Association of British Insurers said in its written evidence:

“While the regime states that investors can stay invested in funds if equivalence has been withdrawn, they do not to spell out the practicalities of the situation an existing investor may face if a fund they are invested in has been suspended, for example if additional money is invested after a fund suspension. For the regime to fully work for consumers, situations such as this need to be clarified.”

What happens to investors in those funds if equivalence is withdrawn? What information will they receive from the Government, from regulators or from anybody else if that happens, so that they know what they have to do in that scenario, if anything? That could affect many people and would be very complicated to unravel, so it would be useful to set out people’s obligations in those circumstances.

We were treated to more of a Second Reading response there from the shadow Minister, with all that he said about the frustrations of the last three years. Having been Minister for three years under three Chancellors and seen the evolution in the nature of that negotiation, I have a lot of empathy with his analysis about the evolving nature of a negotiation, which is of course what happens.

I can tell the right hon. Gentleman that the whole issue of the importance of financial services has gripped me since 9 January 2018, when I came into the role, and he is absolutely right to say that it is a very important industry and that we must do all that we can to maximise opportunities for it. I very much regret where we are on what we thought would be a technical process of equivalence granting. We filled in 2,500 pages of forms over about 40 questionnaires by June last year and, self-evidently, we have been leaders in the regulation of financial services within the EU. We have not heard anything from the EU on the equivalence determinations, which is strange. We regard the EU as some of our most important trading partners, and we look forward to continuing a constructive dialogue.

The right hon. Gentleman raised a number of questions about the Chancellor’s statement, the registration process and the situation for jurisdictions beyond the EU, and I will address those. On the equivalence for UK firms, although the EU does not currently have an equivalence regime for the marketing of investment funds—we cannot speak for any future changes to the EU’s equivalence framework—the Government are introducing the new equivalence regime for overseas investment funds to market to UK retail investors, to allow our consumers to benefit from the widest possible choice of funds. We are doing that to support and preserve consumer choice for UK investors. Currently, about 9,000 EEA-domiciled funds use passporting to market to retail investors in the UK. That makes up a substantial proportion of the overseas funds that are on offer to UK investors. In comparison, about 2,600 UK-domiciled funds are available to UK investors, and UK funds do not commonly sell into the EU.

The geographic scope of the OFR could be used to find any jurisdiction equivalent, but a fund from another jurisdiction could be permissible even if the jurisdiction is not equivalent. That would use a different process—the existing process, which I think is provided for in section 272 of the Financial Services and Markets Act 2000. We hope and expect to refine that to align it with this process to remove any uncertainty.

The Chancellor’s announcement of 9 November, when we made 17 equivalence decisions, is separate to the OFR, which is a new equivalence regime that the UK is introducing for EEA funds. The withdrawal of equivalence can happen at the country level, but the FCA has powers to suspend or revoke the marketing permissions of individual funds. If funds from a country are found equivalent under the OFR, they will not need to go through the section 272 provision, so this will be a faster route.

The hon. Member for Glasgow Central asked what happens to investors if equivalence is withdrawn or a fund is suspended. Obviously equivalence is necessary to ensure that UK investors can assume at least equivalent investor protection to that of the UK. If the Government believe that that is no longer the case, it would be appropriate for the Treasury to act and to make that clear to potential existing investors by withdrawing equivalence.

We recognise the importance of clarity and stability regarding the potential withdrawal of equivalence, so withdrawing an equivalence determination will be undertaken in an orderly and controlled manner to ensure that investors are protected and businesses have time to adjust. In the event of equivalence being withdrawn, funds from the country or territory in question will no longer have recognised status and can no longer be marketed to the general public in the UK.

The Treasury does not envisage that investors will be forced to divest their investments in the fund, and the funds should continue to service them; however, the loss of recognition could make it more difficult for investors to continue investing in the fund.

For example, the loss of recognition might result in investment platforms no longer offering the fund on their platforms. The Bill also includes a power so that the Treasury can take steps to smooth the transition for funds to the existing regime if equivalence has been withdrawn.

I thank the Minister for that clarification. I am just trying to get my head around the practicality or how this would work. If equivalence is withdrawn, how do people who have money in the funds find out about it? Is there an obligation on the funds to tell them, or on the Government to ask the funds to tell them? Do the Government somehow contact these people, and what is the timeline of those things, should that occur?

That procedure would depend on the particular breakdown of the fund and the scale of the problem. It would be for the regulator to work with the individual fund to demonstrate that, and to give clarity to consumers. It is difficult without a specific example to set that out, but the provision is there and the provisions are comprehensive in terms of being able to do that.

The right hon. Member for Wolverhampton South East asked about the relationship between equivalence and the divergence allowed for by the Bill. The Bill makes no assumptions about what the relationship between the UK and the EU will be in the area of financial services. That negotiation is ongoing. That is entirely consistent with the mutual findings of equivalence. It ensures that the right framework is in place for making equivalence decisions and for ensuring that any likely impact on existing equivalence decisions is taken into account when making rules in an area covered by the Bill.

I have tried to cover everything that has been raised. I am sure that I have not covered everything, but if I find anything substantive when I reflect on today’s proceedings, I will write to the right hon. Gentleman and make the letter available to the Committee.

These letters are coming back quite quickly. The one from the other day is already here, so we look forward to any future ones.

Question put and agreed to.

Clause 24 accordingly ordered to stand part of the Bill.

Schedule 9

Collective investment schemes authorised in approved countries

Amendments made: 12, in schedule 9, page 151, line 16, leave out

“granting an application under section 271A”

and insert

“under section 271A granting an application under that section”.

This amendment clarifies that both the application and the order are made under section 271A.

Amendment 13, in schedule 9, page 154, line 43, leave out “271G” and insert “271A”.

This amendment and Amendments 14, 15, 16 and 17 correct cross-references to the section under which an order recognising a scheme is made.

Amendment 14, in schedule 9, page 155, line 14, leave out “271G” and insert “271A”.

See the explanatory statement for Amendment 13.

Amendment 15, in schedule 9, page 155, line 24, leave out “271G” and insert “271A”.

See the explanatory statement for Amendment 13.

Amendment 16, in schedule 9, page 156, line 7, leave out “271G” and insert “271A”.

See the explanatory statement for Amendment 13.

Amendment 17, in schedule 9, page 156, line 29, leave out “271G” and insert “271A”.—(John Glen.)

See the explanatory statement for Amendment 13.

Schedule 9, as amended, agreed to.

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

Adjourned till Tuesday 1 December at twenty-five minutes past Nine o’clock.

National Security and Investment Bill (Third sitting)

The Committee consisted of the following Members:

Chairs: † Sir Graham Brady, Derek Twigg

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

† Baynes, Simon (Clwyd South) (Con)

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

Fletcher, Katherine (South Ribble) (Con)

Flynn, Stephen (Aberdeen South) (SNP)

† Garnier, Mark (Wyre Forest) (Con)

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

† Grant, Peter (Glenrothes) (SNP)

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

† Kinnock, Stephen (Aberavon) (Lab)

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

† Tarry, Sam (Ilford South) (Lab)

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

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

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

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

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

Rob Page, Yohanna Sallberg, Committee Clerks

† attended the Committee

Witnesses

Lisa Wright, partner, Slaughter and May

Christian Boney, partner, Slaughter and May

Professor Ciaran Martin, Professor of Practice in the Management of Public Organisations, Blavatnik School of Government, University of Oxford

Public Bill Committee

Thursday 26 November 2020

(Morning)

[Sir Graham Brady in the Chair]

National Security and Investment Bill

The Committee deliberated in private.

Examination of Witnesses

Lisa Wright and Christian Boney gave evidence

Q80 Before calling the first Member to ask a question, I should like to remind all Members that questions should be limited to matters within the scope of the Bill and that we must stick to the timings in the programme motion that the Committee has agreed. For this session, we have until 12.15 pm.

I welcome the two witnesses from Slaughter and May. Can I ask you to introduce yourselves for the record, please?

Lisa Wright: Hi, my name is Lisa Wright and I am a partner in the competition group at Slaughter and May.

Christian Boney: Good morning. I am Christian Boney and I am a partner in the corporate mergers and acquisitions group at Slaughter and May.

Q Thank you very much, Ms Wright and Mr Boney, for sharing your expertise and time with the Committee. It is indeed extensive experience of mergers and acquisitions.

I am sure you are aware that many countries—the US and Canada are just two—give some sense of the factors that might be considered under a national security assessment. Do you think it would be helpful for market participants to have greater clarity about the types of factors that would be considered? How could we give that clarity while retaining the sensitivity and discretion that are needed on those matters?

Joined to that, there are cases such as Arm and DeepMind where economic security became national security over time. When considering what national security is, what links do you see between national security and economic security or sovereign capability? Can they better be reflected in the Bill?

Christian Boney: Lisa, shall I have a go at that first?

Lisa Wright: Yes, go for it.

Christian Boney: Starting with the need for factors to help inform market participants’ decisions about whether, for example, their potential transaction presents risks, yes—in short, the more guidance that can be given about the kinds of factors that the Government will consider in determining whether a transaction presents a national security concern, the better. The statement of policy intent is very helpful in framing that, but clearly the more detail that can be included, the better.

The other thing that will be important in giving people a sense of whether their transaction should be notified or whether it falls within a mandatory notification sector is the interaction that will take place through informal engagement through the investment security unit. It is very important that the process for getting informal guidance from that unit is as streamlined, interactive and responsive as it can be. That will go some way to giving practitioners realtime guidance on potential concerns.

Lisa Wright: Can I just add a point to the idea of the desire for more certainty around what national security means? I think it is worth recognising that that is particularly important if you look at where we have come from. With the existing regime under the Enterprise Act 2002, there have only ever been a dozen or so interventions on national security grounds. There is not a widespread understanding of what it means and the circumstances in which the Government would intervene. That is the historical position, but we all know that this is constantly evolving.

When you take that and add to it the fact that the prediction now is that there will be, as it says in the papers, between 70 and 90 call-ins a year, that is obviously a huge increase against the 12 since the Enterprise Act. Any greater clarity that can be given around the circumstances in which the Government would be looking to, for instance, exercise the call-in powers would be beneficial, particularly at the beginning of the regime when everybody is trying to learn the ropes.

Q You mentioned, and I think it is absolutely right, the issue about going from a standing start to such an increase in the number of callings but also in the number of notifications—the impact assessment estimates 1,830 notifications. That is on the acquirer and does not take into account the fact that almost every start-up seeks capital investment at some point and I imagine would, therefore, as a consequence have to think about this regime. What impact do you foresee on the UK’s investment climate and especially on capital sources for small and medium-sized enterprises? How could that impact be mitigated or encouraged to be as positive as possible?

Christian Boney: I think this question really divides into two. In terms of larger corporates, investment by, and in, larger corporates is very likely to be unimpacted in any meaningful way by this legislation, because large corporates and their advisers are very used to going through regulatory clearance processes. This will just be another thing that needs to be added to the list.

I think you make a very valid point in the context of start-up and early-stage companies. The concern I would have principally is with those companies that are in that phase of their corporate life and fall within the mandatory notification sectors. Given the kinds of companies that this country is trying to encourage to flourish—those that are active in areas like artificial intelligence, advanced robotics and quantum technologies—a reasonable number of start-ups, I would expect, would fall within those mandatory notification sectors. For them, this regime is going to make the process of getting investment more time-consuming and more complex.

Anything that can be done in the process of consulting on the mandatory sectors, and anything that can be done to pair back the regime to make it more workable for companies in that stage of life, the better. An example might be some form of de minimis threshold, which is included, such that really early-stage companies do not fall within the mandatory notification regime, but the Government can nevertheless rely on their call-in power down the track, should that early-stage company becomes successful and more strategically important within the UK. Those are my principal thoughts. Lisa, do you have anything to add?

Lisa Wright: Not on that point, no

Q May I return to the national security issue—as opposed to the wider public interest test, which is an important question—and get your view as to the Bill’s scope, which is very much focused on national security, versus the wider public interest, to which I think my colleague’s first question alluded?

To clarify, my question was this: how would you distinguish between national and economic security?

My question is more about your reflections on the Bill being narrow in its purpose to deal with national security versus the wider public interest.

Lisa Wright: It is already a very broad regime; it catches a lot of transactions, as we have just discussed. I therefore think it is important and right that it is limited, in terms of the substantive concerns that it is catching, to national security. That is already a necessarily, I think, uncertain or undefined concept. Corporates and investors can make it work as long as other aspects of the regime work efficiently. That may be subject to some of the points that Christian just made about the impact on start-ups.

I think that once you broaden the regime out from national security into other considerations, you do risk introducing quite a degree of unpredictability, which possibly would impact on people’s assessment of the investment climate in the UK. My understanding is that the existing intervention regime under the Enterprise Act is planned to remain in force, so the national security considerations will come out of that and will be dealt with under this new regime. But there will still be the ability for—[Inaudible.]

Mr Boney, do you have any observations while we are waiting for the tech to work?

Christian Boney: I agree entirely with what Lisa has been saying. I think the scope of the Bill is already broad, so to my mind, broadening it further to take account of other areas is likely to introduce the uncertainty that Lisa was referring to and, as a consequence, have a potentially negative impact on the investment climate in the UK.

Lisa, it looks like we have got you back now. Would you like to add anything?

Lisa Wright: I am not sure at what point you lost me, but I think I was saying—

We lost you while you were talking about a “degree of unpredictability”, Lisa.

Lisa Wright: Okay. In my view, if you were to broaden the regime out from national security to take into account other considerations, that would introduce quite a degree of unpredictability and would, I think, potentially impact negatively on people’s assessment of the investment climate in the UK—I am sorry if I am repeating myself. However, my understanding is that the existing intervention regime will remain, so national security will come out of it, but the Government will still be able to intervene in transactions on other public interest grounds under the Enterprise Act. That regime has some limitations, but those powers will still be there.

Q Thank you very much for the really excellent evidence you have already given us. I want to go back to what Mr Boney said about de minimis thresholds and whether you might look at introducing de minimis thresholds for particular areas, sectors or industries that I guess you would say are considered to be low risk from a security point of view and highly beneficial to the UK economy, which should therefore affect our thinking about how you might filter this whole process. But are there not other considerations on filtering as well? In essence, this is a risk management process and you have to identify the highest risks. Surely issues of critical national infrastructure would place a type of acquisition into the high-risk quadrant. If the acquirer is close to a state or Government—particularly a hostile Government—that would place it in the high-risk quadrant. Therefore, on having a more filtered process, is the de minimis threshold the right way to go, or would it not be better to have a strategic approach based on a hierarchy of risks?

Christian Boney: I think the de minimis concept is potentially relevant and helpful in the context of thinking about what needs to be subject to mandatory notification. If you are not within the mandatory notification regime, that does not mean that the Government cannot exercise the call-in power so long as the relevant tests in the legislation are satisfied; it just means that the relevant company does not have to make a notification. There are elements of the mandatory sectors where some form of de minimis has already been included. Energy is a good example of that, and that makes sense in the context of energy.

I think it is worth exploring whether, within any of the other sectors, where we are more likely to see start-up, early-stage companies operating, there is benefit in introducing some form of de minimis regime solely in respect of the mandatory notification requirement. As I say, if a small-scale company operating in critical artificial intelligence is receiving investment from somebody who we view as a hostile actor, that transaction might escape mandatory notification, but that does not mean it escapes voluntary call-in by the Government at the point they become aware of it. That is something that might be worth exploring.

Q I want to explore a bit further the issue of critical national infrastructure, which is defined by the Intelligence and Security Committee as the Government’s 13 sectors ranging from energy to transport infrastructure and anything that relates to public health. With covid, we have seen the massive importance of how we have been overexposed in certain supply chains, and that might have an effect on our thinking about critical national infrastructure. To what extent does that influence your work on mergers and acquisitions and your thinking about whether such mergers and acquisitions in areas of our critical national infrastructure are in the national interest?

Christian Boney: If I am following the question correctly, I think it is the correct balance to strike to say that people pursuing significant M and A activity involving the UK’s critical national infrastructure should expect to go through a notification process and should expect their transaction to be at potential risk of examination and call-in. From my experience, corporates undertaking transactions in the spheres of national infrastructure and so on expect that. It is what they see in other countries and jurisdictions, so it is something they come to accept as part of doing deals in top-tier democratic nations.

Lisa Wright: I agree with all that. I guess I would also add that people are well aware that these considerations change over time. This year has shown that more than ever. People have an eye on what might not have been an issue yesterday; today, it might be different. We saw the amendments coming through to the Enterprise Act earlier in the autumn to bring in the power to allow the Government to intervene on public health grounds. People are very conscious of the fact that this changes, and they keep an eye on it from that perspective.

Q Thank you both for your submissions this morning. I want to go further into the issue of how you, the Government or the agency it sets up to do this makes a judgment about whether a small or start-up company really falls within being a threat to national security. I imagine that that might be quite a difficult judgment to make. I am putting to one side the issue of mandatory notification, which Mr Kinnock has looked at in more detail. I am saying that once it has been notified, how do you make the judgment about whether it is a threat to national security?

I would have thought that there are two aspects to that. One is the nature of the acquirer, which is partly what you have already alluded to. The second part is that I would have thought that it is quite difficult to ascertain whether something at the cutting edge of technology is or is not a threat. I would have thought that that is a really difficult judgment to make in practice. Do you have any thoughts on that, and what experience do you have of other regimes trying to make that kind of judgment?

Lisa Wright: I think there are probably a number of ways to tackle that question. I guess that an answer is that it is ultimately a question for the Government. They are the ones who understand the threats and the intelligence. As advisers, we can look at the guidance and cases that have happened in the past, and we can speak to the unit, which, as we understand it, will be open for engagement and will welcome that. We can guide clients through the process, using the touch points and information that is available to us, but ultimately it is the Government that are in possession of the full set of facts and considerations that go into the decisions about whether that particular transaction is a problem or not. I guess what that speaks to is having the right people in the unit and getting them plugged into the right people elsewhere in Government to arm them with the ability to make these assessments.

Christian Boney: To pick up on that, I agree entirely with what Lisa said. It is not necessarily an easy thing for the advisory community or clients themselves to make a judgment about whether they are presenting risk to national security. That is why this concept of real-time, interactive engagement with the unit that is set up to police this regime is going to be so important.

In the world I operate in, one of the regulators we deal with is the Takeover Panel, which is fantastic at being responsive, with real-time engagement. It results in a dialogue and an interaction that helps advisers navigate their clients through a regime that is not straightforward at times. That is the kind of practice that could usefully be learned from in the context of the investment security unit, because that kind of real-time feedback and informal advice will be very helpful in helping companies make the judgment about which side of the line they fall.

Q Good morning, Ms Wright and Mr Boney. I want to look in more detail at the kind of information that might be included in the Secretary of State’s clause 3 statement, which will set out the kind of factors that they will take into account in deciding whether they needed to intervene.

There is a fair amount of information in the Bill and the documents published alongside it about the kinds of businesses being acquired or taken over that might give rise to concern. There are quite clear definitions of what constitutes a trigger event, whether it is a purchase of shares or whatever, but there is very little detail about how the Secretary of State will decide which potential acquirers pose a threat. There are clearly good reasons why that information cannot be made public in too much detail, but is the fact that there is so little on the face of the Bill about how that decision is arrived at a problem? Does it make it less certain and therefore more likely to result in legal challenge?

Christian Boney: Acquirer risk is one of the points picked up in the statement of policy intent that is going to be looked at when determining the level of risk that a transaction presents. When looking at and explaining acquirer risk, I think that helpful additional guidance could be added to it to, for example, make clearer how the Government will consider acquirer risk in the context of things such as private equity funds and other funds that may be looking to invest in the UK. By that, I mean in particular whether the Government will be willing to disregard the identity of limited partners and other investors in funds that sit above the particular acquisition vehicle that is doing the relevant transaction. That is the kind of thing that I think there would be real benefit in trying to make clearer in the statement of policy intent.

Q Thank you. I will focus a bit more on the definition of a trigger event, and in particular the catch-all provisions that define when somebody becomes a person with significant influence or control over a company.

The Companies Act 2006 has similar requirements for a company to notify Companies House if certain things happen that put someone in a position of significant influence. From a lay person’s point of view, such as my own, some of those provisions are almost word for word the same in the Companies Act and the Bill. Some appear to have the same effect but the wording is different, and therefore there will potentially be occasions when the definition is different. Would there be benefits in completely aligning both pieces of legislation so that a particular event either has to be notified or does not have to be notified? Otherwise, there is the possibility that some events will have to be notified under the Bill, and other events will have to be notified under the Companies Act but not the Bill.

Christian Boney: In short, I think there would be benefit in having as much alignment as there can be. Clearly, the two pieces of legislation are not necessarily designed with the same intent and focus in mind. Yes, I think there is merit in having as much alignment between the two as there can be.

If I may, there is just one point about the trigger events that is worth considering. One of the points in the statement of policy intent in the context of trigger events is the Government considering the risk of espionage. That seems to me to be something that is worth thinking about in the context of this regime. At the moment, the trigger events are focused, as you were saying, on the ability to influence a particular company, but there are certainly circumstances where, without acquiring a level of shareholding that enables a person to influence the company, the person can nevertheless gain very significant access to information—for example, through a board seat, which might come at a shareholding of lower than, for example, 15%. That would give that person considerable access to information within the company.  If they were a hostile actor and they wanted to act in a nefarious manner, it would enable them to feed that information back to another hostile party. We have spoken about narrowing the scope of the regime, and I appreciate that that would be an amplification of it, but I think that is a point that is worth considering.

Q I will carry on with the line you took just now about an investor’s potential influence over or access to a company. A little earlier, you were talking about start-ups who sought to get staged financing in order to try to build their businesses. Of course, there are more ways of getting investment than just getting equity. We know that if a business has a relatively small amount of equity but a huge amount of debt, the provider of the debt has much more influence over the company than perhaps the shareholders do. We saw that on the banking commission when we looked at the role of bondholders in influencing banks, compared with equity holders. Clearly the bondholders, in effect, had much more influence.

The other thing is that a start-up company can raise money in other ways. The Bill tries to make sure that we are not losing intellectual property, but a business can raise finance by licensing the intellectual property that we are trying to protect—I am not sure that that would come within the scope of this Bill—or even sell the intellectual property and license it back again. There are various other ways in which a company can raise finance, over and above equity, where there is a huge amount of influence or it falls outside the Bill. Clearly, crucial national infrastructure is a very different thing, but intellectual property is something that is very difficult to grab hold of; it is like trying to grasp a handful of sand. Given the objectives, I wonder how the Bill tackles those other areas, which seem to allow malign investors a way through.

Christian Boney: I think an important aspect of the Bill—this is one of the reasons why Lisa and I have described it as a broad regime—is that it does allow policing of the acquisition and control of assets, including intellectual property. In my experience, at least, that is quite different from what you see in other international regimes. Clearly, the acquisition of control of assets does not fall within the mandatory notification regime; nevertheless, it is helpful that the Government have the power potentially to exercise a voluntary call-in in respect of, for example, an acquisition or a licence of intellectual property.

Q And the debt issue—the fact that debt holders can be more influential over businesses than equity holders?

Christian Boney: That is certainly fair. I think the level of influence and control that a debt provider will typically get in what I will call the ordinary courts means that it is less likely—I am certainly not saying it is impossible—to be at the level of getting such granular, sensitive, let us call it operational information, which is the kind of thing we would really be concerned about. It would more be focused on getting access to financial projections, financial performance and that kind of information, which, although it can still be sensitive, is probably less sensitive than operational data. A balance needs to be struck, it seems to me, in the context of this legislation. Not having debt providers obviously within scope does limit the legislation, but does it strike an acceptable balance? My personal view is that, on balance, it probably does.

Q From your professional point of view and experience to date, what could be the long-term impact of the Bill on UK business and investors? Will the Bill help or hinder the global position on investing into the United Kingdom?

Lisa Wright: In many ways, the regime just brings the UK into line with major international peers. From that perspective, for people doing deals around the world who have already experienced those other regimes, it ought not to have any real negative impact at all, provided that BEIS can deliver on the aspiration set out of a slick and efficient regime, turning around notifications within sensible deal timeframes and providing the kind of informal advice and early engagement promised. That will be critical, particularly in the early stages of the regime. From that perspective, I do not think this should have a long-term negative impact on people wanting to do deals in the UK. As Christian was mentioning earlier, it may be a slightly different picture for the start-ups and the smaller companies where they are caught up in the mandatory sectors, but overall I think it is right that this can be viewed as the UK bringing itself into line with what else is going on around the world.

Christian Boney: I agree with that. That is the right assessment.

Q Picking up the idea of bringing us into line with global peers and equivalent countries, there are many different regimes and you both have incredible global experience legally. If you have experience of dealing with companies and transactions, mergers and so on, particularly in the US, you will know that it has the Committee on Foreign Investment in the United States, with its white list of almost green-lighted countries, which they can deal with slightly differently. Should we consider something like the US does with its more established regime and having not necessarily an approved list but different layers for our regime, from the most hostile countries through to those who are our closest allies?

Lisa Wright: It is certainly worth considering. I would imagine that those sorts of considerations will be going through the mind of the officials and the Secretary of State tasked with making these assessments and issuing the decisions. I can see there may be some sensitivities and a desire perhaps not to make that all transparent in terms of public documents. Perhaps they think they will deal with it over time through this engagement and, with advisers and parties coming to talk to them, you will get a sense of who is okay and who is not that. But I can see that perhaps they will not want to put that down in very great detail on a public piece of paper, not least because one might imagine it could change over time. I guess there needs to be a degree of flexibility to recognise that.

Christian Boney: I agree. I am certainly not a CFIUS expert, but my understanding of the exempt list of countries is that actually the practical impact is quite tightly drawn. I do agree with Lisa. I think we are likely to get the best sense of those countries that are viewed as more risky than others through the engagement process and as people’s experience of the regime develops.

We are almost at the end of the time available for this session, so there will be no further questions for these witnesses, but thank you, Ms Wright and Mr Boney, for being so generous with your time and assisting the Committee so much. We will now move on to the next witness—either we will suspend the sitting briefly until everything is sorted out or we will move seamlessly on—but thank you both very much.

Examination of Witness

Professor Ciaran Martin gave evidence.

Q Would you mind, Professor Martin, just introducing yourself for the record and for the benefit of the Committee?

Professor Martin: Thank you. My name is Ciaran Martin. I am currently a professor of practice at the Blavatnik School of Government at the University of Oxford, but until August of this year I was the founding chief executive of the National Cyber Security Centre and a member of the executive board of GCHQ, within the Government. I should also declare for these purposes, although I am not sure it is relevant, that I serve on the advisory board of a US venture capital company called Paladin.

Q Welcome, Ciaran; it is great to see you here. Thank you so much for sharing your expertise: as the founder of the National Cyber Security Centre, you have a great deal of expertise. I want to ask you to talk about a question that I have raised a number of times and that your expertise should be able to give us a real view on, which is about understanding the distinction, if there is a distinction, between national security and economic security concerns. You will be familiar with a number of cases, such as Arm and DeepMind, to name just two, that involved an economic security issue, you could argue—in terms of sovereign capability in artificial intelligence in the case of DeepMind, and of mobile silicon in the case of Arm—but that pretty swiftly turned into national security concerns. This Bill identifies a number of different sectors or areas—up to 17, I think— where a notification will be mandatory. How can we look at understanding or reflecting a distinction between evolving economic security and, ultimately, our national security?

Professor Martin: Thank you for your comments, Ms Onwurah; it is nice to see you again. I speak as someone who thinks that the Government have broadly got this issue correct, in terms of their proposals in this Bill. That is not to underestimate the sheer complexity of dealing with the core, fundamental question that you rightly identify of balancing economic security and national security and of where one stops and the other begins. That is a very complicated and difficult thing to do. I think one starts with an attempt to define a core principle, which is essentially around the freedom to act. I think that if you look at something such as Arm—I would say this probably more in the case of Arm than DeepMind—and its potential ultimate sale to Nvidia, you see that the UK has less freedom of choice in a key strategic technology, which undermines its own ability.

I think there is an analogy with the little known but quite long-standing—for more than a century—work on sovereign cryptography. That is one of the areas that has long been covered by national sovereignty requirements. There are things in information security, as we used to call it, cyber-security, as we do call it, that have always needed to be fully sovereign, entirely British-made—they are not very many areas. The problem has been that as technology and communications have changed, it has been quite hard to keep up, and there are always pressures to expand that in a way that is economically harmful to competition and so on. So it needs a clever buyer within Government to identify what will be the strategic areas and what will not be.

In the area of sovereign cryptography, we end up trying to keep, depending on the era, around half a dozen or a dozen companies viable, because it is not a lucrative market. You can see the problem, but the key issue is whether there is enough, first, sovereign, but if not sovereign, friendly capability that allows us the freedom of choice to adopt key technologies. That means identifying the key technologies in the first place, evolving them over time and then having a very difficult to achieve but necessary intelligent function within Government that can evaluate the notifications that it gets. Of course, at the moment we do not have the power to do that, and that is what this Bill correctly seeks to remedy.

Q Thank you. I am very taken by your definition of sovereign and friendly capability. Indeed, that is exactly what we do not have in our 5G networks, hence the mess with Huawei.

Moving on slightly, a comment made numerous times on Second Reading was about the role of the intelligence services. Indeed, my right hon. Friend the Member for North Durham (Mr Jones) asked for more intelligence in the process. How can the Bill better ensure that the intelligence services, including the National Cyber Security Centre, have input and scrutiny and, indeed, provide their expertise as part of the process so that the appropriate decisions are taken?

Professor Martin: I think the essential, principal requirement is not the intelligence services’ involvement—although that is important and I will come to that in a minute—but the understanding of technology and technological developments within Government. These are fundamentally economic issues as well. Apart from anything else, if you look at some of the reasons why the Bill has come about, you will see that, in strategically important technologies, the Government have invested heavily in university-sponsored research and in private sector research, only to see the fruits of that research sold off. Even if that did not impact on national security, which in most cases it does, it is not a good return for the taxpayer in terms of long-term UK involvement if the intellectual property ends up being monetised elsewhere.

I have enormous respect for Mr Jones and I think he is on to something in terms of involving the national security and intelligence services, but I do not think this should be intelligence-led. In my experience—obviously, I cannot go into detail on this particular aspect of it—secret intelligence adds relatively little to your knowledge of intent. If we take Russia and China, the two big strategic threats to the UK, Russia does not have a strategy in this space. We have to worry about Russia and cyber-security because it attacks us, but it attacks us on the internet that the west has built.

China is very different. China has a technological, strategic dominance aim, but it is not a secret. It is published and has been translated into English in the Made in China 2025 strategy, as you know. Our knowledge about the precise, intricate details of how that is implemented gains relatively little from secret intelligence.

What secret intelligence does have, particularly in GCHQ and the NCSC within it, is a knowledge of how technology works in terms of the national security threat space. I think the UK has a head start on other countries, because the National Security Council innovations of the 2010s gave the intelligence services a much bigger voice at the table, and that is reflected in the structures that we have now. The UK should be well placed to be able to listen to the intelligence services, but I would encourage—not least to make sure that in this very delicate balance of trying to show that we still have an open economy and are not shutting the doors to investment—as much transparency as possible on the decision taking. It will not always be possible because GCHQ technologists will know about things—exploitations of particular bits of technology—that they cannot reveal. They will be able to tell that to secret forums within Government for consideration—I am quite confident about that: there will be a seat at the table for them.

My recommendation would be that, as far as can safely be done, the Government should be relatively open about why they make the judgements they make about strategic areas of technology and the interventions they will make once this Bill is passed—assuming that both Houses wish to pass it.

Q Professor, that was excellent and I am very grateful for it. I will follow on from that thought and ask about the proposed powers within the regime for the Secretary of State to gather that information, which, as you quite rightly remind us, is not necessarily secret but about understanding the technology, or a particular piece of the technology, within the sector. What are your thoughts on the regime for the Secretary of State to be able to gather that information to inform a decision or to call in witnesses, so that they are able to really understand that particular issue and therefore make a decision on it?

Professor Martin: I suppose the mantra, if I had one, would be, “Broad powers, sparingly used, with accountability mechanisms”. It is incredibly hard to be specific about this, for two reasons: one is that new areas of technology crop up, as they invariably do, and the other is that sweeping categorisations are needed on the face of legislation.

I am not a deep technical expert—although others are available from my former organisation—but if you take sweeping, umbrella titles like “quantum” or “artificial intelligence”, there are huge swathes of that where, actually, not a lot of these powers in the Bill will be used. There will be companies that will be doing very interesting things—10 interesting things—of which only one would be caught by this Bill.

If you take areas like specialist quantum computing and so forth, I think the community of interest and expertise is actually relatively small and has relatively good relations with Government—not least because, again, while it is not perfect, the whole system of research council funding and Government investment in funding technological research is pretty good, by international standards—so you end up knowing these people. One of the reasons that this sort of policy evolution came about, which has led to the publication of the Bill before you—I remember this from discussions within Government—is that people were volunteering to come to us. World-leading experts, people who had been funded by the Government—I will not go into individual cases because it is commercially sensitive and possibly security sensitive—would come to Government and say, “Look, we’ve had this inquiry from a Chinese behemoth,” or even, “We’ve had this inquiry from a US company,” and so forth: “What do you guys think about this?” and, invariably, we would have to have an informal influencing discussion.

I do not think that some of the businesses to which this will apply will be screaming that this is horrible Government regulation and intervention in areas where that should not be made. There was already a dialogue; there was just no legislative framework. Of course, that meant that companies that felt a loyalty to the UK and so forth but that also had to look after their commercial interests were sometimes in a real bind.

To try to answer your question, I think that the powers should be fairly broad. I think there should be accountability and transparency mechanisms, so that there is assurance that they are being fairly and sparingly applied.

Q This is very interesting evidence. I want to ask you a little bit more about China. As you rightly pointed out, much of this is in the public domain, and the Made in China 2025 strategy is very clear about the objective, which is to achieve global technological dominance. Given your experience at the National Cyber Security Centre, can you share with us a little bit more about how that would manifest itself in practice? What do you see as China’s next moves, in terms of rewriting the rules on technology and on creating that dominant position that you have talked about? How do you see that manifesting itself?

Professor Martin: I think there are broadly two or three areas in which China is very interested in doing that. I can make some comments on motivations, because I think they are very important, and then I will finish with how that manifests itself in UK casework.

Clearly, China has set out a stall, which it published in Made in China 2025, in which it said it wants to be the world’s pre-eminent leader in a number of key areas of technology. It mentioned artificial intelligence and quantum, and it is throwing vast sums of state money and long-term strategies at them, unencumbered by the need to seek re-election and popular consent, so it is a very powerful movement. That is the first thing: it is trying to build up its capability.

China is also trying to change, at least for itself—we will come to that in a minute—the way the internet works. It was reported earlier this year that Huawei and other major companies in these international standards bodies are looking at something called new IP protocols, among many other things. To give you a sense of what the motivations behind that are, at the minute when traffic flows around the internet, despite some popular impressions to the contrary, it is actually pretty hard to work out what is going through it. Therefore, it is relatively difficult to censor, although China has managed it in some ways. The new IP protocol will make it much easier to work out what sort of traffic is going through and being rerouted, so it makes it much easier to control. China is trying to dominate and essentially get a lead in the strategic technology, and also to change the character and culture of the technological age from one that started off fairly anarchic to one that is much easier to control. That is what it is trying to do.

Why is China trying to do that? A lot of this is about the assertion of its own power for itself—the regime, power, Chinese nationalism and so forth. I think it does intend to extend its sphere of influence, but I have never seen that as the primary motivation. One of the interesting things, post the pushback from the Trump Administration and the US sanctions on Huawei, is the extent to which China will now accelerate its desire for self-sufficiency, and the extent to which that leads to a separate pole of technological influence that may become less interested in countries such as the UK, European Union countries and North America.

To date, how has that manifested itself in cases in the UK? Ms Onwurah has already mentioned the Huawei controversy. If you take Huawei as a company, I think it shows the different ways in which this can manifest. The Huawei 5G controversy is going to be dealt with by a Bill that I believe is coming to the House next week, not this one. The 5G controversy was not about investment; it was about selling to British companies to build stuff. Obviously, that case has been very heavily analysed.

I think that the more interesting case in the last 10 years involving Huawei was its acquisition in 2012 of the Centre for Integrated Photonics—a world-leading British firm in a really key area of technology. That, in my view, was pretty strategically damaging. If we had our time over again, that is the sort of thing that the Bill might well notify. I know you have taken evidence from the likes of Charles Parton and people with huge China expertise. The fact that the acquisition of the Centre for Integrated Photonics did down Britain’s technological development was probably a by-product. The point is that Huawei could buy world-leading research, which China could then take and appropriate for itself very cheaply. That is what it will continue to do to build up its own capabilities.

Q Given what you just said about the nature of the threat, how should that inform the composition of the investment security unit, which is going to be placed in BEIS and will be the primary locus for the screening of acquisitions? Would you say that it needs to have absolutely leading expertise in technology in the issues that you mentioned—quantum and so on? Should it also have China experts and people who speak Mandarin?

Professor Martin: One of the reasons that this is so difficult, as I said in my first answer to Ms Onwurah, is that I can think of at least three areas of expertise that the unit is going to need to draw on. Technological, yes, because of what technologies will matter. Geopolitical, yes, and I do not have a strong view on whether it needs Mandarin speakers because the UK has a strong and intelligent foreign service mission in country in China and all over the place that can provide input. But the third thing is actually quite a lot of commercial nous—patent laws and so forth.

This is where there is a distinction. This is not all about China. It is layered, and there will be things that we would not want to see going even to quite friendly countries. Arm is a case in point, with the concentration of power in a couple of US companies—particularly when one of them is derived from UK technology. That is not comparable as a strategic threat to Chinese dominance—I hope the Committee does not think I am saying that—but there are times when it would be a damaging foreclosure, if you like, of UK freedom of action and freedom of choice. We know that the US has a strong and sometimes aggressively used extraterritorial legal system in which it can use the power of US companies and block trading with US companies and so on, so we need people who understand those areas where we think, “We are not sure we would want that to leave the country at all” as well as people who understand Chinese. That involves a lot of expertise in things like patents, international law, US commercial law, sanctions and so on.

Q Professor Martin, I have been listening with interest—it has been fascinating—especially when you were talking about the need to balance national security, the national interest and economic security. I have been reading the very good briefing by the Law Society of England and Wales, which suggests that the Bill could be improved by the insertion of a definition of national security. Do you agree?

Professor Martin: I do not vehemently disagree with that suggestion, but I am not persuaded by it. It is not a new issue. I remember cases—they have nothing to do with this—going back to the aftermath of the so-called global war on terror, with demands during inquiries for definitions of national security. I am not sure what that would achieve other than it would be heavily litigated. In terms of both definitions of national security and the categories of technology, a better answer is a drumbeat of reviewable activity, which is by definition transparent, about how the Government interpret the scope of the Bill, if it becomes an Act, and the sort of cases it applies to so that, over time, you build up a broadly accepted framework—of course, not everyone will accept it—that is seen to be fair and rational.

Q I understand the reluctance to have an explicit legal definition of national security, but would there be a benefit in having an “except for” clause that makes it clear that certain activities do not come under the category of a threat to national security? Would that help to allay fears about infringements of rights of democratic participation—the right to protest and so on?

Professor Martin: I certainly would not be against things like that, if it could be done in a way that did not compromise the wider use of the Bill, because I do not think there is intent to interfere in the democratic process. I think the intelligence services take that pretty seriously. I remember in other contexts, when asked to co-operate on cyber-security with other countries, given that some cyber-security capabilities—by no means all—can be intrusive, that a lot of due diligence is always done on whether they could be turned by more authoritarian regimes against their own people. I would not object to that in principle. I do not know whether you have a case in mind when you say that might be necessary, but I have an open mind on that.

Q There has been some discussion of whether the investment security unit is best placed within BEIS, the business Department. Do you have a view on that? Does it matter where in government it is based? If it does, would BEIS be your preferred location, or do you think it should be based elsewhere?

Professor Martin: In general terms—this is a personal view, for what it is worth—I do not think the location of most government functions matters a great deal. Perhaps I am just a bit of a contrarian on that point, and always have been. The Government is the Government. Institutions do have cultures. I do not know whether the Government or the intelligence services have offered a formal view, but personally I would be reluctant to put it within the national security estate, first, because it has to be economically literate, and secondly, because it has to justify its existence and use. A strong national security input is important, but I would not leave it in the national security community.

I am sorry to sound like a broken record on this point, but I think the more important force in function is some form of reviewable transparency requirement. If you set it up and let it go away, first, you take away pressure to perform well, and secondly, you take away pressure to justify the decisions that are made.

This is a really hard problem. When I was still in government and there were discussions around it, this was not the sort of Bill that most Ministers and politicians came into Government to want to pass. It is a necessity of a bunch of case work that we have become concerned about that has required us to do this. It is sort of the least bad option. The country wants to be open to investment—we are all mindful of the impression it may give that it is trying to deter investment—so it is probably the least bad option, as I say.

I do not think there is any arrogance in government or belief that a bunch of civil servants assembled in BEIS or another Department will make infallible judgments on individual cases, but what is the alternative way to stop the sort of things we have seen happening—world-class taxpayer-funded research in key strategic technologies that are going to be vital for national security being sold for a song to potentially hostile regimes?

I will leave it there, Sir Graham. I may want to come back later, but I will let someone else in now.

Q Thank you for your excellent evidence, Professor Martin. You said, if I understood you correctly, that the process needs to be relatively open about why it is making decisions, but I foresee problems, particularly where there are issues of confidentiality and national security. Would you explore that a little? I note that within the terms of the Bill, decisions will be subject to judicial review or appeal, and the Government will be able to apply for a closed material procedure to protect sensitive matters in such proceedings. It seems to me that there is a potential problem there in relation to commercial and national security information sensitivity, so the “openness” of the system might be fairly limited and it might not be as respected as it could be.

Professor Martin: I get that completely. I do not think 100% transparency will be possible in this case. Obviously, it will be judicially reviewable, but I am entirely unsurprised that there is an explicit provision for closed material procedures. It will be a minority, but there will be cases in which the reason why a particular aspect of a particular piece of technology is really sensitive—it will probably be highly specialised, and there might be a dozen people, of whom four serve in government, who actually understand why—cannot be published. Then, of course, there will be commercial sensitivities.

Having said all that, if you take, for example—these are real examples—the current debate around the potential use of offensive cyber, or the sort of allegations Edward Snowden made against Five Eyes countries in 2013, or some of the defences that the Government had to use in the 2000s about their role in the aftermath of 9/11 and Iraq and co-operating with US forces, in my view there is a clear distinction between being able to describe the operating environment and the sorts of thematic issues that you are dealing with, versus individual cases, which often contain extremely sensitive detail. National security organisations can say much more about the former than historically they have been willing to do.

In something like this, where we are talking about business confidence and how the country looks to potentially very friendly and helpful outside investors who like the UK, want to come here, want to put money here and like the high-quality research and the brilliant innovators and individuals, it should be possible to give them something that says, “In the course of the last year, we have looked at quantum resistant cryptography and here are the types of aspects of this that we are reserving and here are the bits that are more open” or that sort of thing, without disclosing anything sensitive. That is all you need to be able to say—these are the judgments. Let us say that the Bill becomes law in the middle of 2021, for sake of argument. By 2025 and the beginning of the next Parliament, the tech landscape will look very different. You will not want investors to be looking back at the debates you are having in the House now as a guide to the latest way in which the Government are applying this, or looking at drip feeds of information. You will want something official. It should be possible to do that.

Q I want to refer back to some earlier questions about the skills within the investigatory unit that would be within BEIS. With your knowledge of Government, do you see any sort of experiences that can be carried over from the export control joint unit within the Department for International Trade? They do not have all the skills there, but they draw on skills from other Departments, particularly when it comes to arms export control and the eight consolidated criteria. Do you think there is potentially an opportunity in the day-to-day structure of the investigations unit for some lessons to be learned and carried across from the ECJU? Or do you think that is irrelevant?

Professor Martin: I do not know the ECJU that well, but it is relevant. I remember, although it was some time ago, being asked for specific inputs into that sort of point. The important thing is that the unit achieves a prominence and reach across the Government, because bits of Government will have to be involved occasionally and there will be bits that will be embedded. It needs a home—in our system of government, every organisation needs a home with a responsible Minister and an accounting officer and all that. However, I do think this needs to be broadly based and multidisciplinary. Export controls are one of the few areas where we have had to do that consistently for a number of years, so I agree that it is well worth a look.

Q Do you think it should be formalised or do you think an informal relationship with other Government Departments will be adequate?

Professor Martin: I think it should be formal. The Government are not new to this. There should be some sort of review board to make sure that it has the right resources, the right performance, the right skillset and so forth. I would encourage ministerial interest. It may be something that the National Security Council wants to periodically review. In my time in national security, there were standing issues that the Government would come back to twice a year, whether there was anything interesting happening on them or not, just to take stock. That might be an issue. In answer to the previous question about transparency, there may be a case for a formal presentation, secret detail and all, to the National Security Council every year, which would include all the potentially covert and sensitive stuff. It really needs to work with the grain of ministerial thinking as well. That will need to be done collectively, at some point, so there may be a role for the NSC.

Q Good afternoon, Professor Martin. As part of the provisions for transparency and parliamentary oversight of the way the powers in the Bill would be used, the Bill would require the Secretary of State to have a statement approved by Parliament and then reviewed at least once every five years. Does that time period seem reasonable to you? Is there an argument for a shorter review period, especially in the early days when everybody will be feeling their way as to how the Bill works?

Professor Martin: There is a reasonable case for a more frequently reviewable point. There is also a cultural point about the way in which the political processes work. There are aspects of government about which questions are not routinely asked in Parliament, because they seem to be too secret. Again, it is a point about casework versus framework.

To my mind, there is no reason why the Secretary of State for BEIS could not be asked from time to time to update on this or why questions in the House should not be asked. I do not think technology changes fast enough that the whole framework of categories of regulated activity and so forth have to be updated more than every five years, but there will be a possibility of more frequent updates on working, approving listings and that sort of thing.

To be fair, there is nothing to stop MPs from asking questions about international security, but the chances of us ever getting an answer may be somewhat less.

Q You have placed a lot of emphasis on the right technological skills and said that they should be forward looking, for a number of reasons, including identifying new technologies, but also giving clarity and certainty to businesses. Where do you see those tech skills being located? How can the Bill ensure adequate appropriate access to them?

Professor Martin: I am not sure if the Bill will get in the way or help, one way or the other. I think Government technological nous across the civil service needs to be invested in properly. There is a deep, fairly sizeable reservoir in GCHQ. Again, without going into too much detail, more and more people are being transferred and seconded from there into other areas. That is a good thing, and we should welcome that rather than cast aspersions on this being all secret state stuff. It should be permeating normal Government activity.

There will be issues about how to pay for some of the specialists that are needed. I do not think we will ever compete with the big tech companies, but there may be scope for paying some specialists a bit more and bringing them in here. There is something about creating a career path for technologists in Government. There are big issues for the heads of the civil service and the permanent secretaries. If I were heading it, I would want an immediate infusion of seconded talent and private sector buy-ins relatively quickly. Government can do that quite well some- times, and sometimes not so well. There also needs to be a long-term strategy for technologists in Government.

I will now thank you very much, Professor Martin, for giving your time so generously and being of such assistance to the Committee. Given that the next witness is not due to give evidence until 2 pm, I invite the Government Whip to propose the adjournment.

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

Adjourned till this day at Two o’clock.

Environment Bill (Twenty Second sitting)

The Committee consisted of the following Members:

Chairs: †James Gray, Sir George Howarth

† Afolami, Bim (Hitchin and Harpenden) (Con)

† Anderson, Fleur (Putney) (Lab)

† Bhatti, Saqib (Meriden) (Con)

† Brock, Deidre (Edinburgh North and Leith) (SNP)

† Browne, Anthony (South Cambridgeshire) (Con)

† Crosbie, Virginia (Ynys Môn) (Con)

† Docherty, Leo (Aldershot) (Con)

† Furniss, Gill (Sheffield, Brightside and Hillsborough) (Lab)

† Graham, Richard (Gloucester) (Con)

† Jones, Fay (Brecon and Radnorshire) (Con)

† Jones, Ruth (Newport West) (Lab)

† Mackrory, Cherilyn (Truro and Falmouth) (Con)

† Moore, Robbie (Keighley) (Con)

† Pow, Rebecca (Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs)

Thomson, Richard (Gordon) (SNP)

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

† Zeichner, Daniel (Cambridge) (Lab)

Anwen Rees, Sarah Ioannou, Committee Clerks

† attended the Committee

Public Bill Committee

Thursday 26 November 2020

[James Gray in the Chair]

Environment Bill

Welcome to this penultimate, or possibly ultimate—we hope—sitting of the Committee. I think that everybody is observing social distancing today, but the Speaker has made it perfectly clear that we must be very strict about this. For this last—or second last—event, please try to remember that.

New Clause 23

Reduction of lead poisoning from shot

(1) The Wildlife and Countryside Act 1981 is amended in accordance with subsections (2) and (3).

(2) After section 5(c)(viii) insert—

“(ix) any form of lead ammunition used in a shotgun.”

(3) After section 11 (1)(d) insert—

“(e) uses lead ammunition in a shotgun for the purposes of killing or taking any wild animal”.

(4) The provisions in this section come into force on 1 January 2023.

This new clause intends to provide an effective regulation to protect wildlife, the environment and human health by replacing widely-used toxic lead gunshot with alternatives. It intends to ensure a supply of healthy game for the market, whilst meeting societal requirements and those of shooting, food retail and conservation stakeholders.(Fleur Anderson.)

Brought up, and read the First time.

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

It is an honour to stand in this last sitting of our Environment Bill Committee consideration, which began 261 days ago. I have been disappointed, so far, by the lack of agreement over the amendments proposed by Opposition Members.

I hope today will see a sea change; that this new clause is the one that we can all accept, agreeing that lead shot is highly toxic, should not be in our system, is bad for the environment, bad for wildlife, bad for children, bad for adults—bad for everyone. Its days can now be hastily numbered, and we can support the shooting community in their efforts to get rid of lead shot from our environment, our ecosystem and our agriculture.

Lead shot is highly toxic and is easily absorbed into the bloodstream. Birds eat it as they mistake it for grit—which they eat for digestion—and it then gets absorbed into their bodies. It is also highly toxic for children; there is no minimum amount of lead, in any system, that is safe for children.

I am no urban MP, standing up for a city constituency, with no idea of what goes on in the country, because I was raised in Wiltshire, where my father was a rural vicar. Every Christmas, some of our presents would not be wrapped up, but would be hung up outside our door, as they would be a brace of pheasants. I do understand what happens in the shooting community.

Could the hon. Lady outline the differential impacts of steel and lead shot, as that is something that many in the shooting community are interested in and will carefully consider?

I thank the hon. Gentleman for that intervention, and for his interest in this subject, which I have become much more interested in since researching it and talking to relevant bodies.

Steel is considered to be safe, as are tungsten alloys and tin, so there are alternatives out there. There is obviously an issue with single-use plastics, which would currently have to be used with alternatives to lead. However, I believe that with the inspiration and impetus from this amendment, the whole shooting community—including manufacturers of alternatives to lead shot—would be encouraged to use and produce ammunition that was far, far safer than lead shot.

Lead does not need to be used; non-toxic ammunition is widely available, effective, and comparably priced. The hon. Member for Hitchin and Harpenden may be interested to know that Denmark and the Netherlands banned the use of all lead shot in the 1990s; they have proved that changing to safer ammunition is entirely possible.

Why do we need to do this new clause? We know that 8.7% of ducks and geese across Europe die every year from eating lead shot; this includes 23% of pochard, which is a species threatened with global extinction, and 31% of pintail ducks. Lead poisoning from ammunition kills an estimated 75,000 water birds each year, as well as other birds and mammals.

Through ingestion by cattle—which then results in food-safety issues as it enters their system—lead can end up in restaurants and retail outlets; in our food. It also seeps into land, including wetlands, and creates toxic grounds; wetlands have been found to be peppered with lead shot.

Lead is dangerous for people’s health, as lead shot often fragments and is ingested in game meat.  Children and pregnant women are particularly at risk due to the negative impact of lead on the developing brain, which has led to Waitrose labelling its game meat products as not safe for pregnant women and children.

Lead is not something we should allow into our food system. Somewhere in the order of 10,000 children from the UK hunting community are estimated to be at risk of negative impacts on IQ due to household consumption of game meat. If the effects were immediate and something happened to us that caused an immediate breakdown of our health, we would have stopped this years ago, but because lead has a subtle effect on our health—on our brain development and IQ—it has been allowed to carry on for too long.

The new clause has not just been dreamed up in the past few months; it is the result of the Government engaging with this issue since 1991. There have been stakeholder groups, compliance studies, risk assessments and reviews, but the stars are now aligned. We cannot any longer say that the new clause is not needed. I know that the British Association for Shooting and Conservation is moving towards a ban on lead shot, which I welcome. It wants to take action within the next five years to see a change. There is clearly appetite in the shooting world to accomplish what is set out in the new clause by banning lead shot. However, things are not moving fast enough. We cannot entirely rely on that compliance, but the new clause would take us where the shooting community seems to want us to go.

The stars are aligned, and it is time for the new clause. There is a limited ban at the moment, focused on wetland birds, but it is widely flouted and there has been only one prosecution, which is another reason why we need to have the new clause in the legislation. The partial regulation focused on protecting wetland birds, and similar regulations in other home nations, have been ineffective in reducing lead poisoning in water birds because there has been a high level of non-compliance. Birds feeding in terrestrial habitats, where most of the lead shot is legally deposited, are also affected. Moreover, enforcement of the limited regulation has been negligible so far, and human and livestock health have not been protected. Two large-scale restriction proposals are currently being progressed in the EU under REACH, which will bring about a total ban and additional benefits to law enforcement. Let us pre-empt that and go one step further in the UK.

This is the right time for policy change. The coinciding of the new Environment Bill and proposed policy change on lead shot is opportune. The nine main UK shooting organisations recognise the risk from lead ammunition. There is no debate about that. The imminent impacts of regulation on lead ammunition in the EU, and the likely impacts on UK markets for game meat, all need to be considered. Hence, on 22 February, the move to a voluntary phase-out of lead shot within five years was announced. That has already prepared the UK’s shooting community for change, and I have seen that the media narratives around shooting have changed to reflect that.

To date, however, voluntary bans on lead shot have always failed, so to say that the new clause is unnecessary is just not good enough. Denmark, which has gone ahead of us on this issue—we can learn from them—banned all lead shot in 1996. Hunters accept that it was because a progressive Government took such a step that they now lead the world in the control of lead poisoning from shot.

Although there is a desire for change within hunting organisations, there also remains a tradition of resisting regulation, which might just roll on and on over the next five years.

I want to pick up on that point. It is not only BASC but the Moorland Association, the National Gamekeepers Organisation and the Country Land and Business Association that are behind the transition. They are actually going further than what the hon. Lady is asking for, by asking for a ban on single-use plastics in the cartridges, but what they are clearly asking for is a period of smooth transition over five years. Does the hon. Member not agree that that is more appropriate?

I agree, and I thank the hon. Member for pointing out the wide support for a move in this direction, but if we can ensure it is in legislation, the move will go further, it will be deeper and it will be guaranteed to happen. Given the high toxicity of lead, we cannot just leave this issue to voluntary moves by all those organisations. Let us go with the flow and accept their willingness to change, but let us underpin that with legislative change, which moves it on faster. These issues have already been under negotiation. The smooth transition is happening. I am not asking for this to happen on 1 January—the proposal is to give another year. There is time to move forward; the new clause is very reasonable. If we want to go further and talk more about single-use plastics, that will happen in time, and this proposal will enable manufacturers to do that.

Only regulation will provide a guaranteed market for ammunition manufacturers. Moving all users of ammunition through these changes, all at once, will enable ammunition manufacturers to make the change that we all surely want to see, and will ensure the provision of game free from lead ammunition for the retail market. It will enable cost-effective enforcement and protect wildlife and human health much earlier than in five years. Why would we want lead shot in our food for another five years? Why would we want to kill all those birds for another five years?

Action on this issue was recommended in 1983 in the report of the Royal Commission on Environmental Pollution on lead in the environment. It has been long enough. It is long overdue. Now, at last, is the time to act.

I thank the hon. Member for Putney for the new clause and for highlighting her eating of pheasant as a child. I, too, have had many a pheasant hanging in my garage. Indeed, we had roast pheasant for lunch this Sunday. It was absolutely delicious, covered in bacon. It was really nice.

I reassure the hon. Lady that this Government support the principle of addressing the impacts of lead shot. Evidence published by the Wildfowl and Wetlands Trust suggests that, as she pointed out, tens of thousands of wildfowl die from lead poisoning each year and many more birds, including scavengers and predators such as raptors, suffer and die through secondary poisoning.

There is a lot of movement already going on in this space. In England, the use of lead shot is already prohibited over all foreshore, on sites of special scientific interest and for shooting certain waterfowl. I certainly know people in Somerset who give anyone all of the chat before they go out to shoot anywhere near wildfowl and local ponds about not using lead shot.

My hon. Friend the Member for Keighley has pointed out that the new clause falls short of what shooting organisations are calling for. Organisations such as BASC, the Moorland Association and various other countryside organisations—I engaged with a lot of them as a Back Bencher—are calling for an end within five years to both lead and single-use plastics. They are talking about it seriously. As the hon. Member for Putney will know, there is a lot of research going on as well.

An EU REACH regulation on the use of lead shot in or near wetlands is close to being adopted and a wider measure affecting all terrestrial areas is under consideration. The fact that the industry itself is calling for a ban within five years demonstrates the work going on in this space.

The wetlands measure will apply in Northern Ireland by virtue of the Northern Ireland protocol and will apply in the rest of the UK and be retained EU law after the transition period if the legislation providing for that comes into force before the end of this period.

The amendment seeks to prohibit use of lead shot in shotguns for the purposes of killing or taking any wild bird or wild animal. That approach may not be the most effective means of restricting the use of lead shot. It is also slightly unclear because it does not cover clay pigeon shooting, for example. If one were really going to address this issue, all aspects of the sport, as it might be termed, would need to be considered. The new clause does not address them all.

The police would enforce under the Wildlife and Countryside Act 1981, but as with other wildlife crimes, there are considerable difficulties in detection and taking enforcement action in remote locations. All those things would need ironing out; it is not just a straightforward, “Let’s have a ban tomorrow.”

I thank the hon. Member for Putney for her proposal and for drawing attention to this issue, which we all agree is really significant for the environment, animal welfare and even human health. However, it is critical that the Government take the right level of action through measures that are underpinned by evidence, as always, and informed by further conversations with stakeholders. I am not sure that the hon. Lady’s proposal necessarily does that. I also note that, as drafted, the new clause would require a legislative consent motion, and it is not clear whether she has considered this. It would actually be a matter for the devolved Administrations to proceed with and pursue.

I regard the restriction of lead shot as very important, and I assure the hon. Lady that I will ask my officials to continue exploring options for the most effective way forward that would tackle this whole issue in the round. For those reasons, I ask the hon. Lady to withdraw her amendment.

I thank the Minister, but it will not surprise her to hear that I will not be withdrawing the new clause. Assurances do not cut it on this issue; it is too important. I would also absolutely refute any feeling that this is not underpinned by evidence. As I have outlined, so much work by so many different groups has gone into this that it does need to go ahead.

If we need it to, the Office for Environmental Protection has all the powers to go further than my proposal to talk about clay pigeon use and single-use plastics. Let us take this further, absolutely, but accepting the new clause would be a much better assurance and indication of our intentions for what should happen in terms of getting rid of lead ammunition. Assurances and good words will be far less effective than putting this new clause in the Bill. The new clause goes further than voluntary regulations because it puts this firm date, 1 January 2023, in legislation. Those five-year assurances might go on and on; when is the actual end of that five years? The new clause ensures that action will happen, so we will be dividing the Committee.

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

Before we proceed, may I advise the Committee that we are able to sit here until 5 pm on Tuesday, but I personally feel a strong urge to get back to Wiltshire as soon as I possibly can, and cracking on would therefore be a good plan.

New Clause 28

Environmental objective and commitments

‘(1) In interpreting and applying this Act, any party with duties, responsibilities, obligations or discretions under or relating to it must comply with—

(a) the environmental objective in subsection (2); and

(b) the commitments in subsection (3).

(2) The environmental objective is to achieve and maintain—

(a) a healthy, resilient and biodiverse natural environment;

(b) an environment that supports human health and well-being for everyone; and

(c) sustainable use of resources.

(3) The commitments are—

(a) all commitments given by Her Majesty’s Government in the United Nations Leaders’ Pledge for Nature of 28 September 2020, including, but not limited to, the urgent actions committed to be taken by it over the period of ten years from the date of that pledge;

(b) any enhanced commitments given by Her Majesty’s Government pursuant to that pledge, any other pledge, and any international agreement; and

(c) all relevant domestic legislation, including, but not limited to, the Climate Change Act 2008, as amended from time to time.

(4) Without prejudice to the generality of the requirement in subsection (1), that requirement applies to—

(a) the Secretary of State in setting, amending and ensuring compliance with the environmental targets; preparing, amending and implementing environmental improvement plans; and performing all their obligations and exercising all their discretions under this Act;

(b) the Office for Environmental Protection and the Upper Tribunal in performing their respective obligations and exercising any applicable discretions; and

(c) all other persons and bodies with obligations and discretions under, or in connection with, the subject matter of this Act.’ .(Dr Whitehead.)

This new clause ties obligations and discretions of the various parties under this Act (subsections 2 and 3), other acts and international agreements together. It seeks to incorporate commitments as they are made in the future. It requires all relevant public bodies to apply the commitments as they are agreed to

Brought up, and read the First time.

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

Hon. Members with an elephantine memory will recall that at the beginning of this Committee’s deliberations—I have here the exact date and time a clause is debated; it is written on a piece of parchment, it is so old—we tabled new clause 1, which related to the environmental objective. At that time, we said that one reason for tabling this new clause was that the Bill had no cohesion in terms of its overall objectives. While it has many good things in it, those are essentially disparate elements that do not pull themselves together in terms of what the Bill is or should be about overall. We tabled that brief clause to try to pull the Bill together. The clause was not agreed to on that occasion, but as the Bill Committee has progressed and as we have moved into our latter stages in the autumn, nothing has made the Bill more cohesive.

New clause 28 would do exactly that, with environmental objectives and commitments. It would place in the Bill a very clear environmental objective to

“achieve and maintain…a healthy, resilient and biodiverse natural environment…an environment that supports human health and well-being for everyone; and…sustainable use of resources.

I think that would absolutely pull together what we all think we are doing in this Bill Committee. If passed, imagine the new clause placed at the head of the Bill, where it would underline those objectives and ensure that everything in the Bill was read within them.

The new clause goes further still by ensuring that the Bill takes account of

“all commitments given by Her Majesty’s Government in the United Nations Leaders’ Pledge for Nature of 28 September 2020”,

which reflects those environmental objectives. The legislation would include the international commitments that we as a country have made to our environmental objectives, underlining just how important the Bill may be for those objectives.

We are offering a much better and improved environmental objective clause that takes account of all the various issues raised in Committee, and we think it would be a great adornment to the Bill. I know that in this place we are all looking for “the one” when it comes to clauses, and I was grievously disappointed that the last clause did not make it into the Bill, because there was absolutely no reason at all why it should not have been adopted. I have a similar feeling about new clause 28. I hope that the Committee will unanimously agree that we need an environmental objective in the Bill. This clause fits the bill admirably and should be supported.

The shadow Minister said that there is no cohesion to what the Bill is about. He spoke about people with elephantine memories, but surely he has not been listening? Throughout Committee stage, we have talked about what the Bill is about. I thank him for his sentiments, but I honestly think that he has missed the point somewhere along the line.

I reassure the Committee that we have designed each governance mechanism in part 1 of the Bill with guiding objectives. They will ensure that targets, environmental improvement plans, the environmental principles, which are included, and the Office for Environmental Protection work in harmony to protect and enhance our natural environment. That has all been devised as one framework. As is set out on the face of the Bill, the objective of the targets and environmental improvement plans is to deliver significant improvement and to provide certainty on the direction of travel. The first EIP is the 25-year environment plan, which the Opposition have waved at us many times.

The policy statement on the environment principles will be required to contribute to the improvement of environmental protection and sustainable development. Ministers of the Crown must have regard to that statement when making policy. Those aims will therefore be integral to policy making across Government. Furthermore, clause 22 sets a principal objective for the OEP of contributing to environmental protection and the improvement of the natural environmental in exercising its functions, so if the OEP does not think that enough is being done towards that objective, it can say why, give some steers and advice, and things will have to change. Those measures are all closely aligned and will work together to deliver the environmental objectives outlined in new clause 28 on the improvement and protection of the natural environment, and the sustainable use of resources—that is all very much a part of the measures.

The new clause would include commitments made under the voluntary leaders’ pledge for nature. I am very glad the hon. Gentleman mentioned that, because it was a big moment when our Prime Minister said that we support that pledge at the recent UN biodiversity summit at the UN General Assembly in September. The UK is now working with other key signatories to drive forward the 10 commitments in the pledge, including through our hosting of COP26 and our involvement in the convention on biological diversity negotiations in 2021. I reiterate that the leaders’ pledge for nature is voluntary and, as such, was drafted between the participating states in deliberately non-treaty language, partly to serve as a public document that could be read by as many constituents as possible. The UK is now working with other key signatory countries to drive forward those commitments.

Many of the areas reflected in the leaders’ pledge are already included in the Bill, which introduces a powerful package of new policies and tools to support nature’s recovery. I know that the shadow Minister wants that just as much as I do, but I assure him that the measures in the Bill already cover that, not least on biodiversity net gain, local nature recovery strategies, conservation covenants, which he did welcome, and a strengthened biodiversity duty on public authorities. All those things will work together to drive from the roots upwards to get overall improvement. As a result, we will be creating or restoring rich habitats to enable wildlife to recover and thrive in future years. Measures on resource efficiency will help to keep products in use for longer, encouraging better repair and recycling of materials by influencing product design at the very beginning.

Clause 2 places a clear, legally binding requirement on the Government to set an air quality target that goes beyond EU requirements and delivers significant health benefits for citizens. The Bill also supports recent legislation on reaching net zero emissions by 2050 and our wider efforts to build resilience to a changing climate. It will do so by improving air and water quality, supporting resource efficiency, and restoring habitats to allow plants and wildlife to thrive, along with other measures in that part of the Bill.

I hope that I have made it clear that I honestly do not believe that new clause 28 is needed. I ask the hon. Gentleman to withdraw it.

Although the Minister has provided a good concordance on where to look in the Bill for things that could conceivably pull it together, nothing in the Bill actually does that. Saying that if one looks at the Bill carefully, one can see things that move it in the right direction, is not really a defence.

The shadow Minister’s new clause refers to a “healthy, resilient” environment—that is such a loose term. What exactly does he mean by that and what does it mean legally? Does he not agree that, were that wording to be used, it would create huge legal risk and could jeopardise the delivery of key policies in the Bill?

I do not think a healthy and resilient environment can be interpreted in any other way than an environment that needs to be as healthy as possible for human development and progress, and one that is able to regenerate itself and keep as close as possible to the most beneficial way of working that it had prior to human intervention. I do not think there is a problem about the definition. Indeed, having it defined in that brief, particular way gives a very good remit for making sure that those are the ways in which that environment can be defined.

I did not intend to go down this particular route, so I will not go any further down it. I just say, in closing, that we forcefully put the case for an environmental objective clause at the beginning of the Bill Committee, so it is appropriate that we make our case once again at the end of it. On that basis, we seek to divide the Committee.

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

Just to give the batting averages, we have taken half an hour for two new clauses. At this rate, we will be here until 4.30 pm this afternoon. Speed is of the essence.

New Clause 29

Report on climate and ecology

“(1) The Secretary of State must, no later than six months after the day of which this Act is passed, lay before Parliament a report containing an assessment of the adequacy of environmental legislation and policy for meeting the climate and ecology challenges faced by the United Kingdom and the world.

(2) That report must include specific assessments relating to—

(a) water quality, availability and abundance;

(b) biodiversity, including, but not limited to, the restoration and regeneration of biodiverse habitats, natural and human modified ecosystems, and their respective soils;

(c) the expansion and enhancement of natural ecosystems and agroecosystems to safeguard their carbon-sink capacity and resilience to global heating; and

(d) resource efficiency, waste reduction and the promotion of the circular economy.”—(Daniel Zeichner.)

This new clause requires the Secretary of State to go beyond setting one target (as in Section 1(2)) to within 6 months, assess, develop plans and outline adequacy of each target. “Circular Economy” is included as the Prime Minister agreed this concept in September 2020 at UN Leaders Pledge for Nature

Brought up, and read the First time.

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

I am grateful to the Minister for writing to me yet again. We are such regular correspondents that I am half expecting a Christmas card any time soon. She wrote on the debate we had on new clauses 25 and 27. It is a very detailed reply and it does give some reassurance, but I have to say that it shows why we should have had a discussion about those clauses in an evidence session, rather than have them inserted late in the day. I suspect there will be other lawyers who will take a different view on some of these matters, but I am sure that can be pursued as we go through the later stages of the Bill.

On new clause 29, I very much echo the comments of my hon. Friend the Member for Southampton, Test. We believe that new clauses 29 and 28 together would strengthen the Bill. New clause 29 would give additional bite; it can stand on its own, so there is still time for the Minister to redeem herself. Exactly as my hon. Friend said, we take issue with the lack of overall clarity in the Bill. It needs a clearer thread running through.

The new clause, which would require the Secretary of State within six months of the Bill becoming law to report on the adequacy of current environmental law and policy in meeting the climate and ecological challenges the UK faces, would be tremendously helpful, not least because—as we saw yesterday—it seems the Government do one thing one day, and completely different things another day. They fail to face the challenges when they make big policy announcements. The new clause would make it much tougher for the Government to crawl out of their obligations.

We think the report should specifically be required to address issues of water, biodiversity, the capacity of natural and agroecosystems to mitigate global warming, resource efficiency, waste reduction and the promotion of the circular economy. That should be helpful to Government. As my hon. Friend said, we support the Prime Minister’s signing up to the UN leaders’ pledge for nature, and this includes the circular economy in our thinking.

We have taken a number of these ideas from the climate and ecological emergency Bill, which we believe is right to place emphasis on the importance of expanding and enhancing natural ecosystems and agroecosystems to safeguard their capacity as carbon sinks, as well as on the need to restore biodiverse habits and their soils. Out there in the world, which is sadly not following proceedings on the Bill as closely as some of us would hope, there is an appetite for this more ambitious approach.

After the Secretary of State has made the report, we would then very much hope that he or she would act on it and ensure that the environmental targets and environmental improvement plans were appropriately ambitious and would set out not just one long-term target in each area as required in clause 1, but set and outline the adequacy of those targets and lay out adequate plans to address each of those major issues within six months.

If it is an emergency, it needs addressing urgently. We do not believe the Bill does that at the moment. New clause 29 would help.

Much of the Bill is concerned with English-only environmental issues, as I have mentioned in the past, because environment is a devolved area under the Scotland Act 1998 and legislative consent motions have been agreed.

In connection to new clauses 29 and 29, I point out for those who are keen to hear what is happening in Scotland that the Scottish Government are developing their own environmental strategy. “The Environmental Strategy for Scotland: vision and outcomes” was published earlier this year. As the Cabinet Secretary for Environment, Climate Change and Land Reform indicated just yesterday at her appearance in front of the Environment, Climate Change and Land Reform Committee, she will soon be publishing a monitoring framework for the strategy, which will bring together existing statutory targets, elements of the national performance framework and indicators from other strategies. That is after considerable consultation with stakeholders.

The strategy has attracted a broad range of cross-party support. The Cabinet Secretary just yesterday suggested working with Opposition Members to design amendments that will set out an obligation on Ministers to continue the work on an environmental strategy. It is an example of cross-party working that I think this place would do rather well to emulate. The Scottish Government and Parliament are leading the way in many environmental areas. I encourage Members from this place to lift their eyes from here and look to some of the great progress in this area that is being made in the devolved nations of the UK. I think it really would be worth their while.

I thank the hon. Member for Cambridge for moving this new clause. He is always very passionate about what he says. I am pleased that my letter was able to give a bit of clarity on the subjects he raised in the Committee.

I reassure the Committee that the new clause is not needed. It will not surprise anyone to hear me say that. There are already measures in the Bill to help assess the adequacy of environmental legislation. Under clause 26, the OEP will proactively assess how our environmental laws work in practice and advise the Government on the most effective and efficient way of implementing those laws.

The OEP’s reports must be published and laid before Parliament and the Government are required to respond to the OEP and publish that response, which must also be laid before Parliament. Given that climate and ecology challenges are key environmental issues affecting us, we would expect that the OEP would want to address such matters in its clause 26 reports. That is basically its raison d’être and the raison d’être of the Bill. I do not think the hon. Gentleman is seeing what is in there, which covers what he is asking for. We also report annually on our progress in improving the environment through the 25-year environment plan.

The Bill as drafted already introduces a number of reporting requirements in the areas specified. Clause 94, for example, requires designated public authorities, including local planning authorities, to produce five-yearly biodiversity reports. The reports will provide transparency and accountability, and help local authorities to share best practice. Over time, they will become a very valuable source of data to support nature’s recovery. Clause 75 concerns improving water companies’ water resources management plans. This planning occurs every five years, taking into account the next 25-year period. Companies must review their plans annually.

The reporting requirements introduced by the Bill will complement the Government’s existing and proposed reporting and monitoring of the natural environment. There is only so much reporting people can cope with. I honestly think more reporting would cause people to groan under the weight of it all. What we want is action, and that is what this Bill is going to set in motion, which is why we need to get through it.

Last month, the Government published their response to the 2020 recommendations from the Committee on Climate Change. The response sets out the Government’s intention to publish a comprehensive net zero strategy in the lead up to COP26. The strategy will set out the Government’s vision for transitioning to net zero and reducing emissions across the economy. We have already set out our plans for a nationwide natural capital and ecosystem assessment. That is a big data-gathering census and a new large-scale surveying initiative, which will provide us with the all-important data to drive better decision making. That is something I have absolutely wished for as the Minister, as has the whole Department. It will be crucial in our future—we have talked about data before, and it is absolutely essential to know what we have now, what we will have tomorrow and what we would potentially like in the future.

I thank the hon. Member for Edinburgh North and Leith for her comments. We obviously work closely with the devolved Administrations, and we will be sharing a lot of the measures in the Bill. We always like to learn best practice from others—I mentioned that in the main Chamber only this morning, when the hon. Member for Putney and I spoke about air quality.

Although I welcome the intent behind the proposed new clause, I do not believe it is necessary, for the reasons I have outlined. Wide-ranging reporting assessment measures are already in place in the Bill and will be able to drive the sort of action that I think the hon. Member for Cambridge is after. I honestly do not believe we need the new clause, so I ask him to withdraw it.

I am grateful, as ever, but disappointed by the Minister’s response. I do not think we need to divide the Committee, but I doubt whether even the Office for Environmental Protection will be established in the next months. Let us hope that it will go more quickly. I beg to ask leave to withdraw the clause.

Clause, by leave, withdrawn.

New Clause 30

Smoking related waste

“(1) The Secretary of State will by regulations introduce a producer responsibility scheme in England to tackle smoking related waste.

(2) The scheme will compel those tobacco companies operating in England, as defined in the regulations and subject to annual review, to provide financial support to the scheme based on a market share basis.

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