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From my current understanding, MP's are not allowed to clap in the House of Commons. Instead, they say (or shout) "hear" to express themselves. However, after having watched this video, I've become rather confused.

The video: https://www.youtube.com/watch?v=wxods38mAoQ (relevant timestamp: 0:57)

In the following video, you can clearly tell MP's are clapping. I'm now concerned my original understanding of MP's not being allowed to clap is incorrect. I've only recently taken interest in UK politics, so I'm open to learning more about this.

My question being: Can someone please explain if the (I believe) Labour Party was allowed to clap at this moment? And if they weren't, why the Speaker of the House of Commons did not instruct them to stop.

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You're absolutely correct that by convention, applause is discouraged in the House of Commons (and indeed, the Lords). Erskine May, the guide to parliamentary practice, has this to say on the subject:

All Members should maintain silence or should converse only in undertones. Whenever the conversation is so loud as to make it difficult to hear the debate, the occupant of the Chair calls the House to order.

...

The Select Committee on Modernisation of the House of Commons noted in 1998 that, while spontaneous clapping at the end of a speech could not be interpreted as disturbance of the Member speaking, if the practice became established it could lead to a situation where the success or failure of a speech was judged not by its content but by the length of the applause. Both applause and slow handclapping would ‘disrupt the tenor of the debate’.The Speaker has indicated that the rule against clapping did not preclude spontaneous reactions of a non-partisan character; and that in practice it is a matter of judgement for the Chair as to whether to intervene where applause has broken out spontaneously.

The relevant parts of the Select Commmittee's report can be found here.

Some of the more famous examples in which the Speaker has rebuked the offenders include at the debate on the address after the 2015 General Election, which returned a large number of new SNP MPs. These MPs, presumably unaware of the convention on applause, frequently applauded their leader, Angus Robertson, at which then Speaker John Bercow interjected:

Order. May I say at the start of the Parliament that the convention that we do not clap in this Chamber is very, very long established and widely respected, and it would be appreciated if Members showed some respect for that convention? They will get their speaking rights from this Chair—of that they can be assured. They will be respected, but I would invite them to show some respect for the traditions of this Chamber of the House of Commons.

Hansard - 27th May 2015

In another case, current Speaker Sir Lindsay Hoyle jokingly rebuked MPs applauding his election as Speaker.

As to why Bercow chose not to intervene and rebuke the MPs in the specific case you've pointed out, we can only guess. However, in 2016, when asked by Conservative MP Michael Fabricant to give guidance about the current practice, prompted by another instance of unrebuked applause, Bercow gave the following explanation:

I thank the hon. Gentleman for his point of order and his great courtesy in raising it in the way that he did. The short answer is that it is the long-established convention of this House that we do not applaud. For what it is worth, to the best of my recollection, I have never myself done so. If he is asking me whether I would prefer it to remain that way, the short answer is that I would. I think that the convention that we do not applaud but register our approval in other ways is a valuable one. All I would say to the hon. Gentleman, who has raised his point in an extremely polite way, is that as far as the Chair is concerned, each situation has to be judged on its merits. I am very conscious that I am the servant of the House. If, spontaneously, a large group of Members bursts into applause, sometimes the most prudent approach is to let it take its course. However, I would much prefer it if it did not happen, unless the House consciously wills a change, and I am not aware that the House as a whole has done so. In that respect, I sense that the hon. Gentleman and I, not for the first time and hopefully not for the last, are on the same side.

Hansard - 3rd May 2016

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    Call me jaded by what I see on the news and youtube clips, but when I think of the House of Commons, silent is not the first (or even top 10) word to come to mind.
    – corsiKa
    Mar 7 at 5:24
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In general, the conduct of the chamber is a matter for the person in the chair. Guidance comes from Eskine May (full title: Erskine May: Parliamentary Practice), a regularly updated authority on current practice in the UK parliament. The relevant section is part of part 3, section 21 which states

The Select Committee on Modernisation of the House of Commons noted in 1998 that, while spontaneous clapping at the end of a speech could not be interpreted as disturbance of the Member speaking, if the practice became established it could lead to a situation where the success or failure of a speech was judged not by its content but by the length of the applause. Both applause and slow handclapping would ‘disrupt the tenor of the debate’. The Speaker has indicated that the rule against clapping did not preclude spontaneous reactions of a non-partisan character; and that in practice it is a matter of judgement for the Chair as to whether to intervene where applause has broken out spontaneously.

As you will see, there is an ongoing attempt to keep conventions relevant to modern life, rather than mindlessly keeping to tradition with no regard to purpose. Following the references in that section, we find an issue of Hansard, the record of parliamentary debates in which we can hear the words of Mr Bercow, the former speaker featured in your clip

I thank the hon. Gentleman for his point of order and his great courtesy in raising it in the way that he did. The short answer is that it is the long-established convention of this House that we do not applaud. For what it is worth, to the best of my recollection, I have never myself done so. If he is asking me whether I would prefer it to remain that way, the short answer is that I would. I think that the convention that we do not applaud but register our approval in other ways is a valuable one. All I would say to the hon. Gentleman, who has raised his point in an extremely polite way, is that as far as the Chair is concerned, each situation has to be judged on its merits. I am very conscious that I am the servant of the House. If, spontaneously, a large group of Members bursts into applause, sometimes the most prudent approach is to let it take its course. However, I would much prefer it if it did not happen, unless the House consciously wills a change, and I am not aware that the House as a whole has done so. In that respect, I sense that the hon. Gentleman and I, not for the first time and hopefully not for the last, are on the same side.

So it seems that, at least for that Speaker applause was still disapproved of, but not automatically going to be silenced unless it interrupted the business of the house. You will note that Mr Bercow rapidly brought the house to order when the applause threatened to delay Mr. Johnson's response to the question put to him.

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