Instruments drawn to the special attention of the House
Electricity and Gas (Energy Company Obligation) (Amendment) Order 2019 (SI 2019/1441)
Date laid: 31 October 2019
Parliamentary procedure: negative
This Order adjusts eligibility requirements and incentives for the installation of energy efficiency measures under the Energy Company Obligation scheme, embeds TrustMark as the quality framework for all installations and introduces new delivery standards. The changes are designed to address concerns about poor quality installations and increase consumer protection. The Committee is concerned that as energy suppliers pass on costs to their customers through domestic energy bills, there is a risk that, without direct regulatory oversight of this mechanism, some energy suppliers do not have the incentive to ensure properly rigorous control of costs. The House may wish to press the Minister for a fuller explanation of this matter.
The Order is drawn to the special attention of the House on the ground that it gives rise to issues of public policy likely to be of interest to the House.
1.This Order has been laid by the Department for Business, Energy and Industrial Strategy (BEIS) with an Explanatory Memorandum (EM) and Impact Assessment (IA). The instrument makes changes to the Energy Company Obligation (ECO) scheme under which larger energy suppliers in Great Britain are required to reduce domestic energy bills by installing energy efficiency measures. Energy suppliers use delivery partners to procure these measures, who in turn sub-contract with local installers. According to the Regulatory Policy Committee, it is estimated that the ECO scheme involves several hundred delivery partners and around 2,300 installers.
2.The ECO scheme is focused on lower income households and covers measures such as loft, cavity wall or solid wall insulations and boiler replacements or repairs. BEIS says that the scheme aims to tackle fuel poverty, reduce carbon emissions, promote more efficient energy use and encourage innovation in the industry. According to BEIS, between January 2013, when the first ECO scheme was launched, and August 2018, more than 2.5 million energy efficiency measures were installed in over two million homes. The current scheme (ECO 3) seeks to deliver bill savings of £8.253 billion during its lifetime until 31 March 2022.
What is changing
3.BEIS explains that the Order changes the eligibility requirements and incentives for first time heating systems and broken boiler replacements that can be installed under ECO 3. It also makes changes to address concerns about sub-standard and poorly targeted installations, and to increase consumer protection. The instrument embeds the existing TrustMark1 framework as a requirement for all ECO 3 installations, so that all work will have to be delivered by TrustMark registered installers. The Order also incorporates new Publicly Available Specifications (PAS) standards2 into ECO 3, which cover all stages of the delivery of energy efficiency measures, including post-installation monitoring. BEIS says that once the new PAS standards will apply from 1 July 2021, the requirement to comply with them will not be retained in the legislation underpinning ECO 3. TrustMark will take on responsibility for the technical monitoring of installations and will have oversight of the ECO market. BEIS says that this will improve oversight of the market and increase financial and consumer protection, for example by requiring ECO measures to have at least two years’ financial protection in place.
4.We asked the Department whether removing PAS standards and compliance requirements from ECO 3 legislation would make it more difficult to enforce these standards and to seek redress for customers for poor quality work. BEIS told us that:
“The TrustMark Framework sets out the requirements for TrustMark registered businesses to be compliant with, and certified to, the new and updated PAS standards where relevant as well as certain minimum guarantee requirements. This Framework has developed systems for checking that certification is current and in place for the measures being delivered by installers. Therefore, we are satisfied that TrustMark will continue to ensure that installers are certified and compliant through links to UKAS accredited Certification Bodies.”
BEIS added that:
“TrustMark will only take on the full responsibility of technical monitoring for measures delivered within the TrustMark framework from Ofgem after a transition period and a pilot programme is completed successfully. Additionally, TrustMark have a ‘Customer Charter’ which details the rights and responsibilities of any customer receiving advice, installations, products, services or other work carried out by a TrustMark registered business. The ‘Customer Charter’ asks customers to follow the TrustMark process […] if they have a complaint. Under that process if a consumer raises a dispute that [cannot] be resolved with the registered business, they should contact the business’s Scheme Provider. Under the TrustMark Framework, Scheme Providers are responsible for the conduct of their members and must help resolving disputes. TrustMark should work closely with Scheme Providers to ensure that the correct processes and procedures within the TrustMark scheme have been followed.”
5.We asked the Department how TrustMark would be held to account for its new role in the ECO 3 scheme. BEIS told us that:
“TrustMark operates within a Master Licence Agreement issued by BEIS. This Licence sets out the requirements in accordance with which TrustMark must operate the Government Endorsed Quality scheme, including reporting requirements. TrustMark also enter into separate sub-licence agreements with their Scheme Providers who in turn enter into sub-sub-licence agreements with TrustMark registered businesses. The TrustMark Framework also sets out details regarding the approach to audit, compliance and enforcement under the TrustMark scheme. TrustMark have confirmed that they work with their Scheme Providers via an escalation methodology to ensure that identified non-compliance is robustly managed at all stages. In addition, they have confirmed that the TrustMark Code of Conduct (which outlines how TrustMark registered businesses should work with the TrustMark scheme to deliver customer service and good trading practices as well as consistent quality and adherence to standards) has also been produced in conjunction with Trading Standards and will be is subject to review annually to ensure that any change in legislation or learning from scheme operation is adopted so the Code remains fit for purpose.”
Consultation
6.The EM states at paragraph 10.1 that a four-week consultation period on the changes to the ECO 3 scheme was regarded as sufficient, as the main proposals had already been trailed and widely reported in a previous consultation on ECO 3 in 2018. The Committee notes, however, that the ECO scheme is complex and that some respondents to the consultation were critical of the short consultation period. We asked BEIS whether a longer consultation period would have been appropriate. The Department explained that:
“The ECO3 consultation in 2018 was not the only opportunity stakeholders had to feed into these proposals relating to TrustMark and the new PAS standards. The Each Home Counts (EHC) review, industry-led PAS steering groups and the EHC implementation board, include numerous opportunities for interested parties to be aware of and involved in the process. In view of this, Government considered a shorter consultation period was appropriate given it would allow for improved quality and consumer protection to be incorporated into ECO sooner.”
Impact
7.The IA estimates the direct costs to business arising from the changes in this Order to be £62.129 million during the lifetime of ECO 3. This includes costs of £3.14 million for the new TrustMark framework and £59 million for increased delivery costs arising from the new PAS standards and technical requirements. BEIS says that while energy suppliers are expected to recoup their costs by passing them onto their domestic customers through energy bills, the bills of those households which receive energy efficiency measures will be reduced in the long-term as a result of the measures installed. We asked BEIS about the impact of the changes on the energy bills of domestic customers. The Department told us that:
“At the start of the scheme, the expected overall scheme costs were £2.24bn. Delivery costs at the start of the scheme have been lower than anticipated and therefore, without this SI, would have been expected to be £2.15bn. There are additional costs arising from this SI but, even with the addition of those costs, we estimate the total spending will be lower than the original estimate of £2.24bn. Therefore, consumer bills may be higher as a result of this SI than they would be without it, but will still be the same or lower than we originally estimated and the policy was designed on the basis of.”
8.We also asked whether Ofgem, as the regulator, would provide oversight to ensure that suppliers only pass on relevant costs to consumers. The Department responded that:
“The ECO scheme is a market led scheme, therefore, how suppliers choose to pass on the cost of the scheme to consumers through energy bills is a commercial decision for each energy supplier. As such, Ofgem does not have any oversight of these decisions since they remain commercially sensitive. Furthermore, the energy price cap is set by Ofgem taking into account the total costs of Government schemes such as ECO as set out in relevant Impact Assessments. Therefore the price cap helps to prevent suppliers passing on costs to consumers in a way which would breach this cap, which in turn helps to prevent suppliers from passing on unrelated costs to consumers. Suppliers are also unlikely to pass on unrelated costs to consumers in order to remain competitive in the energy supply market.”
Conclusion
9.This Order alters the operation of the ECO 3 scheme. It makes changes to address concerns about sub-standard and poorly targeted energy efficiency installations and to increase consumer protection. The changes are expected to result in extra costs for the sector. The Committee is concerned about the reliance on a market-led approach: energy suppliers pass on their costs to consumers through domestic energy bills but, without direct regulatory oversight of this mechanism, there is a risk that some suppliers do not have the incentive to ensure properly rigorous control of costs. The House may wish to press the Minister for a fuller explanation of this matter. We draw the Order to the special attention of the House on the ground that it gives rise to issues of public policy likely to be of interest to the House.
Public Interest Merger Reference (Gardner Aerospace Holdings Ltd. and Impcross Ltd.) (Pre-emptive Action) Order 2019 (SI 2019/1490)
Date laid: 17 December 2019
Parliamentary procedure: negative
Public Interest Merger Reference (Mettis Aerospace Ltd.) (Pre-emptive Action) Order 2019 (SI 2019/1515)
Date laid: 20 December 2019
Parliamentary procedure: negative
These Orders intervene in the proposed takeovers of two UK aerospace firms (Impcross Limited and Mettis Aerospace Limited) by Chinese companies on the ground of national security. The Competition and Markets Authority (CMA) will investigate the proposals and report to the Secretary of State by March 2020, who will decide whether to clear the mergers or refer them to the CMA for more in-depth reviews. The Orders are the first time that, with intervention notices in place, the Secretary of State has used powers under the Enterprise Act 2002 to prevent pre-emptive actions by the parties to a merger, such as transfers of information or know-how or actions to take ownership or control of the target companies.
The Orders are drawn to the special attention of the House on the ground that they give rise to issues of public policy likely to be of interest to the House.
10.The Department for Business, Energy and Industrial Strategy (BEIS) has laid these Orders with Explanatory Memoranda (EMs). The purpose of the instruments is to intervene in the proposed takeovers of two UK aerospace firms, Impcross Limited (“Impcross”) and Mettis Aerospace Limited (“Mettis”), by two Chinese companies on the ground of national security.
11.According to BEIS, Impcross, a small company with around 100 staff and a UK turnover of approximately £9 million, supplies parts into the UK, US and wider NATO defence supply chains. Mettis is a medium-sized company with 560 staff and a UK turnover of £36.6 million that primarily makes precision forged and machined components for commercial airlines, but also produces components for military aircraft, using production processes approved by Boeing, Airbus, Rolls-Royce, Lockheed Martin and Leonardo.
12.The Committee initially considered the Orders at an earlier meeting but noted the very limited contextual information provided in the EMs about the mergers. The Committee wrote to the Secretary of State to seek further background information which is reflected in this report. The full correspondence with the Secretary of State can be found in Appendix 1. The Department has agreed to revise and relay the EMs to incorporate some of the additional background information on the two companies and the process involved.
Powers under the Enterprise Act 2002
13.According to BEIS, the Secretary of State for Business, Energy and Industrial Strategy has the power under section 42 of the Enterprise Act 2002 (“the 2002 Act”) to issue a notice intervening in certain merger transactions where, amongst other things, a specified public interest consideration may be relevant. BEIS explains that national security is a specified public interest consideration; other specified public interest considerations relate to media plurality and financial stability.
14.Under paragraph 2 of Schedule 7 to the 2002 Act, the Secretary of State also has the power, where an intervention notice is in force, to make an order prohibiting or restricting actions which the Secretary of State considers would constitute “pre-emptive action” and imposing obligations regarding the continuing of activities or the safeguarding of assets. This may, for example, prevent the transfer of information, know-how or documents, or actions being taken to take ownership or control of the target company, pending the outcome of the public interest intervention.
Use of the powers
15.BEIS explains that the decision to intervene in the proposed takeovers of Impcross and Mettis on the ground of national security was informed by advice from the Secretary of State for Defence. While SI 2019/1490 intervenes in the proposed takeover of Impcross by Chinese-owned Gardner Aerospace Holdings Limited, SI 2019/1515 deals with the proposed acquisition of Mettis by Aerostar, a fund established in China, either directly or through Ligeance Aerospace Technology, a company owned or controlled by Aerostar and incorporated in China, or through another company in the same group as Aerostar.
16.Under the 2002 Act, the Competition and Markets Authority (CMA) will have until 2 March 2020 and 17 March 2020 to investigate the proposed takeovers of Impcross and Mettis respectively, and to report to the Secretary of State on their national security implications and any relevant competition and jurisdictional issues. The Secretary of State will then decide whether to clear the proposed mergers, including by accepting any undertakings from the merger parties designed to mitigate public interest concerns, or refer them to more in-depth reviews by the CMA under section 45 of the 2002 Act.
17.In response to questions by the Committee about the national security aspects of the mergers and the role of the CMA, the Secretary of State told the Committee that only limited detail could “be provided publicly on national security issues, particularly during the consideration of a live merger case”. She explained that “Government Departments and agencies will support the CMA by providing them with the national security assessment of the cases”, and that she will also receive separate classified advice directly from Government Departments and agencies to inform her decision. According to the Secretary of State, the national security considerations “might include the protection of the UK’s defence and supply chain, maintaining UK strategic capabilities and/or controlling access to classified information and intellection property”.
18.The Department advises that SI 2019/1490 marks the first time that, with an intervention notice in place, the power of a Secretary of State to make an Order under the 2002 Act to prevent pre-emptive actions by the parties to a merger has been used. The Order prevents any step being taken to integrate Impcross’ business with Gardner’s business, including the transfer of information, know-how and documents, and also prevents Gardner from taking ownership or control of Impcross’ business pending the outcome of the public interest intervention. Similarly, SI 2019/1515 prevents actions being taken by Mettis and its parent companies to integrate its business with that of Aerostar and also prevents Mettis and its parent companies from transferring ownership or control of the business to any third party pending the outcome of the public interest intervention.
19.The Secretary of State told the Committee that the takeover of UK aerospace and defence company Cobham by a US private equity group which was cleared by the Government at the end of 2019, was considered under the same process, the public interest intervention powers in the 2002 Act, but that in the Cobham case a European Intervention Notice was issued under section 67 due to the European Commission’s competence over the competition aspects of the case. It was not considered necessary in that case to make an order preventing the parties taking any pre-emptive action.
Timing of the instruments
20.SI 2019/1490 was made and came into force during Dissolution on 5 December 2019, before being laid before Parliament. SI 2019/1515 was also made and came into force before being laid. The Department explains that this approach was necessary to protect national security by preventing the parties to the mergers from taking actions that might undermine the purpose and effectiveness of the Orders. As required by the relevant guidance,3 BEIS notified the Lord Speaker when the instruments were made of the fact that copies of the Orders had yet to be laid before Parliament and explained the reasons for this approach.
Adequacy of the current process
21.The Committee asked the Secretary of State whether the Government considered the current scope for intervening in takeovers of UK companies by foreign firms sufficient, including in comparison with similar economies, such as those of Germany or France. The Secretary of State highlighted the White Paper on National Security and Investment from July 20184 and the Government’s intention to continue to develop the proposals through the draft National Security and Investment Bill which was announced in the Queen’s Speech in December 2019 and seeks to strengthen the Government’s powers to investigate and intervene in takeovers and mergers to protect national security.
Conclusion
22.There has been considerable interest in past takeovers of UK aerospace and defence businesses by foreign companies, including the takeover of Cobham which the Government cleared at the end of 2019. The House may welcome an opportunity to debate the two Orders, especially in the context of the cited national security concerns and the fact that it is the first time that, with intervention notices in place, the Secretary of State has used powers to make Orders to prevent pre-emptive actions by the parties to a merger. The Orders are drawn to the special attention of the House on the ground that they give rise to issues of public policy likely to be of interest to the House.
Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (SI 2019/1511)
Date laid: 20 December 2019
Parliamentary procedure: negative
This instrument makes wide-ranging changes to the UK’s anti-money laundering regime to implement changes in the EU’s anti-money laundering framework and recommendations by the Financial Action Task Force. According to HM Treasury (HMT), the Regulations aim to combat illicit finance and address emerging risks while minimising the burden on legitimate business. HMT expects total costs of £2,474.1 million over ten years, with average annual costs of £126.9 million. We are disappointed that we had to request copies of the Impact Assessment and HMT’s consultation response, which were not publicly available when the Regulations were laid before Parliament. We urge HMT to ensure that, in future, such documents are published at the time an instrument is laid before Parliament.
The Regulations are drawn to the special attention of the House on the ground that they give rise to issues of public policy likely to be of interest to the House.
23.These Regulations update the UK’s anti-money laundering legislation to implement changes in the EU’s anti-money laundering framework by EU Directive 2018/843 (“the Directive”). The Directive must be transposed into UK domestic legislation by 10 January 2020. The Regulations also implement recommendations by the Financial Action Task Force (FATF) in relation to anti-money laundering (AML) and counter-terrorist financing (CTF) standards.5
Background
24.HM Treasury (HMT) explains in the Explanatory Memorandum (EM) that AML and CTF standards are generally incorporated into UK law through the transposition of EU directives and that, as a founding member of the FATF, the UK will continue updating its anti-money laundering policies according to international standards to ensure that the UK’s anti-money laundering regime is kept up-to-date, effective and proportionate. According to HMT, this instrument aims to combat illicit finance and address emerging risks in these areas while minimising the burden on legitimate business.
Key changes made by the instrument
25.The Regulations introduce wide-ranging changes to the UK’s AML/CTF regime. They bring additional businesses into scope of the AML/CTF framework, making them subject to AML/ CTF requirements, including in relation to registration and customer due diligence. The Regulations broaden the definition of tax advisers and bring into scope letting agencies if they carry out high-value transactions with a monthly rent of €10,000 or more, and businesses in the art market, such as art galleries, auction houses and freeports6 that store high-value art, if they conduct transactions exceeding €10,000. Beneficial owners, officers or managers in these businesses will have to apply to their supervisory authority for approval before 10 January 2021.
26.The instrument also brings cryptoasset exchange providers7 and custodian wallet providers8 into scope of the AML/CTF regime. HMT says that it has chosen a more specific and precise definition of these providers than that used in the Directive and that the instrument also implements some FATF recommendations which go further than the Directive, by regulating a range of cryptoasset activities and exchange points for AML/CTF purposes that are not covered by the Directive. Additionally, the instrument introduces a “fit and proper” test and a requirement for all new cryptoasset businesses to register with the Financial Conduct Authority (FCA) from 10 January 2020, with a transition period until 10 January 2021 for the registration of existing cryptoasset businesses.
27.Other changes introduced by the Regulations include the establishment of a national automated mechanism which allows the identification of people, businesses or organisations which hold or control bank accounts, payment accounts or safe-deposit boxes held by credit institutions. HMT says that this will not impose any new requirements for businesses to collect data and that the Regulations specify the purposes for which access to the mechanism may be permitted as well as the conditions of access. The Home Office will have to report annually to Parliament on the access given to the mechanism for law enforcement agencies.
28.The instrument introduces a requirement for financial institutions to ensure that they undertake risk assessments prior to the launch or use of new products or business practices, as well as new technologies. Their parent companies will have to ensure that they have group-wide policies on the sharing of information about customers, customer accounts and transactions for AML/CTF purposes. HMT says that these provisions implement FATF recommendations and go beyond the requirements of the Directive.
29.The Regulations also amend the Terrorism Act 2000 and the Proceeds of Crime Act 2002 to align definitions of the regulated sectors in those Acts with the updated EU AML/CTF framework, and amend the Companies Act 2006 and other companies legislation to implement requirements in the Directive relating to companies.
Impact Assessment
30.HMT did not publish an Impact Assessment (IA) when the Regulations were laid before Parliament. Instead, the EM states at paragraph 12.3 that a full IA will be published when a final opinion from the Regulatory Policy Committee (RPC)9 has been received. The Committee’s guidance10 makes clear that failure to provide an IA because the document has not yet been validated by the RPC is an internal planning matter for government but not an acceptable excuse for failing to present all the necessary documentation at the time an instrument is laid before Parliament.
31.HMT has shared a copy of the IA with the Committee. The IA estimates the total costs arising from the Regulations to be £2,474.1 million over ten years, including total transition costs of £1,382.9 million, with average annual costs amounting to £126.9 million.
32.Sub-Committees A and B of the Secondary Legislation Scrutiny Committee raised the lack of IAs with HMT during the last Parliament. The then Chancellor assured the Committees in February 2019 that HMT would “continue working at pace on Impact Assessments, to enable Parliamentary scrutiny of the relevant SIs in good time”.11 We are disappointed that the Department has failed to meet its commitment in this case. We urge HMT to ensure that in future, where an Impact Assessments is required, this is published when an instrument is laid before Parliament.
Consultation
33.HMT carried out an eight-week consultation on the changes between April and June 2019 which received over 200 responses from a cross-section of relevant stakeholders. The EM states at paragraph 10.7 that HMT “will soon publish its formal response to the consultation”. According to the Committee’s guidance, an analysis of consultation responses should be available on a website at the time the instrument is laid before Parliament. We asked HMT why the publication of its consultation response was delayed. HMT told us that:
“It was necessary to delay the consultation response due to uncertainty over what the UK’s relationship would be with the EU on the [Amending Directive] transposition deadline of 10 January 2020 and the restrictions of the pre-election period then necessitated further delay. The response is completing HMG clearance processes and will be published shortly.”
34.HMT has shared a copy of its consultation response with the Committee. It includes helpful material on the reasoning behind the legislative changes and the policy choices made. We note HMT’s explanation but are of the view that better planning would have made it possible to publish the consultation response when the instrument was laid. We call on HMT to ensure that, in future, consultation responses are made available when an instrument is laid before Parliament.
Conclusion
35.This instrument makes changes to the UK’s AML/CTF regime. This is an important and complex policy area. It is therefore disappointing that we had to ask HMT for copies of its consultation response and the IA. These documents include material that helps to understand the Regulations, their considerable financial impact and the reasons behind HMT’s policy choices. We urge HMT to ensure that, in future, consultation responses and IAs are made available when an instrument is laid before Parliament, to enable effective and timely Parliamentary scrutiny. We draw the Regulations to the special attention of the House on the ground that they give rise to issues of public policy likely to be of interest to the House.
1 TrustMark is the government-endorsed quality scheme that covers work carried out in a customer’s home.
2 PAS are developed by the British Standards Institute in collaboration with relevant stakeholders. They define good practice standards for a product, service or process.
3 See: para 4.9.4 of The National Archives Statutory Instrument Practice, 5th edition (November 2017): http://www.legislation.gov.uk/pdfs/StatutoryInstrumentPractice_5th_Edition.pdf [accessed 20 January 2020].
4 Department for Business, Energy and Industrial Strategy, National Security and Investment - A consultation on proposed legislative reforms (July 2018): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/728310/20180723_-_National_security_and_investment_-_final_version_for_printing__1_.pdf [accessed 20 January 2020].
5 The FATF is an intergovernmental organisation founded in 1989 on the initiative of the G7 to develop policies to combat money laundering and, since 2001, terrorism financing.
6 Freeports are special zones for customs purposes, defined as places to carry out business inside a country’s land border but with different customs rules.
7 Cryptoassets are cryptographically secured digital representations of value or contractual rights. This includes cryptocurrencies such as Bitcoin.
8 Custodian wallet providers provides services to safeguard private cryptographic keys on behalf of their customers, to hold, store and transfer virtual currencies.
9 The RPC is an independent body, sponsored by the Department for Business, Energy and Industrial Strategy, that assesses the quality of evidence and analysis used to inform regulatory proposals affecting the economy, businesses, civil society, charities and others.
10 See the Secondary Legislation Scrutiny Committee’s Guidance for Departments: https://www.parliament.uk/documents/lords-committees/Secondary-Legislation-Scrutiny-Committee/SLSC-Guidance-for-Departments-May-2019.pdf.