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Eighteenth Report Contents

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Drawn to the special attention of the House

Draft Economic Growth (Regulatory Functions) (Amendment) Order 2024

Draft Growth Duty: Statutory Guidance Refresh

Date laid: 6 March 2024

Parliamentary procedure: affirmative

The draft Order would extend the duty on regulators to have regard to promoting economic growth (“the growth duty”) to Ofcom, Ofgem and Ofwat (“the economic regulators”). The proposed extension is supported by updated statutory guidance that has been laid alongside the draft Order. We received a submission from Wildlife and Countryside Link which raised questions about the interaction between the growth duty and Ofwat’s statutory duties in relation to the environment. Concerns were also raised during public consultation that the economic regulators may pursue growth at the expense of consumer and environmental protections, and about the potential environmental and net zero impact of the extension, including a potential reduction in protections. The Department for Business and Trade argues that the growth duty will not take precedence over other duties, will not legitimise non-compliance with existing protections and will not prevent enforcement against illegal activities. While it is not our role to adjudicate on the different views that have been expressed, public concerns about water pollution in particular suggest that the proposed extension raises questions which are likely to be of interest to the House.

The draft Order and draft guidance are drawn to the special attention of the House on the ground that they are politically or legally important and give rise to issues of public policy likely to be of interest to the House.

1.This draft Order proposes to extend the so-called “growth duty” to the Office of Communications (Ofcom), the Gas and Electricity Markets Authority (Ofgem) and the Water Services Regulation Authority (Ofwat) (collectively referred to as “the economic regulators”). The growth duty came into effect in March 2017 under the Deregulation Act 2015 and requires regulators to have regard to the desirability of promoting economic growth, alongside their delivery of statutory protections. It currently applies to more than 50 regulators.1

2.The growth duty is supported by statutory guidance. An updated version of this guidance has been laid alongside the draft Order. According to the Department for Business and Trade (DBT), the guidance has been revised to reflect the extension of the growth duty to the economic regulators, the responses received during public consultation and the changes the economy has undergone since 2017. DBT says that the revised guidance will provide greater clarity to support regulators in their application of and reporting against the growth duty, including by defining growth and outlining how regulators should consider economic growth alongside principles-based and outcomes-based regulation in their decision making.

3.The Department explains that the energy, water and telecoms sectors account for around 4% of UK GDP and over 13% of annual private UK investment, and that the economic regulators therefore play an important role in shaping the UK economy at a time when there are investment challenges to meet the UK’s infrastructure needs. According to DBT, bringing the economic regulators within scope of the growth duty will help ensure that they consider how best to promote growth in their sectors as they carry out their core functions.

4.The draft Order proposes three exemptions, so that the growth duty would not cover:

• the powers of the economic regulators in relation to competition law which they share with the Competitions and Markets Authority which itself is exempt;
• Ofcom’s specific role in relation to advising the Secretary of State on the public interest considerations on media merger cases; and
• until 6 April 2026, the online safety functions of Ofcom under the Online Safety Act 2023. The purpose of this delay is to enable Ofcom to develop its new online harms functions before the growth duty comes into force.

5.Given that the growth duty already applies to other regulators and that there will often be more than one regulator operating in the same sector, such as Ofwat and the Environment Agency in the water industry, we consider that there is a need for collaboration and regular communication between the different regulators in a sector. We note that the updated guidance refers to such collaboration and states that by working together, “different regulators can share information and avoid duplicating efforts, ensuring the process of regulation provides for an efficient use of resources” and ensuring that the guidance and advice “is consistent and streamlined”. While the focus here appears to be on the efficient use of resources and the growth duty, we take the view that collaboration can also support the effective delivery of the regulators’ other duties and objectives, including in relation to the environment.

Consultation

6.The Department consulted on the proposed extension of the growth duty in summer 2023. The consultation received 58 responses from a range of stakeholders including industry representatives, businesses, regulators, and advocacy organisations.2 According to DBT, a majority of respondents (62%) supported the extension while 25% opposed it, with 13% expressing neutral views. The key concerns raised were that the economic regulators may pursue growth at the expense of consumer and environmental protections, and the potential environmental and net zero impact of the extension, including a potential reduction in protections. In response, DBT said that the growth duty would not legitimise non-compliance with existing protections including environmental, net zero, and consumer protections, and that the statutory guidance provided examples as to how regulators might choose to balance their duties, recognising that in some cases other duties or objectives may take precedence to growth.

Concerns raised by Wildlife and Countryside Link

7.We received a submission from Wildlife and Countryside Link (“Link”), which reflected the concerns raised during consultation, questioned DBT’s approach and raised specific concerns about the impact of the extension on Ofwat’s duties in relation to the environment. We have published Link’s submission and the Department’s response in full on our website.3

8.Link criticised the absence of a clear requirement on Ofwat to consider natural capital, in contrast to the Government’s response to a House of Commons Environmental Audit Committee report on water quality in rivers from 2022 in which the Government accepted that “Ofwat should take natural capital into account in economic decision making”.4 In response, the Department explained that the growth duty did “not create a hierarchy of duties” and that:

“The purpose of the Growth Duty is to ensure that specified regulators give appropriate consideration to the potential impact of their activities and their decisions on economic growth, alongside their consideration of their other statutory duties.

The draft Growth Duty guidance recognises the importance of the environment, with environmental sustainability identified as one of the seven drivers of economic growth.

The Government has set out within the draft guidance that natural capital and the ecosystems in which we live are fundamental to economic growth, and therefore need to be safeguarded for economic growth to be sustained. We are clear that a resilient and prosperous society depends on the availability of natural resources and a healthy environment.

The Government also considers that the existence of environmental legislation (including the Environmental Principles Duty, section 40 of the Natural Environment and Rural Communities Act 2006, and as well as other specific environmental duties applied to individual regulators), together with Net Zero Duties will prevent the possibility of environmental impacts caused by the extension of the Growth Duty to these regulators.

Whilst extending the Growth Duty to Ofwat will mean it (Ofwat) will need to consider the Growth Duty when exercising specified regulatory functions, this will not take precedence over other duties, and does not prevent enforcement against illegal activities.”

9.Link also questioned how the growth duty requirement to give extra weight to the likely economic impacts of enforcement before deciding whether to take action could be aligned with the ‘polluter pays principle’,5 which advises policy makers to match the scale of enforcement to the environmental and social damage caused. The Department responded:

“The draft statutory guidance sets out that regulators should ensure that enforcement action is always proportionate and considers the needs of businesses. However, the guidance does not in any way set restrictions on regulators as to how their enforcement can and should operate. Regulators operate independently from Government and should be free to make enforcement decisions based on the evidence presented to them.”

10.Referring to a recent announcement of plans to allow Ofwat to prevent polluting water companies from paying bonuses to executives,6 Link questioned how the growth duty would impact on this new policy and whether water companies could now challenge any potential future bonus restrictions as damaging to growth. DBT responded:

“The updated guidance sets out that an effective regulator will set a strategy that strikes the right balance between their various pressures or duties, informed by an understanding of what approach might best foster growth.

The policy on bonus restrictions is subject to consultation and we would encourage all interested parties to respond to any future consultations on bonus restrictions.

It is important to note we have established in the draft statutory guidance that the Growth Duty will not take precedence over other duties, and it will not prevent enforcement against illegal activities.”

Conclusion

11.We note the concerns raised in the submission and during public consultation about the interaction and potential tension between the growth duty and the economic regulators’ statutory duties and objectives in relation to the environment, and the arguments put forward by the Department. It is not our role to adjudicate on the different views that have been expressed. Against the background of public concerns about water pollution in particular, we consider, however, that the extension of the growth duty raises questions which are likely to be of interest to the House.

Draft Plant Health (Fees) (England) and Official Controls (Frequency of Checks) (Amendment) Regulations 2024

Draft Official Controls (Fees and Charges) (Amendment) Regulations 2024

Dates laid: 26 February and 4 March 2024

Parliamentary procedure: affirmative

These two instruments support the implementation of the Border Target Operating Model (BTOM) which will establish a new approach to official controls on imports from third countries after Brexit. Amongst other changes, the instruments propose risk-based import checks for plants from EU member states, Liechtenstein and Switzerland which are considered medium-risk. This would align the checks on imports from these jurisdictions with those that already exist for non-EU countries. There are to be exemptions for fruit and vegetables and for any goods which are imported from these jurisdictions into Great Britain via specified West Coast ports. The instruments also propose changes to the way fees are charged, so that they reflect the risk-based approach set out in the BTOM, whilst enabling full cost recovery. The Department for Environment, Food and Rural Affairs has provided additional information about the public consultation on the new fee arrangements and about the so-called Common User Charge, a charge which does not require legislation but will be introduced later this year and about which there has been some concern.

These draft Regulations are drawn to the special attention of the House on the ground that they are politically or legally important and give rise to issues of public policy likely to be of interest to the House.

12.These two sets of draft Regulations support the implementation of the Border Target Operating Model (BTOM)7. The BTOM was published in August 2023 and sets out a new approach to controls on the import of goods from third countries into Great Britain (GB) after Brexit. The BTOM is being introduced in stages and through three major milestones on 31 January 2024, 30 April 2024 and 31 October 2024.8

Changes made by the draft Plant Health (Fees) (England) and Official Controls (Frequency of Checks) (Amendment) Regulations 2024

13.This instrument supports the implementation of the second milestone of the BTOM. Specifically, the instrument would require, with effect from 30 April 2024, risk-based documentary, identity or physical import checks for plants, plant products and other goods9 from EU member states, Liechtenstein and Switzerland which are classified as medium-risk. This would align the checks on imports from these jurisdictions with those that already exist for non-EU countries.10 The instrument also proposes to set the fees charged by the Animal and Plant Health Agency (APHA) for its plant health import inspection services at a level that reflects the frequency of checks set out in the BTOM and that is in line with full cost recovery.

14.The draft Regulations would provide exemptions from the new arrangements for fruit and vegetables from EU member states, Liechtenstein and Switzerland which are currently treated as low-risk goods while risk assessments are being conducted, and for any goods which are imported from these jurisdictions into GB via a West Coast port listed in the Regulations. While the new arrangements would apply across GB, the specific provisions on fees would apply to England only. There will be a consistent approach across GB, however, as the Welsh and Scottish Governments laid equivalent fees legislation earlier this year.

15.The Department for Environment, Food and Rural Affairs (Defra) told us that, in addition to the fees charged by APHA, there will be further fees charged by:

• Port Health Authorities (PHAs): PHAs are operated by local authorities which charge for checks on imports of animal products on a cost-recovery basis. The fees are set individually by each PHA and are published on their website.
• Border Control Posts (BCPs): There will be charges to recover operating costs for all consignments going through government-run BCPs. Defra says that the indicative rate of this so-called Common User Charge is estimated to be between £20 and £43, and that the final policy and rates will be published shortly. Separately, commercial operators will set their own charges to recover the operating costs of their BCP facilities.

16.The Department says that no new legislation will be needed to set the level of the PHA fees and the Common User Charge, but that further legislation will be introduced later in 2024 to support the enforcement of all charges and fees. This will be in addition to enforcement powers that are already available to local authorities.

Changes made by the draft Official Controls (Fees and Charges) (Amendment) Regulations 2024

17.The purpose of this instrument is to enable the fees and charges for official sanitary and phytosanitary controls on goods arriving in GB to reflect the changes made by the BTOM. Specifically, the instrument would facilitate flexibility in the application of fees and charging requirements by APHA and specific local authorities in their role as competent authorities (CAs). The instrument proposes to change the current duty to charge into a power to charge, by extending the circumstances in which CAs may reduce charges or waive them altogether.

18.The instrument also proposes more flexibility on the types of costs that may be used to determine fees and charges. This is to enable the recovery of all relevant costs and the application of risk factors as set out in the BTOM, while maintaining the requirement to not charge more than is necessary for full cost recovery. The instrument would also enable fees and charges to be levied digitally, as under the BTOM not all consignments will have to be physically at a BCP.

Consultation

19.We asked the Department about consultation with affected businesses. Defra explained that there is a statutory requirement to consult on any new fees and on changes to the methodology used to calculate existing fees or charges, and that, in practice, APHA also consults industry on the level of its fees.

20.Defra, along with the Welsh and Scottish Governments, consulted on the extension of plant health import inspection fees.11 We note that there were only three responses to this consultation, including one from the National Farmers Union, and that no concerns were raised concerning the impact of the amended fees charged for checks on medium-risk goods.

21.Defra also consulted on the Common User Charge.12 The Department told us that it had sought feedback on the principles, methodology and indicative rates, and that it had considered “all possible options to ensure we can implement a charging system that will deliver best value for traders, and one which meets government’s cost recovery objectives in as transparent and fair way as possible”.

22.We note that there has been some concern about the Common User Charge, especially in relation to smaller businesses.13 The Department told us that it was “unable to discuss the feedback in detail until the Government Response will be published in the coming weeks”. The House may wish to inquire further about the impact of the new arrangements on importers and about any concerns that were raised by smaller businesses in particular and how these have been taken into account.

Financial Services and Markets Act 2000 (Financial Promotion) (Amendment and Transitional Provision) Order 2024 (SI 2024/301)

Date laid: 6 March 2024

Parliamentary procedure: negative

This Order reverses changes to the financial promotions regime, introduced less than two months ago, that increased the thresholds for categorising a person as ‘high net worth’ or ‘self-certified sophisticated’. These changes were intended to reduce the risk that unlisted investments could be marketed inappropriately to ordinary retail investors.

HM Treasury (HMT) states that it is reversing these measures because of “new and significant concerns” that have been raised about the “unintended impact” of the threshold increases; in particular, that they could significantly reduce the scope for the technology, ‘angel investment’ and theatre sectors to raise funds. While HMT says that some enhanced safeguards remain in place, we are concerned that the risks addressed by the original changes will rearise, and we welcome HMT’s commitment to keep the rules under review. More generally, we have some concerns about the policymaking process. The original changes followed a full public consultation in which all interested parties could have their say. There is no indication that HMT has undertaken an evidence-based review of the effect of the higher thresholds and, indeed, there has been minimal time to do so. However, they are now being reversed following representations from only one area of the market—those seeking to raise funds. As a general rule, we caution against such reactive changes and encourage wide-ranging, timely consultations leading to fully considered policymaking.

This Order is drawn to the special attention of the House on the ground that it is politically or legally important or gives rise to issues of public policy likely to be of interest to the House.

Background

23.This Order reverses some recent changes to the financial promotions regime: specifically, to the exemptions that allow promotions for unlisted companies to be made to ‘high net worth individuals’ and ‘self-certified sophisticated investors’.

24.The Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (No. 2) Order 202314 (“the 2023 Order”), which came into force on 31 January 2024, included changes to the criteria in the regime. These included substantial increases to the financial thresholds that determine whether an individual is high net worth, so that a person would need to have income of at least £170,000 (increased from £100,000) or net assets of at least £430,000 (increased from £250,000). For the self-certified sophisticated investor exemption, the 2023 Order removed the criterion of having made more than one investment in an unlisted company in the previous two years and increased the company turnover required to satisfy the ‘company director’ criterion from £1 million to £1.6 million. The effect of these reforms was that fewer people could be the subject of marketing of unlisted investments.

25.The changes were intended to restore the thresholds to their original values in real terms by uprating them in line with inflation. The measures also addressed concerns about misuse of the exemptions, including to market products inappropriately to ordinary retail investors. This issue had been raised in the House of Commons Treasury Committee’s report on the failure of London Capital and Finance.15

26.This Order reverses all the changes described above; for example, returning the high net worth threshold to £100,000 income or £250,000 assets. The Order is due to come into force on 27 March 2024.

Why are the changes being reversed?

27.HM Treasury (HMT) states that, since bringing forward the 2023 Order, “new and significant concerns” have been raised about the “unintended impact” of the threshold increases. Specifically, HMT says that the technology, ‘angel’ investing and theatre sectors have argued the changes would affect the ability of start-up businesses to obtain investment, and the scope for theatre productions to attract investment from small-scale investors. HMT referred us to two open letters: one from a group of organisations representing technology and angel investing stakeholders,16 and another that argued the changes would “dramatically” affect female investors and businesses with female founders.17

28.Amongst the arguments advanced by the organisations representing technology companies and angel investors was that the investment environment had significantly worsened:

“The changes were first proposed in 2021 when angel investing and V[enture] C[apital] investment spiked. Since then, first-cheque investing figures have fallen off a cliff, with the number of first-round seed-stage deals in 2023 down 28% year on year and at a ten-year low at 1,025. This is down from 1,973 in 2021, when this measure was consulted on.”

Consultation prior to the 2023 Order

29.The changes in the 2023 Order were made following a public consultation that took place between December 2021 and March 2022.18 HMT said that it brought the consultation to the attention of the technology and angel investment sectors, but not to the attention of the theatre sector as HMT “was not aware that the sector used the exemptions for the purposes of raising funds”. We accept that, in this case, HMT made efforts to meet the Government’s Consultation Principles, which state that in forming and publicising a consultation, departments should “consider the full range of people, business and voluntary bodies affected” and should “consider targeting specific groups if appropriate”.19

30.We asked HMT what the views of the specific affected sectors were, as expressed in their responses to the original consultation. HMT said:

“The UK Business Angels Association and stakeholders from the technology sector responded to the consultation, whereas the theatre sector did not. Feedback we received from industry during the consultation process suggested that technology sector stakeholders broadly agreed with the government’s objectives for the reforms. There was no clear consensus among these stakeholders in favour of or against an increase to the financial thresholds.”

31.While HMT’s response states that the technology sector “broadly agreed” with the Government’s objectives, it does not record the sector’s views on the specific changes. Neither does it report the views of the UK Business Angels Association. The House may wish to enquire further on these points and how these views were taken into account in the decision to proceed with the 2023 Order.

Risks from reversing the changes

32.As described above, the Explanatory Memorandum (EM) for the 2023 Order set out how the Government was aware of concerns about misuse of the original exemptions, which are now being reinstated. The de minimis Impact Assessment to the 2023 Order also said that maintaining the status quo would not address “the growing risk that ordinary consumers may be promoted to under the exemptions”.

33.We therefore asked HMT whether reversing the changes gave rise to risks of misuse and inappropriate promotions. HMT stated that other reforms introduced by the 2023 Order would reduce these risks, but that it would keep the position under review:

“The changes made by the 2023 Order to improve the format of the investor statements that potential investors are required to complete and sign, in order to be classified as high net worth individuals or self-certified sophisticated investors, will remain in force. Those changes were designed to reduce the risk that investors incorrectly certify themselves, or not understand the regulatory protections they are giving up when receiving promotions subject to the exemptions. Potential investors will still have to make statements confirming that they meet the criteria for the exemptions, and that they accept the risks of investing without regulatory protections. However, as noted in the Budget document and in the EM, the government will carry out further work to review the exemptions.”

34.If the logic of the original EM is correct, reversing the changes in the 2023 Order in relation to the criteria for high-net-worth individuals and self-certified sophisticated investors must result in some degree of risk. We welcome HMT’s commitment to keep the regime under review.

Conclusion

35.The rules in this area aim to strike a balance between protecting those for whom receiving financial promotions for unlisted companies would be inappropriate, while facilitating marketing to, and capital raising from, more suitable individuals. A consultation that concluded in 2022 resulted in the Government bringing forward changes that, it then believed, more appropriately addressed the risks and benefits.

36.We understand that circumstances may have changed since the original consultation, that a further sector (the theatre) became aware of the effects of the changes in the meantime, and that some enhanced safeguards will remain in place. Nevertheless, we have concerns about the policymaking process in this case. The conclusions formed following a full public consultation are being reversed, apparently following representations from sectors representing just one side of the balance (those seeking to raise funds). Moreover, these reversals are occurring very soon after the new rules came into force, with no indication that HMT has conducted an evidence-based review of their effects. While ultimately this is a judgement for HMT to make, we caution in general terms against such reactive changes and encourage wide-ranging, timely consultations leading to fully considered policymaking.

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