National Security and Investment Bill
Public Bill Committee, 24 November 2020.
Derek Twigg (Labour, Halton)
Before we begin, I have a few preliminary points to make. Please switch electronic devices to silent. Tea and coffee are not allowed during sittings. Members can sit in any seat marked with a “please sit here” sign. That includes the side tables and the Public Gallery, although Hansard colleagues have priority on the side tables. Members sitting in the Public Gallery should stand by the microphone to my right.
We will first consider the programme motion on the amendment paper. We will then consider a motion to enable the reporting of written evidence for publication, and then a motion to allow us to deliberate in private on our questions, before the oral evidence sessions. In view of the limited time available, I hope we can take these matters without too much debate. I call the Minister to move the programme motion agreed to yesterday by the Programming Sub-Committee.
Nadhim Zahawi (Conservative, Stratford-on-Avon)
I beg to move,
That—
(1) the Committee shall (in addition to its first meeting at 9.25am on Tuesday 24 November) meet—
(a) at 2.00 pm on Tuesday 24 November;
(b) at 11.30 am and 2.00 pm on Thursday 26 November;
(c) at 9.25 am and 2.00 pm on Tuesday 1 December;
(d) at 11.30 am and 2.00 pm on Thursday 3 December;
(e) at 11.30 am and 2.00 pm on Thursday 8 December;
(f) at 11.30 am and 2.00 pm on Thursday 10 December;
(g) at 9.25 am on Tuesday 15 December;
(2) the Committee shall hear oral evidence in accordance with the following Table:
TABLE
Date
Time
Witness
Tuesday 24 November
Until no later than 10.30 am
The Royal United Services Institute
Tuesday 24 November
Until no later than 11.25 am
Sir Richard Dearlove KCMG OBE
Tuesday 24 November
Until no later than 2.45 pm
The Centre for International Studies, London School of Economics
Tuesday 24 November
Until no later than 3.30 pm
Skadden, Arps, Slate, Meagher & Flom LLP
Tuesday 24 November
Until no later than 4.15 pm
The Institute of Chartered Accountants in England and Wales
Tuesday 24 November
Until no later than 5 pm
The Investment Association
Thursday 26 November
Until no later than 12.15 pm
Slaughter and May
Thursday 26 November
Until no later than 1 pm
Professor Ciaran Martin, the Blavatnik School of Government, University of Oxford
Thursday 26 November
Until no later than 2.30 pm
Herbert Smith Freehills
Thursday 26 November
Until no later than 3.15 pm
Simons Muirhead and Burton
Thursday 26 November
Until no later than 4 pm
Chatham House
Thursday 26 November
Until no later than 4.30 pm
PricewaterhouseCoopers
(3) proceedings on consideration of the Bill in Committee shall be taken in the following order: Clauses 1 to 10; Schedule 1; Clauses 11 to 58; Schedule 2; Clauses 59 to 66; new Clauses; new Schedules; remaining proceedings on the Bill;
(4) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 11.25 am on Tuesday 15 December
It is a pleasure to serve under your chairmanship, Mr Twigg, and to serve with colleagues on this important Bill Committee.
Derek Twigg (Labour, Halton)
Copies of the written evidence that the Committee receives will be made available in the Committee Room. We will now sit in private to discuss lines of questioning.
Examination of Witness
Derek Twigg (Labour, Halton)
We will now hear oral evidence from the Royal United Services Institute. Before calling the first Member to ask a question, I remind all Members that questions should be limited to matters within the scope of the Bill and that we must stick to the timings in the programme motion. The Committee has agreed that for this sitting we have until 10.30 am. Will the witness introduce themselves for the record? [Interruption.] I am going to suspend the sitting for a few moments to see whether we can sort out the technical problems that we are having. This is not the first time; even the Prime Minister had problems yesterday.
Derek Twigg (Labour, Halton)
Q I will resume the sitting. Sir, could I again ask you to introduce yourself?
Derek Twigg (Labour, Halton)
Thank you very much. I call first Chi Onwurah.
Chi Onwurah (Labour, Newcastle upon Tyne Central)
It is a pleasure to serve under your chairship in this Committee, Mr Twigg. Thank you very much for joining us, with your extensive background, Mr Parton. As you know, we have an investment screening regime under the Enterprise Act 2002 that has led to 12 interventions on national security grounds since the Act came in. Which security threats do you feel are not covered by those existing public interest powers? While we have been waiting for the Government to act on this front, are there specific instances where you think the Government should have acted but did not exercise their powers, or did not have the relevant powers to exercise?Q
Chi Onwurah (Labour, Newcastle upon Tyne Central)
Q Thank you very much for that response. I certainly agree with you on the delay in addressing this critical issue. I appreciate your experience, particularly with China, which obviously, as you say, has made a number of technology acquisitions.
I was particularly interested in the civil-military fusion, if you like, of China’s technology ambitions. Could you say a little more about how the Chinese see nascent technologies that are indirectly critical to downstream industries that supply our national security? I am trying to understand how, if you like, we differentiate between industrial strategy and technology to ensure that we have leading defence and national security capabilities. Is there a distinction that we can make there? Do we need to do further research, as you suggest? Do the Chinese make that kind of distinction? Do we need to address some elements of our industrial capability when we consider national security?
Chi Onwurah (Labour, Newcastle upon Tyne Central)
Q I think you addressed the core of my question. I really like your phrase “defence of technology”, rather than the technology of defence, because the question was around how you distinguish in the industrial strategy between specific security concerns and the development of technologies that give us capability in those sectors. Can we identify at what point that becomes a national security concern?
Nadhim Zahawi (Conservative, Stratford-on-Avon)
Q Good morning, Mr Parton, it is great to see you. Without going further on your last point, I want to reassure you that the Bill is designed to deliver a quasi-judicial role for the Secretary of State for Business, Energy and Industrial Strategy. The team’s infrastructure will be pulling in all parts of Government expertise. My question is this: how do you think the current challenge of covid has exposed national security threats through investment? What are you seeing? How do you see the behaviour of malign actors anywhere in the world at a time of covid?
Nadhim Zahawi (Conservative, Stratford-on-Avon)
I am grateful to you, Mr Parton. I do not want to hog the floor, as I am sure many colleagues want to ask questions. Thank you very much.
Stephen Kinnock (Labour, Aberavon)
It is a pleasure to serve under your chairmanship, Mr Twigg. I do not know whether you can see me, Charlie, but I am here. I am sitting at the back due to social distancing, but it is good to see you.Q
Going back to your point about resourcing the investment security unit, can you give a bit more detail about what would be an ideal outcome from your point of view? Would it be that we need specificity in the Bill that key representatives and experts of the intelligence services, of the Ministry of Defence, of the diplomatic corps and of other agencies be formally named in the legislation, so we would have that reassurance that the body doing the screening had all the necessary breadth across the spectrum of both the economy and national security?
Stephen Kinnock (Labour, Aberavon)
Q Thanks very much; that is very helpful. On this point about making sure that we have the most effective and streamlined system in place, one of the areas where the Bill diverges from legislation in similar jurisdictions, such as Germany and Japan, is that it does not contain a definition of national security as such.
In the Japanese and German cases, they refer to national security including concepts of public order. I refer in particular to your comments about organisations out there in the marketplace, whether they are universities or businesses, needing to have clarity to know what needs to be referred and what does not. They need to know where the amber or red light is flashing, and where it is clearly a green light and not an issue. Would that be aided and facilitated if the Bill contained a definition of national security?
Derek Twigg (Labour, Halton)
Thank you very much. I now call Andrew Griffith.
Andrew Griffith (Conservative, Arundel and South Downs)
It is a pleasure to serve under your chairmanship, Mr Twigg. Mr Parton, thank you for your past service. Q You have clearly studied China and Asia at a fascinating time in their own economic development. I will ask you to play devil’s advocate.
As a Committee considering this Bill, we will hear from a constituency that could sometimes trip over into Sinophobia, being against any form of engagement or trade with China. Looking at the economic development of that market and the opportunities that it presents, could you talk a bit about the non-risk-based categories, such as inert goods and household manufactured goods, which the Committee should draw a clear line around, and those categories that you have talked about, which are covered in the Bill and speak to a real national threat?
Matt Western (Labour, Warwick and Leamington)
It is a pleasure to serve under your chairmanship, Mr Twigg. Mr Parton, I want to pick up your point about access to academics, universities and so on. There is clearly a big push from universities to invest heavily in China and build relationships. Do you think there should be more safeguards in the Bill for those relationships? Secondly, do you think the Bill provides sufficient protections for intellectual propertyQ ?
Matt Western (Labour, Warwick and Leamington)
Q I am thinking about Cambridge and so on, which are moving into more commercial areas.
Nickie Aiken (Conservative, Cities of London and Westminster)
It is a pleasure to serve under your chairmanship, Mr Twigg. Mr Parton, thank you for your time today. You said that small firms may come under pressure to be bought up, and are often targeted. What is your view on how this Bill can strengthen national security by ensuring that firms—particularly small firms—are not taken over by legitimate, friendly actors, which further down the road are bought up by China or whoever? Does the Bill protect us from that type of long-term acquisitionQ ?
Simon Baynes (Conservative, Clwyd South)
It is a pleasure to serve under your chairmanship, Mr Twigg.Q
I want to explore the extent to which the world—if I can describe it as one world—of academic consultants and private sector companies, to which you have referred, would agree with what you are saying. You refer to having a SAGE-like committee; is there a danger that, if you did have such a committee, it would actually have very divergent views?
I fully respect where you are coming from, but you made some quite hard-hitting comments earlier about crimes against humanity in the concentration camps, and questioning whether companies and academia should be involving themselves in aspects of China. You also referred to a top mathematician, who was formerly at Oxford University, helping China with cryptography.
I want to get a feel for the extent to which you think that your views are shared by academics, consultants and the private sector, and then feed that back into whether, if you did put together a SAGE-like committee—and I can see the sense in doing that—you might find it quite difficult to come to a consensus.
Finally, it must be quite difficult to judge exactly whether what is being developed—whether it be from an academic idea or from a corporate idea—will be helpful to the Chinese in a way that is detrimental to Britain, or is actually a perfectly sensible piece of research and development that could be of benefit to both countries.
Simon Baynes (Conservative, Clwyd South)
That is good. Thank you very much.
Peter Grant (Scottish National Party, Glenrothes)
I am pleased to take part in this Committee under your chairmanship, Mr Twigg.Q
Mr Parton, the Bill looks primarily at direct investment by potentially hostile operators. Does it give sufficient protection against indirect control? For example, a company may be reliant on its bankers, who may or may not be based in a hostile territory, and who may rely on technology through a company such as Huawei; or a company’s ultimate owners and controlling party could be registered in an offshore tax haven, and it could be that nobody has any idea who actually owns that company. Does the Bill give sufficient protection against those kinds of threats through indirect influence and control?
Peter Grant (Scottish National Party, Glenrothes)
Q In your experience, is that a technique that either the Chinese Communist party or other potential hostile players either have used or are likely to use if it is in their interests? Do you have knowledge, for example, of China using non-disclosure territories to set up companies in order to try to invest in the UK or elsewhere? Are you aware of them using the influence of the technology, for example, to try to exert influence on companies that do not, at first glance, appear to be directly owned from China?
Andrew Bowie (Conservative, West Aberdeenshire and Kincardine)
It is a pleasure to serve under your chairmanship, Mr Twigg. Good morning, Mr Parton. The Bill obviously aims to protect national security while promoting investment in the United Kingdom and not dissuading any inward investment into the country. With your experience, and given everything that you have said this morning, do you think the Bill will succeed in its aimsQ ?
Andrew Bowie (Conservative, West Aberdeenshire and Kincardine)
Q Secondly, I wondered how the proposal might compare to regimes that are already in place in comparable countries—for example, our Five Eyes partners.
Andrew Bowie (Conservative, West Aberdeenshire and Kincardine)
Thank you.
James Wild (Conservative, North West Norfolk)
It is a pleasure to serve under your chairmanship, Mr Twigg. Mr Parton, I want to ask about influence. We have seen companies linked to hostile states hiring former diplomats, civil servants, parliamentarians and Ministers to provide a veneer of respectability. How can we do more to guard against that? Secondly, on the Bill, provided advice is drawn widely from the agencies and other parts of Government through the investment security unit in the way that you have described, do you think that having a quasi-judicial decision made by the Secretary of State guards against that influence and potential cronyism in the decision makingQ ?
James Wild (Conservative, North West Norfolk)
Q It was picking up on your point, which I think we all share, about ensuring that the investment security unit draws advice from the agencies and across other parts of Government. Provided it does that, having a quasi-judicial decision that is challengeable under judicial review by a Secretary of State in some ways guards against that soft influence or cronyism getting involved in a SAGE-type committee. Can you see the benefits of that model?
Derek Twigg (Labour, Halton)
This will probably be the last question, from Stephen Kinnock.
Stephen Kinnock (Labour, Aberavon)
Q Thank you very much, Chair, for giving me another bite at the cherry. Mr Parton, as a final point, I thought it might be useful to remind the Committee of the symbiotic nature of the relationship between the Chinese Communist party and the Chinese business community. Based on your extensive experience in China, could you briefly outline how the Chinese Communist party in essence runs the business community; the role that it plays in ensuring executives are appointed who are sympathetic to the party; and the whole way in which the nomenklatura works? That will help us to understand the extent to which Chinese business interests in this country are, in essence, the same as the interests of the Chinese Communist party.
Chi Onwurah (Labour, Newcastle upon Tyne Central)
Could I just add to that? That is an excellent point, but could you also say a little bit on how China responds to proposed takeovers that might implicate its national security, if those takeovers are allowed? How does it respond to that investment into its companies?
Derek Twigg (Labour, Halton)
I am afraid that brings us to the end of this part of the session. Mr Parton, I thank you on behalf of the Committee for your evidence and the clear, concise answers you gave. We must now move on to the next session. If Members want to take a comfort break for a couple of minutes, I am happy to do that.
Derek Twigg (Labour, Halton)
Q Order. We will now hear oral evidence from Sir Richard Dearlove. Please introduce yourself for the record, Sir Richard.
Derek Twigg (Labour, Halton)
Thank you so much for being a witness.
Chi Onwurah (Labour, Newcastle upon Tyne Central)
Q Thank you very much, Sir Richard, for bringing your expertise to the Committee. The existing powers for intervening in transactions on national security grounds came in when you were chief of MI6. How have security threats evolved since then? Specifically, which security threats do you consider are not covered by existing public interest powers? It would be helpful to hear whether you think the Government have missed specific threats, or types of threat, by relying only on historical powers, and by not bringing in new legislation until now?
Derek Twigg (Labour, Halton)
Thank you. I have no leeway to go past 11.25 am, so please can we keep questions as succinct as possible.
Chi Onwurah (Labour, Newcastle upon Tyne Central)
Q Absolutely. I appreciate the response and I would like details of the Soviet case of the military-industrial complex that was dismantled, which you mentioned. That would be interesting to compare.
You have talked about the relationship between the military-industrial complex, in the case of Russia, and economic development, specifically in the case of China. We have essential industries that are critical to our economy and there has been concern that BEIS is going to be overseeing the security implications. Where we have industries and technologies that are critical for national security, they are also critical for our economic security, so our national and economic security end up being linked. You have talked about some of those links in the case of Russia and China. How can we reflect those links effectively in the Bill? Do we need structures within BEIS, or outside BEIS, to identify and reflect the overlap between economic and national security?
Nadhim Zahawi (Conservative, Stratford-on-Avon)
Q The Bill provides for an annual report to Parliament, Sir Richard. What is your view on balancing transparency and ensuring Government can take national security decisions sensitively? Where does that balance lie in terms of our ability to be as transparent as we can without harming sensitivities around these decisions?
Derek Twigg (Labour, Halton)
I call Peter Grant, who will be behind you, Sir Richard, because of the social distancing rules we have in Committees.
Peter Grant (Scottish National Party, Glenrothes)
Q I think this is the first time I have had to stand further away from somebody to speak to them. Thank you for your attendance today. We have heard a lot this morning about the threat from China and a bit about the threat from Russia. There may well be other hostile states out there that have their eyes on us. There are certainly hostile non-state enterprises that have their eyes on us. Is the Bill wide-ranging enough to allow the Government to respond to all those different kinds of threat? Does it allow enough flexibility to respond to the threats that we have not yet discovered, that we do not know about or have not yet been invented?
Mark Garnier (Conservative, Wyre Forest)
It is a pleasure to serve under your chairmanship, Mr Twigg. Sir Richard, I want to ask some questions about how the Bill and the mechanisms that make it operate cut across certain other parts of Government Departments. That is clearly looking at how we can scrutinise investments coming into the UK, but we also have a department with respect to export control. Broadly speaking, this is quite a similar type of problem. Although it is not necessarily looking at intellectual assets, it certainly looks at the ability of countries that are buying certain things to reverse-engineer, and therefore to try to steal our intellectual property in that way.Q
I am interested in your view on how the department that is proposed to be set up within BEIS to scrutinise this cuts across the Export Control Joint Unit, which is obviously a combination involving four Government Departments. Is that complementing it or contradicting it? Can they cut across each other? How do you see those two departments working together? They ultimately have the same aim, although they come from slightly different objectives.
Mark Garnier (Conservative, Wyre Forest)
Q I would not want to put words in your mouth, but it sounds like you would suggest that this Committee urge the Government to look at the possibility of developing relationships between those two departments, so that they are not contradicting each other.
Derek Twigg (Labour, Halton)
We are back to facing the front now, Sir Richard. Most members of the Committee wish to speak and I want to get everyone in, but I will have to cut them off at 11.25. Keep questions as succinct as possible.
Matt Western (Labour, Warwick and Leamington)
Q I want to pick up on a couple of points. You spoke about energy policy and, as we have seen over the past nine months, some of the risks and threats to our society and economy come from unexpected places. Do you think that the Bill does enough to recognise where those threats may come from and that they may be from a malign power?
I am thinking of the consideration of investments from China in our nuclear power stations and other infrastructure networks. Something as simple as road traffic signals or rail infrastructure might break down if someone decided they wanted that to happen. Do you think the Bill does enough to recognise the unexpected areas of investment that a malign state might want to attack?
James Wild (Conservative, North West Norfolk)
Q You mentioned Huawei. Were you involved in 2003 when BT was letting the contract for the network? Did you raise concerns at that point?
James Wild (Conservative, North West Norfolk)
Q Well, the ISC report makes clear that Ministers were not informed about the contract at all at the time.
James Wild (Conservative, North West Norfolk)
Q In the Bill, there are 17 sectors listed where mandatory notifications are required. They include transport and communications, as in some of the points that Mr Western was raising. Should others be added to that?
Also, do you think that although we need to look at the Bill as to what it does, we should also recognise that it does not solve all the problems and threats from hostile states—that the intelligence activity and other things we do to raise the cost of theft of IP need to be seen holistically across the piece, and that the Bill cannot solve all the problems?
Stephen Kinnock (Labour, Aberavon)
Q Thank you very much, Sir Richard, for the evidence that you have given us today. The Intelligence and Security Committee defines critical national infrastructure as
“certain ‘critical’ elements of infrastructure, the loss or compromise of which would have a major, detrimental impact on the availability or integrity of essential services, leading to severe economic or social consequences or to loss of life.”
Would the Bill benefit from having that definition of critical national infrastructure embedded in the middle? Linked to that definition, should special measures be taken to raise our guard even higher when it comes to any kind of investment in our critical national infrastructure?
Stephen Kinnock (Labour, Aberavon)
I know time is short, so thank you.
Simon Baynes (Conservative, Clwyd South)
Thank you, Chair. Thank you, Sir Richard. When and why did we let down our guard to China and where would you restrict its access? You made that comment in your statement, and you have commented already on areas such as nuclear power. Can you add to that to give us a bit more of an idea of other strategic areas where you think we should restrict its access?Q
Simon Baynes (Conservative, Clwyd South)
Q The second part was: can you say a bit more about where you would restrict their access, because that was one of your key points? You have mentioned nuclear power.
Derek Twigg (Labour, Halton)
I call Andrew Bowie. This will probably be the last question.
Andrew Bowie (Conservative, West Aberdeenshire and Kincardine)
Q I will be brief. Thank you for commenting. It is a real privilege to listen to you and take on board everything you said regarding our naïveté and the intertwining of our two economies, nowhere more so than in the North sea, where CNOOC, China’s national oil company, initially through Nexen, a Canadian company—this is going back to something my colleague raised earlier—is now the biggest producer of oil. Allowing what some might describe as a hostile actor to have such control over our energy security is incredible—very naïve.
I was going to ask you a question I put to Mr Parton, although it is probably more relevant to you. How does what the Bill proposes compare with what is being done in other, comparable countries, such as our Five Eyes partners? Does it go as far as the Australians and the Americans, or are we still some way short of where we should be?
Derek Twigg (Labour, Halton)
We have two minutes left for anyone who wants to get a quick question in.
Sam Tarry (Labour, Ilford South)
It is an honour to serve under you, Mr Twigg. We have focused mainly on China. Thinking about regimes we could put in place to govern all this as we work through the Bill, do you think there could be exemptions—a bit like the US has done for potential allies? Could we have almost a graded system, so we can build relationships quicker and faster with those we want to support, or do you think that would be a bad ideaQ ?
Sam Tarry (Labour, Ilford South)
Obviously, if you are involved in global universities, for example, there will be some countries that we want to keep a much better relationship with, and whose students our intelligence services will have to monitor less.
Derek Twigg (Labour, Halton)
That brings us to the end of the time allotted for the Committee to ask questions. On behalf of the Committee, I thank our witness very much for his time.
Before we finish, I want to read a message out to Members. I would appreciate it if Members did their best to arrive in the room a few minutes before this afternoon’s sitting starts at 2 pm, to ensure we can be seated in a socially distanced manner so that everybody remains safe.
Graham Brady (Conservative, Altrincham and Sale West)
Q36 Members can sit in any seat where there is not a “Do not sit here” sign. Any Member sitting in the Public Gallery should stand by the microphone when they wish to speak.
We will now hear oral evidence from Dr Ashley Lenihan from the Centre for International Studies at the London School of Economics. Thank you for joining us today. Can you hear me now?
Graham Brady (Conservative, Altrincham and Sale West)
Q We have until 2.45 pm for this session. Will you please introduce yourself for the record? I will then call Committee members to ask questions.
Graham Brady (Conservative, Altrincham and Sale West)
Thank you very much.
Chi Onwurah (Labour, Newcastle upon Tyne Central)
Thank you very much, Dr Lenihan, for putting your expertise at the disposal of the Committee. I am particularly interested in your expertise in the international aspects of the debate. As you are aware—the Bill responds to this—a number of the UK’s allies have national security and investment screening regimes, and almost all of them have updated their regimes in the light of the changing geopolitical and technological contexts. From your comparative work, what governance and decision-making structures have you found others adopting to ensure that all relevant Government expertise shapes national security and investment decisions? Are they appropriately reflected or considered in the Bill?Q
Chi Onwurah (Labour, Newcastle upon Tyne Central)
Q Thank you, Dr Lenihan. That is absolutely fascinating. The need for different agencies to be involved needs to be recognised.
In terms of your work on investments, and the investment regime, is there not a risk that it ends up capturing a host of investment transactions? I am particularly thinking of the burden and impact on our innovative tech start-ups. The likely definitions of the sectors to be involved include artificial intelligence and data infrastructure. Based on your experience of other countries’ introduction of new investment screening rules, have you found patterns in how similar changes have affected foreign direct investment, and potential trade deals, which is a topical subject? Do you have any thoughts on ways to mitigate the burden and impact, particularly on start-ups?
Nadhim Zahawi (Conservative, Stratford-on-Avon)
Q It is a pleasure to serve under your chairmanship, Sir Graham. Dr Ashley, considering your experience of other countries—we talked about the US at length in the first couple of questions—such as Japan and Germany, what are your views on the retrospective powers under our Bill?
Matt Western (Labour, Warwick and Leamington)
It is a pleasure to serve under your chairmanship, Sir Graham. Dr Lenihan, I am keen to know more about whether, other than in the US, you have seen good exemplar approaches to screening investments into these sectors; we spoke about Japan and Germany a moment ago. Can you give examples which we might learn from?Q
Simon Baynes (Conservative, Clwyd South)
It is a pleasure to serve under your chairmanship, Sir Graham.Q
I have found your comments particularly interesting, Dr Lenihan. My own background is in the financial world, where I was involved in cross-border M and A and quoted equity transactions. I fully accept the premise of the Bill, which I think is important and has to be put into effect, and I draw encouragement from what you are saying about other regimes, but I am still left wondering a little bit whether, in practice, it will be really quite difficult for us to put into effect. Your point about the necessity of expertise among staff is crucial. Having sat at the centre of the process, I recognise that the point you make about a huge amount of information flowing across, especially in respect of unquoted companies, is very important; often, there is not much established information in the public domain. That first point is very important. The second point is that there is a very complex mechanism of market sensitivity as well. I do not quite know how this system intervenes with that. Also, within the UK itself there is a culture of openness, which has been touched on before, and in some respects we are a very different country from the others, particularly given the strength of the City of London. We therefore have the ability to transact in a way that some other countries do not, and a different culture.
The other point I wanted to raise and to hear your comments on is that there is a danger of political interference. I know that that is not the intention, but it must be a hazard in this process. What happens if the Government get it wrong about a company? Could not that be interpreted as political interference rather than seeking to establish a security risk?
Graham Brady (Conservative, Altrincham and Sale West)
Thank you, Dr Lenihan. There are lots of Members wanting to speak and we have limited time, so I will try to get through some quickly. I will call Stephen Flynn, Mark Garnier, then Stephen Kinnock.
Stephen Flynn (Scottish National Party, Aberdeen South)
Thank you for your comprehensive and helpful answers, Dr Lenihan. I would like to divert back to some of the comments that were made about the Bill on Second Reading, particularly relating to definitions, or a lack thereof, in relation to national security. I would welcome your thoughts as to whether the Bill should or should not have a definition.
My second question relates to the scope of the Bill, which you mentioned earlier. In terms of the consultation going on, 17 sectors have been identified. The glaring omission seems to be social media, but I would appreciate your view on whether artificial intelligence would cover off social media to a level that you would be comfortable with.
Graham Brady (Conservative, Altrincham and Sale West)
Dr Lenihan, I was trying to squeeze two more questions in, but I think it will probably be just one.
Mark Garnier (Conservative, Wyre Forest)
Thank you, Sir Graham. Dr Lenihan, my questions refer back to points you made in response to the first batch of questions. You spoke of the review regime not being quite up to full standard. It is an interesting dichotomy that the Bill sets up a new review regime in BEIS, but there is an export control unit in the Department for International Trade that already looks at arms control, as well as intellectually sensitive exports. I would be interested to hear your comments about how those two play together.Q
Secondly, it is worth bearing in mind that the Minister, Lord Grimstone, sits in both the DIT and BEIS. He is responsible for investment promotion. We are talking about more acquisitive types of investment, but do you see a potential conflict of interest between the ambitions of the Government to secure more investment into the UK and potentially having the wrong kind of investment?
Graham Brady (Conservative, Altrincham and Sale West)
Sorry, Mark, but we have about 90 seconds for that to be answered. Please have a go, Dr Lenihan.
Graham Brady (Conservative, Altrincham and Sale West)
Thank you very much, Dr Lenihan. That brings us to the end of the time allotted to the Committee for asking you questions. We are grateful to you for your time. Where members of the Committee wanted to ask questions and were not able to, I will try to give them a bit of priority on the next panel—or in another, if that is helpful.
Graham Brady (Conservative, Altrincham and Sale West)
We come to our fourth panel of witnesses. We will hear oral evidence from Skadden, Arps, Slate, Meagher and Flom LLP and Affiliates. For this panel we have until 3.30 pm. Mr Leiter, I welcome you, and ask you to introduce yourself for the record.
Chi Onwurah (Labour, Newcastle upon Tyne Central)
Q Thank you, Mr Leiter, for joining us and sharing your extensive expertise with the Committee. I wanted to look at strategic and critical industry. There are a series of cases where nascent or strategically important industries might become critical to national security in the future, but they are important to industrial and economic strategy now. For example, it was not clear that there was a direct national security threat from Deep Mind’s artificial intelligence algorithms in 2014, but it is clear that the company was important for the UK then, and it is clear that artificial intelligence is important for national security now. That is reflected in the Bill. Based on other countries, how do you think the Bill can capture these forward-looking public interest or industrial strategy concerns within national security grounds for acting?
Chi Onwurah (Labour, Newcastle upon Tyne Central)
Q To follow up on your point about notifications, the Government impact assessment for the Bill suggests that up to 1,830 notifications might come in each year under this new regime. I am concerned that they look at the impact on the acquirer, and they do not capture the fact that almost every start-up seeks capital investment at some point. What impact do you foresee on the overall UK investment climate, and what might FIRRMA and CFIUS changes lead us to expect in our case?
Nadhim Zahawi (Conservative, Stratford-on-Avon)
Q Thank you, Mr Leiter. That is really good feedback. Building on the point made by my colleague the shadow Minister, the CFIUS regime in the US obviously operates successfully, in the sense that the US remains an incredibly attractive place for inward investment. How have the US regulators balanced those two things? Does the Bill as drafted provide us with a similar opportunity to strike that balance?
Peter Grant (Scottish National Party, Glenrothes)
Good afternoon. I do not know whether your saw much of the previous witness’s evidence, but she commented on how countries such as the United States have a limited number of excluded or exempt countries—including the United Kingdom—that are not covered by their equivalent legislation. What are your thoughts on how the Bill does not have any provision to exempt entire countries from its scopeQ ?
Nickie Aiken (Conservative, Cities of London and Westminster)
There are 17 sectors included in the Bill, but are any sectors missing? Is there scope for future-proofingQ ?
Sam Tarry (Labour, Ilford South)
Just thinking and reflecting on a few of your comments, Mr Leiter, if we are given the timescale that you have had at CFIUS—it has a long history, it has been here a long time and you have brought in a new and updated regime to meet the threats that the US Government see are coming towards us—how could we translate that to our context as we put together this regime here? Are there any particular lessons that we could use? Are there new threats that have been captured by the new regime that you now have in placeQ ?
Sam Tarry (Labour, Ilford South)
Q Following on from that, given the scale and breadth of the challenge you have outlined, covering so many areas, including private equity, how do you think we would best resource and staff this arrangement? Clearly this will be a potentially large undertaking for the Department as it stands at the moment.
Andrew Griffith (Conservative, Arundel and South Downs)
It is a pleasure to serve under your chairmanship, Sir Graham.Q
Thank you for joining us, Mr Leiter. It is invaluable to have a practitioner’s perspective as we make legislation; that is something I would like us to do more often. I wanted to ask about your practitioner experience with respect to two things: first, the inclusion in the Bill of personal criminal sanctions and, secondly, its behavioural impact, from the point of view of attorneys and lawyers advising clients, on the likelihood of notification.
Stephen Flynn (Scottish National Party, Aberdeen South)
Q Thank you for your comprehensive answers, Mr Leiter. I am afraid that I have crossed out many of the questions that I had because your answers have been so comprehensive. To go back a couple of steps, you have referenced the structure and understanding of the regulations, and the challenges posed by that, as well as the understandable challenges posed by the creation of a new body to oversee the call-in process. That, understandably, will take time to implement. Do you think that lag and uncertainty might put off investors? On a similar line, in terms of the timeframe for call-in, there is the five-year retrospective, the six months for the Secretary of State to act, and the potential for up to 75 days or more to act. Is any of that likely to put off investors?
Stephen Flynn (Scottish National Party, Aberdeen South)
Q Obviously, the consultation in relation to the 17 sectors, which was mentioned earlier by a colleague, is going to run beyond the end of the Bill—perhaps, I imagine, of its being implemented. The Government may well just get it through the House, but were that to happen the consultation would still be ongoing, so, again, I am sorry to try to pin you down on this, but do you think that would create a level of uncertainty that investors simply would not be comfortable with, and that they might well look elsewhere unless the Government were clear about having a system in place that makes things more flexible for business?
I am sorry to flip back again, but on smaller-scale early-stage ventures, we said this could be an issue, and again, I am sorry to pin you down: could it, or will it, be an issue? Where would you lean in that regard? Will we find that investors seek to go elsewhere with this a little bit more, where the timing is a little easier?
Stephen Kinnock (Labour, Aberavon)
It is a pleasure to serve under your chairmanship, Sir Graham, and thank you very much, Mr Leiter, for your insightful evidence. I was wondering about the acquirer definitions, which are an important part of the equation, and the Q extent to which the legal structure and ownership base of the acquirer should play a role and, perhaps, be more clearly defined in the Bill, in terms, also, of what the triggers are for the screening process. If the acquirer is a state-owned enterprise or a state-backed investment vehicle, should that trigger a, for want of a better word, tougher or more robust screening process? If so, what might that look like in practice, and do other regimes contain that differentiation between a private sector acquirer and a state-backed acquirer?
Stephen Kinnock (Labour, Aberavon)
Q I have a small follow-up question. The points that you have been making about private equity are very interesting. Large swathes of our social care system in this country, particularly residential care homes, are owned by private equity companies. Do you think it would have a material impact on the assessment of a private equity company if it was looking to invest in the social care sector, which one could argue is critical national infrastructure?
Graham Brady (Conservative, Altrincham and Sale West)
We have to end this session at half-past 3, so I think that this will be the last question and it will come from Simon Baynes.
Simon Baynes (Conservative, Clwyd South)
Actually, Mr Kinnock has asked my question, Sir Graham.
Graham Brady (Conservative, Altrincham and Sale West)
In that case, the last question will come from Matt Western.
Matt Western (Labour, Warwick and Leamington)
Q Thank you, Sir Graham. Mr Leiter, I would like clarification on the point about disguised takeovers, and perhaps you can use CFIUS as an example. What happens if a benign country or an organisation in a benign country, such as Canada or wherever, takes over a business and then that gets sold on to a state actor or a non-obviously state actor? How does CFIUS respond to that, and do you think that this Bill covers it?
Graham Brady (Conservative, Altrincham and Sale West)
Thank you very much, Mr Leiter. We are grateful to you for giving of your time so generously to assist the Committee.
Graham Brady (Conservative, Altrincham and Sale West)
We now move to the next session. David Petrie is from the Institute of Chartered Accountants in England and Wales. Mr Petrie, would you be so kind as to enough introduce yourself for the record?
Graham Brady (Conservative, Altrincham and Sale West)
Thank you very much. Before I move on to taking questions, I remind everybody that this session has to close by a quarter past four.
Chi Onwurah (Labour, Newcastle upon Tyne Central)
Q Welcome, Mr Petrie, and thank you very much for placing your expertise at the disposal of the Committee. You have experience of mergers and acquisitions, and I am sure you will be aware that we have seen several transactions in this country—I will name GKN and Melrose, SoftBank and Arm, and indeed I will include the failed Pfizer-AstraZeneca case—where it appeared that the Government had no legal powers to secure jobs, pensions, research and development and key UK industries, relying instead on behind-the-scenes soft power. That created uncertainty and lack of clarity for investors. Do you think that is a problem for both Government and investors, and how do you think we could effectively tackle that gap?
Chi Onwurah (Labour, Newcastle upon Tyne Central)
Q Thank you for your response. If we look at GKN-Melrose and, indeed, even SoftBank-Arm, we could consider that they had national security implications. I suppose the point is that there are essential industries that are directly critical for our economy, but that at first may not seem directly critical for national security because they are evolving technologies, as in the case of Arm and the ongoing takeover by Nvidia, or because they are indirectly critical as suppliers to downstream industries that support national security. Indeed, in the response to the Government’s consultation for this Bill, an example is given of the undermining of the functioning of an airport by a software manufacturer, which would be within the transport sector but would not necessarily immediately appear to be directly concerned with national security. Economic security and national security end up being linked. Do you think that should be reflected in the Bill, and how do you think it can be reflected?
Nadhim Zahawi (Conservative, Stratford-on-Avon)
Q Mr Petrie, you will understand better than most that businesses will want to ensure information is being treated sensitively in any transaction. I want to capture your view of the closed material procedure for judicial review under the Bill and what you think of it in terms of that sensitivity of information.
Stephen Flynn (Scottish National Party, Aberdeen South)
Q Thank you, Mr Petrie, for your answers so far. I just have a couple of straightforward points for you to address. We discussed the timeframe in earlier sessions, in relation to the five years of retrospectivity, the six-month call-in and the potential 75 days. Do you have any concerns about the impact that that might have on potential investors into the UK? On a similar note, in terms of the fact that there will potentially be in excess of 1,800 notifications annually, an entirely new body will have to be set up, possibly working across Departments and involving the security agencies. A lot of detail will need to be put behind that, and again, that will take time. Do you think any of that will cause any uncertainty among investors and perhaps lead them to look elsewhere?
Mark Garnier (Conservative, Wyre Forest)
Q May I follow on from that question about the resources? There is talk about 1,800 companies coming forward and voluntarily disclosing that this transaction is going on, but I am just as interested in what happens with those companies that do not disclose this? I am not for a moment suggesting that there are a huge number of dishonest actors involved in the corporate finance market, but given the fact that the threshold was reduced to £1 million a year under the recent review, there are an awful lot of small businesses with turnover of about £1 million a year that are not very well resourced for their corporate governance functions and that could easily miss the requirement to disclose, should a transaction come through that is enticing for the shareholders, who are presumably offered the same as the directors. Are you confident that the Government have in place sufficient resources to be able to police the whole sector, to make sure that we are not missing out on a number of transactions that are going through? Even if we do, are we getting in there quick enough to make sure that the intellectual damage is not done by the time we have found out what is going on?
Simon Baynes (Conservative, Clwyd South)
Q Thank you, Mr Petrie, for a very interesting presentation. I want to look at two areas. One was touched on by the previous witness: the inclusion of not only businesses, but tangible and intangible assets. That is one issue. The second is the acquisition of material influence over qualifying entities’ policy being another trigger point. I would have thought that these are more subjective—perhaps I am wrong—in terms of how you define them, whereas the other trigger points are obviously very clear cut. There are different levels of voting shares in the qualifying entity. I think the previous witness was somewhat surprised to see the tangible and intangible assets element of it and said that this goes further than other similar regimes in other countries. Can you comment first on whether you are surprised or whether you think it makes perfect sense? Secondly, is it easy to define the material influence and the assets, either intangible or tangible?
Simon Baynes (Conservative, Clwyd South)
Q Could you expand on one or two examples of such intangible assets? You have stated patents. Could you illustrate what you understand to be such assets?
Simon Baynes (Conservative, Clwyd South)
Q But they would be quite difficult to police, would they not? How would you know—
Peter Grant (Scottish National Party, Glenrothes)
Q Good afternoon, Mr Petrie. There will be some entities that try to take over British businesses where the warning flags are flown immediately, because it is well known that either it is a foreign state, or a company controlled by a foreign state. Often, it is difficult or even impossible to know who the ultimate controlling party of a business is if they have arranged to have their ultimate ownership registered somewhere offshore, where that information is not made public. Does the Bill, as presently worded, provide enough protection against a hostile power trying to infiltrate the system by going through a secretive intermediary state? If it does not, what more should be done in the Bill to protect us against that scenario?
Peter Grant (Scottish National Party, Glenrothes)
When you talk about a lot of hard work and digging to get to the bottom of it, does that include potentially gaining information that is not in the public domain and from a jurisdiction where that information is not allowed to be disclosed? Does that potentially mean having to rely on information that is gained covertly by British intelligence, which then cannot be shared in open court if the case is challenged?Q
Sam Tarry (Labour, Ilford South)
Q How have you found your engagement with Government so far, and what processes are you looking for, in terms of how the Government engage with you and the industry—whether it is with your organisation or more widely? Do you have any comments on that?
Sam Tarry (Labour, Ilford South)
Q How do you think the mandatory notification framework could impact small and medium-sized enterprises in particular, which are obviously having a difficult time, given the consequences of the pandemic?
Graham Brady (Conservative, Altrincham and Sale West)
I do not think there are any more questions, so once again I thank you, Mr Petrie, for generously giving your time to assist the Committee.
Graham Brady (Conservative, Altrincham and Sale West)
We welcome Chris Cummings, the chief executive of the Investment Association. Mr Cummings, would you be so kind as to introduce yourself for the record?
Chi Onwurah (Labour, Newcastle upon Tyne Central)
Q Thank you, Mr Cummings, for sharing your expertise with us. We all recognise the importance of inward investment, and indeed of the Investment Association, to our economy. The impact assessment for the Bill estimates that up to 1,830 notifications might come in each year under the new national security and investment regime, but those numbers do not capture the fact that almost every start-up seeks capital investment at some point. The requirements to notify are put on the acquirer, but I would like your thoughts on the impact that may have on start-up companies. As part of that, I imagine it will be especially hard to hold merger and acquisition auctions while checking on the outcome of these processes. What do you foresee will be the overall impact on the UK investment climate, and in particular on the ability of our most innovative start-ups to raise capital? I am often told that access to finance is the key barrier to start-ups growing, and staying in the UK as they grow.
Chi Onwurah (Labour, Newcastle upon Tyne Central)
Q Thank you very much. I note your suggestion regarding the blanket exception for investment funds. I had two quick follow-up points: first, could you say how they would be defined in such a way that would exclude, for example, foreign sovereign investment funds and so on, which might give cause for concern? Also, you said you had a couple of caveats. I take it that is one; what is your other caveat?
Nadhim Zahawi (Conservative, Stratford-on-Avon)
Q Welcome, Mr Cummings. You mentioned the feedback from your members about keeping the Bill focused very much on national security. The message that we want to get out there is that Britain remains very much open for business, and that we want to maintain our place in the premier league of foreign direct investment. How has that statement of policy intent, which we published alongside the Bill, landed with your membership?
Graham Brady (Conservative, Altrincham and Sale West)
Nickie Aiken.
Nickie Aiken (Conservative, Cities of London and Westminster)
Q I forgot to say earlier that it is a pleasure to serve under your chairmanship, Sir Graham. Mr Cummings, thank you for your time today. Are there any particular areas in the Bill that concern you—that you think may put off the investment community from investing? Also, what would you say are the particular strengths of this Bill?
Nickie Aiken (Conservative, Cities of London and Westminster)
Q On the 17 sectors that were included in the Bill, do you think there are too many or do you think any sectors are missing?
Peter Grant (Scottish National Party, Glenrothes)
Q Good afternoon. The Government’s impact assessment expresses the view that a national security regime such as this does not have much of an impact on overseas investors and their investment decisions, as long as they are comfortable that any interventions are appropriate and the regime is predictable. Do you share that view?
Peter Grant (Scottish National Party, Glenrothes)
Q Thank you. Decisions under this legislation will initially be taken by the Secretary of State. In the United Kingdom, the way that Ministers exercise the authority given to them by legislation, and indeed the way that Governments or Prime Ministers exercise the authority that comes down through the concept of the royal prerogative, is governed as much by tradition, convention and understanding as it is by hard legislation. Recently, we have seen an increasing number of occasions when Governments have chosen to do things that are allowed but are completely unprecedented and not according to the usual traditions and conventions. There are some notable examples here, and clearly a number of examples from the outgoing President of the United States. Does that give you a concern that legislation might be passed giving a Minister power under certain understandings, but that the understandings themselves might have no legal force, so a future Minister might exercise that power in a way that is very different from what had been expected or intended when the legislation was passed?
Simon Baynes (Conservative, Clwyd South)
Q Thank you, Mr Cummings, for a very good presentation. I just want to go back to your point about the blanket exclusion for investment managers. First, you say that is the situation in Japan, but maybe you could say where else it exists. Secondly, why is it needed? I totally accept that, on the whole, the investments being made by your members will not fall within the trigger points, because they will not be taking over 25% of Shell or even some small companies, but they might do in certain circumstances.
Thirdly, to what extent do hedge funds represent members within your organisation? Obviously, they have greater capacity, or greater natural affinity, for investing in smaller companies—not always, but in certain cases. They might actually fall within the remit of the triggers, so I do not quite see how we could implement the blanket exclusion, if from time to time there are exceptions to the exclusion.
Simon Baynes (Conservative, Clwyd South)
Q There is a fairly fine line in smaller companies in which an investment manager takes a major stake. There is a fairly fine line between having an active role in its management and having very close scrutiny of its management. From my own experience in the business, the investment manager keeps a very close eye on it in those cases. If they do not, quite a lot of risk is involved. That is quite a crucial grey area, and it therefore makes me think that a blanket exclusion would create problems. It might be viewed by private equity companies or whatever as being an unfair advantage to investment managers.
Matt Western (Labour, Warwick and Leamington)
Q Thank you, Mr Cummings, for being a witness today. I want to come back to the point about capacity in terms of the mandatory notifications. As described, do you think it is going to be able to cope with that, and just how opaque are some business organisations and ownership? With that opacity, will they realistically get to that within 30 days? That is my first question. Secondly, in terms of many transactions, the Government have no legal powers over retaining jobs or research and development in the UK—thinking about SoftBank, Arm and many others. Do you think there is a need to plug those sorts of gaps or deficiencies?
Matt Western (Labour, Warwick and Leamington)
Q No problem. It was just about various deals, with the example of, say, SoftBank and Arm, and the protection of jobs, research and development and pensions in the UK, and whether the Government need to plug that gap to give assurance and protection here in the UK to those elements.
Graham Brady (Conservative, Altrincham and Sale West)
If there are no further questions, I thank you very much on behalf of the Committee for giving your time and assistance, Mr Cummings.